[DAT]

Get poor quick!

A slick salesman with a troubling history has a new scheme: convincing Bay Area folks they can make a fortune trading foreign currency.


By A.C. Thompson

THE SALESMAN IS named Steven Lloyd. Or so he says.


He's got a great smile, a well-sculpted pile of hair, a shiny gold-and-platinum-colored tie, and a slight Texas twang, not unlike that of George W. Bush. –It's a little after one o'clock on a Thursday afternoon, and a crowd of approximately 150 working stiffs have packed a beige-carpeted conference room at the Crowne Plaza Hotel in Burlingame to hear Lloyd lecture for two hours about "the world's most perfect business." The crowd – mostly middle-aged blue-collar types and office grunts – is listening attentively to the silver-tongued pitchman in the crisp dark suit. Most have been lured here by a series of slick TV infomercials airing late nights on programming-deprived KRON, channel 4.


A small microphone clipped to his suit jacket, Lloyd stands before a 6-foot-tall, 12-foot-wide video screen and says, "A year ago I was sitting just where you're sitting. I wanted to learn to make as much money as I can as quickly as possible."


The key to getting rich, according to Lloyd, is day trading in the $1.2 trillion foreign currency market, where "the small investor can get the same benefits and leverage as the big boys who control billions of dollars."


The risk, Lloyd claims, is nominal. The profits are elephantine. "This is how George Soros made a billion dollars last year," he enthuses.


While Lloyd is a masterful communicator, holding the rapt attention of much of the audience, there's much he's omitting from his spiel – starting with the fact that his name isn't Steven Lloyd.


When the Bay Guardian started nosing around – digging through financial documents and Texas public records – we learned the man's true name is Steven Lloyd Daughenbaugh.


And we can understand why Steven Daughenbaugh might not want to use his full name. For one thing, he was sued by the U.S. government in 2001 for allegedly using deceptive sales techniques to defraud 60,000 customers of $15.2 million. The 52-year-old Daughenbaugh and his then business partner paid $40,000 to settle the case and remain under court order to refrain from fraudulent business practices.


His current employer, an Addison, Texas-based company called 4X Made Easy, seems to have some, ahem, issues as well. A Bay Guardian probe – based on interviews, company documents, and public records – suggests 4X Made Easy is flagrantly misleading customers and skirting around federal regulations.


Every salesperson has a product, and Daughenbaugh's is a CD-ROM of PC software that has supposedly been marked down from $6,384 to a mere $2,995 especially for the Crowne Plaza seminar. Billed as "your passport to amazing success in the world's largest financial market," the software delivers streaming currency price quotes over the Internet and purportedly relies on "patented proprietary algorithms" to offer reliable buy-and-sell alerts.


4X Made Easy is only one of a legion of Web-savvy hard-sell outfits hawking software they claim will transform clueless financial neophytes into über-sophisticated – and spectacularly wealthy – arbitrageurs overnight. The 401(k)-draining implosion of the stock market and ongoing corporate meltdown on Wall Street give these postmodern snake-oil salesmen an easy hook: why buy shares in some book-cooking corporation from some shady broker when you can control your own financial destiny by trading currency online in the foreign exchange market?


Evidently business is booming for 4X Made Easy. The privately held firm runs ads on TV stations across the country and offers a constant stream of seminars – more than 100 are scheduled for the next month. Company reps will return to Burlingame in late January.


The annals of *!*!*!*!mery are filled with tawdry schemes that seem to crop up generation after generation, like Ponzis and boiler rooms, both of which involve gullible marks sinking cash into worthless or nonexistent businesses. What Daughenbaugh seems to be doing is a different sort of *!*!*!*!: it's the "oversell," convincing the mark to shell out money for a product that isn't nearly as wonderful as advertised. In fact, though the people packed into the Crowne Plaza don't know it, there are free software programs out there that offer features similar to 4X Made Easy's.


The twist here is that 4X Made Easy could cost people far more than the $3,000 they drop on the computer program by pulling them into a tremendously volatile market, where, odds are, they'll watch their retirement money or their kids' college funds evaporate.


Welcome to the realm of the investment hucksters.

II.

Put the word forex – short for foreign exchange – into Google and you'll get hundreds of hits, many for sketchy-looking companies promising colossal riches.


"There are dozens, if not scores of these people out there," says David Callaway, editor in chief of CBS MarketWatch and author of a column titled "For Scandal, You Can't Beat the Currency Market," which ran late last year. "It's a common *!*!*!*!."


During the past three years, the federal government has brought 53 cases against foreign currency operations that regulators accuse of ripping off $255 million from the public, using a variety of schemes.


