Lab Rats

Most Doctors Agree: Use Caution When Mixing Stocks and Drugs

That scheme, the classic "pump and dump," is hard to orchestrate on the New York Stock Exchange or NASDAQ because both markets are heavily regulated by the Securities and Exchange Commission. Company officers must publicly disclose their sales of shares and file audited financial statements, for instance.

Pink Sheets and the OTCBB, however, are almost impenetrable to both regulators and investors. Pink Sheets is not regulated by the SEC, while companies listing on the OTCBB have only modest reporting requirements. Since it's hard to get independent information on a small company, an investor has little choice but to rely on news releases by the company, which is free to exaggerate — even fabricate — its future prospects.

Often, that company is a shell — that is, existing as a legal entity that sells shares like a traditional company, only with no employees and no assets. Such companies may claim to be marketing a product that does not exist. If there is an office, it may be nothing more than a "boiler room" in which salesmen make cold calls, send junk faxes, or spam messages.

Florida, notoriously, is a magnet for these kinds of unscrupulous dealers, and they're particularly common here at the bottom of the peninsula. It may be more than just the warm weather. "The proximity of South Florida to some of the offshore banking havens makes it an easy venue for people who do their banking back and forth," says Hartley Bernstein, a New York City-based attorney who operates a watchdog website called StockPatrol.com. He's referring, of course, to Caribbean nations whose banks are traditionally more accommodating to crooked businessmen looking to hide dirty money.

While swindlers may make South Florida their home, that doesn't mean they'll make South Florida residents their victims. "They wouldn't necessarily sell [worthless stock] to Florida," Bernstein says. "Their clients will be in Oklahoma or Indiana." Then, in the event that Midwesterners cried foul, regulators in those states would have to contact regulators in Florida, causing bureaucratic confusion. "The more complex it gets in terms of regulation, the harder it is to catch people," Bernstein explains.

Those difficulties multiply when a company is based in another country or when it is based here but selling securities to international investors. Pink Sheets and the OTCBB both allow companies around the world to sell stock. Recent trends show that shell companies based in Theodore's old stomping ground of Canada are feasting on American investors and vice versa.

"The regulators do the best job they can, but they're outnumbered and out-financed," says Kenneth Vianale, a Boca Raton attorney who represents defrauded investors.

One of those regulators, the Florida Office of Financial Regulation's Robert Kynoch, admits, "We really don't have a lot of reach when [the fraud] is in other countries." To build a criminal case, an investigator needs to be able to enforce a subpoena for the accused company's financial records; but the home nation may not cooperate, especially if there is no evidence the company has committed fraud domestically.

Adding to the frustration is the fact that many of the victims never report the crimes, either because they're ashamed of having been swindled or because they assume the company's officers made an honest effort. "Sometimes they just chalk it up to an idea that didn't work," Kynoch says. "The marketplace didn't like [the product] and [the stock] goes bad." In these cases, the swindlers make a clean getaway.

Kynoch's advice for investors isn't surprising: Avoid investment ideas that come from spam, cold calls, or brokers not registered by federal agencies. And if you want to really find out about a penny stock, Kynoch suggests an old-fashioned investigative technique: an unannounced visit to the headquarters of the firm.


By industry standards, it is a point in University Lab's favor that its CEO and president can both be found at the Boca Raton address listed on its website.

And the products it claims to market are real: Packages of Zenstral PMS and Arthroleve are stacked in the office. The packages' labels clearly disclose that the products' aren't subject to the approval of the FDA — another sign of University Lab's integrity.

Clinical research, however, has found little connection between glucosamine, the main ingredient of Arthroleve, and reduced pain from arthritis, just as researchers have given lukewarm reviews to magnesium oxide, the main ingredient in Zenstral, when it comes to alleviating PMS. Still, these products appear to be as legitimate as any in the often dubious market of alternative medicine, which has always clashed with traditional medicine.

It seems fishy that the University Labs website does not promote Dr. Morrow's research credentials as much as his Mensa membership. But a call to the University of Alberta Alumni Association confirms that Morrow indeed graduated with an M.D. in 2001. So University Labs is backed by at least a single qualified physician. The website names several other doctors and researchers who serve on the University Lab medical advisory board, and their credentials check out too.

On his laptop, Theodore cues up a television commercial: A middle-aged man in a tuxedo approaches a statuesque woman in a red dress, extending his hand. She takes it, leaving behind a table full of men who ache and squirm with the pain of their untreated arthritis. The debonair gentleman and his elegant lady tango, as a voice-over extols the pain-killing virtues of Arthroleve.

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