Cockroaches of the Investment Business
Cracking Down
“The little guy, who starts out as a smurf in a boiler-room operation, progresses to own his own family. It's like the mafia,” says Joe Borg, who used to head up the enforcement department at NASAA, of the phenomenon. “They're the ones that didn't quite get caught up in the net.” Part of the problem — part of the reason why these guys never quit — is that most states securities regulators don't have criminal enforcement authority, and so the kinds of penalties they can apply to cases are relatively small fines, cease-and-desist orders — which require the targeted firm or individual to discontinue a specific fraudulent activity — and for the worst cases, a ban from the industry — not huge deterrents when you're talking about hitting it rich. Many firms and individuals consider disciplinary actions and fines to be just a cost of doing business, says Borg.
John Morgan, the director of the enforcement division for the state securities regulator in Texas, says he's working on a case now in which the scamster has gotten 10 cease-and-desist orders. In another case, the guy just changed the name of his company every time he got an enforcement order — at least five times. Often, the principals of a boiler room will also conceal their role, putting up straw men to take the blame when regulators step in, while they disappear to start all over again. Regulators are usually tipped off by customer complaints, but by then most of the money has already been swindled and spent, says Don Saxon, the head of Florida's state securities regulator.
“There is so much recidivism in this business, because the likelihood of detection is fairly low. Also, they're able to cloak themselves in legality,” says Peter Henning, a professor at Wayne State University Law School and a former attorney in the Division of Enforcement at the SEC, where he worked on cases involving penny-stock fraud. “They hire lawyers to draft the documents for them. They can make it look pretty good. Sometimes the companies have a measure of legitimacy, unlike the person who goes in to rob a 7-11.”
Another problem is that securities fraud cases are complex and expensive to sort out, and criminal enforcement authorities have millions of other criminal cases to handle; too often securities fraud cases that are referred away for criminal enforcement get lost in the shuffle. Strapped state budgets don't help. Only the most serious offenders get rapped. The little guys — the future serious offenders — slip away. Last year, the SEC referred 30 cases to the U.S. Department of Justice, 19 of which were closed.
Lately, states have been coordinating their investigations and pooling resources, says Borg. That helps. But ultimately, even for those who do go to jail, the sentences are not terribly onerous. “Often sentencing is reduced from 20 years to two years. Or there are suspended sentences because the jails are full and judges don't see the same threat to society as from violent crimes,” says Wayne Klein, the director of the Utah Securities Division. “Half of the enforcement cases we [bring] are against someone who has a prior disciplinary history — either a prior criminal conviction or a regulatory order to cease selling. It appears that sending people to jail is no longer serving as a deterrent,” he says.
Saxon says that a lot of the guys he's caught are actually intelligent enough to have been successful in legitimate businesses. “I've asked them why they didn't go that route,” he says, “And the answer has been, ‘There's no adrenaline in that.’ For these guys, there's a high in the scheme.”
The victims also do their part. “There is a factor of greed. People who try to make the big score, think well, it didn't happen this time, maybe next time. It's amazing the people who fall for it — doctors and lawyers, they see dollar signs. And once they report it to the SEC, the money is long gone,” says Henning. In fact, a recent study by the NASD Investor Education Foundation found that the victims of securities fraud are actually more financially literate than non-victims.
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