Securities Frauds on the Internet and Current Issues Concerning Online Trading

Testimony of G. Philip Rutledge
Deputy Chief Counsel,
Pennsylvania Securities Commission
Before the
Permanent Subcommittee on Investigations of the Committee on Governmental Affairs,
United States Senate

March 23, 1999

Madam Chairperson and Members of the Subcommittee:

My name is Philip Rutledge. I serve as Deputy Chief Counsel of the Pennsylvania Securities Commission where I have 20 years experience in securities regulation1. I am also an Adjunct Faculty member of The Dickinson School of Law of The Pennsylvania State University; a Fellow of the Society of Advanced Legal Studies, University of London, England; and a Director of the Centre for International Documentation of Organised and Economic Crime, Jesus College, University of Cambridge, England.

I am grateful for the opportunity to appear before the Subcommittee today to discuss various issues concerning the offer, sale and purchase of securities through the Internet, with particular emphasis on the experience of the Pennsylvania Securities Commission with securities frauds on the Internet. The Subcommittee should be complimented on the timeliness of these hearings and its willingness to look at some very complex investor protection issues.

Internet is coming into the homes and businesses of millions of Americans at a time of a booming stockmarket, an economy fueled by consumer spending and a shifting of responsibility for retirement saving from employer to employee. Internet is changing the way Americans approach investing. We need to be alert to these changes and the ramifications they have on our business of investor protection.

Although my remarks refer interchangeably to Internet and the World Wide Web, they do so for sylistic purposes only. The part of Internet with which most Americans are familiar — Web sites with graphics, sound and interactivity — is, technically speaking, the World Wide Web (Web) side of Internet.

Like the newspaper, telegraph and telephone which preceded it, Internet is the newest of mass communication media. Mimicking its predecessors, Internet has attracted mass usage through more instantaneous communication to a wider audience at a lower cost. Legitimate business follows technological innovation and investment fraud follows legitimate business. Here lies the fundamental dilemma that securities regulators always have faced — fostering legitimate capital formation while maintaining adequate standards of investor protection.

Internet’s speed and breadth of communication across geographic boundaries and the multiplicity of uses which it facilitates has increased the complexity of this dilemma. We have seen Internet used for legitimate business purposes such as direct offerings of securities through company Web sites, offering of online brokerage services and electronic delivery of mandated disclosure material. Conversely, bogus securities offerings by non-existent companies, “prime bank” frauds, “pump and dump” schemes and other investment scams have found an inviting home on Internet.


A. The Pennsylvania Model

The Subcommittee asked for specific testimony concerning the “Pennsylvania” model which was designed to provide regulatory guidance that would facilitate legitimate capital formation over Internet, particularly by small businesses, without compromising state enforcement capabilities. Small business is disproportionately affected by, and interested in, the capital raising potencies of Internet because of the significant lowering of costs to reach prospective investors and the lack of interest by underwriters in selling shares of start-up companies.

The Pennsylvania Model was adopted by the Pennsylvania Securities Commission in 19952 and by the North American Securities Administrators Association, Inc. (NASAA)3 in 19964. The Pennsylvania paradigm quickly became the uniform standard at the state level and was cited approvingly by the U.S. Securities and Exchange Commission (SEC) in its long-awaited 1998 Internet Release wherein the guidance it afforded with respect to use of Internet for securities offerings that may be viewed by U.S. persons followed the Pennsylvania Model5.

Under state securities laws, known as “blue sky laws,” it is unlawful for a person to offer or sell a security unless the security is registered or the security or transaction is exempt from registration6. The first issue facing state securities regulators was whether the posting of an investment opportunity on a Web site constituted an offer in all 50 state jurisdictions. If the answer was yes, the second issue was how states could give regulatory relief to an issuer who registered its securities in the states in which it wanted to sell but still wanted to place its prospectus on a Web site.

In its original order, the Pennsylvania Securities Commission said that, although it would treat the posting of the prospectus on the Web site as an offer, it would exempt the offer from being registered in Pennsylvania if the issuer had no intention of offering the securities in Pennsylvania and, in fact, did not sell securities in Pennsylvania as a result of that Internet posting7. The exemption would be selfexecuting e.g., no filing would be necessary to obtain it. Also, the exemption applied only to the registration requirements and not the anti-fraud provisions of the  Pennsylvania Securities Act8.

Under the Pennsylvania Model, state jurisdiction will not be invoked with respect to offers of securities on Internet (Internet Offers) if the offer indicates directly or indirectly that the securities are not being offered in the state, an offer is not otherwise specifically directed to any person in the state and no sales of securities are made in the state as a result of the Internet Offer (Internet Offer Exemption). The legend may be as specific as “the securities are not being offered in the Commonwealth of Pennsylvania” or as general as “the securities are being offered only in jurisdictions where they may be sold legally.” The Internet Offer Exemption is self-executing i.e., no filing is required to be made with a state regulator to claim the benefits of the exemption.

The burden is on the issuer to reply honestly to e-mail from a person in a state where the securities are not eligible to be sold. The issuer may not direct additional information to such person, including a solicitation to purchase another security of the issuer. To rely on the Internet Offer Exemption, no sales of the issuer’s securities may occur in the state as a result of the Internet Offer, including any other securities of the issuer (unless another exemption under state law is available). This is consistent with the premise that the issuer did not intend to offer securities in that state.

B. Linking Entrepreneurs with Investors

The Pennsylvania Securities Commission was the one of the first state securities regulators to recognize the legitimate use of Internet to link entrepreneurs needing capital to experienced, financially sophisticated investors known as accredited investors (Accredited Investors)9. Working with the U.S. Small Business Administration (SBA), the Pennsylvania Securities Commission took action in 1996 to establish a framework for regulatory relief for securities offerings made over the Angel Capital Electronic Network (ACE-Net)10. ACE-Net is a closed, Web-based computer system sponsored by SBA and designed to match entrepreneurs with Accredited Investors subscribing to the ACE-Net system. Pennsylvania’s initiative became the forerunner of the Model Accredited Investor Exemption adopted by NASAA in 1997 which facilitates use of general solicitation, including Internet communications, where all sales of securities will be made to Accredited Investors11.

This year, the Pennsylvania Securities Commission will be proposing further regulatory relief by waiving the requirement that a registration statement filed with SEC must be filed with us prior to an offer being made in Pennsylvania. This will allow companies to place copies of their preliminary SEC prospectus on their Web site without fear of violating Pennsylvania law if the company fails to file a copy of its SEC registration statement with the Pennsylvania Securities Commission.


Just as state securities regulators have been in the forefront of facilitating legitimate capital formation using Internet, they also have been keenly aware of the darker side of Internet. In certain respects, there are as many villains and thieves lurking in cyberspace as can be found in a typical “Western” movie. One cannot see who is behind the Web site or masterminding the posting of fictitious information on various bulletin boards in an effort to push the price of a stock up or down. Familiar trademarks and logos can be migrated or changed slightly and appear on new Web sites to lend authenticity and inspire misplaced consumer confidence. Legitimate-looking graphics, glowing recommendations and laudatory letters can be fabricated and linked to Web sites creating a very credible “Web” illusion.

