Online cons to watch for
June 4, 1999
by Jeffrey Rothfeder
(IDG) -- Early one morning in April, a scam operation took just a couple of hours to swindle dozens of investors out of tens of thousands of dollars.
It all began with a message on a Yahoo stock board alerting investors that PairGain Technologies, a Tustin, California, maker of high-speed Internet products, was about to be bought by an Israeli company for $1.35 billion, nearly twice its market value. To reinforce its authenticity, the message contained a link to a Bloomberg news story giving details of the deal. That was enough proof for many investors, who dived into PairGain's stock, immediately bidding it up more than 30 percent, from $8.50 a share to over $11.
It was a hoax: PairGain wasn't being bought by anybody. The "news story" was a phony article, written to mimic a Bloomberg report and posted anonymously on Angelfire, a Web page service.
If eager investors had only stopped to do a little digging, they would easily have uncovered the fraud. All someone had to do was to look for a legitimate press release on www.pairgain.com, for instance, or search for the announcement on any portal.
But the hoax went unchallenged for almost two hours before anyone discovered the lie and warnings started appearing on the Web. Thereupon, PairGain stock quickly tumbled to prehoax levels, leaving bandwagon investors with stock of a much lesser value.
One week later, federal authorities arrested Gary Dale Hoke, a PairGain employee, on charges of stock manipulation. An FBI task force had tracked Hoke down by following electronic footprints from Angelfire and Hotmail.
"This is the first case in which an individual has abused the power of new technology to spread false news to millions of investors at lightning speed," says Alejandro Mayorkas, United States district attorney in Los Angeles, who is handling the case.
Fraud on the rise
Illegal stock-touting is just one of the countless scams executed on the Internet these days. Thousands of new surfers plunge into the Web each week, but the same technology that they find so attractive also makes it simpler for scammers to rook them. The Internet permits anyone selling good or bad investments, business ideas, or products to reach hundreds of thousands of people at once with virtual anonymity. For the unscrupulous, nothing is more mouthwatering than an expanding pool of potential victims.
The Securities and Exchange Commission currently gets more than 100 complaints a day about illegal Internet activity--mostly involving online stock scams and dubious investment touting, known as pump-and-dump scams. In 1998, the National Consumers League received 7752 Internet fraud complaints--up from less than 2000 the year before. "These scam artists are waging war," says John Reed Stark, the SEC's chief of the office of Internet enforcement. "They're committing frauds that can ruin lives."
The maliciousness of these acts is especially clear when the criminals target the desperate and weak, according to Federal Trade Commission officials. The proliferation of phony weight-loss plans and cheap fake Viagra pills that are nothing more than placebos, official say, are the best evidence of scammers' deviousness. "Deceptive health claims and pseudocures are an epidemic on the Internet," says Betsy Broder, the FTC's assistant director of the Bureau of Consumer Protection.
To combat the alarming surge in Internet fraud, the FTC, the SEC, and many state law enforcement agencies have set up teams to police the Internet daily. The National White Collar Crime Center and the National Fraud Center announced the formation of the Internet Fraud Council recently. Later this summer, the IFC promises to launch its Internet Fraud Complaint Center for consumers, and the Federal Bureau of Investigation will take on an advisory role. Despite the ongoing efforts of federal authorities and law enforcement to curb crime, scammers continue to represent moving targets, in an environment that's perfect for hit-and-run tactics.
Web scams made easy
"Everything about the Internet makes it perfect for criminals bent on perpetrating a scam," says Susan Grant, director of the National Consumers League's Internet Fraud Watch program. Of course for scams to work, the perpetrators must find gullible people. In the past, contacting potential suckers required expensive mass mailings of come-on literature or labor-intensive hours calling from boiler-room telephone banks. Now, armed with mass-marketing software and a CD-ROM of e-mail addresses, a criminal can contact thousands of online targets with one keystroke, relatively cheaply. Or by attaching press releases to a few well-traveled portal sites, announcing a fantastic ground-floor investment opportunity with a hot company, the crook can lure potential victims to the scam's home page for practically nothing.
As e-commerce thrives, more and more people use their credit card numbers to order products over the Internet. Consumers like the protection of being able to cancel a charge on their card if an item they buy doesn't match its specifications. But hackers steal, collect, and sell credit card numbers to "crammers," who in turn use the data to hit the card owners with fraudulent billing charges.
And on the Internet, criminals can operate in relative anonymity: Phony merchants tend to work without a fixed address, relying instead on various mail drops. Their modus operandi involves maintaining multiple e-mail addresses and using a raft of pseudonyms. Shysters can set up virtual shop, make some money, shut down, and relocate to another URL--all without leaving a paper trail or risking detection.
What's more, as evidenced by the Bloomberg hoax, shoddy products and false information can be digitally airbrushed onto a glossy Web site that looks as legitimate as Warren Buffet's or IBM's.
Clearly, con artists are milking the Internet for all it's worth, making stacks of quick bucks. Sometimes their profits depend on volume business--duping many people into losing small sums of money, rather than bilking relatively few out of large amounts. The more you open yourself up to e-commerce, the more likely you are to run into these kinds of scams. Here's a look at the top four scams on the Net according to the National Consumers League's Internet Fraud Watch.
Consumers fight back
Law enforcement agencies can't catch all the scammers who set up shop on the Web, but a growing grassroots movement is working to unearth online scams, issue warnings, and offer tips on how to avoid getting cheated in the first place. This information can be found on a number of sites, including www.scambusters.com, www.scamwatch.com, www.stockdetective.com, and www.bbb.com. Some sites offering products or services that tend to attract swindlers have a section for consumer complaints, where buyers can expose scams. Two such helpful sites are www.bestfares.com and www.creditinfocenter.com.
One tireless Internet-scam vigilante goes by the screen name Steve Pluvia. He is often found on one of the Web's most popular stock chat sites, Silicon Investor. Pluvia has correctly identified several companies as engaged in deceptive activities and has watched day traders scurry out of stocks as their prices plunged.
One of Pluvia's favorite stories involves the unmasking of Teletek, a now-defunct Las Vegas telecommunications company, which in 1996 boasted about its planned expansion. On a hunch, Pluvia checked into Teletek's claims, calling creditors and researching SEC documents. "To keep up the lie about its growth, Teletek would offer long distance through MCI, not pay the bills, get shut off, and then move on to another carrier," says Pluvia. "Of course, none of this was disclosed to the public."
One person taken in by Teletek's illegal touting was Cliff Plas, owner of a Chicago printing firm, who bumped into the company's phony claims on an AOL chat board. He invested $10,000 in the stock, buying 5000 shares at $2 each. The stock's value peaked near $10 per share in March, at which point Pluvia spread the word on the Net about Teletek's deception.
"Pluvia put out some vicious stuff, so I called the company and they told me nothing negative was going on at the company and that Steve Pluvia had it all wrong," Plas recalls.
Plas held the stock as its price per share plummeted to below $6 almost instantly and kept dropping. Shortly thereafter, one of Teletek's controlling shareholders was indicted for fraud, the firm's top management resigned, and the company went bankrupt. "I ended up being right on about 99 percent of what I said," says Pluvia. Plas never got out.
With so many scams and schemes on the Web waiting to ambush victims, consumers' most effective shield may be skepticism. A century ago, P. T. Barnum said a sucker is born every minute. On the Internet, that birthrate is a lot higher.
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