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SEC Cracks Down on Internet Stock Fraud

Securities: Agency brings charges against 44 people and companies. Cases underscore the risk in online stock advice.

October 29, 1998|WALTER HAMILTON and THOMAS S. MULLIGAN | TIMES STAFF WRITERS

Underscoring how pervasive stock fraud over the Internet has become, the U.S. Securities and Exchange Commission announced Wednesday the biggest-ever crackdown on people who illegally promote stocks on computer bulletin boards, online newsletters and investment Web sites.

The SEC sweep targeted 44 people and companies nationwide, including at least five operating in the Southland.

In the most egregious cases, the SEC said, the stock promoters spread falsely positive rumors about the prospects of the companies they touted. In other cases, the information may have been true, but the promoters didn't disclose or didn't fully disclose that they were paid to talk up the companies, the SEC said.

The agency's action points up the risk that individual investors face in the barrage of stock information now available on the Internet. Stock promoters on the Net specifically target small investors, many of whom have been drawn to equities by the long bull market--and by the potential for fast profits.

"Internet fraud has grown as the Internet has grown, and the sophistication of Internet fraud has grown as the Internet has grown," said John Reed Stark, chief of the SEC's Office of Internet Enforcement in Washington.

Stark acknowledged that the enforcement action makes only a "dent" in the number of people illegally touting stocks, but he said the agency hopes the sweep will discourage would-be promoters.

The 44 people and companies targeted by the SEC's civil actions received more than $6.3 million and nearly 2 million shares of stock and options from the 235 companies they represented, the SEC said.

In 13 cases, the defendants settled with the SEC without admitting or denying guilt, and agreed to cease-and-desist orders, and in some cases, fines.

In 10 other cases, some with multiple defendants, the SEC has filed suit in federal courts or has cease-and-desist orders pending.

However, SEC officials said the agency itself lacks the authority to force a Web site to shut down altogether.

The stock promotion business has been a factor in the market for years, mostly involving small, thinly traded stocks. Previously, people touting stocks had to go through the grueling process of "cold-calling" prospective clients or sending out glossy junk mail.

Now, the Internet allows promoters to reach millions of investors at once.

Most promoters portray themselves as objective analysts who carefully study companies and select the most promising stocks. Often, their picks are listed on Web sites trumpeting "hot" stocks that they claim are likely to soar in price.

In choosing which sites to investigate, the SEC said it scanned the Internet and also targeted sites about which small investors commonly complained to the agency.

Some of the promoters charged Wednesday engaged in so-call pump-and-dump schemes in which they spread falsely positive information about small stocks. As small investors piled into the stocks, sending the prices up, the promoters sold the shares they owned.

Usually, such stocks quickly fall back again as the promoters end their hype and move on to other stocks.

In one pending case, the SEC claims that an Internet newsletter called the Future Superstock recommended to its more than 100,000 subscribers to the newsletter's Web site the purchase of about 25 small stocks that were predicted to double or triple in the next three to 12 months.

In most instances, the SEC said, "the prices of the recommended securities increased for a short period of time after a recommendation was made . . . after which the prices of those stocks dropped substantially."

The agency alleges that the newsletter's editor, Jeffrey C. Bruss, often sold stock he owned amid the price run-ups. The SEC also alleges that Bruss' statements regarding the success of past stock picks "have been false and misleading."

In many of the cases brought by the SEC on Wednesday, the company information supplied by promoters appeared to be true. However, the promoters either hid the fact that they were paid by the companies or, if they did reveal payment, they failed to divulge the nature and exact amount of the compensation, as the law requires, the SEC said.

Skip Nordstrom, owner of the National Investors Council in Newport Beach and one of the promoters targeted Wednesday, portrayed his dispute with the SEC as a quibble over "semantics" having to do with the specific wording of the disclaimers on his Internet site.

Nordstrom, 47, of Santa Ana, said that NIC has been in business for 12 years, and he has owned it for 14 months. NIC doesn't pretend to be anything other than a business that takes money from companies to list their press releases and other claims on its Web site and in its newsletters, Nordstrom said.

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