Federal investigators revealed a new extreme in Internet securities fraud Monday when they settled a case with a stock-picking site on the World Wide Web whose president and only named employee is an imprisoned felon.

The

Securities and Exchange Commission's

civil enforcement action against

Genesis Trading

and its owner, Robert Garganese, is certainly not the first case of a huckster trying to dupe investors on the Internet. But it appeared to be the first such case in which the huckster was doing the duping from prison.

"The moral of this case is that people should be careful if they take investment advice from Internet sources because it's not always what they think it is," said David M. Levine, senior adviser to the director of enforcement with the SEC.

The SEC said it had settled the complaint with Garganese and the site,

www.genesistrading.com

, was under orders to stop fraudulently attributing its stock picks to professional traders and to inform site visitors of the SEC's findings. The site appeared to be inoperative on Monday.

It was unclear whether Garganese had technically run the site from prison, which means he would have needed access to a computer with Internet capabilities. Garganese is currently serving a one-year prison term for telemarketing fraud in an unrelated case.

Both the SEC and Garganese's attorney, David Z. Chesnoff, declined to comment on details of how the site has been run. But Chesnoff said he was not aware of anyone other than Garganese who had run the business or controlled the content of the site.

The SEC found that the site and its owner were fraudulently claiming that its stock picks were sourced from "a company composed of professional traders," when, in fact, Garganese was the only employee of the company. Garganese is not a registered member of any official securities dealing or trading organizations.

The SEC also found no basis to back up a Genesis claim that more than 80% of its recommendations were profitable, and ordered the site to stop making that claim.

Chesnoff did not refute SEC's findings, saying instead that "the settlement was mutually advantageous to both the government and my client."

"Since use of the Internet is so new, he

Garganese was unfamiliar with the rules. He had no intent to injure or defraud people of their money," said Chesnoff, a partner, along with Las Vegas Mayor Oscar B. Goodman, at the law firm

Goodman, Chesnoff & Keach

in Las Vegas.

Chesnoff said he did not view his client's conduct as fraud, but rather a ploy to "create more excitement about the site."

The SEC said that it chose to deal with the matter in a so-called internal administrative procedure rather than proceed with litigation. Litigation would have involved proving that Garganese falsely operated as a registered investment adviser, which might have been harder to prosecute. The administrative proceeding charged him only with fraud under the less-specific

1934 Securities Exchange Act

, and was designed only to stop the fraudulent clams, not shut down the site or bring criminal charges.

Genesis began operating in 1998 under the sole control of Garganese, offering between six and 10 stock picks per day, which were allegedly based on the buying habits of institutional money managers. In fact, said the SEC, Garganese was the only contributor to the site, and the stock picks are the product of commercially purchased software that does not specialize in tracking institutional buying or selling habits.

In the finding, SEC also said that Garganese regularly fabricated fictitious names of nonexistent employees in email correspondence with customers, to create the illusion of a full staff. He also made baseless claims that the company's picks "regularly move $2 to $10 in a very short time frame (usually 1-5 days)," and that "81% of our trades that hit our recommended action price move into profitable territory."

Online stock-picking sites have become an increasing concern for regulators in recent years, as the number of investors and alleged stock gurus has exploded. SEC has filed civil fraud suits against Yun Soo Oh Park, who operated under the alias "Tokyo Joe," and is currently contesting the charges. That case is pending dismissal against the SEC's wishes.

Another case against

DynamicDayTrader.com

, and its owner David Rudnick, settled last month, called for Rudnick to pay $15,000 in fines and agree not to give fraudulent investment advice in the future.

Monday's action against Garganese and Genesis Trading was part of a broader crackdown by the SEC targeting fraudulent investing services with cooperation from other government agencies.

Other government agencies separately filed 13 other fraud cases with online trading and information firms designed to teach trading techniques or offer stock picks for a subscription fee. The Federal Trade Commission and the Commodity Futures Trading Commission aided the SEC in those investigations.

Ten of the firms or individuals were named by the CFTC and SEC for promoting online trading systems and advice in commodities trading that were found to be fraudulent. Each of those cases was settled immediately with $10,000 fine, and ordered not to commit online stock fraud in the future. Some of those operators will be able to waive the fine if they can't afford it.

In three other cases, Internet site operators named by the FTC and SEC promoted products and services such as real-time training, software, manuals and literature to day traders priced between $79 to $4,995. Some of the firms made claims that novices who used their techniques could make money trading stocks, futures and currencies whether the market is going up or down. One promised investors returns of up to 2,041%.

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