‘Boiler Rooms’ Prey on Staff of Distant Firms
The thieves took more than $600,000 from the Greeneville Sun before the Tennessee newspaper’s publishers even noticed that it was gone.
They were both sophisticated and greedy, and they got the newspaper’s money without leaving the San Fernando Valley--by using the telephone.
The Sun was the victim of United Business Exchange, based in North Hollywood, a “boiler room” that authorities believe took more than $2 million a year from out-of-state businesses in a long-running telemarketing scam involving office supplies.
And United Business Exchange’s take is only a drop in the bucket. In Southern California, which authorities call the boiler room capital of the United States, the Valley has become home base of the office-supply scam.
More than 100 Valley boiler rooms bilk hundreds of millions of dollars each year from businesses across the country, authorities estimate.
These boiler rooms use slick, high-pressure sales tactics to persuade unwitting purchasing agents to buy supplies ranging from yellow legal pads to generic copy-machine toner at prices inflated as much as 1,000%. Often the products are never even delivered.
‘Unlimited Opportunity’
“It is the valley of unlimited opportunity,” said Assistant U.S. Atty. David Katz.
Katz coordinates the San Fernando Valley Task Force, a team of investigators from several federal agencies who are attacking the boiler room problem. Established earlier this year, the task force has had some success--its agents arrested the chief operators of United Business Exchange.
But investigators concede that the task force is overwhelmed by the number of boiler rooms in the Valley.
Authorities said they do not know why Valley boiler rooms specialize in the office-supply scam, as opposed to other telemarketing frauds. But, they speculate, the area has lots of relatively inexpensive warehouse space, which those operating the scams need to store supplies.
The average boiler room, authorities said, employs about 20 sales agents, but some have as many as 50. It is common for the salespeople to establish their own operations after they learn the ropes of the scam and develop their contacts, investigators said.
Boiler room operators--called “scammers” by authorities--prey on the naivete of their victims and count on the odds. Business directories from cities all over the country provide a supply of potential marks, and the sales agents, cold-calling hundreds of businesses each day, regularly connect with victims, authorities said.
‘Get Foot in Door’
“They are going for the 2% of the calls where they can get their foot in the door,” Katz said. “If they get in and can tap into a large pool of money, then they are off to the races.” Using carefully prepared scripts, the salespeople initially attempt to sell a small quantity of marked-up supplies and usually try to turn the purchasing agents into willing collaborators by sending them small gifts or “premiums,” investigators said.
Scammers, authorities said, hope that the purchasing agents will order larger and larger quantities of the exorbitantly overpriced copy toner, pens, papers and other supplies to continue receiving the premiums--thinly disguised bribes that can range from TVs to trips to Hawaii.
It is a process that investigators call “hooking the mooch.” Once company insiders, or mooches, have accepted gifts, the scammers play on their greed to continue the scheme. Some mooches may even receive direct cash kickbacks. If the mooches hesitate after receiving initial gifts, they are threatened with exposure, authorities said.
“If the buyer wants to balk, . . . the operator will say, ‘Look here, how would you like your boss to know about the gifts that you are getting at home?’ ” said Larry Johnson, a federal postal inspector in Los Angeles who is assigned to the task force.
Rewarding Trade-Off
It is a lucrative trade-off for the boiler rooms. If a sales agent finds highly cooperative mooches, investigators said, the boiler room may not even send the office supplies. Checks to the boiler room from the victimized company and phony receipts and kickback checks to the mooch may be the only items going through the mail, they said.
Such was the case with Edith Malone, a 28-year-old bookkeeper for the Greeneville Sun. Authorities said she enabled United Business Exchange to siphon more than $600,000 from the newspaper in 1985 and 1986.
According to authorities, she received $40,000 and numerous gifts from United Business Exchange while sending back company checks, sometimes for more than $100,000 a month. Few of the supplies that she purchased were delivered, investigators said.
Malone was caught when her superiors noticed the large cash shortages during an internal audit. Malone cooperated with an FBI investigation and later pleaded guilty to forgery. She was sentenced to five years in federal prison.
“We were hit quite a lick,” said Gregg K. Jones, co-publisher of the newspaper. Although insurance covered most of the loss, he said, “it really set us back.”
Malone was described as a naive woman who left Greeneville County for the first time when she was sentenced to prison. She was a trusted employee who authorities believe was initially tricked into her initial order of supplies by high-pressure sales tactics.
Received VCR, TV
Later, authorities said, she willingly joined the scheme, receiving a telephone, a food processor, a VCR, two stereos and a television in addition to the $40,000 as kickbacks.
“After three or four gifts, she was hooked,” said Tom Dugan, another Los Angeles postal inspector on the task force.
