Pyramid cases at peak of online fraud

The Federal Trade Commission has closed down an online pyramid scheme that had allegedly bilked investors of $6 million, one of many operations that the FTC claims is being run by companies using the Net as a home base for their scams.

The allegations against Fortuna Alliance constitute the 12th and the largest online fraud case to date, according to the federal agency. The FTC issued a temporary restraining order against Fortuna after city officials in Bellingham, Washington, reported suspicious activity on the company's Web site.

"What if you paid $250 a month which produced a minimum of $5,250 income each month for you, while you watched?" asked an offering on Fortuna's site. "Well that's exactly what would happen if you hired Fortuna Alliance as your personal Marketing Expert."

No fewer than 17,000 people signed up, sending the online company between $250 and $1,750 each for a total of $6 million.

The FTC has sued the five officers who run the nine-year-old Fortuna for operating an investment program that the agency described as a classic pyramid scheme. Typically in such operations, a handful of people at the top of the "pyramid" make their money from unsuspecting investors at the bottom--who are often left with nothing but debt to show for their contributions.

In the Fortuna case, the FTC accused the company of transferring at least $3.55 million of the investors' money to a bank in Antigua, West Indies. If the court finds the company guilty, the investors will be reimbursed.

Fortuna executives could not be reached for comment.

Entrepreneurs and Internet proponents are concerned that the Fortuna allegations and a growing number of other relatively high profile cases could damage the Internet's reputation as a mechanism for legitimate commerce.

"People are ignorant," said David Kennedy, information security analyst at the National Computer Security Association. "Maybe it's the same people who would fall for the same thing on the street, but the Internet gets blamed because people need to rationalize the fact that they were dumb."

Experts say companies aren't the only scam artists setting up online fraud schemes. Kennedy, for example, recently went online and found what he considered a scam after only five minutes of random searching.

"The angle was sympathy, which is very common. The scam described some desperate plight of a family who couldn't get social security disability and pleaded for people to send them money to a post office box," he said. The family also left their email address, a fact that Kennedy finds incongruous considering their supposedly destitute situation.

One reason for the increase in Internet fraud is the lack of a federal force specifically dedicated to investigating online scam artists. "There are several agencies that care, but they are overwhelmed by the volume and the federal resources needed just aren't available," Kennedy said.

Last fall, the FTC spent 22 days examining the use and development of technology to come up with solutions to the problem of online fraud. The commission issued a report based partly on testimony from more than 70 experts in law, business, technology, economics, marketing, education, and consumer behavior.

Eileen Harrington, associate director of the bureau of consumer protection for the FTC, warned that consumers also need to make themselves aware of such scams. "We concluded that, despite all the positive things the Internet has to offer, there's no reason not to think that bad guys will be there. It's much harder to find perpetrators in cyberspace than in real space and even harder to track them across international borders," she said. "We're hoping that the fraud problem doesn't get out of hand, because that will destroy consumer confidence in the medium."

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