When a stranger calls on the telephone offering a hot tip on the next IBM, amazing numbers of people just can’t resist the urge to blindly invest a few hundred dollars--or a few thousand.
Joseph I. Goldstein, a top enforcement official with the Securities and Exchange Commission in Washington and chairman of the agency’s new task force on penny stock abuse, has received “buckets” of letters from victims who have lost thousands of dollars to telephone salesmen peddling essentially worthless stocks.
“These are very, very sophisticated sales efforts that prey on people who are not that sophisticated in investments,” said Goldstein. “For a lot of them, it is a tragedy.”
Goldstein said investors should spend as much time researching a stock investment as they do buying a new car or television set.
“Don’t buy stock from someone you don’t know, in a company you’ve never heard of, without investigating the broker and the company,” he advised. “If you still have doubts, don’t buy.”
As part of its attempt to curb widespread abuses, the SEC recently issued warnings to investors and advice on what to do if you can’t control the urge to bet in this highly speculative arena.
The SEC lists three warning signs:
- Unsolicited telephone calls. Beware of a salesperson who promises quick profits with little or no risk. If an investment sounds too good to be true, it probably is.
- High-pressure sales tactics. Avoid salespeople who say they have “inside information” and insist that you buy before it becomes public, who say a stock is rising and you better buy now, or who will sell you one stock only if you agree to buy stock in another company.
- Inability to sell stock for cash. Fraudulent penny stockbrokers resist an investor’s desire to sell stocks for cash. They become evasive, insist that you invest the money in another stock or they simply disappear.
For those who still want to invest in penny stocks, the SEC suggests finding stocks traded by more than one brokerage and asking brokers to send written information about the company issuing the stock.
Also, ask the difference between the price you are paying and the price the broker’s firm paid for the stock, known as the “spread.” A big spread should be cause for caution.
Investors also can check out the broker’s background by contacting state regulators (the Department of Corporations in California) or a local office of the National Assn. of Securities Dealers.
Irving M. Einhorn, SEC regional administrator in Los Angeles, offers more pointed advice to investors that he thinks would go a long way toward eradicating abuses:
“If people will hang up the phone when these people call, the problem will go away.”