WELL, NO, LET’S NOT. THE PUPPET READING THAT telephone script didn’t call you last year, never had BioBoom at $2, couldn’t promise a next-day price on an honest stock and can’t be trusted to lick a stamp.
You’ve got a ““cold caller’’–boiler-room scum–who can dial as many as 400 targets a day. Back in the ’80s, fraudsters peddled worthless, low-priced ““penny’’ stocks. The regulators damped that game by writing special disclosure rules for stocks selling at $5 or less. So the slimeballs bounced back with ““microcaps’’–conveniently priced just over $5 or selling on Nasdaq’s SmallCap market, which doesn’t come under penny-stock rules. (You’ll also find microcap mutual funds, but they own larger stocks and aren’t flogged out of boiler rooms.)
Gone fishing: To steal your money in microcaps, stock promoters dig up little companies that are going nowhere. They buy tens of thousands of their shares for a penny or less apiece. Then they dress up the firms–with fake loans, fraudulent newsletter articles, commissioned ““research reports’’–and start trolling for fish (that’s you, in case you didn’t know).
At first the price of your stock might rise, prompting you to ““reload’’–that is, buy more. But your gain is as phony as the sales pitch that reeled you in. In a typical ““pump and dump’’ operation the promoters gradually mark up the stock, sell out to the suckers, then let the price fall to its natural level–just pennies a share. There’s no hope of getting out in time. Your broker won’t sell your position except to roll you into the next pump-and-dump.
New York is currently one of the centers of cold-calling fraud. For one thing, the fish seem to rise to a classy address. (““Hi, madame, I’m calling from Concorde Capital in Manhattan’s Hanover Square.’’) For another, New York has some flaccid laws. For example, fraud fighters can’t make surprise inspections of suspicious firms, so boiler rooms can operate longer there than in many other states. (Attorney General Dennis Vacco will be asking the legislature to take the handcuffs off.)
The defunct Concorde Capital was a small apartment full of phones, says Andrew Kandel, chief of the state’s Investor Protection and Securities Bureau. His report alleges that Concorde’s crew weren’t licensed to sell stocks, mailed clients fake statements of account and illegally pocketed $500,000 of their money. Concorde president Robert Laws and four others were arrested this summer. Laws pleaded not guilty, his attorney, Ronald Kliegerman, says.
You say you’re too smart to fall for a boiler-room pitch? How about A.R. Baron–a brokerage firm, also defunct, that built up an affluent clientele? According to the Securities and Exchange Commission, the firm used customers’ money to manipulate stocks, traded without their permission and often refused to return their funds. Baron’s president, Andrew Bressman, was arrested in May, along with 12 other employees. Bressman’s attorney didn’t return calls. Duped clients filed some $29 million in claims.
The big question for regulators is how to impede the crooks without imposing burdens on legitimate firms, an SEC official says. But legitimate firms can be part of the problem, too, if the way they do business helps crime thrive. Two examples:
The clearinghouses. A brokerage firm can start with as little as $5,000 in capital. To send out its statements and clear its trades, it will hire a major clearinghouse–say, Pershing or Bear, Stearns. Those reputable Wall Street names lend an aura of honesty to a crooked firm. The clearinghouses profit from the dirty trades without being legally responsible for them.
What to do: At minimum, the clearinghouses should tell the regulators when investors complain. They should also report all suspicious activity in low-priced stocks. And is it really too much to ask that they decline the business of known pump-and-dumps?
Nasdaq’s electronic Bulletin Board. Investors think that Nasdaq always looks out for their interests because it sets standards for stocks that list on its National and SmallCap markets. But its Bulletin Board is a free-fire zone. There are no rules. Any dog can trade. The idea was to grant open access to legitimate firms, says Barry Goldsmith, executive vice president for enforcement of the National Association of Securities Dealers Regulation (the NASD parents Nasdaq). But now he thinks that dropping firms that disclose little public information ““might be a good thing.''
What to do: As long as Nasdaq imposes no standards, don’t buy its Bulletin Board stocks. They’re a crap shoot, anyway. Harry Eisenberg of Walker’s Manual in Lafayette, Calif., calls 90 percent of them ““worthless shells.’’ Confirmation of sorts comes from Philip Rutledge, deputy chief counsel for Pennsylvania’s Securities Commission. Rutledge studied the microcaps that sought to sell shares in Pennsylvania during the 12 months ending in June 1996. Among his findings: 75 percent of the companies were losing money; the auditors for nearly half doubted that their firms would last; of the brokerage firms behind the stocks, nearly half had been formally disciplined several times.
Eisenberg says there are gems on Nasdaq’s Bulletin Board, like Rand McNally, Benjamin Moore and some 800 community banks. But those aren’t the stocks you’re going to get cold-called about.
Cold callers should have to pass competency tests if they’re going to sell stocks. But maybe there should be a test for buyers, too. If you don’t score above ““innocent’’ on the verbal and math, an investor-protection angel would tell you to hang up the phone.
