UK Financial Services Authority Warns Against 'Boiler Room' Share Scams

Jason Gorringe, Tax-news.com, London

02 June 2000

The UK's Financial Services Authority, which has responsibility for protecting consumers, this week issued a warning that many unauthorised foreign share-selling operations are targetting the UK with high-pressure tactics reminiscent of the recent movie 'Boiler Room'.

It is not necessarily illegal for a brokerage in a foreign country to target UK investors (depending on the laws of the country concerned) but the FSA points out that many foreign jurisdictions do not offer compensation schemes.

Some brokerages may be operating scams in which they ramp up share prices by buying heavily in small markets, then selling on the shares at inflated prices, before walking away leaving the pyramid to collapse, which it does very quickly. Such activity gets close to fraud, and often does cross the line into outright fraud, although it can be difficult to find and prosecute fleet-footed operations which can move overnight from one jurisdiction to another, needing only telephone lines and a new bank account each time.

The FSA says that anyone offered shares or other investments by a foreign brokerage (and of course some perfectly reputable brokerages trade on the Internet from foreign or offshore jurisdictions) should check the antecedents of the broker before taking any action. Good advice, obviously, but it is astonishing how often people let themselves be blinded by greed, and then they are easy meat for the salesmen.

Here is the full text of the FSA's Press Release:

The FSA has today placed an alert on its consumer webpage (http://www.fsa.gov.uk) following concern that unauthorised firms based overseas may be targeting UK investors using high pressure sales tactics to persuade them to buy shares which may not be suitable for them

BOILER ROOMS: HOLLYWOOD GLITZ OR HIGH-PRESSURED SCAM?

Sounds obvious but if a stranger rings you out of the blue and tries to sell you shares in companies you've probably never even heard of - TAKE CARE! They may be ringing from a boiler room - a company which uses hard-sell tactics to persuade you to buy shares. If they end up persuading you to buy, they'll be the ones laughing all the way to the bank. And you may be left with potentially worthless shares and no rights to complain or claim compensation from the UK authorities.

THE HEAT RISES Just as actor Michael Douglas exposed the corporate greed of 1980's Wall Street, the recent launch of Hollywood film ‘Boiler Room' reveals the high-pressured but profitable world of the boiler room. A world where young men get rich quick by cold calling potential clients and pressuring them to buy shares in often unknown companies. As the "hero" Seth and his fellow ‘stock jocks’ manipulate their way to their first million with commission piling up all around, you may think the high-pressured world of the boiler room would never take off in the UK. We’re a nation of cautious investors after all aren’t we? And wouldn’t they be closed down immediately by the regulator?

Well, yes they would if we found they were operating from within the UK. Firms running this kind of business would have to apply for a licence and abide by rules designed for your protection. BUT WATCH OUT! These rules are not identical abroad. Boiler rooms based overseas are able to communicate with anyone anywhere in the world and could be targeting UK investors.

THE HOOK The first time you hear from such firms could be by post or e-mail, or they might advertise their services over the internet. They may offer you a free research report into a company in which you hold shares, or a free gift or a discount on their dealing charges.

The scenario may follow this pattern. You’ll probably be an investor in smaller companies (often called penny shares). Therefore, your name will have appeared on the share register of the company you've invested in - which anyone can get hold of, including the boiler rooms. Then surprise surprise, you’ll receive a mailshot making you a great free offer. Sign on the dotted line and you’ll receive a free, independent research report outlining future prospects for the company.

"Nothing to lose" you think. "And it's free". So you sign on the dotted line and send your response in the freepost envelope – but don’t worry, it must be OK because its got a UK address and so if anything goes wrong, you'll be able to complain.

What you haven’t realised is:

By signing on the dotted line, you have probably agreed to be contacted by the firm in the future. This was probably written in the small print of the mailshot.
The UK freepost address on the return envelope may simply be a forwarding address – to an overseas address.
WHAT HAPPENS NEXT? Obvious isn’t it? You’ll start to get flooded with calls offering you a great deal on shares, often in smaller companies you may not have heard of or possibly other investments such as futures, options or foreign exchange. The firm's salesforce will probably sweeten, cajole, flatter, bully and even sometimes threaten you to take up their offer. Don't forget, they probably make a commission on every sale.

ALARM BELLS We can’t tell you what you should or shouldn’t do. But if you receive a mailshot, a cold call or something similar:

Always check whether the company is authorised in the UK. Ring the -FSA Consumer Helpline to find out. If it isn’t, take care. You won't have the right to complain or seek a penny in compensation from the UK authorities if things go wrong.
If it's not authorised, it could mean that the company is based abroad. Look carefully for the address. The majority of firms operating from abroad are perfectly respectable - but what if this one isn't? Even if the authorities overseas have a compensation scheme, it could be difficult to pursue a claim.
Read the small print – if you had, you would probably have seen that the company are within their rights to call you once you’d signed on the dotted line. And even if you think you’re immune from such high-pressured selling tactics, you’d be surprised at just how many people give in - simply to get rid of the caller.
If you do decide to go ahead and buy the shares, at least check the current price in the financial press. These firms may be acting as bucket shops, buying in shares from other brokers. If they do so, you may not pay the market price for the share. Even though they will be trying to get you to make a decision quickly, still try to find time to do your own research before buying - look on the company’s website if they have one, get hold of the annual report and read the financial press.
If you decide to go ahead, be aware that it may be difficult to get evidence or confirmation of what shares you hold from the firm - and it may be even more difficult to sell them when you want to.

If the offer on these shares sounds too good to be true - it usually will be!

Enquiries Telephone 020 7676 1000
Press Sarah Modlock 020 7676 3232 outside office hours 07625 105 777
Public FSA Consumer Helpline 0845 606 1234
FSA Website http://www.fsa.gov.uk/

See Discussion Forum Topic: Are Offshore Investments Safe? - add your comments!

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