Great frauds in history: Robert Brennan’s boiler room

Robert Brennan used high-pressure techniques to sell worthless penny shares to unwitting investors, defrauding them of more than $300m.

Robert Brennan was born in New Jersey in 1944 and went on to set up First Jersey Securities in 1974, running it alongside two other brokerages Hibbard Brown and LC Wegard & Company. In the 1970s and 1980s, First Jersey, which specialised in "penny stocks", grew at a fast rate. Indeed, at its peak in the late 1980s it employed 1,200 people across multiple offices, and made profits of around $95m a year. This allowed Brennan to indulge in a lavish lifestyle in 1992 he splashed out $40m ($75m in today's money) on building the Due Process golf club.

What was the scam?

First Jersey Securities was a "boiler room" where salesmen would use high-pressure techniques to sell shares in worthless companies to unwitting investors. At the same time, Brennan's two other brokerages would work to manipulate the stock price upwards, giving the impression that the shares were rising in value. Those brokerages would then dump their shares, causing the price to quickly collapse. Unlike later boiler-room operators, such as Jordan Belfort, Brennan would target the wider public, spending large sums on advertising and making high-profile donations to various public causes to generate publicity (as well as discourage prosecution).

What happened next?

From the late 1970s onwards, First Jersey's activities attracted attention from regulators. Brennan, however, was able to avoid being formally convicted of anything for more than two decades by promising to scale back his business. In 1994 he was finally convicted of fraud and ordered to pay $71.5m in compensation, as well as being banned from the securities industry, forcing him to declare bankruptcy. In 2001 he was convicted of hiding $4.5m in bonds and casino chips from the bankruptcy court, and was sentenced to nine years in jail.The fines Brennan was eventually forced to pay were a fraction of his clients' losses from investing in companies promoted by First Jersey. Indeed, between 1988 and 1995 alone, First Jersey defrauded clients of $300m.

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Lessons for investors

The shares of smaller companies can be a lucrative investment research shows that they produce higher long-term returns than their larger counterparts. Yet this sector tends to account for a disproportionate number of frauds, so you need to tread especially carefully.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri