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Monday, May 15, 2000

Stock scams hit home right through your phone

By Jack Sirard
Scripps Howard News Service
Working his way down a list of hot prospects, Seth Davis hooks a big one when he reaches Harry at his workplace.
   Davis, working out of J.T. Marlin, a New York brokerage house off Exit 53 on Long Island, slowly but surely reels Harry in so smoothly that it would make the best fly-fisherman proud.
   An unbeatable deal is the bait: a sizzling new med-tech stock that sells for just $8 a share. And while Harry is allowed initially to buy only 100 shares, it whets his appetite enough for him to plunk down his $50,000 in life savings a few days later.
   That ill-timed move cost Harry not only his savings but his family as well.
   Fortunately in this case, the scam was a Hollywood creation in the recently released movie "Boiler Room." A boiler room is so named for the high-pressure sales tactics fraudulent businesses use to wrap investors in highly speculative, and sometimes illegal, investments.
   Here's the message investors should take away from this movie: Boiler rooms simply steal people's money by lying. These aren't investment houses; they're criminal enterprises.
   But as veteran Sacramento securities attorney Scot Bernstein says, "It's an all-too-common occurrence in the real world."
   The movie was all too real to Bernstein, whose clients, most often elderly retirees, have been bilked out of part or all of their life's savings.
   "Every day, I see the financial and emotional devastation resulting from investment fraud," he says.
   Fly-by-night brokerages such as J.T. Marlin prey on unsophisticated investors, offering hot new stocks that sell at "bargain prices." Most of the companies are either financial disasters or don't exist at all.
   The boiler room operators, who charge huge and illegal commissions, manipulate and bully their prey. "If you don't want a piece of this action, you're not alive," is an all-too-familiar line from an aggressive boiler room broker.
   As is typical in so-called microcap stock fraud, once the price of the "house stock" is driven high enough, insiders sell, making big profits for themselves, often wiping out the savings of investors, says Bernstein, a 20-year securities attorney.
   "If these scamsters are extra evil, they will take their profits at the top and short the stock all the way down," he adds.
   "Boiler Room" has been praised by the North American Securities Administrators Association for shining the spotlight on a criminal subculture on Wall Street that has stolen hundreds of millions of dollars from investors.
   NASAA President Bradley Skolnik praised writer-director Ben Younger for his insider's view of crime at a bucket shop brokerage firm. He noted that a movie that plays nationwide reaches a far wider audience than securities regulators could ever hope to.
   In recent years, regulators have cracked down on notorious microcap stock brokerages, but while many of the big microcap boiler room operations have been shut, the problem remains serious.
   Some boiler room crooks simply moved across the street and set up smaller operations using a different name.
   New York and south Florida are havens for boiler rooms pushing stocks, while boiler rooms in California and Canada push other scams.
   To protect themselves, Bernstein says, investors should hang up on aggressive cold callers. Baby boomers with elderly parents, a frequent target of boiler room crooks, should buy them answering machines and urge them to screen their calls, he adds.
   Bernstein also warns sophisticated investors "that no matter how smart you think you are, everyone has a button to push and these scam artists are experts at finding them.
   "Their saying is to stay on the phone with a customer until he buys or dies - and they believe it."

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