The founder of an "online eyeware" company used money from investors to finance trips to casinos and topless bars, according to a lawsuit filed by the Securities and Exchange Commission (SEC).

Chidwhite Enterprises, founded by Jerry Chidster, is one of 23 companies and individuals charged by the SEC of using the Internet to defraud investors of $2.5 million and "pumping up" the market value of stocks by $300 million.

The frauds were accomplished by a variety of online means, including "spam" emails, electronic newsletters, Web sites, hyperlinks, message boards and other Internet media. Half all the cases by the SEC have been in the last 14 months, indicating fraud is on the increase.

Perhaps the worse case identified by the SEC in its annual Internet fraud sweep is that of Chidwhite which used spam email and a Web site to announce that a flotation of its "$1 billion online eyewear business" was imminent. These claims brought in $96,000 from naive investors paying $10 for so-called "free stock credits" which, it is alleged, actually went on financing Chidster's playboy lifestyle.

According to the SEC, Chidwhite never received approval for an IPO, the company had no offices, no inventory, and no products or services. The perfect "virtual company" then.

In another case, principals of Internet-firm Smart-Mart allegedly used a "large portion" of 32.4 million in investor funds for unauthorised business and personal expenses, including buying cars, exotic holidays and home mortgage payments. It all seems like a throwback to a forgotten era.

A full list of scams unearthed by the SEC is available here and it makes interesting reading. We particularly liked the tale of a former roofer turned "online expert stock analyst" that claimed he had a proprietary computer trading system, and issued a false resume to this effect.

The SEC has provided a list of helpful advice on how people might avoid scams online, to which we'd like to add our own advise that people need to use more commonsense. If a deal is too good to be true it almost certainly isn't true.

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External links

SEC press release on Internet fraud crackdown
SEC tips on how avoid being conned by fraudsters