The Web's Most Wanted

The Net offers easy anonymity, and anyone can join in. No wonder it's become a magnet for shysters.

Written by David Diamond
Artwork by Lou Beach

It's a jungle out there. The Internet, that terrific new medium that is revolutionizing the way we live, think, flirt, and shop, has also created the biggest free-for-all in the history of deceit.

From chat rooms where scam artists hype questionable stocks and auction sites where shill bidders drive up prices, to the bandwidth-breaking streams of anonymous email hawking variations of cons so dusty it's impossible to imagine anyone still falling for them - credit-repair scams, work-at-home scams, multilevel marketing scams, first-on-your-block investment scams - there's at least one big region of cyberspace that's rolling in profits, albeit illegally. Internet fraud rose by a staggering 600 percent in 1998, according to the National Consumers League. Located in Washington, D.C., the consumer group bases its figures on the complaints it receives. Since the vast majority of fraud cases go unreported, precise figures are hard to obtain, but the Federal Trade Commission, which has about 20 lawyers working full time on Internet fraud at any given time, estimates that billions have been lost in the Internet's earliest years to scam artists. But keeping up is hard to do. The U.S. Securities and Exchange Commission now has a "Cyberforce" of 240 people who devote part of their time to Internet fraud. State attorneys general, and securities and corporation regulators are slowly getting into the act. California's Department of Corporations, for example, has an Internet surveillance team comprising two attorneys, one investigator, and an examiner in the state that is believe to be the highest generator of online crimes. But these budget-constrained regulators are admittedly scrambling to keep up with the growing ranks of fraudsters, and there's no end in sight.

Part of the reason fraud proliferates so wildly online is that the barriers to entry are incredible low and online buyers seem so gullible. From his Lake Worth, Fla., mobile home, Craig Lee Hare presented himself to the online world as Experienced Designed Computers and C&H Computer Services, luring dozens of online auction bidders to send in checks or money orders for computers they would never receive.

The Internet has opened the floodgates for unscrupulous business just as the telephone replace the door-to-door scamster. Even some of those doing the policing are awe-struck at the possibilities. "Think about it. The Internet is made for talking to large numbers of people immediately," says Jerry Steiner, a staff attorney in the FTC's San Francisco office. "In telemarketing you have to call one person at a time. With the Internet you can promote whatever you are selling to an incredible number of persons with one keystroke." The medium is a con artist's dream for many reasons. Steiners says that he, personally, feels would-be victims give far more credence to a written pitch, either in the form of email or a Website promotion, than they do if they hear it over the telephone.

Also, a Web presence can convey a certain legitimacy to the techno-na•ve. "You see a guy selling fake Rolex watches on the street or stolen TVs from a truck and you'll probably run the other way. But you're less likely to be as cautious with pitches to buy things on the Internet," explains Kenneth P. Mortensen, a Berwyn, Pa., attorney who consults with the Pennsylvania attorney general's office on Internet fraud. "On the Internet, you don't see the guy's beat-up car. It's very easy to make something look well-done and professional." Which might be why Gene Block of Durham, N.C.; Robert T. Riley of St. Louis, Mo.; and Renate Haag of Frankfurt, Germany, were so successful at drawing investors to their official-appearing enterprises, Block Consulting Services and The Roberts Group. On CompuServe, Block advertised prime bank securities that would yield returns of 200 percent to 420 percent annually and promised the investments would be guaranteed against loss by the nonexistent "Prime Bank Guarantees". Ultimately, unsuspecting investors sank a total of $4.3 million in the scam.

Even the techno-savvy can be duped; in April, several investors bought stock in PairGain Technologies based on a false message posted by Gary D. Hoke Jr., a former company employee. Hoke posted a message to a Website with links to a phony Bloomberg new service Website, which he created and posted.

Besides the online versions of the old confidence games, we have seen the emergence of at least one scheme that is unique to the Internet: the "Moldova" scam, perpetrated in 1995 by a company known as Audiotex Connection. Visitors to a Website could download free viewer software for "ALL NUDE ALL FREE" pictures. What they didn't know is that the software also secretly disconnected them from their ISP and then turned off their modem's speaker, so they couldn't hear it reconnect them to the Internet through a high-priced international modem connection. A further refinement was introduced in 1997, when dupes were told their connection was going to Moldova (part of the former Soviet Union), but it actually terminated in Canada. Unsuspecting victims paid for the long-distance phone charges to Moldova, while the cons pocketed the difference. In both versions, users stayed connected until they turned off the computer.

And the monumental gains reaped by millions who have invested in legitimate Internet-related stocks is creating a new growth industry: ersatz pre-IPO companies marketed from the same boiler rooms that in earlier times saw retirees pressured to invest in can't miss gold mines or oil leases.

"People who may have heard about the Internet but don't know anything about it can be persuaded that they're getting in on something that's been phenomenally successful and generated a lot of press." Says Monica Tait, a staff attorney in the FTC's Los Angeles office. Why else would innocent folks pony up $4.5 million in partnership shares for Home Net Shopping (a purported Internet mall featuring live hosts), $5 million for Enternet Communications (an alleged ISP serving Chicago, Detroit, and Indianapolis), and $1.5 million for Connectkom Group (an alleged ISP serving Seattle).

So much fraud, so little time
All of these scams share one thing: They have been shut down by law enforcement. But many unsavory deals still flourish. As the Internet has grown in popularity, so have regulators' harsh warnings of its potential dark side. As early as the fall of 1995, the FTC held public hearings to examine the Internet's potential for fraud. Richard H. Walker, director of the SEC Division Of Enforcement has testified before a U.S. Senate subcommittee about the daunting task: "Given the vastness of the Internet, and its constant expansion, no surveillance program can guarantee complete coverage," he said, adding the important point that Internet fraud is a double-edged sword. "The characteristics of the medium that make their promotion accessible to investors also often place their activities in plain view of our Enforcement Division."

In May, SEC Chairman Arthur Levitt urged online brokerage firms to warn their clients of trading risks, charging that some online firms' advertisements more closely resemble commercials for the lottery by promising quick riches. On May 18, the SEC censured Datek Online Brokerage Services and former CEO Michael Moishe Zelcer for, among other things, failing to hold the required minimum reserve, using reserve funds to cover its own expenses, and inaccurate record-keeping. The company was fined $50,000 and ordered to hire an independent consultant to review its internal practices; Zelcer was fined $10,000 and suspended from trading for 90 days. But the task of sniffing out online securities fraud is so overwhelming that the SEC has asked Congress for an $11 million increase to its $337 million budget, one of the main uses of which will be to combat fraud on the Internet - although this will still only represent about 3 percent of the total budget.

Surf Days
Since 1994 the FTC has brought approximately 80 cases against the perpetrators of Internet fraud. It's actually not such an unimpressive figure given the fact that the commission's total work force numbers only about 1,000 people, and that it has broad responsibilities ranging from antitrust violations to fair credit-reporting regulations, consumer protection to franchising. Prioritizing "gets harder and harder," complains attorney Steiner, who has worked for the FTC for 33 years. "We are being asked to do more and more and more."

FTC staffers act on complaints passed on by nonprofit consumer groups, government agencies, or competing businesses. One of its more inventive measures has been to post teasers ads - phony Webpages, such as The Ultimate Prosperity Page, that are designed to attract the sort of folks who fall for easy-money scams. By the third page the viewer is hit with a whammy: "If you responded to an ad like this, you could get scammed." The warning page offers ways of avoiding fraudulent business opportunities and provides a link to the FTC's Website, where visitors can read about Internet scams that were dead-ended by legal action.

The commission also hosts periodic "surf days" on which it coordinates with state, federal, and international agencies for a day of intensified Web-surfing for fraud. One surf day, for example, helped the FTC to track down and warn 330 "HUD tracers" - entrepreneurs who offer to help consumers obtain Federal Housing Administration mortgage insurance refunds in exchange for a 30 percent commission. Typically, tracers give the impression that their service is required for a refund, when in fact, it is unnecessary. As a result of the surf day effort, 70 percent of the identified tracers had shut down within a month or removed questionable claims. Another surf day effort identified 500 possible scams.

The SEC's Cyberforce of attorneys, accountants, and analysts all spend part of their week surfing the Net for such securities laws violations as investment newsletters whose publishers fail to reveal that they are compensated by the companies they hype. The SEC, which is charged with enforcing the broad antifraud provisions of the Securities Exchange Act of 1934, has nabbed about 40 companies in two major sweeps over the past year. SEC spokesperson John Heine says it's far easier to monitor the Internet than boiler rooms, where "you have to wait until people lose money before moving in." The SEC's efforts are coordinated by a four-member Office of Internet Enforcement.

The SEC has taken an aggressive approach: When it suspends trading of a suspicious stock, it will post press release of its actions and the suspension order itself to discussion forums devoted to the stock. It is also appealing to consumers for tips and complaints. When it opened its online Enforcement Complaint Center in June 1996, the SEC generated about 20 complaints a day. An average day now yields between 200 and 300 complaints. Walker says more than half of the complaints relate to and often advance existing SEC inquiries.

