Boiler room (business)

In business, the term boiler room refers to a busy centre of activity, often selling questionable goods by telephone. It typically refers to a room where salesmen work using unfair, dishonest sales tactics, sometimes selling penny stock or committing outright stock fraud. The term carries a negative connotation, and is often used to imply high-pressure sales tactics and, sometimes, poor working conditions.

The "night singer of shares" sold stock on the streets during the South Sea Bubble. Amsterdam, 1720.

Business structure

A boiler room usually has an undisclosed relationship with the company being promoted or undisclosed profit from the sale of the house stock they are promoting. The managers of the boiler room usually have close ties to the same owners of the company whose stock is being promoted. After the sales force of the boiler room sells their clients on the idea of the IPO, they are not allowed to sell the shares that the customer invested. This is because there is no real "market" for the shares, so any shares sold before buyers are attracted would create a large loss in the price of the stock, due to it being thinly traded with no public support. Once the insider investors are in place, a boiler room promotes (via telephone calls to brokerage clients or spam email) these thinly traded stocks where there is no actual market. The brokers of the boiler room actually "create" a market by attracting buyers, whose demand for the stock drives up the price; This gives the owners of the company enough volume to sell their shares at a profit, a form of pump and dump operation where the original investors profit at the expense of the investors taken in by the boiler room operation.

The U.S. Securities and Exchange Commission paints the following picture:

The brokers sat "cheek by jowl" in a room the size of a basketball court. All of their desks were lined up side by side in rows. The firm held mandatory sales meetings every morning at 8:30 a.m. at which time sales techniques were demonstrated and scripts for the firm's "house stock" . . . were distributed. Brokers were expected to follow the scripts and only give customers the information they contained.

Some traits of a boiler room include presenting only good news about the stock to be sold, and discouraging outside research by customers or brokers working there.

The term is likely to have originated from the cheap, hastily arranged office space used by such firms, often just a few desks in the basement or utility room of an existing office building.

A fictional "boiler room" brokerage firm was dramatized in the 2000 film Boiler Room, and the play and film Glengarry Glen Ross show a similar boiler room operation selling real estate.

Many consider boiler rooms a fictional relic of a bygone era. Although many disappeared in the 90s following the burst of the "dot-com bubble", many boiler rooms still operate across the world. Advances in telecommunication technology mean that a company can viably operate in one country while calling prospective investors in another. The advantage of such an operation is that a company can operate without fear of prosecution from the investor's native legal system. For example, many boiler rooms contacting prospective investors in the UK will operate from Spanish cities such as Barcelona and Valencia.

With the advent of the internet and ability to easily create web sites without any regulation and operate from other jurisdictions, boiler rooms have continued to operate into the 21st century. It is easy for scammers to set up a web site on one country, operate from another country and target victims in a third country, hiding their identity and making it difficult to trace them. Financial regulation vary significantly from country to country and some countries deliberately promote low regulatory environments to attract financial business making it easy for boiler rooms to use this to their advantage. Financial Regulatory Authorities in each country have significant difficulty enforcing rules on scammers in other countries. With low financial literacy by investors or victims, particularly in the way global financial markets operate and without better coordination between financial regulators in different countries, boiler rooms continue to operate.

See also

• Bucket shop
• Foreign exchange fraud
• Glengarry Glen Ross
• House stock
• Microcap stock fraud
• Stock dilution
• Pump and dump
• Boiler Room (film)
• Boiler Room Girls

References

Footnotes

General sources

• Stevenson, Robert J (2000). The Boiler Room and Other Telephone Sales Scams. Chicago: University of Illinois Press. ISBN 978-0-252-06934-5. http://www.press.uillinois.edu/books/catalog/67cff7tt9780252069345.html. 
• Lauria, Salvatore; David S. Barry (2003). The Scorpion and the Frog: High Times and High Crimes. Beverly Hills, CA: New Millennium Entertainment. ISBN 978-1-893-22426-1. http://books.google.com/books?id=xNcBAAAACAAJ&dq=isbn=9781893224261. 

External links

• SEC – "Portrait of a Boiler Room"
• FSA – "Share scams"
• The Motley Fool consumer website – Boiler Room FAQ
• This is Money – "UK court halts boiler room scams"
• Sky News – "Anatomy Of A Boiler Room Bust" – Profiting from shorting the inflated prices of equities ramped by boiler rooms
• The Guardian - "Lifting the lid on 'boiler room' scams"
• BBC - "Boiler room scams"
• Economic Frauds - "Black list"