On my way to meet Massachusetts’ top securities regulator to catch the new movie “Boiler Room,” I got to talking with the cabbie. Before I left the car, he asked for my opinion of a “hot penny stock” that a friend had just alerted him to.
A few minutes later, in the theater, the character played by Ben Affleck (shown above with Giovanni Ribisi) was telling a room full of would-be stock operators, “With the Dow where it is now, everyone wants a piece of the action.”
The problem is that such “action” isn’t always the big companies of the Dow Jones industrial average; it’s in the penny stocks touted by my cabbie’s friends. That being the case, if you fall into the category of “everyone” who is interested in grabbing a piece of the stock market, then the new movie has some valuable lessons to offer.
“Boiler Room” is about the fictitious and fraudulent brokerage firm J.T. Marlin, where an army of well-dressed, planning-to-get-rich-quick young men peddle bogus stock deals to unsuspecting customers. It is not a feel-good movie, but the mostly despicable characters certainly make it entertaining.
What’s more, it’s a story that needs to be told.
Matt Nestor, the head of the Massachusetts Securities Division, joined me when the movie opened last month.
We both had seen it all before, though not on the big screen. The story was hauntingly familiar, reminiscent of First Jersey Securities, Stratton Oakmont, H.J. Meyers and any number of other infamous chop-shop swindle houses.
Just a week before the movie opened, 21 brokers in the defunct Sterling Foster micro-cap securities firm were indicted on federal charges. Accounts of their actions sound like something right out of the movie.
Combine high-pressure sales tactics with greed (on the part of both customer and broker), a rebuttal book (which gives brokers a comeback for every possible excuse you can think of to put them off) and a hot stock market, and you end up with an army of guys who, as lead character Seth Davis says, “could sell bubble gum in the lockjaw ward at Bellevue.”
And while the movie focuses on the story of Davis (played by Giovanni Ribisi), it was one of his clients who got Nestor’s (and my) attention. “Harry” was middle-aged with a wife and two kids, trying to save to buy a house and have a future, with some, but not enough, money saved up to reach his dreams.
He falls victim to the sales pitch (“Think of how she’s going to feel when she knows you had the foresight to see a good thing coming”), starts small (to “inspire confidence” in the broker) and winds up throwing everything into a scam.
In the end, Harry catches just two lucky breaks. The first occurs in the movie, when Seth Davis winds up feeling sorry for him. The second is only implied by the movie; since law enforcement jumps into the picture while the brokerage firm is still operating, investors have some shot at getting restitution.
“From the standpoint of someone who has been ripped off, it’s useless for regulators to be financial archaeologists,” Nestor said after the film. “The most legitimate complaint about the regulatory community is that we’re too slow. We get after these people as fast as we can, but we don’t always get complaints or hear about these scams until it’s too late, when getting restitution becomes exceedingly difficult. After all of the money is gone, what’s the point?”
That’s one message investors need to heed whenever they are confronted by someone trying to sell them even the most legitimate of investments.
Every investor needs to take the proper precautions–doing a background check on the broker and the firm, asking for background materials and the like. The wrong time to find out that your financial adviser is a scoundrel is after the money is gone.
As an investor-education tool, “Boiler Room” falls short in three key areas:
– The audience that most needs to see what can happen if they don’t protect themselves is not necessarily the audience that will be drawn to the movie. Someone who is not drawn to things financial in their personal life–the perfect victim for a rogue broker–is not likely to want to see “Boiler Room.”
– The brokers in the movie promised enormous returns. In today’s market, in which dozens of mutual funds posted 100 percent gains in 1999 and a 30 percent annual increase is no big surprise, stock operators have a chance at sounding legitimate just by making more realistic promises. The movie failed to bring that out. Its ploys were, if anything, more obvious than what’s needed to commit fraud today.
– The movie focused on phone solicitations, which make great theater but are not how most chop shops find victims today. The medium of choice for today’s scammers is the Internet, where e-mail amounts to a cold call via new technology. Where a boiler room broker can reach a few hundred potential suckers in a day by phone, hoping for just a few takers, an Internet scammer can reach millions of e-mail addresses.
What “Boiler Room” showed was a classic “pump-and-dump” scheme, by which a firm creates a security (it can even be a legitimate company) and takes a big stake in the shares, then pumps up the demand for those shares.
The share price rises, the firm (and its stock operators) dump their shares, and the investor is left holding the bag.
Internet-variety boiler-room operatives often achieve their ends by name-dropping on message boards, hyping stocks and making sales pitches. All they need are a few suckers to blindly follow those tips in order to jack up the price.
“It’s like meeting a cheap racetrack tout,” Nestor says of the Internet activities. “If they really knew, with certainty, who would win the next race, why would they tell you?
“The kind of stuff that happens in this movie happens to people in real life,” says Nestor. “All it takes is a little bit of preventative medicine and you can be pretty sure that it won’t happen to you.”
CHECKING ON A BROKER
Before doing business with a broker, check out their education, work and disciplinary history. To make the search easy, ask for the broker’s CRD (or Central Registration Depository) number. If the broker says he doesn’t know his CRD number, ask for the Social Security number. If the broker will not give you one or the other number, take the safe route and assume hey has a problem history.
You can find contact information for your state securities administrator’s office at the North American Securities Administrators Association Web site, www.nasaa.org. Remember, too, to check with the state where the firm is domiciled, in addition to where they are doing business.
You can also check the broker’s record via the National Association of Securities Dealers public disclosure phone center, which will tell you if the agency has any complaints or cases pending against member broker-dealers. Call 800-289-9999.
Charles Jaffe
