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Banking Department Files Actions Against
Alleged Boiler Rooms Targeting Stock Investors
May 29, 1997
As part of the biggest nationwide crackdown ever by state securities agencies against telemarketers who sell small cap stock to investors, the Connecticut Department of Banking announced today that it has filed several actions against broker-dealers and their representatives alleging numerous sales practice abuses.
"Investors today need to be on guard against a growing and disturbing trend in boiler room scams," said State Banking Commissioner John P. Burke. "Using extremely aggressive sales practices, scam artists are pressuring people to purchase stock in unknown companies at artificially high prices. When promoters stop hyping these stocks, their price collapses and investors are left with losses."
In response to an increased number of investor complaints and at the recommendation of Securities Division Director Ralph Lambiase, Burke last year approved a shift in agency resources to focus on firms using aggressive sales tactics to push small cap stocks in Connecticut. As other states recognized they shared similar problems, the securities agencies' umbrella organization, the North American Securities Administrators Association, Inc. (NASAA), in the late fall of 1996 authorized a special project. Earlier this year, a task force comprised of representatives from 12 states, including Connecticut, conducted surprise examinations of five brokerage firms with headquarters in the metropolitan New York City area. In addition, branch offices in several other states were scheduled for coordinated audits. One result of Connecticut's examinations and investigations are the actions announced today.
The Department of Banking is bringing administrative action to revoke the broker-dealer registration of First United Equities Corporation, whose principal place of business is located in Garden City, New York. The Banking Department alleges that unregistered agents of First United effected numerous transactions in Connecticut, that agents sold unregistered and non-exempt securities in Connecticut and the firm engaged in dishonest or unethical business practices.
First United employees allegedly represented in telephone calls that an initial public stock offering of U.S. Golf & Entertainment was "oversubscribed." Connecticut examiners found the firm had only one indication of interest in its files for 85,000 shares of U.S. Golf, while U.S. Golf's prospectus indicated an IPO comprised of 1.1 million shares. The agency also alleges that First United executed preferential transactions for family members of employees.
The Banking Department is also bringing administrative action to revoke the broker-dealer registration of Investors Associates, whose principal place of business is located in Hackensack, New Jersey. The agency alleges that the company failed to supervise agents who conducted unregistered activity, failed to prevent an excessive number of cancelled trades and failed to institute adequate branch audit procedures.
Over the past several years, unregistered agents at Investors Associates allegedly executed over 600 transactions with Connecticut residents. State examiners found that 185 out of 768, or 24% of transactions were cancelled at one branch during a recent month. Numerous cancelled trades can be a red flag for unauthorized trading and very aggressive sales tactics.
In addition, the department is seeking to revoke the agent registration of Herman Epstein, Chairman of Investors Associates. Mr. Epstein is responsible for the compliance and supervision aspects of Investor Associates.
The Banking Department also announced it has issued a notice of intent to revoke the broker-dealer registration of Nationwide Securities Corporation, whose last known principal place of business was in Valrico, Florida. The issues raised in the investigation of Nationwide contributed to the agency's decision to shift more resources to examining firms in the small cap market. The Banking Department alleged that the firm and certain of its agents effected numerous transactions in Connecticut while unregistered, that agents sold unregistered and non-exempt securities in Connecticut, that the firm filed a false or misleading statement in seeking Connecticut registration and that it failed to meet minimal capital standards.
As part of the Nationwide case, the Banking Department issued cease and desist orders to Joseph R. Huff, Nationwide's President, and Benjamin Vincent Salmonese, Jr., an agent of the firm. The department alleged that Mr. Huff caused a false or misleading statement to be filed in connection with the firm's application for Connecticut broker-dealer registration by incorrectly stating Nationwide had not previously effected securities transactions in the state. Mr. Salmonese was alleged to have executed at least 34 securities transactions in Connecticut without being registered.
Burke said, "At a time when some have called for less securities regulation, these actions highlight the potential problems that may occur in the marketplace and demonstrate the proactive way state securities regulators can effectively work together to protect local investors. It is unfortunate that unscrupulous promoters use the small cap market, an important source of capital formation, to prey on unwary investors."
The Banking Commissioner urged residents to become immediately skeptical when a caller uses overly aggressive tactics to sell securities. "When you're contacted by someone from an unknown securities firm, always investigate before risking your money," Burke recommended. "Call the Department of Banking's Securities Division to first check out the person and firm. If a stranger starts pressuring you to make an immediate decision, just say you are not interested and hang up the phone."
To help educate the public about the new trend in boiler room fraud, the Department of Banking is releasing an Investor Alert that outlines the scope of the problem and offers tips to consider before investing. Investors can call the department's Securities Division at (860) 240-8230 or toll-free at 1-800-831-7225 to request a free printed copy or they may write to the agency at 260 Constitution Plaza, Hartford, CT 06103-1800.