Last month, the main operators of United Business Exchange, Laszlo Grabecz and Peter Tripp, both 41, were indicted in Greeneville on fraud charges, along with two sales managers, Richard Fonseca, 54, and his son, Christopher Fonseca, 25.
When the suspects were arrested, they were operating a boiler room under a new name, Business Systems Exchange, in Sherman Oaks. They are scheduled to be arraigned this week in U.S. District Court in Greeneville.
Authorities said the case shows how lucrative the boiler room business can be for its operators, particularly if a sales agent can develop a “mega-mooch.”
On the day the operators of United Business Exchange were arrested, Grabecz was driving a Bentley and Tripp was driving a Rolls-Royce, authorities said. Both lived in homes in the Mulholland Drive area. After their arrests, they put up $1 million in bail each and were released.
A Valuable Resource
Since “mega-mooches” are so valuable to boiler rooms, the operators may sell the information about cooperative mooches to other operations, Dugan said.
An office manager at a Denver-based business management consulting firm became a mooch for National Industries of America, a boiler room based in Sherman Oaks. After she helped it filch $10,000 from her employer, she was contacted by seven other Valley-based office-supply boiler rooms, which either bought or were told information about her, Dugan said.
The woman wound up helping the eight boiler rooms steal $100,000 from her employer before she disappeared in February, after being told that the office was scheduled for an internal audit. Presumably, she received about a 10% kickback on the orders she placed, said authorities, who are still investigating the eight boiler rooms.
In past years, boiler rooms rarely hooked “big-money mooches,” authorities said. But, Katz said, his investigators believe that the office-supply scammers are becoming more sophisticated.
“Six months ago, I would have said $100,000 was a mega-mooch case,” he said. “Now I have two cases where there are $1-million mooches.”
But whereas cases involving mega-mooches draw the most attention, authorities said boiler room operations do not require inside operators to make a profit.
‘Toner Phoner’ Scam
Jonathan Levin-Epstein, office manager of a New York law firm, has become an expert in the small scam known as the “toner phoner.”
In July, just two months after he began work as the firm’s office manager, he said he became a victim when he was called by a boiler room now under investigation by the Valley task force.
Levin-Epstein said the caller told him that the price of toner for the firm’s copy machine was about to increase and asked if he would like to place a final order at the old price. Levin-Epstein said he had never before ordered toner and ordered two cases, thinking that he was getting a deal.
When the bill arrived, he was charged $916.55. If he had purchased the same toner from Xerox, the firm’s legitimate supplier, the cost would have been $306, he said.
“They represented themselves as the authorized Xerox supplier, and me being new in the office and naive, I said, ‘Fine,’ ” Levin-Epstein said.
Second Part
About a month after the first shipment, the telemarketing firm called Levin-Epstein again, and he was told that the second part of his order was being shipped, along with a color television he had won in a lottery of customers’ names.
“I thought maybe the second part of the order explained the inflated prices,” he said. But shortly after the second shipment of four cases of toner arrived, so did a second bill--this time for $1,785--and the TV.
Despite the gift, Levin-Epstein wasn’t hooked. He said he contacted Xerox and discovered that the company he had dealt with had misrepresented itself. He refused to pay the bill and contacted authorities.
Like Levin-Epstein, many purchasing agents realize after several deliveries that they are being cheated and cease doing business with the boiler rooms. But the victims usually feel it is not worth their effort to try to recover their losses of $500 to $1,000 from boiler rooms hundreds or thousands of miles away in California.
Authorities say there are victims of Valley-based boiler rooms in every state but one--California. Local telemarketing scammers scrupulously avoid calling businesses here because they know that a lack of in-state victims makes prosecution more difficult.
Since in-state victims are a rarity, Johnson said, state and local authorities have difficulty investigating boiler room operators--which leaves the task to federal authorities such as the FBI, IRS and Postal Service. Those agencies have agents assigned to the Valley task force.
The task force is involved in multiple investigations of boiler rooms. In addition to arresting the suspects in the Greeneville Sun case, its agents raided three other boiler rooms last month. Six other boiler rooms shut down this year after investigators confronted the operators with complaints.
To help stem the tide of boiler rooms in the Valley, the task force routinely cooperates with local authorities in the victims’ regions. The Greeneville Sun case is being handled by prosecutors in Tennessee, and another case, involving a North Hollywood man, is being prosecuted in Oklahoma County, Okla.
Authorities there say John Hagey, an experienced boiler room sales agent trying to launch his own operation, offered 10-ounce silver bars to purchasing agents who ordered office supplies priced at about three times their market value.
Charles Rogers, an assistant district attorney in Oklahoma County, said one of the people Hagey called with that offer was Gene Kelly, the county purchasing agent. With Rogers’ permission, Kelly ordered supplies, received four bars of silver and tape-recorded his conversations with Hagey.
Hagey is being prosecuted on charges of bribery and racketeering. He has pleaded not guilty.
