According to SEC, the growing number of frauds committed over the Internet are types that are generally well-established in the securities industry. The Internet Provides a New Medium to Perpetrate Traditional Securities Frauds

SEC officials told us that the Internet provides a new medium for perpetrating fraudulent schemes that are well-established violations in the securities industry. SEC Has Established a Unit to Coordinate Efforts to Combat Internet Securities Fraud

SEC established the Office of Internet Enforcement (OIE) to coordinate the agency’s response to increasing reports of Internet securities frauds.OIE has several responsibilities, including developing policies and procedures for Internet surveillance, managing the E-mail complaint system, and providing guidance for conducting Internet securities fraud investigations. SEC staff also may obtain information on potential Internet securities frauds from sources other than OIE. SEC Has Concluded About One-Half of the Internet Securities Fraud Cases Initiated Since 1995

SEC initiated a total of 66 judicial and administrative actions since 1995 to combat Internet securities fraud, and about one-half of these cases had largely been concluded by February 1999. However, state or federal criminal enforcement authorities have also initiated criminal proceedings in 2 of these 66 cases, which have resulted in criminal convictions or prison sentences for 7 individuals. In 21 of the 32 cases that have largely been concluded, violators were required to pay some form of civil money penalty. Many states have also initiated enforcement actions to penalize individuals who use the Internet to violate state securities laws. Nearly One-Half of All the States Have Implemented Programs To Combat Internet Securities Fraud

In 23 of the 50 states we surveyed, officials from regulatory agencies reported establishing specific programs to control Internet securities fraud and penalize violators of state securities laws. Regulatory Challenges in Combating Internet Securities Fraud

Although SEC and state regulatory agencies have initiated programs to combat Internet securities frauds, these programs are new, and it is too early to predict their long-term effectiveness. In particular, the potential exists that the rapid growth in reported Internet securities frauds could ultimately place a significant burden on the regulators’ limited investigative staff resources and thereby limit the agencies’ ability to respond effectively to credible fraud allegations. The Rapid Growth of Reported Internet Securities Frauds Poses Challenges to Limited Regulatory Investigative Resources

The rapid expansion of the Internet and the growth of securities-related activities over the past several years pose potential challenges to SEC and state regulatory agencies to control securities fraud on the Internet. State securities regulatory agencies face similar challenges in developing a coordinated approach to Internet fraud investigations and enforcement. Regulators Face Challenges in Educating the Investing Public on the Risks Associated with Internet Securities Frauds

According to SEC, investor education is a critical defense against Internet securities frauds given the fact that regulatory resources to combat the problem are limited. SEC’s capacity to educate investors and disseminate widely relevant information about the potential risks of Internet securities frauds may be limited.
Why GAO Did This Study

Pursuant to a congressional request, GAO discussed Internet securities fraud and regulatory efforts to combat this growing problem, focusing on: (1) information about the incidence and types of securities frauds perpetrated over the Internet; (2) the Securities and Exchange Commission's (SEC) initiatives to combat Internet securities fraud; (3) information on the penalties that have been imposed on individuals found to have committed Internet securities frauds; (4) information from state securities regulators about state efforts to control Internet securities fraud; and (5) potential challenges facing SEC and state regulatory initiatives in combating securities fraud over the Internet.

What GAO Found

GAO noted that: (1) SEC and state regulatory officials generally agree that as the Internet continues to expand rapidly, opportunities for securities frauds are growing as well; (2) an indicator of the growth in Internet securities frauds is the number of public electronic mail complaints that are submitted to SEC's Internet website; (3) according to SEC, the Internet provides a new medium to perpetrate traditional investor frauds; (4) however, some securities frauds appear unique to the Internet environment; (5) SEC has responded to the growing Internet fraud problem by, among other things, creating the Office of Internet Enforcement to coordinate the agency's efforts to combat Internet fraud, providing training to SEC investigative staff on monitoring the Internet, and preparing guidance for SEC staff who are investigating potential Internet frauds; (6) SEC has established programs to educate investors about the risks associated with Internet securities frauds; (7) since 1995, SEC initiated a total of 66 enforcement actions against alleged perpetrators of Internet securities frauds; (8) as of February 1999, 32 of the 66 cases had largely been concluded, with violators generally required to: (a) pay civil money penalties; or (b) refrain from further violations of the securities laws; (9) however, in 2 of the 32 concluded cases, state or federal criminal enforcement authorities prosecuted violators and obtained criminal convictions or prison sentences for 7 individuals; (10) over the past several years, nearly half of all state regulatory agencies have established specific programs to combat Internet frauds that violate state securities laws; (11) although many state agencies have initiated enforcement actions to prevent further violations of state law, officials from these agencies told GAO that in some cases violators may continue committing the fraudulent activity in other states; (12) SEC and state regulatory agency programs to combat Internet securities fraud are new and face significant challenges that could limit their effectiveness in the long-term; (13) in particular, the potential exists that the rapid growth in reported Internet securities frauds could ultimately place a significant burden on the regulators' limited investigative staff resources and thereby limit the agencies' capacity to respond effectively to credible fraud allegations; and (14) the regulators face challenges in developing a coordinated approach to combating Internet fraud and educating a wide audience about the risks associated with Internet investing.