Securities Fraud:

The Internet Poses Challenges to Regulators and Investors

T-GGD-99-34: Published: Mar 22, 1999. Publicly Released: Mar 22, 1999.

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Pursuant to a congressional request, GAO discussed Internet securities fraud and regulatory efforts to combat this growing problem, focusing on: (1) information about the incidence and types of securities frauds perpetrated over the Internet; (2) the Securities and Exchange Commission's (SEC) initiatives to combat Internet securities fraud; (3) information on the penalties that have been imposed on individuals found to have committed Internet securities frauds; (4) information from state securities regulators about state efforts to control Internet securities fraud; and (5) potential challenges facing SEC and state regulatory initiatives in combating securities fraud over the Internet.

GAO noted that: (1) SEC and state regulatory officials generally agree that as the Internet continues to expand rapidly, opportunities for securities frauds are growing as well; (2) an indicator of the growth in Internet securities frauds is the number of public electronic mail complaints that are submitted to SEC's Internet website; (3) according to SEC, the Internet provides a new medium to perpetrate traditional investor frauds; (4) however, some securities frauds appear unique to the Internet environment; (5) SEC has responded to the growing Internet fraud problem by, among other things, creating the Office of Internet Enforcement to coordinate the agency's efforts to combat Internet fraud, providing training to SEC investigative staff on monitoring the Internet, and preparing guidance for SEC staff who are investigating potential Internet frauds; (6) SEC has established programs to educate investors about the risks associated with Internet securities frauds; (7) since 1995, SEC initiated a total of 66 enforcement actions against alleged perpetrators of Internet securities frauds; (8) as of February 1999, 32 of the 66 cases had largely been concluded, with violators generally required to: (a) pay civil money penalties; or (b) refrain from further violations of the securities laws; (9) however, in 2 of the 32 concluded cases, state or federal criminal enforcement authorities prosecuted violators and obtained criminal convictions or prison sentences for 7 individuals; (10) over the past several years, nearly half of all state regulatory agencies have established specific programs to combat Internet frauds that violate state securities laws; (11) although many state agencies have initiated enforcement actions to prevent further violations of state law, officials from these agencies told GAO that in some cases violators may continue committing the fraudulent activity in other states; (12) SEC and state regulatory agency programs to combat Internet securities fraud are new and face significant challenges that could limit their effectiveness in the long-term; (13) in particular, the potential exists that the rapid growth in reported Internet securities frauds could ultimately place a significant burden on the regulators' limited investigative staff resources and thereby limit the agencies' capacity to respond effectively to credible fraud allegations; and (14) the regulators face challenges in developing a coordinated approach to combating Internet fraud and educating a wide audience about the risks associated with Internet investing.

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