Georgia Contract Lawyers

Protecting Yourself Against Online Investment Schemes

What are the rules of the road for investors who decide to travel the information superhighway? Perhaps the most important thing to keep in mind is that there will never be enough "cybercops" to keep the online world free from fraud and abuse. Even though state securities agencies and other investment regulators have mounted serious efforts in recent months to spot and stop cyber-fraud, the simple truth is that there are far too many places in the online world (particularly in the almost entirely unregulated Internet) for swindlers to set up shop. Even if the several thousand people in the United States who work at the Securities and Exchange Commission (SEC), state securities agencies, National Association of Securities Dealers (NASD), and the stock exchanges were somehow able to put aside all other tasks in a massive bid to shut down online investment scams, it is doubtful that this problem could be stamped out altogether.

This does not mean that you should avoid cyberspace. Rather, it means that investors who venture into the online world should do so with caution, being mindful of the danger of fraud and abuse. The good news is that there are self-defense steps that you can take to fend off cyber-fraud:

Don't expect to get rich quick. The online world is filled with timely and accurate information that can help you become a smarter investor. Unfortunately, it also is home to a growing amount of investment fraud and abuse. The trick here is to keep your excitement and expectations about the promise of the online world in perspective. You have to evaluate the information you get online in the same way that you would any news magazine article, television report or whispered "hot tip." A failure to exercise the caution and skepticism that is a healthy response to all unfamiliar investment opportunities could be a fatal misstep here!

Don’t assume that your online computer service polices its investment bulletin boards. Most don’t. The vast majority of services take a "hands off" attitude to validating claims made in message postings. Even the ones that do minimal policing are swamped by the volume of postings, which add up to literally millions of messages each month. In the "wild and woolly" world of the Internet, just about anything goes. Nothing is in place to prevent a con artist from posting one (or dozens) of pitches for a swindle. In the unregulated environment of the Internet, often the only check on abusive messages is "flaming" by other users.

Don’t buy thinly-traded, little known stocks strictly on the basis of online hype. These are the stocks that are most susceptible to manipulation. Unlike blue chips and other stocks with substantial floats (the number of shares available to be bought and sold), the price of low-volume stocks can be moved through relatively small strategic trades. This is why online hype usually involves previously unknown securities, often for companies involved in mining or the world of high-tech. Even if a stock that is being hyped starts to move up, proceed with extreme caution, since this may just be part of the overall manipulation scheme. You could still end up holding the bag! Always take the time to do your own research using reputable resources, many of which are available online.

Don’t act on the advice of a person who hides his or her identity. Keep in mind that many computer bulletin board services allow people to use aliases and nicknames. Though this is intended to protect privacy, it also can be exploited by fast-buck artists. As a result, you may end up dealing with an undisclosed broker, investor, or company insider intent on driving up the price of a stock through false information or baseless speculation that is difficult or impossible to disprove. Don’t assume that two or more people talking up a stock are actually two or more different people! Review the motives of the person sharing investment opinions and information online and take the time to search out other information on your own before making an investment decision.

Don’t get suckered by claims made about "inside information," including pending news releases, contract announcements, and products. Investment bulletin boards and discussion groups are crammed with hot tips about impending developments sure to send a stock soaring in value. Just because these tips appear in cyberspace does not mean that they are exempt from federal insider trading laws and rules. It is extremely unlikely that genuine "insider information" is going to be publicly broadcast on an investment bulletin board.

Don’t assume that just because someone says that they have checked something out that they have actually done so. Online stock hypesters make all sorts of claims about visiting companies, inspecting mining operations, and having personal conversations with company officials. Keep in mind that you may not be able to verify who is making these claims much less whether any of the information is true or the supposed research ever took place. On a related note, keep in mind that an established tactic of investment schemers is to talk up mines and factories in remote corners of the U.S. (or elsewhere around the globe) where it is impossible for you to either visit in person or get meaningful information.

Don’t forget to always be on the look-out for conflicts of interest. A growing number of those who analyze stocks online are receiving cash or stocks in exchange for making glowing comments about the companies in question. Some of these individuals prominently disclose this fact, while others make little or no mention of the fact that they are paid touts. Make sure that you always know why someone is so "high" on an investment opportunity!

Don’t forget to first make sure that an investment opportunity and the person promoting it are properly registered with your state securities agency. Laws designed to protect small investors from fraud and abuse do apply in cyberspace. A failure by an issuer or broker to follow the state requirements here is often a major "red flag" of an investment scam.

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