The ways in which people communicate have changed with advancements in technology, and so have the tactics of "cold calling" boiler rooms.
According to FINRA's National Cause and Financial Crimes program, boiler room operations are still used to pitch dubious investment schemes. Typically run as outbound call centers, boiler rooms are characterized by high pressure sales pitches from promoters targeting retail investors with highly speculative--oftentimes fraudulent--investments. And this goes beyond phone calls; today's boiler rooms also rely on more modern means to contact potential investors, such as messaging apps and social media.
Regardless of the method of contact, the scammer's goal is the same: Use high pressure tactics and persuasive language to convince investors to purchase specific investments that will ultimately enrich the scammer.
One investor recently pumped the brakes on a potential boiler room scam when he questioned why a non-registered individual was contacting him, out of the blue, to purchase microcap securities. The individual received a phone call promoting a low-priced security that was trading on the over-the-counter markets. The promoter claimed that the security was on the verge of being listed on a major exchange and this was the investor's opportunity to get in on the ground floor. The caller instructed the investor to log into their brokerage account and purchase a certain number of shares at a specific price before the stock "takes off." On checking, the investor did see an upward trend in the stock price, which seemed to validate the caller's claims. The promoter also said that if the investor was unhappy with the trade, he would give the investor a discount on a yearly subscription to his stock-picking newsletter. Fortunately, this savvy investor spotted a number of red flags and was able to stop this scam in its tracks.
Image source: Getty Images.
Red flags of a boiler room scam
- The unsolicited pitch. One key red flag is an unsolicited investment pitch. The investor above was suspicious when contacted out of the blue. Why were you selected? If you have shown interest in higher risk investments in the past, or been previously victimized by a scam, it's possible the promoter found your name on a lead list (sometimes called a "mooch list"). If the promoter had a golden ticket, why share this opportunity with you rather than cash it in for themselves?
- The hard sell. Promoters use hard-sell tactics to pressure investors into buying shares that promise high returns on "can't miss" investment opportunities. Scammers often rely on the tactic of "phantom riches" to paint a picture of wealth off an investment and claim time (or product) is scarce. In many cases, boiler rooms pitch microcap securities or other speculative investments for which limited information is available as they are more susceptible to this type of fraudulent activity.
- The unlicensed promoter. Callers may claim to work for organizations that offer stock recommendations. However, in many situations, the organizations are not registered with FINRA, not associated with any FINRA-registered firm and, in most cases, not involved with any legitimate business entity at all. The callers themselves may use fake names and credentials, disguise their phone number to look like a known broker-dealer or firm, or create a new website to appear more credible. Caller ID or website spoofing may be signs of a broker imposter scam.
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- The pump and dump. Fraudsters sometimes engage in "chart building" (a form of manipulative trading) ahead of a cold calling campaign to create the illusion that the stock is on an upward trend and starting to gain traction, as was the case in our example. This could give you a distorted impression of the actual market value of a particular security and be a sign of a "pump-and-dump" scheme.
What can you do to protect yourself?
1. Decide now to decide later. Even if the claims sound plausible, do not say "yes" to stock purchases from an aggressive cold caller or social media promoter, particularly if the stocks being recommended are priced very low. The best fraud pitches are designed to sound believable and counter every possible doubt or opposition. Learn to recognize the tactics fraudsters use, and don't feel guilty about hanging up on a cold caller.
2. Check with regulators and other third parties. Use FINRA BrokerCheck to verify whether a firm and individual are registered to sell securities or give investment advice. And use internet searches to double-check the validity of addresses, phone numbers and other information about the organization or individual. Also check the public disclosure information for the investment using the SEC's EDGAR filings, especially if the promoter claims the stock is--or is about to be--listed on an major exchange.
3. Research the promoter. Fraudsters constantly change the names of their stock promotion outfits and set up new websites to distance themselves from the old outfit, which may have garnered regulatory attention or developed a poor reputation with previous investors. The same group contacting you could be behind several different names. Perform a search on well-established website domain registration databases to see how recently the website was created and by whom. Also conduct a general internet search on the promoter's name along with terms such as "complaints" or "scam" to see whether others may have complained about the promoter.
4. Don't give second chances. Common boiler room practice is to follow up to see if you purchased the stock they recommended. If you haven't invested, they will keep pressuring you. If you have invested, they will try to convince you to invest more.
5. Remain vigilant. Remember, not all boiler rooms "cold call" investors by telephone. Some go through messaging apps, social media and other means. They may even use subscription services or newsletters, sometimes charging over $1,000 a year. Investors might want to think twice before paying money for stock picks from individuals who are not regulated, licensed financial professionals--or relying on tips obtained through social channels. Even if not required to be registered, the promoter could well have a conflict in making their picks. Moreover, investors targeted by boiler room perpetrators may also be targeted in other non-securities-related scams around the same time. Be on the lookout for multiple scam attempts in close proximity to one another.
One of the best ways to avoid unsolicited calls and potential scams is to equip your phone with a caller ID device or service--and if the number is unknown to you, don't pick up. Many scammers won't bother to leave a message on your voice mail. If you do answer and the caller begins an aggressive pitch, calmly say no and hang up the phone.
If you are suspicious about someone giving you unsolicited investment advice or promoting a particular investment, contact FINRA or another regulator to report your concerns. Investors can also contact the FINRA Securities Helpline for Seniors®, toll-free, at 844-57 HELPS (844-574-3577).
