Boom times for stock fraud by CHRISTOPHER CAREY
St. Louis Post-Dispatch
ST. LOUIS — The calls come from Bangkok and Barcelona, from Manila and Budapest.
Smooth-talking brokers, many of them American, use flattery, urgency and sometimes lies to persuade foreign investors to buy stock in the small U.S. companies they tout as the next Microsoft or eBay.
But almost as soon as money changes hands, many of these can't-miss propositions become sure losers. The value of the stock plunges, and the firms that peddled the shares stop answering the phones, shut down their Web sites and vanish.
The prestigious-sounding brokerages are actually unlicensed, offshore ''boiler rooms,'' selling stock in companies that would have little appeal without a listing on the U.S. market and trading approval by the U.S. Securities and Exchange Commission.
The rise of the overseas boiler rooms is an unforeseen consequence of globalization and deregulation.
Just as the U.S. manufacturing and technology industries have gone offshore in search of lower costs and looser operating restrictions, so has the stock fraud industry.
The Internet has added a new twist, allowing boiler rooms to create impressive virtual storefronts. Advanced telecommunications also aid in their deception, routing calls, faxes and voice mail from answering services in Hong Kong, Tokyo and other business capitals to their true headquarters in less visible locations.
In essence the operations are everywhere and nowhere, making them hard to find and even harder to stop.
An investigation by the St. Louis Post-Dispatch has identified more than 100 publicly traded U.S. companies whose stock has been peddled by the offshore rings.
The boiler rooms profit by obtaining newly issued company stock at discount prices and immediately reselling it at big markups, a practice that is illegal in America.
Despite efforts by international regulators and aggrieved investors to disrupt their activities, the number of active boiler rooms appears to be multiplying.
''These stock boiler rooms, unfortunately, are now a permanent feature on the financial landscape,'' said Peter Kell, who led the Australian Securities and Investments Commission's effort to identify illegal operators and warn investors. ''They're well-organized, they've made a lot of money, and they're not about to go away.''
The boiler rooms have netted hundreds of millions of dollars — billions, perhaps — from victims in Europe, Australia, Asia and other parts of the world.
Foreign investors are not the only ones harmed by these operations.
Some Americans get sucked in by e-mail or Web site publicity campaigns, buy stock through legitimate brokers and are wiped out when the companies collapse or the shares sold overseas are dumped back into the U.S. market.
Americans who have sold inventions or businesses to these companies and taken payment in stock instead of cash have been left empty-handed, too.
What's more, legitimate U.S. businesses have been hindered in their search for foreign capital because the frauds have made overseas investors wary.
Foreigners who have been burned have pleaded with the SEC to investigate. They say some companies whose shares they bought are acting in concert with the unlicensed brokerages to deceive investors, a theory borne out by the Post-Dispatch's research.
Nearly half the companies the Post-Dispatch tracked have officers, key shareholders or consultants who previously have run afoul of the SEC, the FBI or other law enforcement or regulatory agencies.
The boiler rooms also have sold shares in nearly 100 privately held companies that were supposedly poised for initial public stock offerings. None has made it to market, leaving buyers with little opportunity to cash out of their investments.
The networks include Americans who specialize in creating dubious public companies, Americans who act as conduits in getting the stock to the boiler rooms and Americans who oversee the boiler rooms or work there as brokers.
The SEC is well aware of the problem. Tucked away on its Internet site, under the heading ''Publications,'' is an alert, ''The Fleecing of Investors: Avoid Getting Burned by Hot U.S. Stocks.''
The report, which succinctly describes the schemes and offers tips for avoiding trouble, was last modified in March 2001.
The SEC only recently brought its first cases against offshore boiler room rings and the Americans allegedly involved in them.
Because the agency has limited resources, it must be selective in the cases it pursues, to ensure that it gets the most for its money, said Paul Berger, associate director of enforcement.
''Obviously, we don't want to see any shareholder injured, and we don't want to see any adverse consequences to the marketplace,'' he said.