A. A Case Study in Web Illusion.

An excellent case study of the risks posed by the Web to investors is the Agency for Interamerican Finance (AIF). This official-sounding organization maintained a Web site where investors could obtain information in English, Spanish, French and German about investment opportunities in Interamerican hard currency bonds which would pay 11.75 percent annual interest for a three year term in minimum principal amounts of $2,50012. Principal and interest on the bonds were guaranteed up to $250,000 by Group American Pacific Financial, Ltd., S.A., a purported independent trust company13. In addition, those who invested at least $10,000 would be provided with 10,000 frequent flyer miles with American Airlines. Investors were to send their money to a post office box in St. John’s, Antigua, West Indies. Dividend checks would be drawn on the local branch of the Swiss American Bank14.

AIF explained that it had established its headquarters in Antigua, a “major Caribbean center for international finance” because it had a “well-earned reputation as the most confidential financial jurisdiction in the world.”15 Included in AIF’s Web site was a graphic from the cover page of Business Week magazine featuring an article on Online Investing16. AIF’s Web site also displayed a reprint from the “World Financial Report” which had an address of 1 Selegie Road, #09-03 Paradiz Centre, Singapore 0718. The “World Financial Report” praised AIF’s hard currency bond for its high yield, safety and customer service and assigned it a rating of “excellent to extraordinary,” particularly with respect to AIF’s financial solvency and management team.17

In response to initial investigation by the Pennsylvania Securities Commission, SEC initiated an enforcement action concerning AIF. According to the SEC Litigation Release, AIF was a total sham18. No bonds existed and AIF had no business operations or assets19. Group American Pacific Financial, Ltd., S.A. also lacked assets and business operations20. Both were Panamanian shell subsidiaries of Octagon Technology Group, Inc., a computer software company located in a suburb of Chicago, IL21. AIF’s headquarters in St. John’s, Antigua actually was a rented mail drop. The World Financial Report was a total fabrication and American Airlines was not awarding frequent traveler miles for the purchase of bonds22.

The SEC obtained an injunction against Octagon Technology Group, Inc. and its promoters which permanently enjoined them from future violations of the anti-fraud provisions of the federal securities laws and imposed a civil penalty23.

B. Pennsylvania’s Experience

AIF was not the first Internet securities fraud case in which the Pennsylvania Securities Commission was involved. Our first Internet case was in 1995 and focused on a Pennsylvania resident, Scott A. Frye, who posted messages and other written materials on Internet to solicit investors in purported coconut groves in Costa Rica. He misrepresented that he had secured a major distribution contract with A&P Supermarkets and that the investment would produce riskless profits24. Pennsylvania Securities Commission staff obtained evidence that was presented by SEC to a federal court which issued an injunction against Mr. Frye’s Internet coconut grove venture, froze his assets and ordered an accounting25.

Before turning to marketing investments in virtual coconut groves, Mr. Frye was involved in gemology. He first came to the attention of the Pennsylvania Securities Commission as the promoter of a start-up company called Gem-Vid which was a SEC Rule 50426 offering that sought registration under Section 206 of the Pennsylvania Securities Act27. Gem-Vid purported to be engaged in the business of marketing a device to jewelers that would allow them to determine the exact quality and value of any gemstone. The Gem-Vid offering was never registered in Pennsylvania due to the issuer’s failure to satisfactorily respond to regulatory comments.

On October 18, 1995, the Pennsylvania Securities Commission issued a Cease and Desist Order against Lazare Industries, Marshalls Creek, PA for violations of the anti-fraud and securities registration provisions of the Pennsylvania Securities Act relating to dissemination of materials on Internet stating that Lazare had a patent for its ozone/oxygen therapy used to treat AIDS and other blood borne viruses and infections when, in fact, it had no patent for this purported therapy28. In April 1996, SEC obtained a temporary restraining order from the U.S. District Court for the Middle District of Pennsylvania to restrain Lazare from violations of the federal securities laws29. The Pennsylvania Securities Commission assisted SEC in this case in which at least $1.4 million of investors funds had been received30. SEC later turned the matter over to the U.S. Justice Department for criminal prosecution31.

In early 1997, the Pennsylvania Securities Commission took an Internet enforcement action where a promoter attempted to hide his unsavory past. This case involved an Internet solicitation for investment in “The Gambler,” a company located in New Jersey which was going to operate a gambling casino over the Internet32. The disclosure documents used in connection with the solicitation of the investment using Internet e-mail failed to disclose that an executive officer of the company was subject to a permanent injunction issued in 1994 by the U.S. District Court for the Southern District of New York enjoining him from violating the federal securities laws and a 1996 action in which SEC permanently barred him from association with any broker or dealer, or association with a member of a national securities exchange or registered securities association33.

Enforcement actions concerning online investment solicitations to Pennsylvania residents increased in 1998. The Pennsylvania Securities Commission took enforcement action against Cen-Tex Alchemy Guild of Copperas Cove, TX (offering “pure contract trusts” with guaranteed rates of return between 70% – 140% and showing how $250 would grow to $26 million in 15 years)34 ; L.A. Power & Light, L.L.P. and Electric Choice Investments of Boca Raton, FL (offering investments to acquire an electric utility license and a “finders fee” of 5% of each investor referred)35; and P.A.E. Properties of Lancaster, PA (a Web site offering 30% annual interest on investments which are secured by a note)36. In the L.A. Power & Light case, there were seven Pennsylvania residents who invested over $90,000. This case also spawned a copy-cat Internet offer as to which the Commission issued a Cease and Desist Order on February 23, 199937.

Also in 1998, the Pennsylvania Securities Commission obtained preliminary injunctions from the Commonwealth Court of Pennsylvania against a company seeking to operate a virtual casino Web page based in St. Kitts, West Indies38. and an organization allegedly engaging in a pyramid scheme which used Internet to solicit investors with promises of a 100% return on their money gained through international transactions and offshore investments in diamond fields, oil wells and gold mines39.

C. SEC Experience

According to SEC enforcement staff, the leading trend in Internet enforcement cases is the manipulation of stock of small companies through distribution of false and misleading statements over the Internet, most often in the form of bogus newsletters40. An exemplar of this trend is SEC’s case involving manipulation of the stock of Systems of Excellence, Inc. In that case, SEC accused the chief executive officer of Systems of Excellence, Inc. (SOE) of orchestrating a stock manipulation scheme whereby he secretly distributed millions of SOE shares in the names of his family members and corporations, issued false favorable information about SOE and its business and sold his shares into the inflated market at substantial personal profit41. Part of the scheme involved giving 250,000 shares of SOE stock to the publisher of a daily stock newsletter disseminated over Internet in exchange for recommending the purchase of SOE stock to his subscribers, which arrangement was not disclosed to the subscribers42. SOE’s chief was sentenced to 46 months in prison and the newsletter publisher received a sentence of 12 months in prison43. A stockbroker accomplice in the manipulation scheme who received $1.6 million in payoffs from SOE’s president was sentenced to three years’ probation and six months’ home detention44.

