Aug 14 – The extended bull market and the record trading volume in U.S. stocks has fattened the bottom line for the nation’s securities firms. Before taxes, they earned more than $12 billion last year – a record. But that money has a downside, too. It’s a temptation for an unscrupulous few.
ONE CALIFORNIA regulator says Los Angeles’ San Fernando Valley is the new ground zero for telemarketing fraud. “Boiler rooms” – places where high-pressure salespeople peddle speculative or possibly fraudulent stocks, by phone, to potential investors – are a major concern. Thirty-five out of 100 suspected boiler rooms that opened in California in the past year came from this region, according to regulators.
CNBC visited Venture Tech 2000 in Encino, Calif. last month. By that time, authorities had already raided the premises. They served the company with a search warrant and confiscated computers. Still, there was sales literature on a table and it was clear the company was still in business.
State investigators say they believe Venture Tech, using a sales force from another company that was already shut down, lied to investors and sold unregistered securities in a year-long telemarketing scam.
A Venture Tech executive vice president said the investigators overreacted and that the company is legitimate. However, he wouldn’t answer any other questions.
CAVEAT INVESTOR
But there are steps investors can take to protect themselves. They must remember that stockbrokers are first and foremost sales people. Customers must think about a broker’s motivation for a trade. Investors need to ask, “What’s your compensation on this trade?” Rather than, “What’s your commission?” In some cases, brokers enjoy tremendous mark-ups on the “house” stocks they push. (A brokerage firm may make a market in these stocks or simply have excess inventory.)
“The simple rule of thumb I have is never, ever buy a security or never buy a stock from someone on the phone that you have never met,” said Richard Walker, director, division of enforcement, Securities and Exchange Commission.
Select a broker after a face-to-face interview rather than over the phone. Talk to several brokers, preferably at their office. Ask about the broker’s professional training and background. Request a copy of a broker’s disciplinary record, known as a C.R.D. Investors should check with authorities in their state too, to be sure the broker is licensed to do business there.
Customers should ask if the broker’s firm is a member of the Securities Investor Protection Corp. The organization doesn’t insure against wrongdoing to investors, but it can provide partial reimbursement if a brokerage goes out of business.
“One of the traps people get into is they think if they don’t understand an investment, it’s because they’re stupid. Often times, they don’t understand the investment because the investment doesn’t make any sense,” said G.W. McDonald, assistant commissioner for enforcement, the California Department of Corporations.
Individuals who have already invested need to watch their account closely and make sure their statements and confirmations arrive quickly.
“The problem is that unless you read the statements and immediately complain about an unauthorized trade and complain in writing then you will have been deemed to have ratified the trade,” said Philip Aidikoff, a California-based investors’ rights attorney.
PRESSURE TACTICS
Even a seemingly routine relationship with a broker can turn sour. CNBC obtained the audio recordings of an investigation spearheaded by the New York Attorney General’s office. An undercover investigator posed as an interested customer, a “Dr. Andrews.” The “doctor” called a licensed broker at a suspect firm and cancelled a $4,300 stock order he placed the night before.
“I had a long conversation with my lawyer and my insurance payment is tied up. I can’t move forward at this stage. I won’t be liquid in the next two weeks like I thought,” said the customer.
“Come on. It’s a pisshole in the snow. You probably spend more than that on a cheap date,” said the broker.
“I have to cancel the trade. I’ll make it as soon as I’m liquid again,” said the customer.
Over the next six minutes the client asked the broker some 27 times to cancel the order. Finally, the broker alluded to a relative whom he said was a member of a violent New York gang.
The gang, police say, broke up in the mid-’80s. But the point is clear. Some brokers will stop at nothing to intimidate to intimidate their clients.