"Let's turn Wall Street into Sesame Street."
Lance Strauss, sporting a spiffy double-breasted suit, is in a Marriott conference room demonstrating how to become rich like him by following the simple market steps of a former cabdriver named Wade Cook.
Sliding a ruler up and down stock charts, Strauss instructs three dozen aspiring investors who have come to a free three-hour seminar to chant "buy" at the bottom and "sell" at the top. This is Cook's signature "rolling stock" strategy--a term whose trademark last year won Cook a $650,000 infringement case against rival inspirational guru Anthony Robbins.
"Do you realize what you've just done in three minutes is what they call on Wall Street 'technical analysis'?" Strauss's voice is amplified by a microphone clipped to a red silk tie speckled with the words "tax" and "amnesty." "Just think of how dangerous you're going to be after spending three days or a year with us."
This sales squeeze, playing out at Cook seminars around the country, has made Cook one of the most successful and controversial peddlers of Wall Street advice. Strauss and 15 other speakers man these free seminars, which are designed to give investors a taste of what they would get if they ponied up a few thousand dollars to attend a longer Cook seminar.
Last year, Wade Cook Financial Corp., a publicly traded company based in Seattle, pulled in $118 million in revenue from seminars, videotapes (one features fellow Salt Lake City native Sen. Orrin G. Hatch strumming the guitar), a Web site that informs subscribers of stock trades he's making, beepers and books ("Wall Street Money Machine," "Business Buy the Bible" and "Stock Market Miracles" are New York Times business bestsellers.)
But it is the merchandise--not the market--that has made Cook a millionaire. And this fact has inspired investigations by securities regulators and consumer watchdogs around the country.
At least 11 states are investigating the company's policies. Two--Texas and California--have filed lawsuits accusing Cook of lying about his own investment performance and violating federal laws that entitle customers to refunds.
And now the Federal Trade Commission's Seattle office is compiling a major consumer-protection case, regulatory sources close to the investigation said. If the FTC's commissioners decide to go ahead with the action, it could be filed by early October.
At the heart of the investigations and lawsuits are Cook's promises to teach people how to double their money every two to four months. Many investors have complained that instead they have lost money trying to follow his strategies. And those who sought a refund allegedly were rejected, in apparent violation of federal laws allowing customers to change their minds within three days of buying products outside a company's main place of business, such as in hotel rooms.
"He kept telling us that he was a taxi driver from Tacoma who made millions and we could, too," said Dana Lough, a Seattle file clerk who has joined a class-action lawsuit to recoup the $6,000 she spent for a seminar and books. "What he taught us didn't work."
Cook did not respond to repeated requests for comment. He recently tweaked his policies--offering a seven-day money-back guarantee, for example--and softened his promotions to doubling "some" of your money. Supporters have said that students who lost money did not properly follow his teachings.
"If regulators are looking for fault with Wade Cook the man, they'd find plenty," said John Childers, a major investor who recently left the company--and the board-- after a falling-out over his contract to train the seminar speakers. "But if they are investigating what he's teaching, they're going to see that it's okay."
Striking It Rich
Cook's rise is as much about his marketing machine as it is about the psyche that is driving record numbers of novice investors into the stock market. As folks heard friends boast of striking it rich on Wall Street, they raced to mass-marketed seminars by self-styled financial gurus. These new investors are generally naive and unsophisticated, making them easy targets for get-rich-quick advice.
"There is a lot of stupidity and greed out there," said David Bayless , former head of the San Francisco office of the Securities and Exchange Commission, which launched an investigation into Cook in 1997. "The market has become Las Vegas writ large."
For regulators, this new breed of adviser is frustrating because they are not technically advisers at all. Cook and a proliferation of copycats are excluded from government oversight because they do not charge for dispensing advice or selling securities. They present themselves as educators. "He was out of our hands--so I told the states, you've got to go after this guy," Bayless said.
