************BAD BOY BROKER NEWS*******
Copyright 1998
New Jersey Online ©
Some other investors weren't as fortunate
12/27/98
By Ted Sherman and Bill Gannon
STAFF WRITER
Investors Associates specialized in taking other people's money.
The New Jersey-based brokerage firm, with offices around the country, was well-known to regulators as a bucket shop -- a place where stocks of dubious value were aggressively pitched through high-pressure, scripted sales calls out of telephone boiler rooms.
''They became a poster boy for sleazy microcap firms," remarked Indiana Securities Commissioner Bradley W. Skolnik, who was among the first to crack down on the company. "They were one of the worst we ever encountered."
Most clients of Investors Associates lost their shirts.
The now-defunct firm was started out of a Saddle Brook storefront in 1969 by Herman Epstein, a former social worker who had dropped out of medical school at the University of Bologna in Italy to sell securities. He was joined in 1971 by Lawrence Penna, who became the firm's president.
''We grew and we had some setbacks in the market and we had a terrible period of time from 1986 through 1989," Epstein recalled in a sworn deposition to New Hampshire regulators.
What they did, Epstein said, was get bigger.
''We looked at ourselves and said do we either go out of business or take a totally contrarian approach and go ahead and borrow some money because we were broke and try to build our firm, because we believed the markets would come back; that the securities industry wasn't dead," he stated.
Investors Associates opened 18 branch offices nationwide, with more than 400 brokers in branches that included Atlanta, Boca Raton, Fla., Buffalo, N.Y., Chicago, Clearwater, Fla., Fort Lauderdale, Fla, Las Vegas, Melville, N.Y., Naples, Fla., New York City, Valley Stream, N.Y., and West Palm Beach, Fla.
Headquartered out of a nondescript office building at 411 Hackensack Ave. in Hackensack, the company became a self-described market maker, specializing in various small capital market and other high-risk equity securities, reporting gross trading profits of $48 million in 1996.
But in that time period, records show, the firm started generating dozens of complaints with securities regulators.
Among the states filing complaints were Alabama, New Hampshire, New Jersey, New York, Massachusetts and Florida.
The company was accused of deceptive sales practices, misrepresenting the risks and prospects of stock through scripted sales pitches, making unauthorized stock trades on customer accounts and using unregistered agents to make cold calls to investors.
According to the Massachusetts Securities Division, the company had an unusually high number of agents with serious disciplinary incidents lodged against them. Some of its brokers even had criminal backgrounds, New Hampshire securities regulators reported.
Its license was pulled in Florida on charges it overhyped thinly traded stocks. And the New Jersey Bureau of Securities signed a cease-and-desist order last year, after the firm was charged with the trading of securities to defraud investors, selling unregistered securities and employing high- pressure, aggressive sales practices.
According to depositions filed in court, New Jersey authorities swooped down on one of its boiler- rooms on Feb. 27, 1997, armed with a subpoena. The office manager took the subpoena and crumpled it up, according to one investigator, who said state agents were kept waiting while the office was cleaned and brokers instructed to get rid of all sales scripts.
According to other depositions, the scripts gave price predictions and were being read by unregistered salesmen acting as cold callers to likely investors, asking prospects their net worth and where they had accounts. The state charged that the firm also sold securities it held in inventory.
Its sale force was persuasive. They called people like Carole Sterling, 62, who was persuaded to invest $49,954 in Compare Generiks, the same stock that netted Sen. Robert Torricelli (D-N.J.) a large profit.
Sterling lost her money. She also put money in a number of other stocks touted by Investors Associates.
''They made promises," she said. "I bought this, bought that. It didn't pan out at all."
She lost just about all of it and said she was forced to sell her Mountainside home for a cheaper place to live.
''This was supposed to be my nest egg and it's no fun losing it," she said.
Another victim was Robert Rack of Madison, who lost $5,392 on Compare Generiks.
''Yeah, I got nailed a little bit," he said. "They called me up and somehow I got involved with them. The first thing I did I made money with but that was something relatively safe. Then I got into Compare Generiks."
Rack said brokers would push him into stocks and then could tell him two days beforehand that it would go up in price.
''It would go up and then down. Bang it up and then do it all over again," he said. "But my money was being held hostage and I couldn't get out of the damn account. If I wanted to buy something, I could always reach my broker, but when you wanted to sell, he was nowhere to be found."
Even when he lost money, Rack said, there was always a story.
''They would give you a big song and dance about 'Hey, you're going to make this money back.' It sounds stupid in retrospect, but these guys could put used car salesmen to shame."
Joseph P. Borg, representing the North American Securities Administrators Association, testified before the Permanent Subcommittee on Investigations of the U.S. Senate last year and said Investors Associates specialized in manipulating the price of stocks by volume and an artificially created demand.
''Once enough shares are sold and the price is driven high enough, insiders sell the stock, creating an unstoppable price slide, making fortunes for themselves and wiping out the savings of innocent investors," he said. "In the vernacular of the industry, this procedure is known as 'pump and dump.' Although the unknown companies being peddled are all small, it is not their size that is dangerous, but the dishonest way that their stock is being represented and sold."
In September, Investors Associates was fined $20,000 by the National Association of Securities Dealers Inc., the industry's own self-regulatory agency that licenses and disciplines brokers and their firms.
It is unlikely that NASD will collect the money.
Star-Ledger researcher Christine Baird contributed to this report.
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