Boiler rooms

Recent years have seen the emergence of a new term in the dictionary of financial markets jargon - ‘boiler rooms’.

The term relates to the aggressive selling of worthless investments to private investors by unauthorised overseas firms – mainly based in Spain, the United States or Switzerland. Creative Commons Image bitchcakesny under cc-by-nc licence Not all boiler houses are so clearly marked

Although the exact nature of the investments being sold varies from scheme to scheme it usually involves illiquid and valueless shares in obscure overseas companies. Aggressive selling encourages the targeted investors to buy these shares on promises that their price will rise sharply. Some schemes have also involved false share deals to make the investments appear valuable. Once the boiler room has secured money from investors it may disappear and then later reappear under a different name. As for the shares they’ve sold - their price then plummets and the hapless investors can only watch helplessly as the losses mount. In fact with no ready market for the shares, they’re left holding their investments that may become completely worthless.

A recent tactic used by boiler rooms has involved conning both investors and small businesses out of their money. A typical scheme involves a boiler room approaching a company and offering to raise capital by selling the company’s shares to investors. These shares are then sold to private investors at anything up to 100% above the price agreed with the company. Once the shares are sold the boiler room takes a fee from the company for organising the share sale – sometimes as much as 90% of the money raised - and then disappears. The company is then left with the prospect that the investors will then demand from it a refund through the repurchase of the shares issued - even though the company only received a percentage of the funds actually raised.

The typical investors targeted by boiler room selling are middle-aged professional men, many with considerable investment experience – a profile deemed to maximize the chances of extracting money via investment scams. A recent Financial Services Authority (FSA) survey found that 81% of boiler room victims were men and 64% of victims were aged over 50. Members of this socio-economic group are more likely than others to have funds available for investment and, perhaps, a belief in their investment prowess and an appetite for the riskier shares that apparently offer the prospect of high returns. Victims of the scams lose on average £20,000 - although losses of over £100,000 have been reported.

The FSA - which regulates the selling of investments within the UK - has detected well over 100 unauthorised investment firms selling into this country. The problem for the FSA is that the companies involved in these boiler room sales are based overseas and are therefore outside the FSA’s jurisdiction. However the FSA has had some success in tackling some UK companies that have been involved in supporting boiler rooms by, for example, approving the promotion of their schemes.

Guidance has been provided by the FSA on the survey above, and certainly if you’re a potential investor you should check to confirm that the companies you are dealing with are authorised by the FSA.

But the key point to note is that if you’re phoned ‘out of the blue’ from overseas by a boiler room, do not to be drawn into any transaction.

If you’re contacted about an investment opportunity, consider the following:

• Is the company authorised by the FSA?
• Is the company calling from the UK?
• Have you solicited the enquiry?

If the answer to these questions is ‘no’ then you may well be dealing with a boiler room.

Remember if an investment sounds like it is too good to be true, it probably is too unsafe to be purchased!

Weblinks

• Your and your money - don't let your money be the boss of you, get help from our interactive
• The psychology of deception - how can rational people fall for scams?
• Moneymadeclear  - guides and advice from the Financial Services Authority

Course

• You and your money: personal finance in context