In its fight against touting of small company stocks on the Internet, SEC has focused on bringing Internet cases on a coordinated basis. In September 1998, it brought 13 actions against 41 defendants for allegedly engaging in small company stock schemes that bilked investors out of $25 million45. In February 1999, SEC conducted a second sweep and accused authors of online newsletters, Web sites and Internet junk mail with misrepresenting companies’ investment prospects or failing to disclose that they were getting paid by the companies about which they made recommendations46. Collectively, these touters allegedly received more than $450,000 and 2.7 million shares of stock and options from the companies47. In one case, SEC alleged that a former stockbroker promoted 10 companies on in exchange for $180,000 and 322,500 in shares of the company48.

Also finding a home on Internet are prime bank frauds, pyramid schemes and phony public offerings. In May 1998, the International Chamber of Commerce issued an investor warning about an investment scam being pitched through Internet chat rooms and bulletin boards called “bank debenture trading programs” in which investors from a number of different countries have lost $30 million49. This particular scam purported to offer investors the opportunity to purchase “Medium Term Notes,” “Standby Letters of Credit,” or “Bank Guarantees” from the world’s top 100 banks but no such program exists50.

SEC recently obtained a permanent injunction against a German resident conducting a similar prime bank fraud over Internet wherein she offered investors a choice of 10 different investment programs with returns ranging from 200% to 420% annually51. She was ordered to pay more than $9.3 million in penalties and was prosecuted in Germany by the Munich district attorney for running a pyramid scheme for which she was sentenced to two years and ten months in jail52.

Internet also has facilitated investor losses stemming from phony stock offerings. In February 1998, SEC won a court order halting promoters from soliciting investors over Internet to raise money allegedly for the purchase of an Internet service provider53. The company had raised over $1 million from 56 investors, most of whom were financially unsophisticated54. The company did not buy an Internet service provider and used funds received to pay sales commissions, salaries, and operating expenses as well as converting some of the funds to the promoters’ personal use55.

In another stock offering conducted entirely over Internet, SEC charged Interactive Products and Services, Inc. and its chairman with raising $190,000 from 150 investors nationwide, pocketing the proceeds and converting the money to his personal use despite language in the offering memorandum that all proceeds would be held in escrow and all monies would be returned if the offering did not raise the $500,000 minimum56. SEC also alleged that the offering document touted the qualifications of three advisors purportedly retained by the company who, in fact, had no affiliation with the company; failed to disclose that the company was insolvent due to outstanding judgments; made optimistic statements about a patent application without disclosing that the application had been rejected; and misrepresented that the offering document had been qualified by SEC57.

D. The Nature of Securities Fraud on the Internet

As demonstrated by these enforcement cases, the type of securities frauds seen on Internet is limited only by the imagination and marketing ability of the fraudster. While Internet has not necessarily changed the types of securities scams routinely seen by securities regulators (touting, bogus securities offerings, “prime bank” schemes, etc.), it has enhanced greatly the marketability of investment scams. In the past four years, the percentage of enforcement cases at the Pennsylvania Securities Commission with an Internet dimension has grown from zero to approximately 20%. As more people acquire personal computers and Internet access and the more fraudsters use Internet to reach victims, I expect the percentage of enforcement cases with an Internet dimension will continue to increase.

1. Lure of the ‘Net

One reason Internet has been a boon to the marketing of investment frauds is that this technology has gained instant credibility with users/consumers. Perhaps this stems from integration of Internet into the daily lives of millions of Americans, such as ordering goods from a catalog, sending e-mail, making airline reservations or researching consumer, educational or medical information. Relying on Internet accurately to perform routine daily tasks may lull consumers into a false sense of security that they can rely on all else appearing on Internet. People often say they do not believe everything they read in the newspaper. They should apply the same axiom to Internet.

Another marketing boon for peddling investment fraud has been widespread publicity concerning meteoric rises in the price of shares of companies whose business involves Internet. As a result, there is a certain allure to investing in companies that say they will be engaged in Internet-related businesses. In this regard, I think the public has become de-sensitized to risks associated with investments in small-cap and start-up companies, the most important risk being the loss of the entire investment. With the backdrop of a robust stock market wherein many individual investors have not experienced a market correction of the magnitude of the 1987 crash, investors are vulnerable to fraudsters who use the lure of the ‘Net to entice investors “to get in on the ground floor” of the next “hot” Internet stock.

2. New Channels – New Victims

As more and more fraudsters discover the distributive powers of Internet, state securities regulators and SEC will see more enforcement cases with an Internet dimension. I use the term dimension because fraudsters only will be adding Internet to their channels of distribution for investment fraud. Internet lowers overhead costs for the fraudster – no banks of telephones to pay for or commissions to be paid to high pressure sales persons. Internet also allows scam artists to change addresses (URLs) without physically changing location and paying associated moving costs. Internet facilitates running many scams simultaneously on different Web sites. Despite obvious advantages of Internet, I do not expect fraudsters to abandon other tried and true methods, like high pressure telephone sales tactics familiar to boiler room operations. Not everyone has a computer or is wired to Internet. Fraudsters will continue to use any method which successfully pries funds from unsuspecting victims.

In using Internet, however, fraudsters may have found a new audience for their scams. Those who would have hung up on an unsolicited sales phone call at dinner time are now surfing the ‘Net after children’s bedtime and may be vulnerable to more subtle, but no less fraudulent scams, such as touting of small-cap stocks in Internet chat rooms or direct public offerings of bogus companies. Those who previously consulted a licensed broker for advice as to suitable investments for a retirement or college education fund may now be following pseudo cyberinvestment gurus who urge investors to follow their stock recommendations without disclosing payments they received from the company whose stock is being recommended or the positions in that stock which they may hold. Of course, our old friends, “invest now before the secret gets out; timing is critical; get in on the ground floor; I made a bundle and you can too,” easily have made the transition to the ‘Net.

3. Build and They Will Come

A disheartening development is the ease by which scam artists, through a modest investment in a personal computer and off-the-shelf software, can construct a phony investment on Internet. SEC’s case against Interactive Products and Services, Inc. is instructive. By posting an offering memorandum on a Website, the company’s promoter raised $190,000 from 150 investors nationwide58. It would seem that a modicum of effort to elicit funds for a highly speculative and even suspect venture, yields some investors.

III. Regulatory Responses to Securities Frauds on the Internet

A. Regulatory Cooperation and Joint Enforcement Programs

From the first Internet-related enforcement cases, state securities regulators and SEC have forged close, cooperative links. The early Agency for Interamerican Finance case is demonstrative. The Pennsylvania Securities Commission detected the fraud, contacted SEC and alerted the Illinois Securities Department when it was discovered that the promoters were located in Illinois. SEC, with the cooperation of Pennsylvania and Illinois, obtained an injunction and civil penalty in the U.S. District Court for the District of Columbia59. There is no regulatory competitiveness as state securities regulators and SEC recognize that our combined enforcement efforts are needed to be effective cops on the Internet beat. Indeed, initial state action sometimes precipitates SEC action and, as exemplified by the Lazare Industries case, criminal action by the United States Attorney60. All are vital to the regulatory effort against securities fraud on the Internet.

