The Battle for Good Online Info

Enforcers at the SEC face a day-to-day standoff with abusers of securities laws. With investors at the mercy of the information available to them -- and with the Internet sometimes muddying the waters -- now is the time for caution, patience, and a complete understanding of one's tolerance for risk, volatility, disappointment, and dirty work.

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By Dave Marino-Nachison (TMF Braden)
January 2, 2001

The Securities and Exchange Commission (SEC) last week sued John Westergaard and two related companies, and Westergaard Broadcasting, alleging Internet stock touting. While all charges are pending, the news nonetheless highlights some of the challenges modern investors face in evaluating the myriad sources of information easily available online and elsewhere.

The government accused the defendants of accepting compensation -- as much as $48,000 -- from publicly traded small-cap companies to publish positive reports about them through press releases, an Internet site, and an Internet radio show, then failing to disclose the financial relationship to investors (a violation of securities law).

The two corporate entities settled the case without admitting or denying wrongdoing, a common practice. Westergaard the man is fighting the charges. "These charges are specious,'' said Westergaard, who told Bloomberg in an interview that he has terminal prostate cancer. "They've been out to get me for three years, and I refuse to back down.'' (Westergaard's website was shut down last year. shares are traded over-the-counter.)

A story from The Wall Street Journal noted that the SEC had concluded a previous investigation into Westergaard without recommending enforcement action. Longtime readers may also remember a 1997 Foolish feature in which Louis Corrigan raised questions about seeming improprieties at Westergaard.

The details of this case notwithstanding, investors are wise to note it and others like it. A search of the SEC's daily online news digest shows that, on any given day, the commission is mixed up with a handful of defrauders and potential defrauders of every stripe: hypesters, pyramid schemers, purveyors of fake offerings, and more. (We took a broad look at the business of bad business in Securities Fraud: How to Avoid the Cons.)

The Internet, with its potentially unlimited reach, has become a fertile ground for those who seek to manipulate the public markets to their advantage. The Emulex (Nasdaq: EMLX) case -- in which 23-year-old Mark Jakob Friday pleaded guilty to sending out a false press release that temporarily decimated the company's market value as he attempted to recoup short-selling losses -- was just one well-publicized example in which unwitting investors were victimized by bad information.

Given the potential pitfalls awaiting even the most studious and diligent investors, how should one endeavor to stay ahead of the game and out of trouble? First, every source of information used to make investment decisions should be vetted carefully and then used only with consideration -- even if the source is, purportedly, the company itself.

With that in mind, investors should remember that when an opportunity looks too good to be true, it probably is. Though discretion can be a difficult practice in money matters, the final accountability will always lie with you. Wandering down dark alleys in hopes of finding shortcuts is rarely the surest mode of transport.

This is little solace for those who've been hurt by no fault of their own. Though regulators will do everything in their power to keep the investing waters as shark-free as possible, there are options -- lower-yield fixed-income investments, for example, or index funds -- for those who want to leave even less to chance.