Isle of Man Constabulary Financial Crime Unit
What is a Boiler Room scam?
Boiler rooms operations are basically share scams which are a bane of investors. Those operating such scams will sell worthless shares at inflated prices to investors that are subsequently found to be impossible to sell. Their technique is remarkably simple. A broker, usually operating from an overseas firm, will cold telephone call an investor and suggests they buy shares in a particular company. The share has usually been purposely publicised by the same people on online message boards. Commonly, the person receiving the cold call is left wondering how the caller obtained their details. On some occasions the recipient may have previously held other shares which are unrelated to that offered.
Commonly the company they are share dealing in will probably be listed on an illiquid market, so the shares cannot be sold, and the price will be hugely inflated. Alternatively, they could be a small, unquoted company that the broker claims is planning to list and, in extreme cases, the company will not exist at all and the broker is simply selling shares in thin air before taking the money and disappearing.
The boiler room firms will operate from 'hotspots' outside the UK, such as Spain, Switzerland, Dubai, Japan, Bermuda or the US, so they are outside of the remit of the UK regulators, such as the Financial Services Authority (“FSA”), and you may find it impossible to recover any losses as such companies are not covered by any compensation scheme. It is possible to lose a great deal of money to these share scams. Such boiler rooms will usually have a UK listed address and may sound very similar to a well known financial company to give an air of legitimacy. They are called 'boiler room' scams because of the highly pressurised sales technique employed by the broker. Initially they may appear professional and sympathetic in order to build a rapport with the recipient. They can grow to be forceful, persistent and highly aggressive. A tactic is to create a sense of urgency about a stock so that they need to invest quickly. Our experience is that after you have sent money you can no longer contact the person who sold you the shares.
One example of how a boiler room operation works - a short video
Boiler Room- Personal experiences
What to Do
If you are thinking of buying shares our advice is be very sceptical of any approach from a cold call. Always make sure that the firm you use is licensed to conduct Investment Business by the Isle of Man Financial Supervision Commission or on the UK FSA register, by checking the register online. The UK FSA maintains a list of unauthorised overseas companies on its website but it may not include all boiler room operations. Because the firm who are attempting to sell you shares has a website online or email address, it does not necessarily follow that their enterprise is legitimate. It follows that when you call a provided UK telephone number that you may not necessarily be speaking to that person in the UK, as calls can easily be forwarded to any location in the world. The FSA also provides additional information about boiler room frauds on its consumer website.
If you have been a victim of this type of fraud, or believe that you are being targeted by a boiler room you should report the matter in the first instance to the Financial Crime Unit. An additional resource is Operation Archway which is a UK boiler room reporting system and is operated by the City of London Police. Operation Archway can be contacted by e-mail at firstname.lastname@example.org following completion of the questionnaire on the City of London Police (Economic Crime Unit) website.
The Financial Crime Unit has had experience in dealing with local victims who have bought overpriced, restricted for onward sale and have little or no realisable value. Having been the victim of an initial scam it is not uncommon for the same victim to receive further cold telephone calls some months later from a different person who may offer to take the worthless shares initially purchased, provided you pay more money for some other shares. Similar advice applies in these circumstances, don't do it. This is known as a secondary scam. The perpetrator of the original scam is likely to have sold your contact details to other person(s).
Restricted stock (Rule 144)
US firms are able to sell stocks overseas that are restricted or controlled for sale in the US because they do not meet stock listings standards. Usually you cannot sell these shares back to the US for at least a year, and even then you must pay a U.S. lawyer or broker to remove the marked legal restriction from the share certificate, before selling is possible. This could cost more than your shares are actually worth. People who have bought restricted shares through boiler rooms are frequently targeted by the secondary scammers as they are naturally anxious to recover some of their initial loss. Cold callers may contact you with an offer to get the restriction removed, only to disappear once you’ve handed over your money.
Further information about Restricted stock originating in the U.S. can be found on the US Security and Exchange Commission website. Also, in addition to the resources offered by the Isle of Man Financial Supervision Commission and the FSA, the U.S. Financial Industry Regulatory Authority (FINRA) has a Broker-Check Service to check the history of American brokers.