NASAA Testimony Before the New York Attorney General Regarding Micro-Cap Fraud

Testimony of Mark J. Griffin
President, North American Securities Administrators Association
Director, Utah Division of Securities
Before the New York Attorney General

July 29, 1997

My name is Mark Griffin. I am president of the North American Securities Administrators Association, also known as NASAA. I am also the Director of the Utah Division of Securities. In one capacity or another, I have been involved in state securities regulation since 1984, and I have served as director of state securities divisions in two states: Nevada and now Utah. I want to thank Attorney General Vacco and Bureau Chief Andrew Kandel for the opportunity to be here today.

NASAA was founded in 1919. It is a voluntary association drawing membership from the United States, and its territories, as well as Canada and Mexico. In the United States, NASAA is the voice of the 50 state securities agencies responsible for grass-roots investor protection and efficient capital formation.

I have come here today to discuss a very serious and growing problem. Daily, it threatens investors across the United States with the loss of collectively millions of dollars, and mounting individual losses are devastating. Moreover, in my opinion, this threat casts a shadow on every great financial institution in the New York area.

I am speaking about the efforts of some small unscrupulous firms who use sophisticated scripts and army of cold calling solicitors and brokers to sell micro-cap stocks to investors by any means, including false and fraudulent representations and dishonest and unethical sales practices.

On May 29th, at a news conference at the New York Bureau of Investor Protection and Securities, NASAA announced that 20 state securities agencies had filed 37 actions against 14 of these firms. The announcement was phase one of what is the biggest nationwide crackdown ever by the states aimed at brokers selling stock over the phone. This project was, in fact, the result of a phone call solicitation I received at my desk at the Securities Division several years ago. It was by far the most fraudulent sales pitch I had ever heard.

The caller was unknown to me. He emphasized that he worked for a Wall Street firm and
professed to have talked with me some six months earlier. The caller went on to assert
that he had made a specific stock recommendation to me during our earlier conversation.
He named the stock, which I do not now recall. He told me that if I had followed his
advice in our earlier conversation, I would have made three times my investment. He
professed extensive experience and prominence in his field. He asked me if I was
interested. I was. So interested, in fact, that I sent two of my staff 2,000 miles to audit the
firm.

Every year since, I have sent Utah auditors to visit a few New York micro cap firms annually. Whenever any of my staff is cold-called by these firms, the firm’s name is added to the audit list. It appears to us that the frequency of these types of solicitations is rising dramatically. And, on our auditing excursions to Manhattan, we have never failed to uncover sales practice violations.

When I became president of NASAA, this project took on a more national focus. I urged my colleagues to organize an audit sweep in the New York Metropolitan area to bring more resources to bear on the problem.

With our member from Connecticut, Ralph Lambiase, heading the project, and with the cooperation of the New York Attorney General’s office, in January, 1997, we created a strike force comprised of representatives from 12 states. In February, we came to the New York metro area and conducted team audits of five pre-selected firms.

At the same time, other states conducted similar investigations. NASAA served as the coordinating council for this nationwide sweep. Eventually, 20 states participated in the actions announced on May 29th. They included Alabama, Connecticut, Delaware, Illinois, Indiana, Maryland, Massachusetts, Missouri, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, Texas, Utah, Vermont, Washington, and Wisconsin. We were assisted by the NASD-R early on in the investigations and we’re grateful for that.

In the weeks leading up to our announcement, state investigators confirmed that employees of the targeted firms pressure their victims into buying stock in unknown companies by reading from scripts.

Some brokers bounce from firm to firm, taking their favorite scripts with them wherever they go. Here’s an excerpt from one taken from a trash can at a brokerage in Long Island, New York, that begins with a stage instruction to speak “slowly and nonchalantly”:

“Two to three times a year, we at Investors Associates get our preferred clients involved with a niche area of the market where we can potentially turn a six, seven figure profit within the course of a few trading hours… More specifically, initial public offerings.”

After providing more detail about a particular stock, the script goes on to say:

“In other words, a return of 100% in 20 minutes perhaps sounds a bit unrealistic… but that’s exactly how our IPO[s] trade… We did three deals last year… yielding collectively 34 point[s] within the first ten days of trading… [That's a] fact!”

Once enough shares are sold and the price is driven high enough, insiders sell the stock, making fortunes for themselves, and wiping out the savings of innocent investors. In the vernacular of the industry, this procedure is known as a “pump and dump.” Although the unknown companies being peddled are all small, it’s not their size that is dangerous, but the dishonest way that their stock is represented and sold.

