In 1997, word began to creep into the back pages of Irish newspapers that something sinister had been happening to a lot of hardworking farmers and merchants in the west of Ireland. People there were getting calls from very reputable-sounding firms that were, or said they were, in places like Barcelona and the United States and Switzerland.
This was the era of George Soros and the irresistible allure of global investing. Ireland had a small, dull little stock market of its own, with dull little companies in dull industries like cement and shipping and zzzzzzzzzzz…It was enough to put an investor to sleep! These people on the phone, who had very nice British or Australian accents, were giving Irish people the opportunity to reap gains from the U.S. market they were reading about at the time. High tech! Telecommunications! Motorcycles! Varrooom!!!!
What these hapless souls didn’t realize was that the people calling them were doing the reaping—and that they were the harvest. The firms at the other end of the phone line had impressive-sounding names, and everything seemed legitimate. After all, cold-calling was, and is, an accepted technique by established stockbrokers. Who knew? Not the good people of west Ireland, even though these brokers were a bit overoptimistic in their sales pitches, even by what the Brits call stock-hawking standards.
It’s not hard to see why the west of Ireland was targeted by overseas boiler rooms. Anyone who has ever been to rural Ireland can give you the reason. It comes back to a question that people often ask themselves when they go to places like Donegal, Tralee, Kerry, Dingle, and other such places: “Have you ever met such friendly, honest, delightful people?”
No, you haven’t met such lovely people, people who would give you the shirts off their backs—and neither have stock scamsters, for that matter. They like people with those characteristics. They’ll rip the shirts off their backs, if not offered. Big, dirty cities with cynical, suspicious people are poor prospects for telephone cold-callers. Green, lush places with moss on the stones (a sign of clean air, or so they say) are natural targets for scamsters. Rural people are trusting, or at least more likely to be trusting than big-city dwellers. They are honest, and as such they expect other people to be honest. That is a mistake when you get a call from someone trying to sell you stock.
The shares that were being pushed on the good people of western Ireland were run-of-the mill microcaps. They had names like DW Filters, Global Connect Direct, Titan Motorcycles, Arc Communications, Ultimistic, and Arc Technology. All were tiny U.S. stocks and most traded on the OTC Bulletin Board, the cesspool of the U.S. markets, the last refuge of stocks too small and dreary to trade anywhere else. The good people of Ireland who bought those stocks were getting a lesson in thievery from one of the stock-pushing world’s perennial favorites—the offshore boiler room.
People across the world are enjoying the thrill of flushing their life savings down the toilet—and it is more often than not an American toilet.
The offshore stock-pushing wave that began in the mid-1990s in Ireland and western Europe, and spread like mad cow disease through the rest of the English-speaking world, is the latest incarnation of a Wall Street institution known as the pump-and-dump stock scam. If you pay any attention at all to financial news, you have probably heard word wafting over gently from Washington and the media that pump-and-dump scams are a thing of the past and that regulators have everything tightly under wraps.
In fact, they are alive and well and more dangerous than ever, and one of the things that make them far more lethal than previously is the public perception that stock scamsters are confined to wood-paneled boardrooms, where they engage in multibillion-dollar thievery of the Enron variety but have vanished from the more straightforward pastime of lying about a stock. The folly of that thinking was demonstrated in the early 1990s, when penny-stock scams dipped below the regulatory gunsights and regulators were saying publicly that they were on the wane. In fact, they were about to spring up again in a different guise, bigger and uglier than ever, as “chop houses,” selling crummy microcap stocks and dodging regulators yet again.
This latest incarnation of the chop houses takes full advantage of regulatory ennui. It’s tough enough to nudge the self-regulatory pyramid into action when American investors are being hurt. Overseas investors? Out of sight, out of mind—and out of the regulatory field of interest completely. The problem with that mindset is that the same people who gorge themselves on overseas wallets are not sated. They’re only whetting their appetites—for you.
