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Could you fall this hard for a stockbroker’s scam?

Medical Economics

Fast-talking broker swindled one doctor out of almost $185,000. Such scenarios happen a lot more often than you’d think.

Clark Gardner was the classic cold-call victim.

Although initially skeptical when a broker he didn’t know phoned, the Los Angeles radiologist was won over by the fellow’s persuasiveness. Like many specialists, Gardner had seen his income drop. So this usually conservative investor was open to new ideas.

Thirteen months later, the broker had committed almost every cardinal sin in the securities business – among them fraud, churning, and unauthorized trading. And the doctor was out almost $185,000.

Gardner, 52, had fallen into the clutches of a so-called boiler-room operation. Brokers from such outfits hype thinly traded, risky stocks, mostly issued by start-ups with little or no earnings. The brokers buy thousands of shares for pennies each. Then they talk up the stocks to clients, calling the companies “hot,” or “sure winners,” and sell the shares at marked-up prices.

On the strength of the buying, the prices may rise even higher, encouraging the clients to buy more. When the stocks sell out, their prices fall, and investors get stuck. This is known as “pump and dump.”

Here’s Garner’s instructive story, told mostly through excerpts from taped phone conversations between the doctor and his broker.

Wizards at winning confidence

Early in November 1994, Gardner took a call from a broker who introduced himself as Samuel Weber of Stratton Oakmont, a Lake Success, NY, firm. Gardner, who already had a broker in Los Angeles, didn’t know the firm.

Weber assured him that the brokerage was established and reputable, with a track record of 22 successful new stock offerings, and that it recommended investments only on the basis of thorough investigations of the companies. If the doctor did business with Stratton, Weber would monitor his account and would never risk his principal, the broker said. And he would sell any stock Gardner owned if its price dropped more than two points.

Weber phoned Gardner a few more times before trying to sell him stock. Each time, he promoted Stratton as a brokerage worth doing business with.

Stratton Oakmont’s records indicated that I million phone calls were made each month from the firm’s office. According to another source, the New York State Attorney General’s Report on Micro-Cap Stock Fraud, cold callers generally begin work at 7:30 or 8 a.m., so they can reach East Coast business owners directly – before their secretaries can screen their calls. The callers may work as late as 10 p.m.

Toward the end of the month, Weber called and said the price of Dr Pepper/Seven Up would be rising. He assured Gardner that it was a low-risk stock, the only type he’d recommend.

The broker followed up with a new-account application form he’d already filled out, listing Gardner’s approximate net worth as $2 million-plus (Gardner had told him it was about $1.3 million) and his investment interest as including speculative companies. When the doctor questioned these misrepresentations, Weber told him the document was computer-generated and unimportant. He urged Gardner to sign it, so he could take advantage of the firm’s investments.

Gardner did so and purchased 200 shares of Dr Pepper for $5,210.

This was the first step in what Gardner’s Beverly Hills, California attorney has dubbed “the Stratton two-step.” Recommending a well-known stock that trades on the New York Stock Exchange is a common boiler-room technique. “It lulls the investor into a sense of security, the next step is to get him to buy a stock the firm is pushing for its own reasons.

Sure enough, about a week later, Weber recommended that Gardner buy shares of Select Media Communications. Stratton had investigated the start-up television-production company thoroughly, Weber said. He himself knew the people who ran it. It was a guaranteed moneymaker. Gardner purchased 2,000 shares at 8 per share.

Many brokers know little about the securities they offer or their chances for success. The reality is that 90 percent of the companies being pitched won’t produce profits. Nor do brokers have much empathy for clients who lose money. Some actually laughed when a guy would send in $50,000.

– A disguised ex-broker, testifying at the New York state attorney general’s 1997 public hearing on stock fraud.

Two weeks later, Weber suggested that Gardner increase his position in Select Media, even though the price had slipped to 6 3/8. There was no problem, the broker reassured his client; this was a buying opportunity. Gardner invested $19,135 more.

Weber never mentioned that Stratton Oakmont made a market in this security, meaning it buys a percentage of a company’s stock to sell and, as a result, can influence the selling price.

In January 1995, Gardner invested $20,010 in United Leisure, on the strong recommendation of Weber. The broker said the company was solid and that its stock price was near its low and would rebound as seasonal travel increased. In truth, United Leisure, a children’s day-camp operator, fledgling real estate developer, and part-owner of a shopping mall and casino, had been mired in expensive litigation since 1986.