Lately, SEC has focused, as its number one priority, on the touting of smallcap stocks by those who fail to disclose receipt of payment for stock recommendations61. States tend to focus on solicitations of investors in bogus offerings and those making misleading or exaggerated claims in connection with an offering of securities.

States securities regulators welcome the assistance of others in fighting securities fraud on the Internet. In a striking example of cross-agency, crossborder and federal-state cooperation, officials from the U.S. Federal Trade Commission (FTC) and securities regulators from 21 states in the U.S. and two Canadian Provinces conducted a cooperative six month sweep of telemarketing, business opportunity and investment scams touted on Internet which, on July 2, 1997, culminated in the filing of 61 actions62. The nine civil cases brought by FTC alone represent investor losses of more than $150 million63. In one case, a company promised returns of up to 600 percent a year on partnership investments in a virtual shopping mall to be placed on Internet but FTC alleges that the defendants converted the money for their own use and left investors with worthless stock certificates64.

In my opinion, further partnering in the fight against Internet securities fraud is necessary both in terms of policing and in terms of pooling of resources. Regulators already are engaging in cooperative enforcement initiatives but we should expand this to include investors, industry and non-profit organizations dedicated to fighting fraud, such as the National White Collar Crime Center65. Through posting information on Web sites and providing e-consumer hotlines like cyberfraud@nasaa.organd, state and federal securities regulators are soliciting assistance from investors who believe they have been swindled or detected an Internet scam. Partnering with industry is in industry’s best interest to boost consumer confidence in use of the Web. Industry can provide expertise and resources needed to build search engines to detect suspicious investment-related Web sites and call them to the regulators’ attention.

The courts are beginning to issue decisions relating to Internet enforcement actions. Receipt of e-mail in a jurisdiction has been held to be sufficient nexus to subject the promoter of a company to suit in that jurisdiction66. A search warrant to seize a computer system as an instrumentality of a crime has been held to render constitutional the seizure of all e-mail stored in that system67.

B. Statutory and Regulatory Changes

The Pennsylvania Securities Commission has responded to Internet with new regulations and increased enforcement authority. Many of the regulatory actions have removed potential jurisdictional pitfalls for legitimate businesses seeking to use Internet to reach prospective investors or for brokerage and investment advisory firms to notify potential customers via Web sites of generic services on offer68.

Act 109 of 1998, effective January 25, 1999, substantially amended the Pennsylvania Securities Act to give us new enforcement authority. Now, if a person continues to violate a Cease and Desist Order of the Pennsylvania Securities Commission, such person will be held in civil contempt and a court will impose a civil penalty of a minimum of $3,000 and a maximum of $10,000 per violation69. In a recent Internet-related case where there was a continuing violation of a Cease and Desist Order, the judge imposed the maximum civil penalty allowed under this provision70.

The Pennsylvania Securities Commission also received authority in Act 109 to impose a temporary or permanent bar prohibiting persons from selling securities in Pennsylvania or acting as a broker-dealer, agent, investment adviser or investment adviser representative or being registered as such71. Administrative assessments that may be imposed against registered persons was increased from up to $10,000 for a single violation and $50,000 for multiple violations to up to $25,000 for a single violation and up to $250,000 for multiple violations with a special additional assessment of up to $25,000 if any of the victims were elderly72. For the first time, administrative assessments of up to $25,000 for a single violation and up to $150,000 for multiple violations with special additional assessments of up to $25,000 each if any of the victims were elderly, the perpetrator had previous disciplinary history or the violation involved telemarketing may be imposed against persons who have violated the anti-fraud provisions of the Pennsylvania Securities Act73.

C. Resource Dedication

The Pennsylvania Securities Commission took the AIF case as an early warning signal of what lie in the future of securities law enforcement. The Commission met this challenge with a systematic plan to increase its resources to match those who would seek to perpetrate securities fraud on the Internet. Since 1995, our Information Technology Department, an essential component of any modern law enforcement effort, has grown from one to four fulltime positions. We also have added fulltime legal and investigative staff positions dedicated to Internet enforcement issues. States have the right to conduct undercover surveillance in the securities area as well as other areas (e.g., narcotics) and we adhere to guidelines established by the courts to conduct these operations.

Our Internet enforcement staff is augmented by other professional staff who are Internet capable. All professional staff have high-speed Internet access and the Commission is committed to investing in systematic upgrades in computer hardware and software so that we are always using cutting-edge technology.

D. Opening the Vaults: Web Access to Investor Information

An informed consumer of investment products is the best defense against fraud. Internet allows regulators to better assist investors because it facilitates fast and easy public access to vast government data bases and information banks. The illusion the fraudster seeks to spin on a Web site can be dispelled by a diligent consumer who accesses information available from regulatory agencies. With this new capability comes an obligation for regulators to make as much information available to investors through Internet as quickly and easily as possible. Each state and federal regulatory agency should have a Web site and ensure that all publicly available materials are accessible through that site.

1. Publication of Enforcement Actions

Internet is all about information. Thus, it is inevitable that Internet also will contain misinformation, disinformation and omission. These are the allies of fraudsters and scam artists. Securities regulators cannot prevent all fraud nor can we save individual investors from their own greed. What securities regulators can and should do is provide diligent investors with the tools to research investment opportunities appearing on the Web. When fraudsters spread misinformation on the Web, regulators need to counterattack with accurate information about the scams and the fraudsters.

The Pennsylvania Securities Commission was one of the first state securities agenices to have a site on the Web at we now average over 40,000 “hits” per month and consistently rank in the top 10 sites visited in Pennsylvania State Government. Since 1995, the Pennsylvania Securities Commission has been placing enforcement actions on its Web site. This allows ‘Net surfers to visit our site and see what is the latest fraud du jour and who is perpetrating it.

In addition to alerting the public to prevent them from being swindled, a side regulatory benefit has been that additional victims have come forward as a result of seeing our actions posted on the Web site and provided us with documentary evidence and testimony helpful to our enforcement proceedings. We now are planning to add a registry to our Enforcement page where investors may register to receive an e-mail notification every time we report new enforcement actions. SEC likewise provides information on its enforcement actions on its Web site at

2. Web Access to Broker Information on CRD

The United States prides itself on having markets based on transparency and disclosure. These concepts also should apply to those to whom Americans entrust their financial security. The Central Registration Depository (CRD), a computerized system created by NASAA and operated by the National Association of Securities Dealers, Inc. (NASD), contains data on persons who have applied to be registered, have been registered or are registered to engage in the retailing of securities to individual investors and their employing firms. This data provides employment information and whether the firm or individual has been subject to disciplinary, civil, criminal or injunctive actions; customer complaints; arbitrations or bankruptcy. In my opinion, the singular most important action which can be taken now to help protect investors from securities fraud is public accessibility to CRD information through a Web site. Just as America has led the world in full disclosure standards for securities offerings, we should lead in full disclosure of the background of those to whom we entrust our money.

