Cyber Crime

Investors consider the Internet a primary tool for researching and trading securities. Securities are stocks and bonds, both financial investments. The number of individuals opening online investment accounts increases every year. With a few mouse clicks investors can gather a great deal of information about a company's stock and decide what to buy and sell. Online they can buy or sell quickly and cheaply.

The same benefits investors enjoy can be used by those intent on committing securities fraud. Easy access, speed, and operating anonymously all create a favorable atmosphere for securities fraud. Law enforcement must deal with three basic types of security fraud:

1. Market manipulation—the most common fraud scheme, involves creating fake or misleading information on a particular stock to run the price up. For example, the owner of a lower priced stock puts fake highly positive announcements about the stock in online newsletters, message boards, and other Internet securities information sites. Investors read this information and begin buying the stock, which in turn makes its price go up rapidly. The owner who made up the phony information sells his stock as soon as the price goes up and makes a large profit. The information is discovered to be false, the stock price falls, and everyone who bought the stock loses money. This scheme is referred to as "pump and dump."
2. Bogus stock—this involves offering stock that does not really exist. For example an unregistered criminal stock dealer may offer phony stock in eel farms in Oregon, pineapple plantations in Hawaii, or most anything else the dealer imaginatively creates. To hundreds of people cruising the Internet looking for investments, they invest their money only to lose it all. The bogus dealer deposits the money in a foreign bank account and leaves the country.
3. Touting—this occurs when a certain individual or group, often a stock investment advisor known and trusted in the investment community, is paid to "tout," or highly recommend, a particular stock as an excellent investment. The touters, however, do not reveal that they are being paid to tout the stock. Investors think they are receiving honest information when in fact they are victims of a scheme called "bought and paid for," meaning the advisor was paid to put out the positive information resulting in an increase or run-up of the stock price.

The Securities and Exchange Commission (SEC) is charged with overseeing stock transactions and brings criminal charges against violators. The Securities Act of 1933 and Securities Exchange Act of 1934 are the primary laws governing securities fraud. Federal laws also require anyone acting as a stockbroker or dealer, either online or offline, to register with the SEC. The biggest challenge for the SEC is keeping up with rapid growth of the Internet. SEC staff investigators find it difficult to keep pace with the many securities scams that originate not only in the United States but from anywhere in the world. Many Internet fraud criminals target U.S. investors without ever coming into the United States.