‘Boiler Room’ Explosion Draws Attention
New Jersey real estate investor Ernie Docs believed in 25-year-old Andrew Borthwick--so much so that he paid $50,000 last fall for a 15% stake in Borthwick’s new precious metals trading firm in La Jolla.
Now, Docs wonders what happened to his money, as do more than 100 clients who invested as much as $1 million in Borthwick’s First International Metals Exchange (FIME).
“I don’t know what happened to the company,” Docs said. “I’m trying to find out.”
So are federal and state authorities, who suspect Borthwick’s firm of fraud and of improperly selling commodities futures contracts, according to affidavits filed in federal court.
Authorities are unsure what happened to the funds--which they estimate could total more than $1 million--raised from investors across the nation since the firm opened 10 months ago.
The business--suspected by authorities to be a “boiler room” operation--was closed after a raid by federal agents June 27, when they seized three dozen boxes containing FIME’s books and records.
Authorities believe there may be more than 55 questionable boiler rooms operating in San Diego County. Typically run out of storefront offices with banks of telephones, these boiler rooms simply “cold-call” potential investors gleaned from “lead sheets” purchased from mailing list companies and other sources. They sell everything from precious metals to securities, which authorities say may not be properly registered with regulators.
Boiler Rooms Closed
A handful of boiler rooms have been closed here in the last two years, including two in the last month.
The problem has become so pervasive that authorities have organized a San Diego Boiler Room Task Force, composed of investigators representing the U.S. attorney, San Diego County district attorney, FBI, state attorney general, the U.S. Postal Service, the San Diego Police and Sheriff’s departments and the Commodity Futures Trading Commission.
The task force is expected to be formally announced today, according to law enforcement sources, who describe San Diego as “certainly one of the central locations in the United States for boiler room activity.”
Although FIME hasn’t been charged with any wrongdoing, the FBI, the district attorney and the CFTC are all investigating the firm.
According to documents filed in federal court, authorities suspect that FIME improperly sold futures contracts by asking investors to make a 22% down payment to buy precious metals, mostly silver, with the balance payable in five years. Authorities contend that such futures contracts must be registered with the CFTC.
However, Mike Vallee, an attorney for FIME, insisted that the company wasn’t selling futures but merely offering “metals contracts on time.”
The affidavit filed in court does not mention the status of FIME’s investors’ deposits. Law enforcement officials say they do not know exactly how much money was raised nor do they know if any of FIME’s clients ever made a profit.
Firm Threw Fancy Parties
Several former employees, however, talk of money spent by the company on expensive parties and extravagant dinners.
FIME may be a “multimillion-dollar” case, according to one law enforcement source. When federal agents raided Borthwick’s offices, said the source, there was a wall chart noting that the firm’s four top salesmen had generated more than $500,000 in the last month alone.
Authorities so far have been able to trace two trading accounts for FIME at outside brokerage houses that at their peak totaled only about $150,000--a figure confirmed by former employees and other sources close to the case.
It could take weeks or months to sort through the dozens of boxes of company records seized late last month, sources said, adding that they are not sure that they have possession of all of the firm’s records.
Andrew Borthwick, who’s now out of a job, declined to discuss his company in any detail.
“I’m not fully aware of every penny that was brought in,” he acknowledged in a brief interview recently. “You’re talking about . . . investing in a market that’s gone down in the past year. And you’re talking about losing money.”
Borthwick said he hadn’t spent much time at the firm since January.
For many of Borthwick’s investors, the first indication that something might be amiss was when an FBI agent contacted them in late June. Other investors discovered that they had seemingly lost their funds when they read about the company’s closure in the newspaper two weeks ago.
Some FIME sales staffers suspected trouble months ago, however.
Not Allowed to Sell
“I contacted all my clients and said, ‘I don’t like what’s going on,’ ” recalled one salesman who left the firm earlier this year.
“I had several clients that, when I did make money and . . . the clients wanted to sell out, the company wouldn’t let me.” The salesman was one of more than 20 who worked at FIME.
Docs knew his equity investment--backed by a promissory note due in October--was in trouble when Borthwick refused to send him any audited financial statements. Docs has hired a San Diego attorney to look into the case.
Docs met Borthwick more than a year ago, when Borthwick worked as Docs’ broker at Concord Trading, a San Diego firm that sells precious metals financing packages. Borthwick worked there from April to July in 1985, according to marketing director David Baumer.
After Borthwick left Concord, he worked for a brief time at Prospect Oil Research Corp., a short-lived La Jolla firm that sold oil-industry investments. Prospect Oil Research folded last summer, just after authorities began investigating it.
The company used entertainer Bob Crosby’s name as its honorary chairman of the board without his authorization, according to Crosby and law enforcement sources.
Trying to start his own firm, Borthwick traveled east and “talked me into making an investment,” Docs recalled. “He’s very personable.”
If FIME’s funds are or were intact, it remains uncertain where they were on deposit.
At Bateman Eichler, Hill Richard’s La Jolla office, Borthwick’s firm never had more than $100,000 on account, according to officials there.
“He only traded a small portion” of the account, according to Lee Brooks, head of the firm’s commodities department in Los Angeles. The majority of the funds were not in a trading account but in a money-market fund, and all of it was withdrawn by the end of April, Brooks said.
Returned the Funds
Another Bateman Eichler official claimed that the firm returned Borthwick’s funds “when we got wind that something wasn’t kosher . . . we didn’t want anything to do with them.”
Borthwick, meanwhile, has complained that Bateman Eichler improperly managed his account, but no legal action has been filed.
Borthwick also has threatened legal action against Clayton Brokerage, which held a $50,000 account for his firm.
According to a broker who handled one of FIME’s accounts, Borthwick’s salesmen would place an order and then “Andrew would call me . . . and say ‘Don’t take orders from them.’ He was just making them feel happy and making them feel like they were placing (trades). It smelled real ratty.”
Some investors felt that way from the beginning.
Ron Ortt, an opinion research field interviewer in Petaluma, said he knew to stay away from Borthwick’s firm when he was asked to invest last September. Ortt lost more than $50,000 in a company that Borthwick used to work for--First International Trading Corp., a gold and silver futures firm in San Francisco that was liquidated last year after it was sued by the CFTC.
So when Brian Devlin--a fellow salesman with Borthwick at FITC and an employee of Borthwick’s at FIME--approached Ortt, the answer was a firm no. “I didn’t trust him,” Ortt said.
Another investor, Clare Heath of Michigan, may have lost as much as $80,000 in FIME. He got involved in Borthwick’s firm because he was an investor at Concord Trading, where Borthwick used to work. And his broker at Concord later went to work for Borthwick.
Devlin left FIME in late December after he discovered that the state had filed fraud and conspiracy charges against him for his role at FITC. He then went underground, according to authorities.
In April, Devlin was stopped for speeding in Phoenix, and the “computers went crazy” when the police ran a check on his license, according to a San Francisco prosecutor. He is now free on $10,000 bail on the fraud charges and is living in Northern California.
Devlin, through his attorney, declined to be interviewed.
Borthwick remains in San Diego and appears relatively upbeat.
“Whatever happens, happens for a reason,” he said last week. “I’ve learned a lot as things went on. Regardless of the business, you just have to be the best person you can be and go along with life.”
