Investors Should be Wary of High-Pressure Sales Calls – Continued…
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. Brokers who apply pressure to buy an investment immediately, without providing an opportunity for the potential investor to investigate the offering, are generally dishonest. Others may speak of a “once-in-a-lifetime” opportunity, basing the recommendation on “inside” or “confidential” information which is false and is against insider trading regulations. Brokers who refuse to send written information about an investment or who are hesitant to state where their office is located are also generally dishonest.
Some of the most common types of cold calling tactics employed by dishonest brokers include:
The “Three-Call” Technique
First call is intended to build trust by describing the firm’s past successes and the high quality of its research. The caller may ask permission to call again if an �exciting� deal comes along, but will apply any direct pressure to buy. The second call is intended to �whet the appetite� of the potential investor by explaining a fabulous deal they �think� they can get investor into. The third call, the �close�, is to urge the investor to �buy now� or miss out on an incredible opportunity.
Bait and Switch
Some dishonest brokers lure new customers by encouraging them to purchase well-known, widely traded �blue chip� stocks. After this sale occurs, they then pressure the investor 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
Some dishonest brokers overcharge their customers by adding an undisclosed �mark-up� to the price the firm paid for the stock. Although it is 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.
House Stock – Finding It Hard to Sell
A broker may call and offer the customer the opportunity to purchase a stock only offered by their firm. Many investors find that once they buy a �house stock,� they cannot get what they paid for it, even if they decide to sell right away. Alternatively, they find that their brokers simply will not sell the stock at all. Some firms follow �no net sales� policies where brokers cannot execute orders to sell �house stocks� unless they find a customer to buy an equal number of shares.
Before opening any new securities account, potential investors must receive a written New Account Agreement. This should be read carefully for all the terms and conditions, especially the margin and credit terms. It is important to fully understand the agreement and to review all other written materials sent by the broker before investing. Investors need to explain to the broker their financial profile and life circumstances before any investment. Brokers must get written permission, such as a signature on a check or an authorization form, before they can take money from any checking or savings account.
Once a new account has been opened, it is important for the investor to carefully check all confirmation and account statements and to look for any evidence of unwanted credit or margin use by the broker. The unauthorized use of margins is illegal.
If any investment advice provided by a broker, that a client believes caused losses because they were provided with misleading information, were pressured into buying without the appropriate time to make an informed decision or is inappropriate advice according to their personal investment profile/goals, should immediately contact a lawyer for guidance and direction. Investors may be compensated for losses if it is proven that the broker violated any SEC regulations.
Senior Investor Fraud on the Rise – “Senior Specialists”
In December 2005, the Department of Financial Institutions – Securities Division issued a Consumer Alert that cautioned senior citizens to carefully check the credentials of individuals holding themselves out as “senior specialists” and who offer planning or financial services. The alert stated that individuals may call themselves “senior specialists” to create a false level of comfort among seniors by implying a certain level of training on issues important to seniors. In 2005, the North American Securities Administrators Association (NASAA) observed a significant increase in designations claiming to provide the holder with expertise in providing services to investors 55 years and older.