The calls come from Bangkok and Barcelona, from Manila and Budapest.
Smooth-talking brokers, many of them American, use flattery, urgency, and sometimes lies to persuade foreign investors to buy stock in the small U.S. companies they tout as the next Microsoft or eBay.
But almost as soon as money changes hands, many of these can't-miss propositions become sure losers. The value of the stock plunges, and the firms that peddled the shares stop answering the phones, shut down their Web sites and vanish.
The prestigious-sounding brokerages are actually unlicensed, offshore "boiler rooms," selling stock in companies that would have little appeal without a listing on the U.S. market and trading approval by the U.S. Securities and Exchange Commission.
The rise of the overseas boiler rooms is an unforeseen consequence of globalization and deregulation.
Just as the U.S. manufacturing and technology industries have gone offshore in search of lower costs and looser operating restrictions, so has the stock fraud industry.
The Internet has added a new twist, allowing boiler rooms to create impressive virtual storefronts. Advanced telecommunications also aid in their deception, routing calls, faxes and voice mail from answering services in Hong Kong, Tokyo and other business capitals to their true headquarters in less visible locations.
In essence, the operations are everywhere and nowhere, making them hard to find and even harder to stop.
An investigation by the St. Louis Post-Dispatch has identified more than 100 publicly traded U.S. companies - some with ties to Missouri and Illinois - whose stock has been peddled by the offshore rings.
The boiler rooms profit by obtaining newly issued company stock at discount prices and immediately reselling it at big markups, a practice that is illegal in America.
Despite efforts by international regulators and aggrieved investors to disrupt their activities, the number of active boiler rooms appears to be multiplying.
"These stock boiler rooms, unfortunately, are now a permanent feature on the financial landscape," said Peter Kell, who led the Australian Securities and Investments Commission's effort to identify illegal operators and warn investors. "They're well-organized, they've made a lot of money, and they're not about to go away."
The boiler rooms have netted hundreds of millions of dollars - billions, perhaps - from victims in Europe, Australia, Asia and other parts of the world.
Foreign investors are not the only ones harmed by these operations.
Some Americans get sucked in by e-mail or Web site publicity campaigns , buy stock through legitimate brokers and are wiped out when the companies collapse or the shares sold overseas are dumped back into the U.S. market.
Americans who have sold inventions or businesses to these companies and taken payment in stock instead of cash have been left empty-handed, too.
What's more, legitimate U.S. businesses have been hindered in their search for foreign capital, because the frauds have made overseas investors wary.
Foreigners who have been burned have pleaded with the SEC to investigate. They say some companies whose shares they bought are acting in concert with the unlicensed brokerages to deceive investors, a theory borne out by the Post-Dispatch's research.
Nearly half the companies the Post-Dispatch tracked have officers, key shareholders or consultants who previously have run afoul of the SEC, the FBI or other law enforcement or regulatory agencies.
The boiler rooms also have sold shares in nearly 100 privately held companies that were supposedly poised for initial public stock offerings. None has made it to market, leaving buyers with little opportunity to cash out of their investments.
The networks include Americans who specialize in creating dubious public companies, Americans who act as conduits in getting the stock to the boiler rooms and Americans who oversee the boiler rooms or work there as brokers.
The SEC is well aware of the problem. Tucked away on its Internet site, under the heading "Publications," is an alert, "The Fleecing of Investors: Avoid Getting Burned by Hot U.S. Stocks."
The report, which succinctly describes the schemes and offers tips for avoiding trouble, was last modified in March 2001.
The SEC only recently brought its first cases against offshore boiler room rings and the Americans allegedly involved in them.
Because the agency has limited resources, it must be selective in the cases it pursues, to ensure that it gets the most for its money, said Paul Berger, associate director of enforcement.
"Obviously, we don't want to see any shareholder injured, and we don't want to see any adverse consequences to the marketplace," he said.
Investigating complex international cases requires more time and more resources than the simpler types of fraud the agency once handled, Berger said.
The FBI also has a mandate to fight fraud and other financial crimes. Since Sept. 11, 2001, however, the agency has counted terrorism as its top concern.
The FBI's stated list of priorities puts white-collar crime at No. 7, after protecting the nation from terrorism, espionage and computer attacks; combating public corruption; protecting civil rights; and fighting global and national syndicates.
But FBI officials said the intensive campaign to root out terrorists and their sources of money actually has aided the fight against stock fraud, by focusing more attention on unusual financial transactions.
"Terrorism priorities cut across all units, including white-collar crime," said Brian Lamkin, who heads the agency's financial crimes unit in Washington. "It's very horizontally integrated."
The FBI also has agents working exclusively on the overseas stock sales and has people undercover in the boiler room world, he said.
The number of boiler rooms operating worldwide has surged in recent months, as improving economic conditions and rising share prices have brought investors back into the stock market.
