The National Association of Securities Dealers, self-policing organization in the securities field, reports that, in its regular examinations of more than 100 investment firms here, it has recently been taking action against 1 out of 3 firms.

The Better Business Bureau hired an ex-FBI agent to investigate Washington securities firms. On the basis of his findings of shoddy and unethical practices, the bureau called on the SEC and the dealers' association to increase their investigative staffs and step up enforcement activities here.

The bureau cited "the promotional activities and business methods of some of these securities firms (that) have resulted in severe losses to the investing public in this area."

RELIABLE FIRMS CONCERNED

Established investment firms here are seriously concerned by the sudden increase in inexperienced, financially unstable firms as well as the out-of-town promoters flocking into Washington.

The many reliable firms welcomed the Better Business Bureau investigation and have labored with the dealers' organization in its self-policing activities as they see the city's reputation for safe dealings in securities threatened.

They are aware of the increasing number of victims-the stock-buying customers many of whom are investing for the first time. Nearly 800 customers were caught in the collapse of 1 firm last year and their experience has been duplicated on a smaller scale by the customers of other firms.

These newcomer firms have opened their doors with promotional fanfare, accepted money from their customers to buy stock and closed their doors. In some cases, they have protected their investors. But, in other cases, the customers have been seriously hurt.

A Star survey of more than 60 firms which have opened for business here since January 1960, showed that approximately one-third of them have already gone out of business or been put out of business by the SEC or the National Association of Securities Dealers.

In one recent week alone, two Washington firms were expelled by the dealers' group and three Washington firms were named in actions launched by the SEC.

Since the start of 1960, the SEC has obtained injunctions against 11 Washington firms and revoked the dealer registrations of 9 firms. The SEC regional office covers Pennsylvania, Maryland, Virginia, West Virginia, Delaware, and the District, but in the past 2 years, half the SEC actions against broker-dealers throughout the region have been against Washington firms.

During the same period, the National Association of Securities Dealers' district committee has filed formal complaints against 44 Washington firms, expelled 18, suspended 1, and fined 20. It has revoked the registrations of 19 salesmen and fined 2 a total of $4,000.

The closed doors, the injunctions, revocations, and complaints do not happen overnight. Before a firm's inexperience, lack of operating capital, or questionable activities leads to formal action, plenty of customers have had a chance to lose their savings.

Both the SEC and the dealers' association report that evidence of violation of rules designed to protect the investing public is worse here than anywhere else in their regions.

Both bodies are aware of the prime cause: Washington nas no local law to safeguard investors against questionable or financially unfit dealers.

NO LOCAL CONTROL

Unlike most States, Washington has no local control over the dealers or the stocks they sell. It has no requirement that broker-dealers be experienced or trained before going into the business of handling other people's money. It has no local control over salesmen. It also has no requirement that broker-dealers have any money of their own before they go into business.

With more stringent regulations going on the books in many Eastern States, promoters have gotten out one step ahead of legal action and moved into Washington where they feel comparatively safe until the SEC or the dealers' association catches up with them.

Out-of-town firms with no stock exchange connections have opened branch offices here to escape the local controls exerted over their headquarters in other States.

Characteristic of some of the newcomer firms are their fancy names, many of which are so close to those of established firms as to be indistinguishable when

said fast. The names also are designed to give the impression to customers that a two-room firm has nationwide connections.

The lack of operating capital, however, is rated particularly dangerous to the customers. Until the SEC pins down a violation of its rule that a firm cannot owe 20 times more than its net capital, some of these firms use their customers' money to pay the rent, promote their business, and furnish their offices. When their doors close, the customers' money-if there's anything left-can be attached by other creditors.

The Star's survey of newcomer firms showed seven had gone into business here in the past 2 years with $500 or less in cash. One of them started with $100. More than half started with less than $5,000. Many were in the hole financially with the costs of launching their business before they even began accepting customers' money to buy stocks.

Their lack of experience in the business is equally apparent-and as potentially harmful to the customers.

EXPERIENCE LACK SHOWN

Of the 45 firms who have registered with the SEC since the start of 1960 and are still in business, the Star's survey showed that 7 had no previous experience in the securities field. Four reported less than a year's experience. Nine got their only training as salesmen for a now defunct firm or in one of the firms stemming from it. In 10 firms, only 1 member of the company had any previous experience. In only 11 of the 45 firms, all the partners had some previous experience but frequently not much of it.

[From the Washington (D.C.) Star, Feb. 5, 1962]

INVESTORS BEWARE: VARIOUS TECHNIQUES USED TO LURE UN WARY

(By Miriam Ottenberg)

The techniques for selling low-grade stocks to unwary Washington investors range from elaborate stage settings to fast telephone patter.

While the stock promoters pretend the greatest solicitude for the safety of their customers' money and act as though their only concern is to let a client in on a good thing, their actual goal is to make a killing before the stock they tout becomes worthless.

They can get away with their gimmicks here longer than in most other places because Washington has no law to assure local controls over the investment firms or their salesmen.

Washington has many reliable, firmly established investment firms but onethird of those in business here today would not be allowed to operate in most other cities.