In February, Gardner invested an additional $71,145 in United Leisure. A small part of the funds came from the proceeds of the sale of Dr Pepper, which had produced a profit of $1,190. Most of the cash – $61,730 – came from the sale of another investment, DualStar Technologies, a new issue underwritten by Stratton.

Weber had recommended the doctor sell DualStar, a holding company with subsidiaries in heating, air-conditioning, and related areas, after owning it only two days, supposedly because he saw a selling trend he didn’t like. DualStar’s price had risen since Gardner had invested. If Gardner were to sell his shares and put those funds into United Leisure, Weber said, “I think we can take in some relatively fast profits in that, as well.” If DualStar’s stock price went down later, he might want to buy back in. Gardner, seeing another small profit – $4,845 – agreed the move made sense.

Even if the first purchase yields a profit, the client will lose money in the end. The shell game can only be played for so long. Ultimately, someone will have to bear the loss. With complaints inevitable, it is necessary for brokers constantly to find new investors and to string along existing customers for more transactions.

Continued from page 2

– A disguised ex-broker, testifying at the New York state attorney general’s 1997 public hearing on stock fraud.

So far, Gardner had invested $118,000 and had profit of $6,035. He asked Weber to sell his Select Media shares, which Weber didn’t do.

Relentless pressure to buy more stocks

On March 22, Weber was back on the phone, excitedly saying he had “incredible information” to share with Gardner. An institutional investor was going to make a major commitment to DualStar, now trading at 6 1/8, and Stratton Oakmont’s president was saying it was going to be a $20 stock, maybe more.

“It’s mind-staggering,” Weber said. “If we get the stock running at 20, that’s a $14 move. For someone who comes in here at 20,000 shares, Clark, we’re talking about a $280,000 potential. And if he’s right about a $25 or $30 plateau, we’re talking la-la land.” It would be a route to gains while Gardner was waiting for Select Media and United Leisure to come to life, Weber said.

Gardner, however, was turning skeptical. “I want to believe you, but this is exactly what you told me before.”

“No, no, it is not,” Weber retorted. “I wasn’t talking about these kinds of numbers before. This is like a dream. You get one shot at a stock like this.” He went on to enumerate new contracts DualStar had signed, and predicted that “overnight” it would go from a $42 million company to almost a $100 million company. Gardner should buy 100,000 shares, he said.

His client wasn’t biting, but Weber wasn’t going to take No for an answer.

Weber: “Based on the enthusiasm here, I think we’re going to continue seeing the stock move, up. If you had the wherewithal to go 100,000 shares, this is the one to do it on. And I’m telling you this as someone who considers himself more than just a broker. I like you, all right? I want to see you make money.”

Gardner: “I can’t get my hands on much; it’s tax time.”

Weber: “It always seems to be like that in life. The best things seem to come along when it’s the hardest to move.”

Gardner: “We weren’t expecting to be sitting here with such tremendous losses.”

Weber: “No, no, obviously not. And this is certainly one way to overcompensate for any of the losses. What can you come up with?”

Sales scripts are powerful tools that allow a broker to control a conversation. Rebuttal books are filled with prepared answers designed to impress clients who don’t want to buy, and to counter any response a client may make.

– A disguised ex-broker, testifying at the New York state attorney general’s 1997 public hearing on stock fraud.

Gardner said he’d be stretching to come up with $25,000.

The broker encouraged him to “work out over the next few days how you can get 20,000 shares.” That would cost about $120,000.

Gardner dismissed that suggestion as ridiculous. But Weber reminded him it was a way to take advantage of an “incredible” opportunity. “We’ll look back at this in a few months and have a couple of laughs over it. I want to come out there, and you’ll take me for a ride to the ocean and have a carefree, wonderful day.”

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Gardner eventually agreed to buy 5,000 shares of DualStar at 6 1/4, for $31,257. “This better take off,” he said.

“I’m telling you, this is the one that’s going to do it, Clark,” his broker assured him.

Two weeks later, Weber called again. “Huge day,” he said. “Huge day.” DualStar was going gangbusters, climbing daily. “Yesterday morning, we were buying it at 8 1/2, and now it’s over 10. If we can capitalize on this, I know you’re going to be very happy.” Gardner suggested they talk again the next day. He needed time to review his investments.

