Beware Of The Boiler Room - Don't Fall For Stock Fraud

We are pleased to welcome the team from Combat-Identity-Theft.com to the site. The following article offers some insights into stock fraud and how organised criminal gangs make money in the stock market. Beware of the boiler room!

A boiler room is essentially a call centre operation selling stock market assets. The major differences with a low cost stockbroker are the assets being sold, the ownership of those assets and the legality of the entire operation.

Invariably, a boiler room will be in the business of selling very small company stock - usually at launch (Initial Public Offering). The small capitalisation of the company means that a concerted effort by a team of highly-skilled and commission-hungry salespeople can influence the price significantly.

This sudden surge in buying and interest will force the price to rise very quickly.

It is at this point that ownership becomes an issue. The stock will likely have been given to the boiler room operators before launch. Now that the price is rising strongly, they will sell into the market, cashing in large gains. The team of salespeople will now stop their selling and those that recently bought the stock are left holding the losses, having effectively given their money to the brokers.

A great example of stock fraud and the workings of a boiler room are described in The Wolf Of Wall Street by Jordan Belfort. His operation was - for some time - the most effective in America and made millions of dollars for all involved. Except for their clients...

Many of these operations will be selling shell corporations that have very little in terms of a business or an asset base. It is this desire to squeeze out every last penny or cent from the operation that sets apart the organised crime syndicates from the rest.

As the following report of UK fraud figures shows, there is a lot of money at stake. And where there is a lot of money, there are serious criminal gangs.

It is worth pointing out that it is very difficult to claim losses back since these groups are usually outside of any regulatory or compensation system.

How can you avoid the boiler room?

There are a few simple steps to take to not be taken in by this approach.

Firstly, these operations are staffed by telephone salespeople. They will be calling you with their 'hot' new offering. You will not have heard from this company. Possibly, no-one has ever heard of this company.

Secondly, they will probably be calling from a different country. In many countries (including the US and UK), selling stocks to non-residents falls under a different set of - usually looser - regulations than selling to residents.

Thirdly, they stock they are selling will probably be about to be listed in a different country again. Once there are several countries involved it becomes difficult for regulatory agencies to enforce rules. It also means that by having to liase with other law enforcement agencies in different languages, any potential prosecution moves very slowly.

Fourthly, they will have a minimum investment amount. When dealing with a normal stockbroker, you would choose the amount that you wish to invest, but with the IPO / boiler room approach, they will tell you a minimum. This will likely be in lots of US$10,000 or more. This means that you won't get to lose a 'trivial test amount'.

Lastly, they will be very pushy. These are not soft-sell salespeople. They will not let you not buy unless you are very firm and literally hang-up the telephone.

We hope that these few tips will help you to steer clear from the losses of professional stock fraud.

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