When the stockbroker called, Robert Gaddis wasn't interested. He knew about cold-callers and their high-pressure push to buy speculative stocks. Yet the Illinois insurance man eventually sank $6,000-plus into a little-known stock through the broker, and lost nearly all of it. How did it happen?
For starters, his cold-caller avoided pushing anything speculative at the outset, instead working to build a relationship. He suggested Gaddis try a blue-chip stock, UST Inc., the maker of smokeless tobacco products.
Gaddis said no, but the broker persisted. He just wanted to build a track record, he said; he just wanted a chance to earn Gaddis' trust.
And his arguments did make sense. Explaining that Warren Buffett owned UST shares, the broker, John P. Clancy, made the most of rumors that the famed investor would buy more. "We're looking for a major announcement literally any day," Clancy said. "Hold this stock through the announcement of Buffett's additional investments in UST. I think your percentage gain here looks to be staggering."
Gaddis finally bought 100 shares, and Clancy had his foot in the door. It was a classic transaction _ so classic it is immortalized on tape for rookie cold-calling stockbrokers to hear.
Those effusive callers who somehow manage to sell unknown stocks to total strangers don't succeed just because they have a knack for persuasion. They also have tapes. An underground collection of audio tapes circulates among young brokers showing how veterans of the boiler-room business repeatedly woo and win clients against high odds.
Some of the tapes record actual sales calls, both ends of the conversation. The listener hears veteran brokers deflecting one objection after another from would-be clients _ keeping them on the line, reassuring them, making them think they're talking to a big-time broker, and finally making the sale.
Other tapes record the veterans' training sessions for greenhorns. Some of these include a tape-within-a-tape, as the teacher plays for the pupils a recording of an effective call he made. "Listen to how sincere I get at the close," says one.
The training-session tapes often were made surreptitiously by rookie brokers who then shared them with buddies on their own. But with the tapes of actual calls, the veterans often did the recording themselves or allowed themselves to be recorded, then supplied the tapes to the neophytes.
Every step of the selling process is named, dissected, explained and rehearsed. There are concepts like "impulse points" and "the schmooze call," plus "rebuttals" and an all-important step, "the second trade."
Clancy is no stranger to these tapes. His voice is heard on many.
"To establish a, like, affair with a guy you don't know or you've never met, over the telephone, you have to tap into the unconscious or subconscious mind," Clancy says on one tape. "You may call me manipulative, but I'm telling you now that this is the way you do it."
On one recording of a sales call, featuring Clancy talking to Gaddis in Illinois, Gaddis says he would like to think it over before investing in UST. Clancy uses a time-honored technique, offering to bow out of the client's life if he isn't satisfied: "If Buffett does not buy any additional stock in the company after 30 days, you call me up and fire me as your broker."
No need to worry about being held to such a pledge, says another veteran, Brian Scanlon, on another tape. He suggests that brokers promise not to pitch another stock until a client's first purchases show a profit. "I say it every day, I'm telling you. And they keep sending money," says Scanlon, who worked at Stratton Oakmont Inc., a firm in Lake Success, N.Y., closed by regulators in 1996.
Clancy also reassures would-be clients by citing his Wall Street status. He is heard telling Gaddis, "I'm a partner in this company. I manage millions of dollars for the most sophisticated investors in the country."
It's a stretch. Clancy is a veteran of Stratton Oakmont and two other scandal-tinged firms, Biltmore Securities Inc. of Fort Lauderdale (since renamed Midas Investment Group), and Monroe Parker Securities Inc., which evolved from a Biltmore branch in Purchase, N.Y. Monroe Parker closed last year after the National Association of Securities Dealers filed fraud and securities-manipulation complaints against the firm and four officials. The four also were arrested and arraigned last month in Harrison, N.Y., on similar charges.
Clancy isn't among those cited. Still, according to records kept by the NASD and state regulators, since the early 1990s the 32-year-old broker has been named in 52 client or regulatory complaints. At least 19 resulted in settlement payments, totaling more than $3-million. Records indicate about a dozen of the complaints were withdrawn or otherwise closed.
Through his lawyer, Clancy says he wasn't the broker in eight of the complaints but was included because of his supervisory role. He also says the firms decided to settle without any contribution from him.
As for the tapes, many were made without Clancy's knowledge, the lawyer says, adding that in any case, much of what they contain is simply salesmanship. Indeed, some of the techniques, from the proper tone of a cold call to customer psychology, have long been taught by even the most prominent retail brokerage firms. But those firms aren't as likely to counsel the use of hyperbole, nor to use these methods to push tiny stocks whose prospects are far less certain than implied.
Clancy's lawyer notes, too, that at one point his client urged brokers not to solicit customers who couldn't afford to lose.
Cold-callers often target independent businessmen, identified through Dun & Bradstreet telemarketing products, and hone their methods for the presumed psychology of these entrepreneurial types. As Clancy tells the young brokers, "I'm looking for the guy that is an arrogant player, a junkie, and maybe a little bit cocky," but also "maybe almost a little bit feeling like he is out of his league when it starts to get to the real numbers."
