Cold Calling

It's known as “cold calling.” For many businesses, including securities firms, cold calling serves as a legitimate way to reach potential customers. But sometimes serious trouble and financial losses await you at the other end of the line. Dishonest brokers may pressure you to buy a bad investment. Or the investment might be a scam.

Whether the calls are annoying, abusive, or downright crooked, you can stop cold callers. The law protects you by requiring cold callers to follow several rules. But you need to take steps to take advantage of these rules and to protect yourself.

This brochure tells you about your legal rights, how to deal with cold calls, how to stop them, and how to evaluate any investment opportunity that comes your way over the telephone.

Cold Callers Must Follow These Rules

Call Only Between 8:00 a.m. and 9:00 p.m. 

These time restrictions do not apply if you are already a customer of the firm or you've given them permission to call you at other times. Cold callers may call you at work at any time.

Say Who's Calling and Why 

Cold callers must promptly tell you

• their name,
• their firm's name, address, and telephone number, and
• that the purpose of the call is to sell you an investment.

Put You on Their “Do Not Call” List, If You Ask 

Every securities firm must keep a “do not call” list. If you want to stop sales calls from that firm, tell the caller to put your name and telephone number on the firm's “do not call” list. If anyone from that firm calls you again, get the caller's name and telephone number, note the date and time of the call, and complain to the firm's compliance officer, the SEC, and your state's securities regulator. Further below, you'll find information on how to make a complaint.

Treat You With Respect 

Cold callers can't threaten, intimidate, or use obscene or profane language. They can't call you repeatedly to annoy, abuse, or harass you.

Get Your Written Approval Before Taking Money Directly From Your Bank Accounts 

Before investing, you should always get answers to the questions below and written information about the investment. If you do decide to buy from a cold caller, do not give your checking or savings account numbers to the broker over the phone. Brokers must get your written permission – such as your signature on a check or an authorization form – before they can take money from your checking or savings account.

Tell You the Truth 

People selling securities must tell you the truth. Brokers who lie to you about any important aspect of an investment opportunity violate federal and state securities laws.

What Are Signs Of Trouble? 

Honest brokers use cold calling to find clients for the long term. They ask questions to understand your financial situation and investment goals before recommending that you buy anything. While you may find their cold calls annoying, honest brokers who follow the cold calling rules are acting within their rights.

Dishonest brokers use cold calling to find “quick hits.” Some set up “boiler rooms” where high-pressure salespeople use banks of telephones to call as many potential investors as possible. These strangers will hound you to buy stocks in small, unknown companies that are highly risky, or sometimes, part of a scam.

Watch for these signs of trouble. 

High-Pressure Sales Tactics 

Aggressive cold callers speak from persuasive scripts that include retorts for your every objection. As long as you stay on the phone, they'll keep trying to sell. And they won't let you get a word in edgewise.

“You'd hammer them. I always remember this one guy, I mean, I just stayed on the phone for almost an hour, and he finally bought.”

– A “boiler room” broker

Beware of brokers who pressure you to buy before you have a chance to think about – or investigate – the “opportunity.”

“Stop right there! You're a businessman and you make decisions every day. You didn't get where you are by being stupid . . . Let's confirm the order now. OK?”

– A “cold calling” script

Watch out for dishonest brokers who tell you about a “once-in-a-lifetime” opportunity, especially when the caller bases the recommendation on “inside” or “confidential” information.

“My broker said the company was in the process of buying this 100,000 watt radio station . . . The information wasn't on the street yet, but once the information did go out, the stock was going to double or triple.”

– An investor in Virginia

Don't fall for brokers who promise spectacular profits or “guaranteed” returns. If the deal sounds too good to be true, then it probably is.

“My broker was speaking of the AIDS epidemic and how much work was going into it with the laboratories and so on. And this particular company, working so close with it . . . he said the stock would go through the roof. And he said it was absolutely a sure thing . . . It would just continue to rise. Maybe as high as $20 or $30 per share.”

– An investor in Virginia, who lost
$70,000 while his broker made
over $15,000 in commissions

Don't deal with brokers who refuse to send you written information about the investment.

“I asked the broker not once but three times to send me some information. 'Ed McMahon's been sending you information for years; he hasn't made you any money,' was his reply.”

– A reporter for the
Washington Post

The “Three-Call” Technique 

Some cold callers wait before turning up the heat. In their first call – the “warm-up” – they'll try to build your trust by describing their firm's past successes and the high quality of its research. The callers might ask permission to call again if an “exciting” deal comes along, but won't pressure you to buy.