Weber urged him to commit to at least 5,000 shares that evening. He dangled a carrot – the price could go to 15 soon.

Gardner, resisting what would be a $50,000 investment, grumbled about the commission on his last purchase of DualStar. He’d bought it at 6 1/4, and Weber had gotten 1/8. So, as another enticement, Weber offered to “use my vice-presidential leverage and take the 1/8 off. I want you to have the stock. I’ll just buy it net for you.”

broker may tell the investor that there’s no commission on a particular stock, when in fact the broker is being paid 15 to 40 percent of the sale price, as a markup or concession for getting rid of the firm’s inventory of a stock that is expected to plunge in value at any time.

– New York State Attorney General’s Report on Micro-Cap Stock Fraud.

Gardner tried to compromise at 2,000 shares. He was still unhappy about United Leisure, which he’d lost sleep over.

“I know,” Weber interrupted. “But I’m just trying to teach you something.” Buying a large block of a stock like DualStar could make up for the investments that had lost value. He even suggested Gardner take money from other investments or his Merrill Lynch account to buy 5,000 shares.

Gardner erupted, saying that he’d already invested with Stratton some money earmarked for his pension plan. Eventually, though, he agreed to 3,000 shares.

“When the stock runs up to 15, you’re going to thank me,” Weber said.

“You won’t talk to me,” Gardner said. “You’ll be busy when it’s down to 2/8.”

“I’m never too busy for you,” Weber protested, still pushing for a 5,000-share buy. Gardner, with great reluctance, agreed. “You’re a hard sell,” he said.

“I’m going to be a hero on this,” Weber said. Gardner purchased 5,000 shares, at 10 1/8, for $51,227.

Unauthorized trades; more double-talk

By early June, DualStar had backslid to $6 per share, but Weber assured the doctor “this thing [will] move back up again.”

In the meantime, Gardner invested $3,500 in Czech Industries, another stock Weber said would help make up for the prior losses. And, once again, the doctor wound up with a loser.

On July 25, Gardner, who apparently hadn’t heard from the broker in a while, called him. Weber immediately launched into a pitch on “how we can get your account back in line.” He suggested Gardner sell United Leisure and invest the proceeds in Solomon-Page Group, a personnel-recruiting firm that had gone public the previous October. The stock had peaked at 7; now it was at 1 1/2 and obviously undervalued, Weber said, “Without your adding a penny, we can buy just shy of 30,000 shares. If we simply get a $1 move, it’s an additional $30,000 pickup,” he explained.

Continued from page 4

Why hadn’t the broker called him, if it was such a good deal? Gardner wanted to know.

“1 called you twice today,” the broker countered. “Didn’t you get my messages?” Gardner hadn’t. But Weber smoothly swung the conversation back to his new ploy, which he said was sure to produce “dynamic profits.” Gardner surrendered. Unknown to him, however, Weber had already sold the United Leisure shares, incurring a $44,477 loss, and had bought 29,500 shares of Solomon-Page at 1 9/16, for a total of $46,104.

If a client wanted to sell and no buyer could be found, the stock would be put into another account without authorization. If the second client complained, the transaction would simply be canceled and rebilled into another client’s account; this was a parking spot for those shares.

– A disguised ex-broker, testifying at the New York state attorney general’s 1997 public hearing on stock fraud.

The client wins a battle – barely

Gardner had asked his broker several times to sell some of the stocks that had lost value. Each time, Weber persuaded him to hang on. In mid-August, Weber got Gardner to invest $3,500 in MVSI, a broad-based technology company. And by October 1995, MVSI had risen from less than I to around 20. Gardner was determined to sell and get a check for his profits; his previous gains had been funneled into other securities. But the broker was equally determined not to let him sell.

On a Friday, Weber said there would be an announcement from MVSI early in the next week that could boost the price even higher.

Gardner was unmoved. “When I tell you to sell something, I mean sell it. When [MVSI] was at 15, I asked you to sell it and you said, ‘You were just kidding me.’ I wasn’t kidding you. It goes from 7 to 15 in one day and I’m finished.”