With such a person, the idea is to exude boundless confidence, act like a broker who handles major trades for big investors, and generally come across as the small-business owner's link to Wall Street fortunes.
Gaddis, the insurance man, is no pushover. In the course of the lengthy taped conversation, he objects 13 times that he isn't ready to buy now or he wants to think it over. But Clancy has an answer every time. One example: "If you had a friend" with Buffett's success record "and he called you up with his next investment, and it was U.S. Tobacco, Bob, how much would you buy?" Another one: "Look, I would never tell you how to handle your insurance business. . . . For you to tell me when to purchase a stock _ you're doing the same thing, Bob."
Why not just hang up? A lot of people, brokers find, seem to feel they have to have a reason to say no. They'll give you "every story ever created," Clancy tells his broker audience, recalling a client who feigned physical distress: "That's how bad this guy did not want to write a big check out to me _ he faked a heart attack."
Gaddis concedes he didn't check out what Clancy said about Buffett purchases of UST: "My thought process was why would this guy lie to me just to make $35 or $50" in commissions? What Gaddis didn't realize was that getting an account going is the crucial first step.
Gaddis eventually complained to the NASD about Clancy's treatment. He says he got back a fax directing him to a brochure about cautious investing.
Once a client agrees to open an account, there is the tricky task of asking for personal information such as salary and net worth. Each question gives the person another chance to reconsider and back out _ the dreaded "renege." Clancy counsels a direct approach: "Come right out and ask the f___ question. You're a man, a businessman for God's sake, not afraid to ask questions."
The opening trade is quickly followed by the schmooze call to keep the client on board until the check clears and pave the way for the critical second trade _ when, typically, the client buys a "house stock" of which the firm owns many shares.
Clancy cautions the rookies to keep their schmooze calls short and not talk about the client's business during trading hours. "You gotta remember, the guy thinks he's, like, dealing with a big broker. Can a big broker talk about my business with the market open? No."
Once the check clears, the tone shifts. "After the schmooze call, you are going to want to set up for the second trade _ that's how we make money," Clancy says. Gaddis found this out. "Once (Clancy) got the first order, everything from there was very high pressure," he says.
The pressure begins even if the tame stock the client bought in the first trade isn't doing well.
Clancy describes how he handled clients when he sold them Unisys Corp. stock and it fell, making them unreceptive to a small stock called Sonics & Materials Inc. He recommends telling the client Unisys is in a "cooling-off period" and that "billionaires" are depressing its price to "wait out" other investors. "Try to address Unisys, put it away, and just try to keep him thinking Sonics."
And don't ever be phlegmatic. "Every time you pick the phone up you got to be excited," Clancy says. "Remember, the guy has to think that you just stepped out of a traders' meeting."
He tells the brokers to be armed with "impulse points" _ reasons the stock is poised to rise "any day," so that time is short.
And ask for a huge order, especially for the second trade. The pressure on brokers can be intense when a firm really wants to move a stock. On a training tape about United Leisure Corp. _ a stock two Monroe Parker officials are accused by the NASD of touting, then secretly dumping _ Clancy sternly tells the brokers that if they ask their clients for "anything less than 100,000 shares, again, I'll have a conversation with you. You should really think about another career."
So, is everything told to the client 100 percent candid? Well, Clancy relates a story of how, right after his firm has done an initial public offering, he gets a call from a client "and I pretend I'm on (a) phone call with someone else that just . . . made a half a million dollars on the IPO." The client bought it, Clancy says on the tape. "He heard the whole conversation" and said, "What the hell are you doing to me? How could you not get me in this deal?"
So Clancy tells the client he can get him the stock. "These are the little things that develop an account, just the little things," he says.
Another little thing: pretending to place a big order for someone else while on the phone to your client.
He cautions, though, that "if you do that with the same guy in two telephone calls in a row, a question mark may go up in the guy's head . . . Pick your spots. It works, it works big. Big."
William Cohune didn't suspect any of this when he got a cold call from Clancy in 1993. The owner of a Nevada technology-sales company, Cohune says he had "built two very successful businesses on being absolutely open and candid." So he figured that callers like this broker were just hard-working guys searching for an occasional believer to give them a shot. Over two years through early 1995, Cohune says, he invested about $1-million with Clancy at Biltmore Securities and Monroe Parker.
After substantial initial gains, he says, he lost about $200,000. He filed an NASD complaint alleging an unauthorized trade by Clancy, which Clancy denies. Nothing has come of the complaint.
And if Clancy called him now? "I'd probably break the receiver slamming it down," Cohune says.
What they say to the client
Veteran cold-calling stockbrokers use certain lines again and again. Here are some of the favorites, culled from tapes rookies use to learn the business.
"I have the next Tommy Hilfiger."
"Put me up against your top broker for the next 45 days."
"(This stock) trades on the Nasdaq National Market, next to MCI, Intel, Microsoft."
"Believe me when I tell you, believe me, I think before your check even hits here, you're up in profits in the stock."
"I'm going to break the firm minimum . . . and pick you up 100 shares."
"You have no idea what you've tapped into here today."
Source: Wall Street Journal