(FORTUNE Magazine) – BREATHES THERE an American of economic substance who has not answered the phone and heard words like these? Is this Henry Longfellow? Henry! Nice to talk to you this evening. This is Arthur Steele in New York, calling from Emerson & Co. I trust you've heard of our firm and know that we're one of the largest securities brokers and money managers in the country. Well, yes, Henry, I know this is the children's hour, but I assure you this will take only a minute. And then, if Henry has not vanished into the gloaming: The reason I'm calling, Henry, is that late this afternoon one of our best research analysts put Smithy Inc. on our recommended list, and it's our considered opinion that the stock could make a sizable move tomorrow. At $40, these shares are just eminently reasonable. This opportunity strikes me as so interesting that I'm buying some for myself and my family, and making a few calls like this. Frankly, Henry, I'm talking only to people who I think are sophisticated enough to find our services of real value, and I've identified you as one of those. Tell me, what could we start something up with? Would you be comfortable with, perhaps, 1,000 shares? Behind that spiel is the world of cold-calling, Wall Street variety. Cold calls are telephone marketing assaults made by salespeople typically dialing a random list of prospects at their homes or offices. Need it be said, the calls are a maddening nuisance for most recipients. On Wall Street, unfortunately, they are considered a raw necessity. Richard Thornblad, director of sales and marketing services at the Securities Industry Association, a trade group, says, ''God gave us the telephone. Cold-calling is kind of like walking, sleeping, breathing, and getting to the next day. It's just what we do.'' What the Street does not do as readily is respond to incoming calls related to this subject. Asked by FORTUNE to explain how cold calls fit into its marketing efforts, Merrill Lynch, for example, begged off. Said a spokesman for the firm as he was preparing politely to hang up the phone: ''It's a no- win situation for us to talk about cold calls. We know they're an irritant to many people.''

In truth, the reasons any broker might not wish to discuss cold-calling are more complex. Cold calls can lead to legal and regulatory compliance problems, and legislators have recently been cracking down on them. Moreover, the Street has systematized its cold-calling in ways that, if fully understood by the public, might reduce the reputation of this selling technique still further, if one can plausibly descend from zero. The brokerage industry's devotion to telephoning total strangers rests on the fact that the sport is just about the only way for a beginning broker -- ''a rookie'' -- to get started, whatever the size or reputation of his firm. Even a training program as well known as Merrill Lynch's salutes that proposition. Merrill trains some of its new hires in its branch offices and some on a Princeton, New Jersey, campus it built a few years ago, but in both cases the rookies are all but glued to the phone. David Bennett, of Louisville, Kentucky, a former Merrill Lyncher now working for a pension- administration firm, recalls his exposure to a course lasting three weeks in 1984: ''I'd say the predominant goal of the training was to make sure the broker was confident about cold-calling.'' Taking Merrill's three-week course, a trainee -- more likely, as is the pattern in the brokerage business, to be a man than a woman -- is typically required to bring with him a list of at least several hundred prospects located near his branch office and presumed to have buying ability. The list might be gleaned from the membership directory of a country club, or the employee phone book of the trainee's previous company, or the yellow-page listings of, say, all pharmacists working in New York City. The trainees then work for several days in ''phone labs,'' making practice calls to their fellow trainees and mastering scripts that set forth apt rejoinders to certain standard rejections. (Callee: ''I have to talk to my wife.'' Caller, gently but firmly: ''Your wife is not an investment professional.'') The trainees also receive what appear to be conflicting instructions: Be polite. Be persistent. Says John P. Lipari, 31, a Merrill Lynch broker in Miami who took his training in 1985: ''We were told never to hang up the phone until they said no for the third time. The point was that some people really don't mean no when they say it, but instead mean, 'Give me more information.' '' Taking their last, tension-fraught step just before they return home, the trainees get on a real phone and begin dialing the prospects on their list, trying to set up face-to-face interviews. Miracles can happen: Lipari got an interview, out of which came a client, on his first try. But the odds are frightening. ''Most of the time,'' says Lipari, ''you have to figure it takes 100 cold calls to get one client.'' The statistic he cites is widely quoted on Wall Street. And yet clearly, and perhaps amazingly, the industry considers cold-calling to be economically sensible. MERRILL LYNCH's approach to the practice is primarily local. But there also exist nationwide calling programs, typically operated over WATS lines out of New York City and carried on in a highly systematic and relentless manner. Among the firms known for widespread calling are Oppenheimer, Bear Stearns, Smith Barney, Gruntal, and most especially Shearson Lehman Brothers, which calls under two names, Shearson Lehman and Lehman Brothers. The firm does its most aggressive phone work out of several offices that