“no-net selling” policy allows a broker to sell a client’s position in a house stock only if another client buys the same shares. If shares are sold back to the firm, the firm takes back the broker’s commission. Therefore, brokers do whatever is necessary to ensure that the stock is not sold.

– A disguised ex-broker, testifying at the New York state attorney general’s 1997 public hearing on stock fraud.

Gardner went on to say how disgusted he was about the DualStar purchase that Weber had pressured him into. And he raised questions about Weber’s firm, Stratton Oakmont, which he accused of “self-dealing,” or selling securities to clients from the brokerage’s own account.

Though Gardner didn’t know it, his instincts were right. Since March 1992, Stratton had been disciplined and fined several times by securities regulators for selling speculative investments through misrepresentation and other boiler-room tactics. When Gardner was dealing with the firm, it was under the supervision of an independent consultant appointed by the Securities and Exchange Commission and was required to tape all phone conversations with its clients.

Weber brushed aside Gardner’s doubts and soldiered on with his efforts to prevent a sale. If Gardner would just hold on until Monday or Tuesday, the broker would be sure to sell if he saw any downward price pressure.

Continued from page 5

“Yeah,” Gardner replied, sarcastically, “you sure you can sell it at 18, or before it gets away from me? You couldn’t sell DualStar when it was at 8 because it was going to 7. You couldn’t sell it at 7 because it was going to 6.” Weber assured the doctor that he was watching the price.

“I want to sell MVSI now,” Gardner said. “Do I have to put this in writing?”

They battled for probably 15 minutes more.

Gardner, who’d done some research on MVSI, had lost faith in it. The company was slow to respond to his requests for information. “I don’t like dealing with people that are not straight with me.”

“I’m totally straight with you,” Weber said.

“I don’t think so,” Gardner replied. He was unhappy, too, because he hadn’t received a statement from Stratton for two months. Weber, trying to placate him, said he’d look into it. At one point, he persuaded Gardner to hold MVSI until Tuesday, “to see if we can grab a few more points,” he said. If the investment weren’t sold then, Gardner vowed, he’d take some action against the firm.

Weber protested, “No, no. When you give me a direct order to sell, absolutely, you know your positions will be sold, there’s no question.”

Gardner said that each time he wanted to sell a stock, Weber talked him out of it. “You gave me permission to hold it, as you’re doing now,” Weber said.

“I’ve asked you 15 times to sell,” Gardner said. And he insisted that it be done that day.

Weber said he’d sell, but wondered why “you’re vacillating this way.”

“Because you’re a good salesman,” Gardner said. “The final statement is S-E-L-L.”

For several more minutes, Weber persisted in trying to get him to change his mind. Gardner didn’t, and Weber did finally sell MVSI for $10,303, or a profit of $6,803, the largest gain the doctor would see on any of his Stratton Oakmont investments.

Pulling the plug in disgust

bout a month later, Weber was on the phone again, recommending that Gardner invest in Hemispherx Bioapharma. This company would become the premier maker of “explosively wonderful” products for treating HIV and other diseases, Weber said. Gardner agreed to invest $11,510. “I’m going to trust you one more time, but don’t ever lead me down a primrose path again,” he said. In fact, the company’s technology was not new, and its effectiveness had been debated for years among pharmaceutical researchers.

Gardner asked whether people in Weber’s office were manipulating the stock price. Weber stoutly denied it and quickly changed the topic.

The following week, Gardner, who’d been unable to reach Weber, complained bitterly to Weber’s supervisor. He griped that the broker had refused to sell when he’d asked him to, had never called to let him know a stock was dropping and warn him to sell, and hadn’t sent any statements for months.

The man listened sympathetically and said he was unaware of any problems with Weber. “Everyone has their bad times,” he said, and he agreed to sell securities Gardner asked him to unload. The Hemispherx shares went for $13,490, a $1,480 profit. The Select Media shares went for a nickel each, or $240 – a loss of $34,950. Czech Industries sold at a loss of $1,707.

Continued from page 6

Finally, on Dec. 7, 1995, Gardner told Weber he wanted to liquidate his account. The never-say-die broker tried to talk up the doctor’s remaining holdings, DualStar and Solomon-Page. When Gardner complained that the broker had bought Solomon-Page without his authorization, Weber halfheartedly said, “It had merit at the time.”

He finally agreed to sell the doctor’s securities.