The Trouble With Auctions
It takes a level of sophistication to pull off even the simplest of security scams or multilevel-marketing schemes. But the advent of online auctions has lowered the IQ bar for would-be cyberfraudsters. Now any joker with a modem and a thirst for a quick buck can become a scam artist. And there is an increasing number of jokers out there: The National Consumers League's 3-year-old Internet Fraud Watch cited online auctions as the most popular and fastest-growing variety of Internet fraud, judging by the number of complaints received. Auctions accounted for 68 percent of the complaints it received in 1998, up from 24 percent a year earlier.

Partly, it's a matter of the odds. Every minute, some 650 bids are placed on the 2.1 million items listed by eBay's 3.8 million registered users. It's a safe bet that some sellers, such as Craig Lee Hare, have no intention of honoring their deals. During a seven-month period ending in April 1998, Hare solicited bids for new and used computers on eBay and other Internet auction houses, requesting that buyers send in checks or money orders via overnight mail carriers. In all, he received at least $22,000, quickly converting checks and money orders into cash at local check-cashing establishments, or having his girlfriend, Stephanie Herter - also known as Stephanie Branham - deposit them in her checking account. "A lot of perpetrators will try to conceal their identity," says Claudia Bourne Farrell, an FTC spokesperson.

When Hare failed to send out computers, the National Fraud Information Center received complaints. It passed along the information to the FTC, which in April 1998 charged Hare with violation of the FTC prohibition on unfair and deceptive practices and of the Mail or Telephone Order Merchandise Rule. The FTC obtained a temporary restraining order and an asset freeze on Hare's and Herter's accounts. The frozen assets are being used to repay bilked customers, though not enough money was in the accounts to make full restitution. Hare was also permanently banned from Net commerce. He's the first person to merit such a penalty.

The FTC, which has civil authority, then turned over its evidence to the FBI in West Palm Beach, Fla., for criminal action. Hare didn't even put up a fight when he was charged in U.S. District Court with three counts of wire fraud. In exchange for an indictment, Hare settled and was sentenced in February '99 to six months of house detention. Susan Grant, director of the National Fraud Information Center and VP of public policy at its parent organization, the National Consumers League, says Hare's crime is among the most popular types of auction fraud. "Either they're not delivering or they're delivering something that's not remotely like what you're promised," she says, adding that the popularity of online auctions has given birth to a host of new deceptive acts, among them the practice of placing shill bids designed to boost the price for auctioned items or having phony positive references posted to a seller's online profile.

As one of the biggest online auction businesses, eBay has developed a counter-strategy for each of these offenses, though not always with perfect success. According to Kevin Pursglove, eBay's senior director of communications, the bidding company maintains an operation in which employees continually scan for a pattern of bids that could indicate possible shilling and for suspicious-looking positive comments in seller profiles.

Often, the investigators act on tips. "We have had phony feedback. We give them a warning and say they'll get suspended if they continue," explains Pursglove, adding that the same action is taken when eBay discovers people have created artificial user names and accounts. When eBay pursues tips that lead to a shill bidder, the perpetrator gets a 30-day suspension for a first offense. Under eBay's escrow program, buyers send a check or money order to an escrow service, which holds the money while the buyer evaluates the goods. If the buyer doesn't find the product satisfactory, both money and goods get returned. "This way, you have a chance to get the item in your hands and examine it before you close the deal," explains Pursglove.

In March, eBay launched its Lloyds of London insurance program, which is free for buyers and sellers of items priced at $200 or less. With the insurance, if you receive an item and it isn't what you believe it should be, you get your money back - minus a $25 deductible fee - after filing a claim. And to help sellers bolster their own reputations, eBay offers a verified user program. The company uses services of Equifax to validate the information provided by any eBay user. If a user qualifies, an icon is placed next to their name.

And that raises another nagging concern. While Pursglove says eBay works proactively with agencies to identify pirated material on the site and promptly remove it , it is generally accepted - although undocumented - that the Internet is the planet's largest dumping ground for stolen goods. "The Internet is the biggest marketplace for hot property," says Jamison "Jamie" Piatt, whom the Pennsylvania attorney general's office caught failing to deliver the Furbies he auctioned on eBay. While Microsoft monitors eBay for pirated software and some federal agencies have targeted eBay for a probe in the alleged sale of contraband on its site, the pursuit of stolen goods is one that might bear little fruit - at least with the current lean investigative bandwidth.

