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A Fool and His Money
Pyramid Schemes Lure Online Investors
That .com is a sure thing. Sure it is.
Pyramid schemes have been given a new lease on life by the explosion of
online investment activity in the US and Europe.
Whoofnet.com, an internet service provider (ISP) with operations in the UK
and Germany, has been taking advantage of internet stock fever to lure UK
investors into a pyramid scheme by offering shares which it falsely claims to
be listed on the Nasdaq stock market and "free shares" to successful
recruiters and ISP subscribers.
To join the scheme , members make a �400 ($660) payment to Whoofnet, which
they are encouraged to earn back by recruiting "friends and family members".
Members move up the pyramid and get higher rewards as their recruitment lists
grow. They are also promised commissions from the companies planned online
lottery, gambling and retail operations, and are encouraged to trade their
earnings for share options at a cost of $15 a share.
The shares offered by Whoofnet are in International Digital Holdings (IDH), a
Florida-based holding company. IDH was delisted from the Over The Counter
Bulletin Board in December because it failed to "submit its financial records
to the appropriate regulatory authorities," according to Wayne Lee of the
National Association of Securities Dealers.
IDH, which has never been listed on the Nasdaq stock market, is quoted in the
Pink Sheets, a US quotation service with no minimum financial standards.
Shares were last quoted at about $2. Companies quoted in the Pink Sheets
should not claim to be Nasdaq- listed, said Cromwell Coulson, chairman of the
National Quotation Bureau. "Regulators do not look kindly on companies that
make false and misleading statements."
Whoofnet's aggressive sales pitch is targeted at the aged and unemployed. A
promoter at a recent revivalist style recruitment meeting in London described
the pyramid scheme as the "kiss of life" for those made redundant on the
"wrong side of 40" and promised the audience a chance to turn their lives
around.
Whoofnet has made several misleading claims about its business partners and
corporate history in an attempt to bestow legitimacy on its operations.
Potential investors are given a glowing review of past business deals, worth
an alleged $700m, with the likes of Direct Line Insurance, a subsidiary of
the Royal Bank of Scotland, Bishopgate Insurance, a UK insurance company, and
Independent Energy, a UK gas and electricity provider. The companies
concerned deny the claims.
Whoofnet said its marketing may have been misleading and added it was
reorganising its strategy to avoid legal difficulties.
International Digital Holdings acquired Whoofnet.com and its parent company
Castleridge Management Services in October 1999 for $600m in preferred shares
in IDH, with a claw-back agreement if the target companies did not achieve a
minimum of $300m in revenues and $40m in net earnings before taxes during a
12-month period over the next two years.
IDH press releases describe Castleridge as a 24-year-old firm with a large cus
tomer base and impressive resources. However, public records do not support
IDH claims, showing that Castleridge Management Services was formed in June
1998 with share capital totalling only �1,000 ($1,640).
Carl Battie, the sole director of Whoofnet.com, was previously director of
Bishopgate Marketing UK, which was dissolved in 1998 by the UK Registrar of
Companies due to lack of business activity.
The US Securities Exchange Commission has already taken action against
several US companies after a wave of "free stock" offerings made through the
internet resulted in a flood of customer complaints. The companies were
prosecuted for failing to register securities transactions and making false
claims about investor returns.
Meanwhile, the SEC said it was pursuing an arrest warrant for Peter Roor, a
Dutch national living in Amsterdam, who it alleges promoted online pyramid
schemes and promised investors risk-free returns. The SEC alleges "the
pyramid schemes were a complete sham based on a slew of empty promises."
Richard Walker , SEC director of enforcement, said, "the Commission will
continue to bring maximum resources to bear in cleaning up the microcap
market. The market is too vital to our nation's small businesses to allow it
to be spoiled by a corrupt few."
"The US has borne the brunt of early internet fraud," said Dan Deganutti,
head of Andersen Consulting's European security and technology team, "but as
Europe moves further along the take-up curve for online services fraud is
going to increase apace."
The Financial Times, Jan. 14, 2000
Political Follies
Gathering Nuts in the Granite State
by Mark Steyn
I HAD barely started on the salad when I felt the presence of Utah Senator
Orrin Hatch, the stiff-necked mellifluous Mormon in the two-tone shirt,
hovering at my elbow, in search of one more voter to add to the 12 he already
has.
