Boiler room (business)
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In business, the term boiler room refers to an outbound call center selling questionable investments by telephone. It typically refers to a room where salesmen work using unfair, dishonest sales tactics, sometimes selling penny stocks, private placements 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 classic image of a boiler room is that it has an undisclosed relationship with the companies it promotes, or an undisclosed profit motive for promoting those companies.
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 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, with the "heat" and "pressure" of close quarters and fast-paced sales tactics analogous to the conditions in the boiler and, in the former case, its surrounding room.
In the early 1970s (and possibly earlier), boiler room was a term used by political parties for a room with many telephones used to call prospective voters.
Modern boiler rooms
Although many disappeared in the 1990s following the burst of the "dot-com bubble", many boiler rooms still operate across the world. Reductions in telecommunication costs 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 United Kingdom operate from Spanish cities such as Barcelona and Valencia.
A boiler room operation is well exemplified by the case of Fort Lauderdale-based company First Resource Group LLC charged by the U.S. Securities and Exchange Commission with conducting a fraudulent boiler room scheme in 2012. According to the SEC, First Resource and Stern used a telephone sales boiler room to make inflated claims and defraud investors while simultaneously manipulating the price of the stocks and making profits for themselves.
With the advent of the internet and the ability to create web sites easily without any regulatory involvement, as well as the ability to 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 in 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 varies significantly from country to country, and some countries deliberately promote low regulatory environments in order to attract financial business. This makes 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 increasingly complex ways that global financial markets operate), and without better coordination between financial regulators in different countries, boiler rooms continue to operate.
Asian boiler room scams
Asian Boiler rooms are international financial frauds, where investors are contacted by phone and e-mail and there are never face-to-face meetings. The professional sounding native English salespersons claim to represent a legitimate firm with offices usually in the South East Asian region like Tokyo or Singapore. They try to win investors' trust by describing their firms' past successes supplemented by nicely printed brochures, business cards and impressive web sites. Their only contact address may be reception service in some business center's "virtual office" to redirect calls and mail to overseas locations, where they could hardly be traced.
In fact, these firms are not licensed by any country's Financial Regulatory Authority, but will soon appear on Warning list of Unlicensed service providers of some country's regulator, which is the official way to alert that this entity is a boiler room scam. See link to real Financial Regulatory authorities in previous chapter.
The products offered are often exotic sounding options, bonds or commodities that are difficult to understand. Alternatively, they may offer micro-cap stocks (thinly traded stocks with low capitalization), pre-IPO stocks or those traded over-the-counter (OTC) in the U.S. market. Some even claim to offer stocks in coming NASDAQ companies. They may guarantee a high return on the investments and offer discounts. They may also allege that the stocks are only offered to a selected group of people for a short time.
Investors are asked to wire direct payment to a Beneficiary Account in overseas bank often in Hong Kong, Taiwan or China for settlement. Once investors have made the down payment, they are bombarded with calls to increase their investment to take advantage of sizable gains. Then investors receive false stock certificates or statements of accounts with good returns. When investors want to sell their stocks and discover that their sales representatives are no longer reachable, it is already too late. These boiler rooms are moved to other locations and disappeared with the money.
Finally, boiler room operators may hit an investor twice by posing as another broker after the first one has disappeared. They offer to help the investor to sell the stocks that are bought through the first broker on the condition that the investor pays more money into the designated bank account. The most likely targets of this fraud are wealthy professionals and business people, who are used to taking risks and receiving unsolicited cold calls but don't have time to check all the details.
Gold Coast boiler room scams
The Gold Coast has been described by investigators as the capital of investment fraud in Australia, with numerous boiler room operators selling bogus investment and sports betting schemes to Australian and overseas customers. The Australian Crime Commission estimates Australians had lost at least $AUD113M up to 2012.
Operators of the scams buy old shelf companies with no complaint history to give the appearance they’ve been trading legitimately for long periods. When complaints cause reputation problems they close the company and start anew. Virtual offices, fake receptionists and fake testimonials are used, and telemarketers cold call victims with misleading claims of high returns. Victims say the betting and investment software does not work and they lost their money when the companies suddenly closed. In 2011, private investigator, Ken Gamble, acting on behalf of groups of victims, provided evidence of millions of dollars worth of fraud to the Queensland Police Service, but says the fraud squad failed to investigate. In late 2014 it was announced Queensland’s Crime and Corruption Commission had taken over investigation of several Gold Coast boiler room scams due to allegations fraudsters were receiving police protection.
In popular culture
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. The 2013 film The Wolf of Wall Street, starring Leonardo DiCaprio, also involves a boiler-room investment business and is based on the memoir of convicted penny stock fraudster, Jordan Belfort. A 2010 episode of the television series White Collar depicted fictional conman Neal Caffrey infiltrating a group of corrupt brokers also peddling inflated penny stocks.
- Boiler Room Girls
- Bucket shop
- Foreign exchange fraud
- Microcap stock fraud
- Pump and dump
- Stock dilution
- ""Portrait of a Boiler Room"". Retrieved 20 September 2014.
- Tony Levene. ""Lifting the lid on 'boiler room' scams"". the Guardian. Retrieved 20 September 2014.
- Tony Levene. ""Boiler rooms chug on"". the Guardian. Retrieved 20 September 2014.
- Press release. "" SEC Charges Boiler Room Operators in Florida-Based Penny Stock Manipulation Scheme"". Retrieved 5 December 2014.
- Joshua Robertson (17 August 2015). "'The biggest mistake in my life': how Gold Coast boiler room scams duped investors". Australia: The Guardian.
- Mark Solomons & Mark Willacy (26 May 2015). "Former police officers under suspicion over Gold Coast boiler room scams that raked in millions of dollars". Australia: ABC News.
- Josh Bavas (8 May 2015). "Arrest over 'boiler room' telemarketing scam that allegedly conned 19 people out of $470,000". Australia: ABC News.
- Mark Solomons (12 June 2015). "Queensland Organised Crime Commission to look into investment fraud, police corruption claims on Gold Coast". Australia: ABC News.
- "Gambling scam takes millions from Australian investors". Australia: ABC 7:30. 2 September 2014.
- 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.
- Lauria, Salvatore; David S. Barry (2003). The Scorpion and the Frog: High Times and High Crimes. Beverly Hills, CA: New Millennium Entertainment. ISBN 978-1-893224-26-1.
- 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"
- The Guardian – "Lifting the lid on 'boiler room' scams"
- BBC – "Boiler room scams"