"If people knew that he wasn't really making trades or he wasn't making the kind of money he claims to make, I don't think they'd be as interested," said Deborah Bortner, Washington state's top securities regulator, who has been investigating Cook for three years. "People are led to believe he makes money in the market. And that is not the case."
In 1997, when the Dow Jones industrial average soared 23 percent, Cook's firm lost $804,000. Cook blamed the losses on seminar speakers who were allowed to use company money to trade on the spot for an audience. "The company was growing so fast, and by the time he realized what was happening, it was a media nightmare," Childers said.
Last year, Wade Cook Financial reported that it made $837,000 trading stocks. That's less than 1 percent of the company's total sales. Cook did not disclose how much capital the company committed to its trading activities, so it's impossible to determine what rate of return it earned. In the first quarter of 1999, SEC documents show, the company earned $416,000 trading securities. Its revenue was $27.2 million; of that, $25.2 million came from seminars and sales of products. The value of the company's own stock has plunged on Nasdaq's Bulletin Board to 37 cents a share, from a high of $5 in late 1997.
Buy and Don't Hold
Cook's main advice is to be a short-term investor--buying and holding for weeks, not years, at a time. He calls this his "meter drop" method--an idea he dreamed up as a cabdriver. Each passenger who got into the taxi, Cook wrote in one of his books, would pay $1.50 to $2 on top of the fare--so a lot of little rides were more lucrative than one long one.
He says this discovery boosted his cabbie salary enough that he was able to start investing in real estate in the 1970s. Cook began teaching others but went bust in the mid-1980s and filed for personal bankruptcy protection. In 1989, he was accused by Arizona regulators of 18 counts of fraud for selling stocks without a license, but the charges were later dismissed. In reports at the time, an attorney said that Cook had not intended to violate the law but had simply gotten bad advice about how to conduct his business.
Cook resurfaced five years ago as a stock-market guru, touting a strategy of buying and selling predictable stocks--those whose highs and lows were fairly consistent for five years. He called these "rolling stocks." But he continued pumping money from investment seminars into real estate rather than investing it according to the strategies that he preaches, documents his company filed with the SEC show.
Billions vs. Burgers
Strauss, standing in the Marriott, compares Cook's methods to those used by McDonald's Corp. "They sell billions of burgers, making pennies each. And where do they learn how to run a franchise? Hamburger U." Wade Cook seminars, he says, are a small price to pay to go into business for yourself.
But where can a small investor find charts for rolling stocks? Wealth Information Network--or WIN--posts "all" the trades made by Cook and his minions, according to promotional material. Until recently, ads invited investors to "look over the shoulder of a millionaire while he invests." Subscriptions cost $2,000 but are often wrapped into the workshop package.
Washington state regulators say a former Web master is prepared to testify that Cook asked her not to post losing trades. Further, the Texas suit alleges that some of the trades posted there never happened.
Another problem regulators have found with the site is Cook's offer to give people their money back if he does not post at least three trades per month that have a 300 percent annualized return. That may sound like a lot, but if an investor bought a stock at $20 and sold it the same day at $20.25, his annualized rate of return would be 300 percent, noted Alan Yengoyan, senior deputy district attorney for Fresno County, Calif., which filed a civil suit in January against Cook. "It's an absurd guarantee."
Cook's guarantee apparently does not factor in the brokerage fees involved in buying and selling. Nor does it seem to account for any taxes owed on short-term trading profits.
Regulators have also come down hard on Cook for his "final sale" policy. Federal law allows customers to change their minds within three days of buying merchandise outside a company's main headquarters. Since many of the sales of Cook's products were made over the phone, Childers said, Cook did not believe the law applied to him.
In California, customers who are not told of this "cooling-off" right have an unlimited amount of time to claim a refund. In March 1998, prosecutors in California threatened a civil action unless Cook offered a refund to all the customers who took courses in California--his biggest market.
