It happens to all of us. The telephone rings as you're
sitting down to dinner, relaxing with family or friends, or putting the kids to
bed. A stranger is selling something.
. . . is there help or trouble on the
line?
It's known as “cold calling.” For many businesses, including securities
firms, cold calling serves as a legitimate way to reach potential customers. But
sometimes serious trouble and financial losses await you at the other end of the
line. Dishonest brokers may pressure you to buy a bad investment. Or the
investment might be a scam.
Whether the calls are annoying, abusive, or downright crooked, you can
stop cold callers. The law protects you by requiring cold callers to follow
several rules. But you need to take steps to take advantage of these rules and
to protect yourself.
This brochure tells you about your legal rights, how to deal with cold calls,
how to stop them, and how to evaluate any investment opportunity that comes your
way over the telephone.
Cold Callers Must Follow These Rules
When people from the securities
industry call to sell you something, they must:
Call Only Between 8:00 a.m. and 9:00 p.m.
These time restrictions do not apply if you are already a customer of the
firm or you've given them permission to call you at other times. Cold callers
may call you at work at any time.
Say Who's Calling and Why
Cold callers must promptly tell you
their name,
their firm's name, address, and telephone number, and
that the purpose of the call is to sell you an investment.
Put You on Their “Do Not Call” List, If You Ask
Every securities firm must keep a “do not call” list. If you want to stop
sales calls from that firm, tell the caller to put your name and telephone
number on the firm's “do not call” list. If anyone from that firm calls you
again, get the caller's name and telephone number, note the date and time of the
call, and complain to the firm's compliance officer, the SEC, and your state's
securities regulator. Further below, you'll find information on how to make a
complaint.
Treat You With Respect
Cold callers can't threaten, intimidate, or use obscene or profane language.
They can't call you repeatedly to annoy, abuse, or harass you.
Get Your Written Approval Before Taking Money Directly From Your Bank
Accounts
Before investing, you should always get answers to the questions below and
written information about the investment. If you do decide to buy from a cold
caller, do not give your checking or savings account numbers to the broker over
the phone. Brokers must get your written permission – such as your
signature on a check or an authorization form – before they can take money from
your checking or savings account.
Tell You the Truth
People selling securities must tell you the truth. Brokers who lie to you
about any important aspect of an investment opportunity violate federal and
state securities laws.
What Are Signs Of Trouble?
Honest brokers use cold calling to find clients for the long term. They ask
questions to understand your financial situation and investment goals
before recommending that you buy anything. While you may find their cold
calls annoying, honest brokers who follow the cold calling rules are acting
within their r쵸xẈƬ��
Dishonest brokers use cold calling to find “quick hits.” Some set up “boiler
rooms” where high-pressure salespeople use banks of telephones to call as many
potential investors as possible. These strangers will hound you to buy stocks in
small, unknown companies that are highly risky, or sometimes, part of a scam.
Watch for these signs of trouble.
High-Pressure Sales Tactics
Aggressive cold callers speak from persuasive scripts that include retorts
for your every objection. As long as you stay on the phone, they'll keep trying
to sell. And they won't let you get a word in edgewise.
“You'd hammer them. I always remember this one guy, I mean, I just stayed
on the phone for almost an hour, and he finally bought.”
– A “boiler room” broker
Beware of brokers who pressure you to buy before you have a chance to think
about – or investigate – the “opportunity.”
“Stop right there! You're a businessman and you make decisions every day.
You didn't get where you are by being stupid . . . Let's confirm the order now.
OK?”
– A “cold calling” script
Watch out for dishonest brokers who tell you about a “once-in-a-lifetime”
opportunity, especially when the caller bases the recommendation on “inside” or
“confidential” information.
“My broker said the company was in the process of buying this 100,000
watt radio station . . . The information wasn't on the street yet, but once the
information did go out, the stock was going to double or triple.”
– An investor in Virginia
Don't fall for brokers who promise spectacular profits or “guaranteed”
returns. If the deal sounds too good to be true, then it probably is.
“My broker was speaking of the AIDS epidemic and how much work was going
into it with the laboratories and so on. And this particular company, working so
close with it . . . he said the stock would go through the roof. And he said it
was absolutely a sure thing . . . It would just continue to rise. Maybe as high
as $20 or $30 per share.”
– An investor in Virginia, who lost $70,000 while his
broker made over $15,000 in commissions
Don't deal with brokers who refuse to send you written information about the
investment.
“I asked the broker not once but three times to send me some information.
