THE RECORD RUN on Wall Street has been great for many investors. But con men also have reaped the benefits of the bull market.
Boiler-room operators, high pressure securities salesmen and those who dream up ways to bilk investors are flourishing. Americans are losing about $10 billion a year, or nearly $1 million every hour, to securities fraud, according to the North American Securities Administrators Association Inc., which represents securities regulators across the country. And fraud claims were up 30 percent last year over the prior year among members the group surveyed.
"Boiler-room artists and scam artists are like cockroaches," said Neal Sullivan, executive director of Washington-based NASAA. "You can't kill them with a nuclear bomb."
Securities regulators are worried now more than ever that investors are easy prey. Investors, they say, have been lulled by fat returns, and their expectations for profits are simply too high.
A recent survey by Montgomery Asset Management found that investors expect their portfolios to produce average returns of 34 percent a year during the next 10 years.
Regulators worry that baby boomers facing retirement are growing desperate and chasing investments they hope will pay off big and fast.
And with the surge in investors, the chances of people getting ripped off are greatly increased. Thirty-one percent of U.S. households now invest in the stock market or mutual funds, compared with 17 percent in 1990.
"It is a recipe for abuse," Sullivan said.
The tricks uncovered by the regulators aren't new, just slick and finely tuned pitches refined with practice.
A recent crackdown at a securities firm revealed a half-dozen phones on a long table and a typewritten telephone script for cold calls.
"Perhaps a 100 percent return in 20 minutes sounds a bit unrealistic," the script said. "But I assure you, that's exactly how all of our IPOs [initial public offerings] trade."
Regulators say such claims should be a warning to stay away.
Regulators in Maryland are seeing similar kinds of claims involving "promissory notes."
The fraud works like this: A securities salesman calls an investor and says he is with a start-up company that is raising money. He guarantees a 10 percent return if the investor puts up at least $10,000 for nine to 12 months.
"There is a lot of pressure to make these deals immediately," said Julie Tewey, assistant attorney general at the Maryland Division of Securities.
Some frauds target investors based on their race, religion or profession. Florida's Division of Financial Investigations, for example, went after a Hispanic-run investment company that advertised in Spanish-speaking newspapers. The money would be invested in oil wells and investors would get a return of 9.8 percent.
About $2 million was collected from 400 investors, and almost everyone lost money because there were no oil wells.
Other schemes use brokers to aggressively push small, thinly traded, start-up companies, known as "micro cap" stocks. Because those stocks are cheap, they're attractive to investors. But they can be easily manipulated by insiders, who sell out when the price peaks, leaving the unwitting investor with the losses.
Sometimes investors are hit with steep commissions, and their sell orders are often ignored.
Sullivan isn't immune from high-pressure tactics. A securities salesman recently called him and promised to double his money. He asked for Sullivan's Social Security number to open an account, and then tried to sell him 10,000 shares of a stock.
Sullivan refused, but the salesman persisted, asking him to buy 5,000 shares. Sullivan refused again, but the salesman countered, saying he would sell him 1,000 shares as a "favor."
"Not only was he fast-talking, but he was extraordinarily persistent," Sullivan said.
The moral of Sullivan's story is never be afraid to say no, and never rush into an investment -- no matter how good it sounds.
"We sensitized an entire society on receiving a second opinion when receiving medical advice, but in the securities arena, we don't check on the individual or the firm we are doing business with," Sullivan said. "That is incredibly dangerous."
Brokerage companies and brokers can be checked out through the attorney general's office or the National Association of Securities Dealers, which releases profiles of brokers and their firms.
Investors should also watch out for brokers who want immediate answers, claim to have insider information, or promise to double your money in a week.
"It is just not that easy and it can't be that easy," Sullivan said. "There is definitely a downside to the bull market."
Pub Date: 5/31/98