Currency Trading Or Currency Scam?

A New York firm may have bilked investors out of millions

The British female voice on Winthorpe Grant's recorded greeting is inviting: "We're a full-service foreign-currency firm, with 50 years' combined management experience...dedicated to helping you reach your investment goals." But on August 3, the New York attorney general's office seized records and computers from Winthorpe Grant, a six-month-old foreign-currency trading firm.

The goals of many investors were dashed after they rushed checks or wired money to this alleged commodities "bucket shop" tucked away in the office-park wilds of central Long Island. Regulators estimate investors have lost millions since February to the former rogue stockbrokers who run Winthorpe Grant. The firm allegedly committed a felony by "soliciting, offering and selling commodities through deceitful and fraudulent practices," according to an affidavit from the attorney general's office. A lawyer for Winthorpe Grant, David Hirschberg, denies the allegation and says that the FBI examined the firm's practices recently and found nothing.

The action against Winthorpe comes in the midst of the biggest attack ever on micro-cap stock fraud by the Securities & Exchange Commission this week, in which 82 individuals and firms were charged. It points to a worrisome trend: As more stock fraudsters are put out of business, many are moving into currency trading, an area almost devoid of regulation.

Winthorpe Grant, in Melville, N.Y., is one of a growing number of firms that trade foreign currency on behalf of average investors. But Winthorpe most likely never bought or sold actual currency. "There was no evidence of real trading--no order tickets, no dealer statements," says Louis F. Burke, an attorney specializing in financial instruments who has studied customer statements from the firm. Winthorpe's lawyer denies this. Burke notes that many of these new, so-called currency firms do little or no trading and mostly pocket customers' money.

"Winthorpe said I could triple my money overnight," says Ronald Schruefer, an Anchorage (Alaska) investor who lost $400,000 to the firm, the bulk of his savings. Says Hirschberg, "Customers are told they can make a lot of money or lose a lot."

The 10 to 15 "brokers" at Winthorpe cold-called hundreds of people a day, primarily small-business owners gleaned from Dun & Bradstreet Corp. "lead cards." They were promised astronomical returns for little risk over the phone, then mailed a brochure that stated: "Currencies are the world's most profitable markets...they invariably outperform stocks, bonds and other commodities."

When a Winthorpe broker hooked a customer, he would have the investor send a check for a few thousand dollars. After a day or two, he would inform the customer that he had made a profit. Then the broker went for higher stakes, faxing a bank "electronic transfer form" to the investor for approval (table). This enabled Winthorpe to tap into a customer's bank account for the amount needed to do a trade. Investors were told this was key because fast moves were critical in currency markets. "One time they wanted me to approve a $1.2 million bank transfer. I told them I didn't have that kind of money," says Schruefer.

Schruefer says that Winthorpe brokers would also fax him Reuters news stories about pending official meetings or changes in economic factors that would "dramatically and immediately affect" the price of the yen, euro, or pound.

The firm's promotional material and confirmation statements sent to customers indicate the firm clears its trades through First Foreign Holding Corp. in Huntington, N.Y. (box). But First Foreign was registered as a corporation by a principal of Winthorpe Grant, Gil Michael Pasculli Jr., in November of last year. Efforts by BUSINESS WEEK to locate it at 757 Park Ave. in Huntington proved unsuccessful. There is no such address, nor does it have a listed phone number. Winthorpe's lawyer declines to comment on First Foreign. He claims the firm trades through CMC (Currency Management Corp.) in England. Nowhere in Winthorpe's sales literature or customer agreement is CMC mentioned.

Winthorpe Grant also allegedly provided investors with fabricated trading records, say experts. Bank records obtained by the attorney general show that from February to June of this year, investors' money was funneled into an account at a Long Island branch of Key Bank. Winthorpe principals Lawrence Salice, Michael Richard MacCaull, and Pasculli withdrew 93% of that money in cash and checks. Winthorpe's lawyer says customers' money went into First Foreign Holding Corp.'s account.

Winthorpe Grant is run by former stockbrokers who were all barred or suspended from the securities industry. The three principals in the firm--Pasculli, Salice, and MacCaull, along with another employee, Vincent Vaccaro--all previously worked at Sterling Foster & Co., the notorious micro-cap stock fraud firm that was shut down by regulators in 1997. "Basically, these guys got nailed by the securities industry and migrated into foreign currency, where regulation is murkier," says Bradley W. Skolnik, Indiana securities commissioner and president-elect of the North American Securities Administrators Assn.

The attorney general's office says that boiler-room techniques used at Sterling Foster, also formerly situated in Melville, were similar to those used at Winthorpe. First, there was the hard sell. According to Schruefer, he was initially told, "We haven't been around as long as Merrill Lynch, but our reputation is just as good." And, as at Sterling Foster, there was the broker disappearing act. As Schruefer's losses mounted, he repeatedly called MacCaull, the "senior trader" who was handling his account. He was routinely told that MacCaull was in a meeting, out of the office, or "on the trading floor."

But there is no trading floor anywhere near Winthorpe's Long Island offices. Winthorpe is merely an open room consisting of several cubicles with computers, phones, and a fax machine.

Besides Sterling Foster, MacCaull, Pasculli, and Salice have a long history of working together at other micro-cap stock firms such as IAR Securities, Royce Investment Group, J. Gregory & Co., and most recently, International Bond & Share. All of these firms have been in trouble with regulators. "These guys could be poster boys for the rogue broker industry," says Skolnik. They, along with all of the brokers employed by Winthorpe, have "extensive regulatory disciplinary histories," according to the attorney general's affidavit. Securities industry records indicate the principals have engaged in activities such as unauthorized trading and stock manipulation.

Foreign currency is the perfect arena for rogues. Regulation among small investors is vague at best. Because of a 1974 amendment to the Commodity Exchange Act, federal commodities regulators do not have jurisdiction over the interbank foreign-exchange (forex) market, where global institutions and banks trade some $1.5 trillion daily. The amendment's intent, say experts, was to make it easy for institutions to trade among themselves, but it leaves a regulatory gap when it comes to small investors. "We're encouraged to ignore activity among average investors because we can't do anything about it," says an investigator at a commodities regulatory agency.

Individual states may have broader power in prosecuting such activity because some states, such as New York and Texas, require foreign currency traders to be registered and treat foreign currency as a security. Texas securities regulators recently shut down a foreign-exchange scam run by a former local football star that cost investors an estimated $50 million.

The action against Winthorpe Grant is the first to be brought about by a new division of the New York attorney general's office, the Securities Prosecutions Unit. "We're strengthening state securities enforcement, especially in regard to those entities that too often fall beneath the radar screen of the SEC or other federal agencies," says Eliot Spitzer, New York's attorney general.

Still, there is scant coordination among individual states or between states and federal agencies. Because of this, foreign-currency promotions are heating up. There are now numerous classified ads with headings like "Triple Your Money In a Week, Trade Japanese Yen!" A cable-television commercial features a Jay Gatsby-like party host telling a guest he made his money by trading currency. And the Internet has become a hotbed for forex scams.

But Winthorpe Grant has no Web site, nor do they run television or classified ads. The firm gets customers the old-fashioned way, by making cold calls. And unlike the voice on Winthorpe's recorded greeting, not one of them has a British accent.