Unwary investors lose billions of dollars a year to investment fraud promoted over the telephone. Self-employment scams and high-tech schemes are among investments most recently heavily promoted by phone. This tip sheet is designed to provide investors with self-defense tactics to fight off the promotion of investment scams by "boiler rooms," the high-pressure phone sales operations from which sales people call to promote abusive and fraudulent deals.
How to Spot a "Boiler Room" Scam:
- High-pressure sales tactics. Salesmen may make repeated calls and even become abusive, questioning, for example, the intelligence of anyone who would pass up such a "sure thing."
- Outrageous promises of extraordinarily high profit at little or no risk. The rule is: The higher the return, the higher the risk. Listen for salesmen who claim it is possible to make extremely high (15, 20 or 30 percent) or even "guaranteed" profits without any risk of loss. Most legitimate firms will provide written materials clearly disclosing the potential for loss in an investment, as well as its short- and long-term tax implications.
- A demand for an immediate decision. Boiler room salesmen want fast action before you have a chance to develop second thoughts or consult with a professional for advice. As a result, many deals will be "gone tomorrow," "sold out today" or have "just one of two remaining openings."
- A reluctance to provide information about the sales firm or the investment. If a boiler room is uncovered, it may be subject to state or federal action. Therefore, some phone scam operators are not forthcoming when asked information about the sales operation and investment.
- Mumbo-jumbo about "inside information" or "secret" technology. In order to close a sale, the voice on the other end of the phone may tell you that this is a "sure thing." A common claim is that celebrities, major corporations or banks will be investing shortly. Or the salesman may claim that a new geological report is coming out shortly. In other cases, the claim may be that the company is using some sort of hush-hush "black box" technology that makes it possible to process gold at a fraction of the cost paid by other firms.
- Delayed delivery of the product and/or profits. This is a classic "red flag" of an investment scam. If you don't have your investment in hand or under your control in some other location, you have nothing for your money. Beware of promises involving delays of more than a few weeks for delivery of your investment.
- Unusual arrangements for collecting funds from investors. Some con artists try to avoid mail fraud charges by using overnight courier services (Federal Express or Purolator, for example). Other phone scam operations go even further-sending a courier or cab to pick up the check. No matter what unusual collection method is used, the purpose is the same: Don't give customers enough time to back out of sending money.
What to Do if You Are Contacted by a Phone Scammer:
- When hounded by high-pressure tactics, hang up.
- Be wary of advertisements in newspapers and other publications which give little or no information other than a toll-free telephone number.
- Do not make an immediate decision. Get written information first about the firm, the sales person, and the investment.
- Do not part with your money until you seek out a professional (lawyer, accountant or broker) for advice.
- Avoid investments you do not understand. The greater your degree of ignorance, the greater is the chance that you will be swindled.
- Do not give out your credit card number over the phone to strangers.
- Contact the Indiana Securities Division at our toll-free number, 1-800-223-8791, to find out if the boiler room and sales person are registered to do business in Indiana. If an investment is being promoted, the firm and agent must be registered to sell into Indiana.
- If you suspect that a phone scammer has contacted you, notify the Indiana Securities Division of the name of the firm and the salesman. Prompt action on your part may protect less wary investors.