Notices

Boiler room

From Traderpedia

Definition:
Term often used to describe an unregulated brokerage firm or other sales organization where unsophisticated investors are aggressively solicited over the telephone; often associated with high-pressure telephone sales tactics in connection with penny stocks, currency options and other risky investments - all will charge extortionately high commissions.


The term boiler rooms developed mainly because the boiler room of a building was where they would ply their dodgy trade with dirt cheap rent, they were often set up in this type of underground room. Today it's different although the principles of there practice are the same. A typical boiler room sales call will ask "would you be interested if I could introduce you to an investment proposal that could double or even triple your initial capital over the next few months?"

Boiler rooms often use sales methods that violate NASD rules requiring brokers to recommend investments that appropriate to each investors portfolio, and break other regulatory laws regarding what claims you can make about possible returns. For example, a broker working in a boiler room might try to sell very speculative stock to retired investors whose portfolios cannot tolerate such high risk. Many boiler room brokers may also try to create investor interest in companies that don't actually exist in order to profit from the sale of fraudulent shares or options.

A boiler room will not be registered or regulated with any regulatory body, and unwitting customers will therefore have no recourse when the brokerage eventually and invariably dissappears after "losing" (read pocketed) all of their clients money - only to setup and continue under another impressive sounding but made up name - like "Richmond Royce Asset Management" or similar.

Boiler rooms are usually operated from locations such as Spain or Dubai where financial regulations are thinner than in the US and UK, and will solicit clients from outside of their domicile to further evade regulatory law, and additionally make it more difficult for their angry clients to show up at their offices demanding their money back.

The FSA run a blacklist of unregulated advisory firms at http://www.fsa.gov.uk/pages/Doing/Regulated/Law/Alerts/overseas.shtml

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