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Beware the "advisory board" scam


Invited to serve as advisers for start-up companies, thousands of physicians ended up as victims of stock fraud.


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Choose article section... Three companies, same basic scam A word from the "suckers" How to avoid becoming a fraud victim

Invited to serve as advisers for start-up companies, thousands of physicians ended up as victims of stock fraud.

When it comes to investment scams, doctors are prime targets. "Like other highly educated professionals, they often get burned by scam artists because they think they're too smart to be conned," says John Nester, a spokesman for the Securities and Exchange Commission. "But they aren't. In fact they're often more susceptible than most."

That was certainly the case in the series of stock scams described below. These companies specifically targeted doctors by offering them membership on phony "medical advisory boards," and then bilked them out of millions of dollars. The following accounts are based on allegations contained in suits brought by the SEC and on settlements reached with the defendant companies and their executives.

Three companies, same basic scam

Here's how it typically works: thousands of doctors receive faxed letters from a CEO inviting them to join the medical advisory board of a small company with a "breakthrough" medical product. In exchange for serving on the board, the physician will receive a specified number of shares of stock and, sometimes, expense-paid trips to annual meetings in resort locations.

Doctors who join the advisory board then receive solicitations from people purporting to be company executives who offer the opportunity to get in on a private stock offering. Once the stock goes public, it's bound to take off, the caller vows, promising returns of 100-500 percent. Invariably, the "company executives" are telemarketers calling from a "boiler room," and working at 25 percent commission. The stock may be worthless, and the product may not even exist.

One such scam was conducted by Boca Raton, FL-based Vector Medical Technologies, which claimed to have developed a "breakthrough" transdermal patch capable of delivering insulin and other drugs. In 1999 and 2000, Vector raised nearly $16 million by selling unregistered stock to 450 investors around the country, most of them physicians. The "private placement" offering, pitched to doctors who bit at the advisory board invitation, was priced at $5 a share in units of $50,000 each.

For those doctors who bothered to check out the company, Vector—like most such scams—put on a good front, with expensive offices and impressive brochures describing its product. But since the stock was unregistered, there was no easy way to research the company or its product from any public sources.

While Vector claimed rights to the patented technology behind the patch, the company actually held no such rights. The company claimed that its product had successfully completed Phase 1 clinical trials, had begun Phase 2 testing, and that FDA approval was expected within two years. In fact, Vector hadn't completed Phase 1 testing, hadn't begun Phase 2, and had no prospect of FDA approval.

Vector claimed that it had a current fair market value of $700 million, and a prospective "investment value" of $1.5 billion. In fact, with no revenues, no title to the patent, and no immediate prospect of FDA approval, that valuation was purely speculative.

The salesmen told doctors that Vector had a "firm commitment" from a well-known underwriter for an initial public offering, but in fact no such commitment existed. Since the promised IPO would offer the stock at a price of $10 or more per share, they explained, doctors who bought pre-IPO stock at $5 a share had an opportunity to double their investment. Later sales pitches suggested that the IPO price could be as high as $25—a potential profit of 500 percent.

In September 2003, the SEC sued Vector and several of its executives, charging them with securities fraud. That suit has been settled, but it's unlikely that any of the investors will get their money back.

Nutrition, based in North Palm Beach, FL, claimed to be a distributor of health and nutritional products that it sold through retail stores, health clubs, shopping malls, and the Internet. Comparing the company to other Internet successes like America Online, eBay, and, NSS salesmen pitched "private offering" stock at $3 a share, in units of $12,000. They "guaranteed" returns ranging from 200-400 percent once an "imminent" IPO took place.

In updates sent to investors, NSS president Anthony Musso issued highly inflated revenue projections, and predicted that the venture would "rapidly become a billion dollar a year company." In fact, according to the SEC, NSS at that time had only modest revenues, little or no assets, and significant recurring losses.

Thanks to their high-pressure tactics, NSS telemarketers sold $8.5 million of stock to about 700 investors, again, mostly doctors. In December 2002, the SEC sued Nutrition and several executives for securities fraud, and sought a court injunction to stop the sale of its unregistered stock. In settlements reached in 2003, a US District Court in Florida granted the injunction, ordered NSS to pay a "disgorgement" of $8.5 million, and ordered Musso to pay nearly $100,000.

Without admitting or denying any wrongdoing, company executives agreed to the judgment. Little of that money has been paid yet, however, and since the company has few remaining assets, it's unlikely that the doctor investors will receive restitution for their losses.

According to its promotional literature, Medical Research Industries in Fort Lauderdale planned to manufacture and market medications in transdermal patch form for weight loss, sexual problems, and sleep disorders. The company's major product was "SlimPatch," which it described as a "revolutionary homeopathic remedy" made from "a blend of 27 natural ingredients."

In three years of high-pressure tactics that began in 1996, MRI raised a total of $52 million from 2,500 investors, again, most of them physicians. According to the SEC, MRI's telemarketers and sales managers received commissions and bonuses of up to 20 percent. Jeffrey Goldberg, vice-president for sales, earned at least $800,000 in commissions.

In June 2001, the SEC sued Goldberg, CEO William Tishman, and others involved with MRI. The suit accused them of securities fraud, and sought a court injunction barring them from violating various securities regulations. The suit also charged that Tishman had "misappropriated" about $18 million for gambling debts and other "personal expenses."

The case was settled in 2002. Without admitting or denying the SEC's allegations, Goldberg agreed to pay a "disgorgement" of nearly $1.5 million, plus a $50,000 civil penalty. Tishman was ordered to pay a civil penalty of $110,000, plus a $19 million judgment obtained by a court-appointed receiver representing MRI creditors and shareholders.

