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US SEC warns investors on Internet ‘auto-trading’

July 1, 2005

WASHINGTON (Reuters) – U.S. market regulators warnedinvestors on Friday to be wary of a new type of onlineinvestment vehicle and filed civil fraud charges against asmall Internet investment advisory firm called Terry’s TipsInc.

The Securities and Exchange Commission accused Terry’sTips, based in Vermont, and its founder Terry Allen ofpromising clients misleadingly large investment returns inmarketing the firm’s auto-trading programs.

Auto-trading is a new investment vehicle that is spreadingfast on the Internet, said Kenneth Israel, districtadministrator of the SEC’s Salt Lake district office.

Investors typically are asked to subscribe to online newsletters and open trading accounts at a brokerage chosen bythe newsletter’s publisher. Investors are then asked to givethe publisher authority to automatically direct trades in thetheir brokerage accounts, the SEC said.

Both the newsletter subscription and the auto-tradingarrangement typically involve the investor paying fees to thepublisher, the commission said.

After an account is set up, the publisher sends tradinginstructions by e-mail or fax to the brokerage and only tellsinvestors about trades after they have been executed.

The SEC charged Terry’s Tips in U.S. District Court inVermont with violating antifraud laws. The agency alleged thatas recently as September 2004, the firm had 1,200 auto-tradingclients with total assets of over $14 million.

An attorney for Allen and the firm declined to comment.

“In this case, what we allege is Terry’s Tips was promisingreturns of about 100 percent a year when they were actuallylosing substantial amounts of money,” Israel said.

The SEC action seeks a permanent injunction against thefirm, repayment of ill-gotten gains and a monetary penalty.

“Investors should be careful when they give this kind ofauthority to trade in their account to anyone,” Israel said.




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