Just one day after U.S. regulators charged more than 120 people in 11 states with online investment fraud, the Securities and Exchange Commission (SEC) on Thursday shut down a “virtual stock exchange” that allegedly defrauded hundreds of investors across the country.
Lured by a promise to “double your money every month,” the investors fell victim to a Caribbean company called SG Limited, which told its users they were guaranteed monthly returns of 10 percent — or 210 percent a year on a compounded basis — according to SEC officials.
Beginning in 1998, 23 year-old Russian citizen Oksana Pavluchenko operated the Web site from the island of Dominica, offering stock in 11 virtual companies that have turned out to be nonexistent. The SEC contends the operation was a classic pyramid scheme in which investors are paid with money taken in from other investors. At least 800 individuals bought stock through SG Limited, to the tune of millions of dollars (US$).
The SEC has been granted a temporary restraining order and asset freeze against the company, and is currently working with officials in Estonia to seize $2.7 million deposited in a bank account there.
Classic Internet Fraud
“From our eyes this is the quintessential Internet investment fraud,” said William E. Morse, a deputy assistant administrator of the Securities and Exchange Commission’s Boston office.
According to the SEC, the money and Internet trails led through Dominica, Belize, Cyprus, Latvia, Estonia and the United States. Even though the U.S. government was actively pursuing the case as of Thursday, SG’s Web site, Stockgeneration.com, was still up and running yesterday, offering heavy returns for people investing in its list of virtual companies, known only as “Companies Nos. 1 – 11.” The site referred to the investments as part of a game.
“They say people are guaranteed a return of 10 percent monthly. This isn’t a game,” said Jim Adelman, an associate administrator with the SEC. “In most Internet cases you think you’re buying something. This was all for shares in virtual companies.”
A long, rambling message was added to the site recently, titled “The Level of Risk,” which sought to assure the hundreds of individuals who trusted their investments to SG Limited that the company’s operation was legal.
“First of all, we are a totally legitimate organization that has all the necessary documents for its work,” the message said. “In particular a license for the gamewhether somebody likes it or not, we operate on a totally legal basis and there is nothing else to talk about here.”
SEC Received Complaints
Despite more than 70 complaints from U.S. investors in 27 states, the company continued to operate until yesterday, when the SEC was successful in freezing its assets.
The shutdown of SG Limited is another in a series of actions by the SEC to crack down on Internet securities fraud. Just last month, 14 companies peddling “get rich quick” schemes were forced by Federal Regulators to significantly alter their advertising methods and sales pitches.
The Commodity Futures Trading Commission settled charges against 10 Web sites that promised customers big profits if they used the sites’ futures trading software or services. The U.S. Federal Trade Commission (FTC) acted against three sites offering easy money from day trading.
In March, agencies from 28 countries used powerful Internet search engines to ferret out 1,600 Web sites offering suspicious online investment schemes. Almost half of those sites were shut down or forced to change their business methods, according to U.S. regulators.