Under Pennsylvania law, CRD information is deemed to be a public record74. Currently, investors must call the Pennsylvania Securities Commission to obtain the entire CRD record. The convenience to the investing public of having this information available to them at the click of a mouse while they are surfing the ‘Net would be of inestimable value. Like supermarkets, fraudsters count on impulse buying of the scam being offered. The best way to counteract a fraudulent come-on is to provide a quick way and easy way on the Web for the investor to perform a baseline check with CRD of the firm, the stock or the promoter.

Unfortunately for investors, NASD plans for public access to CRD information via the Web this year appear in severe jeopardy. First, there was an effort to cull CRD records prior to CRD data being made accessible through the Web by removing so-called non-investment related felonies older than 10 years75. The Pennsylvania Securities Commission strongly opposed this proposal stating, “informed and educated investors are the best defense to securities scams and abusive practices. . . If investors are considering placing their financial assets and trust in the care of a person who previously has demonstrated a propensity to engage in felonious conduct, they should be accorded the opportunity of receiving full disclosure. To introduce an “investment-related” exception is insufficient and inefficient. It serves only to create grey areas and induce development of additional standards for determining what activity should be made public. Although a felony conviction for laundering of drug proceeds may be argued not to be investmentrelated, an investor nevertheless may not be cheerful about having such person as a broker.”76

Second, NASD has announced that its interpretation of current federal law relating to immunity from civil liability for release to the public of CRD information does not give them sufficient immunity from liability if that information is made accessible through Internet77. I would urge Congress to enact, as quickly as possible, whatever statutory amendments NASD believes necessary to provide it with immunity from civil liability to allow investors access to CRD information through the NASD Regulation, Inc. (NASDR) Web site.

3. Investor Education and Linkages

In addition to posting of enforcement information, the Pennsylvania Securities Commission maintains a Securities Fraud Awareness Program section on its Web site. This section contains Investor Alerts about current investment scams of which investors should be aware, including an Investor Alert on “Touting of Stocks in Cyberspace.” The section also features a “Broker’s Notepad” that includes key questions investors should ask anyone who is recommending the purchase of an investment. A copy of the Pennsylvania Securities Act is located on our Web site so investors can look up regulatory requirements in Pennsylvania while online. NASAA has published a number of investor education materials relating to investment scams on the Internet which can be found at SEC has developed “Tips for Online Investing” and an “Internet Fraud” brochure which are available from SEC’s Office of Investor Education and Assistance or on its Web site at

Linkages also are important. The Pennsylvania Securities Commission Web site is linked to the NASAA Web site from which an investor can go to the Web page of any state securities regulator. Our Web site also links to the SEC Consumer Cyberfraud Page, the National Fraud Information Center, the Investor Protection Trust, the National While Collar Crime Center and the NASDR Online Customer Complaint System. NASAA has published a brochure which includes a number of Web sites where investors may obtain useful information or report investment scams. The Pennsylvania Securities Commission has added a segment on Investing on the Internet to its Investor Education Seminars which are investor outreach programs held throughout the Commonwealth.

IV. Trading Securities Through Internet

A. Online Trading

In 1998, it was estimated that three million Americans trade securities online over the Internet78. The online division of Charles Schwab & Co., called e.Schwab, has over 1.6 million active online accounts, up from 1 million at the end of 1997, and experienced a 60% increase in the number of new online accounts for the first quarter of 199879. In 1998, E*Trade’s accounts doubled from the prior year80. In February 1999, the largest U.S. full-service brokerage firms, including industry giant Merrill Lynch, announced that they also will allow customers to effect online securities trades through their Web sites81. To execute a straightforward trade, it may be hard to beat the cost and time effectiveness of online trading through the Internet, except when technology fails.

1. Risk of Technology Failure

Online trading raises a number of issues concerning execution, investor suitability and surveillance. Failure to execute a trade due to failure of online trading systems or inability to access Web-based trading sites during times of market volatility increasingly are becoming the subject of consumer complaints. With individuals trading highly volatile stocks, particularly in the technology sector, seconds count and use of margin magnifies the gain or loss.

On a volatile trading day such as October 28, 1997 when the Dow Jones Industrial Average (DJIA) plunged almost 190 points before finishing up over 337 points, online traders were shut out of Web-based trading sites of some online brokers and received busy signals when trying to contact their brokers via telephone82. E*Trade Securities became the subject of a first-of-its-kind class action law suit filed by an investor who could not get through to E*Trade’s Webbased trading system on 27 and 28 October 1997 (when the DJIA was subject to wide fluctuations) even though its customer agreement states that E*Trade cannot be held accountable for the performance of the Internet or E*Trade’s electronic systems and that all claims against the firm are subject to NASD arbitration83. Another class action suit was filed against E*Trade in Santa Clara County, California on February 9, 1999 arising out of a shutdown of E*Trade’s systems for three consecutive days during the week of February 8 although E*Trade says that only 2-5% of its customers were affected by the outage84.

E*Trade experienced further difficulties on February 4, 1999 when its customers were unable to trade stocks for 2 hours 45 minutes due to a software glitch that also had halted trading on its systems the previous day85. This round of interruptions prompted launch of an inquiry by the New York State Attorney General’s Office wherein official concern was expressed that customers were not being made aware of the risks of online trading86. Letters from Congress have been issued to SEC requesting information on the extent of online trading, operational problems afflicting online trading and the adequacy of disclosures to investors87. A recent Business Week article reported that, for its constant promotion of itself as a technology company, E*Trade spends three times as much on marketing ($150 million in 1999) as it does on technology88.

2. Investor Suitability and Online Investing

Investor suitability – the affirmative obligation of brokers to know their customers and determine whether their recommendations comport with the investor’s risk tolerance level, current financial circumstances and investment objectives – is developing into a major regulatory issue with respect to online investing. NASDR officials have expressed concern that online investing is undermining compliance with investor suitability requirements because there is no personal exchange between the broker and the online customer89.

SEC staff have asserted that investing over Internet is no different from investing by telephone and the same investor suitability requirements attach to online firms90. Some cyber-brokers, however, reject this assertion and claim they are not subject to investor suitability requirements because they do not engage in making investment recommendations91. This position could prove tenuous if a customer asserts that a purchase was made as a result of a statement made by, or communication with, a person affiliated with an online firm, whether by e-mail, chat room or bulletin board. Charles Schwab is facing several arbitration claims that it did not follow suitability and know-your-customer rules when it allowed online customers to trade beyond their means by accepting market orders in a hot Internet IPO92.

Some online brokers are incorporating surveillance components into their trading systems to detect trading irregularities or insure investor identity because, as one online trader remarked, “investors get caught up in the glamour of online trading and throw caution to the wind. . . it’s like a video game to some people.”93

One cyber-broker issues daily, weekly and monthly reports on customer accounts for review by compliance officers while another requires investors to use a password, account number or personal identification number before executing a trade and sends a trade confirmation to the individual’s e-mail address94. Another online firm asks investors to review each order and affirmatively approve it before it will execute95.

