Bought any good shares over the phone lately? You might be surprised at the number of people who are willing to invest substantial sums in valueless shares promoted by someone they have never met. Share scams take many forms but pressure selling by overseas-based "boiler rooms" has proved a remarkably successful way of catching gullible investors.
Usually the money is lost but the Financial Services Authority (FSA) scored a recent success, helping more than 150 investors get back over £1m. Working with the authorities in Canada, the FSA managed to retrieve most of the money invested through a number of boiler rooms in two Canadian gold mining companies.
Boiler rooms are effectively telemarketing operations that work from rented offices and target investors with high-pressure sales techniques. They are usually based abroad, where their activities are often not illegal, making it harder for the regulator in the country where the investors are based to take action.
They promote shares that are often overpriced, cannot be easily sold on or have little or no realisable value. The shares you are offered might, example, fall under Regulation S. This means they can only be traded over the counter – that is, not on a regulated stock exchange that would impose certain standards – and they cannot be sold to US citizens, so trading is likely to be thin.
The way the promoters work is to phone people at home, often over a period of several weeks, offering a life-time opportunity to benefit from a corporate event that no-one else has spotted. A company may be coming to market, facing the prospect of a takeover bid or about to launch a new product that will sweep the market. But, the smooth-talking salesman will explain, you must act quickly or the opportunity will be lost. Sometimes the shares you have bought may indeed go up, probably because the price is being manipulated by the fraudsters. You will then be urged to invest more in the stock to maximise your profits.
Once they have your money, the relationship changes abruptly. The promoters stop contacting you and no longer return your calls or your emails. If you try to track them down you will find they have disappeared. The rented offices and telephones will have been let go and the fraudsters will have moved on to another address.
Investors who put their money with unauthorised firms will have no recourse to the compensation schemes in place to protect those who use reputable financial outfits. Companies promoting or selling shares to UK investors require authorisation from the FSA. The boiler rooms that operate from overseas are more likely to be on the FSA’s list of unauthorised firms that is available from the authority’s website www.fsa.gov.uk.
Sometimes the victims of these scams are complete novices. But a surprisingly large number of experienced investors have also found themselves sucked in by the prospect of riches. Familiarity with share trading appears to breed complacency in some investors. That old principle, if it looks to good to be true, it is, applies with a vengeance here.
By Charles Batchelor