Investors warned of 'boiler room' scams |
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Tue, 19 Apr 2005 01:00
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Meager gains from the stock market is making many UK investors look for alternate means and methods to make their savings create wealth. Taking advantage of this sentiment some organisations are running a scam by which investors are duped into buying shares of companies that are usually based abroad. The regulatory body Financial Services Authority (FSA) has warned investors and the general public of such scams.
The sales technique is usually highly persuasive – making cold calls and highly exaggerating the prospects of the investment. The tactic is called ‘boiler room’ technique because they pressure the victim by saying the opportunity may be lost. The investor is told that he/she could expect as much as 100% returns in a year’s time. The scam works both ways: they con not only the investor, but also the company - usually small businesses whose shares they sell.
| The FSA said that such firms are not regulated and therefore acting illegally by selling and promoting the shares of firms that were outside the UK. The scams now also involve small UK firms whose shares are being offered by the scamsters.
Their modus operandi was rather effective. They would approach a small business organisation and propose to raise capital for them by selling £100,000 worth of shares in that company to investors. From the sale of these shares, they would take 60% i.e. £60,000 as their fee and the company would get the remaining as their capital. The scamsters would them approach investors and hard-sell the shares of the company. They would sell the shares for any thing from 10% to 100% over the agreed price. They would then take their fee and vanish leaving both the company and the investors considerably out of pocket.
In certain cases, the investor has recourse to demand a refund from the company if it is based in the UK. This company would have to pay back the full price of the shares sold, even though it had received only a small percentage of the takings.
A spokesman for the FSA said that small businesses based in UK stand to lose more by such scams. Besides financial losses they could also end up with a tarnished reputation. For small businesses the financial losses would hurt more as they would have to refund the full price paid by investors for their shares.
The news comes in the wake of a petition last week by the Department of Trade and industry asking the High Court to have some property investment firms closed down in public interest. These property investment firms had devised schemes by which they were luring investors. These included some that offered expensive training courses in how to acquire a portfolio of buy-to-let properties without paying a deposit.
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