Here’s a statistic that demonstrates the success of this form of stock scamming: According to the Australian Securities Commission, citizens of that country, which has fewer people than reside in the state of Texas, were ripped off by $400 million in the early part of the millennium by offshore stock pushers peddling American stocks. And that, the Aussies point out, is just a rough and conservative estimate. The overall figure worldwide is hard to calculate, but is believed by the Australian regulators to run into the billions of dollars. More than two hundred offshore stock pushers are listed on the Web sites of the Australian and New Zealand securities regulators. Though only a few of those firms are actually situated in the United States, American stocks are invariably involved and American stock-promotion firms, run by the same crooks who are always finding new ways to victimize you, profit from every one of the hundreds of U.S. stocks sold overseas.
In theory, at least, regulators recognize the scope of the problem. The SEC Web site is bubbling over with concern. But the U.S. response has been far from robust. The SEC, after sitting on its hands for about a half dozen years, brought its first case in recent years against an offshore stock scamster in 2002. By 2005 it had brought a grand total of three cases against offshore boiler rooms. The scorecard for Eliot Spitzer? Zip.
Overseas prosecutors have brought a smattering of criminal cases against the offshore boiler rooms. Thailand, Laos, Britain, Spain, France, and Australia are among the countries that have sicced the cops on offshore stock scamsters. But their efforts have been uncoordinated and ineffective. It’s just too lucrative to be wiped out, particularly when U.S. authorities have been dozing through the whole thing, thereby allowing crummy U.S. stocks to become roving bad-will ambassadors for this great democracy.
Besides, the economics are irresistible.
Offshore boiler rooms are a kind of outsourcing, but with a twist. Instead of hiring people in places like Bangalore to operate phone banks that take calls from American customers and solve problems for them, these overseas stock promoters operate phone banks—“boiler rooms”—in places like Bangkok to make calls, generally to non-American customers, to sell American stocks and create problems for them.
The key concept at work here is overabundance. At the customer service and technical-support phone banks in India, it is an overabundance of low-paid bright people. At the transnational boiler rooms, what you have is an overabundance of investor greed and a bumper crop of stocks that can be bought for pennies and sold for big bucks to the aforementioned greedy investors.
The effect of both forms of outsourcing is the same: As a result of the miracle of cross-border telephony, the profitability of the enterprise sponsoring the phone bank is strengthened, be it AOL, Dell, or the people who satisfy unreasonable investor expectations by pushing lousy U.S. stocks. The world is made “flat” for crooks, as Thomas Friedman might say.
The boiler-room business model has been a mainstay of Wall Street larceny for decades. The concept is simple: Stocks in shaky companies, obtained at little or no cost, are sold to investors at huge profits. In the 1980s and 1990s, boiler rooms ripped off Americans for gobs of money, perhaps $10 billion a year at their height in the mid-1990s. Their names occupy a special place in Wall Street history, penny-stock houses like First Jersey and Blinder Robinson in the 1980s, and their 1990s successors Hanover Sterling, A.R. Baron, and so on. There were dozens of them.
Domestic boiler rooms began to be replaced by the Internet in the late 1990s. But overseas boiler rooms have never slackened at all. In the 1980s, when the bull market in the United States was just starting to gear up, boiler rooms were operated in Amsterdam under the supervision of Irving Kott—definitely a name to keep in mind if you’re keeping a stock-scamster box score. This Canadian fraudmeister moved to Europe after being nabbed in a mining-stock scam in Ontario. His name still pops up today, making this hardy troubadour a roving ambassador of Wall Street bad will. After paying a $4 million fine in Amsterdam in 1990 and moving back to these shores, Irving went right back into business, bless his greedy little heart, and has been tangling with regulators and law enforcement ever since.
Another early Vasco da Gama in reverse was a man whose name should reflexively send your hand to your wallet. His name was Thomas F. Quinn, and he is usually referred to in the media as a disbarred lawyer because that is one of the kindest things you can say about him. In the 1980s, at about the same time as Irving was establishing his boiler room amid the hippies and canals of Amsterdam, Tommy Quinn was in France, eating well and setting up a network of boiler rooms throughout Europe. He returned to the United States in the 1990s.
Quinn is also a kind of must-mention fellow for anyone writing a book about securities fraud, mainly because he has done so much of it and suffered so little as a result. He is relevant to this book chiefly in one sense: as an example of how simply marvelous it is to be sued!