The Hong Kong Securities and Futures Commission had 143 suspected boiler rooms on its alert list at the end of March, up 70 percent from a year earlier. Regulators in Britain say their list has doubled in roughly the same time.
Most of the stocks being promoted by the rings are listed on the Nasdaq Over the Counter Bulletin Board, an electronic exchange for companies whose assets or share prices are too low to qualify for listing on more prestigious exchanges.
Warning lists compiled by foreign regulators contain the names of nearly 400 unlicensed firms selling investments worldwide. More than 50 of the boiler rooms have claimed headquarters or branch offices in the United States.
Because the SEC has its hands full with bigger fraud cases on U.S. soil, the sale of dubious stock abroad is well down its list of concerns, said Mark Maddox, former Indiana securities commissioner and one-time head of the North American Securities Administrators Association's international enforcement committee.
"At the end of the day, the SEC's going to prioritize what people are screaming the most about here at home," Maddox said.
William K. Black, a lawyer and professor at the University of Texas at Austin, who specializes in corporate fraud, said, "The SEC is clearly a farce in the modern era."
The agency's investigative and enforcement arms have been weakened by high turnover, low morale, inadequate budgets and impossible workloads, said Black, who was litigation director for the Federal Home Loan Bank Board during the 1980s savings and loan scandals.
But foreign securities regulators also have been powerless to stop the boiler rooms.
The rings are careful to operate across international borders, selling shares issued in the United States to investors in a second country, through an office in a third. So, they neatly evade any single government's jurisdiction.
"The boiler room operators are fully aware of the difficulties of cross-border law enforcement, and they exploit them quite expertly," said Kell, now chief executive with the Australian Consumers Association.
Tapping technology
The tactics that offshore boiler rooms employ come straight from the manuals of notorious American brokerages, such as First Jersey Securities Inc. and Stratton Oakmont Inc., the models for the movie "Boiler Room," which came out in 2000 and starred Vin Diesel, Ben Affleck and Giovanni Ribisi.
Their operators are behind bars, doing time for fraud or related offenses.
The similarities in style and technique are no coincidence. When authorities cracked down on the most blatantly corrupt U.S. brokerages in the 1980s and 1990s, some of the proprietors and their pitchmen set up shop in countries with less effective regulators.
Their use of the Internet exploits the growing acceptance of online investing, the global reach of the medium and the comparatively low startup and operating costs.
The best of the boiler room Web sites are visually impressive and emotionally persuasive. They include earnest letters to potential clients, high-minded mission statements and primers on the profits that can be realized by investing in small, promising companies before they are discovered by the masses.
Some have links to market news, stock quotes - even regulatory agencies, such as the SEC.
However, in many cases, the boiler rooms have lifted their text almost verbatim from the Internet sites of legitimate brokerages, including A.G. Edwards & Sons Inc. of St. Louis.
Many of the addresses on their letterheads and Internet sites actually correspond to business centers operated by third parties, which provide answering services and other "virtual office" functions for a monthly fee.
More than 30 addresses belonged to a single operator, Regus Group, of Britain. At least eight boiler rooms claimed to operate from the same Regus center in Bangkok, a 23rd-floor office in a complex just steps from the U.S. Embassy.
The fee for phone, fax and mail service there starts at less than $110 a month.
Regus said the operations that used the Bangkok address are out of business, and the company immediately terminates the contracts of any clients linked to improper behavior.
To extend their illusions, boiler room operators have created Web sites for nonexistent industry groups, such as the International Venture Capital Association and the International Organization of Certified Public Accountants.
The site for the International Venture Capital Association was a close copy of the one for a real group, the National Venture Capital Association.
The NVCA put a notice on its site warning of the deception. It says it is working with federal authorities to locate and prosecute the people who sought to use its name and reputation to defraud investors.
Subtle, convincing
Distinguishing charlatans from legitimate brokers can be difficult, even for experienced investors.
The slick Web sites, glossy brochures and impressive addresses in world financial capitals are so convincing that even people who work for banks, accounting firms and stock exchanges were fooled into investing.
"I feel like such an idiot," said Jane Williams, a British business owner, who invested $8,000 last fall through a European boiler room. "They lied through their teeth from the word go. They said they advised world banks. So what were they doing talking to me?"
Cold-calling remains a standard practice in the brokerage industry, a rite of passage for new brokers without an established client list. So, many of the people targeted by the boiler rooms, especially business owners, managers and professionals, are accustomed to getting unsolicited pitches for stocks and other investments.
And the techniques boiler rooms use to gain investors' confidence are more subtle and convincing than most people might imagine, said Kell.
"It's one thing to be sent one of those classic Nigerian e-mails," he said. "It's quite another to get a very well-constructed pitch from a very persuasive operator, who's trying to sell you a stock that actually exists."
The companies whose shares have been peddled by boiler rooms span a wide range of business pursuits, from the ordinary to the absurd. Their purported products include everything from computer software and communications hardware to electronic voting machines, car bomb detection devices and medical marijuana.
