Share Investment Scams
It has been described variously as the "biggest fraud threat to households" generating an estimated loss to investors of between £500m and £1bn in the last year alone. The true extent of the problem is difficult to gauge because, worst of all, many do not even know they are a victim of boiler room fraud.
Boiler room fraud is the name given to share investment scams where individuals posing as brokers, use high pressure marketing techniques to sell investors shares that, in due course, turn out to be worthless. The initial approach is usually over the telephone and victims are usually cold-called. The shares might be shares in real companies, but they are sold at above market price and usually turn out to have little or no realisable value, therefore preventing the investor from selling them on. As often as not, investors are sold shares in companies that do not even exist. The boiler rooms then often vanish, leaving the investor out of pocket.
Boiler rooms are often operated from abroad in an attempt to put themselves beyond the reach of the law. By way of example, the police estimate that there are approximately 400 boiler rooms operating in Spain alone, employing over 600 people. However, the problem is thought to be worldwide. For those involved, the rewards are rich. According to the FSA, the average individual loss is in the region of £20,000.
So what's being done to tackle this seemingly seismic problem? Not enough according to many. In a recent House of Commons debate (15th May 2008), the message was clear:
Nigel Evans, MP and Chairman of the all party identity fraud group, was pressing for the Financial Services Authority to do more and the police to be given more resources, more training and better guidance. He criticised the FSA as having made a "poor response" to the problem stating "the authority is supposed to be the UK regulator responsible for protecting consumers, including shareholders." So too, it appears the Treasury has placed responsibility firmly on the FSA's shoulders; in a written response to questions raised by Mr Evans, Kitty Ussher, Economic Secretary stated "The Treasury does not undertake consumer protection activity or raise awareness of boiler room frauds directly. The Financial Services Authority has a specific statutory objective to protect consumers, which includes advising and protecting investors against boiler room frauds."
According to the Treasury, "in the last 12 months, the FSA have taken part in 11 broadcast media appearances on the issue, including radio interviews and TV appearances... The FSA have also opened 250 boiler room enquiries, and the names of 215 boiler rooms firms have been added to their unauthorised firms list, an average of 18 per month. No estimate of cases of fraud involving boiler room operations in 2007 is available."
The FSA has gone on record saying: "Boiler rooms are not authorised by the FSA, and are based abroad outside our reach, so victims are not protected by the financial services compensation and complaints scheme. Our strongest tool is to make people aware of the scam."
In recent months, a multi-agency taskforce, co-ordinated by the City of London Police, has brought together key agencies such as the Serious Organised Crime Agency, the Serious Fraud Office and the FSA under the banner of "Operation Archway". This initiative is intended to provide a contact point for victims and a concentrated pool of expertise that turns national intelligence about boiler room fraudsters into action against them.
Earlier this year, two UK based firms, Chesteroak Limited and Bingen Investments Limited, incorporated in Gibraltar, were placed into compulsory liquidation by the High Court for assisting boiler rooms. The boiler rooms were unlawfully promoting and selling shares to UK investors and the FSA believes about 800 investors sent money for shares to the two companies.
The order was made as a result of winding up petitions presented to the High Court by the FSA, in which the FSA alleged that Chesteroak and Bingen were dealing in shares or arranging deals in shares without authorisation. Chesteroak and Bingen did not oppose the FSA's petitions.
The order followed on from interim injunctions the FSA obtained against Chesteroak and Bingen in January 2007 stopping them from continuing their involvement in assisting boiler room activities in the UK and freezing their assets and other assets under their control.
Jonathan Phelan, head of retail enforcement at the FSA, said: "Our action against these firms should serve as a warning to other UK companies and individuals who assist boiler rooms, that the FSA can and will take action to protect consumers. Where possible, the FSA will continue to protect investors. However, people should always be cautious when called out of the blue by anyone promoting or offering to sell shares. They should either hang up or at least check that the firm is authorised by the FSA."
With boiler room fraud now firmly on the political agenda, therefore, and more funding promised to tackle the problem, it is likely that we will see the FSA step up its efforts to investigate boiler room activity. At its recent enforcement conference "Credible Deterrence: changing behaviour through enforcement", Margaret Cole, Director of Enforcement made it clear that the FSA intended to increase focus on using its powers to bring criminal prosecutions. Although these comments were made more in the context of market abuse and insider dealing, it seems likely that a similar approach to boiler room activity will follow. This is not to say that every investigation will end up in a criminal prosecution; according to the Director, each case will continue to be decided on a case-by-case basis. However, we can expect to see a shift in emphasis away from settlement and civil sanctions as the number of prosecutions increase.
For those boiler room cases that are set to become the subject of a criminal prosecution, we await to see with interest under what offence they are charged and whether the FSA will take the lead or prosecute in conjunction with another prosecuting agency such as the SFO or Fraud Prosecution Service. Either way, the stage is set for the FSA to get tough and turn up the heat on those involved in boiler room fraud. Watch this space.