Some private investors have lost as much as £40,000 from the 'boiler room' scam.
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I think the ‘boiler room' is the ugliest financial scam of them all.
Telesales staff outside the UK call up unsuspecting private investors and pressure them to buy dodgy shares at inflated prices. Some people believe the crooks' sales patter and frequently they end up losing all the money they've invested.
Don't assume that it won't happen to you. Often the victims are pretty sophisticated folk who have been playing the markets for ten years or more.
Indeed, the Financial Services Authority (FSA) has highlighted one case where a management consultant in his 50s lost £40,000 to a boiler room scam, and he had been investing in the stock market for 12 years...
How does it work?
Boiler rooms are always based outside the UK and are not regulated by the FSA.
The boiler rooms use various techniques to get hold of names to call. They can follow up initial market research calls or call up investors on shareholder registers of small companies. Dealers can then offer free research on a punter's favourite share, and a relationship can be built from there. Or you might be offered free research via junk mail. If you send a reply card back with a tick in a particular box, the dealing room can then claim it's making a legitimate phone call.
Often the boiler room salespeople push shares that ‘are about to IPO' (list on the stock market) and ‘big profits' can be expected. More often than not, the company never lists and the investors lose all their cash.
Sometimes the shares are listed, often on fairly obscure markets such as the ‘pink sheets' in the US. On occasion, the shares are listed on better known exchanges, but either way there's a good chance that the share price will start to fall shortly after you've paid your cash. What's more, the boiler room may have taken an outrageously high dealing commission.
Why does it work?
The boiler rooms don't give up easily. They will constantly call a target, trying to build a relationship and get their confidence.
According to FSA research, six out of ten targets were pursued for at least a month regardless of whether they purchased shares. Nearly a quarter of targets said they were receiving calls from the same boiler room for more than a year.
What can you do?
If you're cold-called by somebody trying to sell you a share, be very suspicious indeed. If it's such a sure thing, why is he ringing up complete strangers and telling them about it? The simplest approach is to hang up as quickly as possible.
If your curiosity won't let you do that, you can check the FSA's list of unauthorised overseas firms that are targeting UK investors. But if a firm isn't on the list, don't assume it's a kosher operation. Boiler rooms frequently change names to get around this.
You can find out much more about boiler rooms in this excellent FAQ compiled by star poster JakNife on our discussion boards. Also read these useful tips by my Foolish friend David Kuo.
> Anatomy Of A Boiler Room Scam | How To Spot A Scam | The Motley Fool Sharedealing Service