came from the old Lehman Brothers and whose brokers still use that name on the phone. One celebrated Shearson Lehman cold-caller is Martin D. Shafiroff, 52, a managing director whose book, Successful Telephone Selling in the '90s (co-authored with Robert L. Shook), is virtually a bible on Wall Street. Though many cold-callers try to make an immediate sale when they get a prospect on the phone, the Shafiroff-Lehman system calls for three sequential moves. First, having nabbed the rare prospect actually willing to chat, the caller ''qualifies'' him by ascertaining his investment objectives, his willingness to accept a follow-up call some days later, and -- never forgotten! -- his financial ability to place a sizable order. Next comes a mailing to inform him about the firm's standout reputation or investment record. Lehman usually sends a chapter of a 1966 book, The Merchant Bankers, which describes the firm as it was two decades before its 1984 merger with Shearson. Finally, there's the follow-up call, made to present a specific idea and get the order. Shearson brokers by the thousands all over the country carry out versions of this routine, and as a whole get 30% of their new accounts from cold calls. The comparable tally for the Lehman Brothers brokers is more than 50%. THE TEMPLES of nationwide cold-calling at Shearson are two Lehman Brothers offices in Manhattan, one downtown on Water Street, the other in midtown on % Madison Avenue where Shafiroff operates. At these sites, the initial ''dials'' are often made by young kids, many right out of college, who get $5 an hour and lunch for spending their day on the blower intoning, say, ''I'm calling for Martin Shafiroff, a managing director of Lehman Brothers.'' Usually the dialers get rebuffed in seconds by the prospect or his secretary. But once in a while they get a live mark and then the dialer hands off the call by yelling to a ''qualifier'' to pick it up (''I've got Henry Longfellow on line 4''). The qualifier, who is an assistant somewhat higher on the pay scale, collects what information he can about Henry and, if Henry acquiesces, assures him that Martin Shafiroff, say, will be calling him shortly with an idea. Shearson does not readily allow outsiders to see these operations today, perhaps partly because the New York Stock Exchange fined the firm $750,000 in May for various rule violations committed by its Water Street office in 1985, 1986, and 1987. Some of these violations were deeds of cold-callers, although the exchange says that it is unable to supply details of exactly what they did. A second reason for secrecy may be that Salomon Brothers' government-bond scandal has raised the sensitivity of all Wall Street executives as to what looks good and what doesn't. Gang-style cold-calling can't be what a firm would brag about. A FORTUNE staff member, however, got a glimpse of Shearson's Madison Avenue operation, and here's what it looks like. A bullpen one-quarter the size of a football field. A sea of people, mostly young men in white shirts talking on headsets and beavering through stacks of cards, many bought from Dun & Bradstreet, that bear the names and phone numbers of prospects. A sign on one desk reading REMEMBER: NO ONE CALLS BACK. Says a young fellow who used to work dialing for $5 an hour: ''Basically, it's a white-collar sweatshop.''

Specimens of daily scorecards that the Madison Avenue office circulates to its cold-callers reveal a remarkable amount of activity. In the first four working days of October, 41 callers in one part of the office -- including dialers, qualifiers, and brokers -- got no fewer than 18,004 prospects to listen to at least a few words, qualified 1,208 of them, made 659 sales presentations to leads qualified on previous days, and opened 40 new accounts. A phone phenomenon was a $5-an-hour man named Steven Mitchell, who got through to 1,311 prospects in those four days, 98 of whom were subsequently qualified as leads. FORTUNE wanted to ask Mitchell about his work, but he said he was too busy to talk -- and never called back. The Madison Avenue statistics help explain why so many business people recoil at the name Lehman Brothers. Moreover, the rat-a-tat-tat of cold- calling, as carried on all over the Street, casts doubt as to whether an aggressive practitioner can adhere to the New York Stock Exchange's ''know your customer'' rule. This regulation requires a broker to learn enough about a given customer to understand what securities might best suit him. In order to fill out the new-account form that his firm must have on file before a trade is made, the broker has to know something about the buyer, including his investment objectives. But that requirement often appears to be met in a slap- dash manner. Many brokers actually hoot at the mention of cold-callers and the know-your-customer rule in the same breath. The only things that count, says one broker, is that the customer have ''a pulse and money.'' Even then, customers acquired through a cold call may turn out to have more pulse than purse. Sometimes buyers are deadbeats, or ''reneges,'' as the Street calls them. Suppose that a new customer buys a stock on a cold-caller's recommendation and then, in the five days before his payment is due, watches it fall. He may then refuse to pay, claiming he never placed the order. (Naturally, he almost always pays if the stock has gone up.) At this juncture, unless the customer can be successfully pursued, either the brokerage firm or the broker himself becomes, in effect, the owner of the losses that the customer dodged. DIFFERENT FIRMS have different rules about whether they or the broker absorbs the loss or