Boiler rooms: Hollywood glitz or high-pressured scam?

BOILER ROOMS: HOLLYWOOD GLITZ OR HIGH-PRESSURED SCAM?

Sounds obvious but if a stranger rings you out of the blue and tries to sell you shares in companies you've probably never even heard of - TAKE CARE! They may be ringing from a boiler room - a company which uses hard-sell tactics to persuade you to buy shares. If they end up persuading you to buy, they'll be the ones laughing all the way to the bank. And you may be left with potentially worthless shares and no rights to complain or claim compensation from the UK authorities.

THE HEAT RISES Just as actor Michael Douglas exposed the corporate greed of 1980's Wall Street, the recent launch of Hollywood film Boiler Room' reveals the high-pressured but profitable world of the boiler room. A world where young men get rich quick by cold calling potential clients and pressuring them to buy shares in often unknown companies. As the "hero" Seth and his fellow stock jocks manipulate their way to their first million with commission piling up all around, you may think the high-pressured world of the boiler room would never take off in the UK. Were a nation of cautious investors after all arent we? And wouldnt they be closed down immediately by the regulator?

Well, yes they would if we found they were operating from within the UK. Firms running this kind of business would have to apply for a licence and abide by rules designed for your protection. BUT WATCH OUT! These rules are not identical abroad. Boiler rooms based overseas are able to communicate with anyone anywhere in the world and could be targeting UK investors.

THE HOOK The first time you hear from such firms could be by post or e-mail, or they might advertise their services over the internet. They may offer you a free research report into a company in which you hold shares, or a free gift or a discount on their dealing charges.

The scenario may follow this pattern. Youll probably be an investor in smaller companies (often called penny shares). Therefore, your name will have appeared on the share register of the company you've invested in - which anyone can get hold of, including the boiler rooms. Then surprise surprise, youll receive a mailshot making you a great free offer. Sign on the dotted line and youll receive a free, independent research report outlining future prospects for the company.

"Nothing to lose" you think. "And it's free". So you sign on the dotted line and send your response in the freepost envelope but dont worry, it must be OK because its got a UK address and so if anything goes wrong, you'll be able to complain.

What you havent realised is:

• By signing on the dotted line, you have probably agreed to be contacted by the firm in the future. This was probably written in the small print of the mailshot.
• The UK freepost address on the return envelope may simply be a forwarding address to an overseas address.

WHAT HAPPENS NEXT? Obvious isnt it? Youll start to get flooded with calls offering you a great deal on shares, often in smaller companies you may not have heard of or possibly other investments such as futures, options or foreign exchange. The firm's salesforce will probably sweeten, cajole, flatter, bully and even sometimes threaten you to take up their offer. Don't forget, they probably make a commission on every sale.

ALARM BELLS We cant tell you what you should or shouldnt do. But if you receive a mailshot, a cold call or something similar:

• Always check whether the company is authorised in the UK. Ring the -FSA Consumer Helpline to find out. If it isnt, take care. You won't have the right to complain or seek a penny in compensation from the UK authorities if things go wrong.
• If it's not authorised, it could mean that the company is based abroad. Look carefully for the address. The majority of firms operating from abroad are perfectly respectable - but what if this one isn't? Even if the authorities overseas have a compensation scheme, it could be difficult to pursue a claim.
• Read the small print if you had, you would probably have seen that the company are within their rights to call you once youd signed on the dotted line. And even if you think youre immune from such high-pressured selling tactics, youd be surprised at just how many people give in - simply to get rid of the caller.
• If you do decide to go ahead and buy the shares, at least check the current price in the financial press. These firms may be acting as bucket shops, buying in shares from other brokers. If they do so, you may not pay the market price for the share. Even though they will be trying to get you to make a decision quickly, still try to find time to do your own research before buying - look on the companys website if they have one, get hold of the annual report and read the financial press.
• If you decide to go ahead, be aware that it may be difficult to get evidence or confirmation of what shares you hold from the firm - and it may be even more difficult to sell them when you want to.