I want to introduce you to two stellar examples of the type of activity I’m talking about: Mr. Daniel Scott Hernandez and Mr. Scott Charles Shay. Both work for the firm of Meyers Pollack Robbins, Inc. They are not here today, but I have brought you transcripts of their sales pitches.

Recently these gentlemen separately cold called the same Utah citizen on different occasions. The citizen happened to be my chief of Licensing. He recorded the conversations. Here are excerpts from Mr. Hernandez’ pitch:

Jenkins: How long have you been in the business?

Hernandez: I’ve been in the business for eight years now.

Jenkins: Eight years?

Hernandez: Yes. I’m the principle here at Meyers, Pollack on the seventh avenue office. We have currently been in business since 1963. We co-wrote all of our funds through Bears Stern. I’m sure your familiar with them?

***

Hernandez: …I’m part owner of this firm. I have a 30 man staff that works below me.

****

Jenkins: So how long have you been a broker?

Hernandez: I ‘ve been a broker for seven years.

Jenkins: Seven years?

Hernandez: Yes.

****

Jenkins: …okay. So did you go to college?

Hernandez: Yes, I did. I went to Zuni Farmingdale. What I’m telling you is this, my knowledge right now of what I can do for you,

Jenkins: Wait a minute, what did you major in? I want to see how bright you are. All right, I mean, did you major in Finance or business or some…

Hernandez: I majored in finance and computers.

Jenkins: Did you graduate?

Hernandez: Did I graduate? Of course I did.

Jenkins: Okay, so you have a bachelors degree.

Hernandez: Yes, I do.

***

Jenkins: So how old are you?

Hernandez: 27 years old.

Jenkins: 27?

Hernandez: Yes.

****

Jenkins: How many branches do you have?

Hernandez: 54.

Jenkins: 54 branches?

Hernandez: Yes.

Daniel Scott Hernandez is 21 years old, not 27. He has been a broker for 2 years, not 8. In fact, eight years ago he was 12 years old–probably in the 6th or 7th grade. He holds no college degree–he graduated high school in 1994. Meyers Pollack has only 29 branches, not 54. Hernandez is no principal of the firm and has no staff of 30 people. The office in which he works has 10 licensed securities agents, and he is not a branch manager.

He appears to be no better at being honest about the company whose stock he was selling than he was about answering questions about his experience. However, one thing he was very careful of was to inform Mr. Jenkins of his affiliation with the well-known firm of Bear Sterns and his prominent Wall Street Location:

Hernandez: Yes. I’m the principal here at Meyers, Pollack on the seventh avenue office. We have currently been in business since 1963. We co-wrote all of our funds through Bears Stern. I’m sure your familiar with them?

Jenkins: Yeah.

***

Hernandez: Let me make a recommendation to you, if what you get involved in a very conservative manner here of a thousand shares at these levels, vacation investment of a touch under 11 thousand dollars, now I’ll get you a standard confirmation from Bears Sterns on your desk tomorrow, along with information about my firm, Meyers, Pollack and Robbins and myself, Daniel Hernandez.

***

Hernandez: Okay, now what I’m saying to you is this. I typically never open up accounts with clients that have never men at my stature. I have men that always do at least, at least a hundred thousand in gross for themselves every single year because these type of individuals, they can understand the recommendations I bring to them,…

Hernandez: Now Matt, we’ve been on the phone for 15 minutes squabbling back and forth. I’m gonna get you all this information. Bears Sterns has been in business since 1923. All of our funds are cleared through them.

***

Hernandez: You’re in Utah, right?

Jenkins: Right.

Hernandez: I’m in Manhattan, New York.

Jenkins: Uh-huh.

Hernandez: There’s about a two hour difference between you and I and more importantly much more miles, am I right?

Jenkins: Right.

Hernandez: Now what I’m saying to you is this, the guy you deal with at Piper Jaffray, is he local or is he here in New York?

Jenkins: Local.

Hernandez: He’s local. Now, he probably does his own research, but where do you think he gets his information from?

Jenkins: I don’t know.

Hernandez: You don’t know, do you? I can almost guarantee you, all the information he gets comes from some source here in Manhattan. This is the financial, this is where the market is. I probably hear more ideas in the morning going down to have coffee than he hears in an entire week.

****

Hernandez: Matt, you know what, I like guys like you because men like you really never dealt with a New York broker, so you really have no idea what opportunity you are leaving behind right now.

