Net Fraud Is Tangled Web for Victims, Police

By KRT Newsfeatures
June 3, 2002

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.

As you read this, hundreds of crooks are trolling the Internet for victims. Their get-rich-quick schemes clog e-mail inboxes and online bulletin boards.

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.

Local police 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.

What's Wrong?

Why can't authorities catch Internet crooks?

The Internet 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.

Government agencies and police are stuck with old-world budgets, geographical jurisdictions and antiquated laws -- cumbersome tools to attack fraud on the anonymous, limitless Web.

The policies 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: Buyer beware.

Fast Fraud

The Internet 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" scheme.

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.

Regulators 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 this month.

Not Their Problem

The majority 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.

Most complaints of online fraud are never investigated because no one agency is assigned to that task, said Mark Rasch, a national expert on Internet crime.

Rasch calls it the "S.E.P. Syndrome," for "someone else's problem."

There's always another agency to which a victim can be shuffled.

"The best 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."

Rasch ticks 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.

"Multiply 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."

Under the Radar

Orange County 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.

The reason: Internet scams tend to involve smaller dollar amounts than other frauds.

However, he acknowledged that the total collected could be far higher, because Net scams can quickly reach so many victims.

"With the Internet, there is no way of knowing where those scams are based, how many victims there are, or how much has been collected," Molko said.

"You get a complaint from someone who didn't get something for which they paid $50 -- what do you do with that?"

Crossed Wires

Federal agencies have tried to coordinate an attack on Internet fraud, with mixed results.

The Internet 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.

"We usually 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.

Few Successes

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," she said.

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 prosecutions.

"We have 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 after."

Lax ID Requirements

The private 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 off.

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.

Even getting 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.

Despite that, the online services say they do the best they can.

Deluge of Scams

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.

Still, Yahoo's 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 new scams.

Come-ons continued even after the board's administrator pleaded for them to stop.

"Creativeness 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."

'Communication Gap'

Kip Schlegel, 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.

"If you 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.'"

Many people who say they were victimized online think that, too. Because people blame themselves for losing money online, they often don't inform police.

Multilevel Debacle

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."

Web-hosting 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.

Never Say Die?

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.

"IBM's 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.

"Lemonade 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.

"P.S. You'll get a hit if you keep swinging the bat."

Click for Original Article at CardinalCommerce