So-called 'boiler room' share scams are on the up, with many of them being targeted at over-65's. We explain what they are and how to avoid them.
Have you ever been called, out of the blue, by someone claiming to be from an investment firm and trying to sell you their favourite shares? Or received an email approach? The chances are, you've been contacted by a 'boiler room' fraudster, and if you go along with them you'll be fleeced.
They usually operate from overseas (Spain, for some reason, seems to be a popular location for them), they are not regulated by the Financial Services Authority (FSA), and they're acting illegally when they call you. Some of them are getting quite sophisticated these days, but the basic patter is always pretty much the same. They're acting as the broker or advisor for a company whose shares they claim are sure to fly very shortly, as soon as the word gets around. Or the company is private and just about to float on the market, with those getting in early pretty much guaranteed very high returns as the company starts to rake in the profits.
Some of the scammers even organize meetings for new investors, at reputable UK hotels, and will go as far as to set up UK bank accounts to channel investors' money through. But even with such dressing-up, the accounts will be emptied and the money long gone by the time the punters get suspicious.
Pump and Dump
Usually, the truth behind the claims comes down to one of two things.
Often, the boiler room scammers are operating a Pump and Dump scheme , on behalf of the current owners of a company. The company in question will typically have only a very small market, with few investors interested in buying the shares. The job of the boiler room is to promote the shares to as many newcomers as possible, creating an artificial demand that will drive the price up. This demand allows the original owners of the shares to sell out at an inflated price, with the victims of the fraud being left with shares whose price shortly crashes back to earth when there’s nobody left who wants to buy them.
The second common scenario is that the company doesn't actually exist, and there are no shares for you to buy at all -- they simply run away with your money as soon as they've cashed the cheque.
On the rise
With plummeting interest rates from savings, the current economic environment makes the promises of the claimed high returns by the boiler rooms particularly attractive, especially to older people whose retirement income has been hard hit.
In fact, according to a poll done on behalf of the FSA, 35% of people targeted by investment fraudsters over the past year were aged over 65 (with over-65's accounting for about 16% of the population).
As the FSA's director of financial capability, Chris Pond, said, "Fraudsters, like all criminals, tend to prey on the most vulnerable people and our research shows this is definitely the case with criminals who commit financial crimes. This is a clarion call to everyone that we cannot sit back and let honest people lose their hard earned money to unscrupulous individuals."
Many scams also ask for personal information, like passport and driving licence details, and information about mortgage applications (the scammers will claim they need them for identification purposes, or for checking credit ratings, etc), and 41% of the people questioned in the poll did not realize that such information can be used for identity fraud.
What do you do?
The FSA is, apparently, joining forces with Age Concern to try to tackle the problem of investment scams aimed at older people, though exactly what they plan to do is not yet clear.
So it is really down to individuals to protect themselves, and that is best done by the following:
- never get involved with anyone trying to cold-sell an investment;
- always check if an investment firm is FSA-registered;
- never disclose personal information to cold-callers;
- familiarise yourself with all of the FSA's excellent advice;
- listen to this Podcast, in which the FSA's Jonathan Phelan talks to David Kuo; and
- always remember that if it sounds too good to be true, it isn't true.
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