Boiler Room schemes are large-scale operations using high pressure sales tactics by marketers selling highly speculative investments (mainly penny stocks). Communication may occur via phone, email, text messages, social media, and other means. While boiler rooms present themselves as a third-party brokerage firm, sometimes they have undisclosed relationships or financial interests with the companies being promoted. Sometimes the investment doesn’t even exist!
History of Boiler Rooms
In the past, Boiler Room operators set up offices with banks of telephones manned by salespeople with little or no experience in finance, but plenty of experience in high-pressure sales. Increased use of technology changed the Boiler Room scheme method to use a wide variety of communication methods.
The first step for a Boiler Room operation is to establish their legitimacy and prominence. Inexperienced brokers will use fancy titles (e.g. investment executive, senior account executive), tout their firm as a major player on Wall Street, and talk or type fast with a lot of jargon. The point is to convince the investor they are talking to a seasoned veteran who has great insight or inside information on the company being promoted. Boiler Room brokers focus on establishing this trust so that investors won’t question the broker, the company, or the investment. Investors should be extremely cautious about any broker that reaches out by cold calls, or via email, social media or text. Boiler Room brokers will misrepresent the investment and do whatever it takes to close the sale.
"Bait the Hook"
The second step for a Boiler Room scheme is to use a cleverly crafted script to walk the investor through the investment, and make the “house stock” appear to be an incredible opportunity. The Boiler Room broker boasts the genius of the company, the miraculous product, the amazing technology, the game-changing idea, or the revolutionary service. Then the broker explains that the stock is going to go public or release some great news that will skyrocket the stock price. The broker is selling this opportunity to invest ahead of the game. Sometimes the company, product, technology, service do not even exist. Often the Boiler Room operators already own the worthless stock and design these sales to drive up the stock price so they can sell it off at a profit, leaving the investor stuck with a worthless investment. This is called a “pump and dump”
"Close the Sale"
The final step is where the boiler room broker makes his/her livelihood: closing the sale. Top producing brokers will do whatever it takes to close the sale; they misrepresent the investment, manipulate any situation, and pressure relentlessly. If investors change their minds and want to sell, the broker bullies investors to keep the stock; some firms will even implement a “no sale” policy so that the Boiler Room operators can dump their stock before investors. For their part, the Boiler Room broker receives hefty commissions (often undisclosed to investors) and other perks at the expense of the investor.
Boiler Rooms Today
Internet and online trading has led to web-based Boiler Rooms that use new technology to employ the same high-pressure sales tactics. Quality websites, online press releases, and paid search results help build the legitimacy of web-based boiler rooms and the companies being promoted. Social networking, email, and instant messaging extend the high-pressure sales tactics into the cyber world.
Boiler Rooms today use both old-school methods and new-age technology to hype their product and hard-sell investors. From phone calls to social media platforms, unscrupulous brokers will find any way to pitch investors and close the sale.
Common products involved in Boiler Rooms pitches include microcap stock and binary options which are highly speculative and entail a lot of risk. Investors can lose their entire investment. Mobile trading apps can also provide a way to act upon the high-pressure tactics.
Repeat Victims are Targets
Boiler Room operators and the agents may take their list of contacts from one Boiler Room to the next. These lists may also be sold to third parties. Con artists even focus their pitches on helping investors recover losses from their worthless stock that was leftover from the previous Boiler Room that scammed them.
Unfortunately, investors who have lost money are often eager to “double down” and invest more in the hopes of recovering losses. Boiler Room brokers prey on these desperate investors by running “recovery room operations” or “reload scams.”
Watch For Red Flags
When you receive unsolicited telephone calls or emails, look and listen for red flags.
Red flags are found in the “three-contact” technique. The first contact sets the stage by developing the relationship, discussing general investments, and establishing the reputation of the firm. The follow-up contact whets the investor’s appetite for an investment by hyping the company, its product, its breakthrough, its technology, or its service. These fraudulent statements misrepresent the investment and mislead investors. During the last contact, the broker pressures the investor to buy the stock by imposing false deadlines, rejecting any questions, and harassing the investor.
Another warning sign is the “bait and switch” technique. Unscrupulous brokers lure in new clients by offering them well-known and widely-traded blue chip stock. But once the account is opened at their firm, the broker pressures the investor to buy a microcap stock. Sometimes these brokers will even buy the stock without the investor’s approval!
Other red flags that the brokerage firm is a Boiler Room include:
- Repeated, unsolicited calls or emails hyping a deal
- Refusal to say anything negative about the investment
- Baseless price predictions (e.g. “the stock will double in price in a short time period”)
- Pressure based on peers that have already invested
- Insults and condescending behavior (e.g. questioning the intelligence of passing a “sure thing”)
- Extraordinary profits with little or no risk
- Promises of “guaranteed profits”
- Urgency and false deadlines (e.g. “immediate action required” “the opportunity will be gone tomorrow”)
- Exclusive deals (e.g. “special” or “private” deal only made to “a few lucky investors” to “get in on the ground floor”)
- Inside information
- Unusual arrangements for collecting funds from investors
Concerns To Consider
Licensing Requirements to Sell Securities Investments
Any person or company that seeks to sell securities in Utah must be properly licensed as broker-dealer or agent under Utah law. Licensing creates a public record of the company and its agents. Investors should review those records prior to investing.
Investors should verify that both the company and individual agent are licensed. Investors should also review the licensing and registration records of the company and individual agents. These records allow investors to consider how long the company and agent have been in business, whether customers have filed complaints against the company or agent, and whether the company or its agents have any other derogatory information on their records (e.g. regulatory actions, bankruptcies). You can verify a license and check out an investment online or by calling the Division at (801) 530-6600.
Many Boiler Rooms and their agents either fail to provide investors with disclosure documents or there are inadequate disclosures in the documents provided. The omission or misrepresentation of material information in the offer or sale of a security is considered securities fraud.
Sometimes investors trust the person selling the investment and rely on that relationship rather than reading the written disclosures and verifying information from independent sources including regulatory filings, licensing, and registration.
Pump and Dump Schemes
Boiler Rooms may be used in “pump and dump” schemes. Boiler Rooms are used to hype and tout or “pump” a company’s stock raising the stock's value and price share in the market. Insiders and promoters sell or “dump” their shares at the peak of the pricing and make huge profits on the frenzy. Once the profits are taken, the shares are no longer hyped and artificial market trading is no longer supported, investors will find the price of their shares falling or becoming worthless. These schemes frequently appear through unsolicited email messages, texts or social media posts. .
Key Questions Before Investing
Investors should ask questions and take notes of what is being said over the phone in the sales pitch. Here are some key questions to ask:
Tools and Resources
Do Not Call Lists
Ask to be put on the do not call or do not contact list. Securities firms are required to maintain lists and abide by the rules not to contact.
Contact the Division with questions or concerns - 801-530-6600