On April 7, Bloomberg News (www.bloomberg.com) woke up to discover it had an evil twin on the Internet. That morning, someone had posted a site identical to the respected financial news service's, reporting that the Tustin high-tech company PairGain Technologies Inc. was being acquired by the Israeli company ECI Telecom Ltd. for $1.35 billion. Eager investors who saw a message linking to the site on a Yahoo! financial bulletin board flocked to invest, only to get hit hard when the story was revealed as a hoax-what's called in the business “pump and dump”-several hours later and the stock price plummeted.
Bloomberg sued the unknown perpetrators on April 12, just three days before the FBI arrested the man they say is behind the hoax: 25-year-old PairGain employee Gary Dale Hoke of Raleigh, North Carolina. The news service is seeking unspecified damages and a court order to prevent future counterfeiting of its site.
Kevin Lichtman feels their pain. Just two days after Bloomberg filed its lawsuit, the founder of Stock Detective (www.stockdetective.com), a site that profiles dubious stocks in an effort to keep investors from getting scammed, discovered someone had duplicated his site, too.
“We contacted the site's ISP, and they turned off the site,” he said. “Someone told us the owner of the site had left for Canada or something. But by doing some sleuthing of my own, I found out that the contact person listed for that site was also listed as the contact person for a number of other stock sites we had exposed in the past. My suspicion is that they may have been preparing to get revenge on us-maybe by putting false information on a site that looked just like ours.”
Lichtman has exposed a lot of scams since Stock Detective went online in April 1997, but that was the first one involving his own site. And he expects to see a lot more cases of stolen identity on the Internet.
“The PairGain thing was extremely clever,” he said. “It really was. I'm surprised that it hadn't happened sooner. I think there were a number of stock promoters taking very careful notes. We're probably going to see similar types of frauds in the future.”
And if anyone is an expert of Internet stock fraud, it's Lichtman, who is regularly quoted in the press as a stock-fraud expert. The former stock broker now runs FinancialWeb, a network of financial sites, with Stock Detective as its crown jewel. He and his staffers spend their days digging in corporations' closets to unearth skeletons that might otherwise remain hidden. They publish the results in a section on their site called “Stinky Stocks.” They also have a “Red Light District,” in which they let investors know of warning signs that suggest a company might not be all its publicity claims it is.
As the stock market balloons around the 10,000 mark, credulous middle-class investors are turning up on cyber Wall Streets in record numbers. They bring their naivete, their outsized expectations and their money. Unscrupulous speculators-like those involved in the PairGain scam-bring the matches.
That's where Lichtman's organization comes in. When the Securities and Exchange Commission (SEC) made its well-publicized Internet sweep in October 1998, charging 44 stock promoters with violating securities laws, Stock Detective had previously profiled an even dozen of them.
“Only one time did the SEC scoop us,” Lichtman said. “They halted trading on a company we were in the process of researching. We're very proud of that.”
While Lichtman says the SEC is getting better at going after Internet stock fraud, he thinks law enforcement isn't the answer to the burgeoning financial scams online. “Consumer education is the answer,” he said. “The SEC will never catch up because they can't move as fast as the perps can. The SEC has to abide by the law; lawbreakers obviously don't. We see ourselves as an investors' advocate. If investors knew as much as we did, they probably wouldn't fall for these kinds of schemes.”
To that end, Lichtman and his cohorts spend their days immersed in frauds, cons and scams dedicated to ripping off investors. They've exposed companies with $100 million in stock but no employees or office. They've uncovered pump-and-dump schemes similar to the one involving PairGain, where company insiders hype the stock and sell when it's at its most inflated, leaving investors holding the bag. They've debunked claims of new “miracle” technology. And they continually post tips and articles to keep investors from losing their life's savings. (The only article I've found that said anything negative about the site was a press release from one of the companies he slammed; it accused him of spreading “misinformation.”)
All of this effort has earned them considerable praise in the financial press, including Money magazine, Worth magazine, Forbes and PC Week (which called it “required reading”), as well as not a few threats from profiled companies and two lawsuits. (One is being settled for no money; the other is in its early stages.)
“I can't tell you how many times we've been threatened,” Lichtman said. “But we simply report the truth, and the First Amendment was still intact the last time I checked.”
Some might find it depressing to spend all their time wallowing in the depths of human deception and greed, but not Lichtman. “I don't find it depressing-I find it quite exciting,” he said. “I'm doing something for people that is really very good for them. There isn't anyone else out there doing this, and there's a growing need for it. It used to take a long time to commit a major securities fraud: you had to send out newsletters, spend a lot more money, and do a lot more work to promote a stock. Today, on the Internet, you can promote it instantly.
“It's not an easy job,” he added. “We get threats and criticism because obviously we're going to offend people. But hopefully, the people we offend are themselves offenders. I just wish I had more staff; more potential frauds emerge every day than we can possibly uncover.”
And if the PairGain hoax is any indication, the scam artists are going to keep getting more sophisticated-at investors' expense.
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