How to Spot and Avoid "Boiler Room" Scams

Securities regulators estimate that investors may lose billions of dollars a year to investment fraud promoted over the telephone. High-tech schemes and self-employment scams are typical investment deals heavily pushed by "boiler rooms" or high-pressure telephone sales operations. We hope this information will provide you with effective self-defense tactics to avoid such scams.

How to Spot a "Boiler Room" Scam:

High-pressure sales tactics

A salesperson may make repeated calls to you. If you express any hesitation about investing your money, the caller may become abusive and question, for example, the intelligence of someone who would pass up such a "sure thing."

Outrageous promises of extraordinarily high profit at little or no risk

The rule is: The higher the return, the higher the risk. Listen for salespeople who claim it is possible to make extremely high (30, 40 or 50%) or even "guaranteed" profits, without any risk of loss. Most legitimate firms will provide written materials clearly disclosing the potential for loss in an investment, as well as the short- and long-term tax implications of an investment.

A demand for an immediate decision

Boiler room salespeople want fast action before you have a chance to develop second thoughts or consult with a professional for advice. As a result, many deals will be "gone tomorrow," "sold out today" or have "just one or two remaining openings."

A reluctance to provide information about the sales firm or the investment

If a boiler room is uncovered, it may be subject to state or federal action. Therefore, some telephone solicitors may be evasive when questioned about their sales operation or the investments they're promoting.

Mumbo-jumbo about "inside information" or "secret" technology

In order to close a sale, the voice on the other end of the phone may tell you that this is a "sure thing." A common claim is that celebrities, major corporations or banks will be investing shortly. Or the salesman may claim that a new geological report is coming out shortly. In other cases, the claim may be that the company is using some sort of hush-hush "black box" technology that makes it possible to process gold at a fraction of the cost paid by other firms.

Delayed delivery of the product and/or profits

This is a classic "red flag" of an investment scam. If you don't have your investment in hand or under your control in some other location, you have nothing for your money. Beware of promises involving delays of more than a few weeks for delivery of your investment.

Unusual arrangements for collecting funds from investors

Some con artists try to avoid mail fraud charges by using overnight courier services. Other phone scam operations go even further - sending a courier or cab to pick up the check. No matter what unusual collection method is used, the purpose is the same: Don't give customers enough time to back out of sending money.

What to Do If You're Contacted by a "Boiler Room"

• When hounded by high-pressure sales tactics on the telephone, simply hang up.
• Don't be misled into believing that you've been "specially chosen" to receive the salesperson's offer. Salespeople often call hundreds of prospects daily with automated phone technology, and they may use the same sales script to tell everyone that they're getting a "special deal."
• Don't be impressed by a salesperson's title. The "senior vice president" on the telephone line may really be just a junior employee of the firm. Titles can be easily handed out to salespeople without any relationship to their actual work experience.
• Don't feel foolish for failing to act on a caller's sales pitch. If the caller truly had a great investment prospect, would he or she be phoning strangers?  Remember that salespeople make money through commissions on sales; if they don't sell you anything, they may not earn anything.
• Do not make an immediate decision. Get written information first about the firm, the salesperson and the investment. Ask the salesperson to provide any promises or claims in writing.  Always feel free to seek independent advice about potential investments from a trusted professional (lawyer, accountant or broker).
• Know your risk tolerance for a possible loss of your invested monies.
• Avoid investments you do not understand. The greater your degree of ignorance, the greater the chance that you will be swindled. Be wary of investments in less seasoned companies, businesses that are long on promise and short on operating history.
• Don't give out your credit card number or other personal financial information over the phone to strangers.

Contact the Securities Division to find out if the salesperson and firm are registered to do business in Connecticut. A call to the Better Business Bureau in the city in which the firm is located may turn up calls from investors who have been victimized.  If you suspect that a phone scammer has contacted you, call the Securities Division with the name of the person and firm calling. Prompt action on your part may protect less wary investors.

Note: many investments promoted over the phone are legitimate. Informed investors who follow these simple steps will be able to distinguish "good" from "bad" telephone solicitations.

This publication is adapted from a fact sheet prepared by the Council of Better Business Bureaus, Inc. and the North American Securities Administrators Association, Inc.  Updated June 20, 2000