3. Chat Rooms and Bulletin Boards

Chat rooms on the Internet facilitate real-time discussion among individuals whose comments usually are not saved. Bulletin boards are places on the Internet where individuals can post messages which usually are archived in the order received. Investors increasingly have turned to chat rooms and bulletin boards to exchange information on investment opportunities. Unfortunately, so have persons intent on posting messages to hype specific stocks as part of a stock manipulation scheme.

Motley Fool,, a popular online forum in the US, has seen a 1000% growth in its bulletin board area and has indicated it will add 25% more online monitoring staff to discourage hyping and touting of small-cap stocks96. Motley Fool, which operates investing bulletin boards on 3,100 subjects, will delete a message if it appears to hype a stock or identifies a stock that is not traded on a major stock exchange97. Yahoo,,, another popular online forum, however, believes users of its chat rooms should be able to say anything they want because it is impossible to monitor everything that is said in chat rooms; it thinks the best response to an inaccuracy is more discussion98.

E*Trade Securities, Inc. startled the brokerage and regulatory community when it announced that it would launch an online investor center, complete with chat room99. Its chat room would have moderators to ensure that certain topics would not be discussed, such as penny stocks, small cap stocks, mutual funds and options100. E*Trade will not permit its registered representatives to participate in these chat rooms either anonymously or identified as E*Trade brokers101. E*Trade appears to be going further than the chat room established by Pro Trade, a California brokerage firm, which opened a chat room in February 1998, to allow investors to access customer service representatives102.

E*Trade’s announcement caught the regulatory eye of SEC and NASDR. Robert Colby, deputy director of SEC’s Division of Market Regulation, warned E*Trade to take precautions so that participants in the chat room will not be able to hold the company liable in instances of bad investment decisions103. While participation in an investment-oriented chat room by registered representatives without identifying themselves as such is not specifically a violation of NASD rules, NASDR has indicated that it may be extremely difficult for firms to acquit their responsibilities for supervising registered representatives participating in chat rooms and it further noted that scripted chat room conversations by registered representatives are subject to NASD recordkeeping rules104.

Merrill Lynch has issued specific policies banning its registered representatives from identifying themselves when using Web chat rooms and bulletin boards and from having their own Web sites105. Merrill explained that, under rules of the NASD and the New York Stock Exchange, firms must supervise brokers’ communications with the public106. Difficulties associated with supervising online participation by registered representatives and the liability that statements made by registered representatives may be attributed to the firm led Merrill to impose this absolute ban107. Merrill Lynch, Quick & Reilly and Waterhouse Securities have stated publicly that they will not develop chat rooms on their Web sites because it is too risky108.

4. Unregistered Investment Advisers and Online Accounts

Compliance audits by the Pennsylvania Securities Commission of brokerage firms that offer online trading facilities have detected that third parties often are authorized to trade in the accounts of customers of the brokerage firm. Charles Schwab is beginning to air commercials in which a mature couple explain how their financial advisor, who relieves them of the complex burden of managing their assets, also takes care of making trades for them through their Schwab account109. The Pennsylvania Securities Commission is concerned that online brokers, who are aware of the third party trading authorizations, may not be inquiring whether these third parties are acting as investment advisers and, if they are, determining if they are registered with the state securities commission or SEC as required by the federal Investment Adviser Act of 1940110.

B. Day Trading

According to the Washington Post, of the 5 million Americans who will trade online everyday, a small percentage are known as day traders and account for 12 – 15 percent of the volume of the NASDAQ Stock Market111. In effect, day trading is a subset of online trading. Day traders make hundreds of trades a day, closing out all positions by the end of the day. The most common way to make money in day trading is scalping, in which traders chase a stock to capture small price improvements112. While the concept of moving in and out of positions throughout the course of the day is not new; what is new is that personal computers and Internet have provided individual investors with the ability to become day traders but also have exposed them to the risks that come along with it113.

The Post reports that there are about 70 day trading firms offering desk space, high-speed market access and large loans114. The Electronic Trading Association, however, says there are 40 day trading firms nationwide with eight controlling 85% of the market115. While arrangements vary from firm to firm, new customers will put down a deposit ($25,000 – $50,000) with the day trading firm to cover losses and then make overhead payments of a fixed monthly rent, a penny per share in commissions and a percentage of the profits116. Others call their customers limited partners and pool their money to secure bigger loans which allows them to take larger positions in the market117. The owner of the day trading firm featured in the Post article also offers, for a $1,000 fee, a five-day seminar to aspiring day traders118.

C. Regulatory Concerns with Online and Day Trading

Brokerage firms offering online transaction services have been aggressively advertising their services to the public in an effort to increase market share and  sign up more accounts119. Will the addition of more online brokerage accounts, combined with the day trading phenomenon and entry of full-service brokerage firms into offering online transactions result in “stress” on the operational capacity and efficiency of the brokers’ trading systems? Will this lead to more instances of systems’ failure resulting in more investors being locked out of their online accounts?

Should persons using online trading systems expect 100% operational reliability from online brokers or is occasional technological failure an acceptable risk of online investing but one which should be fully and adequately disclosed to customers? Is there a minimum operational capacity requirement which every broker offering online transaction services should meet? Should online brokers be allowed in customer agreements to exclude all liability for losses incurred as a result of technological failure? As more and more investors elect to dip their toes into the waters of online investing, I would urge SEC to give careful consideration to these and other questions and provide regulatory guidance.

I also would suggest that SEC consider providing regulatory guidance on issues of the responsibility of online brokers to determine if third parties authorized to trade in customers accounts are acting as investment advisers and if they are registered either with SEC or the state securities regulator. Also, what investor suitability obligations arise in connection with opening a brokerage account in which the customer has the opportunity of using the broker’s online transaction services? Should online brokers sponsor chat rooms and bulletin boards and what responsibility do they have for investment-related messages posted in those areas, particularly if customers of the firm effect trades in those securities?

With respect to day trading, state securities regulators are concerned about day trading firms operating as unregistered broker-dealers, making false, misleading or unrealistic advertisements about the profitability of day trading and running firms that are undercapitalized120. The Massachusetts Securities Division has filed actions against On-Line Investment Services (NJ), Bright Trading, Inc. (NV), and Block Trading, Inc. (TX) while the Texas State Securities Board issued administrative orders against Infinitum Management Co. and Infinitum Capital Management121. On February 18, 1999, the Indiana Securities Division summarily suspended the license of Self-Trading Securities, a Texas-based, day trading firm with operations in Fort Wayne, IN122.

In the complaint filed against All-Tech, the Massachusetts Securities Division alleged that the office manager engaged in forgery, commingled funds, created fraudulent accounts and failed to comply with customer instructions123. The complaint also alleged that All-Tech’s president made deceptive statements on television interviews, in All-Tech brochures and on All-Tech’s Web site by failing to disclose that it was highly likely that investors would incur losses from day trading124.

State securities regulators and SEC are concerned that individuals inexperienced in investing will be lured into the day trading phenomenon with promises of false profits and will sustain loses which they can ill afford. SEC Chairman Levitt has said that day trading is highly risky and retail investors should only engage in such activities with funds that they can afford to lose125. As one state securities regulator said, “having $50,000 is not a prescription for being a sophisticated investor,”126 particularly if that represents the sum total of the investor’s liquid assets. Securities regulators should be vigilant as to tactics used by day trading firms to attract individuals to become day traders, promises made, terms and conditions imposed by the firm and insure that these firms are acquitting all their obligations under the law as broker-dealers.

