By H. Bernstein - Editor, StockPatrol
Boiler rooms, which thrived in the 1980s and 1990s, are still active according to the SEC, who charged Discover Capital Holdings Corp of bilking retirees out of $1.1 billion.
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The demise of the brokerage boiler room has been greatly exaggerated. In broker-speak, a boiler room is a high pressure sales operation where salespersons aggressively hawk overvalued stock by providing misinformation and making empty promises. Boiler rooms thrived in the 1980s and 1990s but faded from prominence after regulators clamped down on penny stock firms, and forced the most notorious of those operations out of business.Those firms may be gone, but boiler rooms have survived. And why not? They work. Last week, the SEC filed an action accusing Discover Capital Holdings Corp., a Uniondale New York based financial services company, and its wholly owned subsidiary, Indianapolis Securities Inc. of Boca Raton, Florida, of cheating investors out of approximately $1.1 billion through a boiler room driven private placement scheme.
According to the SEC, Discover's president, Eli Dinov, his brother Ari Dinov (who was Indianapolis's secretary and treasurer), and David Rubinov, all of Brooklyn, New York, employed high-pressure "boiler room" sales tactics to sell a fraudulent and unregistered private placement of Discover securities to elderly and retired investors. Regulators say that the scheme targeted retirees who had been customers of several defunct brokerage firms, including Denver-based Rocky Mountain Securities and Investments, whose accounts had been transferred to Indianapolis Securities.
The Dinov brothers have been associated with a number of small brokerages in New York and California. Eli Dinov was censured, fined and suspended by the NASD in 2000 after he failed to pay for securities he had purchased for his personal account. The SEC barred Rubinov from working as a broker in July 2002 after he settled charges that he had engaged in fraudulent sales practices while employed at the firm of W. J. Nolan. Prospective investors in the Discover private placement were not told of this disciplinary history.The SEC complaint charges that the defendants and their boiler room sales force provided false information to investors, including claims that Indianapolis Securities had applied to the NASD to act as an online broker; that the private placement provided a means by which individuals could obtain Discover Capital stock at a significant discount to its public market price; and that Discover Capital stock would be worth $8.00-$30.00 per share within months to a year.
In addition to their aggressive telephone sales, the defendants allegedly employed e-mails claiming, falsely, that Discover Capital planned to increase its revenues fifty-fold and have $5 billion in "assets under management" within the next five years.
The SEC Complaint also charges that the defendants engaged in a related scheme to fraudulently inflate the public market for Discover Capital common stock by surreptitiously selling thousands of Discover Capital shares that were secretly controlled by Rubinov, at inflated prices.
A federal judge in Washington, D.C. issued a temporary restraining order freezing the assets of Discover and Indianapolis Securities.
That's where things stood when we published our report in June 2002.
Now, it's clear that our concerns were justified.
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