What Is A Boiler Room?

This article is taken from The Guardian, circa 2003. It gives an insight into a boiler room operation, and gives some suggestions as to how to avoid being caught.

Don't get roped in by the offshore cowboys

The FSA's list of unauthorised investment firms is longer than ever. Mary O'Hara reports on how to avoid slick share scams.

Saturday May 3, 2003
The Guardian

The Financial Services Authority this week issued its biggest blacklist yet of firms that investors need to be extremely cautious of before handing over any cash. The list - which has tripled in size in a year - is an attempt by the watchdog to alert investors to potential cowboy firms that operate scams using heavy handed sales ploys to convince them to buy worthless shares. The watchdog has also warned of a new scam that means some people are being stung twice.

Commonly known as "boiler rooms", these unregulated firms often exist only on paper as a front for flogging shares with the promise of extraordinarily high returns when in reality they may be nearly worthless.

Thousands of investors have been caught out by scams where very slick, convincing and persistent salespeople ring up and verbally bludgeon them into parting with cash - usually with the line that the investor is getting in "on the ground floor" and by insisting they hand over cash immediately or lose out on the "opportunity" altogether.

The sales reps work from lists - sometimes compiled using the names of people who have fallen for similar scams in the past and sometimes by duping people who inadvertently responded to mailshots without reading the small print.

The reps will often tell investors they stand to make as much as 100% return on their investment. Sometimes they rely on jargon to pull the wool over people's eyes and the shares being sold often sound obscure and hi-tech or are quoted on little-known markets.

The firms operate out of a number of countries - popular choices being China and south-east Asian countries - to get around UK regulations and often by the time an investor realises that no money is forthcoming the operation has shut up shop, closed down websites, disconnected phone lines, moved on and changed its name.

And because all dealings will have been done on the phone and any UK addresses they may use tend to be nothing more than postal pick-up addresses, the investor has no way of tracking the culprits down.

In some cases, the firms are regulated in other countries, but a foreigner who attempts to get compensation is likely to find it impossible.

The companies use names that sound vaguely familiar and official to lull would-be investors into a false sense of security.

Carol Sergeant, FSA managing director, says: "Dealing with unauthorised firms can seriously damage your wealth. You may be lucky and have no problems but if you do, you will have no complaints or compensation scheme to turn to and you could lose all your money.

"Before deciding to deal with a firm, our advice is always to check with us whether a firm is authorised. You should also be careful not to hand over personal details such as your bank account and credit card numbers until you have established the credentials of a firm."

The latest scam uncovered cleverly lures investors into selling their original shares for an upfront "administration fee" if they have found them difficult to sell through other avenues - a not uncommon occurrence.

However, what investors find is that once the "fee" has been handed over they never hear from the firm again and are stung twice, having lost both their original investment and the fee.

One investor who contacted the FSA said he had bought $37,500 (£23,618) of shares from an unauthorised firm describing itself as a broker in Switzerland.

About 18 months later a different firm contacted him describing itself as an US settlements company. It was offering to sell his shares for nearly five times the amount he paid for them, providing he paid a "withholding tax" of $8,850 (£5,574).

After paying the money he received another call from the same firm saying it needed a further $57,000 (£35,899) to complete the transaction. The investor did not send the money and still holds the shares he bought, but is out of pocket by $8,850 for the "withholding tax" he paid.

The FSA can and has taken action (including criminal proceedings) against companies it has been able to track down and prove have been swindling investors.

However, because the companies involved are unregulated and outside its jurisdiction no compensation is available to their victims.

A spokeswoman says: "It's a bit like shutting the stable door once the horse has bolted. By the time we get to the firms investors have already lost their money. Consumers need to do as much research as possible about firms who approach them."

How can you tell if a firm is authorised? Investors can check by visiting the FSA "firm and person check service" or by phoning 0845-606 1234.

As an additional precaution, it may be worth checking out those firms banned by other countries with the relevant authorities. Some have longer lists of banned companies than the UK.

You can get more valuable information from the boilerromms.co.uk forum, from where this was originally located.