I know, most of us don’t like being sued. It is so…rude. All those accusations and nastiness and wherefores and forthwiths. A lawsuit is a kind of controlled, legalized form of rudeness, society’s way of channeling aggression. Wall Street generally dislikes lawsuits, and, as Rand Groves and others so situated have experienced, the legitimate, established Street firms go to great lengths not to be sued, when you are the suer.
However, individuals who are not legitimate have a different perspective on the lawsuit than you or I. Quinn was one such person. As a disbarred lawyer, he had been subjected to a good deal more rudeness than the majority of ordinary people. In the 1980s, as federal prosecutors aimed their grand juries at insider traders, Mike Milken and other, better-publicized transgressors, the self-regulatory pyramid’s weapon of choice against the Tommy Quinns and other penny-stock hucksters was the rude, annoying, but totally harmless lawsuit.
The SEC obtained a court order freezing and seizing Quinn’s assets for some stock-fraud schemes he hatched in the United States. The SEC’s effort to squeeze bucks out of the rock that was Tommy Quinn made the federal docket sheets long enough to stretch to China—without showing commensurate success. Tommy moved on to other things, including an association with rogue financier Martin Frankel. He had lost the lawsuits, but won the war.
In the mid-1990s, while the SEC was still chasing down Tommy Quinn’s assets and just starting to get wind of the boiler-room menace in the United States, the scamsters were two steps ahead of them. That was when they made their move into the west of Ireland, and also branched out elsewhere in Europe and in East Asia.
The stocks they sold to the people of Europe and the Pacific Rim were in scuzzy little companies. Most would be a distant, foul memory within a few years. But they were, it must be emphasized, almost always legitimate, real companies, with actual or planned operations and even a smattering of revenues. They were certainly not the fictional outfits that the public usually associates with stock scams.
That perception was, in fact, a serious problem for the investors in Ireland and elsewhere who were sucked in to these scams, and would continue to plague investors as the offshore stock pushers spread throughout the world in the years ahead. It would have been much better from the victim perspective if the firms weren’t legitimate.
Some years later, in a revealing study of boiler-room techniques commissioned by the Australian Securities Commission, researchers found that the legitimacy of touted companies was actually a major advantage from the crook perspective. The fact that these stocks existed “conferred legitimacy upon the broker,” the Australian researchers said.
Also typical of offshore scams was that the stock peddlers—using a technique perfected by U.S. boiler rooms in the 1990s—spent time jawing with their customers. These were not quick-hit, scripted sales pitches. The brokers patiently answered investor questions and sent them brochures and written materials, just as legitimate firms did. True, claims in the brochures were fake and even the addresses of the firms were also, at times, fictitious. But the victims found out long after it was too late.
For the Irish in 1995 and 1996, what happened was a fairly typical pump-and-dump boiler-room scam, very much the same kind of thing that was going on in the States at the time. Some hapless Irish investors were sold shares in Applied Technology at about six dollars a share in 1995, and by the following year those shares were selling for about a penny. Applied, a legitimate company like the rest of its ilk, was engaged in “object oriented software development,” but the only object that interested the stock pushers was known as the “wallet.” The firm that sold Applied Technology to the Irish had the nice-sounding name of Unified Capital Group, was situated in Geneva, and conveniently vanished after walking away with a good chunk of the savings of western Ireland.
Other investors put their money with an alleged U.S. brokerage firm called Abbott Financial Services. That happened to be the name of several legitimate firms, which was probably why the scamsters used it. Its brochure showed an address in Seattle and a phone number, neither of which were its actual address or phone number when the Irish Embassy tried to track down the firm for a panicky investor.
That was a typical scenario that was to be repeated time and again in the years to come, right up to the present day. The boiler rooms fanned out to the Philippines, Laos, Bangkok, Portugal, Spain, and Switzerland, as well as the good old U.S.A. By 2000, investors were targeted in Japan, England, western Europe, Australia, and New Zealand. (India has been resistant to this form of reverse outsourcing, or so people there tell me.) Australia and New Zealand securities administrators fought back by listing the names of alleged scamsters on their Web sites, with Australia listing its first eighty-two unlicensed cold-calling firms in 2000. New listings were still being added in 2005. No surprise here. The supply of crappy American stocks is inexhaustible.