“In the future, if there’s anything that you want to do, give me a call,” Weber said, ever the salesman. Then the two said goodbye.

few days later, Weber finally sold Gardner’s remaining investments. Like most of the others, those sales generated sorry numbers. The DualStar shares went for $11,865, a $70,619 loss. The Solomon-Page shares sold for $21,203, a $24,901 loss.

fter investing approximately $290,000, Gardner recouped $59,506. He’d lost $184,583 in 13 months.

Four months later, in April 1996, the NASD voted to throw Stratton Oakmont’s president out of the securities industry, suspend the firm’s head trader, and fine both a total of $275,000. The firm was fined $500,000. The NASD also barred Stratton from selling securities that it owned to its customers.

In May 1996, Gardner filed an arbitration claim against Weber and Stratton Oakmont with the National Association of Securities Dealers. The claim charged the broker with putting the doctor into unsuitable investments, making unauthorized transactions, and churning; it also charged Stratton with failure to supervise its broker.

fter investigating cases like Gardner’s, the NASD closed down Stratton Oakmont in December 1996. The following April, it awarded Gardner $10 million in punitive damages, compensatory damages of $184,583, plus $24,375 in interest on the money he’d lost. In an unusual move, the NASD panel said the punitive damages were to be paid by four Stratton officials, two of whom had had no direct contact with Gardner, based “on their participation in the overall business of Stratton Oakmont.”

The NASD was sending a message that brokerage management couldn’t hide behind claims of not knowing what a broker was doing.

Gardner’s win was the largest punitive judgment ever for a customer in securities arbitration; most claimants are awarded much less than they lost, if anything. But it’s too early for Gardner to uncork any champagne: Weber and a principal of Stratton Oakmont filed for bankruptcy, which removed them from the arbitration claim. And when Gardner won his award, the other defendants filed a petition in federal court to overturn the judgment, which delayed collection. The judge recently denied the petition.

Samuel Weber’s days of working the phones appear to be over, however. In March 1998, the NASD barred him from the securities business. He’d left a trail of red ink in his clients’ accounts and had been the subject of 21 complaints and arbitrations between 1995 and 1997. And those stocks he’d been touting to Gardner? As of July, 31, two were trading at less than $1 per share, and four had minimal gains. The only winner was the first stock Weber had recommended: Dr Pepper/Seven Up, which was acquired in March 1995 by Cadbury Schweppes for $33 per share. It recently was traded at about 55.

Continued from page 7

How to put a cold caller on ice

Brokers like the one who swindled Los Angeles radiologist F. Clark Gardner “don’t work for the Merrill Lynches of the world,” says his attorney. If you get a call from a broker or firm you don’t know, be suspicious if you’re told:

* You can’t meet face to face with him.

* You must make your decision right now.

* The brokerage’s address is a post-office box.

* You’re getting in on the ground floor.

* Your money will double in a short time.

* There’s no risk involved.

* The investment is IRA- or IRS-approved. (There’s no such thing.)

Whether a call seems dubious or not, ask questions such as:

* How did you get my name?

* Who are your firm’s principals and officers?

* Will you explain this investment idea to my attorney or accountant?

* How much of my investment would go to commissions? Can I see that in writing?

* Will you send me a prospectus and other information on this investment?

* When can we meet?

Be suspicious if someone avoids answering questions about his background and the investment. Watch out for comebacks like, “Are you questioning my integrity or the legitimacy of this deal?”

Finally, ask for the broker’s CRD number. This lets him know you’ll check his credentials with the Central Registration Depository, a computerized data bank on registered brokers that’s maintained by state securities regulators and the National Association of Securities Dealers (see page 67). The CRD number ensures an accurate database search, though you can still get information without it.

Not all cold calls are scams

Telephoning strangers and asking them to invest is how rookie brokers from legitimate firms get clients. It’s not illegal. But there are rules imposed by securities regulators.

Brokers must:

* Call only between 8 a.m. and 9 p.m. They may call you at your office or at home.

* Tell you their name and their firm’s name, address, and telephone number.

* Disclose that the purpose of the call is to sell you investments.

* Not threaten or intimidate you or use obscene language. Nor may they call repeatedly and harass you.

* Add your name to the “do not call” list every brokerage is required to maintain, if you request it.