The Internet can serve as an efficient tool for investors, but it is also an excellent tool for defrauders. The Internet allows individuals or companies to reach tens of thousands of people by building a web site, posting a message on an online bulletin board, entering a discussion in a live chat room, or sending mass e-mails. Because defrauders can easily make their information look real and credible, investors may have difficulty telling the difference between fact and fiction.
Many companies use online bulletin boards, online investment newsletters, or e-mail spams to promote fraudulent investment opportunities by disclosing fake "inside" information about companies. A common scheme that they use is “pump and dump,” which involves the use of false or misleading statements to increase stock prices and then sell the inflated stocks to the public. As investors often do not know the parties with whom they deal on the Internet, investors may not discern whether the information is legitimate and unbiased.
To avoid falling for an online investment fraud, investors should never rely solely on unsolicited information gathered from online bulletin boards, online investment newsletters, chat room, or e-mails. Investors should diligently research the companies using a legitimate source, such as SEC's EDGAR.
For more information, see:
- Internet Fraud, Securities and Exchange Commission (SEC): http://www.sec.gov/investor/pubs/cyberfraud.htm The SEC describes and warns against internet fraud.
- Mass-Marketing Fraud, United States Department of Justice (USDOJ): http://www.usdoj.gov/criminal/fraud/internet The USDOJ provides information and warnings on internet fraud.
- Internet Fraud, Federal Bureau of Investigation (FBI): http://www.fbi.gov/majcases/fraud/internetschemes.htm The FBI outlines tips to avoid internet fraud.
- Investor Protection Guide: "Pump and Dump" Schemes, Legal Information Institute (LII): http://www.law.cornell.edu/wex/investor_protection_guide_micro-cap_stock_fraud_pump_and_dump Cornell University’s LII describes “pump and dump” schemes.