Boiler Room - Fraudulent Brokerage Firms

Boiler Room Definition


A boiler room is an operation often associated with fraudulent activities, where salespeople cold call high net worth individuals in hopes of getting them to invest in thinly traded stocks.  The phone reps have very little information on the securities and focus more on selling the client on the idea of making fast money.  The name boiler room originated from the fact it is a high-pressure environment where phone reps are expected to close no matter what.  While boiler rooms sound like a small back alley operation, the National Association of Securities Dealers estimates that over 10 billion dollars is lost every year as a result of boiler rooms.

How Boiler Rooms Work

Sales Force

Boiler rooms prey on young ambitious sales people to back their operations.  These salespeople are often young twenty somethings looking to get rich. 

Boiler Room Sales Environment

Phone reps are expected to make hundred of calls per day.  If a sales rep is unable to keep up with the required call volume and/or sales quota, the person is let go almost immediately.  This sort of competition amongst reps breads the cut throat environment, which ultimately leads to people neglecting their moral judgment for financial gains. 

Selling The Mark

The phone rep focuses on getting the investor in as many shares as possible, in order to increase the commissions to the firm.  The executives of the boiler rooms will stress to the phone reps the importance of simply selling the potential investor.  They should not waste time discussing the financials or core competency of the company.  Simply tell the potential investor that the stock is a "sure bet" and "guaranteed money".  The phone reps will then advise investors to purchase "micro cap" stocks due to the increased volatility and the fact the stocks are cheaper.  There micro cap stocks are selected by the boiler room executives and are called the "house stocks". 

Reporting a Boiler Room


If you suspect that you have been a victim of a boiler room, contact the National Association of Securities Dealer to report your claim.

Boiler Room

Tim Ord
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