Stock Fraud Stampede Tramples the Unwary Wall Street's Bull Market Draws Crooks to Unsophisticated Investors. Regulators Step Up Enforcement

Article excerpt

Top securities watchdog Arthur Levitt likens this tale to a Hollywood movie script: A penny stock promoter in Nevada was arrested last week after trying to have an accountant pushed down a stairway to prevent his testimony in a stock fraud case.

The charge is unusual in the securities business. Rogue brokers often perpetrate financial mayhem, not physical violence. But it illustrates the degree to which stock fraud has accelerated in the shadow of Wall Street's success.

With stock prices up dramatically, securities crooks are cheating investors out of record amounts of money. Stock fraud this year has reached at least $6 billion, say officials, triple the peak of the 1980s. "In a market like this, parasites crowd in to feast on the bull's success," Mr. Levitt, chairman of the United States Securities and Exchange Commission (SEC) told a congressional subcommittee Monday. Fraud in low-priced stocks, especially so-called penny stocks, has soared. The cheap prices, less than $5 per share for penny stocks, make these securities easy targets for price manipulation. "With more and more new investors in the market and the Internet becoming more available, it is easier to reach and tap that investor enthusiasm," notes Barry Goldsmith, head of enforcement in the self-policing arm of the National Association of Securities Dealers (NASD), the regulatory body of the brokerage industry. The amount of fraud may sound large, but it forms a tiny part of the US securities business. The Nasdaq Stock Market alone trades about 600 million shares daily, some $17 billion worth, and accounts for just over half of all US securities trading in share volume. But a flood of investor complaints has invited not only congressional attention but an array of remedial measures by regulators. These range from a new SEC pamphlet on how to handle fast-talking brokers to stepped-up investigations into fraud. In May, regulators in 20 states began a crackdown against 14 brokerage firms accused of fraudulent sales practices. And the FBI has been working with securities regulators to investigate stocks of 19 small companies allegedly manipulated by organized crime. "We have stepped up both our civil and criminal enforcement efforts - we are working with {law enforcement} authorities as never before to lock up bad brokers and deter wrongdoers," Levitt testified. He said the agency also is looking to close loopholes in the rules governing the penny-stock market and is focusing more attention on unscrupulous brokerage firms, not just individual brokers. New York attorney general Dennis Vacco talks of asking the New York state Assembly for a law to help track unethical brokers, who often jump from one boiler room operation to another. The NASD already maintains a central registration depository, which incorporates a broker's disciplinary history into a permanent record. This information is available to investors through a telephone hot line (see story, below) and is scheduled to become available on the Internet early next year. Another plan calls for tighter listing restrictions for stocks on the NASD's Bulletin Board, a favorite area for unscrupulous brokers, issuers, and promoters. The Bulletin Board is not the NASD's Nasdaq Stock Market, which requires extensive financial disclosure from listed companies, such as Intel and Microsoft. But it is part of the over-the-counter market, a vast amalgam of publicly traded firms loosely regulated by the NASD. …


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