Boiler Room Sales
Attorneys Representing and Protecting Investors
State and Federal securities regulators, together with FINRA’s Department of Enforcement, have been instrumental in closing many of what may be characterized as boiler room operations. However, more instrumental in closing these firms has been their inability to pay or satisfy arbitration awards against them by their customers. As these firms are closing, or forced out of business by regulators or regulatory actions against their principals, some of which have been charged with criminal conduct in recent years, the brokers migrate or “cockroach” to a new firm, where the same conduct generally continues. Many of these firms, over the years, have had impressive sounding names like AS Goldman or Royal Hutton. However, do not be fooled. Most often these firms are thinly capitalized and are generally owned or controlled by individuals with a shady past and a history or association with rogue brokerage firms where they received their training. The federal securities laws and self-regulatory rules technically only require firms in some instances to maintain a net capital of as low as $5,000. SIPC insurance generally only covers custody of customer funds or securities. Fidelity bond coverage is usually minimal and only protects against actual theft. Neither cover investor fraud or sales practices claims.
Broker-dealers are not required to maintain errors and omissions insurance to satisfy customer claims. Even where sometimes such insurance exists the insurance company may disclaim coverage for a variety of reasons. Generally, customers defrauded by most boiler rooms, even if they act quickly, may soon find they have no likely source of recovery.
The Boiler Room Cold Call
Most boiler room cases begin with a “cold-call.” Someone you do not know calls you to sell you investments. Sometimes, customers get these calls because their name is on a “leads list,” or a customer list of some defunct brokerage firm where someone may have had an account that gets passed around from broker to broker as these brokers migrate from brokerage firm to brokerage firm.
Most often, the cold-caller, or broker may purport to be part of a major Wall Street investment banking firm, often located somewhere on Long Island, and the broker may claim that their firm has special investment information or investment research, or only offers its services to large institutions, but is doing you a big favor, because you are a savvy investor.
Generally, these calls start out as merely introductory. These calls most often, include touting the performance of past recommendations. Customers may be told which companies the firm is watching or recommending to its better customers, Recommendations, at least generally initial recommendations, are limited to generally credible large-cap, Fortune 500 type companies. However, once the account is opened, and the assets are gathered, these recommendations generally always involve, or devolve into selling the high brand name recognition securities to purchase some low priced, obscure house stock, off-shore gambling venture, or some start-up pharmaceutical company. Whatever the story, there is a story. Whatever the stock, generally, these firms and their brokers as part of an underwriting, warrant conversion, unrelated large seller, proprietary inventory, or simply as a result of their market making activities, may have a large undisclosed financial interest in these securities, and a large financial interest in their sale to customers often as principal with large undisclosed mark-ups and trading profits.
Generally, these investments turn out to be worthless, but generally, before they become worthless, the broker will trade low priced securities in your account, often without pre-authorization, until your account is worthless.
Many of these same brokers, many of whom have been associated with a laundry list of expelled or disciplined firms, migrate to new firms, some of the larger independent firms, where they are given their own offices, and made to pay their own expenses, including the cost of insurance, and to avoid the scrutiny associated with the sale of low-priced securities, but using the same deceptive sales techniques, sell variable annuities or thinly traded fixed income securities, with large commissions, mark-ups or other often non-disclosed, or inadequately, disclosed fees.