This NFA compliant is a fascinating read and highlights the poor use of resources by financial regulators. Instead of going after the blatantly criminal activity highlighted here, they prefer to get celebrity scalps for accounting technicalities and Section 1001 violations. Martha Stewart gets the headlines, but the faith the ability of the regulators to control the market is damaged much more by firms like this.
Take one part Boiler Room, one part that Sopranos episode with the stock brokers and two parts ‘Born to Steal’ and this is what the result would be. Ruthless currency options brokers targeting unsophisticated investors without even a nod to following regulatory guidelines.
The firm listed in the complaint, Forward Forex, had only 162 customers in six months but managed to bring in revenue of over $3.6 million. Just like the movie Boiler Room the brokers would not let go once they had their claws in someone. In one case the Forward Forex broker urged his client to, “take out a second mortgage on his home, or withdraw retirement savings, or take an advance from his American Express credit card, in order to invest additional funds.”
The sales pitches are almost beyond belief and unfortunately so is the fact someone would fall for them. Anyone who has seen Boiler Room will recognize the basic tactics. These manipulations are as old as the hills and still work frequently enough that these boiler rooms can open and be shut down over and over.
How to get them on the line:
The information itself was unimportant. The brochures were sent so the broker would have a reason to contact the client.
Boiler Room:
The info we send is bullshit. The important part of the call is telling them you have that one great idea, and that a broker is going to call them back in a month.
Forward Forex:
Cohen also sent Colley a brochure regarding risk, but told Colley that the risk information was for another type of investment and was not relevant to forex. He added that the risks involved in the products that he was offering to Colley were minimal. In fact, Cohen told Colley that forex options were less risky than Colley’s investments in the stock market.
Element of Urgency:
ABC. Once they were on the line, clients had to be closed quickly. If they had time to think about it, or do even minimal research, they might change their mind. By forcing a quick decision clients would become confused, pliable, and acquiescent to the brokers demands.
In nearly every violation noted in the NFA complaint there was an element of extreme urgency in the pitch.
Boiler Room:
CHRIS
That's great, Doc. If you want to missyet another opportunity here and gowatch your colleagues get rich doingclinical trials, then don't buy a shareand hang up the phone.DR. JACOBSWell hold on a second. I didn't saythat. I just wanted to talk more aboutit.CHRISHonestly Doc, I don't have the time.This stock is blowing up right now.The whole firm is going nuts. Let meopen the door to my office.You hear that? That's my tradingfloor, Doc.Now I have a million calls to make toother doctors who are already in theknow. I can't walk you through thisright now. I'm sorry.DR. JACOBSOkay, okay. Let's do this.
Forward Forex:
When Blauch informed Deruiter that he earned a profit on his initial investment, Blauch told Deruiter that in order for Deruiter to capitalize on the extraordinary opportunities in the markets he needed to add additional funds quickly.
…
Blauch told Herickoff that he had access to information from the government about currency movement that only the biggest banks knew and that Herickoff had to act immediately if he wanted to have any chance of profiting from this information’
Selling the Dream:
The idea of Selling the Dream is that a pitch centers on the stuff the client will be able to acquire if he goes through with the trade. Talking about what could be purchased makes the gains more tangible than a focus on dollar amounts. While all brokers do this to some degree, Forward Forex took it much farther than most.
Boiler Room:
SETHI remember you saying something aboutbuying a house, right?HARRYYeah.SETHWell, how'd you like to pay for ittomorrow... in cash?
Forward Forex:
The unknown Hamlin Mercer sales person told Fish that it was not unusual to see a $15,000 investment turn into $60.000 and promised Fish to put a Ferrari in his front yard.
Anything for a sale:
Insults, yelling, pleading, anything goes.
Boiler Room:
SETH
Listen, if you couldn't pull threethousand together your name wouldn't beon my desk during business hours. Whatdo you mean you don't have it? John,please, you're embarrassing me. I'mpitching you from under my desk. I'membarrassed.
Forward Forex:
Blauch also told Herickoff that his account was far too small for Blauch to waste his time on. Blauch told Herickoff that if he did not add another $25,000 to his account immediately, Blauch was not going to work with him.
Doubling Down:
The brokers always come back demanding more. If the first trade went well, “hey lets make some REAL money now,” if not, “we’ll double down and make it up on the next one.” Once they have a client marked they would not give up calling him. With only 162 clients they had to squeeze them hard to keep the firm going.
Boiler Room:
SETHRight, and it's still going there,probably even higher now. This doesn'tchange anything except that you'regoing to make more money than you didbefore. Look Harry, I liked it ateight, I love it at four. It's anaverage down for you.HARRYWhat?SETHDollar cost averaging. If you own ahundred shares at ten dollars and nowyou buy another one hundred at five,that's a F200 shares at $7.50 a share.Your cost basis is lower. Now if I getyou involved at ten and take you out atfifteen, you've made how many pointsHarry?
Forward Forex:
Canter told Eggers that his account was doing exceptionally well, and that it would be foolish not to take further advantage of these favorable markets. Canter even encouraged Eggers to take out a Second mortgage on his home, or withdraw retirement savings, or take an advance from his American Express credit card, in order to invest additional funds.
Coming home to roost:
When the scam finally beings to fall apart, the brokers who never stopped calling are suddenly unreachable, by then the money is gone and several months later the regulators might get around do doing something about it.
Boiler Room:
HARRY(almost crying)Listen Seth, I'm in a heap of troublehere. I need that money back. I wassupposed to use it for a down paymenton a house for my family. We're goingto lose the house now.SETHHarry, listen, it's going to rebound.HARRY(screaming)Seth!! I need the money back!!!SETHI'm sorry. I can't do that. I have togo.Seth hangs up the phone. He looks very disturbed.SETH (CONT'D)If he calls back, I'm not here.
Forward Forex:
Customers Willingham and Hammersmith were unable to reach Blauch or anyone else at Hamlin Mercer, for days at a time. All the while, their open option positions were nearing expiration.
…
Hammersmith – after being unable to contact Blauch – tried to reach Winters, his original broker. The receptionist at Hamlin Mercer refused to connect Hammersmith to Winters, telling him that Winters was no longer his broker and that he would have to speak with Blauch. Hammersmith also contacted Freedberg, who told him that Blauch had had a heart attack and was at a hospital in Minnesota. Freedberg said that Hammersmith was not going to be able to contact Blauch again. When Hammersmith asked whether he could be connected to Winters, Freedberg stated that he did not even know who Winters was and added, “Sorry, but this is the chance that you took.”
So far the NFA has only filed a complaint. It’s too little too late for the customers of the firm, over 90% of them have lost money, likely for good, so this won’t have a happy ending. Yet it will still be better than the alternative ending to Boiler Room. If you have the DVD you can view this:
Seth comes out of the building and heads to his car. As soon as he begins to cross the lot he notices a man coming toward him. It is HARRY. There are walking right towards one another. Harry accidentally drops his briefcase. The contents spill onto the floor. Seth bends over to help. He nervously looks around as he helps Harry, waiting for the Feds to show. Seth unknowingly picks up the gun case and hands it to Harry. Harry is very gracious. HARRY Thank you so much. SETH (smiling genuinely) No problem. CUT TO BLACK.
Posted: July 23rd, 2007 under General.
Comments: none
Our monthly reports tell you what countries and currencies offer the best deals. Travel and buy smart!