*AV*--the following is very long but worth reading as a friendly heads up related to scams and fraudulent practices. Fore armed is fore warned.
Also, the following may be of interest to those still trying to decide which discount brokers to investigate.
Online brokers..Discount Brokers Ranked and more....
articles entitled "Discount Brokers Ranked" at
astro.lsa.umich.edu:80/users/philf/www/discount.html
Andrew
By LESLIE EATON
<Picture: N>EW YORK -- The surging stock market has spawned widespread
investment fraud across the country, with New York as the epicenter of the
problem, according to law enforcement officials and securities regulators.
The fraud involves the sale of marginal companies' low-priced stocks to
amateur investors who are besieged by telephone sales calls. While the
victims are usually told that the company in question is the next Microsoft
or McDonald's, the shares they buy often turn out to be worthless.
Americans lost $6 billion through this kind of fraud in 1996, according to
state securities regulators, who report that complaints about stock-market
swindles are up 25 percent through midyear. At the Securities and Exchange
Commission, complaints about unsolicited sales calls from brokers -- known
as cold calls -- increased 37 percent in 1996, while total complaints rose
10 percent.
In New York, which is home to many of the brokerage "boiler rooms" that push
phony stocks, complaints about brokers jumped 40 percent last year, to
3,100, and are running at an even higher rate this year, said Andrew Kandel,
chief of the securities bureau for state Attorney General Dennis Vacco.
Law enforcement officials are becoming concerned that con men, swindlers and
even violent thugs are turning to what they see as easy pickings in the
stock market. Last week, the U.S. attorney in Manhattan indicted 19 people,
including some described as senior members of two of New York's organized
crime families, on charges that they defrauded investors in seven states out
of millions of dollars.
Wall Street has always had a dark side, and stock swindlers still represent
a tiny fraction of the securities industry.
But the size and scope of fraudulent activity appears to be soaring along
with the stock market, which has given investors unprecedented financial
gains in recent years, just as more Americans than ever are investing in the
market. Just this year, the broad stock market has climbed almost 30
percent, despite the recent turmoil in markets around the world;
historically, stocks have risen about 10 percent a year.
The shares of some small, young, sometimes money-losing companies have
soared even higher, particularly new issues for technology companies, where
returns of as much as 350 percent in just a few months are not unheard of.
Publicity about such hot deals has increased Americans' interest in making
such investments -- along with their gullibility.
"There's so much money in the stock market, and so much psychology that
everything will go up, that people are much more predisposed to throw
dollars at get-rich-quick schemes," said William R. McLucas, director of
enforcement for the Securities and Exchange Commission, which has set up a
special task force to consider ways to root out fraud in the small-stock
marketplace.
The commission is not alone. Regulators from states across the country have
banded together to go after New York's stock-pushing telemarketers, who are
also under increasing scrutiny from the National Association of Securities
Dealers.
Both Congress and New York's attorney general have held hearings this year
on stock fraud; this week, Vacco is expected to release a report calling for
changes in state laws and securities-industry regulations to make it easier
to crack down on swindlers, changes that are supported by
securities-industry giants like Merrill Lynch.
Prosecutors have filed an unusual number of criminal cases recently against
people they accuse of organizing small-stock scams. At the U.S. attorney's
office in Manhattan, traditionally the most active in the securities area,
Wall Street-related indictments have almost doubled in the last year, and
many of those relate to boiler rooms, bribery and racketeering in the
small-stock arena.
Historically, penny-stock fraud occurred mostly in the western United
States, where brokers based in Denver and Salt Lake City sold worthless
mining and energy shares to the unwary. In the booming stock market of the
1980s, this kind of scam moved to both coasts, where swindlers set up shop
in places like Boca Raton, Fla., and San Diego.
But in the late 1980s, prosecutors and regulators focused more on the
collapse of the junk bond market and crimes like insider trading. Only
recently have they been forced to turn their attention to the boom in
small-stock fraud, which has been fed not only by the soaring stock market
and Americans' increasing interest in investing but also by the rise of
low-cost telecommunications and technology like the Internet, which make the
business of stock promoting easier and more efficient.
Even people who describe themselves as experienced investors have been taken
by New York con artists. Take, for example, Fred Geiger, a construction
executive in Tampa, Fla.. It was only after he sent the $5,600 check to the
stockbroker in New York that Geiger became suspicious about the brokerage
firm, Paramount Capital Management, that had sent him a glossy brochure.
When he could not find any evidence that the company he thought he was
investing in planned to sell shares to the public -- among other things, it
had not filed the necessary papers with the SEC -- Geiger asked a friend of
his wife to drop by Paramount's offices on Broadway near Wall Street. What
he found was "an office with two desks and two phones, yellow pages and
Fedex envelopes," Geiger told regulators in early November. "I think it
could be a possible scam."
The SEC agreed, and on Nov. 19 got a judge to freeze the bank accounts of
Paramount Capital, which appears to have been set up by a 20-year-old who
had worked briefly at three small brokerage firms in the city.
Complete fictions like Paramount Capital Management are not uncommon. Over
the summer, Vacco's office closed an outfit calling itself Concorde Capital,
which was operating out of a one-bedroom apartment on Hanover Square in
Manhattan. Five people, including two convicted felons, were arrested; one
has pleaded guilty to six felonies.
Another problem is what regulators call a "pump and dump." In these cases,
stock promoters -- often disbarred brokers or lawyers -- gain control of
most of the shares of a marginal or struggling business. Then they hire
people to help drive up the price of the stock. A public relations firm may
receive free shares in exchange for issuing glowing press releases about the
company and its prospects. An "analyst" may recommend the stock in a
newsletter, on the radio or over the Internet, also in return for free
stock, which he would sell when the price started to rise.
