Boiler room (business)

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.

Business structure

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.

In the 20th century, the U.S. Securities and Exchange Commission described boiler rooms as follows:^[1]

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.

Etymology

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

In the late 1960s to the 1980s, boiler rooms sold municipal bonds to unsophisticated investors. These boiler rooms were located primarily in the southeastern United States, most notably Memphis, Tennessee and later Little Rock, Arkansas. The operators got the nickname "Bond Daddies." The operators would sell the bonds at inflated prices, substitute different bonds, mislead investors about the risks, or fail to deliver the bonds to the investor.^[2][3]

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.^[4][5]

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.^[6]

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.

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.^[7]

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.^[8][9] Victims say the betting and investment software does not work and they lost their money when the companies suddenly closed.^[8] 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.^[10] 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.^[11]

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.

See also

• Advisorshares
• Boiler Room Girls
• Bucket shop
• Foreign exchange fraud
• Microcap stock fraud
• Pump and dump
• Stock dilution

References

Footnotes

General sources

External links

• SEC – "Portrait of a Boiler Room"
• FCA (UK) – "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"