Boiler room (business)
Encyclopedia
In business
, the term boiler room refers to a busy centre of activity, often selling questionable goods by telephone
. It typically refers to a room where salesmen work using unfair, dishonest sales tactics, sometimes selling penny stock
or committing outright stock fraud. The term carries a negative connotation, and is often used to imply high-pressure sales tactics and, sometimes, poor working conditions.
they are promoting. The managers of the boiler room usually have close ties to the same owners of the company whose stock is being promoted. After the sales force of the boiler room sells their clients on the idea of the IPO, they are not allowed to sell the shares that the customer invested. This is because there is no real "market" for the shares, so any shares sold before buyers are attracted would create a large loss in the price of the stock, due to it being thinly traded with no public support.
Once the insider investors are in place, a boiler room promotes (via telephone calls to brokerage clients or spam email) these thinly traded stocks where there is no actual market. The brokers of the boiler room actually "create" a market by attracting buyers, whose demand
for the stock drives up the price; This gives the owners of the company enough volume to sell their shares at a profit, a form of pump and dump
operation where the original investors profit at the expense of the investors taken in by the boiler room operation.
The U.S. Securities and Exchange Commission paints the following picture:
Some traits of a boiler room include presenting only good news about the stock to be sold, and discouraging outside research by customers or brokers working there.
The term is likely to have originated from the cheap, hastily arranged office space used by such firms, often just a few desks in the basement or utility room of an existing office building.
A fictional "boiler room" brokerage firm was dramatized in the 2000 film Boiler Room
, and the play and film Glengarry Glen Ross
show a similar boiler room operation selling real estate
.
Many consider boiler rooms a fictional relic of a bygone era. Although many disappeared in the 90s following the burst of the "dot-com bubble
", many boiler rooms still operate across the world. Advances in telecommunication technology mean that a company can viably operate in one country while calling prospective investors in another. The advantage of such an operation is that a company can operate without fear of prosecution from the investor's native legal system. For example, many boiler rooms contacting prospective investors in the UK will operate from Spanish cities such as Barcelona and Valencia.
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
, the term boiler room refers to a busy centre of activity, often selling questionable goods by telephone
Telephone
The telephone , colloquially referred to as a phone, is a telecommunications device that transmits and receives sounds, usually the human voice. Telephones are a point-to-point communication system whose most basic function is to allow two people separated by large distances to talk to each other...
. It typically refers to a room where salesmen work using unfair, dishonest sales tactics, sometimes selling penny stock
Penny stock
In the United States, penny stocks are common shares of small public companies that trade at less than $1.00. In some countries, similar shares of stock are known as cent stocks.-Concerns for investors:...
or committing outright stock fraud. The term carries a negative connotation, and is often used to imply high-pressure sales tactics and, sometimes, poor working conditions.
Business structure
A boiler room usually has an undisclosed relationship with the company being promoted or undisclosed profit from the sale of the house stockHouse stock
The term house stock usually refers to a stock that the management of a brokerage firm has instructed all brokers working for it to promote. The brokerage firm or its owners might be receiving an undisclosed profit from the sale of the house stock....
they are promoting. The managers of the boiler room usually have close ties to the same owners of the company whose stock is being promoted. After the sales force of the boiler room sells their clients on the idea of the IPO, they are not allowed to sell the shares that the customer invested. This is because there is no real "market" for the shares, so any shares sold before buyers are attracted would create a large loss in the price of the stock, due to it being thinly traded with no public support.
Once the insider investors are in place, a boiler room promotes (via telephone calls to brokerage clients or spam email) these thinly traded stocks where there is no actual market. The brokers of the boiler room actually "create" a market by attracting buyers, whose demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
for the stock drives up the price; This gives the owners of the company enough volume to sell their shares at a profit, a form of pump and dump
Pump and dump
"Pump and dump" is a form of microcap stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price....
operation where the original investors profit at the expense of the investors taken in by the boiler room operation.
The U.S. Securities and Exchange Commission paints the following picture:
Some traits of a boiler room include presenting only good news about the stock to be sold, and discouraging outside research by customers or brokers working there.
The term is likely to have originated from the cheap, hastily arranged office space used by such firms, often just a few desks in the basement or utility room of an existing office building.
A fictional "boiler room" brokerage firm was dramatized in the 2000 film Boiler Room
Boiler Room (film)
Boiler Room is a 2000 American drama film written and directed by Ben Younger, and starring Giovanni Ribisi, Vin Diesel, Nia Long, Ben Affleck, Nicky Katt, Scott Caan, Tom Everett Scott, Ron Rifkin and Jamie Kennedy....
