Boiler Room Investment Frauds
“Boiler rooms” is a term used to describe predatory brokerage firms. Salespeople in boiler rooms push investment scams and persuade investors to buy high-risk stocks with the promise of enormous returns. These stocks are usually penny stocks that trade for very little and are not listed on a public exchange. Boiler room salespeople might receive commissions from the companies that issue penny stocks, also known as over-the-counter stocks. The investments they push might be entirely fake, or their growth potential could be grossly exaggerated.
To push these stocks, salespeople—who may or may not be legitimate stockbrokers—gather in a call center to cold-call investors. Boiler rooms get their name from subterranean rooms where boilers provide hot water for a building. Salespeople in boiler rooms use intense, high-pressure sales tactics to close the sale before hanging up the phone. The cold-call lists may consist of individuals who fell victim to other scams.
What is an Over-the-Counter (OTC) Stock?
Over-the-Counter stocks are stocks that do not trade over a public exchange. OTC stocks are often penny stocks that trade for less than $5 per share.
- They may be issued by shell companies with no real operations or growth potential.
- Because these securities are not listed on the stock exchange, they do not have to register with the SEC, making them ideal for fraudulent transactions.
- The SEC urges investors to check if a company that issues penny stocks has been the subject of a recent trading suspension.
Legitimate stocks may trade over the counter. These shares are typically issued by companies that are too small to trade over a public exchange. Following the rules set out by the Financial Industry Regulatory Authority (FINRA), brokers do not pressure investors to purchase penny stocks. Investors should only buy penny stocks if they have investing experience and are willing to take on the significant risk.
Wall Street Boiler Rooms
Boiler rooms reached their peak in New York in the 1990s. Jordan Belfort ran one of the most famous Wall Street boiler rooms and inspired the Martin Scorcese film The Wolf of Wall Street. Belfort ran a boiler room operation through his firm, Stratton-Oakmont, where he and his cronies stole a total of $200 million from investors, many of whom have not been able to recover their losses. FINRA barred Stratton-Oakmont in 1996, and Jordan Belfort went to prison in 1999, serving 22 months for securities fraud.
Boiler Room Pump-and-Dump Schemes
Stratton-Oakmont used its boiler room to run a pump-and-dump scheme. In a pump-and-dump, fraudsters convince investors to buy shares of an OTC stock. Unbeknownst to the investors, the brokerage behind the boiler room owns large shares of the penny stocks they are pushing. The influx of new investors drives up the stock price, and once the price has significantly increased, the brokers sell their shares at a healthy profit. This causes the value of the shares to plummet, resulting in a loss for the duped investors.
Modern-Day Boiler Rooms
Today, investment scams usually do not stem from call centers. There is no need for boiler room scammers to work out of the same call center. In fact, it benefits modern-day boiler rooms to operate in a different country than their potential targets, as they can more easily evade local law enforcement.
Boiler rooms have also evolved to focus on trendy investments like cryptocurrencies. Investors might be lured by an online advertisement that offers information about investing in cryptocurrency. Cryptocurrency investments are volatile, speculative investments and often come with hefty fees—making them unsuitable for most investors. These facts, however, do not overshadow many investors’ fear of missing out on the next big thing.
Even though boiler rooms are past their heyday, the SEC still occasionally uncovers boiler room frauds.
- In 2016, the SEC charged Sanomedics Inc. and Fun Cool Free Inc., with operating a boiler room. This boiler room allegedly specifically targeted senior investors—boiler room fraud often overlaps with elder financial abuse.
- The SEC charged a “securities fraud recidivist” in 2020 with selling shares of a pre-IPO stock through a boiler room—shares that the fraudster allegedly did not own and was not in a position to sell. This boiler room allegedly misappropriated $900,000 of investor money.
- In 2019, the SEC alleged that Benjamin Conde paid a boiler room to pump up the price of stocks he owned, allowing him to misappropriate $3 million from seniors and inexperienced investors using high-pressure sales calls.
Boiler Room Sales Calls
Boiler rooms sales calls rely on dishonest sales techniques. The SEC has outlined the following characteristics of a boiler room sales call:
- Their calls, emails, or social media messages are unsolicited.
- Boiler room brokers may state that high-risk investments are guaranteed to generate high returns. This should always be a red flag—investments are never guaranteed.
- The broker might say that they do not want their potential investor to miss the chance for an incredible deal.
- They insist this is a short-lived opportunity—they want you to agree to pay for the investments before you have time to independently verify any information about the investment.
How to Avoid Boiler Room Scams
If a boiler room salesperson realizes you want verifiable information about their credentials and the security, they will know you are not their ideal mark. Make sure you have the broker’s full information. Ask for their name, their member firm, as well as their Central Registration Depository (CRD) number. Look up their number on FINRA BrokerCheck and ensure the information matches their official record. If the information does not match, the cold caller may be lying about who they are.
If a FINRA-registered broker pressures you to purchase a high-risk investment without informing you of the potential for losses, you can file a statement of claim with FINRA and recover your losses with the help of a securities lawyer.