According to one estimate, about half of all Americans are investors, a large potential harvest for stock fraudsters. Stock fraud has persisted for decades, the MO only varying slightly with new technology. The losses are huge and are borne mainly by older savers who are more vulnerable to fraudulent schemes, specifically, ‘pump and dump’ schemes.
The Attorney General of New York carried out an investigation and found that $ 6 billion had been lost in micro–cap fraud. The result of the country–wide purge that followed led to the dissolution of the firms involved
Periodic clean–up exercises are carried out by industry and state authorities to protect the public. In 1997 the North American Securities Administrators Association (NASAA) launched a nationwide investigation in to stock exchange fraud involving twelve states and growing to twenty. But three things ensure stock fraud remains a viable ‘investment’ for offenders.
First, sanctions are hardly deterrent. Regulatory bodies are extraordinarily forgiving and it is not uncommon to find offenders with form going back decades for similar offenses but which resulted only in fines, paying back money and brief suspensions. The length of time it takes for some state and industry regulators to intervene to stop serial offenders means many more investors are defrauded than would have been the case if they had been stopped in their early years.
Additionally, the intended deterrent effect of the long prison sentence allowed by law is watered down by the practice of sentencing offenders to terms close to the minimum four years, giving them just over two years behind bars with good behavior on the inside. The maximum is twenty-five years.
Third, to protect the public, convicted offenders are usually barred from practice and banned from associating with other stock brokers. However, how well such a sanction is or can be enforced is an open question because convicts are often individuals ‘previously registered’ or barred for disciplinary reasons.
The unintended result has been a metastasis of brokers with disciplinary issues joining and forming other firms, keeping their fraudulent practices alive. Mark J. Griffin, president of NASAA in 1977 testified to the NY Attorney General that, “Some brokers bounce from firm to firm, taking their favorite scripts with them wherever they go.” A script is the rehearsed bait–spiel given to potential marks usually over the telephone.
The latest casualties of the lure of stock fraud are Thomas Heaphy Jr., 43, and Brian Ferraioli, 41, both of Long Island, New York. They promoted stock in a company with no viable income generating activities. Their co-conspirators then sold their own stock in that company at prices inflated by the promotional activities. They then stopped promoting their clients’ stock which became unsalable while they received 25% of the profits from the dumped stock. They are due to begin their six year sentences on 9thJuly 2018 and must make restitution of close to $7 million each.
These recent cases build on a tradition elevated by Stratton Oakmont which was only interrupted by an earlier joint operation between industry regulators and state authorities. Stratton was a stock–broking firm based on Long Island and run for ten years by Jordan Belfort, the Long Island resident who became so notorious that he featured in the film Wolf of Wall Street played by Leonardo DiCaprio. In 1996 Stratton Oakmont was de-registered by the Securities and Exchange Commission (SEC) after revelations of massive fraud. Compensatory awards against them broke all existing records.
A look at Heaphy and Ferraioli’s track records would have raised several red flags. Heaphy began his career with Stratton Oakmont. He then moved on to Duke & Co. Duke brokers systematically telephoned ordinary people offering them investments that had no hope of making the promised profits. If refused, they sometimes offered stocks in well–known businesses like McDonalds. Once they had the client’s portfolio, they would sell the blue chip shares either without the client’s knowledge or permission or after persuading the clients with false information, and then invest the funds in shares they were pumping. Other Duke alumni went on to stock fraud elsewhere for which they were convicted.
Heaphy worked for 13 firms in 18 years, five of which were expelled by the financial investment industry’s regulatory authority (Finra). During that time he was suspended twice and his license to practice was revoked by both Ohio and Alabama state regulators. Between 1999 and 2012 he was involved in eight customer disputes resulting in damages to customers of a combined $ 329,300 and regulatory sanctions resulting in fines of over $ 50,000.
His partner, Brian Ferraiolo had a shorter career, 2003 to 2007. Still, he was suspended in 2003 and fined $5,000, had his license revoked in Illinois in 2004 and was finally barred in 2007 for failure to produce records. Four of the fourteen firms for which he worked were expelled by Finra.
In the 2017 clampdown on investment fraud, Leonard Vincent Lombardo, 42, a Melville, Long Island resident pled guilty. He and his firm, The Leonard Vincent Group defrauded over 100 victims, many of them retirees, of $ 6 millionusing “high–pressure” sales tactics.
In August of the same year Eric Erb, 39 entered a guilty plea to defrauding investors of over $ 3 million of the $ 6 million he had solicited from them between 2016 and 2017. While assuring his clients of one destination of the funds he would invest their money elsewhere and then send them false accounts to cover his losses. He has agreed to hand over; the proceeds of his house, his Porsche and his boat in restitution totaling some $5 million.
September saw Brian R. Callahan of Old Westbury sentenced to 12 years imprisonment with three years’ supervised release, and ordered to pay approximately $67 million in restitution following his April 29, 2014 guilty plea to securities and wire fraud.
Two more Long Island scams resulted in thirteen people charged in July/August 2017 with defrauding investors of $14 million. Some of the defendants were former stock–brokers barred from registration for investment fraud. Others had previous disclosures dating back a number of years. Some had worked for firms themselves with histories of as many as sixty past incidents of rule–breaking. Others worked for firms that were later barred from trading.
As in many of the earlier cases, only a portion of the money Lombardo solicited by cold–calling was invested in what the client intended (real estate) and the rest went on luxuries like cars and marina fees. Some was invested in an e–cigarettes business. He and his firm offered to pay $5.9 million in settlement Newsday reported in September last year.
What makes Lombardo interesting is that he too was first registered at Stratton Oakmont. The rate at which Long Island stock–brokers succumb to investment fraud and the regularity with which they are flushed out makes them not so much wolves of Wall Street as lemmings of Long Island. In July 2017 a group of fourteen Long Islanders was charged with causing $147 million in losses through stock fraud. Brokers from Kensington Wells, yet another Stratton Oakmont spin–off, were convicted and sentenced in 2002.
There seems to be no shortage of new victims for American stock exchange scammers. No amount of publicity discourages the next person from falling for the same old tricks. One Long Island resident complains that not a day goes by without a spam–caller offering to invest his money for him. A study shows eight out of ten respondents have received potentially fraudulent cold calls.
Many investors are unwilling or unable to go the extra few yards to check the credentials of, and past complaints against their brokers. Checking has now been made easy using a simple tool provided by Finra. While the investment industry regulates itself vigorously and makes the results of investigations public, it also allows offenders to continue in the industry, racking up more and more infractions and destroying more lives before they are eventually de–registered.
Lombardo’s violations are a good example. They began in 1996 for which he was ordered to cease-and-desist by two State regulatory authorities. In 2000 he was barred by the National Association of Securities Dealers. It was a full seventeen years after that that the SEC itself barred him.
While the maximum sentence for enterprise fraud in New York is twenty–five years, even the leaders in some notorious cases have come away after serving sentences of between just two and five years. This allows them to re-enter the trade as investor relations professionals.
This profession has emerged with the internet and does not require registration. Holders and promoters of junk stock can and do pump stock using investor relations professionals. There has been a rash of recent cases in which firms hired writers to write a series of articles under the guise of impartial analysis. The articles contained statements designed to mislead potential investors.