Fool.com: The Razor's Edge (Fribble) July 31, 2000

Fribble The Razor's Edge

By E. W. "Darby" Darbyshire (DarbyII@AOL.com)
July 31, 2000

I enjoyed reading the Fool's School newsletter titled "A Broker's Life." It brought back not-so-fond memories of my very short career as a registered representative (the title bestowed by the National Association of Securities Dealers on those who pass the Series 7 exam).

It was 1985 and I had taken a break from my law enforcement career. Just prior to taking the leave, I had been working in an organized crime intelligence unit. A new brokerage came to town and offered to send applicants to a Series 7 license prep course free of charge. I was interested, took the course... and passed. They offered me a job. Yep -- a Denver-based penny stock brokerage.

I walked into the brokerage at 6:00 a.m. on my first Monday and it wasn't at all what I had imagined. There were rows of tables with phones and a registered rep. sitting at each phone. After I sat down, the boss gave us the morning's pep talk. Our client lists were then issued: photocopies of phone book pages from the New York area, and a client list from another brokerage (one of the RRs had brought it along when he changed employers). It was time to start the cold calls. "All-star Publications" was the company that we were to push. (It was the company that the current sales contest was based on -- a trip for two to Hawaii!) There was a biotech company (I can't recall its name) that was an alternate. We were to include in our pitch the fact that our brokerage was advertising on FNN (Financial News Network). Wonderful.

During the first day I learned that All-star Publications had the exclusive North American rights to distribute a cute little European product: a disposable razor that looked like a match book. When the user opened the flap and squeezed the sides it folded up into a handle. The script said that All-star had secured contracts with the Department of Defense to include one in every MRE (meal ready to eat); Budweiser would place one under the plastic six-pack holder of each six-pack of Bud, and Leggs Pantyhose would include one in each pantyhose plastic "egg."

It was an exciting time for the sales force there. It became apparent to me that virtually every registered rep. and every broker in the company was holding many thousands of shares that they had purchased at about $0.10 per share, and the issue was now trading at about $0.50. The target price for the dump was $1.00.

The biotech was involved, according to the script, in a blood-filtering technique that removed viral particles from blood. The target virus involved HIV. They were very close to a breakthrough. The University of Toronto was the lead research unit and the professor's name was included.

Now, being a freshly licensed RR and an honest person, I did my due diligence as required by the SEC. It took two weeks to complete and dozens of calls. The Department of Defense, Leggs, and Anheuser-Busch had never heard of All-star Publications, and none had any plans to include a disposable razor with their products. As for the biotech, it was true: The professor and the University of Toronto had been involved in the research -- and had abandoned it in 1984 as being unsuccessful. The professor said that the company was at least 20 years from having a product on the market -- if ever.

Oh... I watched FNN daily and never saw a single spot for the brokerage.

I never sold a share there and left them after two weeks. When I handed the boss my resignation he suggested that I was just having a "cold streak" with my sales. I thanked him for his concern and told him that sales were about to get a bit colder -- I had protected myself and had advised the SEC. The agents rolled in and rolled them up six weeks later.

So... why don't Fools invest in penny stocks? This is another reason you can add to the list.