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HOW BRIBES WORK--FROM ONE WHO'S BEEN THERE

Bribes grease the wheels of the chop-stock business. How does bribery work? How commonplace is it? What follows are excerpts from an interview between BUSINESS WEEK Senior Writer Gary Weiss and a veteran of the chop-stock business, who has worked for five chop houses since 1993.

Q: When corporate officials are confronted with charges of market manipulation, they protest that they don't know anything about it. What's the real situation?
A: In my experience, there has been an incestuous relationship between the small, unproven, speculative corporation and the broker backing his company.... Say Company A needs to get its stock up for many reasons: (1) to allow insiders to sell their own positions at a handsome profit; (2) to make an acquisition; or (3) to remove fear of a declining stock. It's not rare for a corporate officer to approach a broker and, in nonincriminating language, ask: ''What will it take to have you recommend my shares?''

Q: What is that supposed to mean?
A: Compensation. The corporate representative might suggest to the broker there might be additional compensation to the broker if he can ''put away'' [sell to customers] so many shares of the company's stock. It could be 10,000, 100,000, 1 million shares. The payoff occurs as the broker can document the amount of shares he put away. Usually, the broker is asked to supply a copy of each transaction sheet, each customer confirmation, showing the amount of shares that were purchased. And on that basis, a forum would be arranged in which the broker would be paid off in cash or in near-cash items. Near-cash items would be a trip to Hawaii, maybe a luxury car, and so on.

Q: Would payoffs come direct from the company?
A: It could be either way. A cautious company, of course, would always use intermediaries. It could be another broker at the same firm. It could be the brokerage firm itself.

Q: How much are the payoffs?
A: That depends on the amount of shares put away and the price of the shares. Say the stock is 2 [bid] 2 1/2 [asked]. The company wants the stock to go from 2 1/2 to 5. They find a corrupt broker...[and pay] maybe a $5,000 cash payment up front and maybe $5,000 for every half-point the broker can show he lifted the stock.... The deal calls for the broker to buy, say, 100,000 shares of the stock, 200,000 shares of the stock. The broker shows copies of customer confirmations. That way, the intermediary is convinced the broker is doing what he said.

Q: How knowledgeable were officials you encountered from the National Association of Securities Dealers (NASD)?
A: I would say very weak in their knowledge--not in the rules and regs of the NASD but in the actual goings-on in the brokerage firms. They didn't have a clue as to what was going on! When I was there, my experience was that they were easily deceived by the broker-dealers, particularly chop shops. The chop shops would work overtime just to cover the books. They're not fools. They're notified by the NASD that they're going to be examined, so they know when to prepare. They know which trades to eliminate from the books. They know how to work the capital out.

Many brokerage firms were in a rush to get into the business. New brokerage firms, in many cases an offshoot of a firm that had gone out of business, would need a PMI--that is, a ''pre-membership interview''--by the NASD. This can be a long process because each of the principals' backgrounds is thoroughly examined, [they] have to be in compliance with rules and regs, proper forms have to be filed, and so forth.

And in many cases, there were certain members of the regulatory authorities who were known to approve the PMIs in a relatively short period of time. So in many cases, those officials might have been short of cash, and intimations were made that the PMI process would be speeded up if certain things were done.

Q: Such as?
A: Some kind of cash gratuity, usually $10,000, $15,000, as high as $25,000. Remember, what you're talking about here, you're talking about the entrance of a hot broker-dealer into these markets. The quicker they can make it, the faster they make money.

Q: Do you know of specific instances where this has happened?
A: Yes, I do.

Q: Did you see it happen?
A: I was there.


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