Matt Jenkins knew exactly what he was leaving behind–the chance to lose money. But many people across America are taken in by the fast-taking, lying brokers. The transcript from Mr. Shay’s pitch is equally laced with lies calculated to ensnare the unwary. We summarily revoked Mr. Hernandez’ and Mr. Shay’s licenses in Utah. There is a hearing scheduled for Meyers Pollack. In the course of NASAA’s sweep, state examiners discovered four systemic abuses by the targeted firms. These include:

  • Sales practice abuses. Our examiners found an army of unlicensed solicitors who are accused of falsifying records, conducting unauthorized trades, and failing to complete trades.
  • Failure to report investor complaints. State examiners found hundreds unreported. Most of the offices audited failed to have centralized procedures for handling and reporting customer complaints.
  • Evasion of broker-dealer registration requirements through use of third party franchise agreements. When a broker-dealer or its satellite offices aren’t properly registered, that’s a sure sign something is wrong. And…
  • Abusive cold calling practices. Most of the firms and branches relied on highpressure, scripted telephone cold calling techniques that include falsifying experience and performance, as well as other outright lies.

One victim, a retired grocer in her eighties from a mid-Atlantic state, told us how she was cheated out of $99,000 when an Investors Associates broker sold, without her permission, her stake in RJR Nabisco while she was in a hospital recovering from surgery. Then again, without her permission, the broker invested the proceeds in a little-known telecommunications company. The new stock tumbled. Her demands for her money back went unanswered. Then Investors Associates offered her a settlement of $12,000. She rejected the offer and her case is now in litigation.

A truck driver in his forties from New England invested about $10,000 in a stock recommended by a broker from Investors Associates. Motivated by a desire to save for his retirement and the college educations of his five children, he asked a lot of careful questions before turning over his money. But after a series of unauthorized trades were made by a broker at Investors Associates in Melrose, New York, his entire life savings were lost.

A retired Midwestern salesman in his late seventies who does not have a pension was contacted by a broker from L.T. Lawrence & Company of New York. On January 16, 1997, the broker convinced the gentleman into buying 200 shares of Callaway Golf. Five days later, the broker sold the shares without authorization for a small profit.

On the same day, the broker then bought a thousand shares of a little known medical technology company for $13,840 without consulting his client. Six days after that, the broker bought another 4,700 shares of an unknown company for $12,400. And so on. The client learned of the trades when he received the confirmation notice. The gentleman told the broker that he didn’t have the money to pay for all that stock and he didn’t want it in the first place. But the broker wouldn’t listen.

After numerous complaints, his account was closed and remaining shares were sold and the investor, he received a check for a total of $292. L.T. Lawrence & Company lost 93% of his money.

The list is long of investors in a similar fix, all doing business, mostly with these microcap firms who make a business out of cashiering the reputation of Wall Street. What do the vast majority of these people come to think of when they again hear of Wall Street, Manhattan and New York?

In the two months since our announcement, participating states have moved aggressively against the targeted firms. Alabama, Indiana, Massachusetts, New Hampshire, Oklahoma and Texas revoked the license of Investors Associates to operate in their states. Ohio has denied their application. New Jersey has moved to revoke. Pennsylvania has scheduled a hearing for October, but the firm has not responded.

Connecticut revoked the license of Nationwide Securities. Vermont has broadened its investigation into Meyers Pollack Robbins by examining registration and sales practices issues. At a revocation hearing being conducted by Massachusetts, a broker testified to potential stock manipulation by the president of the firm, as well as numerous sales practice abuses.

New Mexico has broadened its investigation into Sterling Foster. Toluca Pacific has not responded to Indiana’s allegations of fraud; further action is pending. In many other cases, revocation proceedings on licenses of various firms to do business are under way or have been scheduled.

States that were not part of the May 29th event have moved against the targeted firms and others. Iowa, for example, has taken action against L.T. Lawrence & Company, its agent, and a former agent. Rhode Island has suspended the license of Euro-Atlantic Securities. Colorado has expelled La Jolla Capital Corporation due to widespread unlicensed securities agent activity.

In addition to these public actions, many other non-public investigations are currently underway by the states. Together, they underline the systemic, nationwide problem that we are seeking to address.

One in three U.S. households now owns securities, compared with one in 17 households in 1980. In this high-flying bull market, it’s easy for swindlers to make claims of outrageous returns sound plausible. Unfortunately, far too many investors are falling for the lure of this latest trend in boiler room scams. And the telemarketers, playing upon people’s desire for ever-greater financial returns, have been running away with millions of dollars of hard-earned money.

The state securities agencies are determined to put these firms out of business and, when appropriate, to refer their cases to the proper authorities for criminal prosecution.

Thank you for the opportunity to report on the activities of the states with regard to this important matter. Please do not hesitate to contact me or NASAA if we can provide additional information or be of assistance in any way so that we can continue to work together to protect individual investors.

July 29, 1997

Issues & Advocacy, Legislative Activity, Testimony