Investor Alert: Boiler Room Scams

By: Michael Williford, fall 2016 student intern

In a previous post I’ve discussed how fraudsters use telephone scams to prey on senior citizens. Recently, FINRA issued another investor alert focused on a very specific type of telephone scam: Boiler Rooms.

Sales calls are not an uncommon tactic by which securities are sold, but the Boiler room-style calls are a different creature. Characterized by high pressure tactics in which sales people promise high returns on securities they promise are “sure things.” The securities are frequently the kind of penny (or microcap) stocks involved in “pump-and-dump” schemes in which the sales people are paid promoters who raise the value of an otherwise worthless stock by creating a buying frenzy based on false or misleading promises about the health of the underlying company. Once investors are lured into purchasing the stock, the scammers sell shares they own, collapsing the price of the worthless stock collapses, leaving investors holding the proverbial bag.

The latest round of boiler room calls identified by FINRA are frequently not even from FINRA registered broker-dealers, meaning the calls are likely part of an outright fraud designed to take investors’ money without providing even the nearly worthless stock the sales person is hawking. To perpetrate the scam, FINRA says the callers often use fake credentials or disguise their phone numbers to appear to be legitimate dealers.

Unfortunately, the examples are numerous. FINRA identified several incidents in which investors were scammed. In one, an elderly couple was conned into buying nearly $900,000 of a worthless penny stock. In another, a senior citizen purchased $500,000 of a stock while on the phone with the caller. In a third, a retiree was convinced to mail $2,500 checks to a mail drop box that was not associated with any business at all.

If you receive a boiler room-type call, FINRA advises that you simply hang up the phone. More generally, if you are contacted by someone claiming to offer a deal that sounds too good to be true, do yourself the favor of doing some basic homework before you hand over any money. Utilize the free Broker Check service, available through FINRA’s website to learn more about the broker or the firm for which he or she works. To learn more about the latest boiler rooms, check out the original alert, here. To educate yourself about the kind of cold-calling tactics utilized in boiler room scams, view the SEC’s primer on cold-calling. If you receive a cold call from a boiler room, contact FINRA’s Securities Helpline for Seniors to report it.