Hundreds of U.S. stocks are being peddled overseas, and in many instances buying these stocks is, if you can imagine, even worse than buying them in the U.S. Buying stocks from an offshore boiler room is very often a bit like stuffing your money into a Roach Motel. Often, stocks pushed overseas have to be held for a year before they are sold—which is an eternity when you are holding a piece-of-dung stock. That’s because there is actually a class of shares that are designed to be stuffed into Roach Motels, exclusively for non-U.S. investors, under something called Regulation S of the securities laws.
Regulation S has been around since 1990, and abuses of this particularly odious section of the securities laws have been lamented in the media ever since. Most of the weeping and hand wringing that you may have seen involves abuses of Regulation S. But the problem is not that Regulation S is abused, but that it exists. As the overseas boiler rooms are demonstrating every day, Regulation S is America’s gift to the stock scamsters of the world. It couldn’t have been more beautifully drafted, from the crook standpoint, if the crooks themselves had dreamed it up. Like most daffy ideas that come out of Washington generally, this one had good intentions—to give companies, particularly the scrawnier ones, a way of tapping the overseas capital markets that might not otherwise give them the time of day.
Regulation S shares (they can also be bonds, actually) are unregistered securities and can be sold at any price the stock promoters conjure up out of thin air. Shares issued under Regulation S must be sold exclusively outside the United States. As originally envisioned by the geniuses who thought up this idea, the shares had to be held for forty days before they could legally be sold in the United States. So some bright scamsters would set up phony offshore accounts to buy Regulation S stock at a cheap price, wait the requisite forty days, and sell the shares at inflated prices back in the United States. To fix that anomaly, the holding period was extended to a year in 1998, during Artie Levitt’s tenure at the SEC. Good old Artie—he knew just what to do. One scam ebbed away, another was nurtured. The Roach Motels were open for business.
A one-year holding period fixes one of the major problems facing stock scamsters. One of the things the scamsters hate the most is customers selling stock while they are hard at work in their boiler rooms, peddling shares. Selling depresses share prices, and you don’t want prices to go down at the same time your cold-callers are selling them. A flood of shares on the market makes it impossible for them to control, or “box,” the market in a particular cruddy stock. So crooked U.S. brokers have frequently refused to take orders from customers who wanted to sell their stocks, or allowed them to dump their shares only when a buyer could be found. Or—sort of like a dealer in gray-goods audio equipment—allowed the sales to be unloaded only in exchange for other lousy stocks. Such tactics are flagrantly illegal, and were often cited in the criminal cases against the boiler rooms in the late 1990s. Regulation S resolves that issue.
Regulation S stocks aren’t used in every offshore stock scam, but in enough to make one wonder why the feds don’t simply get rid of the thing entirely. After all, the markets managed to exist perfectly well in the pre–Regulation S years before 1990. From the boiler-room perspective, Regulation S makes a great crime into pretty much a perfect crime.
You might think that all these offshore boiler rooms got people mad and that people must have been thrown in jail, and that these outfits were shut down. You would be right. It has happened a couple of times—and it hasn’t made a damn bit of difference.
One of the firms that was selling shares to Irish investors, the Lisbon affiliate of a Swiss-based firm called Paramount Securities, was raided by the Portuguese police in 1997. A British national who headed the local office was convicted of various charges, and the Swiss parent was shuttered by banking authorities. It was just what you’d see on an old episode of Dragnet. Bad guy arrested. Justice done.
The only problem was that the Irish investors were still saddled with stocks that weren’t worth very much. And the scamsters were not deterred. While it was true that one of their people was nabbed, that was a fluke—and they knew it. Nor were they deterred when Thai authorities raided boiler rooms, all peddling Regulation S stocks, operated by three outfits—the Brinton Group, Benson Dupont, and Sigama Capital. That happened in July 2001. Even though the Thais put on a convincing Joe Friday act, arresting eighty-five cold-callers, deporting them, and eventually convicting the seven ringleaders, the result was the same. The boiler rooms continued to chug along throughout the globe—in Thailand and other places—as if nothing had happened. (It might have helped just a little that the seven were convicted on reduced charges, received suspended sentences, and cut loose.)
