Beware of crooks calling with stocks

Staying Ahead

November 17, 1997|By Jane Bryant Quinn | Jane Bryant Quinn,Washington Post Writers Group

IT'S dinner time, the telephone rings, and "Hi," says the salesperson on the line. "Remember that $5 stock I told you about last year? Well, it went to $44. Today, we have a situation we like even more! Trust me, it's a guaranteed winner. Let's lick your doubts and open this account right now."

Let's not. The puppet reading that telephone script didn't call you last year with a stock at $5, can't guarantee profits and couldn't be trusted to lick a stamp.

You've got a boiler-room crook on the phone. Don't confuse them with regular stockbrokers, who also make dinner time calls and politely take no for an answer. Boiler-room scum high-pressure you with offers that trusting investors find hard to refuse.

They're selling stocks they call "microcaps" -- priced just over $5. That avoids the special disclosure rules for stocks selling at $5 and less.

Typically, these microcaps are traded on Nasdaq's Bulletin Board. That's an electronic stock exchange where anyone can list any stock. No one checks if the company is real or not.

If the stock sells for less than $5, it's probably listed on Nasdaq's SmallCap Market, where the special small-stock disclosure rules don't apply.

(There are also microcap mutual funds, but they own larger stocks and aren't flogged out of boiler rooms.)

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 companies -- with fake bank accounts, fraudulent newsletter articles, phony "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 artificially mark up the price of the stock, sell you the stock they bought for pennies, then let the price fall to the penny level.

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 City is one of the centers of cold-calling fraud, for a couple of reasons. First, 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.

The firm called Concorde Capital, now defunct, was a small apartment full of phones, says Andrew Kandel, chief of the state's Investor Protection and Securities Bureau.

Kandel's report alleges that Concorde Capital's crew weren't XTC licensed to sell stocks, mailed clients fake account statements and illegally pocketed $500,000 of their money.

Concorde President Robert Laws and four others were arrested last summer on charges including deception and fraud. Laws pleaded innocent, his attorney, Ronald Kliegerman, says.

Boiler rooms aren't always apparent. Take A. R. Baron -- a genuine brokerage firm, also defunct, that built up an affluent clientele through aggressive cold calls.

According to the Securities and Exchange Commission (SEC), A. R. Baron used customers' money to manipulate stock prices, traded their accounts without their permission and often refused to return their funds.

Baron's president, Andrew Bressman, was arrested in May, along with 12 other employees. Charges include grand larceny and fraud. Bressman's attorney didn't return several 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.

For example, take the major Wall Street firms that act as back offices for small brokerage houses. They're hired by crooked firms to send out statements and handle trades.

The crooks gain credibility by using the big firm's name. The big firm makes money, while taking no responsibility for what's going on.

And consider Nasdaq, which runs reputable exchanges for the better small-company stocks. Few investors realize that its Bulletin Board is a free-fire zone, where some 90 percent of the stocks are "worthless shells," says Harry Eisenberg of Walker's Manual in Lafayette, Calif.

What to do:

1. As long as Nasdaq imposes no standards, don't buy its Bulletin Board stocks.

2. Don't buy from anyone, ever, who cold-calls with a fantastic deal. You're about to lose your shirt.

Pub Date: 11/17/97

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