Fraud Is Tangled Web for Victims, Police
By KRT Newsfeatures
June 3, 2002
when the SEC does find fraud, it has no criminal authority. As the
Furr case shows, the SEC can win a multimillion-dollar civil judgment
but may never collect the money.
As you read this, hundreds of crooks are trolling the Internet for
victims. Their get-rich-quick schemes clog e-mail inboxes and online
Odds are they
won't get caught.
An FBI-led Internet
fraud task force received 49,711 complaints last year. Of those,
93 ended in an arrest.
see most Internet fraud as outside their jurisdiction; federal authorities
see most of it as too small to pursue. In the wide-open world between,
online scammers are making fortunes -- and victims are losing more
than $500 million a year.
Why can't authorities
catch Internet crooks?
is such an efficient tool for fraud that a con artist can run a
million-dollar scam from a closet, cheating thousands of people
out of amounts too small to attract law enforcement's attention.
and police are stuck with old-world budgets, geographical jurisdictions
and antiquated laws -- cumbersome tools to attack fraud on the anonymous,
of Internet companies such as Yahoo and Hotmail hinder law enforcement.
They often don't verify information about their customers or take
other preventive measures against fraud, so law enforcers have trouble
finding out who's running scams.
The recent investigation
of Cole Bartiromo, a Mission Viejo, Calif., teen accused of swindling
$1.6 million from investors in a phony sports-betting scheme, focused
attention on the high profits of online scams.
But the fact
that Bartiromo was caught makes him more an exception than the rule.
The only reliable protection for a Net surfer is the old saying:
has accelerated almost every aspect of modern life. News spreads
faster. Deals are done quicker. And fraud burns through the Internet
in a matter of days.
Michael A. Furr,
who lived in Coto de Caza, Calif., is accused of collecting more
than $3 million in Internet profits in 1999 with what the U.S. Securities
and Exchange Commission called a classic "pump and dump"
Armed with a
Web site and calling himself the Wall Street Research Group, Furr
touted more than two dozen "penny" stocks with e-mails,
infomercials and on the radio, the SEC said.
Furr did not disclose that the companies paid him with shares of
those stocks -- which he sold when the price spiked. Investors lost
millions when prices cratered, the SEC said.
The SEC obtained
a judgment against Furr for $3.4 million in profits, plus $420,000
in interest and penalties. So far, he hasn't paid a dime -- and
the SEC has no idea where he is, officials with that agency said
of scams on the Net don't take in millions. They skim a few hundred
dollars or a few thousand at a time, or they skim even smaller amounts
from thousands of individuals all over the world. That makes them
hard to investigate.
of online fraud are never investigated because no one agency is
assigned to that task, said Mark Rasch, a national expert on Internet
it the "S.E.P. Syndrome," for "someone else's problem."
another agency to which a victim can be shuffled.
kind of [Internet] crime to commit is a complex crime below $100,000,"
said Rasch. "It's too complex for the locals to investigate,
and below the threshold where the federal government is interested."
off a list of agencies that could have jurisdiction over a single
Internet crime -- from local police to county district attorney
to the FBI and federal regulators.
that times 50," he said, because victims in each state complain
to their own state and local agencies. "You can see how it
might get confusing."
is a base for many Net frauds, regulators say. But Bob Molko, a
veteran prosecutor who heads the county District Attorney's Major
Fraud Unit, said he doesn't focus on it.
Internet scams tend to involve smaller dollar amounts than other
acknowledged that the total collected could be far higher, because
Net scams can quickly reach so many victims.
Internet, there is no way of knowing where those scams are based,
how many victims there are, or how much has been collected,"
a complaint from someone who didn't get something for which they
paid $50 -- what do you do with that?"
have tried to coordinate an attack on Internet fraud, with mixed
Fraud Complaint Center, founded in 2000, has no budget of its own
and borrows its staff of 80 from the FBI.
It does not
investigate crime but instead collects reports from consumers and
forwards them to agencies that might have jurisdiction.
Most of the
time, nothing is done with its referrals.
don't do a follow-up on information we get from the Internet Fraud
Complaint Center if the perpetrator is in, say, New York and the
victim is in Huntington Beach," confirms Huntington Beach Police
Lt. Ron Burgess. "We leave that for them to handle."
The center referred
16,755 complaints to law-enforcement agencies last year; three ended
in an arrest, according to its annual report. Of the center's complaints,
71 percent involved losses of less than $1,000. About 20 percent
of the complaints cited losses of less than $100.
There have been
a few highly publicized successes. Ninety people were charged in
last year's Operation Cyber Loss, a nationwide sweep based on information
from the center and led by the FBI. The SEC sued Cole Bartiromo
and Michael Furr.
