Alabama Securities Commission
I N V E S T O R E D U C A T I O N
I N V E S T O R T I P S
Cold Calling Alert
The telephone rings . . .
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 rights.
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.
U. S. Securities and Exchange Commission
Office of Investor Education and Assistance
Mail Stop 11-2
450 Fifth Street, N.W.
Washington, D.C. 20549
Phone: (202) 942-7040
Fax: (202) 942-9634
E-mail: help@sec.gov
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.
Toll: (202) 737-0900
Website: http://www.nasaa.org
Tell Bad Cold Callers Not to Call Again
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.
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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 www.nasdr.com .
Ask Your Broker These Questions
1. Is the investment registered with the SEC and the state
securities agency where I live?
2. 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?
3. 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?
4. How does this match my investment objectives? What is the risk that I could
lose the money I invest?
5. 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.
This alert is brought to you by ...
North American Securities Administrators Association, Inc.
U.S. Securities and Exchange Commission
The Director of the Alabama Securities Commission (ASC) cautions
potential investors to thoroughly check out any investment opportunity. For inquiries regarding securities dealers,
to report suspected fraud, or obtain consumer information email, call, or write
the ASC.
Email: asc@asc.state.al.us
Call: 1-800-222-1253
Write: Alabama Securities Commission
770
Washington Ave., Suite 570
Montgomery,
Alabama 36130-4700