"Although this is an emerging problem, we have neither the time nor the resources to surf the Internet," complains George Grotz, a special agent in the FBI's San Francisco office. What the FBI is doing, however, in conjunction with the National White Collar Crime Center, is launching a National Complaint Center, scheduled to go online in late summer. But the FBI readily admits it is already very busy with efforts to rein in kiddie porn and keep track of adults using the Internet to lure minors across state lines.

It's a jungle out there.

David Diamond (ddiamond@well.com) is a frequent contributor to Business 2.0

I have seen the future of the Internet and his name is Jamison "Jamie" Piatt. The 21-year-old occasional construction worker and Internet scam-meister meets me in front of the Sporting Club, a private drinking establishment that dominates downtown Mocanaqua, Pa. (population about 600). Stuck amid the grandeur of Pennsylvania's mostly depleted hills of anthracite, Piatt has a high school linebacker's build, two earrings, jeans sunk to mid-butt, and the soft facial features of a Matt Damon. His single mom, Jenna, has tendd bar at the Sporting Club for 16 years - it's one of three jobs - but he was banned from the club for "getting verbal" with her one night. As a kid, Piatt was sentenced to juvenile probation for shoplifting and for being with friends who were robbing houses. He dropped out of high school in his senior year.

Piatt says he is plagued with two basic problems: He's lazy and cursed with bad luck. Just last year, the latter struck the week before Christmas. He was sleeping on the couch in his friend's apartment, because, he says, his bedroom was stacked to the ceiling with 500 Furbies. He explains that he bought the Furbies from the Wilkes-Barre Toys 'R' Us, where his friend stocks shelves, and from a dealer he met at a Parsippany, N.J. collectibles show. He paid between $30 and $50 for each of the furry creatures, an investment he financed in part with a $10,000 loan from his mother's friend. He hoped to unload them on eBay the way he had been unloading baseball cards online for three years. Visions of easy riches swam in his head, he says, as he logged on and posted a $60 Dutch auction price tag for the hard-to-get Furbies. Earlier in the week he had made his best deal ever - selling a $325 Michael Jordan rookie card online for $2,500. But the vast majority of his trades net him profits in the $10 range.

He lights a Newport, takes a drag, shakes his head. "I told everybody I would have the Furbies delivered in time for Christmas. That was my big mistake. I should never have guaranteed delivery." Thirty-five buyers eagerly put in their orders and Piatt collected $3,000 to $4,000 in checks. He deposited the checks in his bank and held off sending the Furbies until he was certain the checks had cleared. "Nobody sends out anything until checks clear. Besides, I deposited them in bulk and had no way of knowing which ones had cleared," he says, looking away.

Meanwhile, he explains, he logged on one evening and was greeted with about 30 email messages, one from almost every buyer - all of them angry that the Furbies had not arrived. In message after message, respondents to his Dutch auction announced tha they were stopping payment on the checks they had sent Piatt. Another message offered an explanation for the mass exodus: It was a note forwarded by "a real wacko," he says. The individual had emailed each of the buyers, warning them that Piatt was a scam artist who was using an alias. Piatt had, in fact, been selling the Furbies under the name George Williams, but instructed buyers to write the checks to his real name. "He started a real with hunt," he says. "I had problems with another wacko a few years ago."

Piatt was online in his first-floor apartment at 5 p.m., when an agent arrived from the Pennsylvania Office of the Attorney General. As soon as the visitor started questioning his roommates, Piatt had an inkling they were there for him: "Attorney general?" he piped in, "Over here."

Piatt was offered a deal: Pay a $1,000 fine and return the buyers' money within 90 days. "I had never heard of consumer protection until then," he says, rolling his second Budweiser bottle between his palms. "I thought I was going to jail."

But it wasn't the end to Piatt's bad luck. He withdrew $4,000 from his bank to begin the process of paying his fine and restitution and, he says, made the mistake of showing it to a friend. The follwing night five men dressed in black, a gang from Wilkes-Barre, stormed his apartment, beating him with billy clubs in the hope that he would turn over the money. His roommate fled to another room and called the police. Piatt endured welts on his back and bruises to his head, but didn't tell his assailants the money was in a jacket draped over a nearby chair.

Piatt now lives with his mother and grandmother across the east branch of the Susquehanna River, near the town of Shickshinny. He rarely answers his telephone and typically stays online until 4 a.m.

But even he, the quintessential Net scammer, is cautious about who he deals with online. "You get some real wackos out there."

© 1998 Imagine Media Inc.