What are Boiler Room Operators?
Boiler room operators are sales people who sit in one room making cold calls
to potential investors and trying to pressure them into purchasing worthless
investments. They are usually armed with sophisticated sales scripts and
high-pressure sales techniques used to convince their victims to purchase
dubious investments. Their victims are usually individuals with money such as
business people, professionals and retirees.
What Type of Investments do Boiler Room Operators Peddle?
Boiler room operators will try to sell:
- Penny or Microcap stocks
- Foreign Exchange Investments
- Risky Initial Public Offerings (IPO's)
- House Stocks
~Microcap Stocks or Penny Stocks
In the US microcap stocks are considered to apply to companies with low or
"micro" capitalizations, which refers to the total value of the
company's stock. Many microcap stocks trade in the "over-the-counter"
(OTC) market and are quoted on OTC systems, such as the OTC Bulletin Board (OTCBB)
or the "Pink Sheets." They usually do not have to file financial
reports with the Securities and Exchange Commission. In Canada, microcap stocks
are referred to as penny stocks which loosely means stocks whose stock price is
less than a $1.00. The reporting requirements in Canada do require penny stock
companies to file financial statements.
In both cases, however, these stocks are thinly traded and therefore subject
to price manipulation by unscrupulous promoters and company insiders.
~Foreign Exchange Investments
Scam artists try to solicit money for investments in exchange instruments
traded in foreign markets during periods of financial crisis in such markets.
The promoter tries to convince its callers that certain foreign exchange
instruments are good investments which are currently undervalued because of such
crisis which presents a tremendous buying opportunity. The investments are
~Risky Initial Public Offerings (IPO's)
Companies that are initially becoming publicly traded companies usually do an
initial public offering to raise money. While many of such offerings are
worthwhile investments, many are risky ventures. The boiler room operator will
tend to downplay or neglect to tell the investor the negative aspects so as to
ensure the investor proceeds to invest. Many boiler room operators will try to
sell IPO's that are underwritten by the investment firm for whom they work.
"Underwritten" means that the investment firm either has been hired as
an agent to find buyers for the initial offering or has purchased all or some of
the initial offering itself and now is trying to resell it to the public,
usually at a profit. Accordingly, these boiler room operators are in a conflict
of interest since they are looking out for the interest of their company and not
that of their clients.
House stocks are stocks that an investment firm has purchased themselves to
resell at a profit. Consequently, brokers of these house stocks will try to
manipulate the market by buying stock of thinly traded companies. They will pump
these stock prices up to higher prices and then sell them to their clients at a
profit. The clients will find that there are no other buyers to buy their
stocks. Consequently, without buyers, the stock price will fall leaving many
unsuspecting investors with worthless stock.
Problems with Boiler Room Operators
Being a broker making cold calls to potential investors is not a violation of
laws. Some boiler room operators, however, run afoul of the security laws and
regulations by engaging in abusive selling practices or by not being properly
registered. Here is a list of some of the problems encountered with some boiler
room operators. Some boiler room operators:
- make unauthorized trades in the names of the investors. Once the investor
discovers what the boiler operator did, the boiler room operator tries to
convince the investor to hold on to the stock.
- evade broker-dealer registration requirements. All stockbrokers and the
firms that employ them are required to register in the state or province in
which they do business. Once the firms are registered, the authorities can
monitor the activities of the firms to ensure compliance with laws designed
to protect investors.
- engage in abusive cold calling practices. Boiler Room operators rely on
high-pressure, scripted telephone "cold calling" practices
designed to pressure the investor into making an investment. The investor is
not given time to think about the investment but is made to feel that he has
Some boiler room operators engage in sales practice abuses. These include:
- lying about their firms' reputation and expertise.
- falsifying records especially relating to unauthorized trades.
- lying about the risks of investments that they are promoting.
- failing to tell the client that they were underwriting the stock.
- failing to tell the client that the stocks were house stocks.
- pushing stocks that they know are worthless or inconsistent with the
investors' financial objectives.
- guaranteeing profits or making unsupported predictions of price.
- failing to execute sell orders. The operator doesn't want to create
downward pressure on stock price.
- pressuring investors to make quick on the spot decisions.
- lying about investments entirely.
