Quezi

No, not this sort of boiler room. (photo by joemacjr CC-BY)

A boiler room scam is a fraud where you are sold shares in a company that either does not exist, or is a very high risk share which will invariably fail because they are overpriced, cannot be easily sold on and have little real value. It has international dimensions with perpetrators and victims in North America, Europe, and Australia. The methods and scenarios are always slightly different, but the initial approach is always the same.

It starts with you being bombarded with unsolicited phone calls or mail shots containing what appear to be good investment opportunities in company shares. After several telephone calls in which they gain your confidence, if you then show any interest you will be subjected to some very high pressure sales techniques. Once you have committed yourself to buying the worthless shares, there will be little chance of recovering your money as the operators of these schemes are always overseas and are not regulated in anyway by financial regulators. Many just disappear after completing the fraud.

Occasionally they target existing shareholders who have previously made a poor investment decision on a particular company, offering to buy the shares at well above the market price. However, before they do this they will require from a payment for a bond or some other type of security. This is sometimes called an advance fee. They will never buy the shares from you and the advance fee will never be returned. For this part of the fraud, fraudsters often get your details from share registers.

It is difficult to calculate the size of the problem, but a survey by the UK’s Financial Services Authority (FSA) found the average loss in these scams is around £20,000. Last year they were contacted by 3000 victims, but it is thought this is just the tip of an iceberg. Because it involves shares, many people think it is professional investors who loose out, but this is not the case, as the FSA discovered. They are ordinary people, some just looking to invest their savings ready for retirement but who are naive in the ways of investing, or elderly people often easily bullied.

What can I do to protect myself? If you receive such a call or mail shot in the UK.
1. Check the FSA register. This is described on this quezi article How do I check out a financial adviser in the UK?
2. If they are not on the register, then do not deal with them. Contact the FSA on 0845 606 1234.
3. If they are on the register and you are interested if it is a genuine investment offer, then tell person you will call them back and use the company’s main switchboard number as supplied on the FSA register. Some fraudsters impersonate genuine people and companies. This gets around this problem.

As for the phrase, boiler room, its origin is unknown, but it is said that either it is named after the high pressure selling techniques, or that the operators cram themselves into a small rented office working furiously on the phones trying rope in victims.