how to spot and avoid boiler room scams
like other forms of confidence schemes boiler rooms take advantage of the subjects greed and emotions in order to get their money they often rely on high pressure sales tactics such as aggressive cold calling misinformation and extravagant promises to assure buyers that they are buying a sure thing they may also hint at insider information such as an upcoming merger or acquisition that would affect the share price the sec requires brokers to adhere to strict standards when selling securities brokers may not misinform or omit material facts when selling securities nor can they exaggerate their own track records they are also required to have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for a customer 3 if a broker is trying to reach potential buyers by cold calling they may not have the customer s needs in mind the sec strictly prohibits securities dealers from misinforming investors or making material omissions if a purported stockbroker claims to have access to secret inside information that is a classic sign of a scam examples of boiler roomspopularized in films like boiler room glengarry glen ross and the wolf of wall street boiler rooms have become synonymous with unethical sales tactics however the actual techniques have changed substantially here are some recent examples penny stocks are small companies that trade for less than 5 per share most penny stocks are too small for regular stock markets and are only traded over the counter this means that a comparatively small group of buyers can cause a significant rise in price in a typical penny stock scam operators would first accumulate a small cap stock at a low price and then use boiler room tactics to find buyers for an inflated price in such a scam victims may think that they are buying on the open market when they are effectively buying their shares directly from the operators not all boiler rooms sell securities in a 2015 case in the australian state of queensland police discovered a boiler room selling sports betting software according to abc the telemarketers were working from a carefully prepared script to collect millions of dollars from australian investors promising extravagant returns of up to 80 000 per year the scammers also used false names and fabricated testimonials while paying off local police to provide cover boiler room faqsa pump and dump is a form of illegal market manipulation in which scammers artificially raise the price of their own shares in order to sell them at a profit pump and dump scams are particularly popular with cryptocurrencies due to the lack of market depth and effective regulation in a typical pump and dump operators use cold calling message boards or social media to reach investors and persuade them to buy the security usually with promises of guaranteed profits as the price starts to rise the operators sell their own shares leaving buyers holding the bag passed in 1990 the penny stock reform act sought to reduce the occurrence of penny stock fraud such as the schemes outlined above the act included stringent disclosure requirements for brokers selling penny stocks in order to prevent them from misinforming buyers it also established an electronic marketplace for quoting such securities dial and smile refers to the telemarketing technique of cold calling potential buyers for sales purposes as the term implies these techniques rely on high pressure sales tactics and emotional manipulation to persuade people to buy things that they would not ordinarily want to combat aggressive cold calling government agencies have prohibited telemarketers from making false statements calling cell phones or violating the do not call list the bottom lineboiler room scams are as old as the stock market while they are no longer done in literal boiler rooms the technique is the same brokers use unethical tactics to market low quality securities without disclosing the hidden downsides while technology has changed boiler room tactics haven t while securities fraud isn t going anywhere there are now stricter regulations against boiler room tactics requiring brokers to disclose all material information and forbidding them from exaggerating the potential upsides 