One of the things I love about being alive today is social media; it’s a true testament to the power of the human network. I can honestly say firsthand, that my company wouldn’t exist as it does today without Twitter & blogs. It’s through social media I’ve met a ton of amazing & interesting people, and one of them is Edmundo (aka Eddie) Braverman. I can’t tell you what it was exactly that connected us, but I will tell you over the last couple of years I’ve been reading & interacting with him on Twitter, Eddie knows his stuff.
Eddie’s background is in equities and commodities trading. He started as a stockbroker in 1992 and moved to commodities in 1997, where he made enough in two years to walk away for good. He’s owned several companies since including an insurance agency, a property management company, and a yacht brokerage. He is currently a full-time freelance financial journalist living in Paris. His work has been featured in The Atlantic and the New York Times, and his Tank-a-Bank plan was the subject of a Playboy Magazine cover story in November 2010. You can follow Eddie on Twitter at @EddieBraverman.
And he reached out to me after this tweet:
Some of our clients are getting hammered with the “we’ve got Facebook shares” scams. The calls are all coming from Florida.
— Scott Bell (@iheartWallSt) April 24, 2012
I’ll let Eddie tell you the rest….
When Scott mentioned last week that a client of the firm had been approached about buying Facebook shares from a broker in Florida, I had to chuckle. Some things are never going to change. Before I go any further, let me sum one important point up for you: if you are a retail brokerage customer, you are NOT going to see any Facebook IPO shares, and it doesn’t matter who tells you otherwise.
The fact is that Morgan Stanley and Goldman Sachs financial advisors won’t get enough of the IPO shares to make a difference for any of their clients – and those guys are the lead underwriters. (Josh Brown wrote this enlightening post about what he would do with his meager allocation if he were one of those guys.) So if you’re getting a call from some jamoke in Boca Raton working at a firm you’ve never heard of and asking if you want any Facebook IPO shares, hang up the phone.
They say Florida is a sunny place for shady people, and nowhere is that more true than in the financial services industry. It is thus for a number of reasons, not the least of which are the staggering population of wealthy retirees, the liberal blue sky regulations, and the “unlimited homestead exemption” law that makes the state something of a haven for scofflaws of all extractions. It’s no accident that O.J. Simpson called the Sunshine State home, that Bernie Madoff trawled the country clubs of West Palm Beach for victims, or that former Lehman CEO Dick Fuld sold his $13 million Jupiter Island mansion to his own wife for 10 bucks in a naked attempt to shield the property from shareholder lawsuits.
The epicenter of Florida financial scams has always been Miami or, more specifically, the Fort Lauderale to Boca Raton corridor. One section of Boca had such a high concentration of penny stock boiler rooms in the 80’s and early 90’s that it became known as “The Maggot Mile”. The scams changed over the years (precious metals in the 70’s, penny stocks in the 80’s, commodities in the 90’s, etc.) but the geography remained the same. Some of the same guys have been there for 50 years; they just grow a pony tail, buy a new gold chain and pinky ring, and move on to the next scam.
In this particular case, Scott had the name of the broker and his firm in Florida touting the Facebook shares. I looked him up and it was pretty much what I expected. He’s worked for 10 different firms since 1995, six of which he was with for 12 months or less. One of the firms where he actually lasted for 16 months forced him to resign, physically locked him out of the building and barred him from contacting his clients. He had to cough up $50,000 in 2002 when he was fined for churning, fraud, and misrepresentation. Of course there’s all the pending arbitrations as well. Real quality individual. And did I mention that he has a Series 24? So he’s probably in a supervisory role at this bucket shop.
I don’t know exactly how their particular flavor of the scam works, but I’m betting it’s something like this:
“Mr. Client, we have a rare opportunity that just came up and I’ve been authorized to share a piece of it with my best customers. Have you heard of a company called Facebook? (Duh, but it makes the client – often elderly – feel like they’re in the know to answer in the affirmative) Well they’re about to go public in what is anticipated to be the biggest IPO in a decade. Now, I don’t have access to any of the IPO shares because I’m not a sellout who works for Goldman Sachs. What I do have is some pre-IPO shares of Facebook, also known as founder’s shares.”
“It’s kinda funny how we came to be in possession of this stock and if you have a minute I’ll explain it to you. You do? Great. Well, it seems like one of the early investors in Facebook died recently, and the shares he owned were in a charitable trust for the benefit of a religious endowment fund in Arizona (nice unnecessary and esoteric touch that lends credibility). This particular fund is like a pension fund, so they’re only allowed to own AAA-rated investments. It’s in their charter.”
“Normally this wouldn’t be a big deal; when they were willed the stock they would usually just turn around and sell it and there wouldn’t be any problem with carrying a non AAA-rated investment on their books. But because Facebook is set to go public, the secondary market in Facebook founder shares has been shut down and the endowment can’t sell the shares. On top of that, it is literally illegal for them to hold the shares after the IPO – even for one minute. So they made a deal with one of the principals of my firm to transfer the shares to us at a $58 billion valuation. As you may have heard, Facebook is probably going to value in the $103 billion range at IPO.”
“So the good news is that I can offer you $10,000 worth of Facebook founder’s shares at a $65 billion valuation. We’ve got them at $58 billion, so we’ll make a little money on the deal too. And if Facebook values at $103 billion like everyone thinks it will, you’ll be up 58% on day one. If it values for more you’ll make more, and if it values for less you’ll make less, but you get the idea.”
“The bad news, however, is that you won’t have a choice about selling the shares. Your shares will be included in the stock being sold to the public, so you’ll be taken out instantly at the open. But 58% isn’t a bad return for 10 seconds worth of work, am I right? Plus you’ll be helping a religious endowment out of a tight jam. But I have to know right now, because these shares are gonna go fast. Are you good for $10,000?”
Boom. Of course the scenario makes no sense, but it doesn’t have to. As the old saying goes, if you can’t dazzle them with brilliance, baffle them with bullshit. If you make something just believable enough, the mark’s greed will do the rest of the work for you. And that’s how these boiler rooms stay in business.
Fortunately, as the overall sophistication of the investing public grows with each passing year, these scams are becoming fewer and further between. Guys like the clown pitching these Facebook shares are starving out. They’re becoming extinct as the financial advisory model is proving that a good guy can make a good living doing right by his clients, and the con artists who used to churn and burn can’t compete with that.
And the next time you get a call from someone you don’t know in the 561 area code, why don’t you go ahead and let it go to voicemail.
Edmundo is a regular contributor to Wall Street Oasis, an online community of finance professionals that offers Wall Street career advice, financial modeling training, a guide to finance interviews and a finance resume review service.
See? What did I tell you? The man knows his stuff. Thanks Eddie!