| Caveat
Emptor: Investment Fraud & Misinformation on the Internet |
Dateline: 2/9/98
Last year disaster struck the
resource industry when the Bre-X scandal broke. A penny stock
that had shot up to over $200 a share on hype and outright lies
crashed and burned. Not only did it burn a lot of investors, some
of whom had leveraged the stock heavily (I read of at least one
suicide by a despondent investor), it burned an entire investment
sector. Resource small cap stocks suffered. And gold itself
suffered. Whether the crash of Bre-X and the decline in the price
of gold are related is doubtful. That they coincided with each
other was catastrophic.
How the heck did the Bre-X boys
pull it off? In their new book, Mutual Funds and RRSPs Online, Canadian Internet gurus Jim Carroll
and Rick Broadhead devote two full chapters to the whole question
of Internet Investment Fraud. Bre-X, they point out, was greatly
hyped and promoted in the online community. Online discussion
groups hyped the stock unrelentingly. Not only that, Bre-X had
its own website where they continuously "disseminated
positive information" about the alleged gold find. Many
investors took the Bre-X postings as gospel truth, not
questioning the accuracy of the reports.
too good to be true. - Jim Carroll & Rick Broadhead |
Carroll and Broadhead point out
that the Internet is an ideal tool for fleecing the unwary. They
discuss how easy it is for a savvy con artist to create a
professional looking website, to create a fictitious research
institute to release positive news about some invention or
discovery, and to populate discussion groups with fictitious
people to hype a stock.
Even when there is no fraud, investors should be cautious. Hype based on fact can also artificially inflate a stock's price. The market often displays a herd mentality.
The main things you should be
aware of in using the internet for investment research is that:
Examples of the first are what the U.S. Securities Exchange Commission calls the "Pump and Dump." These are "hot tips" spread over internet newsgroups and by emailed "alerts". In their book, Carroll and Broadhead cite the example of Ashton Mines, a diamond play in Alberta. In April 1997 a discussion forum user posted a message that Ashton had pulled a huge diamond from its Buffalo Hills mine in Northern Alberta. The stock jumped from $1.70 to $7.65 by mid-May, despite denials by the company that the information was false! Online discussants argued that the company was deliberately keeping the "find" secret.
A superb example of incorrect information comes from those Canadian internet gurus again. In mid-1997, the British Treasury Department reported online that the governor of the Bank of England had asked for a half point increase in interest rates when, in fact, he had asked for a quarter point. The news reached British financial markets before it could be corrected. If the venerable Bank of England can screw up, then you really should double check everything you find on the internet for accuracy.
And a good example of out of date information is a site called Bidding on Bay Street. It focuses on small cap growth stocks, but the length of time between updates is infrequent. The last update was October 27 at this writing. The update before that was August 19. Another example is the GMT Newsletter. This one also focuses on small cap growth stocks.
On its front page GMT has a table of their track record. It seems impressive on the surface with excellent gains on their stock picks. But the table does not give current prices. One of the picks is a company called Coconimo SMA which they featured in their October newsletter at 20 cents with a target of $1. The track record table shows that it gained 1225% to $ 2.65. What the table doesn't tell you is that the stock then plummeted back to its current level of 48 cents (that's still a gain of over 100% on the price when recommended, but what if you bought in at 75 cents or more?). Nor does the table tell you that the stock traded as high as $8.50 in March.
Another example from the GMT site is MIS International. I subscribe to GMT's newsletter and the day an emailed newsletter came out with some new press release information, the stock jumped from 31 cents to 59 cents before falling back the next few days to 31 cents again. Did it rise on the hype of the newsletter and press release? What do you think? This is not to say that either of these stocks is a bad investment, just that you should be cautious.
There are numerous resources for investors on how to be wary of online fraud, inaccuracy and misinformation. Carroll & Broadhead offer Ten Tips for Avoiding Fraud on the Net in their book. These range from "Don't expect to get rich quickly" to "Don't buy thinly traded stocks on the basis of hype" to "Don't trust strangers". (Gee, my Mom used to tell me that too!) The book is worth getting for those two chapters alone and I recommend it.
In general, it's buyer beware! Check out all relevant information before you invest. Meanwhile, here is a list of excellent online information on investment fraud on the internet:
Investing (Canada) Notes
Our Data Retrieval page now includes a search form to get American stock quotes and charts. It links to Wall Street City.
We've added the new category of Investment Fraud to our Net Links. There are now over 250 links in our Library of Net Links!
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