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Boiler room (business) In business, the term boiler room refers to
an outbound call centre selling questionable investments by telephone. It typically refers
to a room where salesmen work using unfair, dishonest sales tactics, sometimes selling
penny stocks, private placements 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 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 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. Etymology
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. In the early 1970s (and possibly earlier),
boiler room was a term used by political parties for a room with many telephones used to call
prospective voters. The name is inspired by an analogy between the many telephone lines
leading out of the room and the many pipes leading out of a real boiler room.
Modern boiler rooms Although many disappeared in the 1990s following
the burst of the "dot-com bubble", many boiler rooms still operate across the world. Reductions
in telecommunication costs 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 operate from Spanish cities such
as Barcelona and Valencia. With the advent of the internet and the ability
to create web sites easily without any regulatory involvement, as well as the ability to operate
from other jurisdictions, boiler rooms have continued to operate into the 21st century.
It is easy for scammers to set up a web site in one country, operate from another country
and target victims in a third country, hiding their identity and making it difficult to
trace them. Financial regulation varies significantly from country to country, and some countries
deliberately promote low regulatory environments in order to attract financial business. This
makes it easy for boiler rooms to use this to their advantage. Financial Regulatory Authorities
in each country have significant difficulty enforcing rules on scammers in other countries.
With low financial literacy by investors or victims (particularly in the increasingly
complex ways that global financial markets operate), and without better coordination
between financial regulators in different countries, boiler rooms continue to operate.
In popular culture 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. The 2013 film, The Wolf of Wall Street,
starring Leonardo DiCaprio, also involves a boiler-room investment business.