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Avoiding stock scams
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September 1, 2000: 8:52 a.m. ET
The Emulex hoax shows how Internet scams can be very real for investors
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - The ever-faster pace of communications, coupled with the ease of disseminating information via the Internet, have created great stomping grounds for hustlers and swindlers.
Last week, a false news report about the company Emulex (EMLX: Research, Estimates) sent its shares tumbling as spooked investors sold out. The authorities on Thursday arrested a man they claim perpetrated the scam in an effort to profit from the ensuing trading frenzy.
A mirror-image case involving PairGain Technologies saw its stock rise 32 percent in April 1999. A former employee later admitted mocking up an Internet news page that contained a false story that PairGain Technologies (PAIR: Research, Estimates) was selling out to an Israeli company.
Unreliable information is everywhere
Though investment scams are much more prevalent with small-cap stocks, whose light trading is easier to influence with false news or rumors, even  large-cap companies aren't immune. Recently, Lucent Technologies stock dropped 4 percent after a false earnings warning appeared on a Yahoo! message board.
"They're out there every day on the message boards," John Nester, a spokesman for the Securities and Exchange Commission's investor-education and assistance office. Whether they're scams, pump-and-dump schemes or plain unreliable sources, bad information is plentiful.
Click here for an earlier CNNfn.com story on avoiding Internet stock scams.
 Always be skeptical of information in chat rooms and on message boards, Nester suggests. But you have to be in the chat room to read that information in the first place.
Respectable news sources reported both the Emulex and the PairGain scams. Both hoaxes purported to be legitimate news items. Investors happened across them and found them more difficult to discern than obvious gossip or rumors.
"When you get it up to the mass media, that elevates it up to a much wider level," Nester said. "It casts it to a much wider net of people who can get ensnared."
The Five 'Ws'
Here are the SEC's basic tips for avoiding stock hoaxes. The SEC suggests investors use the "Five Ws" common in news stories to evaluate information they receive:
Who is behind the news? Check with the company in question by visiting its Web site or contacting its investor-relations or public-relations department.
What are they saying? Verify any claims about product developments, lucrative contracts or a company's finances independently. Investors should do their research, Nester said, and not rely on being spoon-fed.
Where did you hear it? The Internet may make it easier to generate hoaxes, but 'You can't believe everything you read' applies everywhere. Mistakes happen. "Just because you heard the story from a legitimate news agency or well-known analysts doesn't make it true," the SEC states.
When was the "news" announced? Companies often wait until the end of regular market hours before announcing news that will affect its stock price.
Why was the "news" announced? Who stands to benefit? Con artists can't profit unless people trade in reaction to the false news.
The SEC also has a booklet, available free online, on avoiding Internet investment scams. And it has an educational page about investing online and using the Internet for investing.
"We obviously always urge people to do their research," Nester said. "If you hear it on TV, it doesn't make it true. Watching TV is not research. You need to independently corroborate information you hear about a company's prospects." 
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