"Hi," I said, trying to think of any issue I needed to know his position on.
Basically, it's always the same. How do you feel about nuking Leamington Spa?
"I wanna tell you, I've been there and I've done it. And I'll do it again.
"Nice tie," said my neighbour Eleanor across the table. She was right.
Senator Hatch has a reputation as a snappy dresser, if you like neckties with
different coloured outlines of New Hampshire all over them.
Eleanor's an old hand at this sort of thing: like Paula Jones with the
President, she can spot each candidate's distinguishing characteristic a mile
off. Alan Keyes, the apocalyptic African-American speechifier, swung by.
"We're so privileged," she said. "You're such a brilliant speaker." Which is
code for: "But such an unelectable candidate."
We were at the "Salute To The Next President" in Durham, along with George
Dubya Bush, John McCain and the rest of the gang, to enjoy a pleasant 5.30pm
dinner on the basketball court of the New Hampshire Wildcats. In New
Hampshire we get too hungry for dinner at six: this is a state where, as the
big-town boys from the national media always complain, the only meal you can
get after 7pm is breakfast. "Go, Wildcats!" droned Senator John McCain
cheerlessly in a bit of ironic post-modern pandering. "He's peaked too
early," one of his most prominent supporters told me.
There are only two-and-a-half weeks to go till Primary Day and we're at that
stage in the disaster movie where the handful of survivors have managed to
stagger through the wilderness and almost back to civilisation (or, anyway,
out of New Hampshire) but half of them have gone stark staring nuts. "I've
done it," Orrin Hatch assured my wife woozily, "and I'll do it again." He
threaded his way to the podium and played us I Love Old Glory, a song he'd
written about a schoolboy pledging allegiance to the flag:
May he grow up in a land of honour
Never to see his flag
Trampled and torn at the hands of the faithless
Burned like a common rag.
"That's how I feel," he added, "when I see people urinate and defecate on the
flag." Utah must be more lacking in nightlife than I thought.
Senator Hatch then read out the results of a Kennedy School poll showing him
with one per cent of the vote and explained to us why this was good news for
his campaign. "I've been there and I'll be there again . . ."
New Hampshire exists in the same relationship to the general US electorate as
a hardened theatre critic does to a West End coach party. For almost everyone
else, the presidential election is a pleasant night out once every four
years. But in the Granite State we've had 12 months of it, day after day, and
it's hard to come up with something we haven't seen before. Like Orrin, we've
been there, done that.
New Hampshire are the first-night reviewers. Every season some bigshots
breeze in figuring they're critic-proof, only to get closed down before
opening night. Elizabeth Dole is out of the race because she thought she
didn't need us. George Dubya got in trouble because his minders reckoned he
could skip us. He's been making up for lost time in the last couple of weeks.
In Durham he came by our table, and my assistant pressed her friend Tammy on
him for her complementary grope. Tammy lives in Woodsville but has been over
in Europe so was the last surviving female in New Hampshire not to have been
felt up by the governor. He got the biggest cheer of the night - for his
speech, I mean, not his finesse with Tammy. John McCain, by contrast, got
little more than perfunctory applause.
The media, meanwhile, are showing signs of impatience. Penned up behind us,
the TV crews surreptitiously extended their boom mikes over our heads and on
to the table next to us to pick up some small talk from billionaire geek
Steve Forbes and his supporters. No one was saying anything.
They were eating their chicken in total silence. The sound guys assumed there
must be a technical problem and lowered their mikes until they hovered a mere
inch and a half over the plate. Still nothing. Not a word. At our table, Jim
Rubens, a former gubernatorial candidate, had had enough. "Burp, one of you!"
he yelled at Forbes and his pals.
But Forbes just smiled enigmatically as the boom mike roamed around his
Adam's apple like the Mars Explorer looking for a landing site. Forbes can
barely do big talk, never mind small talk. In his speech he was upbeat.
"Watch out, Democrats," he intoned lifelessly. "We're just getting warmed
up." Yeah, but how can you tell?
