Scam unit zeroes in on manipulators

Scott Boyle and his team of Ontario Securities Commission regulators are prowling through boiler rooms and chat sites looking for fraudsters

JANET MCFARLAND

In a surveillance room at the Ontario Securities Commission, a team of investigators is processing public complaints, monitoring Internet chat sites and skimming newspaper ads in an effort to shut down a booming business in stock frauds.

The new scam unit marked its first success last week, receiving a temporary cease trade order involving two Toronto-based companies - Al-tar Energy Corp. and Alberta Energy Corp. - and 10 people allegedly related to the companies.

The order says the individuals will not be able to buy or sell shares of the two companies for 15 days while the investigation unit probes allegedly improper share sales to the public.

Scott Boyle, assistant manager of investigations at the OSC and head of the new unit, said cease trade orders will be the unit's first line of attack to try and shut down boiler rooms and other scams quickly before more victims are targeted.

A cease trade order prohibits individuals from trading securities in Ontario, making it impossible for them to place buy or sell orders and manipulate stocks for a scam.

"We want to get all of the people that are involved in this, including the people that are on the phone," he said. "We want to make it as unpleasant as possible for those people taking this kind of employment. Because what we're seeing is the same individuals moving from one boiler room to another."

The scam unit was set up this spring after the OSC saw the number of individual stock frauds climb steadily between 2001 and 2006, said OSC enforcement director Mike Watson. In the late 1990s, the OSC shut down a host of penny stock schemes at small brokerage firms targeting individual investors.

"This kind of activity is sort of like a virus," Mr. Watson said. "Eventually it will mutate and find a way around the cure that you've imposed, which is essentially what has happened here."

The new unit will target two types of fraud.

One is the traditional boiler room, where scammers rely on a series of phone calls to victims to convince them to mail in money to invest in unknown penny stocks.

Those scams tend to be somewhat impersonal, often targeting baby boomers in their forties and fifties who have $5,000 or $10,000 available to invest. While e-mail spams touting stocks are often used as a supplement to help pump up stock prices, boiler rooms usually rely on phone calls.

The other type of fraud is a more personal, one-on-one scam. In many of these cases, someone infiltrates a tight-knit community, such as a church group, often building the trust of members and extracting far larger sums of money. Seniors are often victims in these cases, and the scam typically spreads as victims unwittingly recommend the fraudulent investment to others in their group.

"Sometimes they'll initially target the minister at a church, because he's a really good guy to have onside," Mr. Watson said. "He makes a bunch of money up front and says to everybody in the congregation what a good buy it is."

The scam unit already has most of its six staff in place, and has a half-dozen cases under investigation.

To identify cases, the unit will rely primarily on consumer complaints, Mr. Watson said. Increasingly, he said, members of the public will call the OSC while a fraud is ongoing and the people involved have not yet disappeared.

"A lot more people who get approached on these kinds of things recognize it for what it is and phone us and tell us," he said.

In addition to public complaints, the OSC team is also monitoring Internet chat sites devoted to penny stock investing, and is probing newspaper ads touting dubious stock deals.

Once a scam is identified, the investigators work to figure out the identities of the people behind it, which typically involves following the money trail. Victims write cheques that must be cashed somewhere, and investigators then have to follow the movements and transfers of the money to try to find the owners of the accounts.

"Someone has to pay someone, someone has to rent the premises, somebody has to rent the cellphone. All of that information we are able to use in our investigation."

The OSC's enforcement work is not a perfect solution, however, because the commission does not have authority to impose jail sentences. Ideally, municipal police forces would also pursue frauds, Mr. Boyle said, but they rarely do.

"Typically, and unfortunately, many municipal police forces don't have the capacity to take on these types of cases, or the expertise. That's part of the reason we wanted to form this unit, so we could develop some expertise in this area."

Mr. Watson said a cease trade order can still eventually lead to jail terms. If an individual breaches a prior cease trade order, the OSC has the option of laying quasi-criminal charges in provincial court, where jail sentences can be imposed.

Mr. Watson said it is also difficult to recover funds on behalf of victims. The OSC can seek to freeze bank or brokerage accounts, but the money is generally moved too quickly.

"In the vast majority of these situations, once you invest your money it's gone," Mr. Watson says.

Buyer beware

Some common techniques used by stock scammers:

1. Target men. Women are more likely to seek outside opinions and advice. Men are more confident about making their own investment decisions.

2. Flatter the victim's investing skill. Even if he only has a pension plan at work, tell him he's an experienced investor.

3. Tell him you work for a big investment firm. Create an elaborate website showing offices in many locations. Set up a "virtual office" with a receptionist in a major European city to give the appearance of a global operation. Say you are the only firm eligible to sell a company's shares.

4. Suggest to the victim there is a time-sensitive reason to invest in a company quickly before its stock soars. Typical reasons: a pending initial public offering, or the launch of a drilling or exploration program. Suggest there's a limited amount of IPO stock left, so he has to decide soon.

5. Reassure doubts about the legitimacy of the investment by inviting the victim to look at the company's website - which has been created as part of the scam. It will often show phony press releases stretching back years to suggest the company has been in business for a long time. It may list office locations around the world to suggest the company is well-established.

6. Suggest the victim send an e-mail to the company to check out its legitimacy. Victims will then get a return e-mail from the company's "president" verifying the claims.

Source: The Ontario Securities Commission