V. Conclusion

Madam Chairperson, thank you very much for the opportunity to appear before the Subcommittee and allowing me to share my regulatory experiences with you concerning securities frauds on Internet and current issues regarding online trading. I welcome any questions that you or any Members of the Subcommittee may have.

1The Pennsylvania Securities Commission, as a matter of policy, disclaims any responsibility for any publication by its staff. Unless the context indicates otherwise, the views expressed herein are my own and do not necessarily reflect the views of the Pennsylvania Securities Commission. Alternative formats of this document may be available upon request. Please call (717) 787-1165 or TDD Users: via AT&T Relay Center 1-800-654-5984.
2In Re: Offers Effected Through Internet That Do Not Result In Sales In Pennsylvania, Pennsylvania Securities Commission (31 August 1995); subsequently codified as a regulation at 64 Pa. Code §203.190.
3NASAA is the oldest international organization devoted to investor protection. Organized in 1919, NASAA is a voluntary, non-profit organization whose membership consists of the 65 state, provincial and territorial securities administrators in the 50 states, District of Columbia, Canada and the securities regulatory authorities in Mexico and Puerto Rico. In the United States, NASAA is the voice of the 50 state securities agencies responsible for grass-roots investor protection.
4NASAA Rep. (CCH) ¶7040 (7 January 1996).
5Use of Internet Web Sites To Offer Securities, Solicit Securities Transactions, or Advertise Investment Services Offshore, SEC Release Nos. 33-7516, 34-39779, IA-1710 and IC-23071 (23 March 1998), footnote 19.
6Section 301, Uniform Securities Act of 1956, NASAA Rep. (CCH) ¶4872.
7supra, note 2.
870 P.S. §§1-201, 1-401.
9An individual is an accredited investor if the person had individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year, or has an individual net worth or joint net worth with spouse at the time of the purchase of the securities which exceeds $1 million. see 17 C.F.R. §230.501.
10Securities Offerings on the Angel Capital Electronic Network and the Pennsylvania Securities Act of 1972, Pennsylvania Securities Commission Release No. 96-CF-5 (23 December 1996).
11NASAA Rep. (CCH) ¶361 (27 April 1997).
12SEC Litigation Release No. 14942 (11 June 1996); the descriptive information came from AIF’s web site <> (accessed May 1995). This address is now assigned to Associated Industries of Florida.
13Id at web page.
18SEC Litigation Release No. 14942, supra note 12.
23 SEC v. Octagon Technology Group, Inc., Michael J. Tidd and Jeffrey L. Punzel, Civil Action No. 96-1299 U.S. District Court for the District of Columbia (11 June 1996).
24SEC Litigation Release No. 14720 (15 November 1995).
25SEC v. Scott A. Frye, 95 Civ. 9205 U.S. District Court for the Southern District of New York (15 November 1995).
2617 C.F.R. §230.504. At the time of the Gem-Vid offering, Rule 504 provided an exemption
from registration with SEC under Section 3(b) of the Securities Act of 1933 (15 U.S.C. §77(c)(b)) for
offerings of $1 million or less within a 12-month period. General solicitation is permitted and no resale restriction is imposed on the securities sold. There is no specified information that must be furnished to investors. As part of its anti-microcap fraud program, SEC amended Rule 504, effective April 7, 1999, to impose a prohibition on general solicitation and a restriction on resale if the securities sold are not registered in at least one state that provides for registration, public filing and delivery of a disclosure document, except where state law provides an exemption which allows general solicitation in connection with an offering where all sales will be made to accredited investors as that term is defined in 17 C.F.R. §230.501 (see SEC Release No. 33-7644 (25 February 1999)).
2770 P.S. §1-206; Pennsylvania Securities Commission Docket No. 94-10-003QP (27 October 1994).
28Pennsylvania Securities Commission v. Lazare Industries, Inc., Administrative Proceeding Docket No. 9510-10 (18 October 1995).
29SEC v. Lazare Industries, Inc., U.S. District Court for the Middle District of Pennsylvania, Civil Action No. 3:CV-96-705 (25 April 1996).
30SEC Litigation Release No. 13893 (25 April 1996).
31U.S. v. Lazare Industries, U.S. District Court for the Middle District of Pennsylvania, Criminal Action No. 3:96 CR 286.
32Pennsylvania Securities Commission v. The Gambler, Inc., World Wide Web Gaming and James Patrick Harrington, Administrative Proceeding Docket No. 9612-09 (15 January 1997).
34Pennsylvania Securities Commission v. Cen-Tex Alchemy Guild, Scott Klion and Other Individuals Referring Participants to Cen-Tex Alchemy Guild, Administrative Proceeding Docket No. 9802-08 (21 April 1998).
35Pennsylvania Securities Commission v. L.A. Power & Light, L.L.P., Electric Choice Investments, Donald LaBarre, Andy Hanzel, Tom Solmo and Individuals Referring Investors to Electric Choice Investments, Administrative Proceeding Docket No. 9808-02 (8 September 1998).
36Pennsylvania Securities Commission v. P.A.E. Properties, Paul-Allen Enterprises, Inc., Barrylee Paul Beers and Mickey Allen Weicksel, Administrative Proceeding Docket No. 9801-07 (12 May 1998).
37Pennsylvania Securities Commission v. Reliable Electric & Power, Reliable Electric & Power, L.L.P., Full Power Corporation, 21st Century Power, Inc., Anthony Austin, Roy Cooper and George N. Falsone, Administrative Proceeding Docket No. 9901-04 (23 February 1999).
38Commonwealth of Pennsylvania, Pennsylvania Securities Commission v. Virtual Gaming Partners, Gaming Management Services, Ltd. and John Titley, Commonwealth Court of Pennsylvania, 774 M.D. 1998 (10 September 1998).
39Commonwealth of Pennsylvania Acting By Attorney General D. Michael Fisher v. Greater Ministries International, Inc., Gerald Payne, Betty Payne, and various John Does, Commonwealth Court of Pennsylvania, 729 M.D. 1998 (2 November 1998). On January 25, 1999, Judge Eunice Ross found defendants Greater Ministries International, Inc., Greater Ministries International Church, unincorporated, Greater Ministries International Church, Gerald Payne, Betty Payne, Don Hall and Brenda Hall in willful violation and contempt of the Court’s Order of November 2, 1998. On March 2, 1999, Judge Ross imposed $6.4 million in civil penalties against the defendants for failing to purge themselves of contempt and further ordered a contempt fine of $2,000 per day for each day that defendants remain in contempt.