But most victims
will never even hear from regulators.
Lisa Gok, who
runs the SEC's Internet enforcement branch in Los Angeles, says
she has time and budget for only 20 to 30 Internet fraud cases a
year. "We go after things that are of national scope,"
Even when the
SEC does find fraud, it has no criminal authority. As the Furr case
shows, the SEC can win a multimillion-dollar civil judgment but
may never collect the money.
The SEC must
rely on the FBI and the U.S. Attorney to pursue criminal charges.
In the end, less than one-third of the L.A. unit's cases end with
seven people to deal with the entire Southern California region,
which is about 15 million people," said Assistant U.S. Attorney
Arif Alikhan, chief of the region's computer-crime unit. "So
we try to make sure we get a deterrent out of the cases we do go
companies that profit from the Internet -- such as AOL (NYSE: AOL)
, Microsoft (Nasdaq: MSFT) , Yahoo, eBay (Nasdaq: EBAY) and others
-- know they lose many potential customers who fear being ripped
But still, many
of them operate in a way that hampers efforts to curb fraud. Investigators
often reach a dead end, because none of these services requires
customers to use a postal address; an e-mail address and credit-card
number are enough.
minimal information about Internet users can be cumbersome, said
Irvine police investigator Tucker. Just getting a warrant and serving
it on a company that's out of town or out of state can take weeks,
if not months.
None of the
online companies has a legal responsibility to police their Web
sites for fraud, said Alikhan.
the online services say they do the best they can.
The eBay auction
site, for example, has a fraud-investigation team that shuts down
some accounts. PayPal (Nasdaq: PYPL) , an Internet money-transfer
service that did $3.5 billion in transactions last year, also has
a fraud unit, and suspends accounts when it suspects illegal activity.
message boards are jammed with come-ons for "guaranteed income"
and "immediate returns," as are the online communities
on AOL and MSN. Online payment services, such as PayPal, still make
it possible to collect money from credit cards and checks without
bank accounts or even a verified address. And e-mail services, such
as Hotmail, allow you to create an anonymous e-mail address with
just a few clicks.
After the SEC
shut down Bartiromo, an MSN Internet message board was established
for his victims, but it was promptly flooded with messages pushing
even after the board's administrator pleaded for them to stop.
and the desire of a human being to defraud another human being really
has no limits to it," said Kevin Pursglove, a spokesman for
eBay. "There's always going to be someone who wants to avoid
the rules and profit at the expense of others."
chairman of the Department of Criminal Justice at Indiana University,
blames "a tremendous communication gap" between federal,
state and local agencies for the poor response to Internet crime.
Beyond that, he says, is the common belief that Internet victims
were done in by their own greed.
call the local police or the state attorney general or the U.S.
attorney general and complain you've been had by some Internet fraudster,
the typical response would be, 'Why did you do that? Why did you
invest in that?'" he says. "The view of a lot of law enforcement
is, 'Well, that's their problem.'"
who say they were victimized online think that, too. Because people
blame themselves for losing money online, they often don't inform
Take the case
of Mary Wheeler, 55, a nursing-home worker from Cottage Grove, Ore.,
who invested $612 last year in 121.TV, a Newport
Beach, Calif., multilevel marketing company that sold Web sites
it called "Personal Profit Portals."
services are advertised for as little as $4.95. But 121.TV marketers
sold their sites for $106 to $506, advertising that buyers could
use them to earn six-figure incomes. In a February 2001 press release,
the CEO of 121.TV reported signing up 45,000 distributors. That's
$4.7 million in revenue at the minimum portal price.
This was simply
the Internet version of multilevel marketing -- not much different
from buying a distributorship that enables you to sell cosmetics.
That's legal as long as distributors receive a product or service
they can resell for a profit. If the advertised profits can be made
only by reselling distributorships, the Federal Trade Commission
warns, it's an illegal pyramid scheme.
In May 2001,
121.TV shut down without notice. Wheeler and others lost their investment.
Wheeler blamed herself for being gullible; she never contacted authorities.
In an interview,
121.TV founder and President Ray Mario said he left before the company
collapsed. However, Mario denied that 121.TV was a pyramid scheme.
corporate structure is shaped the same," Mario said. "I
don't understand how it could be construed as a pyramid."
After the collapse,
former marketing representatives of 121.TV wasted no time in contacting
Wheeler and other out-of-luck distributors to offer new investments.
out of Lemons!" one wrote in an e-mail. "What happened
to 121 was unfortunate and the result of a bizarre set of circumstances.
... Fortunately, we have the opportunity to move to the next level
with a more solid opportunity with even more potential, eWorldnet.
get a hit if you keep swinging the bat."
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Article at CardinalCommerce