Wherever investors gather, you’re going to find fraud and the Internet is an especially hospitable spot.
Some 7 million U.S. households currently use the Web’s investment-related services, according to an estimate by Jupiter Communications, a New York-based research firm on emerging technologies. New investors, in particular, don’t realize how easy it is to make a bogus stock look real.
Marc Beauchamp, spokesperson for the North American Securities Administrators Association in Washington, has a shorthand way of measuring the spread of Internet fraud.
“A year ago, my e-mail box at home would fill up with come-ons from X-rated Web sites,” he says. “Today, it is almost all financial scams.” Could it be that, in the ’90s, money beats sex?
At very small cost, Beauchamp says, scam artists can now reach tens of millions of people at once. Think of it as increased productivity. By becoming technologically hip, fraudsters can greatly increase their take.
Exactly how this works was explained in a fable recently published by “Insights,” a newsletter for corporate and securities lawyers put out by Aspen Publishers in New York. It’s about an imaginary company called PhenomX, which claims to have a cancer cure.
PhenomX has just applied to have its new and only drug approved by the Food and Drug Administration (FDA). The company president, Willie Sutton, knows the FDA will say no. The drug is merely coffee grounds in tablet form.
Willie and his friends own all 10 million of PhenomX’s shares, which are currently quoted at 50 cents on the OTC Bulletin Board. He intends to pump up the stock price, then dump his shares at a profit before the truth is known.
Here’s how he does it, on the Web:
Step One: The Phony Web Page. Willie sets up a central location (home page) on the Web, to tell potential investors about his miracle drug. He posts exuberant reports about PhenomX, thrilling-but-phony financial projections, documents bearing the FDA seal and information on how to buy the company’s shares. There’s also a bulletin board for posting messages and a chat room where investors can talk. The setup costs Willie nothing. He builds his flashy home page with free software downloaded from the Web.
Step Two: Spam, spam, spam. “Spam” is Web-speak for junk mail. Unlike ordinary mail, however, electronic mail costs almost nothing to send.
Willie finds his victims in many ways: through a “mining” program that extracts e-mail addresses from all over the Web; by gathering addresses himself from stock-chat bulletin boards; or by hiring a firm to do mass e-mailings. He drafts a personal note, calling PhenomX a phenomenal buying opportunity, and beams it out. Any investor who reads it can, with a mouse click, jump to Willie’s stock-selling page.
Step Three: Begin the Buzz. Willie smothers Web investment forums with marketing materials. He creates discussion forums for PhenomX, where investors can talk about the stock.
To get the discussion going, he posts enthusiastic entries under false names. He asks questions with one name and answers them with another. Investors get interested, and the stock price starts moving up.
Step Four: Tout It Yourself or Bribe a Tout. Willie concocts a more sophisticated buzz by creating “independent,” online investment newsletters that tout PhenomX. He can build them with the same free software he used for his home page.
He posts the newsletters’ Web addresses on various investment bulletin boards and waits for investors to respond. If he wants to spend more money, he pays an existing, dishonest online newsletter to name PhenomX as its “pick of the month.”
By this time, bedazzled investors might have bid the stock price up to $10. Willie and his friends sell out, the buzz stops, the FDA wakes up and smells the coffee grounds and the share price collapses.
If you spot an online stock fraud, report it to the SEC at: Enforcemen@sec.gov. You might stop Willie before he cheats again. But if you invested, your money is probably gone.
Tax Relief For the Divorced
Something has to be done for innocent spouses who are pursued for income taxes that, in justice, they don’t owe.
The victims tend to be women, either divorced or separated. Their husbands cheated on their taxes and skipped, leaving their wives to face the music. That’s because wives become equally liable for unpaid taxes when they sign a joint tax return.
The IRS chases an innocent wife when her ex-husband is hard to nab. Typically, he’s self-employed, so there’s no salary to attach. Sometimes he’s unemployed. He may own no assets, or live outside the jurisdiction of the regional IRS office.
The wife, by contrast, may have been left with the family home. She also may have a job, and hence a salary to garnish. Her tax refunds can be taken, too.
If she lives in one of the nation’s nine community-property states, such as California, and has remarried, her new spouse’s income can also be tapped to pay the ex-husband’s tax (to what extent depends on state law and whether the couple has a pre- or post-nuptial agreement).
In the other states, the new husband can’t be required to pay. But he might contribute anyway, just to get the monkey off their backs.
At least some changes appear to be under way.
Rep. Nancy Johnson, R-Conn., is pushing a reform legislation that would help new spouses in community property states by removing their liability for federal taxes owed by their spouse’s former husband or wife.
The Senate Finance Committee just approved a bill that goes even further. You’d be able to limit your liability for back taxes to items directly traceable to you. If the underpayment arose from your husband’s business, for example, only he would owe the tax. If you both worked in the business, the person primarily responsible would owe first. If he or she couldn’t pay, the other would owe. Fraud provisions would try to stop cheaters from shifting the tax liability to a spouse without income or assets.
This is emphatically not a tax-simplification law. A bunch of new regulations would have to be written. “But innocent spouses would have a simple way of getting tax relief,” says David Keating, consultant to the National Taxpayers Union, Alexandria, Va. And that’s worth it.
Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington, D.C. 20071-9200.