How a boiler room scam works

2013-06-05 10:00

If an overseas broker calls you out of the blue to sell you shares, chances are they’re trying to rip you off, writes Maya Fisher-French

Two months ago, Steve* received a call from a trader supposedly working for a Shanghai-based stockbroking firm. Steve was told he had been identified as a potential blue-chip client and the firm, Foerster Consulting, wanted to introduce him to offshore trading.

Steve informed him he was not interested but soon received a phone call from “David Huntley”, a South African working for the firm.

Huntley told him they had a hot tip they wanted to share with him. Again Steve refused and told them he did not do business on the phone.

He then received a call from Huntley’s senior manager “Robert Maxwell”, who spent an hour on the phone with Steve trying to convince him to trade with them.

“I was suspicious that they were spending so much time pushing me. I earn an ordinary salary, I am never going to trade large amounts of money. But they were very convincing.

“They are very good salespeople,” says Steve, who eventually gave in and agreed telephonically to buy more than R70?000 worth of shares in a company called Suncor Energy.

The company sent him confirmation and wanted him to transfer the money.

At this point, Steve started to get cold feet.

He realised he had just entered into an agreement with people he did not know and had no proof he had actually bought these shares except for a piece of paper they had emailed to him.

He tried to cancel the deal and then they got heavy. “Jim Dawkins”, their so-called legal officer, threatened him with legal action.

“They said they would use a debt collection agency and blacklist me if I didn’t proceed with the transaction. They also said they can use ‘voice biometrics against me in court with the verbal consent I gave’,” says Steve.

After being harassed daily with phone calls and threats, Steve contacted City Press for help. He wasn’t sure what to do, but it was obvious he had fallen for a scam.

There are various types of trading scams. In some cases, the shares are not actually bought and the entire transaction is a scam.

But in what’s known as a boiler room scam, there are actual shares. It is just that the investor is overpaying for the shares and being used to manipulate the share price.

The term “boiler room” is used to describe an outbound call centre that sells dubious investments by phone and is often used to create a market by attracting buyers, which in turn drives up the share price.

This usually happens when a company is listing and wants to boost their share price by creating buying activity.

As Steve confirmed, Suncor Energy was the only share ever mentioned in any of his discussions with the traders.

Clients are usually told after the sale they are not allowed to sell the shares they have invested in for a specific period.

What they don’t tell the client is that there is no real market for the shares, so if the client tried to sell, the price would fall as there is no support for it.

The ultimate benefit of the scam is for the owners of the listed company who are usually involved with the company running the boiler room.

They are now able to sell their shares at a profit as the boiler room has created a market for the shares out of duped investors.

Once the owners have sold to the investors, the investors would suddenly discover the shares they bought are worth half of what they paid for them.

It is very difficult to prosecute these types of organisations as they always operate outside the legal jurisdiction of their investors.

But this can also work to the advantage of someone in a similar situation as Steve, as they have no legal recourse to hold him to his agreement.

* Name has been changed

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