SEC Brings Four Enforcement Actions for Internet Fraud

(February 26, 1999) The Securities and Exchange Commission announced that it has brought four more enforcement actions against thirteen individuals and companies for committing fraud on the Internet. Three of the actions involve illegal touting of securities, and one is for an illegal "pump and dump" scam.

"Today we have good and bad news to report and a reminder to impart. The good news for investors is that the disclosure of information they need has improved dramatically since our first Internet fraud sweep in October," said Richard Walker, Director of the Securities and Exchange Commission's Enforcement Division. "The bad news for cyber-scammers is that the SEC continues to be vigilant in its efforts to stamp out fraud on the Internet. If you're trying to cheat investors on the Internet, we are watching and we will catch you. Finally, a blunt reminder to people who are paid to tout stocks on the Internet: You must disclose the nature and amount of your compensation and it must be easily accessible, not buried somewhere on the website."

Last October the SEC initiated twenty-three actions for fraud on the Internet -- all for illegal touting. Three of the four actions just announced are for illegal touting. Under Section 17(b) of the Securities Act of 1933 it is illegal to publicize, or tout, a security, for pay, unless the nature, amount and source of the compensation are disclosed.

For example, in one action the SEC charged that a former stock broker, and his company, had been using spam and web site to spread information about certain companies, without properly disclosing the receipt of compensation, in the form of cash and stock, from those companies. The SEC has instituted cease and desist proceedings.

In the single "pump and dump" proceeding, the SEC alleged that two individuals sold to the public essentially worthless securities of a software development company, which were not registered with the Commission as required by federal securities laws. They also arranged for publications to tout the company on the Internet and elsewhere. When the stock's price rose in the wake of these touts, they sold their shares at a profit. Subsequently, the stock collapsed and the company ceased operations.