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Savvy Internet users know that when they get an email in capital letters with a subject line asking for help, they've been sent spam that's targeting more gullible people in order to acquire access to their sympathy first, followed swiftly by their bank account numbers. You may receive notification that you've won the British lottery, and all you have to do is send your account number and the million pounds sterling will be deposited directly. Or you may get a heartfelt letter from someone whose father is imprisoned in Sierra Leone (or some other exotic locale) and who needs your assistance in liberating a large sum of money from an offshore account. In exchange for your help, you are assured that you'll receive a commission. Both of these very common email spam campaigns have earned tremendous amounts of money from people who specialize in Internet fraud. But a more complicated form of Internet fraud can also cost innocent people their life savings: Internet investment fraud bilks thousands of people each year.
There has never been an easier time to perpetrate an investment fraud. In earlier days, criminals had to work a lot harder for their ill-gotten gains, renting offices (or at least P.O. boxes), printing brochures, holding investors' meetings, and running the scam face-to-face until either getting the money or getting caught. With the Internet, all that's changed. For a minimal investment, it's a breeze to set up a good-looking website, generate a "buzz" through newsletters or advertising, send millions of solicitation emails, and rake in the cash. The Internet has made investment fraud a much simpler career option than ever before!
Real companies use the Internet to disseminate information, and plenty of investors use the Web to research stocks, mutual funds and news stories related to the stock market. Legitimate companies like Morningstar carry educational articles, statistics and current stock market information, and millions of investors use the Internet to manage their own accounts, to purchase stocks and to research potential winners. Because so many people do use the Internet for investing, real but dumb investment options have a better chance of being taken seriously. Once, a novice investor would be prevented from buying penny stocks by a strict, honest, face-to-face financial advisor: now, people can squander their savings in the privacy of their own homes.
The people who create investment scams understand that, even behind a smart, conservative investor lies a more childlike being who hope to get something terrific for very little. Who wouldn't like to be able to brag that he or she bought a hundred dollars worth of penny stocks in a gold mining company that struck gold six months later! Investment frauds are based on our capacity for wishing: maybe this time, I'll be lucky. Even experienced, intelligent investors are on the lookout for the stock that's going to make it big, and that's where fraud comes in: convince people you're a legitimate company, make your "product" look like the next Big Thing, offer "shares" at a low, low price, and watch the money roll in.
So, how does the average investor tell an Internet investment scam from the real, next Big Thing? It's tough! But there are some things that should send up a red flag. First of all, if someone sends you an email with an "offering" in it, you can be quite sure it's not an offer you want to take. The fact is, real companies don't send out mass emails asking people to buy their stocks. Real companies list their stocks on one of the stock exchanges. You can look up the stock price over the past year, or the past five or ten years, see its fluctuations, and read about its track record. Buying a share of a company you've never heard of is a bad, bad idea. Making a decision to buy shares based on a message thread you read on an online bulletin board is also a big mistake. The people who post on those boards, more often than not are being paid to talk up some sort of product, and on an investment board, that product is likely to be an investment-related item, isn't it?
The Securities and Exchange Commission (SEC) is the national watchdog when it comes to investment scams and corporate fraud, Internet and otherwise. Because Internet fraud can come from anyone, anywhere, scams can be hard to track down, but the SEC also works with state and federal police to catch the people who perpetrate Internet investments, to return money to the people who were cheated, and to fine and imprison the criminals.
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