, and the play and film Glengarry Glen Ross
Glengarry Glen Ross
Glengarry Glen Ross is a 1984 play written by David Mamet. The play shows parts of two days in the lives of four desperate Chicago real estate agents who are prepared to engage in any number of unethical, illegal acts—from lies and flattery to bribery, threats, intimidation and burglary—to sell...
show a similar boiler room operation selling real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
.
Many consider boiler rooms a fictional relic of a bygone era. Although many disappeared in the 90s following the burst of the "dot-com bubble
Dot-com bubble
The dot-com bubble was a speculative bubble covering roughly 1995–2000 during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the more...
", many boiler rooms still operate across the world. Advances in telecommunication technology mean that a company can viably operate in one country while calling prospective investors in another. The advantage of such an operation is that a company can operate without fear of prosecution from the investor's native legal system. For example, many boiler rooms contacting prospective investors in the UK will operate from Spanish cities such as Barcelona and Valencia.
See also
- Bucket shopBucket shop (stock market)As defined by the U.S. Supreme Court a Bucket shop is "[a]n establishment, nominally for the transaction of a stock exchange business, or business of similar character, but really for the registration of bets, or wagers, usually for small amounts, on the rise or fall of the prices of stocks, grain,...
- Forex scamForex scamForeign exchange fraud is any trading scheme used to defraud traders by convincing them that they can expect to gain a high profit by trading in the foreign exchange market. Currency trading "has become the fraud du jour" as of early 2008, according to Michael Dunn of the U.S...
- Glengarry Glen RossGlengarry Glen RossGlengarry Glen Ross is a 1984 play written by David Mamet. The play shows parts of two days in the lives of four desperate Chicago real estate agents who are prepared to engage in any number of unethical, illegal acts—from lies and flattery to bribery, threats, intimidation and burglary—to sell...
- House stockHouse stockThe term house stock usually refers to a stock that the management of a brokerage firm has instructed all brokers working for it to promote. The brokerage firm or its owners might be receiving an undisclosed profit from the sale of the house stock....
- Microcap stock fraudMicrocap stock fraudMicrocap stock fraud is a form of securities fraud involving stocks of "microcap" companies, generally defined in the United States as those with a market capitalization of under $250 million. Its prevalence has been estimated to run into the billions of dollars a year...
- Stock dilutionStock dilutionStock dilution is a general term that results from the issue of additional common shares by a company. This increase in common shares of a stock can result from a secondary market offering, employees exercising stock options, or by conversion of convertible bonds, preferred shares or warrants into...
- Pump and dumpPump and dump"Pump and dump" is a form of microcap stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price....
- Boiler Room (film)Boiler Room (film)Boiler Room is a 2000 American drama film written and directed by Ben Younger, and starring Giovanni Ribisi, Vin Diesel, Nia Long, Ben Affleck, Nicky Katt, Scott Caan, Tom Everett Scott, Ron Rifkin and Jamie Kennedy....
- Boiler Room GirlsBoiler Room GirlsThe "Boiler Room Girls" were the female members of Senator Robert F. Kennedy's 1968 presidential campaign staff. While an American political campaign often makes calls from a phone bank that has much in common with a marketing boiler room, this group actually had desks in space designed as a...
- GrouponGrouponGroupon is a deal-of-the-day website that features discounted gift certificates usable at local or national companies. Groupon was launched in November 2008, the first market for Groupon was Chicago, followed soon thereafter by Boston, New York City, and Toronto...
External links
- SECUnited States Securities and Exchange CommissionThe U.S. Securities and Exchange Commission is a federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets in the United States...
– "Portrait of a Boiler Room" - FSAFinancial Services AuthorityThe Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
– "Share scams" - The Motley Fool consumer website – Boiler Room FAQ
- This is Money – "UK court halts boiler room scams"
- Sky NewsSky NewsSky News is a 24-hour British and international satellite television news broadcaster with an emphasis on UK and international news stories.The service places emphasis on rolling news, including the latest breaking news. Sky News also hosts localised versions of the channel in Australia and in New...
– "Anatomy Of A Boiler Room Bust" – Profiting from shorting the inflated prices of equities ramped by boiler rooms - The GuardianThe GuardianThe Guardian, formerly known as The Manchester Guardian , is a British national daily newspaper in the Berliner format...
- "Lifting the lid on 'boiler room' scams" - BBCBBCThe British Broadcasting Corporation is a British public service broadcaster. Its headquarters is at Broadcasting House in the City of Westminster, London. It is the largest broadcaster in the world, with about 23,000 staff...
- "Boiler room scams"