Christopher MarkowskiArticle, Wall Street FraudLeave a Comment

Since our inception we have done our best to carry on the good fight for individual investors. We try to do everything possible to educate, inform, and warn of all the landmines, booby traps and pitfalls that can adversely affect individual investors. In September of 1997, I wrote an article that articulated one of the most prevalent problems at that time, boiler room or bucket shop brokerage firms.

“One of the more serious problems in the securities industry today is the amount of fraud and the blatant lack of ethics that has become almost commonplace at many firms. This is a very disturbing development that has occurred for a long time but has been getting the attention that it deserves during the last couple of years. The abuses in this industry are varied and widespread but almost always include the telephone and an involvement with ‘micro-cap’ companies. With the current bull market we are experiencing there is even more opportunity for these crooks to work their deception. The success of the equities market has investors pouring more money into the market. As a result, there are an increasing number of inexperienced investors who may fall victim to many of these crooks’ schemes.”


One of the many firms that we lined up in our crosshairs back in 1997 was finally brought to justice recently. The name of the bucket shop was Sterling Foster.

Bloomberg (October 29)–Sixteen former brokers at Sterling Foster & Co. were sentenced to prison for duping investors out of $88 million in one of the most successful boiler room operations in U.S. history. One of the men got 51 months behind bars; another got 41. The defendants were convicted of manipulating stock in six companies, including Advanced Voice Technologies and Applewoods Inc. In April, Randolph Pace, who secretly controlled Sterling Foster, was sentenced to more than eight years in prison. Most of the brokers admitted using high-pressure sales tactics to target thousands of investors, though four were convicted at trial. The Melville, New York-based firm, which closed in 1997, once had 275 brokers. Twenty-three of them, including the entire leadership team, have been convicted. Prosecutors said some brokers induced customers to buy blue chip stocks and then switched their holdings to smaller stocks. The brokers also used high-pressure sales techniques and scripted pitches, and refused to execute sales orders. Many of the victims were elderly and lost their life savings, prosecutors said.

The most interesting thing about the penny stock/boiler room business is the tremendous similarities between their conduct and the practices of the large “white shoe” investment houses that we have been warning against for the past few years.

There are a couple of differences between the sins of the two. The first is the size. The havoc wrecked by boiler room fraud can be measured in millions of dollars. For Merrill, Smith Barney and the rest of the big guys, billions. The second distinction is the handling of the predicament by regulators. With the chop shops we have had the guilty pleasure of watching the perpetrators do some hard jail time. As far as justice for the big boys with the white shoes, there will be no justice, instead, a classic sell-out. The so called global settlement that is being put forward is one the biggest sell-outs in the history of white collar crime.

The New York State Attorney General and federal securities regulators had a “Sopranos” style sit-down to work out their differences this past month. After hashing out the sticky details, the crew put together a plan to fix the system.

This “makeover” of Wall Street first involves the creation of independent stock research entities. Brokerage firms would be required to provide individual investors with some new form of research that is supposed to be unprejudiced and honest. I am trying to figure out how this new “entity” will operate in an independent manner if these “new and improved” analysts are reporting to the same CEO that was behind all of the current malfeasance.

The regulator gang is also calling for their cut in the ill gotten gains of our not so distant past by having the firms pony up $2 billion to pay for this oxymoronic independent research thing. If you are like me, and were not born yesterday you know that any cost or fine that is imposed on these big brokerage firms is actually imposed on the general public. These new costs incurred by the brokerage firms are going to be passed on to in higher fees from services ranging from IRA maintenance to checking accounts.

This global settlement plan requires each of the 10 firms under investigation to appoint an independent monitor to purchase and distribute independent research. The monitors would be appointed by the firms and be required to report to the SEC once a year. I hope everyone is detecting the stench from this nonsense. This is a classic case of the foxes guarding the hen house. An independent monitor is probably one of the worst ideas I have ever heard. After all the lies, greed and manipulation the big firms have been guilty of over the past ten years we are now supposed to trust them in regulating themselves. Jack Nicholson had a great line in the movie As Good As It Gets that sums up my thoughts. “Sell crazy somewhere else, we are all stocked up here!”

This plan would also require brokerage firms to create additional “firewalls” to keep the evil investment bankers away from influencing the analysts. This is another joke; barbed wire, buttresses and moats would not keep greedy unscrupulous bankers away from putting pressure on analysts. The new firewalls will force the big firms to go through the agonizing task of possibly moving the 30th floor to the 31st and having to reprint some stationary.

If you take a good look at the fine print of this settlement you will also notice the fact that all the sins of the big firms such as IPO spinning and laddering, are being packaged neatly into this quaint arrangement. Ordinarily, regulatory settlements include an accompanying detailed bill of particulars about the alleged wrongdoing. But in this case, because of the expedited nature of the settlement, it’s possible that the charges could be described only in broad general form. If this happens, any broad settlement could make it more difficult for investors to win private claims filed against Wall Street firms alleging IPO abuses. If and when this settlement is ratified what you are looking at is the ultimate get out of jail free card. Firms would not be liable for suits from individual investors. Current liability from suits outstanding today is around $13 billion dollars.

This whole “global settlement” idea, to put it mildly is not just putting lipstick on the pig, it is injecting the pork with some Botox. Politicians and regulators can claim they are doing everything they can to clean up Wall Street. This is nonsense. Washington couldn’t fix a clogged sink without breaking a water main. All these politically expedient settlements are nothing but a waste of time, energy and, of course, tax payers’ money. The big investment firms are guilty of the same crimes as the little bucket shops. The question many bright minds are asking is if they can put the heads of those boiler rooms in jail, why can’t they do the same with Merrill, Citicorp, CSFB etc.? First thing first, you never bite the hand that feeds you. Second, it is not socially couth to put your golf partner/fraternity brother behind bars.

I have a novel idea, why don’t we grab some non-conflicted investment professionals to fix conflict of interest problems. Nah, that is too easy, and it might work!

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