Crooked brokers on Bulletin Board should be shunned by investors

THE BALTIMORE SUN

The National Association of Securities Dealers Inc. says it must act to rid the securities industry of crooked brokers who specialize in selling stocks of small, thinly traded companies on the over-the-counter Bulletin Board stock market.

These stocks are susceptible to price manipulation because they are subject to few regulations.

Is it time to overhaul the Bulletin Board market, and crack down on bad brokers? How risky are these stocks?

Andrew Kandel

Chief, investor protection and securities bureau, New York attorney general's office.

The amount of fraud on the Bulletin Board has probably outpaced the legitimate environment.

We just had three days of public hearings and they only confirmed our belief that there is widespread fraud in this area. We heard from three, hooded brokers who testified and pointed out that the percentage of people who made money by their transactions -- it was so minimal. We estimate that there are anywhere between 50 and 80 firms that have many of the problems that are complained about: unauthorized trades, failure to sell a stock when ordered to do so, excessive trading and manipulation. Risks are never discussed with these types of securities.

While small-cap and OTC stocks may be good investments, people need to be aware of the risks. Risks are never discussed with this type of security.

The brokers are only concerned with making this immediate transaction whereas the larger, more reputable firms seem to be more interested in cultivating a broker-client relationship. That is not to say there aren't problems with the larger firms.

Mark Griffin

President, North American Securities Administrators Association, Washington, D.C.

We share the NASD's concern. Sales practices in this area by a handful of unscrupulous firms are giving the industry a black eye.

It is not so much the companies, it is the way their stocks are sold. The companies might not be aware that the stocks are manipulated.

Frequently, older Americans are intimidated by high-pressured tactics. To prop up the price of the stock, they, the brokers, refuse to place sell orders. That is a way of levitating the price of the stock.

There are a host of pernicious practices. We actually have some tape recordings of these sale pitches of these particular firms. I felt like taking a shower after hearing them. They show a repeated interest in getting the money, but not a keen interest at all in disclosing anything about the company. They outright lie to you.

We tell people to deal with reputable firms, firms that have a track record.

Investing in micro-cap companies is not for the faint-hearted.

John R. Boo

Senior vice president, Nasdaq trading, Ferris, Baker Watts Inc., Baltimore.

We make a market in a lot of Bulletin Board issues; almost all of them are bank stocks.

It is easy to see how you could have fraud. The companies themselves have no relationship with Nasdaq. It is a process that doesn't really lend itself to any regulatory oversight.

The way it is structured, Nasdaq has no responsibility to pick up the phone and get them to update their records. The burden is placed on the dealers.

You've got a company that really doesn't care whether the stock is trading with a proper name because it trades once a year. So, we try to get some definitive statement from the company and the regulators want the information from us because they don't have the right or authority to call the company.

I'd love to see it totally revamped so investors are better served. But people are certainly better off having stock on the Bulletin Board than trading on the pink sheets.

Kenneth Pasternak

President, chief executive, Knight Securities, Jersey City, N.J.

It is hard to say what is fraudulent and what is not fraudulent. I do see stocks that have relatively small asset bases with a lot of volume and very high market values on the Bulletin Board.

To balance it out, I do see that the regulators are cognizant of it and they are trying to understand it better. They are playing a little catch-up.

There is information empowerment going on that even bad people can take advantage of. It is much easier to use Internet hype to disseminate information. Those factors create a challenge for regulators.

I think micro-cap stocks are a very speculative way to invest. You have to understand not just the company, but understand market values and fundamental analysis.

If you like a company like IBM, you know it is a multibillion-dollar company. If you hear about a company that is the next Microsoft, you have to understand that no matter how sexy it may be, there has to be an operating company to execute the plan.

Pub Date: 8/17/97

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