Fraudsters pose as broker firms

Nov 14, 2005 @ 12:01 am

By Bruce Kelly

NEW YORK - At least 75 broker-dealers' identities have been stolen by scam artists, according to sources familiar with the Securities and Exchange Commission's tracking of such "mirror fraud."

Using nearly the same names of legitimate firms, the fraudsters set up phony websites, track down shareholders of worthless stock and then offer to find buyers of those shares, for a fee.

They then pocket the registration fee and disappear, according to the owner of one small broker-dealer, who has been the target of the so-called "advance fee" fraud.

The fee could range from less than $100 to hundreds of thousands of dollars, said the small-business owner, who asked that he and his firm not be identified. He is a veteran of the brokerage business with more than 40 years of experience.

And he is incredibly frustrated.

"I've gone to everybody I could, the FBI, Eliot Spitzer, the police," he said. "The SEC is looking at this, but they won't say what. This is an epidemic."

Regulators have recognized that the fraud is on the rise. In September, NASD of Washington issued an alert to investors outside the United States warning them of scams that use phony websites and fake identities.

Micro-cap scam

The SEC last year also warned investors, particularly those overseas, of the advance-fee frauds as well as "recovery room" scams, which focus on investors who buy micro-cap stocks.

If the stock price crashes or the company shuts down, the fraudsters seek out the shareholders and claim they can help them recover losses for a substantial fee - often disguised as a tax, deposit or refundable insurance bond, according to the SEC.

Bill Singer, a securities compliance attorney with Gusrae Kaplan Bruno & Nusbaum PLLC of New York, said he knows of at least three broker-dealers that had been targets.

"I'm hearing it more and more from regulators," said Mr. Singer, adding that New Zealand and Romania are two countries in which the identity thefts are occurring.

Industry sources added that other Eastern European nations, South Africa and particularly Australia are also locations where the fraud is perpetrated.

Mr. Singer said that one client with an office across the street from the World Trade Center before Sept. 11, 2001, eventually shut down his firm, only to be told a couple years later by a former employee that a website with photos of the firm's executives was up and running.

Mr. Singer said he was annoyed at the response from some securities regulators. "They're not doing a decent job," he said. "It's a daisy chain. They refer you round and round and round. There seems to be nobody doing anything about it."

Part of the problem, industry sources said, is that U.S. regulators lack authority overseas.

Two types of phony broker-dealers are perpetrating the fraud, sources said. One is a fake firm with an almost identical name to a NASD-registered firm, and the other is one named to convey a false pedigree.

Broker-dealers should periodically type the name of their firm into a search engine such as Google to check its presence on the web, according to industry observers.

Near the end of August, securities regulators from New Zealand contacted the owner of the small U.S. broker-dealer to inform him that his firm's identity had been stolen.

According to a letter from the New Zealand Securities Commission, "Mr. Howard Douglas … has been making unsolicited investment offers to New Zealand investors," using a name identical to that of the U.S. firm but for one difference: It is identified with "Corporation" rather than "Inc."

The scam artists are so sophisticated that they even use NASD information, according to the New Zealand regulators. The phony firm sent a fax to investors with the real firm's NASD identification number, known as a CRD, or central registration depository, number.

"We're a clean firm, and they're telling people go to CRD and check us out," the owner of the small broker-dealer said.

And the scam artists use technology with ease and skill. "If they're offshore and using Internet phone numbers, it's very hard to track."

When contacted, the phony broker-dealer identified itself on an answering machine encouraging a caller to leave a message.

The real small broker-dealer doesn't have a website, but the phony broker-dealer does, the business owner said. "Everything is the same except for the phone number," the business owner said.

And the scam artists like to sound choosy about their clients. The phony website reads that the firm "reserves the right to accept clients based on criteria set by our management. Not all applicants will qualify."


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