The London Telegraph, Jan. 14, 2000
Digital Society
Banks Are Losing Control of Money
by Michael Klein
Talk of an international financial "architecture" reveals a belief that
clever humans can construct an orderly global financial system. However, what
really determines the future may turn out to be a wave of technology-driven
change in the world of money. The effects could be manifold.
First, monetary policy and central banks may become irrelevant. The growth of
real-time gross settlement systems promises to reduce the need for some form
of "final settlement money". In addition, private settlement systems such as
Chips may come to accept private means of payment including, for example,
company shares. In a world of private money the fate for central banks is
privatisation or maybe transformation into a regulatory body.
Second, national and private currencies may compete effectively with each
other, rendering exchange rate policy and balance of payment concerns
obsolete. Smart payment cards and wireless communication devices are
spreading across the world, even to the poorest countries, and costs continue
to fall dramatically. The spread of the internet allows each financial
transaction to be settled 100 times more cheaply than manual settlement via
bank branches. Today, e-cash providers are offering new payment mechanisms,
even for small cross- border transactions. Once the demand for privacy,
security and trust is met via encryption, regulation and branding, we may see
a new world of financial settlement.
This is a world of "capital flight for all" and no longer just for the rich.
People choose which currency block to belong to. As a result, there is no
longer a match between geographical entities such as nation states and the
money that is used to settle physical transactions conducted on their
territory. Governments lose the tool of nominal exchange rate depreciation.
National current account deficits would be as meaningless as in currency
unions.
Third, more flexible forms of denominating wages may act as a substitute for
the loss of nominal exchange rate flexibility. Wage contracts are usually
inflexible ("sticky"), because people will not agree easily to a cut in the
remuneration agreed in their contract. In situations where wages need to fall
to restore employment, the adjustment is long and hard, unless some mechanism
such as currency depreciation allows all wages in a suffering country or
sector to move downwards in one fell swoop. But in future wages could, for
example, be denominated in shares of the employer. Or employees might prefer
to have their contracts denominated in units of a diversified fund of shares
in companies exposed to the same adverse shocks as their employer.
By re-denominating contracts with "sticky" prices, society would create new
"units of account". In fact, one cannot have both price flexibility for
contracts with "sticky" prices and a unique unit of account. In a world of
e-commerce and open borders, people would increasingly compare prices quoted
in different currencies.
Fourth, the work of bank regulators may be made easier by heightened capital
market disciplines. In a world of private money or currency competition the
state would no longer be able to provide open-ended deposit insurance or
liquidity support by printing money. Overall, the disciplines on financial
institutions would come to resemble the ones seen under free-banking systems
of the 18th and 19th century. Without regulatory prompting, banks would
typically carry capital in the order of 20 per cent of assets or more, a bit
like today under currency board systems. They would advertise with hard
numbers on their financial health and have an incentive to avoid moral
hazards.
Beyond private insurance schemes, the residual burden to provide liquidity
support for banks would fall on fiscal policy. This would require strong
underlying fiscal positions, so that governments could borrow in times of
crisis. With limited fiscal options and without monetary and exchange rate
policy, macroeconomic policy as we know it would be at an end.
Finally, 19th century-style deflation and financial crises may become more
likely, at least during the transition to this new world of money. The move
to more flexible price systems would be lengthy and hard. Furthermore, as
uncontrollable electronic flows swept across countries with weak banking
systems, financial crises could be triggered. Ultimately, once monetary
authorities are redundant, it will be harder to conduct counter-cyclical
macro-economic policy.
The unresolved debate is whether a market among competing issuers will work
well or not - whether markets are destabilising, or self-correcting. What we
do know is that the shape of the global monetary system will change. Since
the introduction of fiat money and the demise of the gold standard, global
monetary regimes have changed about every 20 to 30 years. Why should that
stop? The real question is what comes next.
The author is chief economist of the Royal Dutch/Shell group of companies.
The Financial Times, Jan. 14, 2000
-----
Aloha, He'Ping,
Om, Shalom, Salaam.
Em Hotep, Peace Be,
All My Relations.
Omnia Bona Bonis,
Adieu, Adios, Aloha.
Amen.
Roads End
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