It wasn't too long ago that penny-stock peddlers inhabited the fringes of the online world--a newsletter here, a scattering of message bases there. Well, online trends move with the speed and power of a tsunami, and this one is no exception: Penny-stock hucksters have gone online, and in force.

Penny-stock promoters have spread well beyond the ubiquitous message centers, such as the Internet stock newsgroups and commercial bulletin boards, where stocks are frequently hyped. In just the past two months, dozens of World Wide Web sites have been organized by penny-stock promoters. And despite stepped up Internet-related enforcement actions, regulators find themselves hard-pressed to deal with them. "There's no doubt that the [Internet] is now the leading source of penny-stock promotion--it's just so easy for the penny-stock types to operate there," says Benjamin A. Lewis, a North Carolina securities investigator who heads a multi-agency Internet task force led by the North American Securities Administrators Assn.

To be sure, not all the penny-stock devotees on the Net are shady operators. Many of the postings in the Internet's Usenet message centers are from well-intentioned small investors and reputable brokerages and newsletter writers, such as longtime small-stock maven John Westergaard, who has established a Web site in recent weeks. But others are far more troublesome. Penny-stock newsletters, often resembling objective market letters, often provide little more than thinly disguised, paid advertisements for the companies they write about.

DUMPED. Stock hype is also growing ever more worrisome. Regulators and veteran Internet users say that "pump-and-dump" schemes are becoming rife on the Net's online message bases, notably the Internet's "misc.invest.stocks" and the new "alt.invest.penny-stocks" newsgroups. Notes James B. Adelman, assistant district administrator at the Securities & Exchange Commission's Boston office: "It used to be, you had to dial a phone hour after hour to pump up a stock. Now, you just pay $25 to $30 a month to an Internet service provider, come up with an exciting story, push a button, and you can be seen by 100,000 people."

The "pump" side of pump and dump is often evident among thinly traded stocks. Promoted online by people owning the shares, the shares rise and then are dumped, causing the share prices to fall. It's a high-tech takeoff on the old penny-stock boiler rooms, which have largely become a thing of the past. Bapcha Ramamurthy, a 29-year-old semiconductor designer in California and longtime Net-watcher, says that trading of several small stocks has been sustained by promotion on the Net, particularly computer issues and Canadian mining issues.

PAID FOR. A good example is Computer Concepts, a Bohemia (N.Y.) software designer. Shares climbed as high as $4 in June, partly because of energetic postings on the Net, a Computer Concepts executive acknowledges. Notes Ed Warman, Computer Concept's executive vice-president: "That's understandable--we make a product that is heavily used by techies, and we make our software available on the Web." The stock has since fallen to $1.50. Warman says the company was not responsible for any postings affecting share prices.

Another stock with an injection of Net adrenaline is the Dallas software maker Camelot Corp. Like Computer Concepts, it rose through the summer on a wave of favorable Net postings, only to fall more than 30% from its $7 high. The company is still a mainstay of penny-stock mavens on Prodigy's Money Talk Bulletin Board. "CAML-NEWS TONIGHT!!!" was the title of one typical posting recently on Prodigy, which recounted in lengthy detail the contact between a Prodigy user and Camelot officials, including chief executive officer Daniel Wettreich. A Camelot spokeswoman says online postings have been but one of many factors influencing the share price.

Prodigy and the newsgroups are not the only places where Camelot is hyped. It is a top pick of one of the latest phenomena in online stock hype--the penny-stock letter. Ex-broker Rob Pittenger's Market Success Web site features Camelot prominently in his latest issue. But although the penny-stock letter boasts it provides "Quality Research for the Small Cap Market," it is actually entirely paid for by companies. "I seek out good companies, go out and write a report for them to use in their investor relations," says the Omaha-based Pittenger. The fee varies, but averages about $1,000. Companies pay an additional $250 a quarter for updates.

ONLINE COPS. Penny-stock letters like Market Success are not a new phenomenon. But the Internet is giving them exposure and credibility never before seen. Pittenger says it has increased his access to potential clients. "I tell them I write research that appears on the Internet. They're almost afraid to say no," he says. So far not a single company has refused his request for access. Likewise, the Net has become a bonanza for Pennsylvania-based Global Markets. Like Market Success, it has been online for only a few weeks. Indeed, the latest issue features a single stock, biotech outfit Quigley Corp., which trades at about 13 cents.

Global Markets is the brainchild of Richard A. Sauers, 44, who has written a print version for 12 years. His method of finding and writing about companies is simple. "If I see a company I like, I write about them. I show it to them, and if they like what I wrote, I ask if they want to become a sponsor," says the Morrisville (Pa).-based Sauers. "Sponsors" pay for mail distribution of that issue of the newsletter, which, he says, goes out to 10,000 off-line subscribers. He says about a quarter of his featured stocks involve subsidies.

Like most Net-based investment mavens, Sauers and Pittenger are not registered investment advisers. "I don't make buy and sell recommendations," says Pittenger. And regulators say that they are generally reluctant to prosecute newsletter writers because of possible First Amendment issues--even when they do not assert, as many do, that they are journalists. "The main danger to investors is that they don't know who they're dealing with," notes National Association of Securities Dealers Executive Vice-President John Pinto.

But the opposite is also true. The scamsters don't know who they're dealing with either. The regulators are out there, and are growing increasingly computer literate. Indeed, the NASD uncovered, and sent on to the SEC, a prime bank fraud case uncovered by the off-hours online perusings of one of its compliance officers. The SEC moved fast--bringing a court action only a month after the alleged fraud was uncovered. But it will take a lot more prosecutions before "caveat scamster" becomes the operative term online.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE