Beware the brokers out to steal your cash

published 5 July 2006

Where do these scams come from? From so-called boiler rooms, an illegal offshore dealing room, often located in Spain, Switzerland or the US, where highly motivated sales people cold-call UK investors to try to convince them to buy shares in foreign or UK companies. Generally, the shares turn out to be either non-existent or worth much less than the victims end up paying for them, as well as being impossible to sell anyway as you tend to get no proof of ownership in return for your money. These nasty outfits are known as boiler rooms because of the heat' generated by the frenetic environment the sale forces work in, and the high-pressure sales tactics they use.

How does the scam usually work?

There are several types. Firms can pose as discount brokers', for example, claiming they can sell you shares on the cheap. Instead, they aim to get investors into small and illiquid firms at way above the market price. The scammers sometimes buy into a stock to give the price an artificial boost, so they can then show potential investors how the share price has just shot up. One refinement on this, says the FSA's Steve Kemp, is for the boiler rooms to sell regulation S' shares in small US companies. These are shares that can be sold to non-US residents without the obligation to provide them with a prospectus, but unlike ordinary shares you can't sell them for 12 months after purchase. So even while the boiler rooms pump up the prices to keep people buying, their victims can never actually sell into the rising price.

What other kinds of scam are there?

In one type of boiler room scam in effect, a version of advance fee' fraud a scammer calls shareholders in small UK firms, apparently on behalf of a big US client. He says he is working for a client who is trying to buy up enough shares to gain a controlling stake in a UK firm, and is prepared to pay a premium of more than twice the going market rate per share. Once the deal is agreed, he explains that his client needs to take out a bond' to hedge against the risk of failing to buy up enough shares. The UK investor is asked to contribute a proportion of the cost running to several thousands of pounds to be repaid once the sale has gone through. The same scammers have also recently started to target companies. The FSA has warned of a new trend for boiler-room operations to offer to raise cash by selling new shares on behalf of small UK businesses. Once agreed, the boiler room then sells the shares to its usual victims at much higher than the agreed price and banks the bulk of the proceeds before disappearing.

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Who falls for boiler-room cons?

The typical victim is a middle-aged professional male with investment experience. They are often people who have had their fingers burnt before on high-risk investments, but who decide to try and make good with one big throw of the dice. Boiler rooms identify potential victims by scouring business directories and publicly available registers of shareholders, particularly in small companies. They might also acquire consumer databases such as lists of subscribers to financial magazines and use these. Under UK law, financial services firms aren't allowed to cold-call customers without permission. But boiler rooms often get round this and at the same time gain trust and credibility in the mind of the victim by setting up as brokers offering ultra-low dealing charges or sending you free reports on companies they know you own shares in. When you agree to receive this kind of service, and provide contact details, the (very) small print will include your agreement for the boiler room outfit to contact you in the future. You can then expect to be bombarded with calls from highly articulate, convincing and focused salesmen, working to a finely-tuned script.

How do I tell if an approach is a scam?

You can check the list of known dodgy outfits on the FSA's website at www.fsa.gov.uk. But boiler rooms necessarily change their names frequently, so any list is unlikely to be fully up to date. A good rule of thumb obvious and yet all too easily forgotten in the heat of the moment is that if an opportunity looks too good to be true, then it almost certainly is. Be wary of unsolicited offers by telephone, email or post, especially if the company concerned uses a PO Box rather than a street address, or is not using a reputable UK bank. If a salesman tries to rush you into a decision, wants your bank details or any kind of fee' upfront to guarantee' you get a slice of the action, it's not for you. Finally, if you do get caught out, be doubly wary of getting hit again by a so-called recovery room' operation. Boiler room victims sometimes get called by people promising to get back their money by taking over the shares they got stuck with. Normally, this requires some kind of upfront fee' and is just an

How can I protect myself against scams?

Always check with the FSA whether the firm you are dealing with is authorised to do business in the UK. If it's not, you stand next to no chance of getting your money back if things go wrong. (Of course, it might be a perfectly legitimate overseas business: check whether it's regulated in its home country and how regulation and compensation works there.) Also, ask for additional hard information from the person who contacted you such as company registration documents, terms of business and printed prospectus and check what you receive against official websites such as UK Companies House. Examine the firm's own website carefully, but remember that scammers are more than capable of constructing professional-looking sites. extension of the original con.