Weary of theoretical warnings about the risks in "hot" investments?
Then take a gander at two actual stories that show the sort of bad things that can happen in such diverse favorites of the 1980s as high- yielding "junk" bonds and low-priced "penny" stocks.The two cases were very different and totally unrelated. But their occurrence on the same day, June 15, put a double emphasis on a common theme.
The test of faith for junk bond fanciers came when Integrated Resources Inc., a New York financial services company, defaulted on $955 million in short-term debt. The news knocked Integrated's common stock, and its high-yielding "junk" bonds and preferred stock, for a loop.
Separately, in Washington, the National Association of Securities Dealers announced disciplinary actions against five managers and salespeople from F.D. Roberts Securities, a defunct Paramus, N.J., firm that dealt in low-priced stocks.
The NASD said its actions arose from "an investigation into the price manipulations and fraudulent markups in sales to customers of a penny stock, Frankel Capital Management Inc."
F.D. Roberts was the sole underwriter, or sponsor, of Frankel when it went public at 3 cents a unit in January 1987, the NASD said.
As the securities began trading in the penny stock market, according to the NASD, individuals at F.D. Roberts "dominated and controlled the trading in Frankel."
They started off selling it to customers for 15 cents a unit, "an arbitrary increase of 400 percent over the offering price," as the NASD described it.
To top that off, when Frankel stock was sold to investors from F.D. Roberts's inventory in its role as a dealer, customers "were charged fraudulent markups ranging from 25 percent to 107 percent over the prevailing market price," the NASD said.
To clamp down on similar chicanery in the future, the Securities and Exchange Commission has proposed new rules governing underwriters and dealers in the penny stock game.
Among other things, the regulations would limit a broker's ability to sell low-priced (typically below $1) shares of small new companies to anyone who doesn't meet a specific definition of a "regular customer."
At Integrated Resources the business problem, in simplest terms, arose from changes in the tax laws followed by mounting debt, until the company could get no more money from its bankers and other short-term lenders.
This, of course, was dismaying news to all of Integrated's other creditors, including owners of its junk bonds.
The losses suffered by owners of the bonds are hard to quantify precisely.
Early last week, the prices of Integrated's three preferreds had posted losses of 79 percent to 85 percent from where they stood at the start of the year, when they offered the "allure" of yields around 15 percent.
That brings us to the point at which these two stories converge - a 15 cent stock may be anything but cheap; a 15 percent yield is no assurance of a rewarding return.