Turning up the heat on the `boiler rooms'. Big task force cracking down on investment con games in US
In December, southern California was dubbed ``the investment fraud capital of the world'' by its own state attorney general. As many as 200 illegal ``boiler room'' operations were hawking everything from gold to office equipment. ``It was like somebody turned the entire country on end and all the boiler room con operators fell into this corner,'' says assistant United States Attorney Terree A. Bowers.
Mr. Bowers is coordinating a huge federal, state, and local task force that has been cracking down on boiler room fraud since last fall.
And on Jan. 1, a tough California telemarketing registration law went into effect, giving enforcement officials a new weapon against telephone sales fraud. Now, it's the boiler room operators who are feeling the heat.
``We're bringing charges against three or four operations a month,'' Bowers says. State and local authorities are moving, too. ``We're already having an impact. Sometimes its hard to put together an operation of this size. We've had extraordinary cooperation at all levels,'' he says.
But the task force work is far from over. There are investigations into some 60 commodities operations in Orange County, and investigators are eyeing a dozen oil and gas operations in the area. ``In just a few months, depending on the pitch, they can rake in millions of dollars,'' says Bowers. In all, more than 100 investigations are pending.
Southern California became the fraud operators' mecca by default. In the last two years, a federal and state crackdown in Florida sent many swindlers scurrying west, first to Nevada, then California.
And ``over the last 10 or 15 years there's been an incredibly disproportionate number of operators in the Sunbelt states,'' says Douglas L. Campbell, an investigator with the National Futures Association (NFA).
``Why don't you have boiler rooms in Bismarck, North Dakota? Because these guys want to be out flashing their money,'' Mr. Campbell says. The stereotypical boiler room salesman, he says, wears a diamond ``pinky ring,'' a gold necklace, and open-collar shirt and drives a Mercedes 280SL. ``And they own a boat that says `Trust Me' on the stern. You have to have a pretty big ego to lie 100 to 150 times a day.''
But boiler room scams know no geographical boundaries. Victims are scattered all over the country.
``It's almost a rule of thumb that you don't solicit in your home state, because you don't want to get the local authorities aroused,'' says Dennis M. O'Keefe, head of the state and federal liaison unit of the Commodities Futures Trading Commission in Washington. The CFTC is a federal watchdog agency similar to, but smaller than, the Securities and Exchange Commission (SEC).
Florida is cited as a state that has made significant strides in ousting con artists.
Two years ago there were 30 to 50 boiler rooms in the state. Now officials know of perhaps a handful. ``Florida has taken the enlightened attitude of `Who cares where the victims are, they're operating illegally in our state,'' Mr. O'Keefe says.
Florida, working with the CFTC, is pursuing a course successfully taken by New York a few years back: tougher laws and aggressive prosecution. ``New York doesn't have a problem now, because they started filing criminal cases and putting people in jail for four to 12 years,'' says Campbell at NFA. In some states, he says, con artists figure a short six-month jail sentence into the cost of doing business.
Orestes J. Mihaly, director of the bureau of investor protection and securities in the New York Attorney General's office, says that ``the word got out in that underground of people knowledgeable about commodities fraud'' that New York was an inhospitable environment.
But New York and Florida are among the few states with clear jurisdiciton over such fraud. Many states are geared toward handling securities fraud but lack legislation to attack commodities fraud. Swindlers take advantage of this gray area, knowing that federal resources are thin and that it may take a long time for investigators to gather enough evidence for prosecution. By then, they've skipped town.
In 1985, the CFTC, the National Futures Association, and the North American Association of Securities Administrators came out with a Model State Commodities Code to plug gaps in commodities regulation. Missouri, New Mexico, and Washington have made it law. It's before the legislators of Maine, Minnesota, and Arizona now. Ten more states are considering passage of the code.
Still, O'Keefe at the CFTC thinks a solution requires more than tougher laws. ``The real problem is a manpower problem,'' especially at the federal level.
O'Keefe points to the one CFTC investigator and three lawyers charged with monitoring hundreds of legal and illegal commodities firms in 13 western states. Says one California state official, ``They're hopelessly undermanned.''
State securities officials also lament the decline of the SEC's prosecution of boiler room scams.
``They're leaving a lot for the states to do. We find ourselves handling massive interstate cases at the state level,'' says Matthew J. Zale, head of the securities division of the Arizona Corporations Commission. Mr. Zale, a former investigator at the SEC, adds: ``I don't want to be unfair to the SEC. A lot of the guys there are doing their job. But as a national policy they've pulled back from Ponzi schemes, oil and gas -- garden-variety investment fraud. That's a failing. And individual investors are being hurt.''
In the end, enforcement officials say, the best solution is an alert, educated public.
``A fool and his money will soon be parted -- and there's nothing the federal government can do about it,'' says Arthur Salzberg of the Los Angeles CFTC office.
Second of a two-part series on securities fraud. Part 1 ran March 24.