By NEIL ROLAND
c.1995 Bloomberg Business News
WASHINGTON -- The investment offer of a ``whopping 20 percent rate of
return'' from low-risk bonds was no different from countless other
get-rich-quick schemes.
Daniel Odulo's offer failed to disclose that he had no ongoing
business, just an idea for an eel farm with which he had no
experience, investigators said.
What set the Odulo plan apart was that it appeared on the Internet,
the fast-growing, loosely controlled computer network, and was
detected by federal regulators.
``We're probably catching just one out of 40 to 50 perpetrators on the
Internet,'' said Ben Lewis, a North Carolina securities investigator
who heads an Internet panel of state regulators. A growing number of
investment scams are being run on the Internet and other on-line media
as con men discover that they can reach an audience of millions with
little cost or risk of detection, investigators say.
Federal and state regulators trying to solve the budding problem say
that the massive flow of new electronic postings each day make
cyberspace scams particularly hard to discover.
``Use of the Internet has the potential to develop into a major
vehicle for fraud,'' said William McLucas, the Securities and Exchange
Commission's enforcement chief.
Odulo settled the SEC charges in August, agreeing to commit no future
fraud violation while neither admitting nor denying guilt. His
offering was caught and halted before anyone invested, the SEC said.
While the medium may be sophisticated, the come-ons are as tawdry as
ever and the victims as unsuspecting, regulators say. Among other
offerings now under inquiry after being pulled from the Internet by
state regulators:
--``Anti-aging pill is here now!...Two profit centers with 8 percent
affinity bonus paid twice a month.''
--``Investors needed to invest $500 to $3,000 in real estate venture
(foreclosures) in Chicagoland Area. Return on investment is 300%.''
--``If you could make $10,000 in the next 30 days, would you take 20
minutes to learn how it is done?''
No one knows the scale of the actual fraud because there's no
systematic way to monitor it, said Lewis, whose panel was appointed by
the North American Securities Administrators Association. Regulators
rely on random searches of the electronic media, he said. Computer
experts note that the on-line media offer inherent advantages to
would-be swindlers that are likely to frustrate law-enforcement
officials.
``Someone can do a hundred different versions of a scam simultaneously
in a single day,'' said Eric Brewer, a computer sciences professor at
the University of California at Berkeley.
``It's going to be very difficult for investigators to discover that
there are really a hundred frauds, and prosecutors are going to be
reluctant to take on just one or two cases.''
Law-enforcement officials are starting to address these problems.
State regulators and SEC and National Association of Securities
Dealers officials met in Vancouver last week to pool investigative
information, devise tools of detection and formulate uniform rules,
Lewis said.
A panel of state regulators plans to propose registration, education
and enforcement guidelines by January for use by the 50 states and the
District of Columbia, Lewis said.
Regulators also have started filing charges for Internet investment
fraud during the last seven months. No one is believed to have been
fined or imprisoned, and most offenders have agreed to settle charges
by promising to avoid future violations, regulators said.
Officials in Kansas, one of the more active states, have brought 25
cases since May, said Larry Cook, Kansas securities enforcement chief.
The SEC has brought four cases and is investigating a handful of
others, McLucas said. The agency announced today that a federal judge
in New York has issued a temporary restraining order against Scott
Frye of Pennsylvania and froze his assets.
Frye, who hasn't commented on the charges and couldn't be reached at
home, was accused of falsely promising riskless profits for investing
in Costa Rican coconut ventures.
In an SEC case brought in March, two concerns were accused of
fraudulently raising over $3 million from 20,000 investors through the
Internet.
Orlando, Florida-based Pleasure Time Inc. and Cincinnati-based Group
Dynamics Downline told investors that they could earn at least $60 a
week from an American Indian telephone lottery that would have $300
million in sales, the SEC alleged. The unregistered securities were
sold without disclosure of the risks involved, the complaint said.
The operator of Pleasure Time, Richard Welch, and of Group Dynamics,
Minette Acra-Kelly, have not yet been found and haven't commented on
the charges, said the SEC's Robert Burson.
The growing problem adds a new headache for investigators already
trying to cope with Internet security flaws that allow eavesdroppers
to review electronic mail containing personal information.
About 37 million people in the U.S. and Canada, or 17 percent of the
population over the age of 16, have access to the Internet, a recent
Nielsen Media Research poll showed. These numbers are expected to
triple by 1997, a recent Goldman Sachs & Co. report predicted. Use of
the international medium is intense: Prodigy Services Co., the third
largest on-line service, said it has about 60,000 new bulletin-board
postings each day.
Its low price makes the medium appealing. The three largest on-line
services - America Online Inc., CompuServe Inc. and Prodigy - charge
$10 a month for five hours of on-line time, and $2.95 an hour for use
after that, said Prodigy spokesman Brian Ek.
The cost is even cheaper for those using any of dozens of
direct-access Internet providers, and is free for customers connected
through a university, Ek said. Hundreds of investment appeals can
easily be sent within hours, he said.
In an arena that seems impervious to close regulation, officials are
leaning toward an investor education approach.
Prodigy Services Co. has granted state regulators access to its
service, and about 25 states have set up e-mail addresses from which
to answer investor questions, Ek said.
The SEC and the states are joining to enhance the investor ``home
page,'' or electronic publication, that the SEC has on the Internet.
The joint venture, expected to cost less than $100,000 a year, would
guide investors on questions to ask when evaluating a possible
investment, Lewis said.
``Education may be our best policy,'' Lewis said. ``We're just
ignorant now because there's no track record yet.''
NYT-11-01-95 0745EST
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