'Ed McMahon's been sending you information for years; he hasn't made you any
money,' was his reply.”
– A reporter for the Washington Post
The “Three-Call” Technique
Some cold callers wait before turning up the heat. In their first call – the
“warm-up” – they'll try to build your trust by describing their firm's past
successes and the high quality of its research. The callers might ask permission
to call again if an “exciting” deal comes along, but won't pressure you to buy.
“I am invariably told these are not sales calls!! They assure me that all
they want to do is pass along some information concerning their firm and track
record, and will get back to me if and when something hot' comes along. When
asked about such esoteric things as appropriateness, risk levels, risk
tolerance, asset allocation and/or diversification, the topic is immediately
changed back to their history of high returns for clients.”
– An investor in Illinois
In their second call – the “set-up” – they'll whet your appetite, telling
you about a fabulous deal they “think” they can get you into. In their third
call – the “close” – they'll urge you to “buy now” or miss out.
Bait and Switch
Dishonest brokers lure new customers by encouraging them to purchase well
known, widely traded “blue chip” stocks. After you take the bait, they may
pressure you to invest in small, unknown companies with little or no earnings.
These stocks tend to be very risky and thinly traded, leaving more investors
with losses than profits.
Paying Too Much
Although they may not say so, dishonest brokers who push you to invest in a
small, unknown company often work for firms that own large amounts of the stock.
Their firm may have been involved in the company's initial public offering. Or
the firm may “make a market” in the stock, which means it buys and sells the
stock – sometimes called a “house stock”– for its own account. If only one firm
or a small group of firms makes a market in the stock, the price can be
manipulated and may not reflect the true value of the company. Dishonest brokers
often pump up the prices of their house stocks until they get rid of their own
holdings at high prices. But when they stop promoting the stock, the price
falls, and investors lose their money.
If you're not careful, you may pay too much for “house stocks.” Some
dishonest brokers overcharge their customers by adding an undisclosed “mark-up”
to the price the firm paid for the stock. Although it's illegal for brokers to
charge excessive mark-ups, some dishonest brokers mark up the prices of the
stocks they sell by as much as 100% or more.
Finding It Hard to Sell
Many investors find that once they buy a “house stock,” they can't get what
they paid for it, even if they decide to sell right away. Or they find that
their brokers simply won't sell the stock at all. Some firms follow “no net
sales” policies where brokers can't execute orders to sell “house stocks” unless
they find a customer to buy an equal number of shares. Other firms discourage
brokers from selling “house stocks” for their customers by offering low – or no
– commissions on those sales.
Dishonest brokers often refuse to take – or return – phone calls from
customers who want to sell.
“Whenever I call my broker, I am told that he is in a meeting or out of
the office.”
– A common investor complaint
These brokers will use high-pressure tactics to persuade you to keep the
stock. Or they will simply refuse to sell it.
“When I told my broker to sell my portfolio, he said I can't do it . . .
I can't explain why, but what I'll do is send you the stock and you sell it
through another broker.”
– An investor in New York
Portrait of a “Boiler Room”
The SEC and state securities regulators have investigated – and taken action
against – numerous firms and brokers who use high-pressure tactics to sell
securities. In a recent case, “boiler rooms” were described this way:
The firm was operating a classic boiler room. The brokers sat “cheek by
jowl” in a room the size of a basketball court. All of their desks were lined up
side by side in rows. The firm held mandatory sales meetings every morning at
8:30 a.m. at which time sales techniques were demonstrated and scripts for the
firm's “house stock” . . . were distributed. Brokers were expected to follow the
scripts and only give customers the information they contained. Brokers were
discouraged from doing any outside research, and were told to rely on the firm's
research and representations. . . .
After the morning sales meeting, brokers were expected to spend the entire
day (except for a lunch break) on the telephone. The firm expected a high volume
of sales, and if brokers did not stay on the phone, they were fired. . . .
One broker conceded that he falsely identified another salesman . . . as the
firm's research analyst, and gave a fictitious description of the purported
analyst as “fat, bald, and badly dressed.” He stated that the reason for the
firm's policy of discouraging customer sales was its desire to avoid negative
price pressure on house stocks, a circumstance that he did not disclose to
customers.
– From an opinion in a recent SEC enforcement case
Brokers in one boiler room defrauded investors by
lying about the firm's reputation and expertise, claiming it had a “research
department” that analyzed stocks when it didn't,
refusing to say anything negative about the stocks they pushed,
including the “risk factors” discussed in the prospectus,
making baseless price predictions, promising that certain stocks would
double in price within a short time period,
impersonating other salespeople at the firm, and
discouraging customers from selling the stocks they recommended without
regard to the customers' best interests.
