http://www.identitytheft911.com/education/article/idtheft_20031211_sipc.jsp

11 December 2003

The Securities Investor Protection Corporation (SIPC), a federally chartered agency, is warning investors and brokers about a new Internet fraud scheme in which scammers falsely pose as authentic brokerage firms. In at least one instance, the scam — which the SIPC refers to as "brokerage identity theft" — has garnered as much as $20,000 from a single victim. One twist makes the scheme especially difficult for its targets to recognize: Since the firms that the con artists impersonate are actually legitimate members of the SIPC, investors who look into the information provided on the ersatz web sites will find that their credentials seem to check out.

How the Scam Works
The SIPC warning comes in the wake of more than a dozen complaints from U.S. and overseas fraud victims hit by this new investment scam. While the scheme exists in several versions — and is mutating rapidly as criminals find and exploit new opportunities for fraud — a general pattern is evident from the cases reported so far. The scammers typically set up a web site using the name of an actual SIPC member brokerage firm, but with a different address. Alternatively, the scammer may set up a bogus entity using the name (and, in some cases, the real address) of an actual registered broker. Either way, the bogus online entity claims to be an established and respected brokerage firm belonging to the SIPC. In fact, the target is often instructed to "verify" the firm's status by checking the membership database on the SIPC web site. What has really happened, of course, is that the scammer firm has stolen the identity of a real SIPC member.

"SIPC has recently received information from more than a dozen U.S. and non-U.S. victims of this type of fraud," said SIPC President Stephen Harbeck. "Experience tells us that most investors who lose money never follow up with a regulatory authority. We believe the complaints we're seeing are just the tip of an iceberg."

It isn't yet clear whether this scam aims solely to extract financial gain directly from its victims, or is also being used to cull personal information to be used in further frauds based on true identity theft. Nevertheless, Harbeck advised that investors and brokers alike employ the greatest possible caution in divulging their personal and financial information, noting that the expansion of this scam into the realm of true identity theft may just be a matter of time.

Variations on a Scheme
In the most basic form of the scheme, the scammers simply offer a security for sale, taking in investor funds (often by wire transfer) and then vanishing. In one more elaborate version, scammers contact a shareholder of a thinly traded security, offering a reference to the SIPC web site as proof of their bogus brokerage firm's good standing. They then offer to buy the security at an attractive price — sometimes claiming to represent an unnamed party seeking a controlling interest in the company in question.

Since the shares often have virtually no market value, the potential purchase looks like a windfall — making the broker's insistence on a substantial "good faith deposit" prior to the sale much easier to accept. Of course, the transaction never actually takes place. The would-be seller may receive email explaining that the SEC has "declared a moratorium on all accounting-based trades" or has "rejected the trade" — or, in at least one case reported to SIPC, that the buyer had contracted cholera. Excuses notwithstanding, the "good faith deposit" is gone.

In another variation, victims are told that their thinly traded, valueless shares can be used as a "deposit" or "down payment" for the purchase of shares in a larger, better-known public company. There is, however, an additional sum to be paid in order to complete the new purchase. The victim sees that the "down payment" values the thinly traded securities at a premium, wires the money, and never hears from the "broker" again.

Shutting Down the Scammers
The SIPC has seen evidence of victims in the United States, Canada, Norway, Sweden, Denmark, the Netherlands, South Africa, Singapore and Australia within the last few months. Harbeck said that the organization has forwarded files to the Securities and Exchange Commission (SEC) and the North American Securities Administrators Association, Inc. (NASAA) documenting instances of this new form of fraud, "in the hopes of identifying and shutting down these 'brokerage identity theft' rings."

"Brokerage identity theft joins a long list of scams that rely on the Internet to stalk millions of potential victims at minimal cost," noted NASAA President and Connecticut Securities Director Ralph A. Lambiase. "Identity theft is inherently difficult to detect. For that reason alone, investors should refuse any unsolicited online contact from anyone seeking personal information or money by simply hitting the delete key. I urge investors to contact their state securities regulator if they suspect they have been defrauded by this scheme."