An Uphill Battle: The Difficulty of Deterring and Detecting Perpetrators of Internet Stock Fraud

I. INTRODUCTION When fifteen-year-old Jonathon Lebed of New Jersey was convicted of securities fraud through the Internet by the Securities and Exchange Commission ("SEC") in September of 2000, it brought national attention to an already existing question in the investment world. (1) That is, "Where is the boundary line between legal promotion of stock and illegal misrepresentation of stock?" Unfortunately, there is no clear answer, and as investing online through the Internet allows for increased communication among all potential and actual investors, perpetrators of Internet stock fraud will continue to take advantage of the blurry distinction. Undoubtedly, advancements in technology and increased access to the Internet have allowed the securities industry to go "online." (2) Not only has the Internet increased the number of traders and investors in securities, it has dramatically increased the amount of information available to investors. (3) Because the securities market is essentially driven by information about securities, it is no surprise that the securities market has embraced and exploited the information capabilities of the Internet. (4) But increased information and trading online has also given criminals new means of perpetrating stock fraud to unsuspecting investors. "The Internet has opened new avenues for securities fraudsters to swindle the investing public." (5) Responsible for regulating the securities market, the SEC is aware of the current and future threats posed by Internet fraudsters. Richard Walker, director of the Enforcement Division of the SEC, recognized that "[w]hile insider trading was top priority for the agency in the past decade ... policing the Internet `is unquestionably our greatest enforcement challenge today.'" (6) In addition to the efforts of the SEC, other sources of protection from, and enforcement against, securities violations exist. Federal statutes give defrauded investors private causes of action for illegal misrepresentation, and state enforcement agencies that monitor the securities markets offer some protection against Internet fraud. But due to the vastness of both the securities markets and cyberspace, these protections fall woefully short of successfully curbing Internet fraud. Despite the seemingly successful and much publicized SEC sanctioning of the teenage fraudster, Lebed, the SEC and other enforcement agencies face an uphill battle as they attempt to deter and detect perpetrators of Internet stock fraud in their attempt to secure the integrity and legitimacy of securities traded online. This Note argues that because of the limited resources of the SEC, the demanding requirements to prove misrepresentation, the current lack of cooperation between federal and state securities regulators, and a perverse admiration for fraud masterminds, illegal stock price manipulators like Lebed will continue to profit from unsuspecting investors. Various measures to curb Internet fraud, however, are currently being pondered by industry experts. Among the most effective and realistic are, in order: increasing investor education and awareness, (7) increasing the SEC's "firepower," (8) increasing penalties and jail time for offenders, furthering coordination of federal and state efforts, (9) and creating a "seal of approval" for traders and brokers. (10) Absent an increased effort in a combination of some or all of the proposed solutions, Internet stock fraudsters will continue to exploit the "easy pickings" created by Internet investors. II. TYPES OF INTERNET FRAUD Unfortunately for both investors and the SEC, it is not easy to discern if online advisors and promoters are acting within the law. (11) "Telling the difference between what's legal and what's not has always been tricky, and it's getting more complicated in the Internet age, where opinion and fact and hype are combined in a volatile mixture." (12) Individuals may legally tout or promote a stock if they actually believe in the value of it, and much of this sort of communication is harmless because no one believes it. …