Cook did not comply. The following month, however, he changed his contracts to offer refunds within seven days of registration--but only before taking a seminar. While this puts Cook within the law, Yengoyan said it is of no use to people who feel duped after they take the course.
In January, California followed through with its threat, seeking refunds of the $18 million customers spent on Cook classes in the state in 1995, 1996 and 1997. It also seeks $4 million in civil penalties.
The suit followed a similar one in state court in Bexar County, Tex., accusing Cook himself and Wade Cook Financial of "false, deceptive and misleading acts." Cook's programs have "marginal validity," according to the suit, which says they carry a "high risk" of causing the loss of "large amounts of money."
In an SEC filing, the company said it is cooperating with 11 states investigating its practices. As for the cases that were filed, it said it believes it has not intentionally engaged in false, deceptive and misleading business practices.
The Federal Trade Commission's investigation focuses on the validity of Cook's claims for possible deceptive advertising and Cook's compliance with the federal cooling-off law. A source familiar with the investigation said the case will be larger than typical FTC cases, given the amount of money and the number of investors involved.
It will investigate how much money Cook--and his disciples--really make from trading securities. It also may allege that it is impossible to follow Cook's personal track record by watching his Web site.
If the FTC causes a landslide of new demands for refunds, the financial ramifications for the self-made millionaire could be profound. His company's profit fell last year, and Cook reported that the company owes $5.1 million in back taxes.
Probes and Threats
Critics, meanwhile, are doing their best to inform the public of the allegations circulating. In Kansas and Massachusetts, regulators are warning investors about Cook's alleged transgressions. Securities regulators in Massachusetts said Cook's company has threatened them with a lawsuit.
Another vociferous critic is the Motley Fool, the Alexandria-based online investment site. Recently, after the Motley Fool posted articles mocking Cook's strategies, Cook mailed the Web site's staff a letter asking them to put up $1 million to test their strategy against his.
Motley Fool declined. "I guess we're flattered," said spokesman Chris Hill. "But we're busy trying to focus on customers. It's great [Cook's company has] grossed more than $100 million. I wonder how their students have done. I also wonder why Wade Cook doesn't invest it in his strategies that supposedly return 20 to 40 percent a month."
Strauss said that 40 percent of the seminar participants come from referrals from students, underlining their satisfaction with the course. He claims to be among the happy ones. Fifteen years ago, Strauss was in bankruptcy after a run-in with the Internal Revenue Service. Now, at the age of 48, he is "basically retired," he said.
If he's so rich, why is he teaching a Wade Cook course? He volunteers the question and answers it the same way he does many questions: "We'll save that for later."
Strauss said more than 50,000 people have gone through the three-day workshop. The price, he said, fluctuates "like airline prices." A recent SEC filing said it costs between $695 and $5,695.
The other day, Strauss handed around a price list for a three-day seminar that cost $6,195. But Strauss told the people gathered in a conference room that he would reduce that to $4,242. He then threw in an extra $1,000 discount to the first seven takers.
Strauss pooh-poohed audience members who said they would have no money left to trade after paying for the course, suggesting that they charge it on a credit card and pay off the balance in $300- or $400-a-month increments. "I don't like paying 18 percent annually," he said. "But I'll do it in a heartbeat if it means making 18 percent monthly."
He digressed into hypothetical jottings of money-making scenarios, laughing about the measly interest his credit union offers on deposits. By getting a cash advance of $1,700 on a credit card and borrowing 50 percent from a broker, he purported to demonstrate, exquisitely timed trades could turn that $1,700 into $1 million in three years.
Regulators say Cook's strategies are not innovative or new. "A lot of recommendations depend on the timing of when a stock is purchased," Bayless said. "Even half an hour can make a hell of a difference. A lot of people were doing what he said, but doing it at different times, losing money."
Strauss never came back to the question of why he's teaching a Cook course if he's so rich. Cornered after the seminar, he said, "I like helping people." Then, sensing skepticism, he added: "And Wade is paying me a lot of money to be here."