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Watch out for Internet stock frauds

Colt
Colt  

March 6, 2000
Web posted at: 11:21 p.m. EST (0421 GMT)

WASHINGTON (CNN) -- New technology is producing new ways to get swindled based on a tried and true method involving securities.

The movie "Boiler Room," which opened in theaters last month, shows old-fashioned stock swindlers at work "pumping and dumping": Pumping up the price of a cheap stock, then dumping those shares at a profit before the price collapses.

The Internet makes that sort of scheme easy to pull off. It's so easy, in fact, that law enforcement officials say some students made big money in their spare time at Georgetown University's law school.

Student Douglas Colt set up a web site -- "fast-trades.com" -- that recommended stocks to others. That is legal.

 VIDEO
CNN's Brooks Jackson looks at the scheme, where it went wrong and if this is just one case of people taking advantage of a booming economy and undereducated investors.
Windows Media 28K 80K
 

But it was the next step Colt took that got him in trouble with the Securities and Exchange Commission.

Officials say Colt enlisted classmates Kenneth Terrell, Jason Wyckoff and Adam Altman, who then flooded Web sites with messages falsely claiming fast-trades.com had a good record picking winners.

"It's fraud. It misleads people, and it causes people to falsely buy stock on false and misleading information ... and lose money as a result," said Richard Walker, chief of enforcement at the SEC.

Colt, himself, made another posting on an unrelated Internet message board detailing what the SEC calls a blueprint for high-tech fraud.

He was quoted as saying a Web-based stock manipulator should first find a cheap stock with few buyers or sellers.

Then, he said, "Buy a bunch of this garbage stock."

And finally, "Tell your idiot subscribers how great the stock is, and, like sheep, they will run out and buy it."

That's just what the SEC said Colt did with a California company called Artecon, which was selling for less than $1.13 a share.

Colt and his friends bought more than 51,000 shares in a single morning. Then fast-trades.com recommended that stock -- and buyers came out of the woodwork, pushing the price to $6 that same day.

The next step in Colt's "blueprint" was to "dump the shares you bought a few hours ago to these suckers."

Final step in his plan: "Watch the stock steadily tank" and "laugh all the way to the bank."

According to the SEC, Colt and friends dumped their shares for a profit of $164,000 in a matter of hours. And within days, Artecon stock was back down near a dollar again.

Colt traded in four different stocks along with his classmates, his mother, Joanne Colt (a Colorado Springs city councilwoman), and three others, making $345,000 in total illegal profits, according to the SEC.

The agency said the accused spent most of their illegal profits on lawyers to defend them.

The SEC brought and settled securities charges against the five. Those accused aren't talking, but they have all consented to legal orders banning them from similar scams in the future -- without denying or admitting any guilt or paying any fine.

Georgetown University said the law students will even be allowed to graduate.

But those "suckers" who lost money are apparently just out of luck.

To avoid getting ripped off by Internet stock scams, the SEC urges traders to check the agency's Web site, Internet Fraud: How to Avoid Internet Scams at http://www.sec.gov/consumer/cyberfr.htm or http://www.sec.gov/consumer/offertip.htm.



RELATED STORIES:
Review: A 'Boiler' that bubbles
February 23, 2000
'Boiler Room' exposes ugly underbelly of investment scams
February 17, 2000

RELATED SITES:
US Securities and Exchange Commission
  • Avoiding Online Investment Scams
  • News Item: Law Students Sued for Internet Scheme
Georgetown University
Movie: The Boiler Room
Artecon

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