How to Spot Boiler Room Operators
If you receive a telephone call from a broker who wants you to invest in one of
the various instruments listed in Part 1, be mindful of the following list of
descriptions which are typical hallmarks of a boiler room operator:
- High-pressure sales tactics. The caller will try to force you make a
decision on the spot and repeatedly make calls trying to force you into
making a poor and hasty investment decision.
- Promises of guaranteed or great profit at little or no risk. There are no
investments that guarantee high returns and no or little risk. If it sounds
to good to be true, it usually is. These callers will not tell you all the
inherent risks in the investment nor try to determine whether it suits your
- Scant information given on the investment. Most legitimate firms will
provide written materials clearly disclosing the potential for loss in an
investment, as well as its short- and long-term tax implications.
Illegitimate firms will by reluctant to give you anything in writing.
- References to "inside information". Callers will try to make you
think that they have inside information that will, once disclosed to the
public, cause the price of the stock to rise. Trading on insider information
is prohibited at law. Usually promoters are not disclosing inside
information, but simply false information to get you excited about the
stock. Some promoters will claim that a large number of buyers will soon be
coming into the market to purchase stock that will cause the stock price to
- Some brokers will try to set you up. In the initial telephone call, the
broker will try to build your trust by describing their firm's past
successes and the high quality of its research. They won't try to push any
stock but might simply ask your permission to call again. In their
subsequent call they will pique your interest by telling you about a great
stock or investment that they will try to get you involved in. In the final
call they will encourage you to buy the great investment immediately or lose
- Bait and Switch technique. Some brokers will at first discuss blue chip
stocks and then start to encourage you into microcap or penny stocks.
If you have been a victim of the boiler operation, you will notice that once
you have purchased a stock recommended by the caller, the previous heavy buying
of the stock will have disappeared. In cases where the broker has enticed the
investor into buying a house stock, once the broker or his firm have sold their
stock position ("pump and dump") there are no other buyers who will
buy your stock from you. The price will start to drift downwards.
You will also notice that once you have purchased the stock, the broker
suddenly becomes unavailable to talk to you or encourages you not to sell. In
some cases, the broker in fact does not execute your sale orders.
Tips on How to avoid being a Victim
Here are some tips that can help you avoid being a victim of a boiler room scam:
- Don't cave in to high-pressure tactics.
- Don't make an immediate decision. Get written information first about the
firm, the sales person, and the investment.
- Seek a second opinion from a professional advisor.
- Don't invest in anything you don't understand.
- Contact your state or provincial securities office to find out if the
boiler room operator and his or her firm are registered.
- Contact your local Better Business Bureau in the city in which the firm is
located to determine whether there are any prior complaints. You can also
conduct a search of our database at our Complaint Centre.
- Don't encourage the caller to call again and don't be afraid to tell the
caller to not call you again.
- Don't share any personal information with the caller.
- Hang up if the caller engages in abusive and persistent tactics.
- Do your own research. Look at any recent press releases of the company and
take the company at face value. Analyze the company based on existing facts.
Ignore any promotion that the company is about to make a great discovery or
land a great deal. Look at its prospectus and any other company information
that has been filed with a securities commission or exchange to determine
exactly the type of risky company that you are being lured into.
- Just say no to risky companies. There are plenty of legitimate companies
that offer growth without great risk. There is no need to invest in risky
ventures when money can be made in strong companies with legitimate products
- Be true to yourself. Know what your tolerance to risk is and how much you
are willing to invest and lose. If you invest in a penny stock be prepared
to lose everything.
If you suspect that the phone caller aims to scam you, then write down as
much information about the caller as you can discover such as:
- his name and the name of his firm,
- the type of investment that the caller was promoting,
- if the broker was promoting the purchase of a stock, then the name of the
company of the stock
- the time and date of the call
- what was said by the caller and your responses.
After the telephone call has terminated, notify your state or provincial
securities office and convey the information that you collected. This will
ensure others are not scammed.
If you have been scammed, then report it to the state or provincial regulator
or commission to warn others and to ensure it doesn't happen to any body else.
In Canada, contact the applicable securities commission which are listed in
the Investor Centre. In the US contact the North American Securities
Administrators Association, Inc. (NASAA) at http://www.nasaa.org.
The NASAA site lists the various state regulators.