28th March, 2011
A phonecall today prompted me to update and republish this article. If you’re contacted out of the blue purporting to offer some wonderful investment opportunity, for goodness sake, get advice locally from a licensed qualified adviser
Boiler room scams continue unabated, and Iocal residents continue to be victimised. The Isle of Man Constabulary recently recorded the second £1million loss suffered by a victim of this crime.
The following is a generic typology of the modus operandii employed by boiler room fraudsters, which may assist the finance industry in recognising potential victims.
A ‘boiler room’ is a bogus stockbroking company, usually based overseas, which cold-calls investors and pressures them into buying worthless or bogus shares, or even old shares they might have with the promise of participation in a hostile takeover bid for the shares they already own. This latter case had pressurised the individual concerned into signing a ‘non-disclosure agreement’ (NCD) which prevented him from feeling able to seek advice earlier – they were actually preying on his pride. This horror story meant £50,000 had already been sent with a further £50,000 promised and he had only contacted us to check the bank weren’t acting strangely in refusing to send a second sum to an international escrow account!
Historically, older people with previous experience of investments or share dealing are targeted. Typical local losses average around £40,000, but are increasing rapidly and when you see the extent to which these criminals will go to with false websites and bogus due diligence you will see how easy it can be to be lulled into a false sense of security.
In the current economic climate, boiler rooms are starting to target high net worth victims or those who are not experienced investors, the latter initially being asked for smaller sums of money to invest. Many victims participate seeking to supplement their pensions with interest rates remaining a record lows.
Those operating the boiler rooms have developed new strategies to target investors, such as a promise to recover monies lost to the original boiler room, or to purchase these worthless or bogus shares, once an up-front fee has been paid. In addition, investors are being encouraged to sell previously highly regarded ‘blue chip’ company shares, such as banks and financial institutions and to invest in green or new technology shares marketed by the boiler rooms, or even to take out loans to fund new investments, like warrants, possibly even in company shares they already own.
The fraudsters are usually well spoken and knowledgeable. They are also very persistent and may groom their victims for several years beforehand. They might call their victim several times with offers of research, discounts on stocks in small overseas companies, or shares in a firm that is about to float. They warn them to guard the information jealously as otherwise they may miss out. Boiler rooms make their money in one of two ways: by simply taking money and walking away, or selling ”shares” at vastly inflated prices and with exorbitant dealing charges.
Most victims purchase their “shares” by telegraphic transfer, with smaller amounts being paid by same day money transfer (Western Union, Moneygram etc). Where banks are utilised, it is evident in most cases that the victim has not sent money by this method before. Fraudsters also coach the victim in what to say to bank staff if challenged over transferring large sums of money. Generally, most payments are made to accounts in Spain and the USA but other jurisdictions, particularly in the Far East eg Hong Kong, also feature prominently. There are no known cases where the victim has sent money to the same country that the “broker” or “shares” purport to be in.
If the investor has access to the Internet, they may be directed to websites to monitor the share’s impressive performance, not realising the entire site is controlled by fraudsters. Soaring share prices often induce the investor to increase their holding. Often, when the investor attempts to sell their holding, the fraudster encourages them to reinvest their “profits” in another red hot share, and then introduces a minimum investment sum which is greater than the profit figure, so if the investor wishes to participate they are required to send more money.
If the investor insists on selling, they will then realise their shares are “restricted” – it sometimes states this on the share certificate, if the investor has one. The fraudster will demand fees upfront to de-restrict the shares and once the investor has paid these fees the fraudster disappears. It is during the selling process that victims usually realise they have been scammed. Intelligence suggests most boiler rooms operate from virtual office accommodation using virtual telephone numbers etc which are untraceable.
The IOM FSC Financial Crimes Unit kindly requests that any person identified as a boiler room scam victim or potential victim, be furnished with a copy of this Advisory Notice and advised to seek independent financial advice. In blatant cases of deception, victims should be encouraged to consider reporting the matter to police.
Victims of boiler room scams are not likely to see their money again, mainly due to the length of time which elapses between them investing and realising they have been defrauded.
Stocks and shares and other such investments should only ever be purchased from locally licensed stockbrokers, and not from strangers who cold-call them at home. If in doubt consult an impartial and well qualified financial adviser; someone who is responsible (and insured) for the advice given. Please do note that if you are cold called, this is against the rules. Do not use a firm or individual who is not authorised in the Isle of Man or the UK; you’re just asking for trouble.
