Spotting Online Investment Scams


By Geoffrey Smith Rip-offs thrive on the Net, and investment scams are among the worst problems. The Internet Fraud Complaint Center reported earlier this month that online scams cost nearly 10,000 Americans $18 million last year. Auction fraud is the most prevalent problem. But the average investment scam costs victims $1,000, far more than the $395 lost in the typical auction scam.

Those are only the reported numbers. There's a scam every minute, and it's hard to imagine how many people fall for them. But fall they do.

As a columnist covering online financial services, I still get e-mail from distraught victims of one of the most notorious online investment frauds ever, Stockgeneration.com. Two years ago, the Securities & Exchange Commission shut down this fake online stock market. The agency sued the company, claiming that it ripped people off for $5.5 million. The case is still slowly moving through the courts. The e-mail I recieve are from people who claim to have lost thousands of dollars and want to know how they get their money back (see below).

"BUYERS ALERT"? I also get bombarded with dubious e-mails touting new investment or business opportunities. It's hard to know when these promotions cross the line. But they're filled with hype and promise -- and sometimes, red flags.

Consider the e-mail I received on Apr. 10 with a stock tip. It was a "buyer's alert" from a Florida company called stockbuyersalert.com, pushing a penny stock called GoHealthMD Inc. (GOMD). The e-mail started by highlighting the sender's claims of a stellar track record. Its last four stock picks had increased 100%!

Several warning signs are there for those who bother to look. No names are attached to the e-mail, which includes disclaimers about the speculative nature of the investment. SBA is not a registered investment adviser or broker-dealer, and it trades in GoHealth's stock, according to its e-mail, which also states that the firm has received a payment to issue the buyer's alert.

POISED TO EXPLODE. But the e-mail insisted that GoHealthMD was a stock-buying opportunity not to miss. Why? "Web-influenced health-care spending will soar to $61 billion by 2006," it says. The company also has a "proven revenue model." The e-mail gives a half a dozen other reasons why the company was poised to explode. Stockbuyersalert set a target price on the stock $1.75, a 400%-plus gain.

I checked with the SEC. GoHealthMD's revenues were $195 for the three-month period ending Sept. 31, 2001, the company's latest reported numbers. You're reading that right: $195.

On Apr. 9, the day before the e-mail was sent, the stock was at 35 cents. On Apr. 11, it closed down 37%, at 22 cents. In an attempt to get a comment for this story, I left a message with the answering service at stockbuyersalert.com, but I haven't heard back.

Federal officials are pushing to make investors aware of the pitfalls of online investment fraud. On Jan. 25, the SEC and other watchdog agencies posted a fake Web site called www.mcwhortle.com. The site touts a company that makes a handheld biohazard-warning device that "detects all known biohazards." Mcwhortle had also been "pre-approved" by the SEC to issue an IPO.

Though it's an obvious fraud, the SEC waited until visitors went at least three clicks into the site to inform them of the fake scam. Since it was launched, nearly 1.8 million visitors have gone to the site, the SEC says.

CONTACT THE SEC. The people who put money in Stockgeneration.com weren't so lucky. This online scam, which I've written about previously, promoted a fake online stock market (see BW Online, 2/26/01, "An Open Door for Online Crooks?", and 9/24/01, "There's an E-Scam Born Every Minute"). It was long ago shut down by the SEC, but not before it took $5.5 million from "investors."

To those people who continue to ask me how to get their money back from Stockgeneration.com, here's what to do. The case is still pending in the courts. But you should notify the SEC's Boston office at 617 424-5900. Tell them you're a victim of the Stockgeneration.com scam and want to give your name and contact information to the attorney working the suit in case it ends with a verdict that can result in refunds. Be prepared to document your losses in as much detail possible. Good luck -- and be more careful in the future. Smith covers a wide variety of topics, including personal finance issues, from BusinessWeek's Boston bureau. You can e-mail him at geoff_smith@businessweek.com


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