EXAMPLES OF TECHNIQUES

Selling techniques of some stock promoters are shown in reports of an ex-FBI agent who "shopped" Washington investment firms for the Better Business Bureau, in customer complaints and in reports of unethical practices furnished by Washington's reputable firms. Here's the pattern:

(1) To create the impression that stocks of little value are being heavily traded, the promoter installs a blackboard in his office and changes the stock quotations on it hourly.

While a customer listens, the promoter calls a well-known investment firm and asks for the latest price on a stock. When the promoter gets the answer, he tells the customer: "See, the big boys are trading in this, too."

JUST WINDOW DRESSING

The impressed customer doesn't realize that the blackboard quotations are just window dressing. He doesn't know that the answer given by the big firm was simply read from the daily sheet of over-the-counter listings and that a reputable firm wouldn't touch the particular stock. He also is unaware that the buying price of the stock given to him is substantially higher than the price the promoter got over the telephone.

Reputable firms are trying to curb this practice by offering to call back with the answer when they suspect a fly-by-night outfit is on the other end of the telephone.

If their suspicions are proved correct, they don't call back-but they can't detect them all.

(2) To create the illusion of respectability, a shoestring outfit claims it is trading regularly with one of the well-known firms.

To prove it, the promoter flashes a bill on the letterhead of the big investment house. The bill was easy to come by. The promoter simply ordered some wellknown stocks or bonds as any customer could do. Even if he lost a little money on the deal, he has evidence to show the doubting customers that he does business with recognized firms.

(3) To attract servicemen with a few dollars to invest, the promoters recruit officers retiring from the Armed Forces as salesmen or junior partners. The promoters are attracted by the service contacts of these former officers as well as by their savings.

The ex-FBI agent working with the Better Business Bureau reported hearing a promoter addressing several telephone callers by their officer rank, and added: "It has become rather obvious during this investigation that the Armed Forces offer a tremendous market for over-the-counter dealers."

A number of the letters from customers who lost their savings in the collapse of one Washington firm came from both officers and enlisted men.

ATTRACTING SALESMEN

(4) To attract salesmen with some money of their own, the promoters put help wanted ads for salesmen in the newspapers on the same day they advertise spectacular new issues.

When the would-be salesmen apply for jobs, they have to agree to invest in these questionable new stocks themselves before they can go to work. They are expected to get their relatives and friends into the deal, too. To milk them a little more, the promoters make them pay various fees as well as a lump sum for so-called training.

The wife of one salesman who went into a now defunct firm complained that her husband had given up a good job in another field, invested all their savings in the stocks he was supposed to sell and ended up with neither savings nor job.

VARIOUS GIMMICKS

(5) To drain the financial resources of their customers the promoters have several gimmicks.

One convinced a customer to cash in his life insurance and put the money in low-priced stocks which would grow and grow in value.

The head of another firm here told the Better Business Bureau investigator that customers left their money with him and authorized him to use his own discretion in buying and selling stocks. The reputable firms, with plenty of capital behind them, are extremely cautious about accepting any such discretionary accounts and do it only in individual cases for long-standing customers.

A similar promoter concentrates on older people who have clung through the years to a few blue chip stocks. They are advised to sell the blue chips because they can get more income out of a lower-priced stock. They are not warned that a promised 8-percent dividend might be accompanied by a greater risk. So they give up safe investments in favor of stock in struggling young companies that can't make ends meet.

TELEPHONE USE

(6) To promote sales, promoters hire a battery of part-time telephone salesmen. Prospective customers called at random are told a stock selling for $2 has just gone up an eighth and the inside word from New York is that it actually has gone up a quarter. No reputable firm would bother to use fractional changes to interest investors but the salesmen are trained to give the impression that the stock is moving fast and the time to get in on quick profits is now.

Or prospective investors are told the salesman has inside information about a contemplated merger, a spectacular earnings report, a new invention, an extra dividend, a big order the company has just received or a successful test of a complicated gadget.

Some of the promoters have imported high-pressure salesmen from New York. One of their favorite gambits is the earnest assurance that the salesman has bought stocks in this venture for his mother. Obviously, the customer is led to believe, if a man put his own mother's money in the stock it must be safe.

ANOTHER ARGUMENT

Or the argument is advanced that low-priced stocks are safer to buy because they can't drop as far as the high-priced stocks.

Complaints from the public indicate that many of those fleeced were buying stocks for the first time. Typical of their innocence is one victim's remark that she did not investigate the salesman before she let him take her money because she thought all stock salesmen had to be licensed.

In many places, both the investment firms and their salesmen are subject to local regulation, but not in Washington.

[From the Washington (D.C.) Star, Feb. 6, 1962]

INVESTORS BEWARE: CASE OF 1 FIRM AND 800 VICTIMS

(By Miriam Ottenberg)

When a Washington investment firm called American Diversified Securities, Inc. closed its doors last year, close to 800 customers were caught in the collapse. Their claims amount to over half a million dollars.

Nobody is sure yet what can be salvaged for the customers and other creditors, but the company's ultimate deficit is expected to run over a million dollars.