Knowing how boiler rooms operate, you should be extremely
skeptical when considering any investment opportunity a stranger tries to sell
over the phone.
What Can I Do?
Report Abusive Cold Callers
When cold callers use harassing, abusive sales tactics and lie to you about
investment opportunities, they violate the cold calling rules and break federal
and state securities laws. Don't let them off the hook! To complain about
abusive cold callers, write down the name of the caller, the name of the firm,
the date and time of the call or calls, what the caller said to you, and what
you said to the caller. You can send your complaint to either the SEC or your
state's securities regulator.
Look for that telephone number in the state listings of your telephone book.
Or contact The North American Securities Administrators Association (NASAA) for
the name, phone number, and address of your local securities regulator.
Some salespeople just don't get it. No matter how many times you've told
them “no thanks,” they keep calling. If you're annoyed by cold callers, stop
them before they start their sales pitch. Tell the caller to put you on the
firm's “do not call” list. If anyone from that firm calls you again, complain to
the firm's compliance officer, the SEC, and your state's securities regulator.
Don't Warm Up To Bad Cold Callers
Cold callers often try to “warm up” potential customers with flattery or
friendship. They might try to put you off guard by chatting about your hometown
or the local sports team. Or they might suggest they've spoken with you before.
Don't fall for their tactics. And don't feel compelled to be polite or stay on
the line. You don't have to listen if you don't want to, and you don't have to
tell cold callers about yourself or your finances. Say “no, thanks” or “I'm not
interested” – and then hang up. Don't wait for the caller to end the call. YOU
are in control and can hang up at any time. If you get a fraudulent sales pitch,
be sure to take notes and report the caller to the SEC and your state's
securities regulator.
What If I Want To Invest?
Never buy an investment based simply on a telephone sales pitch. A wise
investor will always slow down, ask questions, get written information about the
investment, and investigate the background of the firm and broker. Take notes so
you have a record of what the broker told you, in case you have a dispute later.
Before making a final decision and handing over your hard-earned money, take the
time to investigate. Follow these steps:
Call Your State's Securities Regulator, and Ask
Is the investment registered?
Is the broker licensed to do business in my state?
Have you received any complaints about the broker pushing the investment or
the broker's firm? Does either have a disciplinary history? Your state's
securities regulator is the best source for this information because they give
investors more information than other organizations about the brokers who do
business in your state. States pull this disciplinary information from a
national computer system, the CRD, the Central Registration Depository.
Have you received any complaints about the stock, the company, or the
company's managers?
You can obtain a partial disciplinary history of the broker pushing the
stock and the broker's firm by contacting the National Association of Securities
Dealers' toll-free public disclosure hot-line at (800) 289-9999 or visiting
their website at http://www.nasdr.com.
Ask Your Broker These Questions
Is the investment registered with the SEC and the state securities agency
where I live?
How long has the company been in business? Is it making money? If so, how?
What is its product or service? Have the people who are managing this company
ever made money for investors in the past? Will you send me the latest reports
that have been filed on this company? How can I get more information about this
investment?
Where does the stock trade? How can I get information about the stock's
trading price? How easily can I sell? What price would I get if I decide to sell
immediately?
How does this match my investment objectives? What is the risk that I could
lose the money I invest?
What are the costs to buy, hold, and sell this investment?
Do Your Own Research
Get as much written information about the investment as you can. Ask for a
prospectus, annual report, offering circular, and financial statements. Your
local library may have resources that provide additional information about the
company, such as lawsuits, liens, or recent credit reports. Compare the written
information to what you've been told over the phone. Watch out if you're told
that no written information about the company is available. If that happens,
call your state's securities regulator immediately.
Get a Second Opinion
Talk to a trusted financial advisor or your attorney. Consider calling
another firm for a second opinion on the opportunity.
Monitor Your Investment
After you've invested, watch your investment closely. Make sure your broker
sends you account statements and written confirmation of all trades. Read these
documents carefully to make sure they are correct. Be alert for any transactions
you did not authorize.
Complain Promptly
If you have any problems, complain promptly. Contact your broker's
supervisor or the firm's compliance officer. If that does not resolve the
problem, complain to the SEC or your state's
securities regulator. We welcome your letters. Often complaints from
investors alert us to wrongdoing in the industry and are the first step in
stopping a bad broker or firm. By complaining early, you will have a better
chance of getting your money back and protecting your legal rights.