With three years’ experience putting money into get-rich-quick programs online, Jack Reitzel believes he has learned all the rules.
One rule is not to believe anything the promoters say. If they promise a 300 percent return on investors’ money in two weeks, it’s more than likely the site will disappear before the deadline is up. If they claim their response is slow because they’ve had emergency surgery, or technical problems, or a dispute with their bankers, it’s time to worry.
And above all, one should understand that the longer one plays, the better the chance of losing.
“There have been dozens [of programs] where I’ve lost $10, $20, $50 ,” he said. “In some I’ve lost $500.”
“It will take me a long time to get my head above water,” said Reitzel, a 56-year-old computer engineer. “I definitely don’t call this investing. It’s gambling.”
Tell that to the roughly 1,000 people who lost a combined $1 million in “Invest Better 2001,” a scheme run by 17-year-old Cole Bartiromo of Mission Viejo, Calif. Like Reitzel, many of them appear to have been serial players, jumping from program to program on the Web.
Unlike true victims, many often know what they are getting into: online variations of the Ponzi, pyramid and get-rich-quick come-ons that have lured credulous citizens for decades. Relying on tips passed among users of online bulletin boards, they are gambling that they can get their initial investment out fast, then reap as much profit as possible before the wild promises collapse.
This strategy involves risk. For one thing, without insider complicity it is almost impossible to be sure where one is located in the pyramid.
“All these sites say `Get in on the ground floor now’ no matter when it is in the life of the pyramid,” said Jim Kohm, an attorney for the Federal Trade Commission. Most participants lose everything they invest, he said.
Moreover, many state laws define any participation in pyramid scams, even that by apparent victims, as engaging in an illegal activity, said Steve Larsen, manager of the Washington state attorney general’s Cyber Consumer Resource Center. That subjects investors to similar criminal and civil penalties as promoters.
Although the Internet has proved a boon to scam artists, it has also helped prosecutors catch them in the act, said John Reed Stark, chief of Internet enforcement for the Securities and Exchange Commission. “The electronic footprints that they have left on the Internet offer a resplendent evidentiary trail,” he said.
Many suspect Web sites hint that they are associated with investments in gold, foreign bank securities or investment opportunities not otherwise open to small investors. The vagueness of the actual investment goal, perversely, often enhances its appeal to customers.
“The nonsense of believing in pyramid schemes goes back to childhood days of telling ghost stories in tents,” said Mike Caro, a games and gambling expert associated with Hollywood Park racetrack in the Los Angeles area.
Today there is a new element: the Internet’s ability to facilitate the spread of these schemes. Mass e-mailings, or “spam,” circulate word of new programs to thousands of potential marks at a click. “Once your name gets into the mill, it’s like junk mail,” said Reitzel.
Promoters use public message boards to reach huge audiences of computer users. Anonymous Web-hosting services enable investment promoters to shield their identities and locations from investors and law enforcement officials.
“It’s never been easier for con men to reach so many victims so easily,” said David Marchant, a Miami-based publisher of newsletters exposing offshore investment scams. “The Internet has accelerated the life span of your average Ponzi scheme, which used to be spread by word of mouth. With the Internet, they don’t have to do the traditional things like infiltrating church groups anymore.”
Prosecution of online fraud is hampered by the difficulty of showing clear criminal intent.
“You have to prove that inside a guy’s brain he knew this was a fraud,” said Timothy Healy, chief of the FBI’s Internet Fraud Complaint Center. “The challenge on any type of fraudulent scheme is to prove that he intended fraud.”
Investment schemes are so widespread on the Web that law enforcement authorities know the thousands of complaints they receive each year represent the barest tip of the iceberg.
“People have confidence that they will strike it rich the next time. They don’t often see themselves as victims of fraud,” said Betsy Broder, an attorney with the FTC’s consumer-fraud division. “Although we know with mathematical certainty that about 90 percent of people who participate in a pyramid scheme will lose money.”
And repeat losers are common, experts agree. “The vast majority of people involved in these things are those who grab for the brass ring continually, who believe the pitch over and over again and lose money every time,” not unlike compulsive gamblers, said Kohm.
It has its own infrastructure
“The scam industry is so big that there’s a well-defined infrastructure,” said Jay D. Adkisson, an Irvine, Calif., financial consultant who operates Quatloos.com, a clearinghouse for information about financial swindles. “There’s a long list of facilitators.”
Perhaps most important, the Internet has provided easy ways to move money from investors’ pockets to those of promoters. Many online scams advise their customers to open accounts at online money-transfer services such as PayPal or E-Gold. These services were founded principally to facilitate e-commerce payments by acting as financial intermediaries between buyers and merchants. But they also can facilitate the funding of scams without requiring cash to be sent through the mail.
“Our user agreement clearly states that PayPal cannot be used for any illegal purpose or activity,” said Vince Sollitto, a spokesman for the Palo Alto, Calif.-based company. He said the service relies on proprietary software to spot suspicious transaction patterns.
Other services say the uses to which their systems are put are none of their business. “It’s vexingly difficult to determine the legality of what someone does,” said Douglas Jackson, chairman of E-Gold. “We don’t ask.”
