Internet Fraud
| Published date | 01 January 1997 |
| Date | 01 January 1997 |
| DOI | https://doi.org/10.1108/eb025785 |
| Pages | 242-244 |
| Author | Jim Drinkhall |
| Subject Matter | Accounting & finance |
Journal of Financial Crime — Vol. 4 No. 3 — Computer Fraud
COMPUTER FRAUD
Internet Fraud
Jim Drinkhall
Enforcement authorities around the world are
facing a vast threat from unscrupulous persons
who correctly see the Internet as a new fraud vehi-
cle that most agencies and governments are under-
staffed and ill prepared to deal with. In hundreds
of news stories, the Internet is being touted as a
powerful new force that will allow companies to
tap into a new market of investors to raise even
more money than on traditional exchanges.
Some services have already started to handle
trades on the Internet and a few, like discount
broker Charles Schwab in the USA, offer trading
through dial up accounts. These instances involve
but an infinitesimal fraction of securities trading
and the technology to make it universally accept-
able is a long way from being widespread. Besides
the scale of securities, the public is being offered
an almost limitless array of alleged investment
opportunities ranging from financial instruments
to new inventions.
The reality is that before companies benefit
from this innovation, they must now face the fact
that the new medium makes them vulnerable to an
increasing extent because cyberspace law is unde-
veloped, the Internet is virtually beyond the con-
trol of regulators, and increasingly liberalised state
stock offering rules will allow untested companies
to solicit investors. It is clear that the unregulated
Internet is a long-term threat to the world's estab-
lished stock exchanges and shareholder value.
Individual investors are being offered the same
fraudulent schemes that existed before the Inter-
net. The difference now is the technology and the
glamour and glitz that the Internet can provide.
Now, because of the instantaneous global reach of
the Internet, there are many more prospective vic-
tims.
At the same time, law enforcement and gov-
ernment regulators around the world are woefully
behind in adapting to the new technology.
Because of the Internet's amorphous nature,
companies face a heightened level of susceptibility
to insider trading, taking hits from short sellers
and misinformation that can play havoc with an
orderly market. Among the first questions a com-
pany could face are: how to monitor Internet
news? How to counter deceptive and misleading
information? How to identify those who spread it?
Who can be sued? What jurisdiction applies?
Thousands of messages are posted every day on
Internet news groups, bulletin boards and online
chat rooms by persons whose identity may be
unknown and whose messages may be misinfor-
mation. A series of messages posted on the Inter-
net news group misc.invest.stocks is a classic
example of what companies will increasingly face.
These messages were partially responsible for
pushing the US stock market value of Comparator
Systems Corp. from around US$36m to over
US$1bn in only three days, apparently the largest
rise in the history of Nasdaq for one issue on one
day. At the time, Comparator was a virtually
unknown, money-losing company pushing an
unproven fingerprint identification technology.
Despite that questionable pedigree, Comparator
was traded on Nasdaq, also the trading home of
companies like Microsoft, Intel and Oracle.
On 3rd May, 1996, Comparator's stock price,
which had traded at three to seven cents for years,
suddenly spurted to 28 cents in one day as 123
million shares were traded, the biggest amount for
any Nasdaq stock in one day. (Comparator had a
massive 600 million plus common shares outstand-
ing.) Within a week, the stock soared to US$1.88
then dived to US56 cents as regulators halted trad-
ing because of, among other things, questions
about the accuracy of the company's information
and asset valuation.
By the end of May, the United States Securities
and Exchange Commission (SEC) sued Compar-
ator and three of its current and former officers,
alleging that they defrauded investors by filing false
financial statements and by grossly inflating the
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