To understand the hucksters, you need a little background. In contrast to the stock market, which is anchored by a handful of big-name exchanges – like the NASDAQ and New York Stock Exchange in New York City, and the Pacific Stock Exchange here in San Francisco – the currency market is a diffuse, far-flung creature. Money is traded informally between banks in different nations. It is traded on the floor of the Chicago Mercantile Exchange, an institution whose history stretches back to the days when Chicago was a world center for selling and buying cattle. And, increasingly, currency is traded on unregulated "off-exchange" platforms – virtual markets on the Internet.


This brand of trading is the process of buying one currency while simultaneously selling another. It's akin to what you do when you visit another country and swap your dollars for euros or rubles or yen.


In simple terms, forex players make money by buying a currency, watching it escalate or drop in price, and then swapping it. An elementary example: The dollar and the ruble are trading evenly, meaning $1 equals 1 ruble. The trader buys 100 rubles for $100. If the dollar rises against the ruble – to, say, $1.10 for every ruble – the trader unloads the Russian money in favor of dollars and pockets a 10 percent profit.


The vast bulk of forex trading is done by major banks. They employ tremendously adroit traders who spend their days glued to multiple computer screens filled with jagged-line trend charts and premium, continuously updated data. Like geneticists scanning DNA readouts, pro traders divine meaningful patterns from information that means nothing to the rest of us. When describing those patterns, they speak another language, talking about Bollinger bands, Fibonacci retracements, doji stars, and harami.


They describe market conditions using indecipherable equations like this:


for (i = Length; i > 0; i --)


sum += (i - (Length + 1) /3) * close(i - Length);


WT = 6 / (Length * (Length + 1)) * sum


Even with state-of-the-art computer models, it's an ulcer-inducing business. As any honest market insider will tell you, the supersize profits offered by currency speculation are mirrored by equally mammoth losses.


But the brutal downside doesn't exist in the mythology spun by Daughenbaugh and other hucksters. "If this was a risky market," Daughenbaugh asks the crowd at the Crowne Plaza, "would the U.S. government let the banks trade [currency]?"


4X Made Easy, according to Daughenbaugh, lets Joe Truckdriver in Peoria, Ill., compete with the banks. He repeatedly tells the audience it faces "no risk" in the forex market, if it relies on his program. Words flash across the video screen: "4X MADE EASY MAXIMIZES YOUR PROFITS AND MINIMIZES YOUR LOSSES."


In fact, he claims, the currency market is so easily mastered that teenagers are getting rich using 4X Made Easy. "Fifteen-year-old kids are making hundreds of thousands of dollars," Daughenbaugh says. (Children can't actually play the market, because they can't legally enter into contracts.) Daughenbaugh claims one especially talented adolescent trader "has joined the top 1 percent of income earners in the United States." (That would mean, according to government figures, this possibly fictional kid is making at least $826,700 annually.)


In reality, however, Daughenbaugh and company are luring novices into a market that can bankrupt them in a matter of minutes.


Michael Solt, a finance professor at San Jose State University, puts a fine point on the bank account-draining possibilities of the forex game. Sitting in his office, Solt whips out a stack of data – stats on the yen, British pound, and Canadian dollar. He grabs a pencil and circles a number at the bottom of a page full of figures. "See this?" Solt asks. "You can sum this up by saying the risk [of loss] is 125 times greater than the average return on the yen." In other words, people betting on Japanese currency are 125 times more likely to lose money than to make it. The pound and Canadian dollar aren't much better.


As far as Solt's concerned, the way 4X Made Easy calculates risk "is bullshit" that "no academic" would endorse. "It's misleading," he says.


He likens 4X Made Easy to the ubiquitous spam *!*!*!*!s flooding the Internet, the ones that have pitches like "Dear friend, I am a millionaire businessman living in Nigeria. Will you help me ..."


"I compare it to these e-mails you get from Africa, these people trying to dangle millions of dollars before your eyes," he says. "I would stay away from these people."


At UC Berkeley's Haas School of Business, professor Terrance Odean, an expert on Internet investing, concurs. "The average investor has no business trading in these things," says Odean, who thinks outfits like 4X Made Easy are "appalling."


For small investors, trading currency online is like "playing the roulette wheel," Odean suggests, before correcting himself. "Actually, it's harder than the roulette wheel."


He brings up a conversation he had with a friend, a doctor who'd taken a weekend course in currency and futures speculation and planned to sink $5,000 into the game. "I told her, 'I only see two options: either you're going to lose that $5,000 right off the bat," Odean recalls, "or worse, you're going to make a little money at first, keep playing the market, and lose a whole lot more later. Sooner or later you're going to lose. For your sake, I hope you lose that $5,000 very quickly.' "


Investment hucksters like Daughenbaugh attract small fish by expounding on the virtues of "leverage." That means mom-and-pop investors can trade huge bundles of cash by depositing a relatively paltry sum with an exchange. In some cases, the investor need only put down a $500 deposit (known as "margin") to trade $100,000 in currency.


