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Scams still beckon, even when hoaxes

INVESTORS were largely ignoring the educational materials posted on the Securities and Exchange Commission's Web site.

So three years ago, agency director Susan Ferris Wyderko and her staff launched a Web site of their own - a fake investment scam.

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It was a complete hoax that promoted a company on the verge of going public. When viewers clicked on the site for more information, a message would warn them they could have been suckered had they responded to such a solicitation. It then offered tips on avoiding financial scams.

Since the initial hoax, approved by the then-chairman, the controversial Harvey Pitt, the government agency has launched a fake banking scheme, mutual fund, hedge fund and investment advice site.

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The result: 2 million Web site hits and hundreds of e-mails from investors, most of them thanking the agency for the heads-up, Wyderko said.

"Since these people were not coming to us, we went to them," she wrote in a recent letter to Sen. Peter Fitzgerald, an Illinois Republican, who had asked for more information on the program after Wyderko testified about it to a Senate subcommittee as part of a financial literacy hearing in March.

Investors shellshocked by the stunning investment-world malfeasance of the past few years have a couple of justifiable questions here.

First, what does it say about the collective investor psyche that such schemes are still hugely alluring, despite brutal lessons ranging from the technology stock bubble to Enron to the mutual fund scandal?

Second, aren't we nevertheless on a slippery slope when government officials blatantly issue misinformation, even when the cause is admirable?

The first question scares University of California professor Terrance Odean the most.

To Odean, who studies investor psychology, it means the age-old sucker's mentality still thrives, and it is far more dangerous than ever, despite whatever efforts authorities have made to restore trust in the markets.

Today's investors are largely on their own, with few traditional pensions and an uncertain future for Social Security. Compounding the problem is a near total lack of basic financial education in schools, he said.

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The fake SEC scams do some good because they put investors in the situation, Odean believes. We learn the most from realistic case studies and when scams happen to close friends and relatives, he said.

"The best protection from scams is inoculation, getting a little bit of the disease without being devastated," Odean said.

As for the slippery-slope question, that also bothers Odean, as well as Cass Sunstein, a University of Chicago professor who published a journal article last year with colleague Richard Thaler titled "Libertarian Paternalism Is Not an Oxymoron." The paper discussed ways authorities can encourage positive behaviors (like automatic retirement savings defaults in company plans) without offending libertarian sensibilities.

"It's odd and it's troublesome, but not clearly unjustified," Sunstein said of the fake scams. "It's ingenious because the strategy is specifically tailored to the audience it is trying to protect. If you're a scam-prone person, this is likely to help you. The sympathetic view is that the SEC is trying to meet fire with fire, trying to defeat big-time fraud with white-lie fraud."

But unlike the savings incentive behavior Sunstein wrote about, this involves deception by the government.

"Nothing we talk about involves deceit. In general, the government shouldn't deceive, and I think a lot of people would be outraged" by the idea, he said.

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Wyderko said the only negative reaction has been from taxpayers who initially thought the government was spending a lot of taxpayer dollars on fancy Web site design.

"We paid $50 to register the URL and designed the site ourselves," she said. When investors heard that, they were all for it and thanked officials, she said.

I hate proving the old line that no good deed goes unpunished, but this tactic deserves some more thought and scrutiny. Creatively helping investors avoid scams is a laudable achievement, but the cost could well be another chink in the shopworn armor of investor trust.

E-mail Janet Kidd Stewart at yourmoney@tribune.com.


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