Investigating complex international cases requires more time and more resources than the simpler types of fraud the agency once handled, Berger said.
The number of boiler rooms operating worldwide has surged in recent months, as improving economic conditions and rising share prices have brought investors back into the stock market.
The Hong Kong Securities and Futures Commission had 143 suspected boiler rooms on its alert list at the end of March, up 70% from a year earlier. Regulators in Britain say their list has doubled in roughly the same time.
Most of the stocks being promoted by the rings are listed on the Nasdaq Over the Counter Bulletin Board, an electronic exchange for companies whose assets or share prices are too low to qualify for listing on more prestigious exchanges.
Warning lists compiled by foreign regulators contain the names of nearly 400 unlicensed firms selling investments worldwide. More than 50 of the boiler rooms have claimed headquarters or branch offices in the United States.
Because the SEC has its hands full with bigger fraud cases on U.S. soil, the sale of dubious stock abroad is well down its list of concerns, said Mark Maddox, former Indiana securities commissioner and one-time head of the North American Securities Administrators Association's international enforcement committee.
''At the end of the day, the SEC's going to prioritize what people are screaming the most about here at home,'' Maddox said.
William K. Black, a lawyer and professor at the University of Texas at Austin, who specializes in corporate fraud, said, ''The SEC is clearly a farce in the modern era.''
The agency's investigative and enforcement arms have been weakened by high turnover, low morale, inadequate budgets and impossible workloads, said Black, who was litigation director for the Federal Home Loan Bank Board during the 1980s savings and loan scandals.
Foreign securities regulators also have been powerless to stop the boiler rooms.
The rings are careful to operate across international borders, selling shares issued in the United States to investors in a second country, through an office in a third. So, they neatly evade any single government's jurisdiction.
''The boiler room operators are fully aware of the difficulties of cross-border law enforcement, and they exploit them quite expertly,'' said Kell, now chief executive with the Australian Consumers Association.
The tactics that offshore boiler rooms employ come straight from the manuals of notorious American brokerages, such as First Jersey Securities Inc. and Stratton Oakmont Inc., the models for the movie Boiler Room, which came out in 2000 and starred Vin Diesel, Ben Affleck and Giovanni Ribisi.
Their use of the Internet exploits the growing acceptance of online investing, the global reach of the medium and the comparatively low startup and operating costs.
The best of the boiler room Web sites are visually impressive and emotionally persuasive. They include earnest letters to potential clients, high-minded mission statements and primers on the profits that can be realized by investing in small, promising companies before they are discovered by the masses.
Some have links to market news, stock quotes — even regulatory agencies, such as the SEC.
However, in many cases, the boiler rooms have lifted their text almost verbatim from the Internet sites of legitimate brokerages, such as A.G. Edwards & Sons Inc. of St. Louis.
Many of the addresses on their letterheads and Internet sites actually correspond to business centers operated by third parties, which provide answering services and other ''virtual office'' functions for a monthly fee.
Distinguishing charlatans from legitimate brokers can be difficult, even for experienced investors.
The slick Web sites, glossy brochures and impressive addresses in world financial capitals are so convincing that even people who work for banks, accounting firms and stock exchanges were fooled into investing.
''I feel like such an idiot,'' said Jane Williams, a British business owner, who invested $8,000 last fall through a European boiler room. ''They lied through their teeth from the word go. They said they advised world banks. So what were they doing talking to me?''
Cold-calling remains a standard practice in the brokerage industry, a rite of passage for new brokers without an established client list. So, many of the people targeted by the boiler rooms, especially business owners, managers and professionals, are accustomed to getting unsolicited pitches for stocks and other investments.
And the techniques boiler rooms use to gain investors' confidence are more subtle and convincing than most people might imagine, said Kell.
''It's one thing to be sent one of those classic Nigerian e-mails,'' he said. ''It's quite another to get a very well-constructed pitch from a very persuasive operator, who's trying to sell you a stock that actually exists.'' |
