What is... | August 10, 2011

What is a boiler room scam?

Boiler room scams play on human fallibilities of greed and gullibility. As well as being an uncomfortably hot and stuffy room in a home, in finance terms a boiler room is also a bad place to be.


In finance terms, boiler rooms are illegal high-pressure operations that try to sell worthless – or even non-existent – shares to investors. The term is part of popular culture thanks to a 2000 film Boiler Room about a fictional stockbroking firm in the United States. Boiler rooms are one of more than a dozen common investment scams the Canadian Securities Administrators warn against.

Cold calls
A boiler room scam is relatively simple and plays on human fallibilities of greed and gullibility. Fraudsters pretending to be stockbrokers typically cold call people on publicly available shareholder lists offering to sell shares in a particular company (which may not actually exist) with a promise of massive returns. Often the scammer will ensure the company is given a bullish forecast on share-tipping message boards used by private investors, giving the impression it is a one-way bet. The sales pitch might be backed up by fictitious but expensive-looking websites reporting news of make-believe shareholder meetings and giving made-up corporate details.
The name boiler room comes from the high temperature and aggressive sales technique used by the fraudsters.

Hot air
The sales technique often portrays the immediate need to invest in a company claimed to be about to go public or whose share price is “poised for a spike”. The crooks are notoriously persistent and aim to wear down the target’s resistance. Only after the investors have handed over cash do they discover the truth behind the scam. If the shares being peddled are in fact real, they tend to be worth little or are only tradable in highly illiquid markets. Alternatively the company may never have existed.

Old dogs, new tricks
Regulators appear to be becoming more adept at catching boiler room crooks, with the UK’s Financial Services Authority (FSA) securing its first conviction for boiler room fraud in June 2011. But fraudsters are also finding new ways to operate. UK newspaper The Guardian writes crooks have stolen identities of registered advisers in a move termed “cloning”. Despite the regulatory onslaught, a Google trend analysis suggests there is little sign that criminals are giving up on the scam.

Stay cool
Boiler room frauds are just one of a range of financial scams. The internet is reportedly making it easier for financial fraudsters and scam artists to find potential victims. The Canadian Securities Administrators detail 13 common investment scams in its Avoiding Fraud section, including offshore investment scams (in which money is sent to another country in an arrangement that makes it difficult to get the funds back), affinity frauds (which target groups, such as social clubs or religious communities) and spam emails (which can peddle high-risk investments).
The eZonomics article What is … a Ponzi scheme? details one of the most well-known financial frauds. So, what can be done to protect against financial scams? In the case of boiler rooms, regulators and police urge people to not respond to cold call invitations – however enticing – and suggest instead that details of attempted frauds are reported to them. In the case of suspected Ponzi scams, the eZonomics story lists warning signs (such as unrealistic performance statements and a lack of trading confirmations).
In short, it can pay to be vigilant and ask questions before making any investment, examine risk factors and be sceptical.

InvestingScam

Phil Thornton
Phil Thornton

Lead consultant at Clariti Economics

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