splits it. Making the broker pay encourages him to be prudent in his selection of customers. But Shearson, for example, long had a policy that it would accept a renege loss if one occurred on a broker's first trade with a cold-call customer. Nothing about that policy promoted caution. However, Joseph Plumeri, who took over as head of Shearson's retail operation last year, says the firm now normally makes the broker absorb the loss. As these facts suggest, sleazy customers with a yen to gamble may sometimes buy from a cold-caller. But who else does? The most amazing answer is supplied by Michael E. Silverman, a Holmdel, New Jersey, lawyer who used to work at Shearson, mainly handling compliance cases. Silverman says some investors / think it is their lucky day when they get a cold call, since they see this chance event as Destiny telling them to buy whatever is being sold. Perhaps they first check their horoscopes. Silverman, in any case, is now in private practice, where he sometimes represents investors who once thought they were lucky and later became litigants charging they were sold unsuitable securities. ANOTHER GROUP of people say yes to cold-callers in hopes that this will get them to go away, which does not seem totally logical reasoning. Investors in areas remote from a large city may also like the cachet of having a broker in New York or Chicago, especially one who succeeds in presenting himself as someone special. Cold-callers from one Gruntal & Co. office in Manhattan, for example, sometimes say they are a part of the firm's ''executive services group.'' Sam Gilliland, an Oppenheimer & Co. broker who began his Wall Street career in 1982 as a cold-caller for Bear Stearns, recalls the subtleties of his pitch there: ''I trust,'' he would say, ''that you're familiar with our firm, which is one of the most profitable on Wall Street. This will be very short. We are an institutional firm and do only a small amount of retail business. But from time to time our partners have ideas that they themselves especially like and are willing to have passed along to people like you . . .'' It is hilarious to imagine that Alan ''Ace'' Greenberg, CEO of Bear Stearns, would want to broadcast his best ideas. But, says Gilliland, ''it works.'' He adds that, for some unknown reason, it particularly works with lawyers, immigrants, and Southerners. In his experience, it does not work with women, who he thinks distrust strange men who call on the telephone. In turn, most cold-callers who do evening duty dislike having a woman answer the phone, since they suspect that she does not make her family's financial decisions. This writer has often answered the ring of a cold-caller in the evening, only to have him speedily hang up if he learns her husband is not at home. William C. Nichols, of Rogers, Arkansas, who sells lists of prospects to brokers, at prices ranging from about 5 cents to 20 cents a name, indicated in a recent phone interview that women's names are not a big seller. But he also points out that the ''more mature woman'' -- one of whom he may have guessed was on the other end of the line -- is often sitting on considerable wealth and should be treated not like ''a dingbat'' or ''somebody's wife'' but as a ; potentially valuable client. Considering the intrusiveness and doggedness of cold-callers of all varieties, it is not surprising that consumers have rioted in protest. Congress is threatening to pass junk-phone legislation, and a few states already have restrictive laws on their books. In Florida, for example, if you do not want to receive cold calls, you may pay $10 to the state for the privilege of having your name included on a do-not-call list that the state publishes quarterly. If an off-limits resident gets a call, he or she may report the violation to the state, which first warns the caller and, upon repeated complaints, may impose a $10,000 fine. Only 28,000 Florida households, out of about five million, have put themselves on the list. Even then, they have not been spared calls entirely, since brokers who either have not checked the list or are flouting it continue to ring up. In mid-November there were on file in Tallahassee 45 complaints against brokers who had called the forbidden. The record included three complaints each against brokers from Prudential Securities, A.G. Edwards, and Raymond James, a Florida-based firm; five against Smith Barney; six against Shearson Lehman; eight against Paine Webber; and 17 against Merrill Lynch. THE BROKERAGE industry predictably despises laws of the Florida type. But in response to the public's disgust and their own fear of legislation, some firms are clearly struggling to clean up their cold-calling practices and to stress alternatives like referrals and seminars for getting new customers. Polls taken by Registered Representative magazine in 1990 and 1991 indicate that brokers have reduced their reliance on cold-calling by a fair amount in the past year, a trend that some recipients may argue has certainly not been visible to them. Shearson Lehman even has a new, highly detailed code of conduct for cold- callers. The first ''guideline'' in the code says that neither a financial consultant, which is what Shearson calls its registered reps, nor a qualifier may identify himself as being from Lehman Brothers without going on to explain that Lehman is a part of Shearson. If you believe that last bit is going to be proffered consistently, maybe you'd also like to buy some czarist bonds. Moreover, the rule says nothing about those $5-an-hour dialers. So brace yourself for more calls from Lehman Brothers, because they're assuredly not about to dry up.