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THE NATION | COLUMN ONE

Taking a Flier on a Scam

Proliferating Ponzi schemes on the Internet tempt gamblers who think they can get out in time. Most don't.

January 25, 2002|MICHAEL A. HILTZIK and CHARLES PILLER | TIMES STAFF WRITERS

With three years' experience putting money into get-rich-quick programs online, Jack Reitzel believes he has learned all the rules.

One rule is not to believe anything the promoters say. If they promise a 300% return on investors' money in two weeks, it's more than likely the site will disappear before the deadline arrives. If they claim their response is slow because they've had emergency surgery or technical problems or a dispute with their bankers, it's time to worry.

And above all, one should understand that the longer one plays, the better the chance of losing.

"There have been dozens [of programs] where I've lost $10, $20, $50," he said. "In some, I've lost $500." One program purportedly investing in racehorses, into which he was enticed by a recommendation from a friend of a friend, cost him $5,000.

"It will take me a long time to get my head above water," said Reitzel, a 56-year-old computer engineer. "I definitely don't call this investing. It's gambling."

FOR THE RECORD
Los Angeles Times Sunday January 27, 2002 Home Edition Main News Part A Page 2 A2 Desk 2 inches; 43 words Type of Material: Correction
"Invest Better" site--In a Friday story in Section A, The Times said "Invest Better 2001," an Internet investment program, was a scheme run by Cole Bartiromo of Mission Viejo. Bartiromo turned over $900,000 as part of a settlement with the Securities and Exchange Commission but did not admit or deny guilt.

Tell that to the roughly 1,000 people who lost a combined $1 million in "Invest Better 2001," a scheme run by 17-year-old Cole Bartiromo of Mission Viejo. Like Reitzel, many of them appear to have been serial players, jumping from program to program on the Web.

Unlike true victims, many often know what they are getting into: online variations of the Ponzi, pyramid and get-rich-quick come-ons that have lured credulous citizens for decades. Relying on tips passed among users of online bulletin boards, they are gambling that they can get their initial investment out fast, then reap as much profit as possible before the wild promises collapse.

This strategy involves risk. For one thing, without insider complicity it is almost impossible to be sure where one is located in the pyramid.

"All these sites say 'get in on the ground floor now' no matter when it is in the life of the pyramid," said Jim Kohm, an attorney for the Federal Trade Commission. Most participants lose everything they invest, he said.

Moreover, many state laws define any participation in pyramid scams--even that by apparent victims--as engaging in an illegal activity, said Steve Larsen, manager of the Washington state attorney general's Cyber Consumer Resource Center. That subjects investors to similar criminal and civil penalties as promoters.

Those penalties vary widely by jurisdiction and the scale of the crime. Under federal sentencing guidelines, the sponsors of scams that net more than a million dollars and involve a large number of victims can face big fines and up to 20 years in prison. In most cases, the perpetrators also are expected to repay victims.

Although the Internet has proved a boon to shysters, it has also helped prosecutors catch them in the act, said John Reed Stark, chief of Internet enforcement for the Securities and Exchange Commission. "The electronic footprints that they have left on the Internet [offer] a resplendent evidentiary trail," he said.

Authorities say Bartiromo's Invest Better Web site, which was shut down this month by the SEC, bore several common characteristics of online investment scams. These include the promise of outlandish investment returns, backed by a marginally plausible investment idea seized upon by eager investors. Bartiromo promised his customers returns of up to 2,500% "risk free," purportedly as a result of placing "safe bets" on sports contests.

Other suspect Web sites hint that they are associated with investments in gold, foreign bank securities or investment opportunities not otherwise open to small investors. The vagueness of the actual investment goal, perversely, often enhances its appeal to customers.

"The nonsense of believing in pyramid schemes goes back to childhood days of telling ghost stories in tents," said Mike Caro, a games and gambling expert associated with Hollywood Park.

Today there is a new element: the Internet's ability to facilitate the spread of these schemes. Mass e-mailings, or "spam," circulate word of new programs to thousands of potential marks at a click. "Once your name gets into the mill, it's like junk mail," Reitzel said. Promoters use public message boards, easily accessible via services such as Yahoo, to reach huge audiences of computer users. They often disguise themselves as delighted investors eager to pass on word of a sure-fire program. Anonymous Web-hosting services enable investment promoters to shield their identities and locations from investors and law enforcement officials.

"It's never been easier for con men to reach so many victims so easily," said David Marchant, a Miami-based publisher of newsletters exposing offshore investment scams. "The Internet has accelerated the life span of your average Ponzi scheme, which used to be spread by word of mouth. With the Internet, they don't have to do the traditional things like infiltrating church groups anymore."

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