The story of the rise and fall of American Diversified is the story of what can happen in a community without a local law to protect investors from inexperienced and undercapitalized investment firms.

OFFSHOOTS SPROUT UP

It is a continuing story, because many of American Diversified's former salesmen and associates have opened investment firms of their own-and some of them have already run afoul of Federal regulations.

Six have been named in proceedings by the Securities and Exchange Commission or the National Association of Securities Dealers. Four others have closed. At least seven are still in business. Among other newcomers to the burgeoning securities business here are broker-dealers who gained their only experience in firms launched by former American Diversified salesman.

Some of these offshoots presumably have learned something from the experience of American Diversified and are trying to conduct a different kind of business. But a survey shows that others belong in the one-third of Washington investment firms which wouldn't be allowed to operate in most States.

Most of American Diversified's successors are selling the same kind of stock, using the same sales methods, and operating with the same lack of experience and shaky financing that contributed to American Diversified's boom-and-bust history.

BEGAN AS ONE-MAN FIRM

American Diversified had its origin in a one-man company launched in February 1958, with $2,200 and no previous experience in the securities business. It incorporated in August 1958.

Its cash amounted to less than $3,000 when it launched its plan to raise the capital to keep going. It started issuing stock in its own newly formed corporation and announced its program to organize mutual funds among members of national organizations.

During 1959, according to a report of a court-appointed accountant, 49,000 shares of American Diversified stock were sold. Ultimately, this accountant reported, $335,000 was raised through stock sales. People paid as much as $28 a share for American Diversified stock.

The mutual fund concept which had attracted stockholders never got off the ground. While waiting for it to materialize, the company engaged in selling overthe-counter securities and started underwriting stock issues.

EXPANDED RAPIDLY

The company rapidly expanded. From 20 employees in 1958, it had grown to 120 by September 1960. Like similar companies, it took on retired officers from the Armed Forces who could and did interest officers and enlisted men in the lowpriced stocks being offered by the company.

Among its other salesmen were former used car salesmen, discount house salesmen, electricians, men's wear salesmen, floor managers, and hotel clerks. Much of their business was done by telephone.

American Diversified spread out. It opened a Philadelphia office, merged with another company and, in the fall of 1960, opened offices in Miami and New York.

At that point, the Securities and Exchange Commission moved in. The SEC tries to protect the investing public by requiring the firms entrusted with the public's money to keep a proper record showing who owes what to whom.

COURT ISSUES INJUNCTION

In September 1960, District court, at the request of the SEC, enjoined American Diversified from doing business until its books and records compiled with SEC rules. An SEC investigator reported at the time that the books were 3 months behind and that the firm had about 3,000 customers' accounts "many of which contain inaccurate securities positions and errors which reflect purchases for which the firm has not received payment and many unrecorded receipts and deliveries of securities."

Summarizing American Diversified's rapid expansion and its first setback, the court-appointed accountant reported:

"Despite this feverish growth, the company at no time earned any income ***. For the most part, the company was living on its expectations. The company had geared itself to a high volume operation. When such was not forthcoming, losses became severe. The SEC shutdown for the fall of 1960 was a heavy burden to overcome. Opening two new offices during this same period was an excessive one."

PRESSES STOCK DRIVE

After the SEC shutdown, American Diversified brought in a national accounting firm to straighten out its books. The firm, according to a later report, had to make more than 1,000 corrections in the records.

When the records were adjusted, the company was allowed to reopen for business in January 1961.

In less than 2 months, it was in financial trouble because of its heavy operating expenses and vast corps of salesmen. The court-appointed accountant tells how the company, faced with a second shutdown, zeroed in on one stock and feverishly began promoting it. The chosen stock went from $7 a share on March 11 to 21% by April 3.

American Diversified salesmen were busy. Letters from customers who were solicited to buy the chosen stock during the March drive are now in the files of the trustee in bankruptcy in the American Diversified case.

One Midwestern customer said he was called long distance on March 20 and advised to buy 50 shares of the chosen stock at $13 a share. He said he was called again a week later by the same salesman, who told him the stock had been recommended by a New York investment house which sounded to him like Rothschild. Urging him to buy more, the salesman said the stock was now selling at $20 and was expected to go much higher.

BOUGHT $6,000 WORTH OF STOCK

A Washington doctor, also solicited by telephone, reported he bought $6,000 worth of the stock on March 17. A Washington woman wrote that she bought $237.50 worth of the stock on March 13 and added that "this may not appear to be an impressive transaction, but these shares were paid for out of savings accumulated through 11 years of hard work as a waitress."

A Shreveport, La., man isn't sure exactly what he bought. He knows he bought 50 shares of this stock on January 17 and sold 25 shares on March 13. Then, he said, he was notified the next day that he had sold another 25 shares but his salesman told him to ignore that notice because it was a mistake and he still had 25 shares. On March 27, he was notified that he had sold his remaining 25 shares but in April he was advised that he had bought 50 shares, "which was news to me."

COULDN'T PAY FOR SHARES

The flurry of activity reflected in these letters and dozens like them climaxed when American Diversified couldn't pay for the shares it had ordered from other