Most of those judgments remain uncollected, however, and none of the shareholders has received any restitution yet. While the company still exists as a legal entity, it's currently in liquidation, with few assets of value. (Although it lacks FDA approval, SlimPatch is still being sold by some doctors and other distributors via the Internet.)

A word from the "suckers"

It's easy to think of the victims of such frauds as naive, gullible, or greedy, and many probably were. One of MRI's early investors was a 62-year-old California ob/gyn who prefers anonymity because of his embarrassment. After he joined MRI's medical advisory board, he received a letter from its president, Dr. Jonah Botknecht, congratulating him on his membership, and confirming his 200 shares of free stock. "They gave me free stock like a fisherman uses bait," he says, "but it was really worthless. They created it like counterfeit money."

Then came repeated calls from MRI's telemarketers urging him to buy more stock—which he did. Over the next few months, this ob/gyn bought 20,000 shares of common stock at $5, plus 30,000 shares of "preferred" stock at $10, for a total investment of $400,000.

MRI rewarded his enthusiasm by promoting him from the advisory board to its "executive committee," which also involved no particular duties, and never met. They did send him free samples of SlimPatch, but never asked for his evaluations. "I was stupid," he admits. "They kept coming after me to buy more stock, and I did, because I trusted them."

He gradually became suspicious, however, and began writing to Tishman and Botknecht to ask for his money back. When he got no response, he finally sued the company and its executives. That has cost him $35,000 in legal fees so far, but hasn't produced any refund. He has since corresponded with several other physicians who bought MRI stock, including a retired psychiatrist who lost $275,000.

Now sadder and wiser, the ob/gyn has lost much of his savings from a career in medicine. So he's understandably upset that his repeated appeals to government officials in Florida haven't helped get his money back. And he's angry that no one has "put those crooks in jail."

Compared to the ob/gyn, Samuel Sells Jr. got off easy. An FP in Shelbyville, TN, he lost only $30,000 because he was more cautious. "At first, I was interested in the product, not in investing," recalls Sells, now 54. "I'd read about the SlimPatch, so I contacted the company and they sent me some samples. I tried it with a few patients, and it really seemed to work. I thought it was a good product, so I decided to invest."

As one of the early investors and advisory board members, Sells was also invited to join MRI's executive committee. One of his colleagues who joined the advisory board, an FP from Chattanooga, invested $45,000. "They kept calling us to buy more stock," says Sells. "When they find a sucker, they keep after him."

Sells and his friend were not completely naive. After some time passed, they wondered why MRI's advisory committee never met. "We got suspicious, and decided to check out the company ourselves," says Sells. "We requested a meeting with Tishman and Dr. Botknecht, and we flew down to Florida to talk with them. But when we got there we were told they were away at a medical meeting in California. So we met some of the other people there, and they seemed legitimate. Then we looked over the company's books, and toured the 'manufacturing facility,' which turned out to be one little room. It all looked pretty superficial. That's when we really got nervous."

After that visit, Sells and his friend tried to get their money back, but they were too late. When the SEC finally sued MRI, Sells and the other investors hoped that would result in some restitution.

But as Sells now admits, "The SEC got judgments against MRI's executives, but they still haven't paid a penny, and I'm afraid none of the doctors who invested are going to get a dime. We're all stuck with a bunch of worthless stock."


How to avoid becoming a fraud victim

Unlike publicly traded companies whose stock is registered with the SEC, unregistered or "private" stock offerings by start-up companies should be approached with caution. Legitimate pre-IPO stock is normally sold only to sophisticated investors, not to the general public. Such private offerings should include financial disclosures that make it clear that there's no public market for the stock and that its price is arbitrary because it's based on the company's own projections of potential sales.

According to the SEC, any company that sells securities to the public must either register with the SEC or qualify for an exemption, which generally means that it can't advertise the offering or make solicitations to the general public. If the stock is neither registered nor exempt, it's illegal.

The following steps should help you avoid becoming a victim of unregistered stock frauds:

1. Never buy stock simply on the basis of a telephone sales pitch. Before buying, investigate the company and the product carefully. Ask for copies of the company's audited financial statement, and have it reviewed by a qualified attorney or investment adviser.

2. Contact state securities regulators to see if the company or its executives have ever been convicted of or sued for fraud, or if they've been subject to any disciplinary action. Also ask if its salespeople are licensed. (You can find a list of state securities regulators at the North American Securities Administrators Association Web site:

3. Don't invest in a company simply because others in your specialty or profession have done so, or because they serve on its advisory committee. They too may be unwitting fraud victims.

4. Beware promises of spectacular profits or "guaranteed no-risk" returns. Whatever the investment, the higher the potential profit, the greater the potential risk.

5. If the sales pitch is based on "inside" or confidential information about a "revolutionary" new product, an impending IPO, or an imminent FDA approval, be wary.

6. If the salesman says he doesn't "have time to put the offer in writing," or tells you this opportunity is "strictly confidential," and shouldn't be revealed to outsiders, stay away.

7. Don't be pressured into buying quickly because the salesman says that if you don't you'll "miss out on a once-in-a-lifetime opportunity."

8. Be skeptical about unfounded comparisons to other established, successful companies.

9. If the stock isn't registered, ask how you can liquidate your investment if the company doesn't go public.

10. Finally, remember this rule: "If it sounds too good to be true, it probably is."


Berkeley Rice. Beware the "advisory board" scam.

Medical Economics

Aug. 6, 2004;81:33.

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Jennifer N. Lee, MD, FAAFP
© National Institute for Occupational Safety and Health
© National Institute for Occupational Safety and Health