What “Boiler Room” teaches you about scams

Vin Diesel in Boiler Room

Boiler Room (2000) is a film starring Giovanni Ribisi and Vin Diesel (pictured), set in the world of underground brokerages (also known as boiler rooms). To the distaste of his father, college dropout Seth (Ribisi) makes a living by running an illegal casino in his house. One of his customers persuades him to apply for a  job at brokerage JT Marlin.

Seth quickly learns the brokerage is a scam, selling penny stocks in dubious companies to investors using high-pressure sales techniques. Disillusioned, Seth tries to set up a scheme to destroy the brokerage, which backfires, leading to his father and him facing arrest.

The key moment

Shortly after Seth joins the firm, senior broker Chris Varick (Diesel) explains how the firm operates. A junior broker cold calls lists of potential leads, with anybody expressing interest passed over to a senior broker, who pitches them an idea in one of the firm’s penny stocks. The broker will try and force the prospect to make an immediate decision, discouraging them from consulting their family. Initially the price of the stock rockets, thanks to all the buying orders, then the original owners sell out at a profit, leaving investors with worthless shares.

Lessons for investors

Boiler rooms take advantage of people’s ignorance, so always do your own research on an investment and never put money into anything that you don’t understand. Similarly, if someone demands an immediate decision, or tries to talk you out of consulting your family members, then this is a big red flag.  It’s generally a good idea to ignore all cold-calls from people claiming to be financial advisers or stockbrokers altogether, and only deal with firms that are registered with the Financial Conduct Authority. Indeed, firms are now banned from contacting people out of the blue about their pensions.

Being scammed by a boiler room isn’t the end of the pain for some victims, who are then approached by people posing as “asset recovery firms”. The companies inform their victims that they have been cheated, but promise that they can recoup the losses incurred – in return for an upfront fee. Naturally, once the money is paid over, neither the firm nor the cash are ever seen again. It should go without saying that you should avoid anyone who makes such an offer.

 

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