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Regulators in British Columbia have developed a new strategy to battle fraud on the Internet: fighting fire with fire.
As scams promising impossibly high rates of return proliferate online, staff at the British Columbia Securities Commission have launched a counterattack, using their own Web tools to make certain that investors are hearing the truth - by ensuring the regulator's warnings show up prominently when someone does a Google search.
The first salvo began in February, when the BCSC began a campaign of blogging and tweeting to warn investors about an online fraud, calling itself Genius Funds, which was being run from Europe and luring investors from B.C.
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"We were confronted by a scam that was exploiting all the leverage through the Internet that they could," said Lang Evans, director of enforcement at the BCSC.
"So what we did was take the same tools that the scammers were using and turned it to our advantage. We basically met them on the same playing field that they were engaged in. So where they were trying to solicit investors, we were trying to get our message out so people knew it was a scam."
The BCSC is unaware of any other securities regulator tackling a fraud with a blogging campaign. But Mr. Evans says old tools are no longer adequate by themselves.
When a securities commission gets wind of a stock fraud, it can issue a warning notice to the public, but the warning often goes unseen. Regulators can also try to halt the operation with a cease-trade order. In many cases, however, they cannot find the identities of the perpetrators. Many of the schemes are not being operated in Canada where regulators have authority.
"If we took regulatory action and no one knew about it, it would probably give us a nice warm feeling, but it wouldn't have any effect," Mr. Evans said.
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The BCSC's involvement with Genius Funds began earlier this year when the commission was contacted by staff from a bank branch in Vernon, B.C., after two clients came into the branch seeking to wire money to an account in Australia so they could invest in a Genius Funds offering.
Mr. Evans said the branch manager convinced one of the men not to invest in such a dubious plan, but the second customer insisted on going ahead with a $25,000 transfer.
When BCSC staff looked at the Genius Funds website, they were immediately suspicious. It was offering payments of up to 1.9 per cent daily on one of its funds and 9 per cent weekly on another - returns impossible to achieve with real investment strategies, but typical in the world of online Ponzi schemes.
The Genius Funds scheme is known on the Web as a high-yield investment program, or HYIP (pronounced high-yip). There are hundreds of such schemes operating online at any time, allowing fraudsters to target wide audiences around the world. The funds often promote themselves with positive reviews posted in chat rooms.
The Genius Fund's website was unusually sophisticated and was translated into seven languages. It also had promotional videos on YouTube and its own Facebook site.
While the site claimed the company was operating out of Cyprus, investor funds were being channelled through accounts in Australia and elsewhere. The bank accounts were being accessed from Italy, however.
The commission first took the traditional step of issuing an investor alert and a cease-trade order - also duplicated by some other provinces. Then the BCSC decided to go online to counter the claims coming from Genius Funds.
BCSC director of communications Patricia Bowles used her online blog - investright.org - to begin a series of posts questioning the claims on the Genius Funds site.
The commission also tweeted highlights of the blog to try to spread the message. Among the information in Ms. Bowles' blog postings is a repeated explanation that such high returns are not possible from legitimate schemes.
"Please tell your friends and family not to invest in Genius Funds," she concluded in one posting.
Slowly the BCSC actions began to attract notice. Initially, Ms. Bowles said, potential investors doing an online search of the term "Genius Funds" would get pages of hits all linking to sites with glowing reviews. But once the BCSC got involved, people searching "Genius Funds" on search engines were being directed to a growing series of negative blog posts from the BCSC.
Ms. Bowles' blog postings also expanded to include criticisms of other HYIP schemes, although the BCSC says it will largely limit its actions to programs they know are attracting B.C. investors.
Ponzi schemes grow quickly, so the key is to shut them early when fewer investors will lose out, Mr. Evans said.
Genius Funds shut down in March after the BCSC launched its campaign, and after the Cyprus Securities Commission issued a statement to investors warning the fund was not licensed to operate in that country.
One HYIP information website claims Genius Funds "scammed people" for $450-million. But the BCSC says its efforts to trace funds through payment processors have located just $25-million transferred by investors.
Ms. Bowles, meanwhile, has no doubt the Genius Fund founders have since launched another scheme.
"Probably they've moved on and have set up a new website with a new name and new promises," she said.
HYIP highlights:
A high-yield investment program or HYIP (pronounced high-yip) is an investment scheme operated through the Internet that promises high rates of return
BCSC staff said one ranking site has compiled information on at least 2,000 HYIP investment schemes in operation around the world
All promote high rates of return to compete for investors. One fund analyzed by BCSC promised 5.5 per cent hourly for 19 hours or 165 per cent after two days. Another promised 2.8 per cent daily for 180 days for investments over $20,000 (U.S.). That means a $20,000 investment is promised to grow to $730,000 in a matter of months.
Many HYIP funds claim to earn their returns through foreign-exchange trading or other complex trading strategies. Regulators say the rates of return cannot be legitimately earned, and there is usually no real investing activity going on
Most, if not all, are Ponzi schemes, according to regulators. That means early investors are paid out with funds from later investors, not from investment returns.
Many websites exist to help investors compare and analyze HYIP options, giving the appearance they are legitimate investments. Specialized HYIP chat groups have advice about the best schemes with the highest payouts.
Janet McFarland