Boiler room (business)

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The "night singer of shares" sold stock on the streets during the South Sea Bubble. Amsterdam, 1720.

In business, the term boiler room refers to an outbound call centre selling questionable investments by telephone. It typically refers to a room where salesmen work using unfair, dishonest sales tactics, sometimes selling penny stocks, private placements or committing outright stock fraud. The term carries a negative connotation, and is often used to imply high-pressure sales tactics and, sometimes, poor working conditions.

Business structure

A boiler room usually has an undisclosed relationship with the company being promoted or undisclosed profit from the sale of the house stock they are promoting. The managers of the boiler room usually have close ties to the same owners of the company whose stock is being promoted. After the sales force of the boiler room sells their clients on the idea of the IPO, they are not allowed to sell the shares that the customer invested. This is because there is no real "market" for the shares, so any shares sold before buyers are attracted would create a large loss in the price of the stock, due to it being thinly traded with no public support. Once the insider investors are in place, a boiler room promotes (via telephone calls to brokerage clients or spam email) these thinly traded stocks where there is no actual market. The brokers of the boiler room actually "create" a market by attracting buyers, whose demand for the stock drives up the price; this gives the owners of the company enough volume to sell their shares at a profit, a form of pump and dump operation where the original investors profit at the expense of the investors taken in by the boiler room operation.

The U.S. Securities and Exchange Commission paints the following picture:^[1]

The brokers sat "cheek by jowl" in a room the size of a basketball court. All of their desks were lined up side by side in rows. The firm held mandatory sales meetings every morning at 8:30 a.m. at which time sales techniques were demonstrated and scripts for the firm's "house stock" . . . were distributed. Brokers were expected to follow the scripts and only give customers the information they contained.

Some traits of a boiler room include presenting only good news about the stock to be sold and discouraging outside research by customers or brokers working there.

Etymology

The term is likely to have originated from the cheap, hastily arranged office space used by such firms, often just a few desks in the basement or utility room of an existing office building.

In the early 1970s (and possibly earlier), boiler room was a term used by political parties for a room with many telephones used to call prospective voters. The name is inspired by an analogy between the many telephone lines leading out of the room and the many pipes leading out of a real boiler room.

Modern boiler rooms

Although many disappeared in the 1990s following the burst of the "dot-com bubble", many boiler rooms still operate across the world. Reductions in telecommunication costs mean that a company can viably operate in one country while calling prospective investors in another. The advantage of such an operation is that a company can operate without fear of prosecution from the investor's native legal system. For example, many boiler rooms contacting prospective investors in the UK operate from Spanish cities such as Barcelona and Valencia.^[2]^[3]

With the advent of the internet and the ability to create web sites easily without any regulatory involvement, as well as the ability to operate from other jurisdictions, boiler rooms have continued to operate into the 21st century. It is easy for scammers to set up a web site in one country, operate from another country and target victims in a third country, hiding their identity and making it difficult to trace them. Financial regulation varies significantly from country to country, and some countries deliberately promote low regulatory environments in order to attract financial business. This makes it easy for boiler rooms to use this to their advantage. Financial Regulatory Authorities in each country have significant difficulty enforcing rules on scammers in other countries. With low financial literacy by investors or victims (particularly in the increasingly complex ways that global financial markets operate), and without better coordination between financial regulators in different countries, boiler rooms continue to operate.

In popular culture

A fictional "boiler room" brokerage firm was dramatized in the 2000 film Boiler Room, and the play and film Glengarry Glen Ross show a similar boiler room operation selling real estate. The 2013 film, The Wolf of Wall Street, starring Leonardo DiCaprio, also involves a boiler-room investment business.

References

Footnotes

General sources

Stevenson, Robert J (2000). The Boiler Room and Other Telephone Sales Scams. Chicago: University of Illinois Press. ISBN 978-0-252-06934-5.
Lauria, Salvatore; David S. Barry (2003). The Scorpion and the Frog: High Times and High Crimes. Beverly Hills, CA: New Millennium Entertainment. ISBN 978-1-893224-26-1. Cite uses deprecated parameters (help)

External links

SEC – "Portrait of a Boiler Room"
FSA – "Share scams"
The Motley Fool consumer website – Boiler Room FAQ
This is Money – "UK court halts boiler room scams"
Sky News – "Anatomy Of A Boiler Room Bust" – Profiting from shorting the inflated prices of equities ramped by boiler rooms
The Guardian - "Lifting the lid on 'boiler room' scams"
BBC - "Boiler room scams"

v t e Scams and confidence tricks

Terminology	Confidence trick Error account List of confidence tricks Shill Sucker list Conman

Notable scams and confidence tricks	Advance fee fraud Art student scam Badger game Bait-and-switch Black money scam Bogus escrow Boiler room Charity fraud Clip joint Coin rolling scams Drop swindle Embarrassing cheque Employment scams Fiddle game Fine print Fodder scam Foreclosure rescue scheme Foreign exchange fraud Fortune telling fraud Get-rich-quick scheme Green goods scam Hustling Intellectual property scams Kansas City Shuffle Long firm Miracle cars scam Mock auction Patent safe Pig in a poke Ponzi scheme Pork Barrel scam Pump and dump Pyramid scheme Reloading scam Shell game Sick baby hoax Slavery reparations scam Spanish Prisoner Strip search phone call scam Swampland in Florida Telemarketing fraud Gem scam Thai tailor scam Thai zig zag scam Three-card Monte Trojan horse White van speaker scam Work-at-home scheme

Internet scams and countermeasures	Advance fee fraud Avalanche (phishing group) Click fraud Computer crime CyberThrill DarkMarket Domain slamming Email authentication Email fraud El Gordo de la Primitiva Lottery International Promotions Programmes Employment scams Internet vigilantism Lottery scam PayPaI Phishing Referer spoofing Ripoff Report Rock Phish Romance scam Russian Business Network SaferNet Scam baiting ShadowCrew Spoofed URL Spoofing attack Stock Generation Cramming (fraud) Website reputation ratings Whitemail

Pyramid and Ponzi schemes	Aman Futures Group Dona Branca Caritas Bernard Cornfeld Foundation for New Era Philanthropy High-yield investment program (HYIP) Investors Overseas Service Bernard Madoff MMM Make Money Fast Petters Group Worldwide Pyramid schemes in Albania Reed Slatkin Saradha Group Scott W. Rothstein Stanford Financial Group

Confidence tricks in the media	Literature Fictional con artists Film and television

See also: List of con artists List of confidence tricks List of Ponzi schemes

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