With the recent years' bull market and the increase in the number of retail customers investing in stocks, boiler room operators are back at work trying to defraud investors.
What are Boiler Room Operators
Boiler room operators are sales people who sit in one room making cold calls to potential investors and trying to pressure them into purchasing worthless investments. They are usually armed with sophisticated sales scripts and high-pressure sales techniques used to convince their victims to purchase dubious investments. Their victims are usually individuals with money such as business people, professionals and retirees.
What Type of Investments do Boiler Room Operators Peddle
Boiler room operators will try to sell:
Microcap Stocks or Penny Stocks
In the US microcap stocks are considered to apply to companies with low or "micro" capitalizations, which refers to the total value of the company's stock. Many microcap stocks trade in the "over-the-counter" (OTC) market and are quoted on OTC systems, such as the OTC Bulletin Board (OTCBB) or the "Pink Sheets." They usually do not have to file financial reports with the Securities and Exchange Commission. In Canada, microcap stocks are referred to as penny stocks which loosely means stocks whose stock price is less than a $1.00. The reporting requirements in Canada do require penny stock companies to file financial statements.
In both cases, however, these stocks are thinly traded and therefore subject to price manipulation by unscrupulous promoters and company insiders.
Foreign Exchange Investments
Scam artists try to solicit money for investments in exchange instruments traded in foreign markets during periods of financial crisis in such markets. The promoter tries to convince its callers that certain foreign exchange instruments are good investments which are currently undervalued because of such crisis which presents a tremendous buying opportunity. The investments are usually fictitious.
Risky Initial Public Offerings (IPO's)
Companies that are initially becoming publicly traded companies usually do an initial public offering to raise money. While many of such offerings are worthwhile investments, many are risky ventures. The boiler room operator will tend to downplay or neglect to tell the investor the negative aspects so as to ensure the investor proceeds to invest. Many boiler room operators will try to sell IPO's that are underwritten by the investment firm for whom they work. "Underwritten" means that the investment firm either has been hired as an agent to find buyers for the initial offering or has purchased all or some of the initial offering itself and now is trying to resell it to the public, usually at a profit. Accordingly, these boiler room operators are in a conflict of interest since they are looking out for the interest of their company and not that of their clients.
House Stocks
House stocks are stocks that an investment firm has purchased themselves to resell at a profit. Consequently, brokers of these house stocks will try to manipulate the market by buying stock of thinly traded companies. They will pump these stock prices up to higher prices and then sell them to their clients at a profit. The clients will find that there are no other buyers to buy their stocks. Consequently, without buyers, the stock price will fall leaving many unsuspecting investors with worthless stock.
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