40New SEC Enforcement Office, Daily Report for Executives (BNA) at C-1 (19 August
41Huttoe, Others Settle SEC Charges over Alleged Stock Manipulation, 29 Securities Regulation & Law Report (BNA), No. 47 at 1674 (5 December 1997).
42Publisher of Internet Stock Newsletter Sentenced on Securities Fraud Charges, 29 Securities Regulation & Law Report (BNA) No. 37 at 1288 (19 September 1997).
44Stockbroker Sentenced over Role in Internet Fraud, Manipulation Scheme, Daily Report for Executives (BNA) at A-23 (1 May 1998).
45Schroeder, “SEC Charges 13 Illegally Touted Stocks Online,” Wall Street Journal (26 February 1999).
46SEC Files New Set of Internet Fraud Lawsuits, New York Times (26 February 1999).
49Hasenstab, “Business Group Sounds Alarm on Con that Cost Investors Millions,” CNNfn data stream (12 May 1998).
51SEC Gets Injunction Against German Resident in Net Scheme, 2 Internet Compliance Alert 1 at 2 (12 January 1998).
53SEC Moves Against California Promoters of Investment in Internet Service Provider, 30 Securities Regulation & Law Report (BNA), No. 8 at 288 (20 February 1998).
56SEC Charges High-Tech Concern, CEO with Phony Stock Offering over Internet, Daily Report for Executives (BNA) at A-11 (9 April 1998).
58SEC Charges High-Tech Concern, supra note 56.
59SEC v. Octagon Technology, Inc., et al., supra, note 23.
60SEC v. Lazare Industries, supra, note 31.
61see “SEC Charges 13 Illegally Touted Stocks Online,” supra, note 45 and SEC Files New Set of Internet Fraud Lawsuits, supra, note 46.
62Gordon, “New Investment Scams Fought,” The Associated Press Online (2 July 1997).
65See Daraghi, “States must do more to stop online fraud,” <> accessed 15 February 1999.
66Cody v. Ward, U.S. District Court for the District of Connecticut, No 3:95 CV 169 (RNC) (4 February 1997); 29 Securities Regulation & Law Report (BNA) No. 9 at 267 (28 February 1997).
67Davis v. Gracey, U.S. Court of Appeals for the Tenth Circuit, No. 95-6245 (21 April 1997); 65 United States Law Week (General Law) (BNA) No. 49 at 1166 (6 May 1997).
6864 Pa. Code §§203.190 and 604.020.
6970 P.S. §1-509(c).
70Commonwealth of Pennsylvania v. Greater Ministries International, et. al, supra, note 39.
7170 P.S. §1-512.
7270 P.S. §1-602.1(c).
7470 P.S.§1-603 and 65 P.S. §66.1.
75Special NASD Notice to Members 98-71 (August 1998).
76Letter from Robert M. Lam, Chairman, Pennsylvania Securities Commission to Joan Conley, Office of the Corporate Secretary, NASD Regulation, Inc. (23 September 1998).
77Antilla, “Sorry, Investors, No Broker Dirt on Internet Yet,” Bloomberg News (24 February 1999).
78With 3 Million Trading Securities on Line, Regulatory Issues Multiply, Panelist Says,” 30 Securities Regulation & Law Report (BNA) No. 19 at 709 (8 May 1998).
79Schwab Finds Net Growth Tied to Service, 3 Financial NetNews 16 at 2 (20 April 1998).
80Spiro, “Will E*Trade Move Beyond E*Tragedy?” Business Week at 118 (22 February 1999).
81Humer, “Big brokers planning to offer trades on Internet,” Dow Jones New Service as published in Harrisburg Patriot-News at B3 (22 February 1999).
82Raghavan and Simons, “Some Trading On-line is Trying Task,” Wall Street Journal at C1 (29 October 1997).
83Industry Doubts E*Trade Class Action Has a Chance, 2 Financial NetNews 48 at 1 (8 December 1997).
84“Will E*Trade Move Beyond E*Tragedy?” supra, note 80.
85Rynecki, “On-line bug prompt trade investigation,” USA Today (5 February 1999).
87Rep. Dingell, Others Note Concerns about Online Trading, Seek Levitt’s Input, Daily Report for Executives (BNA) at A-8 (5 February 1999).
88“Will E*Trade Move Beyond E*Tragedy?” supra, note 80.
89NASD’s Zarb Fears On-line Activity Outstrips Oversight, Wall Street Journal (22 May 1998) at C1. See also NASD Notice to Members 99-11 (February 1999) wherein NASD noted that an online broker responded to orders in an IPO stock subject to price volatility by halting online access and requiring investors to purchase the securities through a registered representative by telephone or in person so that the representative could explain “the difference between market and limit orders and the benefits and risks of each, and encourage customers whose primary goal is to achieve a target price and protect against sudden price moves, and who understand that there is a possibility that the order will not be executed, to enter limit orders.”
90Compliance Navigator: Online Trading, 3 Financial NetNews 22 at 8 (1 June 1998).
92Burned IPO Investors Say Schwab Should Have Saved Them From Themselves<” 6 Compliance Reporter 3 at 1 (1 February 1999).
93Compliance Navigator: Online Trading, supra, note 90.
96Motley Fool, Silicon Investor to Build Compliance Staffs, 2 Financial NetNews 19 at 2 (13 July 1998).
97Lucchetti, “Some Web Sites Getting Tough on Stock Chat,” Wall Street Journal at C1 (28 May 1998).
99Broker-dealer Launches Chat Room for Investors, with Passive Moderators, 30 Securities Regulation & Law Report (BNA), No. 22 at 824 (29 May 1998).
102California Brokerage Opens Chat Room, 3 Financial NetNews 4 at 6 (26 January 1998).
103Legal Pros, Regulators Voice Concern over Broker/Dealer Chat Rooms, 3 Financial NetNews 22 at 1 (1 June 1998).
104Broker-dealer to Launch Chat Room for Investors; SEC Watches with Interest, Daily Report for Executives (BNA), at A-23 (22 May 1998).
105“Merrill Bans Reps from Chat Rooms, Personal Web Sites,” 2 Internet Compliance Reporter 10 at 3 (19 May 1998).
109Commercial for Charles Schwab aired during prime time on ABC Television Network (7 March 1999).
11015 U.S.C.§80a-1 et seq.
111Dugan, “For this Day Trader, Stock Market is one Big Casino,” The Washington Post at A1 (25 February 1999).
113Hare, “Much Ado About Day-Trading; Are Existing Regulations Adequate?” 31 Securities Regulation & Law Report (BNA), No. 6 at 214 (12 February 1999).
114“For this Day Trader, Stock Market is one Big Casino,” supra, note 111.
115Smith, McNamee and Spiro, “Day of Reckoning For Day Trading Firms” Business Week at 88 (18 January 1999).
116“For this Day Trader, Stock Market is one Big Casino,” supra, note 111.
117Id. at A-8.
118Id. at A-9.
119see “Will E*Trade Move Beyond E*Tragedy?” supra, note 80 and Customer Service Poses Problems for Web Brokerages 3 FinancialNetNews 48 at 1 (30 November 1998).
120“Much Ado About Day-Trading: Are Existing Regulations Adequate?”, supra, note 113.
122LeDuc, “Firm’s state license suspended,” Fort Wayne News-Sentinel at accessed on 18 February 1999.
123“Much Ado About Day-Trading: Are Existing Regulations Adequate?”, supra, note 113.

March 23, 1999

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