Investors buy these phony investments from aggressive salesmen who usually
describe themselves as senior executives of legitimate-sounding firms with
Wall Street addresses. In fact, those addresses turn out to be dingy
offices, one-bedroom apartments or even mail drops.
And the "executives" are young men with high school educations whose only
training is in the hard sell and whose previous jobs may have been at pizza
parlors or tire stores. They receive huge commissions, known in the business
as "grease," which may take the form of stock, cash or even drugs. (Federal
prosecutors in Brooklyn filed a case in November against a convicted drug
dealer who authorities said recruited would-be brokers on the subway and
rewarded them with marijuana.)
But the big profits from this business go not to the brokers but to the
organizers, who sell their shares once the price starts to rise. In the
mob-related case brought recently in Manhattan, promoters made $1.4 million
by selling shares they drove from pennies to $3 a share, the authorities
said.
The biggest problem for regulators, however, may be the large operations
that on the surface appear to be legitimate brokerage firms, which they
sometimes were before the con men took them over. These firms often make
enough money that they consider even multimillion-dollar fines merely a cost
of doing business.
Earlier this year, the FBI raided Sterling Foster & Co., which the National
Association of Securities Dealers says made $53 million in 14 months by
defrauding investors. An executive of the firm recently pleaded guilty in
Manhattan to conspiracy to commit securities fraud and launder money, and
law enforcement officials say the investigation is continuing.
And there is the case of Stratton Oakmont, which was expelled from the
securities industry last year because it posed "an ongoing risk to the
investing public," the securities dealers association said; the firm had
compiled a regulatory rap sheet going back to 1989.
One Florida investor, a semiretired businessman who spoke only on the
condition that his name not be used, said he and his family lost several
million dollars by investing with a stockbroker at a firm that specialized
in initial public offerings of small stocks. At first, his investments
appeared to be making money, the investor said.
But last summer, some of the stocks started to fall -- and his broker talked
him out of selling. "He kept saying, " 'No, that's the biggest mistake you
can make. I know what's going to happen. There will be big announcements,'
"' the investor said. The announcements never materialized. The investor has
since discovered that many of the stocks were said by regulators to have
been manipulated. He believes the broker churned his account to reap big
commissions.
Regulators urge prospective investors to check out people who try to sell
them investments by calling state officials or the regulatory division of
the National Association of Securities Dealers, which keep records of
complaints about brokers and disciplinary histories.
Investor advocates also recommend ignoring brokers' pleas, threats or claims
of once-in-a-lifetime opportunities for those who send money right away.
They also suggest that investors insist on receiving the legal documents --
a prospectus or registration statement -- that describe a company and its
securities.
Investors should also trust their instincts, said Geiger, the investor who
tipped off the SEC. 'Probably somewhere back in my mind, early on, I felt
something was wrong," he said. "I should have gone with my gut."
*****
September 23, 1997
Senate Panel Is Told of Stock Fraud
By ROBERT D. HERSHEY Jr.
<Picture: W>ASHINGTON -- The booming stock market has brought a fresh wave
of securities fraud, much of it concentrated in so-called penny and microcap
issues, which are subject to minimal disclosure and other scrutiny, federal
and state regulators told a Senate panel Monday.
"It is an unfortunate irony of history that the best markets bring out the
worst elements -- the higher the market, the greater the investor optimism,
the more the opportunities for outright and outrageous fraud," said Arthur
Levitt Jr., the chairman of the Securities and Exchange Commission.
Levitt was the lead witness before the Senate Permanent Subcommittee on
Investigations, whose chairwoman is Sen. Susan Collins, R-Maine. The panel
is looking into penny-stock abuses, which are estimated to bilk investors
out of $6 billion a year, triple the peak figure of the 1980s. Legislation
was enacted in 1990 that was intended to alleviate the problem.
Among the other witnesses were two elderly investors and a Federal Express
truck driver with five children who told of being victimized through
high-pressure telephone sales tactics, unauthorized trading in their
accounts or manipulation of stocks.
"The stress of this situation has greatly affected my health, both
physically and emotionally," said Helen Sprecher of Philadelphia, who
described how she and her seriously ill husband, both 85 years old, had
watched their main retirement account dwindle to $2,300 from nearly $76,000
over six years.
Barry Goldsmith, senior regulator for the National Association of Securities
Dealers, told the panel that the stocks with the greatest potential for
fraud were the thinly traded micro-capitalization securities, which are more
numerous than penny stocks.
Micro-cap stocks, which have low market capitalization and include penny
stocks, can be traded in the over-the-counter market for more than $5 a
share -- the limit for penny stocks.
While this is separate from the reputable Nasdaq stock market, a part of the
over-the-counter market known as the OTC Bulletin Board is operated by
Nasdaq. The Bulletin Board, an electronic quotation system for subscribers,
has no standards for inclusion; nor does it have requirements for periodic
corporate reporting. One deception perpetuated by scam artists is to make
investors think they are operating in a highly regulated market, Goldsmith
said. He called for a "zero tolerance" approach to fraud.
In addition to unauthorized trading and "pump and dump" manipulation of
stock prices, Levitt cited such unscrupulous broker practices as bait and
switch tactics, churning to generate commissions, excessive undisclosed
markups and arbitrary quotations.
As for remedies, Levitt disclosed that he met Monday morning with officials
at the New York Stock Exchange, the National Association of Securities
Dealers and the North American Securities Administrators Association and won
a pledge from each to take joint initiatives against microcap market abuses.
He noted that the commission was already considering a measure that would
broaden its definition of penny stocks to include those selling for more
than $5 a share and prohibiting a broker-dealer from recommending any
non-Nasdaq stock without reviewing current company information. |
