Cockroaches of the Investment Business
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YOU CAN SPOT THEM A MILE AWAY — the boiler-room operators who continue to plague the retail investment industry. They often set up shop in a tony zip code, adopt a fancy name that suggests old money and country clubs — remember Stratton Oakmont? — and get to work fleecing retirees, widows and other gullible investors with promises of quick, outsized returns. They grow quickly, adding more brokers and maybe even branches, and then, suddenly, they're gone: Regulators and law-enforcement officials swoop down, seize the files, padlock the office and, perhaps, make a show of perp-walking the principals past the media.
But the schemes go on. Within weeks, the many of the same rotten brokers are dialing for dollars at another boiler room — using high-pressure patter to put old ladies into fraudulent or unregistered securities or penny stocks that the firm is pumping and preparing to dump. And, they usually resume their smarmy work in the very same hotbeds: Boca Raton, Long Island, Orange County — places with lots of money and lots of old people.
These are the cockroaches of the investment business. You turn on the lights and they scatter, but they always come back. And, to an alarming degree, they continue to succeed. Despite a massive sweep of boiler rooms in 1996 and 1997, and again in 1999 and 2000 — when almost 100 firms were shut down, including the infamous Stratton Oakmont — new firms keep popping up. Regulators have gotten smarter about ferreting them out and coordinating with other enforcement authorities to shut them down. But the securities fraudsters have gotten smarter, too, and are working in smaller operations — sometimes through front men — that make them harder to detect.
But it's not just a matter of size. Boiler rooms continue to succeed because investor education has not. They're very good at covering their tracks, and the penalties — civil lawsuits, revocations of licenses, (relatively) small fines — are not a big deterrent when you're talking about making a quick million bucks. And even if the firms are found out, enforcement authorities' limited resources are spent trying to nail the principals while the small fry move across town to another boiler-room shop.
“We've seen, in Melville, Long Island, people running out the back door and taking records with them,” says Frank Widman, director of the New Jersey Bureau of Securities. Often, they're taking victim, or sucker, lists. “You close that firm, but unless you tag the reps with disciplinary action, they move on to another firm,” he says. And that is the point. The “reps” often don't get tagged.
Actually, most scamsters aren't even real reps. Securities regulators say that 60 percent to 70 percent of the complaints they receive concerning fraud are committed by unregistered individuals, while 97 percent to 98 percent of registered reps have virtually spotless records. But a few crooks can do a lot of damage to the industry's reputation, says Widman. The message for good reps, he adds, is that they should do everything they can to help regulators crackdown on bad brokers and firms. “Investor confidence is very important. And it needs to be real,” he says.
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