Bull Market For Stock Fraud

By CBSNews.com staff CBSNews.com staff

July 26, 1998 / 7:59 PM EDT / CBS

Stock fraud is booming right along with stock prices, reports CBS News Correspondent Russ Mitchell. Complaints are up as much as 25%, especially with so-called penny stocks -- investments in start-up companies that can yield huge profits, but carry a tremendous risk.

Almost 3 years ago, Don and Joyce Johnson began making financial plans for their retirement. They contacted their broker, J.B. Dean, a man knew for 15 years.

"I had no cause to doubt that he was not a very reputable broker," said Mr. Johnson.

Dean persuaded the Johnson's to buy more than 54,000 shares of Clean XPress, a new laundromat franchise, at around a $1 a share.

They were also talked into loaning $100,000 to a start-up company called Berkshire Venture Partners. Dean promised them their money back with 20% interest in just six months.

"At my age I couldn't afford to gamble," said Ms. Johnson. "And he reassured me this was no problem, there was a guarantee."

A guarantee was made in writing by Dean's brokerage house, Global strategies. However, 6 months later the Johnson's say it all collapsed. The price of the stock in Clean XPress had plummeted, and that $100,000 was gone. Worst of all, their broker wouldn't answer the telephone.

"When we tried to chase the Global Strategies office, this is where we became very concerned because the Global Strategies office in San Francisco was closed down, was raided by the U.S. attorney's office and the FBI. And they seized all their records," said Mr. Johnson.

The raid was part of a nationwide investigation by the FBI and U.S. Attorney's office into brokerages believed to have ties to organized crime.

"The organized crime member or associate will gain control using the traditional techniques of organized crime -- violence, threats of violence, fear -- to have brokers, have their customers buy large volumes of new issues to drive the price up, and then the brokers who are in cahoots with organized crime sell out at the top of the market," said U.S. Attorney Mary Jo White.

The FBI and the U.S. Attorney's office will not give specifics about their investigation of Global Strategies, but will say that they are still in the pre-indictment phase.

A dozen other investors, who have lost well over $1 million, are suing to get their money back. However, the defendants claim they cannot defend themselves because the FBI has their papers. They have also filed for bankruptcy which leaves little hope of restitution any time soon.

"Even if we do get judgements -- and I think there is no doubt that we will -- the question is where is the money," said attorney Jeffrey Feldman.

Barry Goldsmith, Vice President of Enforcement for the National Association of Securities Dealersays his organization barred over 425 brokers last year. While their first goal is to get restitution for the investor, he says prevention is the best solution.

"The cardinal rule is to know who you are investing with, know the broker, know the firm we have disciplinary information available to all investors," said Goldsmith.

CBS News obtained A copy of the disciplinary history of Global Securities which showed a pattern of disciplinary actions going back to the middle 1990's. That is cold comfort for the Johnson's.

"That was to be our retirement, that's why we are so frustrated," said Ms. Johnson. "It was foolish on our part, we've learned a lot, but we trusted someone."