Friday, October 5, 2007

Con Man's Little-Known Stock Options Scams--Legal or Fraudulent?

--How the legal line was blurred in the 1990s hi-tech boom

Magalia, California--Stock options scams?

Collapse of employees' stock portfolios, post-9/ll? Continuing practice today? These are some of the questions posed by Jack Payne, author of 55 business books, who has studied this problem in depth.

To comprehend--legal brokerage or con man boiler room?--understanding the "exercise-and-hold" strategy used by stock brokers, to lure employees of hi-tech companies into converting their lucrative stock options into brokerage accounts is essential.

In the late 1990s hi-tech boom, many thousands of employees had two options: they could convert their immensely-inflated stock options to either "exercise and sell"--whereby they would immediately line their pockets with supposed obscene cash profits--or, they could "exercise and hold"--rollover the proceeds into brokerage accounts.

The latter option was mouth-watering for brokers. Frenzy to convert these stock options into brokerage accounts knew no bounds Courtships developed. Financial planning seminars proliferated. Brokers even solicited employees at their workplaces.

It's said these options-holders were lured with "hooks." The creditline, believed to be an unsecured line of credit, turned out to be a margin loan, with all the inherent dangers of such, including the risk of total loss.

Tax advantages were hyped, it's charged, where none existed.

The accusations were many and pointed: brokers sold themselves to these new customers as "full service financial advisors," They were not. Their house profits were still their prime incentives.

The "diversification," peddled as bait, was pure hallucination. Brokers took the lazy way, from the shelter of their management fee structure, and concentrated the investments in few areas. This, as opposed to the hard work of true diversification into a variety of securities, as a straight brokerage commission structure would have encouraged. And, the list of charges goes on:

Frosting on the cake was the brokers' margining the further stock purchases that the creditline enabled into areas the employees' companies were already in. Net effect? The opposite from diversification. Instead, their customers' accounts became overly concentrated, and with margin, subjected them to quick dissipation, even total disappearance of their nest eggs in a down market--which is what happened after 9 / 11--it is theorized.

Jack Payne, former editor / publisher of Business Opportunities Digest, sums it up,"Similarities to legendary con man games?" he asks. "This goes beyond simple stock tips. The pot of gold: dirt pile. Feeding frenzy of the up market; panic of the down market: Ponzi. The tax-advantage pitch to get the account, then the lazy management style, into highly-leveraged margin accounts: bait and switch. See the bouncing ball here / how did it get over there?: shell game."

As In his legal thriller, Six Hours Past Thursday, Payne claims, "It's a now-you-see-it, now-you-don't exercise you won't forget."

Though much of this hi-tech boom era flim-flammery has been cleaned up, vestiges remain. Conmanship to assiduously study. Learn well. And, prudently avoid."


Charlotte said...

Hey Jack, Thanks for visiting my blog and the nice compliments. I agree, writing is fun, and there really isn't any other way that I prefer to spend my time. It is hard sometimes, but then anything worth it is, right?

I probably didn't write anything of great import at BC, so no worries. I'm sorry that you are having trouble with it, though, as it is my favorite networking site by far. The others all confuse me. Maybe its just because I'm too old to take to computers naturally...

Anyway, it is great to meet you and lets keep in touch.


Jack Payne said...

Interesting add-on to this piece. Now stock options back-dating is coming on as the latest predominate scam.

footiam said...

Oh! of course, your blog is interesting. It's very serious and would attract mature, serious readers. Mine, oh, I am just out for some fun. I keep my text short and have lots of visual effects but I do try to provoke thoughts on life. Thanks for dropping in!

Jack Payne said...

Yes, Footiam, and the dance goes on. Now it's not only backdating that's adding to the problems of stock options issuers, it's reloading.