What did the United States do while all this was going on? Nothing. Not one single, solitary thing was done throughout the 1990s, into the 2000s, until 2002, when the SEC sued an operator of overseas boiler rooms called the Millennium Group. A different bunch of people were sued in 2003, and another bunch in late 2004—once a year. Not bad. In a hundred years or so, each of the hundred or so members of the offshore boiler-room community will have a lawsuit of its very own.
The 2003 case was the most interesting for a number of reasons. The suit was filed in October of that year against twenty-one defendants, led by a young fellow named David M. Wolfson. Whatever you might think of the SEC case against Wolfson & Co.—bold and ambitious or too little, too late—the documents in the case provide the first close-in look at how the overseas scamsters work. It is a pretty remarkable case in several ways.
For one thing, there is the timing. This scheme allegedly involved boiler rooms in Bangkok that were set up in October 2002, a year after the Bangkok boiler rooms were raided. Also remarkable is how open and brazen this alleged scam was, beginning with the defendant. Wolfson, who is from Salt Lake City, was twenty-three years old when the scheme was hatched. What’s interesting is not his age but his family background. His father was Allen Z. Wolfson, a career stock swindler with convictions stretching back two decades. He was one of the principal defendants in a massive case, one that received widespread publicity, which was brought against dozens of Mob-linked stock swindlers in June 2000. The elder Wolfson was supposedly involved in the offshore scam his son ran, by helping to set up one of the companies peddled overseas. All that organizing and peddling took place after Allen Wolfson was arrested, and while his June 2000 case was working its way through court. He was convicted, after trial, in early 2004.
Did David Wolfson turn away from the alleged pursuit of an allegedly less-than-honest dollar just because Dad was targeted by the feds? I should say not. In fact, the SEC complaint indicates that he wasn’t deterred by the fact that he was targeted by the feds. In 2002, David Wolfson was named, along with his father, in an SEC enforcement action related to yet another pump-and-dump scheme. But a lawsuit from the SEC just rolled right off his back. SEC documents make it stunningly clear that David did little to conceal his role in the scheme. He was president of the stock-promotion firm that put the whole deal together. His name wasn’t on any of the companies that issued the stocks, but one of them, Stem Genetics (the one Dad helped set up), had the same address as a suite of offices where David openly ran several other companies.
By the way, be sure to stick the word allegedly into every sentence of the preceding paragraph. In the eyes of the law, David Wolfson is neither guilty nor innocent, but in a kind of twilight zone in which both are possible. He hasn’t admitted a darn thing, but he hasn’t denied anything either. He just isn’t saying.
Shortly before Christmas of 2004, David settled the SEC charges that were brought against him in the offshore boiler-room suit in 2003 and the unrelated stock-scam suit in 2002. He neither admitted nor denied liability. He consented to $3 million in civil penalties for both cases. And, perhaps most important of all, he promised never to do it again.
Well, he may keep his promise. More surprising things have happened in the world. True, the charges that David was able to buy his way out of were about as nasty as the ones that were brought against his pa’s dozens of boiler-room and mobster buddies in June 2000. If the younger Wolfson and the rest of them did all the things they are accused of doing, why not go all the way—and press criminal charges? The SEC failed when it sued Tommy Quinn. It didn’t put a dent in the scamming that he committed, and it wasn’t even able to squeeze a dime from him. Yet here they go again, suing, and settling, and not even getting an admission of guilt—a gut-wrenching, confession-is-good-forthe-soul admission, “I did it.”
The boiler rooms still going strong in Europe and Asia haven’t been even the slightest bit deterred by all this regulatory huffing and puffing. They’ve done the math, which is dramatically in their favor. The boiler room involved in the Wolfson case received 70 percent of the money that was poured into this scheme from investors around the world, and the other 30 percent was divided among the issuers and the stock promoter, Wolfson in this instance.
A tax-free skim of 70 percent of the take—more than 80 percent if you factor in the stock promoter—is enough to risk a spell in jail. Or to put it more precisely, the risk of getting away with it.
Of course, plenty of Wall Street crooks aren’t getting away with it. Their problem is not that they committed a crime, but that they committed the wrong crime.