“I am invariably told these are not sales calls!! They assure me that all they want to do is pass along some information concerning their firm and track record, and will get back to me if and when something hot' comes along. When asked about such esoteric things as appropriateness, risk levels, risk tolerance, asset allocation and/or diversification, the topic is immediately changed back to their history of high returns for clients.”

– An investor in Illinois

In their second call – the “set-up” – they'll whet your appetite, telling you about a fabulous deal they “think” they can get you into. In their third call – the “close” – they'll urge you to “buy now” or miss out.

Bait and Switch 

Dishonest brokers lure new customers by encouraging them to purchase well known, widely traded “blue chip” stocks. After you take the bait, they may pressure you to invest in small, unknown companies with little or no earnings. These stocks tend to be very risky and thinly traded, leaving more investors with losses than profits.

Paying Too Much 

Although they may not say so, dishonest brokers who push you to invest in a small, unknown company often work for firms that own large amounts of the stock. Their firm may have been involved in the company's initial public offering. Or the firm may “make a market” in the stock, which means it buys and sells the stock – sometimes called a “house stock”– for its own account. If only one firm or a small group of firms makes a market in the stock, the price can be manipulated and may not reflect the true value of the company. Dishonest brokers often pump up the prices of their house stocks until they get rid of their own holdings at high prices. But when they stop promoting the stock, the price falls, and investors lose their money.

If you're not careful, you may pay too much for “house stocks.” Some dishonest brokers overcharge their customers by adding an undisclosed “mark-up” to the price the firm paid for the stock. Although it's illegal for brokers to charge excessive mark-ups, some dishonest brokers mark up the prices of the stocks they sell by as much as 100% or more.

Finding It Hard to Sell 

Many investors find that once they buy a “house stock,” they can't get what they paid for it, even if they decide to sell right away. Or they find that their brokers simply won't sell the stock at all. Some firms follow “no net sales” policies where brokers can't execute orders to sell “house stocks” unless they find a customer to buy an equal number of shares. Other firms discourage brokers from selling “house stocks” for their customers by offering low – or no – commissions on those sales.

Dishonest brokers often refuse to take – or return – phone calls from customers who want to sell.

“Whenever I call my broker, I am told that he is in a meeting or out of the office.”

– A common investor complaint

These brokers will use high-pressure tactics to persuade you to keep the stock. Or they will simply refuse to sell it.

“When I told my broker to sell my portfolio, he said I can't do it . . . I can't explain why, but what I'll do is send you the stock and you sell it through another broker.”

– An investor in New York

Portrait of a “Boiler Room” 

The SEC and state securities regulators have investigated – and taken action against – numerous firms and brokers who use high-pressure tactics to sell securities. In a recent case, “boiler rooms” were described this way:

The firm was operating a classic boiler room. The brokers sat “cheek by jowl” in a room the size of a basketball court. All of their desks were lined up side by side in rows. The firm held mandatory sales meetings every morning at 8:30 a.m. at which time sales techniques were demonstrated and scripts for the firm's “house stock” . . . were distributed. Brokers were expected to follow the scripts and only give customers the information they contained. Brokers were discouraged from doing any outside research, and were told to rely on the firm's research and representations. . . .

After the morning sales meeting, brokers were expected to spend the entire day (except for a lunch break) on the telephone. The firm expected a high volume of sales, and if brokers did not stay on the phone, they were fired. . . .

One broker conceded that he falsely identified another salesman . . . as the firm's research analyst, and gave a fictitious description of the purported analyst as “fat, bald, and badly dressed.” He stated that the reason for the firm's policy of discouraging customer sales was its desire to avoid negative price pressure on house stocks, a circumstance that he did not disclose to customers.

– From an opinion in a recent SEC enforcement case

• lying about the firm's reputation and expertise, claiming it had a “research department” that analyzed stocks when it didn't,
• refusing to say anything negative about the stocks they pushed, including the “risk factors” discussed in the prospectus,
• making baseless price predictions, promising that certain stocks would double in price within a short time period,
• impersonating other salespeople at the firm, and
• discouraging customers from selling the stocks they recommended without regard to the customers' best interests.

What Can I Do? 

Report Abusive Cold Callers 

When cold callers use harassing, abusive sales tactics and lie to you about investment opportunities, they violate the cold calling rules and break federal and state securities laws. Don't let them off the hook! To complain about abusive cold callers, write down the name of the caller, the name of the firm, the date and time of the call or calls, what the caller said to you, and what you said to the caller. You can send your complaint to either the SEC or your state's securities regulator.

