1. The Return of the Boiler Room

    December 14, 2012 | by Wynne James | Category: Uncategorized | Comments (0)

    The movie “Boiler Room” portrayed a company illegally selling stocks to unsuspecting investors over the telephone. The company obtained lists of people throughout the country, and the company’s brokers made “cold calls” to prospects and told promising but untrue stories about the stocks they were pushing. This method of selling, known as “general solicitation”, has generally been illegal, and lawsuits against boiler room operators have usually relied on this prohibition. This is because the use of general solicitation has been relatively easy to prove.

    The boiler room is back. Only this time, general solicitation is legal. Congress has recently passed the JOBS Act. The illegal operators will be subject to obligations to disclose to prospects all material facts about the investment, which implies a requisite degree of honesty, but who are you kidding?

    Actually, there are many features of the JOBS Act that have little to do with general solicitation and provide meaningful incentives for business development. But the potential for fraud by using general solicitation is considerable.

    Over the last twelve years, I have, as a lawyer, represented hundreds of investors in fraudulent offerings of securities. I’ve seen investment scams, for example, in oil and gas, water rights, technologies and real estate. I haven’t seen investments in kudzu, but I know they must be out there. I’ve seen the perpetrators of these scams go to jail and learned that investor monies often end up in banks in Panama or the Bahamas. Most tragically, I know hard-working, honest people who are gullible and got a little greedy lose most of their savings. As a result of their losses, some investors get divorced, lose their homes or declare bankruptcy.

    How do boiler rooms work? Generally, a fraudulent operator will hire people to sell its securities and give them some minimum training in the business and sales (many of the salesmen were formerly in the used car business). The salesmen use any sales tactic they think will work, but the usually favored technique is to establish some rapport with a prospect on some area of interest, such as hunting, sports or grandchildren. A favorite tactic that is very successful and often employed is religion.

    Do these scams really work? Don’t most people just hang up? The answer to both questions is yes. But, assume that an illegal securities operator wants to raise $20,000 from each of fifty people, or $1,000,000. A salesman can usually make about 250 calls a day. If the operator has ten salesmen, then the number of placed calls can be 12,500 per week or 50,000 per month. If all you need is fifty investors and you make 50,000 calls per month, then you only require a success rate of one gullible person per 1000 calls, or one-tenth of one percent. Running a successful boiler room, then, is not much more than the gift of gab and the laws of probability.

    Making general solicitation legal means that people will need more education. What then, should you do if you receive a call from some charming and engaging person who wants to sell you a security in a company you’ve never heard of?

    The easiest and safest thing is to never buy an investment over the phone or the internet (not including “crowdfunding”, which may have more regulatory safeguards). If you’re really interested in the investment, try locating the company and its principals on the Internet and see a lawyer who has experience in securities. Ask the securities regulators in your state (in Tennessee, it’s the Tennessee Securities Division) if they’ve got knowledge of the operators. Many investors never ask anyone for advice. But perhaps the best advice is in the comment of a retired Baptist minister who lost almost all of his savings: “I should never have kept talking to that guy”.

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