Too hot to resist

Boiler-room scams aren’t just the stuff of movies like Martin Scorcese’s 2013 film The Wolf of Wall Street. Con artists around the world continue to rake in millions by persuading investors to spend a fortune on worthless stocks and shares.

If anyone thought that boiler-room scams, the type featured in the 2013 Martin Scorsese film The Wolf of Wall Street, were a thing of the past, the arrest of an international gang of fraudsters in late February put that notion to rest. "Thousands of British investors, many of them elderly, were left destitute when a network of fraudsters operating from bases in the UK, Spain, the United States and Serbia targeted them with convincing sales talk, persuading them to spend a fortune on worthless stocks and shares," The Telegraph reported.

More than 100 con artists, the majority British, were nabbed in the four-country operation.

"In one of the biggest anti-fraud operations ever staged, 40 City of London Police officers joined 300 Spanish colleagues to swoop [in] on the boiler room scammers, [who were] living a life of luxury and excess," the Daily Mirror reported. The newspaper likened the fraudsters’ outlandish partying to the bacchanalian antics of Jordan Belfort, portrayed by Leonardo DiCaprio in The Wolf of Wall Street, and his large and eager sales staff.

Nominated for five Academy Awards, the film showed how Belfort (a real character) used the enormous profits he acquired from his once fledgling boiler-room business to open Stratton Oakmont, a high-flying brokerage house, in the late 1980s. At Stratton Oakmont, a team of up to 1,000 stockbrokers conned victims into purchasing worthless stocks while Belfort and other executives ran pump-and-dump scams involving IPOs for legitimate companies, such as Steve Madden Footwear Ltd.

While DiCaprio, who consumed stunning amounts of drugs and frolicked with a bevy of hookers in the movie, made Belfort a somewhat sympathetic character, the film didn’t show the damage he and his subordinates inflicted on innocent victims.

In the British scam, at least one of the victims committed suicide as a result of being fleeced, while hundreds of others, many elderly, face a bleak financial future.

The Telegraph cited 78-year-old Joan Mayer, who lost a six-figure sum, as an example. "She decided to invest thousands of pounds in carbon credits, rare earth metals and gold after being cold called by a convincing salesman," the paper said. "Mrs. Mayer even sold off part of her home to pay for more of the worthless stock on offer."

"I wanted to start investing what I had, very carefully, to build a pension for my daughter — that is what mothers do," Mayer said. "When I had the first call about investing in carbon credits I thought that was the beginning."

She recounted how the person on the phone "had become quite a pal. Over a period of many weeks I felt I got to know him quite well. He was very helpful and thoughtful and he kept in touch regularly." Developing what seems to be a friendly relationship with a mark is a common trait of effective boiler-room sellers, a tactic that can work especially well with people who are lonely, isolated or otherwise vulnerable.

Once Mayer had invested a little amount, she was sent impressive-looking brochures about the earth metals and other investment opportunities (including antimalaria products) and was promised considerable returns on her money.

It takes a certain kind of heartlessness to work as a boiler-room fraudster. Mayer’s "broker," for example, urged the elderly woman to get more equity out of her house, "which I foolishly did," she said. "It was only when that [gold mine] flotation mysteriously managed not to happen that I [realized] that I was deep in it."

The term "boiler room," in respect to fraud, likely originates in the world of politics. It was not uncommon for political parties, as far back as the 1960s, to set up a large room filled with banks of desks and telephones from which volunteers or paid workers would try to solicit donations to the party. The room was often in a basement or a spartan room, such as a space in an unused office building.

The boiler-room reference likely arose because of the noise and the heated pressure to make a sale, or maybe because the room’s many telephone lines resembled pipes in a boiler room.

Fraudsters found the boiler-room concept an ideal setup for selling worthless penny stocks to people they either randomly cold-called or whose names and telephone numbers they had been given as potential marks. The callers would tout a micro-cap stock that could, in fact, be real but would have virtually no chance of achieving the soaring financial gains the caller promised; other times the stock would simply be nonexistent. The real stocks would invariably be traded over-the-counter, which meant the companies offering the stocks wouldn’t have to meet many of the standard regulatory requirements.

"Besides the fact that these operations are based on deception and coercion, many of these salespeople and brokers are not even qualified to work in the securities industry," says the Investopedia website. "Some of these ‘brokers’ will claim to have offices in different countries to give the impression of importance and wealth, but in reality they have set up virtual offices with a mailing address and a call forwarding system."

The boiler-room operators often create documents, post on message boards or put up fake websites that laud the companies in grandiose terms.

Pump-and-dump schemes, in which the owners of a worthless stock trade it among themselves (the pump), are also part of some boiler-room scams. The victims see the stock quickly rising in value and assume what the caller is telling them is coming true. The caller insists the victim has to invest immediately or risk losing out on a windfall profit. When the stock reaches its likely highest point, the scammers sell their shares (the dump), the stock’s value plummets and the victim is left with little or nothing.

"If you become a victim of a boiler room operation, it can be tough to get out," says Investopedia. "If you agree to purchase a stock and it doesn’t perform as well as you thought it would, the brokers may try strongly to persuade you, or even bully you into not selling the stock. This is assuming that when you call and leave a message to speak to your broker, your calls are actually returned. Once these people have your money, they often have no desire to speak to you and might claim to be ‘in a meeting’ or ‘out of the office.’ "

An Australian website that lists an encyclopedia of scams says that when victims complain, the con artists pass them to a "cooler," who assures them they lost their money fair and square due to the risks associated with the stock exchange. "One boiler-room con artist managed to scam his victim out of $20,000," the website notes. "The victim sent a fax threatening to kill the con artist. The con artist rang him and not only managed to be forgiven but also separated the victim from a further $20,000. This is called reloading."

February’s police operation closed down 14 boiler rooms in Spain, two in the UK and one in Serbia, The Telegraph reported. "Detectives have so far identified more than 850 victims in the UK, with some losing up to half a million pounds. During their raids, police seized cars, including an Aston Martin and a Ferrari, more than half a million pounds in cash and luxury watches."

The scams, which were run by organized criminals, like to recruit young men, often students, to make the calls and work the victims. The lure for the students is the promise, often met, of huge commissions.

In The Wolf of Wall Street, DiCaprio, as Belfort, shows his acolytes how to reel in a mark as he sits at a desk in a grungy strip mall in Long Island, NY. "Good morning, Jordan Belfort with Investors’ Center in New York City. The reason I’m calling is that an extremely exciting investment opportunity crossed my desk today. Typically our firm recommends no more than five stocks per year: this is one of them. Aerotyne International is a cutting-edge tech firm out of the Midwest, awaiting imminent patent approval on a new generation of radar equipment."

In reality, The Guardian notes, "Aerotyne is a worthless, dilapidated garage in Dubuque, Iowa. But Belfort hooks the investor with "research" that indicates the US6¢-a-share stock could rise to a dollar, "or go much, much higher — your profit on a mere $3,000 investment would be upwards of $50,000. That’s right, you could pay off your mortgage.’ The investor falls for the spiel, parting with $4,000."

The FBI caught up with Belfort and he was indicted in 1998 for securities fraud and money laundering. He spent 22 months in prison and had to pay US$110.4 million in restitution.

The new wave of Belforts don’t just rely on cold calling. They buy lists of potential victims as easily as Belfort bought drugs, and they create websites that appear to be legitimate.

No matter what the look, however, the scam is basically the same as always: appeal to a victim’s need and desire for a quick and large profit and then turn up the temperature until the heat is impossible to resist.