What Daughenbaugh and his ilk don't mention is this: If the market turns against the investor by even a percentage point or two, he or she may be on the hook for the rest of the money – that is, the entire $100,000 – and that, of course, is where things get pretty damn dicey.


The federal government takes a dim view of Daughenbaugh's rosy, risk-free assessment of the forex game. The federal Commodity Futures Trading Commission, which oversees some, but by no means all, currency trading, regularly warns consumers about the hazards of the market, and licensed brokers are required by law to disclose the perils of the business.


"Margin trading," one CFTC advisory reads, "can make you responsible for losses that greatly exceed the dollar amount you deposited."


Susan Bovee, an upper-level official in the CFTC's enforcement division, is quite familiar with the risks of currency speculation. "Any investment in which your funds are subject to the financial ups and downs of the marketplace is risky," she says. "If your investment is 'leveraged' – that is, if a small amount of money you invest controls a larger sum – the investment is even riskier."


Solt is blunt: "If the currency moves against you, you could lose everything, like that – " he snaps his fingers.


While Solt holds a Ph.D. in finance, Daughenbaugh's credentials as a financial whiz are a little suspect. Though he claims he's been "selling securities for 20 years," he isn't registered as a broker with the National Association of Securities Dealers and hasn't been for at least two years, according to the association. 4X Made Easy provided us no proof that Daughenbaugh has ever held a license to sell stocks or bonds.


And he's not licensed by the CFTC to act as a currency broker, something you might expect from a forex expert.


Nor is he licensed by either the Securities and Exchange Commission or the state of California to dispense investment advice.

III.

When we phone Daughenbaugh at his Texas home, he politely refuses to go on the record and directs our inquiries to 4X Made Easy. "I've got a contract that says I'm required to pass all media calls on [to the company]," he says.


We take our questions to 4X Made Easy, which issues a written, three-page defense of its product and business practices.


Regarding Daughenbaugh, the company states, "He was hired as a professional speaker – based upon his background as a speaker – to present the software product to attendees at our preview sessions.... 4X Made Easy was not aware of the circumstances regarding [Daughenbaugh] until we received your questions." As for Daughenbaugh's history of legal problems, 4X Made Easy is "continuing to investigate just exactly what happened as we are taking this very seriously."


4X Made Easy denies any knowledge of the outlandish claims made by Daughenbaugh. "We are investigating your question as to the claims made by Mr. Daughenbaugh at the preview session in Burlingame and don't yet have enough information to draw a conclusion," the firm says.


The company portrays its software as a simple informational tool: "4X Made Easy does not – and cannot be used – to make trades. We do not solicit money from investors to make trades and we are not in the trading business. Hence we are not bound by any legal requirement for licensure by the state or federal governments.


"Nor does 4X Made Easy 'dispense investment advice.' The software depicts graphically on a computer screen data representing trends in the marketplace based on actual trades taking place in the market. How investors use that information is entirely up to them."

IV.

In the eyes of the U.S. government, Daughenbaugh has a prior history of distorting the truth.


During the late 1990s Daughenbaugh co-owned a Prairie, Texas, firm called College Resource Management. Using a nationwide direct-mail campaign and high-pressure sales tactics, the company targeted cash-strapped parents hoping to send their kids to college.


The pitch was simple: College Resource Management was a "nationally recognized" firm dedicated to helping moms and dads secure financial-aid grants for their children. The company guaranteed its "personalized" advice would net at least $2,500 in financial aid for school. The cost? Roughly a thousand bucks.


After a lengthy probe, the Federal Trade Commission in 2001 charged Daughenbaugh and the company with ripping off some 60,000 consumers of $15.2 million by engaging in a variety of "unfair or deceptive" business practices. According to the FTC's suit, College Resource Management provided customers with "broad, general strategies not tailored to the consumer's specific financial situation. Many of the recommended strategies are not feasible or practical for most consumers."


Apparently some paying customers had trouble getting anything out of the company. In court documents the FTC says consumers often had to contact College Resource Management repeatedly to get the firm to "perform any services."


The firm also allegedly refused to recognize its money-back guarantee and charged customers a $300 annual "renewal" fee without their knowledge.


Admitting to no wrongdoing, Daughenbaugh and his then business partner paid $40,000 to settle the case, and they remain bound by a court order barring them from misleading customers and requiring them to keep the federal government informed of their whereabouts and business activities. (They've since sold the firm to another corporation.)


