Boiler Room
In business, the term boiler room refers to a place (a room) where salespersons indulge in the unfair practice of selling dubious goods, usually by telephone. The term has negative connotations as it involves use of deceptive or fraudulent means with the intention to cheat, sometimes selling penny stocks or outright stock fraud. Boiler room usually implies poor working conditions and aggressive, forceful and insistent selling tactics.
Modus Operandi
The relationship with between a boiler room and the company being promoted is often kept sectet as well was the profit from the sale of house stock, stock that the management of the brokerage has a vested interest in selling. Those in charge of operating a boiler room usually have a close and profitable relationship with the owners of the company whose stock they are promoting. Once the boiler room operators have successfully been able to convince their clients to subscribe to the IPO, the brokers are instructed not to sell the shares simply because there is no real market for the shares. The reason behind it is that if shares are sold before they attract buyer interest it would result in a huge drop in price. As soon as insider investors take their positions, the boiler room becomes active and starts promoting the shares through telephone calls and/or spam e mails. The underlying idea is to generate demand by attracting buyers so as to ‘create’ a market where none exists. This provides adequate opportunity to the owners of the company to dump their shares in the market; the original investors make a killing at the expense of investors worked upon by the boiler room operators.
The U.S. Securities and Exchange Commission had this picture painted of a typical boiler room operation.
Brokers sit in close proximity to each other in a room the size of a basketball court. All desks are lined up close together. Without fail, every morning sales meetings are held where sales techniques are demonstrated and written information about the house stock is distributed. Brokers are instructed to follow the written instructions and give only positive information about the stock as contained in the script.
Boiler room operations typically involve presenting only good news and discouraging independent research by customers and brokers present there.
The term boiler room is apparently derived from the type of office space used, usually in basements or utility rooms of buildings.
A film by the name of Boiler Room, released in 2000 and a play, Glengarry Glen Ross depict a typical boiler room operation selling real estate. The Burns Verkaufen der Kraftwerk episode of The Simpsons, where Mr. Burns wishes to sell his power plant to two German investors for $100 million so that he may pursue other interests. The episode shows the safety inspector Homer’s broker calling from a plain office saying that he is “renewing (his) notary license on weekly basis.” When he asks the broker what his stock is up to, his broker says, “Let me punch that up on the computer” but actually looks up the price in the newspaper. Ultimately, Homer sells at $25, missing out on $5,200 he could have made if he had waiting till the end of the day.
A lot of boiler rooms disappeared after the dot.com bubble burst in the 90s. However, many such boiler rooms still operate all over the world. Technological advancement in telecommunications means that boiler room operations can be carried on viably in one country and call prospective buyers in another country. The advantage of such a setup is that the company can operate with immunity as there is no fear of prosecution under the legal system of the investor’s country.
Boiler rooms continue to operate in the 21st century over the Internet. Websites can be created in jurisdictions where regulations are not strict. Scammer websites can be set up in one country, operated from another to target victims in yet another country making it practically impossible to trace the real operator.
What makes boiler rooms survive is the fact that financial regulatory authorities have difficulty in enforcing rules on scammers operating from another country. Moreover, financial regulations differ across countries. Some countries have lower regulations intentionally in order to attract foreign investments not realizing that this makes it easier for boiler room operators.
Also, boiler rooms continue to indulge in their nefarious activities due to factors such as financial illiteracy, the way global financial markets function and lack of coordination between financial regulators across nations.