In September 1986 a man calling himself Jay Hyma walked into a brokerage firm and placed an order to buy some over-the-counter stocks. Mr. Hyma had opened 53 accounts with 18 brokerages. When it came time to pay for the stocks, he did not. He had been trying to benefit from price manipulations of stocks bought through different brokers. A common scam, this operation results in a brokerage firm having to buy the stocks, at a loss when prices fall.
It took an investigation by the Securities and Exchange Commission and the Federal Bureau of Investigation, with cooperation from clients of the Compliance Data Center Inc., to uncover Hyma's real name. Only then was his history of securities violations and three years in jail uncovered. The man has since been indicted.
Opportunists like Hyma are always trying to prey on brokers, but since the market took its dramatic turn, brokers are on the counterattack.
``The only way he [Hyma] was going to be able to trade was to change his name,'' says McKay White, the senior vice-president of CDC.
Miss White has spent years refining and expanding CDC's international computer files. ``We are simply a credit clearinghouse for the investment community,'' she explains. White and a staff of 21 gather information on the antics and activities of those who bounce checks, skip out on stock payments, or try to run away from a previous life in the financial services world.
The company has compiled files on businesses and people by drawing on information from brokers who have been cheated, stock exchanges, arbitration hearings, the SEC, and other sources. CDC members provide it information by mail, computer tape, or telephone.
With the stock market's plummet Oct. 19, CDC's business has picked up and three more firms have become clients, bringing the total membership roster to 130. The list includes large institutional and retail brokers, banks, and smaller regional brokerage firms.
``Brokers now are being more vigilant in all their accounts,'' White observes. Firms are particularly concerned about the assets behind margin accounts, where many people lost money during the market's plunge as brokers asked clients to put up more collateral to cover accounts. CDC's president, Richard Green, estimates that Wall Street firms lose $100 million a year from those who walk away from obligations or cheat brokers.
The Quick & Reilly Group Inc., a discount brokerage, runs every new account through CDC's computer files. ``Just about every day we get a call from them,'' says Leslie Quick III, president.
The other day a man tried to open an account through Quick's Phoenix branch. A check with CDC revealed that the would-be customer was a former client from whom Quick had spent two years trying to collect $2,000. ``The man didn't even change his name,'' Mr. Quick says.''
Because of the Fair Credit Reporting Act of 1970, CDC is only an intermediary in providing its member firms information. ``I don't give advice,'' White emphasizes. ``I don't say, `You shouldn't do business with this person.' That's up to the broker to decide. I don't know what happens after we call, and we do not put out lists with any negative information.''
What happens before she or the staff members call a client, however, must be a ``hit,'' or match, between a request for information and CDC's files. From there White or a staff member checks on the match to ensure that it is the same person or business.
Depending on the importance of the information revealed in a hit, White or one of her two top aides, Tom Pirro and Janet Mucher, will pursue the case. Some information is so sensitive that only White has access to it.
In tracking a lead, CDC checks a ZIP code, social security number, alias, address, or any other item that seems worth pursuing. ``I think of things in the middle of the night and keep a note pad by my bed,'' White says.
Scrambled ZIP codes or heavy activity in one area can result in an answer. ``There's no such thing as a hunch. A case can be tracked back like a puzzle,'' she says.
Mr. Green started CDC in 1962 in San Francisco. White joined in 1969, and now she runs the company's operations and its four offices, with a London office pending. The company is headquartered in Zephyr Cove, Nev., where a back-up computer system is housed.
In 1974 CDC took over the operations of the Exchange Firms Information Corporation, which was owned by New York Stock Exchange member firms and provided credit information. Today one other firm, started by a former CDC employee, provides credit-rating information.
CDC's services range from checking on a firm's new daily accounts to an occasional phone call from a compliance director asking about a potential client. White will not reveal how much CDC's services cost, but members can pay $5 per name to check a client's creditworthiness.
``Whether they've saved us money, it's hard to know,'' says Don Summers, commodity operations manager at A.G. Edwards, Inc. in St. Louis. ``But if they save us from one bad experience, it's worth it. It's hard to put a value on their service.''
A.G. Edwards uses CDC's service in screening new accounts. Mr. Summers says that an alert from CDC could lead the firm to limit the number of contracts a person can buy. ``If the situation is really bad, such as an indictment, we would not do business,'' he says.
Louis Bulba, director of compliance at the full-service firm Dain Bosworth Inc. in Minneapolis, occasionally calls CDC about new customers. ``It happens maybe twice every six months,'' says Mr. Bulba. ``We use it for commodity accounts and where there is cause for concern.''
Bulba says that many people are walking away from margin accounts. One account that Bulba scrutinizes is an order from a large institution with a foreign address, funny clearing numbers, or a large unsecured debit. ``There's a lot of vulnerability, because a person can hide behind a corporation,'' he notes.