Hell Hath No Fury Like an Investor Scammed.

By Lynn D. Duke

Aug 07, 2000

Most of the investigations into securities fraud that make headlines, large or small, deal with schemes that have already been launched. There's little in the way of preventative measures that regulators can take, save for educating investors so they can spot fraud for what it is.

But millions, perhaps billions of dollars are lost each year to securities fraud that most people never hear about: private placements, or "pre-IPOs," that are hawked over the phone, via email and occasionally through direct mail solicitation. It's often only after money has changed hands, outrageous promises have gone unfulfilled and investors are frantic that regulators step in.

A lot of what eventually ends up on the desks of SEC investigators start as a "pre-IPO," or private placement. Investors are told they're being given a rare opportunity to get in on the "ground floor" of the next Microsoft or Cisco Systems – or fill in the blank with the name of any popular stock market success story. These urgent pitch calls usually come just after dinner, when the mark is sated, settling in for the night. The frenetic broker warns that this "once-in-a-lifetime offer" will be gone before the gravy's gelled if the investor doesn't say yes, and say yes big, right away.

Now, it's not as if the SEC doesn't have any rules governing IPOs, private placements and every other manner of issuing stock. It's just that before the shares are actually trading, or any paperwork is filed with the Commission, it's very easy for the boiler rooms to operate while avoiding regulators’ surveillance. Unless some poor sap broker is unlucky enough to accidentally be handed a lead that takes him to someone who investigates securities fraud, it's a pretty sure bet they'll have at least a couple of weeks to run their ruse before anyone catches on.

But a group of investors have been quietly, and quite effectively, policing the investment arena. And, for a fee, anyone can be privy to what the Investor Data Exchange finds out.

Investor Data Exchange (IDE) was launched in 1993 by a group of investors that also were scam victims. Each had been fleeced for thousands of dollars, and one even dropped a cool million into a scammer's pocket. Investor Data Exchange president Bernie Bicoy lost $115,000 to some sweet-sounding deals, and has put those hard lessons to work for others. The group focuses almost exclusively on private placements.

The U.S. Attorney General's office estimates investors lose $40 billion annually to fraud, according to the Investor Data Exchange website. Since its inception, IDE has produced research reports on more than 1,300 companies and their pre-IPO proposals. Eighty percent of the companies are now out of business, but not before swallowing $8 billion of investors' funds, IDE says.

Bicoy knows how easy it is to get sucked in. Before heading the eight-member staff at IDE, Bicoy worked in the bond business, including many years at Wells Fargo. But having a solid financial background doesn't make you immune to the hook.

"You get busy doing things and somebody hits you with a plausible story at the right time and you invest," Bicoy says. "You think you're bulletproof, but you're not."

The 300-member group (dues are $295 per year) has been growing by word-of-mouth until the recent launch of its website. Still, traffic is slow at about 1,000 hits per month, and Bicoy jokes that most of those are probably sleuths from the SEC looking for leads.

IDE has seen the other side of snooping feds, when they're looking for evidence, not clues. IDE's California offices were visited by the FBI, who looked around, asked them what they did and left, according to Bicoy. IDE speculates that disgruntled scam artists whom IDE had exposed tried turning the tables and reported IDE as a scam itself.

Although IDE's web presence hasn't generated many new members, Bicoy says that's not necessarily the website's goal. Sure, it would be nice to bring more members into IDE's circle, but each new member means more leads for an already fully-extended staff.

"The more members we have, the more people we can help," Bicoy says. "But more members are more burdensome." Bicoy says IDE's office reviews about 60 private placement packages each month. Most of these are passed along from members who received them from brokers and other cold callers. About 90 percent of these prospectuses are reviewed in an hour or less -but the other 10 percent can take months to fully investigate. Bicoy says IDE sometimes calls on members to do on-site inspections, if an investigation gets that far. With members in 40 states, IDE has quite a physical reach, which Bicoy appreciates.

And members get their fair share of paperwork, too. Initial enrollment will bring a stack of files to a new member's door that towers over even the heftiest collection of Yellow Pages. Once that's been sifted through, IDE's monthly reports will keep investors busy.

Let's be clear: IDE does not advise members whether or not to invest. It cannot, since it is not a registered investment advisor. It does provide members with information about private placements based on a "set criteria, composed of a mixture of venture capital criteria and experiences of hundreds of other investors nationwide."

"The final investing decision always remains in the members' hands," IDE says.

Lynn N. Duke is the former editor of Stock Detective and a national award-winning journalist. She is currently writing a book about stock market scams.

 

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