Report on Micro-Cap Stock FraudOver 45 states, the SEC, the NASD and the New York Stock Exchange ("NYSE") have ..... over-the-counter or "Bulletin Board" stocks that do not trade on the ...
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NEW YORK STATE ATTORNEY GENERAL
REPORT ON MICRO-CAP STOCK FRAUD
BUREAU OF INVESTOR PROTECTION AND SECURITIES
December 1
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Table of Contents
OVERVIEW
HISTORICAL PERSPECTIVE
THE MICRO-CAP INDUSTRY: PROS AND CONS
INVESTOR COMPLAINTS
THE TELEMARKETING OF MICRO-CAP STOCKS
Cold Calling Abuses
Use of Scripts and High Pressure Sales Tactics
Other Sales Practice Abuses
Illegal Use of Unregistered Agents
Misrepresentations of Quality or Risk
Unauthorized Trades and "Parking"
Failure to Execute Sell Orders
Undisclosed Mark-ups and Concessions
Suitability
Market Manipulation
Unauthorized Use of Margin
Exaggerations of the Broker's Experience, Title and Amount of Total Customer Funds Under Management
Neglect of Customer Complaints
FRANCHISE OFFICES OF BROKER-DEALERS
LICENSING OF BROKERS
New York Review and Licensing Authority
Unregistered Brokers and Broker-Dealers
Series 7 Examination Cheaters
Concorde Capital
INSIDE A BOILER ROOM
So You Want to Be a Broker? Beware The Boiler Room!
Tactics of a Boiler Room Broker
Why Boiler Rooms Persist
CLEARING HOUSE PRACTICES
Dimensions of the Problem
J.B. Oxford Search Warrant
Collapse of Clearing Firms
Bankrolling Manipulation
Participating in Manipulation
Clearing Firm Conduct
Due Diligence on Introducing Brokers
Financial Responsibility and Introducing Brokers
Remedial Measures - - Industry Proposals
ENFORCEMENT ACTIONS
New York State Attorney General's Office
People v. Concorde Capital, et al.
People v. Edward McKay
In the Matter of Investors Associates, Inc. and First United Equities Corp., et al.
People v. Campbell and Prudential Corp., et al.
Other State Actions
Nationwide Crackdown on Fraudulent Telemarketing of Micro-Cap Stocks
Massachusetts: H.J. Meyers & Co.
Indiana: Sterling Foster & Company, Inc. and Biltmore Securities
NASD Regulation, Inc.
Stratton Oakmont, Inc.
GKN Securities Corp.
D.H. Blair & Co.
La Jolla Capital Corp.
INTERNET STOCK FRAUD SURVEY
POLICIES AND PROCEDURES IMPLEMENTED BY THE ATTORNEY GENERAL'S OFFICE
Access to Premises, Records and Persons
Computerization
The Franchising of Branch Offices
Stay in the Transfer of Assets
Internet Surveillance
PROPOSALS AND RECOMMENDATIONS TO COMBAT MICRO-CAP STOCK FRAUD
Increased Resources for Investigation, Registration, Enforcement and Investor Education
Licensing of Brokers
Affirmative Background Disclosure and "Broker List"
Attorney General Inspection Authority
Attorney General Cease & Desist Authority
Recognition and Implementation of Other Jurisdictional Findings
Reciprocal Subpoenas
Clearing House Operations
CONCLUSION
Hooded ex-broker testifying at the Attorney General public hearings
ACKNOWLEDGMENTS: This report was prepared by the Investor Protection and Securities Bureau of the New York State Attorney's Office, specifically, Andrew Kandel, Bureau Chief; William Mohr, Deputy Bureau Chief; Verle Johnson; John DiChiara; Scott Andersen; Elizabeth Block; Jean Marie Cho; Patricia Cheng; and Joseph Punturo. The Bureau would like to thank all of the people who provided testimony at the public hearings and assisted in the preparation of this report. The Bureau would especially like to thank the New York Law School, the North American Securities Administrators Association, the New York State Attorney General Investigators and the Financial Crimes Unit, William Martinez, Mark Griffin, Ralph Lambiase, Joe Borg, John Moscow, Daren O'Connor, Eric Colandrea, David Cieluswiak, Joseph Waterman and Lillian Reye
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OVERVIEW
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