Greg Ashe is the FTC attorney who sued Daughenbaugh and College Resource Management. The company, Ashe recounts, "would charge $900 to $1,200 for services that were greatly overstated. It was deceptive advertising."


Daughenbaugh, Ashe says, "is a salesman. I don't think it really matters to him what he's selling, as long as he's selling. It doesn't surprise me he's going under his first and middle names."


The lawyer sees clear parallels between College Resource Management and 4X Made Easy. "The modus operandi of College Resource Management was going around to meetings in hotels in various cities. The 'seminars' they offered were just high-pitched sales operations." 4X Made Easy's hype-loaded, you-must-purchase-now sales spiel "is typical of what College Resource Management would do."


While we talk on the phone, Ashe pulls out Daughenbaugh's court order, scans it, and decides "there's a possibility that he's in violation of the order." He sounds annoyed. "Something needs to be done if this is an all-out *!*!*!*! or deceptive marketing."


4X Made Easy stands behind its sales seminars, arguing it seeks "to enlighten attendees regarding the potential of the spot FOREX market; to give them a taste of how the market works and what it takes to make the software work."

V.

The firm is telling the truth when it says it doesn't actually execute trades for customers – instead, the company's Web site funnels customers to a outfit called Forex Capital Markets, an online exchange based in New York.


Forex Capital Markets is registered with the CFTC and must abide by federal rules. That means the company must inform customers of the real potential downside of their investments and can be held liable for the bogus claims of Daughenbaugh and 4X Made Easy.


"Forex Capital Markets can get in trouble with us if they accept business from entities who are misleading customers," explains Cyndi Cain of the National Futures Association, a self-regulatory body that collaborates with the CFTC and the Federal Bureau of Investigation in enforcing federal financial regulations.


Companies like Forex Capital Markets, according to Cain, "are required to supervise the activities" of companies who solicit business on their behalf.


We obtained one of Forex Capital Markets' standard client contracts, a legally binding document. It contradicts just about everything Daughenbaugh and 4X Made Easy say. Forex trading, the contract states, "is suitable only for those sophisticated institutions or sophisticated participants financially able to withstand losses that may substantially exceed the value of margins or deposits."


Via e-mail, Marc Prosser, a spokesperson for Forex Capital Markets, admits his company has a business relationship with 4X Made Easy but says Forex Capital Markets is now launching an investigation of 4X Made Easy's sales tactics.


Forex Capital Markets, he writes, "will be initiating a review of 4X Made Easy promotional materials for forex trading accounts and will require them to correct any deficienience or inaccuracies in their solicitation materials and presentations. No introducing broker of FXCM is allowed to represent foreign currency trading as a 'no risk' venture. FXCM appreciates you bringing this matter to our attention."


CFTC records show Forex Capital Markets has had problems in the past. In July 2003, Shi Fang Du of Fort Lee, N.J., filed a formal complaint against the company, alleging Forex Capital Markets ripped her off for more than $11,000. According to Du's complaint, "a trading agent for Forex Capital Markets ... made lots of untrue/misleading statements concerning the profitability of currency trading and making multiple phone calls."


Du, a medical case manager, eventually gave Forex Capital Markets $15,000 to open an account. Things soured quickly. Within days she accused the company of allowing a broker to run wild, making 96 "crazy" and unauthorized trades in her account over 17 days, costing her $11,272.


Contacted by phone, Du tells us she settled her claim against the company and can't comment because the deal included a confidentiality clause.


Prosser offers a little more detail on the matter, arguing that his firm isn't the source of Du's woes. "Du," he e-mails, "made the classic mistake of opening an account with a 'family friend.' The 'family friend' traded away the account and then disappeared." According to the spokesperson, Forex Capital Markets "was not involved in soliciting the account or trading the funds."

VI.

A few days after Daughenbaugh passed through town in November, authorities took down a whole gaggle of New York forex firms for allegedly screwing customers out of more than $25 million.


It was a scene that's become commonplace on Wall Street during the past three years: federal agents storming an office tower and marching out a string of suit-wearing perps in handcuffs. According to Reuters reporters who were at the scene, "Federal Bureau of Investigation officers swarmed on 2 World Financial Centre late on Tuesday afternoon and led out men in business suits, taking them away in vans and cars. Some of the men covered their heads with overcoats while others bowed their heads to hide from television cameras and photographers."


The sting, dubbed Operation Wooden Nickel, led to charges against 23 individuals working for eight different firms.


The busts prompted CBS MarketWatch's Callaway to write, "Just the fact that this currency *!*!*!*! was operating right on Wall Street while all the other scandals raged and ruined all around it is an enduring monument to the continued gullibility of the investing public, and the fact that behind every sucker there are 10 more waiting to push to the front."


Who's next?

E-mail A.C. Thompson