Managerial Application 141

Internet Fraud

The Internet allows individuals or companies to communicate with a large audience without spending a lot of time, effort, or money. Anyone can reach tens of thousands of people by building an Internet Web site, posting a message on an online bulletin board, entering a discussion in a live "chat" room, or sending mass e-mails. It is easy for fraud perpetrators to make their messages look credible; it is nearly impossible for investors to tell the difference between fact and fiction.

Investment frauds seen online mirror frauds perpetrated over the phone or by mail:

• The "pump and dump" scam. Paid promoters sometimes accumulate stock and then leak imaginary favorable information to pump up the stock price. After the stock price has risen, fraudulent promoters dump their shares on an unsuspecting public.

• The pyramid. Many Internet frauds are merely electronic versions of the classic "pyramid" scheme in which participants attempt to make money solely by recruiting new participants.

• The "risk-free" fraud. Be wary of opportunities that promise spectacular profits or "guaranteed" returns. If the deal sounds too good to be true, then it probably is.

• Off-shore frauds. Watch out for off-shore scams and investment "opportunities" in other countries. When you send your money abroad and something goes wrong, it is more difficult to find out what happened and to locate your money.

The Securities and Exchange Commission (SEC) is effectively tracking Internet investment fraud and has taken quick action to stop scams. With the cooperation of federal and state criminal authorities, the SEC has also helped put Internet fraudsters in jail. If you believe any person or entity may have violated the federal securities laws, submit a complaint at

See: John Hart and Michael Rothberg, "Anonymous Internet Posting Pits Free Speech Against Accountability," The Wall Street Journal Online, March 6, 2002 (

government policy risk

Chance of loss because foreign government grants of monopoly franchises, tax abatements, and favored trade status can be tenuous expropriation risk

Danger that business property located abroad might be seized by host governments national firms hedge against currency price swings using financial derivatives in the foreign currency market. This hedging is not only expensive but can be risky during volatile markets.

Global investors also experience government policy risk because foreign government grants of monopoly franchises, tax abatements, and favored trade status can be tenuous. In the "global friendly" 1990s, many corporate investors seem to have forgotten the widespread confiscations of private property owned by U.S. corporations in Mexico, Cuba, Libya, the former Soviet Union, and in a host of other countries. Expropriation risk, or the risk that business property located abroad might be seized by host governments, is a risk that global investors must not forget. During every decade of the twentieth century, U.S. and other multinational corporations have suffered from expropriation and probably will in the years ahead.

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