Online Investment Scams Are Flourishing

WASHINGTON - Larry Cook was prowling for financial advice on the Internet one night in August when he ran across a message telling people how much money they could make by investing in a coconut plantation in Costa Rica.

Buying into a coconut plantation is "similar to a CD, with a better interest rate," Cook was told as he sat at his home computer in Topeka, Kan., exchanging electronic messages with a Pennsylvanian who said his name was Scott A. Frye.

An investment of as little as $10,000 could produce a 20 percent annual profit for the next 50 years, Frye said in another message to Cook. "How much do you have to invest?"

Instead of sending a check, Cook served Frye with a court order citing him and two companies he owns for selling unregistered securities. Cook is the director of enforcement for the Kansas Securities Commission and one of the nation's first undercover investigators working the Internet beat.

Now facing a lawsuit by the Securities and Exchange Commission as well as state charges, Frye denies he was trying to sell unregistered securities on the Internet. He said he doesn't know how the information about his coconut plantation got onto computer networks.

That's what makes controlling electronic investment scams so difficult, regulators say: It's hard to track computer messages and often impossible for investors to tell with whom they are dealing or where those people really are.

The SEC and state regulators - working through the North American Securities Administrators Association - say they are gearing up to handle this new wave of swindlers who are using the Internet, commercial online services, computer bulletin boards and electronic mail to contact investors.

The state regulators group is studying whether new laws may be needed to control the crimes that have been adapted to take advantage of electronic communications.

In the past few weeks, the SEC and state agencies have filed civil charges against people who allegedly were using electronic media to manipulate stock prices, promote chain letters, sell shares in a nonexistent mutual fund and lure investors into an imaginary eel farm.

"I expect we are going to have a lot more of this," said Texas Commissioner of Securities Denny Crawford.

Although regulators are learning quickly about the scams, they haven't found ways to stop all of them.

One retired investor in Austin, Texas, Crawford said, liked to spend time on computer services where people exchange stories about their investment experiences and swap financial advice. Over several sessions online, he signed on to a personal investing forum and heard another investor describe his success with a particular mutual fund. The retired Texan decided to invest in the fund, asked his electronic pen pal for the address and mailed off a check for $10,000.

"There was no such mutual fund," Crawford said.

The address was a post office box, and the person who suggested the investment has disappeared.

"With a boiler room (where investments are sold by phone), you have a physical location you can track down," Crawford said. "Sometimes it's very difficult to figure out where an electronic message emanated. It can take substantial resources to track it down."

Crawford said high-tech communication provides credibility to investment schemes.

"Generally, people are sophisticated enough to know they should be very skeptical of people who call on the phone. But when one sits down in a front of a computer screen, one's defenses tend to drop," Crawford said.

And the incentive can be rewarding to the scammer. With a mailing-list program and a modem, it's easy to launch a get-rich-quick scheme, said Richard Adelman of the Boston office of the SEC.

"If you have an Internet connection and can get your ad out and hundreds of thousands of people read it, all you need is a few to make money," he said.

Not many people would send $10 to a total stranger who mailed them a chain letter or pay attention to an offer of 200 percent a year interest, risk-free, but e-mail chain letters and too-good-too-be-true deals continue to flourish in cyberspace.

The unwitting suspension of disbelief engendered by computers enables fraud artists to recycle scams that have long been used in other media, said Joan McKown, chief counsel for the SEC enforcement division.

"They're not different in character from what you see through the mail or on the phone," she said.