Southland Is Nation’s ‘Boiler-Room Capital,’ House Hearing Told

Two convicted swindlers who ran wildly profitable but fraudulent telephone marketing “boiler rooms” in Orange County told members of Congress Wednesday how their employees bilked innocent “mooches” out of millions of dollars in phony coin and oil lease schemes.

“In the companies I was personally involved with, I saw over $75 million get taken down,” said John Albright, a former scam operator who is cooperating with federal authorities in other fraud investigations.

Albright--the name is an alias--wore a black hood, sat behind screens and testified through a voice modulator during his appearance before the consumer affairs subcommittee of the House Committee on Government Operations.

“The objective was to steal as much money from the victim as possible, within a two-month period, before the client started questioning the whereabouts of his guaranteed refund,” added Stephen P. Bederson, who helped run an Irvine telephone scam called Midwest Mineral Properties in the late 1980s.

Southern California, especially Orange County, is the “boiler-room fraud capital” of the United States, several law enforcement authorities testified. Orange County Deputy District Atty. William L. Overtoom told the panel that the county is home to about 200 fraudulent boiler rooms that ring up gross annual sales of up to $1 billion.

The telephone swindlers’ testimony highlighted the first day of subcommittee hearings on fraudulent telephone marketing operations. The panel is considering possible changes in federal law that would help enforcement officials crack down on the scams.

Centered largely in Southern California and Florida, the fraudulent operations cost unsuspecting Americans billions of dollars a year, according to investigators.

Boiler-room artists use telephone banks to sell everything from vitamins and vacation packages to investments in precious metals and foreign currencies, often without delivering any merchandise. On those occasions when a customer does receive something, it often is worth far less than he paid.

Also testifying Wednesday were law enforcement officials and three victims of telemarketing fraud. Two widows, one 84 and the other 90, said that they had lost life savings of $20,000 and $750,000, respectively, in frauds involving investments in a movie company and foreign currencies.

“I worry constantly about a future without any savings,” said Grace L. Singletary, 84, of Dawson, Ga., who sent off a total of $20,000 to “Chariot 7 Productions” in California after a man who told her that he was a “native Nebraska boy brought up with high morals” persuaded her to invest in a film project.

Small-businessman Orlo Ellison described how office supply telemarketers corrupted his bookkeeper with personal gifts and then, with her assistance, billed his company $100,000 for merchandise that was actually worth about $10,000.

Many scam operators set up shop in Newport Beach and nearby areas simply because Orange County is “a nice place to live,” Albright told the panel.

A federal, state and local boiler-room task force in Orange County in the last two years has initiated 16 prosecutions, arrested 36 people, won 14 convictions and has 30 investigations in progress, he said.

Nationally, law enforcement officials estimate that at least 85% of boiler rooms are not being investigated, Overtoom said. “The primary reason . . . is the lack of manpower, economic resources and effective laws,” he said.

Katz, Overtoom and other prosecutors who testified said that the federal government should consider amending its mail and wire fraud statutes to permit authorities to seize, with a court order, the assets of fraudulent telemarketers. The concept was endorsed by California Rep. C. Christopher Cox (R-Newport Beach), one of the subcommittee members.

Albright and Bederson described in detail how fraudulent telemarketers ply their trade.

They often begin by purchasing names of existing but dormant corporations “off the shelf,” so that they can claim their boiler room has been in existence for five or 10 years. They told of how inexperienced salespeople called “fronters” use written pitches to make initial calls to potential victims, or “mooches.” The ones who show an interest then are turned over to more experienced account closers, he said.

Albright, who worked a coin scam, explained how another boiler-room employee known as a “reloader” would “find out how deep the customer’s pockets were and ascertain how long it would take to get as much of that money as possible.”

“We targeted the wealthy and the elderly in our fraud,” Bederson said. “We found the elderly intent on enlarging their nest egg, their limited income, and often interested in generating money for their grandchildren.”