SEC forms office to fight Internet fraud

The Securities and Exchange Commission last month stepped up its fight against securities fraud on the Internet with the creation of an office dedicated to finding and prosecuting cases and training other agencies and groups about the pitfalls of cyberspace.

"The Internet has made it so much easier [to commit fraud], since anyone can put up information, and there is no way to verify it," said John Reed Stark, chief of the new Office of Internet Enforcement. Stark has served as special counsel for Internet projects at the SEC Enforcement Division since 1995. "It's really the same scams, just a new medium," he said.

The SEC has brought more than 30 civil suits and administrative proceedings since the first Internet-related fraud case in 1995. The SEC's Enforcement Complaint Center receives more than 120 complaints every day about possible Internet-related violations.

The center has become one of the SEC's best sources for leads.

"[The complaints] are very detailed, very sophisticated," Stark said. "I'd say people want to do their best to help us."

Members of the SEC, and now the Office of Internet Enforcement, often work with and train other regulatory and law enforcement personnel, including those who work for the National Association of Securities Dealers (NASD) in Washington, D.C., the FBI and the Secret Service, Stark said.

Instruction includes trends in Internet-related securities fraud, Internet surveillance and updates on the latest SEC Internet-related enforcement actions.

"It's not that we're teaching the FBI how to prosecute, it's just we have a lot of expertise in both securities and the Internet," Stark said. "It's a very specific field."

For investigation, the office has a surveillance program manual that is used internally as a guide in gathering information on frauds, "but we don't make any of that public because we don't want to tip off anyone," Stark said. There is also a group of 85 specially trained Enforcement Division staff members who each conduct Internet surveillance for about an hour every week.

Other regulatory agencies are implementing programs to combat Internet-related fraud as well. The NASD has launched a program called NetWatch, which is an agent-driven search engine that nightly collects information containing key phrases set by the organization. If a phrase such as "can't miss" is mentioned often by one person or on one site, it will tip off an analyst within the NASD to look into the site or information more carefully, said Michael Robinson, a spokesman for the NASD. The analysts will often pass information on to the SEC, he said.

Once a case of fraud has been found, the Enforcement Division can file a civil suit or start an administrative proceeding that would seek injunctions and penalties to get back illegally gained profits.

"This has generated a lot of excitement because it gives a clearer area for other agencies to work with," Stark said. "The people we work with on a regular basis know who to come to, but many others do not know where in the SEC to go."

Robinson agreed: "Regulators have been aware for a long time that protecting investors on the Internet is a top priority."

Currently the only members of the office are Stark and newly appointed deputy Jay Pearlman, a senior attorney in the Office of the Chief Counsel.

Stark said he plans to hire another attorney and analyst soon.