Securities Fraud

The rapid growth of the Internet has begun to transform the securities industry. About 22 percent of all securities transactions were done over the Internet in 1998. Only three years earlier, such computer trading was virtually nonexistent. The Internet is popular among investors because it allows them to buy and sell securities from their personal computers, cut commission costs, and gain ready access to market research. Unfortunately, the Internet also provides criminals with a new and efficient medium to defraud investors of millions of dollars. Fraudulent operators can set up professional looking websites at far less cost than using other means of telecommunications, such as the telephone. Moreover, the Internet makes it easy for fraudulent operators to remain anonymous and commit crimes from virtually anywhere in the world, making it difficult for U.S. regulatory and law enforcement authorities to apprehend them. According to the Securities and Exchange Commission (SEC), as the Internet expands, so do opportunities for securities fraud. For example, the number of E-mail complaints sent daily to SEC about securities fraud on the Internet soared from about 10 to 15 in 1996 to between 200 and 300 in early 1999. SEC has established an office to coordinate its response to Internet fraud, train SEC staff on monitoring the Internet, and develop guidance for SEC staff to follow when investigating Internet fraud. SEC has also (1) developed an education program to warn investors about the risks associated with Internet investing and (2) begun 66 enforcement actions since 1995 to punish alleged perpetrators of Internet securities fraud.

GAO noted that: (1) SEC and state regulatory officials generally agree that as the Internet continues to expand rapidly, opportunities for securities frauds are growing as well; (2) an indicator of the growth in Internet securities frauds is the number of public electronic mail complaints that are submitted to SEC's Internet website; (3) according to SEC, the Internet provides a new medium to perpetrate traditional investor frauds; (4) however, some securities frauds appear unique to the Internet environment; (5) SEC has responded to the growing Internet fraud problem by, among other things, creating the Office of Internet Enforcement to coordinate the agency's efforts to combat Internet fraud, providing training to SEC investigative staff on monitoring the Internet, and preparing guidance for SEC staff who are investigating potential Internet frauds; (6) SEC has established programs to educate investors about the risks associated with Internet securities frauds; (7) since 1995, SEC initiated a total of 66 enforcement actions against alleged perpetrators of Internet securities frauds; (8) as of February 1999, 32 of the 66 cases had largely been concluded, with violators generally required to: (a) pay civil money penalties; or (b) refrain from further violations of the securities laws; (9) however, in 2 of the 32 concluded cases, state or federal criminal enforcement authorities prosecuted violators and obtained criminal convictions or prison sentences for 7 individuals; (10) over the past several years, nearly half of all state regulatory agencies have established specific programs to combat Internet frauds that violate state securities laws; (11) although many state agencies have initiated enforcement actions to prevent further violations of state law, officials from these agencies told GAO that in some cases violators may continue committing the fraudulent activity in other states; (12) SEC and state regulatory agency programs to combat Internet securities fraud are new and face significant challenges that could limit their effectiveness in the long-term; (13) in particular, the potential exists that the rapid growth in reported Internet securities frauds could ultimately place a significant burden on the regulators' limited investigative staff resources and thereby limit the agencies' capacity to respond effectively to credible fraud allegations; and (14) the regulators face challenges in developing a coordinated approach to combating Internet fraud and educating a wide audience about the risks associated with Internet investing.