Another factor, Kell said: The most sophisticated scammers do not start with high-pressure sales pitches. Instead, the initial caller asks whether the target would be interested in receiving information on investment opportunities. Later - sometimes a month or two after the material arrives - a second caller initiates the sales push.
The rise of online stock trading also has made targets more willing to entrust their investment accounts to companies that exist mainly in cyberspace.
Consider that E*Trade Financial Corp., the world's biggest online broker, had 2.85 million retail brokerage accounts at the end of last year. The investments held by those customers totaled $70.8 billion. Unlike the boiler rooms, E*Trade is registered with the SEC and the National Association of Securities Dealers.
Filling in the blanks
Even though the boiler rooms have been lifting text, names and other proprietary material from legitimate brokerage and venture capital companies, those industries have done little to warn investors or fight back.
The Securities Industry Association, a trade group representing 600 companies in the brokerage industry, tends to stay out of civil and criminal enforcement matters, spokesman Dan Michaelis said. "This is really a regulatory function.'
But some investors who were burned have gone on the offensive, using the Internet to trace people involved with the schemes and to post warnings about them on financial Web sites and message boards.
The evidence gathered by one group helped spur the SEC to file a suit in October against Sukumo Ltd., a boiler room based in Laos, and five U.S. companies whose shares it promoted.
The SEC got started on the case because of a tip from a confidential informer, said Kenneth D. Israel Jr., the agency's director in Salt Lake City, where one of the companies and many of the defendants were based.
The information supplied by overseas investors helped fill in some blanks and flesh out the evidence, he said. "We were basically coming at it from a purchaser end and a packaging end," Israel said.
The SEC alleges that Sukumo collected at least $16 million from foreign investors - and that less than 20 percent of that money went to the companies whose shares the investors purchased.
The defendants include John R. Chapman, who already was facing civil fraud charges in another SEC action, and Mary E. Blake, who also had a previous run-in with the agency. A third defendant, David M. Wolfson, is the son of Allen Z. Wolfson, a repeat financial criminal, currently in prison.
The SEC recently brought a second boiler room case, against Millennium Financial Ltd. of Spain and its alleged operator, Rodney S. Shehyn of Las Vegas.
The SEC said in its civil suit that Millennium took in more than $20 million from 700 investors by selling "pre-initial public offering shares" in three other American companies.
Government investigators said in court filings that Millennium operated not only from Spain, but also from the United States and Mexico.
Shehyn previously was indicted in May 2001 for his role in a U.S. boiler room network that collected some $117 million from investors for shares in nascent Internet and telecommunications companies. He was released on bail, then re-arrested in June 2002 for violating the terms of pretrial release. He was picked up returning to the United States from Europe. He was sentenced in April to 37 months in prison on the earlier charges.
Authorities said Shehyn used six other names at Millennium - Robert Schmidt, Zach Adams, Jack Bishop, Geoffrey Williams, Alex Gray and Jason Henley.
Indeed, frequent identity and address changes make it difficult to track boiler room operators, said Norman Miller, director of enforcement for the New Zealand Securities Commission. "We regard that as a bit of futility," he said.
So do the loopholes and conflicting language in the securities regulations of different countries. "It brings up some extremely complicated questions of law," said Maddox, the former state regulator who now represents investors pursuing claims against brokers and brokerages. .
Authorities and investors often have been frustrated in their efforts to bring charges against offshore boiler rooms.
For example, in 2001, Thai authorities raided the Bangkok offices of three boiler rooms - Brinton Group, Benson Dupont and Sigama Capital - that had peddled millions of dollars worth of shares in a handful of U.S. companies.
Agents from the FBI and the U.S. Customs Service went along on the raid, which turned up more than 80 brokers and support workers from the United States, Britain, Canada and Australia.
Most of the people picked up in the raid were fined and deported. The managers of Brinton and Sigama -- three Irishmen, three Britons and an Australian -- were told to remain in Thailand to face charges.
It looked to be a serious setback for the worldwide boiler room industry. But Thai prosecutors eventually dropped the most serious criminal charges against the managers, saying they lacked evidence of fraud. All seven were convicted last week of conducting an unlicensed securities business and received suspended two-year sentences.
Although the sale of U.S. stocks by offshore boiler rooms has escalated in the past few years, such schemes have been around for more than two decades.
In the 1980s, a ring headed by an American, Thomas F. Quinn, operated a string of boiler rooms on Spain's Costa del Sol. Quinn was convicted of fraud and sentenced by a French court to four years in prison. The SEC also filed a fraud suit against Quinn in 1985.
Israel, the SEC director in Salt Lake City, worked on that case, which involved old Utah-based shell companies that were used in new stock schemes.
Israel was struck by the similarities between the old schemes and the methods recently used by Sukumo.
"The operations are very similar," he said. "It seems to be a formula that works."
Reporter Christopher Carey E-mail: ccarey@post-dispatch.com Phone: 314-340-8291
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