U. S. Securities and Exchange Commission

Office of Investor Education and Assistance

450 Fifth Street, N.W.

Washington, D.C. 20549-0213

Fax: (202) 942-9634

Online Complaint Form

Your State's Securities Regulator

Look for that telephone number in the state listings of your telephone book. Or contact The North American Securities Administrators Association (NASAA) for the name, phone number, and address of your local securities regulator.

Toll-free: (888) 846-2722

Website: http://www.nasaa.org/nasaa/abtnasaa/find_regulator.asp

Tell Bad Cold Callers Not to Call Again 

Some salespeople just don't get it. No matter how many times you've told them “no thanks,” they keep calling. If you're annoyed by cold callers, stop them before they start their sales pitch. Tell the caller to put you on the firm's “do not call” list. If anyone from that firm calls you again, complain to the firm's compliance officer, the SEC, and your state's securities regulator.

Don't Warm Up To Bad Cold Callers 

Cold callers often try to “warm up” potential customers with flattery or friendship. They might try to put you off guard by chatting about your hometown or the local sports team. Or they might suggest they've spoken with you before. Don't fall for their tactics. And don't feel compelled to be polite or stay on the line. You don't have to listen if you don't want to, and you don't have to tell cold callers about yourself or your finances. Say “no, thanks” or “I'm not interested” – and then hang up. Don't wait for the caller to end the call. YOU are in control and can hang up at any time. If you get a fraudulent sales pitch, be sure to take notes and report the caller to the SEC and your state's securities regulator.

What If I Want To Invest? 

Never buy an investment based simply on a telephone sales pitch. A wise investor will always slow down, ask questions, get written information about the investment, and investigate the background of the firm and broker. Take notes so you have a record of what the broker told you, in case you have a dispute later. Before making a final decision and handing over your hard-earned money, take the time to investigate. Follow these steps:

Call Your State's Securities Regulator, and Ask 

• Is the investment registered?
• Is the broker licensed to do business in my state?
• Have you received any complaints about the broker pushing the investment or the broker's firm? Does either have a disciplinary history? Your state's securities regulator is the best source for this information because they give investors more information than other organizations about the brokers who do business in your state. States pull this disciplinary information from a national computer system, the CRD, the Central Registration Depository.
• Have you received any complaints about the stock, the company, or the company's managers?

You can obtain a partial disciplinary history of the broker pushing the stock and the broker's firm by contacting the National Association of Securities Dealers' toll-free public disclosure hot-line at (800) 289-9999 or visiting their website at http://www.nasdr.com.

Ask Your Broker These Questions 

• Is the investment registered with the SEC and the state securities agency where I live?
• How long has the company been in business? Is it making money? If so, how? What is its product or service? Have the people who are managing this company ever made money for investors in the past? Will you send me the latest reports that have been filed on this company? How can I get more information about this investment?
• Where does the stock trade? How can I get information about the stock's trading price? How easily can I sell? What price would I get if I decide to sell immediately?
• How does this match my investment objectives? What is the risk that I could lose the money I invest?
• What are the costs to buy, hold, and sell this investment?

Do Your Own Research

Get as much written information about the investment as you can. Ask for a prospectus, annual report, offering circular, and financial statements. Your local library may have resources that provide additional information about the company, such as lawsuits, liens, or recent credit reports. Compare the written information to what you've been told over the phone. Watch out if you're told that no written information about the company is available. If that happens, call your state's securities regulator immediately.

Get a Second Opinion 

Talk to a trusted financial advisor or your attorney. Consider calling another firm for a second opinion on the opportunity.

Monitor Your Investment 

After you've invested, watch your investment closely. Make sure your broker sends you account statements and written confirmation of all trades. Read these documents carefully to make sure they are correct. Be alert for any transactions you did not authorize.

Complain Promptly 

If you have any problems, complain promptly. Contact your broker's supervisor or the firm's compliance officer. If that does not resolve the problem, complain to the SEC or your state's securities regulator. We welcome your letters. Often complaints from investors alert us to wrongdoing in the industry and are the first step in stopping a bad broker or firm. By complaining early, you will have a better chance of getting your money back and protecting your legal rights.

This alert is brought to you by ...

North American Securities Administrators Association, Inc.
U.S. Securities and Exchange Commission

http://www.sec.gov/investor/pubs/coldcall.htm