Hello can I rip you off?

Published:
 29 december 2006 Investors Chronicle: `How I cheated Investors` Cover story
 11 january 2007 Times, Times 2 supplement "Hello, can I rip you off?" Lead story

Copyright: Financial Times Business Group, London UK

Selling shares from a Buenos Aires Boiler Room

The offer seems inviting. You’re tipped off that shares, set to rise by 80 per cent, are available via a select German-based company. You buy, and then find they are genuine but worthless. Pieter De Vries spent a month undercover in the Buenos Aires ‘boiler room’ from where experienced British investors are routinely conned
With an alias and the following opening lines, I’ve been approaching thousands of people in the UK during the past month to try to sell them shares in an American oil company. “Hello,” I’d say, “this is Ryan Jansen calling from XXXX Capital Management, the research and advisory house, based here in Frankfurt. You spoke to a colleague earlier in the year about your investments in the stock market . . .”
The calls actually come from a small office in Buenos Aires, Argentina. Inside, there are seven second-hand school desks, with a mix of worn-out chairs. Above the desks, cards are mounted on the walls. One agent encourages himself with a paper sheet that states: “You are John Connally. You’re a broker, be a c***!!!” Some agents use headsets, others normal telephones. The noise of the agents, and of the ever-present Bloomberg Radio, can be almost deafening.
An operation like this is known as a “boiler room”, from where unauthorised sales agents persuade people to buy shares. I ran into it through an advertisement in the Buenos Aires Herald. The names of those targeted come from lists bought by the people who run the operation. Often, they are from shareholder lists of specific companies. So if you own shares in publicly listed companies, it’s quite likely you will receive a call.

Opening call

The Buenos Aires Boiler Room

The sales process follows a fixed pattern and for every phase there are scripts. You are “opened” with an introduction to the company: a classy-sounding name, based in Frankfurt. It has a German address, phone and fax number and an internet site, created to make the company appear trustworthy. The website is hosted in Malaysia. It looks professional, but it’s quite basic and gives only very general information. No names of staff or management appear, and the suffix Inc is certainly not German.
The opening pitch claims that the company works for major corporate investors. Names dropped include Deutsche Bank, Credit Suisse and Barclays. “We compile reports on potential investments for these guys, sourcing the companies that are going to outperform the market and work out what level of return is to be expected.” Then the target is told: “We hold the right to share this information with private clients, thus bridging the gap between the professionals and the smaller private investor such as yourself.” One of the selling points is that “we charge our private clients at the back end, out of the actual profit made”.
It’s important that the “brokers” get information about what investment level the client is accustomed to. The conversation continues with chit-chat about your portfolio and investment strategy, leading to: “How much do you put into a position when you like what you see?” This is used to judge how many shares they can offer you. Some are reluctant to give this data, but many give all the information. Then, it’s explained that, at this point, there are no recommendations but the company will keep them up to date with developments.
Opening is time-consuming, hours of dialling numbers and waiting until a fish finally bites. From my experience, around one person in 25 won’t immediately hang up on you and will be receptive to a conversation.

The Friday call

The following call is brief and always takes place on a Friday. “I’m sweeping up before the weekend, did you have a chance to take a look at the website? Any questions, any thoughts?” This often provides an opportunity to get a bit more informal, for instance by inquiring about plans for the weekend. Building a trusting relationship is key. The call is closed with the news that there aren’t any recommendations but that something might materialise within the next week.

Warm-up call

And, surprise, surprise, the following Tuesday you receive a call: “We are going into a meeting tomorrow. It looks like we’re going to be briefed on a position. It’s yet to be decided if we’re going to use it as a new recommendation but, if this is the case, I’d like to have the opportunity to run it by you.” Many say that they’re not planning to invest. It’s up to the sales agent to hold firm. “I just want to run it by you, it’ll only take ten minutes of your time. If you still decide that you’re not interested, that’s your prerogative, but at least you can make an informed decision.” Most then reluctantly agree.

The sale

On Thursday, as agreed, you are called. What follows is a very comprehensive briefing. In my case it was a tiny American oil company. You’re told that it trades on the Nasdaq and that you can track it by entering its ticker symbol on www.nasdaq.com or any financial website, such as Bloomberg or Reuters. The pitch starts with an analysis of the crude oil market. This comes to the conclusion that high oil prices are here to stay and that oil producers in the US are well positioned to realise record levels of growth. It has just unearthed 700,000 barrels of oil — and this follows the discovery of 4.7 billion cubic feet of natural gas, just 50 miles off the Texas coast. The markets are yet to be made aware of this and, consequently, the stock’s value is a bargain. You are led to believe that the share price will rise up to 30 per cent in a five-week period and increase up to 80 per cent in 18 months, when the time comes to sell out.
At this stage, you’re being pressured enormously to buy at least something, if only to welcome you on-board as a new client and to show you some performance. “It’s a results business and we like to be judged accordingly.” Not investing is not an option. One of the few rules in the boiler room is: never give up and don’t end the conversation until they hang up on you.
The stock will initially grow substantially. On financial websites, you can see that this oil company traded for less than $2 in April, while (at the time of writing) it trades at $7.75. Clients who bought this share saw growth of more than 300 per cent in some cases. These clients are obviously approached again with other proposals. In the weeks that these clients are being “loaded”, the sales volume at the “brokerage” is more than $500,000, generated by only three sales agents.
The new shares sold to existing clients included an online dating company and a development company about to produce an upmarket tourist complex in Belize.

