Think you’d never fall for such a birdbrained pitch? More than 700 investors did, says the Securities and Exchange Commission. Between 1992 and 1995 they shipped $6.5 million to International Breeders, Inc., a Dallas, Texas, company, and its affiliates, according to a complaint filed by the SEC. Very few saw any return. The company’s 31-year-old chief executive officer may be living in Brazil. And some of the loot is in offshore accounts.
The most interesting thing about this head-in-the-sand story isn’t how dumb people can be. It’s how a bull market can make even smart people act dumb. Two things happen when stocks dazzle year after year. First, everybody wants to be a player. If you’re not getting the 25 percent, 35 percent and 45 percent that ““everybody’’ else is, you feel like a rotary-phone owner in the e-mail age. When a friendly broker calls offering a 50 percent or 60 percent return, ““it doesn’t seem that unrealistic compared to the market,’’ says Thomas Geyer, commissioner of securities in Ohio. The second consequence of a megamarket: investment schemes become the vehicle of choice for hustlers. ““In a market like this, parasites crowd in to feast on the bull’s success,’’ summarized Arthur Leavitt, chairman of the SEC, speaking to a Senate subcommittee last week.
One way to avoid the sleaze factor is to steer clear of easily manipulated penny and microcap stocks. But you don’t have to deprive your portfolio of small company stocks if you learn to recognize a crook’s come-on. That’s harder than it used to be because today’s swindlers are using new techniques and tools. ““Even very smart, sophisticated, well-educated people are getting taken,’’ says Nancy Smith at the SEC. Here’s a tour of two key street corners where bull-market hoodlums gather–and advice on avoiding them.
Cold-Call Ripoffs: Investors usually don’t gripe much during a bull market. Complaints registered with the SEC last year fell almost across the board. But beefs about solicitation, especially cold calls, are soaring. Telephoning complete strangers to persuade them to invest is how rookie brokers often get clients, but it’s also a time-honored way to steal money. There were plenty of clues that brokers with Sterling Foster, a Melville, N.Y., broker-dealer that the SEC says stole $75 million, weren’t to be trusted. They allegedly told investors that Sterling Foster had inside information about certain stocks, could predict the stocks’ prices and that no prospectuses were available. But the clincher was that the stocks were real. Sterling Foster ripped off customers, according to the complaint, by overcharging. A veneer of authenticity helped The Geneva Group, an Orange County, Calif., company, gull investors, too, according to the SEC. After buying and reselling stock in Force Technologies, a legitimate Canadian company, Geneva acquired a shell company whose stock traded in the United States, say regulators. Geneva then allegedly changed the shell’s name to ForceTek Holding and its stock symbol to FRCE, identical to the Canadian company’s symbol, and began selling the worthless stock to investors. Good credentials are the ticket for other scamsters. Bruce Schuerger, a Fairfield, Ohio, broker working for Lincoln National Equity Sales, induced a couple to spend more than $83,000 to buy stock in a company he owned by misrepresenting the risks, the return and how the money would be used, according to Ohio’s Division of Securities.
High-pressure tactics of ““boiler room’’ operations, so called because a swindler’s salesmen are often squeezed into basements and other out-of-sight spots, are easy to spot. Tip-offs: an aggressive manner, a retort for every objection, claims that you’re getting inside or confidential information, guaranteed returns and pressure to buy quickly. More subtle ripoff artists take the opposite tack. They first call not to sell but to introduce themselves courteously and ask permission to call again. The second call alerts a victim that a special opportunity may be available. The third call is bingo–a chance to buy if the investor acts fast.
Nail these guys by taking notes when you get a call. You can get rid of the obvious stock-hypesters by asking them to put you on the firm’s ““do not call’’ list. But if they continue to harass you, complain to your state’s securities regulator or the SEC (202-942-7040). If the caller sounds legit, start digging. Ask for the latest reports filed by the company whose stock or debt you’re being offered. Compare the price of buying the shares to the price at which you could sell the investment back to the firm if you had to sell right away. A big difference will tell you that the stock is thinly traded or dramatically marked up–or both. Ask about the costs associated with buying, owning and selling the security. Meet the broker at his or her office. Check out both the investment and the broker with regulators (box).
Internet Swindles: You couldn’t invent a better medium for financial crooks if you tried. Like the phone, the Web lets bad guys lie without having to do it face to face. But it takes much less effort, because victims come willingly. They’re presold on a scam because of what they’ve read elsewhere on other apparently independent sites–conveniently linked, of course, to an investment-scheme site. The simplest foolish investment you can make is in a pyramid scheme. One step away from a chain letter, pyramids ask you to send money to several people to buy a ““product,’’ such as a series of reports on how to make money from multilevel marketing. After receiving the electronic reports, you put your name at the top of the list of report suppliers. Then you advertise and resell the product on the Web. ““Do you have any idea what 11,700 five-dollar bills looks like piled up on the kitchen table? . . . IT’S AWESOME!’’ exults one testimonial.
Fancier deceptions are in full force, too. Infinity Group, an operation that has collected between $5 million and $10 million from more than 4,000 investors, according to Ohio regulators, plied its investments on at least six Web sites. One hook: huge returns of 138 percent to 181 percent from capital units in the Infinity Group Trust. Another tangled Web seductive plot involved Systems of Excellence, a Coral Gables, Fla., seller of videoconferencing technology whose stock symbol was SEXI. The company and the technology existed, but its prospects were pumped up to blimp-size proportion. Theodore Melcher touted the company in SGA Goldstar Whisper Stocks, his electronic newsletter, without disclosing that he had been given SEXI shares by the company. The hyping fooled investors, and the shares zoomed. ““I didn’t lose my life savings, but a lot of people did,’’ says a consultant who received restricted stock in return for a project.
Don’t accept technological savvy as a sign of credibility. It’s a snap for a scamster to set up a few Web pages, rent a post-office box and watch investors’ money roll in. Be wary of online enthusiasts who hide their identity, can’t verify their affiliations or research, or pose as corporate insiders. Don’t ever post your name, address or phone number online and don’t assume that anyone is policing the Web or investment bulletin boards for miscreants. Thoroughly check out an investment offering’s risks and pedigree. You should also review the National Fraud Information Center (www .fraud.org), a database of suspect sites maintained by the nonprofit National Consumers League. You can also submit reports on the site. That’s one of the ways to ensure you’ll hear less about ostrich farms and cow embryos–and more about genuine and sensible ways to make money.
IS THAT DEAL FOR REAL?
Weighing an investment’s risk against potential rewards is a big job. But finding out if a hot deal is legitimate isn’t. Here’s how:
Inspect the Investment: Is the investment registered to be sold in your state? Have there been complaints about the security or the company? Ask your state’s securities regulator, listed in the blue pages, or get in touch with the North American Securitites Administrators Association (ww.nasaa.orgor 888-845-2722).
Check out the broker: Call a state securities regulator. Some history is also available at the National Association of Securities Dealers (www.nasdr.com or 800-289-9999) and the Securities and Exchange Commission (800-732-0330).
