A boiler room refers to a specific place or an operation involving legally questionable activity of promoting and selling stocks or other assets of uncertain value via the telephone, messaging or over the Internet. Boiler rooms are often associated with unethical selling practices and fraudulent actions.
The term “boiler room” is connected with a historical practice of situating such activities in basements and other auxiliary premises, and it also reflects the nature of high-pressure selling taking place in boiler rooms.
Boiler Room main tactics
Although a boiler room isn’t necessary a base for outright criminal activity, such a practice is considered to be controversial at best, as its selling techniques often involve manipulation and applying to emotions.
Boiler rooms are infamous due to the practice of cold calls and contacting prospective buyers against their will, thus imposing initially unwanted offers. This way of connecting a potential buyer is convenient for conducting fraudulent activities and cheating due to lack of previous contact between a seller and a purchaser, which doesn’t enable trust, but at the same time gives no reason for suspicion and makes it harder to trace back the boiler room caller.
Boiler room employees often use unethical methods of advertising the stocks they intend to sell, omitting important information, exaggerating positive traits, and avoiding telling about disadvantages. Most of these practices directly contradict the laws of many jurisdictions, thus making the activities of boiler rooms illicit.
Another common trait of a typical boiler room persuasive strategy includes an impossibility for a potential buyer to check the information given, and a boiler room employee often tries to prevent a customer from further research, instead of it insisting on immediate purchase.
The persuasive technics used in boiler rooms usually play on people’s emotions, mainly appealing to a person’s greediness, or fear, or curiosity.
Frauds associated with Boiler Rooms
A boiler room often sells assets of low or questionable value, which are often penny stocks, unreliable securities, or outright non-existing assets (such as stocks of expired companies and so on).
Concerning penny stocks, a traditional boiler room scheme involves buying of said stock at low prices, rise the price artificially and then employ aggressive selling techniques via the phone and the Net to find buyers for the stock, claiming it to continue its price increase. After the initial stock is sold at exaggerated prices, it usually decreases significantly, thus causing a loss to its secondary buyers.
A pump and dump, a dial and smile techniques are also conducted under similar rules, all involving cold calling and aggressive persuasion, although price manipulations are employed only in some of these practices.
In some cases, the securities or goods being sold with the use of boiler room tactics aren’t really worthless, but in most cases their value is exaggerated by operators. So, it’s generally recommended to check all the offers coming in such a way and do an independent research before purchasing.
Ways of detecting Boiler Room schemes
For an inexperienced investor, some offerings coming from boiler room operators might seem lucrative, but almost any transaction promoted in such a way implies high risks of losses. So, it’s important to know some typical features of a boiler room call to identity it and avoid unplanned expenses.
Firstly, a boiler room employee usually uses more emotionally charged expressions and catchphrases than a regular broker would normally do. It often involves promises of extra-high returns, often immediate, or claims for a deal to be unique and taking place only at a given moment.
Secondly, a boiler room scheme suggests no negative information to be presented to a potential buyer, so an explicit avoidance to provide any kind of information on the stocks besides enthusiastic claims is a huge warning sign.
Another common and distinctive trait of a boiler room scheme is appealing to insider information or claiming to be related to the stock issuer and obtaining top-secret facts. Any kind of such affirmations is a typical sign of an aggressive selling tactic and a boiler room scheme.