Compliance

If you have agreed to buy, a magic moment follows in the boiler room. Everybody stops phoning and Bloomberg Radio is turned off. Now it is time for a different role-play. One agent assumes the part of the “compliance officer” and calls you in an atmosphere of absolute silence. Everything is being verified and the further proceedings are explained.
After the call, there’s an exuberant atmosphere and the agent is congratulated. The money is not yet in, though. First the investor receives a contract by courier, after which he or she still has three days to enact the trade by wire, transferring the money to the US — time in which they can come to their senses.
Around 80 per cent of people transfer the money. If you’re one of the other 20 per cent, you will be pressurised to follow through. You’re told that the compliance call has been recorded and has legal value. The firm threatens you with legal action and you’re even told that you could be “banned from the stock market”. If you stick to your decision and don’t pay, you’ll never hear from the company again.

The shares

The shares being touted are presented as trading on Nasdaq. And, at first sight, this appears to be true because, as well as on http://www.nasdaq.com/, you can track down the shares on any major financial website.

The shares are real, but they’re not being traded on any regulated market and the price doesn’t necessarily represent their real value. A report by the New York State Attorney-General on stock fraud explains what’s going on: the businesses are so-called “micro-caps”, relatively small enterprises that give out over-the-counter (OTC) securities to raise capital.
The stock is controlled by one or a small number of brokers who sell them over the telephone and many use a number of illegitimate techniques to inflate the stock. Once bought, the stock is impossible to get rid of: no one will buy the shares and, of course, the broker that sold you them, if it’s still operating, will not respond to your request to sell them.

The victims

In general, these are decent, polite elderly men (and sometimes women) who listen to you without interrupting. They can’t imagine it’s a big lie. They are under the impression that you are an experienced senior adviser working for a sophisticated pan-European research house. They’re very vulnerable to the arsenal of arguments fired at them and your persistence.
At one point, a friendly man told me that he was sorry he wasn’t going to buy because he just wasn’t in a position to do so. He assured me that the next time he was planning to invest, he would contact me, because I had put in so much effort. Obviously, most of them are naive, badly informed and trusting. But more experienced investors, who think they know what’s going on out there, can also be conned.
The Financial Services Authority (FSA) has come to the conclusion that the typical victim of an investment scam is a middle-aged professional male with considerable investment experience. One of my clients appeared to know the ins and outs of the stock market quite well. He realised what was going on only at the very last stage, after he had asked me if these were OTC securities and I — at that time, having no clue what he was talking about — said yes. After which he requested not to be contacted again. There was someone who had second thoughts after the deal was closed. He consult his financial adviser who, of course, warned him not to pursue the transaction. Despite these warnings, after a considerable amount of pressure had been applied, he still decided to transfer the money because he was “a man of his word”.
There’s little reliable information about exactly how many people are being conned by these sorts of operations, but the FSA says its helpline receives approximately a hundred calls each month. It has a list on its website with hundreds of known, unauthorised overseas companies targeting UK investors. But hundreds more aren’t on the list and, if they do ever appear, within a week they change their name — often within the week. A survey the FSA conducted among complainants concluded that the average loss was £20,000 — some were more than £100,000. For these victims, there’s no hope of ever retrieving their money. The fake company doesn’t respond or doesn’t even exist any more — their money will probably be in an untraceable offshore bank account.

I worked in this boiler room for four weeks. I didn’t conclude a deal with any client. If I had, I would have called the victims afterwards under my own name to warn them not to transfer the money.

Frame: THE SALESPEOPLE

Looking for fresh talent

The boiler room in Buenos Aires has been operating for about nine months. The staff consists of four agents who work on a commission basis of 10-15 per cent. There is a constant search for new “talent”, but this is difficult to find. Many newcomers disappear after the first week, when they find out that they have to put in a lot of effort before they start making money. Their training programme consists of learning the scripts and listening to the experienced agents for a couple of days. Then they start calling people and overcome their nerves by learning on the job. None has experience in the financial markets. Their knowledge is based on the scripts and a limited set of arguments, often mounted on the wall.
The guy who runs the show is a young Brit. He’s the most experienced and talented seller. Apparently, he ran into a boiler-room operation in Spain and discovered that he was good at it. He decided to start his own operation in Buenos Aires, where the authorities are neither equipped nor interested in investigating and prosecuting this kind of small illegal enterprise, aimed overseas.
When he’s on the phone, he undergoes a change of character. His expression and posture changes and he truly believes what he’s saying. This is, according to him, the trick. He encourages his people to create a resumé for their characters. His own CV states that he worked for six years at Cazenove in London, until he was headhunted by this firm.
After hours, I asked my colleagues whether they found it difficult conning people. The reactions were unanimous. Although aware that what they do isn’t legal, they don’t see themselves as criminals. They consider it role-playing and are reluctant to think of the damage they do. Objections are brushed aside with the argument that these are people with a lot of money, who have already invested in the stock market. They believe the “victims” know that they run the risk, and so are prepared to take the gamble.

WHAT TO DO WHEN YOU’RE CALLED

Check if the company is authorised in the UK. Call the Financial Services Authority helpline, 0845 6061234; http://www.fsa.gov.uk/.

· Is the company a member of a trade body? If based overseas, check if it is authorised by a reputable regulator, as that will be responsible for investigating. If not, the only recourse is legal action.

· Be suspicious of uninvited calls, especially if they offer mouthwatering returns.

· Give yourself time to cool off before making financial decisions.

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