LeoGlossary: Boiler Room
A place, usually an outbound call center, where people push speculative investments. Often these are fraudulent offerings. The callers tend to be high pressure salespeople who operate from scripts designed to get funds out of individuals. They also use strong arm tactics to push them into buying.
In many places, the practice is illegal. Where it is not, ethical violations are usually in play. Securities are often presented only stressing the positive, totally ignoring the downside risk.
These are often used by unlicensed dealers to push "business investments". These are not securities, with the contracts drawn up in a way to avoid crossing that line. The risk is much greater under these circumstances since the offering is not regulated in any manner. Like the securities being offered, these are often frauds.
The operations are often supplemented with informercials and other advertisements meant to generate leads.
Structure
There is often a relationship between the boiler room and the entity being promoted. This is obviously no disclosed. Unknowing buyers are actually aiding the insiders who are in place long before the operation starts.
A common tactic is a pump and dump scheme. This is often done by licensed brokers. They are legally trading securities, just like any other brokerage firm. The main difference is the fact that what is being promoted to the buying public is held by those behind the fraud. As the price escalates due to the selling, the insiders of the scheme dump their stock. Once they remove themselves from the equation, the price usually collapses as there was no value to begin with.
The main tactic of the boiler room is to generate excitement. Often, the hype is framed as some unreleased announcement of some type of breakthrough for the company. The promoters prey upon the greed of people by claiming the stock is going to see large appreciation once the news gets out. Of course, to take advantage, the individual has to get involved.
Boiler rooms, when dealing in securities, often focus upon penny stocks although private placements are used. In the end, much of this equates to stock fraud.
Etymology
The idea stems from being in a small office, often in a basement, that contains few desks. Being in close quarters, the "heat" is generated through the pressure to close deals.
In the 1970s, the political parties used boiler rooms to contact potential voters regarding the elections.
General:
There was a movie by the same name made in 2000.
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