Fraudulent investment schemes are costing a lot of people a lot of money – don't you be one of them. While we have all heard of the "Nigerian letter" scam and might get obviously fraudulent emails spruiking supposedly money making opportunities, there are other, more subtle and professional operators after your money often in what are known as "boiler rooms". Here at the Motley Fool not losing money is high on the agenda and it pays to be alert for cheats.
What is a "boiler room"?
Boiler rooms are businesses that use high pressure sales techniques to solicit investment in non-existent or essentially worthless shares and other securities. Boiler rooms generally cold call you and can be persistent, sometimes over months. They are professionals and can look and sound remarkably legitimate. They may mention companies you have heard of and have a professional looking website. Boiler room operators typically sell thinly traded international stocks of "microcap" companies.
Could it happen to me?
Do you consider yourself an experienced investor – well you might be in a high risk category. According to a recent report from the Australian Institute of Crime, the most likely individuals to be victims are:
- middle aged to older persons (often over 35 years old but usually over 50 years old)
- male
- small business owners
- self funded retirees
- individuals who have previously made investments in other companies and were considered financially literate
- on share holder registers
- socially isolated individuals—geographically or otherwise.
In addition, Australian victims have typically been assessed as "educated, computer literate and have undertaken preventative research that provides them with a sense of assurance". The victim profiles in the report (e.g. experienced financial advisor) should scare you if you think it could never happen to you. This is clearly a worldwide problem. As well as the Australian and U.S. authorities warning investors, just last week I received a letter from the English bank HSBC warning of exactly this problem in the UK.
Warning signs
According to the U.S. Securities and Exchange Commission (SEC) the following are warning signs if you receive a cold call:
- High-pressure sales tactics. Aggressive cold callers speak from persuasive scripts that include answers for your every objection. As long as you stay on the phone, they'll keep trying to sell. And they won't let you get a word in edgewise.
- Pitches that stress "once-in-a-lifetime" opportunities. Watch out for someone who tells you about a "once-in-a-lifetime" opportunity, especially when the caller bases the recommendation on "inside" or "confidential" information.
- Callers touting companies with "breakthrough technologies." These technologies play off of legitimate technologies, but at the same time sound just a little too good to be true.
- Callers who refuse to send you written information about the investment. This is a form of manipulation designed to force a quick decision. You should be able to receive information about an investment and take as much time as you need to review it.
- Calls from unregistered and unsupervised salespersons. Cold-calling "brokers" and their bosses may not be properly registered to sell shares and often operate in an environment completely devoid of required supervisory procedures.
Avoiding the scams
Remember if it sounds too good to be true, then it probably is.
Check any company you are discussing investments with has a valid Australian Financial Services Licence at https://www.moneysmart.gov.au. (You can find ours at here.)
Hang up on unsolicited telephone calls offering overseas investments; don't worry about being polite.
Alert your family and friends to suspected fraud, especially anyone who may have savings to invest.
Visit https://www.moneysmart.gov.au or call 1300 300 630 for further information or to report suspected fraud with as much detail as you can remember such as company name, location and contact details.
Even the experts make mistakes
As an aside, there have even been consumer complaints about one of the websites included in the report. The 'Global Investor Alerts' website seems to have been taken substantially offline, amid some complaints that it was accepting "legal fees" without providing a service. It just goes to show you have to be extra careful when transacting online and with companies you don't know"
Foolish takeaway
As the HSBC letter reminded me, forewarned is forearmed – so be alert but not alarmed.
More reading
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- The online delivery war hots up
- Going for ASX gold
- Australian dollar flying high – Aussie tourists to benefit
Motley Fool contributor Tony Reardon fits some of the profile of the 'high risk' group – but has avoided falling prey. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
