When Jonathan Lebed was only 14, he made a small fortune trading Internet stocks from his bedroom through what is known as a "pump-and-dump" strategy.

Between Aug. 23, 1999, and Feb. 4, 2000, the Cedar Grove, N.J., teen logged onto his brokerage accounts 11 times before and after school and purchased large blocks of thinly traded micro-cap stocks. Then, using a variety of screen names, he sent out hundreds of email messages touting his stocks, using phrases like "next stock to gain 1,000%" and "the most undervalued stock ever." He also offered a "tip" that one company trading at $2 per share would rise to more than $20 per share "very soon." Most of these emails were sent to

Yahoo! Finance message boards.

Lebed typically sold his shares, usually within 24 hours, after investors bid up the prices of the stocks he had touted. Later, to settle a civil fraud suit brought by the

Securities and Exchange Commission

, he was forced to return $272,826 of his gains, plus interest, though published reports indicate that was only a portion of them.

If a teen-ager with a computer and a not-terribly-sophisticated plan can extract hundreds of thousands of dollars from unsuspecting investors, you can imagine what a problem Internet stock fraud has become for regulators and law enforcement officials.

The Internet is prime real estate for investment scammers of all ages. The rent is cheap. The work is easy. Email, bulletin boards, chat rooms, Web sites and online newsletters all serve as low-cost, easily accessible tools to spread the scammers' messages to the masses, despite efforts by the SEC to crack down.

In September, the SEC announced it was charging 33 companies and individuals for using the Internet to defraud investors through pump-and-dump stock manipulation involving more than 70 micro-cap companies. Illegal profits totaled more than $10 million among those charged. This SEC's September sweep brings the total number of Internet cases filed to more than 180. More than one-third were brought in the past year.

Lebed's transparent touting might be rather obvious in retrospect. But many who bought into the stocks he promoted may not even realize they've been victimized. Often, victims of these types of schemes believe their losses are due to market fluctuations, says Phillip McKee, assistant director for the Internet Fraud Watch at the

National Fraud Information Center in Washington, a project of the

National Consumers League

.

More sophisticated operations are even harder for investors to spot. Last April, the SEC filed a complaint against Stephen B. Marek, in part, for using an Internet newsletter named

BigProfitNews

to allegedly tout the stocks of micro-cap companies. The newsletter contained a company profile, a safe harbor disclosure, a warning that small-cap and micro-cap stocks are high-risk investments and unsubscribe instructions. It read, more or less, as if a professional wrote it. Here's an excerpt:

Intelliquis International, Inc., (OTC BB:INTQ) is best known for its IntelliFIX 2000 program, a software product designed to combat year 2000 (Y2K) conflicts on personal computers by automatically identifying, diagnosing and repairing PC hardware, software, operating systems and data files.

Of course, some overly enthusiastic language could have given away the intentions of the author to a careful reader: "This deal has huge implications..." read one part, and "while INTQ's management intends to make some serious money ..." read another.

Marek was ordered to return $100,835 in profits and pay a civil penalty of $100,835.

"Consumers need to be careful whenever they receive an email investment newsletter, especially when it's unsolicited," says McKee.

That may be difficult for some. The bull market seems to play into investors' belief that it's easy to find winners. Others fall for scams because they were late entering the market and want to catch up with the winnings it seems everyone else is reaping. This greed and desperation make investors putty in the hands of those willing to take advantage of them.

With newsletters, it's easy to get scammed, especially if you don't know what to look for. Erich Schwartz, assistant director of enforcement at the SEC, says that many publishers are paid to recommend securities -- and that it's not illegal if the compensation is disclosed. But, says the SEC, too many stock promoters fail to make any disclosure or they lie about payments they received, about their "research" and about their track records.

As a result of SEC enforcement activity, you'll find lengthy disclaimers on most newsletters. Newsletter writers who receive promotional payments are required by law to disclose who paid them, the amount and the type of payment received (cash, stock, etc.). If any of this information is missing, consider it a red flag.

The SEC recommends taking a close look at newsletters' disclosure information. Consider the following statements as red flags because they do not contain specific information:

  • "From time to time, XYZ Newsletter may receive compensation from companies we write about."
  • "From time to time, XYZ Newsletter or its officers, directors, or staff may hold stock in some of the companies we write about."
  • "XYZ Newsletter receives fees from the companies we write about in our newsletter."

Also, be wary of newsletters that bury their disclosures or print them in tiny, hard-to-read typeface.

And no matter how enthusiastically a newsletter touts a stock, investigate the company or investment opportunity yourself. Be wary of stocks for companies not on file with the SEC. Also check with your state securities regulator, which you can locate at

www.nasdr.com.

If you think you've already been a victim of fraud, you can fill out an enforcement complaint form at

www.sec.gov/enforce/con-form.htm.

Stacie Zoe Berg, author of

The Unofficial Guide to Managing Your Personal Finances and

The Unofficial Guide to Investing in Mutual Funds, is a freelance journalist whose work has appeared in the Washington Post, The Washington Times, trade magazines, Consumer Reports and on financial Web sites. She welcomes your feedback at

personalfinance@thestreet.com.

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