CYBER-SCAM ARTISTS, BEWARE! STATE REGULATORS ARE ON THE CASE: THEY WORRY ABOUT AUNT MILLIE, BLITHELY SURFING THE INTERNET

Securities regulators in at least three states are starting to police Internet-based investment scams on their own after a coordinated effort by their national organization failed to get off the ground.

“A lot of states aren’t equipped to find it and ferret it out,” says Robert Newtson, Illinois’ assistant secretary of state and director of securities.

“We were hoping that the North American Securities Administrators Association would set up a joint investigative structure where states could participate in a formal way,” Mr. Newtson adds. But the association is finding its financial resources stretched as it works to implement the 1996 law that put financial advisers managing less than $25 million in assets under the sole jurisdiction of the states.

And a number of states don’t consider Internet fraud a serious concern yet. “At the moment, it’s just an ad hoc effort,” says Mr. Newtson.

So far, individual state efforts are centered in California, Illinois and Texas, where officials have begun using “off-network” web sites -akin to an unmarked police car -that allow investigators to pose as small investors and solicit information from get-rich-quick and other schemes via e-mail that can’t be traced back to the state agencies.

surveillance model

In California, William McDonald, assistant commissioner of the enforcement division of the Department of Corporations, is leading an effort to develop a prototype Internet surveillance project that other states could eventually use. Since early May, California investigators have been experimenting with different search engines and key-word search combinations, to filter out fraudulent offers that originate within California, where officials have jurisdictional powers to shut down firms and confiscate assets.

“Technology will only get you so far,” says Mr. McDonald. “Human intervention is critical to determine jurisdiction and the severity of the problem – and more important – to shop the information to state regulators where the offering is based,” he adds.

The California regulator hopes to restart efforts to create a coordinated Internet surveillance approach among states at the state regulators’ group’s fall meeting in Nashville, Tenn. “We need to contract this out to a disinterested, technically qualified third party, such as the National White Collar Crime Center, who will do this on an organized basis,” says Mr. McDonald.

In Illinois, officials have been surfing the web for nearly five months for well-worn scams like bogus products and pyramid schemes, as well as to augment investigations into traditional investor complaints.

For example, Department of Securities investigators searched the Internet for the principals behind a questionable oil and gas drilling venture and found a web site that described where in Illinois the

wells supposedly were. Investigators checked out the locations and discovered the wells didn’t exist. If a plea bargain couldn’t be reached, regulators were expected to file charges, according to Michael Morehead, assistant director for enforcement.

Illinois investigators say they have visited more than 330 web sites in the last month. (They decline to disclose how many of those reviews resulted in criminal referrals.)

Though the state officials say complaints over Internet-based investment offers are still low, they believe many current computer users understand that the Internet is unregulated and they need to protect themselves. But regulators in California, Illinois and Texas are trying to develop a coordinated effort as the next, less sophisticated wave of consumers begins using the Internet.

“Very soon Aunt Millie is going on there using her television set,” says Mr. Morehead. “That’s when it’s really going to become critical for us to have gotten a handle on how to investigate cases and to bring actions.”