BW Online | September 24, 2001 | There's an E-Scam Born Every Minute

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SEPTEMBER 24, 2001

PERSPECTIVE
By Geoff Smith

There's an E-Scam Born Every Minute
Thanks to a court ruling, however, the feds now have greater freedom to put online con artists out of business

STORY TOOLS

On Sept. 13, while the world's attention was fixed on the aftermath of terrorist attacks on the U.S., a federal appeals court handed down a ruling that received scant attention but will have an immense impact on online investment frauds. The appeals court declared that stockgeneration.com, a now-defunct Web site, was a massive investment scam, not a game, as a lower court had ruled.

Stockgeneration was owned by a company based on the Caribbean island of Dominica. The Web site was a pyramid scheme that purported to be an investment game, and was copied by hundreds of the other Web sites that proliferate through Yahoo, Delphi, and e-mail links. Before it was shut down last summer by the Securities & Exchange Commission, Stockgeneration urged investors to put money in a virtual stock exchange that included one fictitious "privileged company" guaranteed to go up at least 10% a month, or 215% annually. In January, Judge Joseph L. Tauro ruled that since the Web site clearly identified itself as a game, players were well aware they were taking a chance rather than making an investment.

In overturning Judge Tauro's ruling, the appeals court sliced through the veil of deception, quoting Shakespeare's Romeo and Juliet: "A rose by any other name would smell as sweet." Translation: Just because Stockgeneration called itself a game didn't make it one.

PARADE OF FRAUDS. Based on its findings, the appeals court sent the case back to Judge Tauro for retrial. But Stockgeneration's lawyer, Daniel Small of Butters, Butters & Small in Boston, says he is still considering whether or not to pursue his client's case. If he does, he's not likely to prevail. Of course Stockgeneration was a fraud. The Web site ripped off Netizens to the tune of at least $5.5 million. That money is being held under court order in banks in Latvia and the U.S. For more background on the Web site and the secretive people who may have been behind it, see my Feb. 26, 2001, column, "An Open Door for Online Crooks".

Small also says, "Sadly, the court of appeals has given the SEC the green light to go on fishing expeditions across a wide range of Web sites." In fact, it will only allow the SEC to go after sites that purport to sell securities under the guise of a game. But that's a lot of territory. Netizens who track online fraud say there are still hundreds of similar scams operating at any one time. Rana Adamchick, who started a Web site call victimsagainstscams.com, says one of her goals is to turn over information on online fraud to federal and state officials. "We turn them in daily, and for everyone we take down, another five pop up," she says. "I get about 10 of them in my e-mail a day, and we get probably 20-30 victims from each program," she adds.

If Judge Tauro's decision had been upheld, it would have been open season for online crooks. Anyone could copy Stockgeneration's scam, as many already have. And it likely would have taken an act of Congress to close the loophole in the law the Judge Tauro thought he saw. As long as the appeals court's ruling stands, the SEC can go after scam artists with renewed confidence and vigor. If you've had experience with Stockgeneration or other online investment frauds, click on the e-mail link below and send me the details.

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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