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SEC sets up fake company Web site to warn investors of scams

The Securities and Exchange Commission, in an effort to educate investors about online scams, has launched its own Internet site for a fraudulent company aimed at teaching a lesson to investors with an itch to get rich quick.

"An educated investor is our best defense against fraud," said SEC Chairman Harvey Pitt, who made an appearance at a news conference Wednesday as Thomas McWhortle, the creator of McWhortle Enterprises, the SEC's fictitious company.

In addition to that site, the SEC has several other fake sites--including a prime-bank scam that was created in partnership with the Treasury Department--that are designed to teach investors a lesson, said Susan Wyderko, director of the SEC's Office of Investor Education.

Crooks learned how to use the Internet a long time ago and now regulators are learning to use it to fight back, she said.

"Regulators all over the world are very concerned" about prime-bank scams, Wyderko said. The prime-bank instrument purports to offer an alternative to the current banking system, but no such thing exists.

The fake SEC sites are designed to target specific past scams that have fooled investors, in hopes of teaching individuals the right questions to ask and to recognize warning signs that an investment might be fraudulent.

Pitt deemed the sites a "low-cost, high-impact way to reach people" who need to be more discriminating in their investments. The SEC spent $50 of taxpayer money to register the domain name, Wyderko said. The SEC did not identify the costs of building the site.

The SEC intends to create similar sites in the future and "the sky is the limit" on how many, she said. It is a relatively easy learning tool to create, and it is effective, at least according to public feedback to the agency, Wyderko said.

The McWhortle site launched earlier this month, but investors were directed to it Friday through the help of a fake press release posted on Internet portal sites. Since then, the site has had 150,000 hits, Wyderko said, and almost all visitors reach the page explaining that the company is a fraud created by the SEC, the FTC and other investor-related organizations. That page is reached by attempting to submit a bid to invest in the firm.

The SEC receives about 40,000 scam complaints a year, but Wyderko believes the problem is larger because many people are too embarrassed to admit they fell for a scam.

The McWhortle site includes many techniques real crooks use, such as offering pro forma financial statements, creating a sense of investment urgency and including testimonials, as well as disclaimers that their sites contain forward-looking statements.

"If it sounds too good to be true, it is. And guaranteed profits aren't," Pitt said. Another red flag is if a firm offers only a post office box as an address and no street number.

Investors also should check the SEC's online company filings in a service called EDGAR, where all legitimate companies must file financial statements and other investor information, Wyderko said.