Readers lose thousands to ‘boiler rooms’ Firms are targeting wealthy investors by selling them shares that soon turn out to be worthless. By Jessica Bown
THE Sunday Times Money desk has been inundated with letters from readers who have lost up to £100,000 after investing through boiler rooms — so-called because of their hard-sell tactics and high-pressure sales targets.
Boiler rooms — the theme of a film of that name six years ago — try to persuade investors to buy shares, but there are also scams involving options, futures and currencies. Some offer shares that promise huge returns but turn out to be worthless; others sell shares in companies that do not even exist.
One similarity, however, is that they are generally extremely professional outfits that target seasoned investors, whose contact details are often obtained from shareholder registers (see below).
Boiler rooms originated in the US, but Money readers also report being targeted by firms claiming to be based in continental Europe — or Britain.
One investor, who does not want to be named for fear of reprisals from the European boiler rooms he dealt with, has seen the value of his investments plunge by 90% over the past two years, leaving him with a total loss of about £100,000.
The Financial Services Association (FSA) recommends you call its helpline (0845 606 1234) to check firms are authorised in Britain before buying shares, as only then can you approach the Financial Ombudsman Service (FOS) if you feel you have been misled. It also means that any losses resulting from the broker going bust will be covered by the Financial Services Compensation Scheme.
However, investors who have lost out after buying US “Regulation S” shares through an FSA-authorised company, Pacific Continental, are sceptical about the watchdog’s advice.
Regulation S allows unlisted US companies to raise funds by selling shares to overseas investors without listing on the stock market. Shares of this kind carry high risk, and investors are likely to find it difficult to check their status and liquidity. There is therefore a good chance you could lose part — or all — of the money you invest.
The shares are typically issued at a discount, although only a small amount of this is generally passed on to investors — and they cannot be sold back into the US for at least a year.
Even then, you must pay for a US lawyer to remove the marked restriction from your share certificate, and there is no guarantee that you will be able to trade them on.
Eleanor Hughes of the FSA said: “The legal fees for doing this might add up to more than your shares are worth, so check their value before forking out.”
Robert Jackson, a retired civil servant from Beckenham in Kent, stands to lose up to £40,000 after investing in Regulation S shares through Pacific Continental and in British companies through a broker, Hoffman Philips, that the FSA has named as a possible boiler room.
Jackson, 73, said: “I was contacted by both brokers about three years ago and was persuaded to invest about £16,000 with Hoffman Philips, which I believed to be a London firm, before I found out it was based in Spain and was on the FSA list of suspected boiler rooms.
“Most of those investments are now worthless, although I’m still trying to chase the £8,400 of shares I have in a company based in Essex. And Pacific Continental convinced me to invest £25,000 in four different US companies, which have all lost money since.”
As part of its campaign to get Jackson to invest, Pacific Continental wined and dined him at the London Capital Club, a plush private members’ club in the heart of the City, where the restaurant menu includes rump of royal dornoch lamb for £23 and whole dover sole at £29.
He said: “They treated me to a very nice meal. But while the companies I invested in through Pacific Continental have not gone out of business as far as I know, the value of my investment has plummeted. Regulation S shares are also very hard to sell so I’m just letting them lie in the hope that things pick up.”
Pacific Continental managing director Steven Griggs argues that many of the company’s clients have made money by investing in Regulation S stocks.
He said: “Regulation S shares are a perfectly legitimate share class that has unfortunately been brought into disrepute by illegal offshore boiler room operations.
“We are not a boiler room, and we are not currently offering Regulation S stocks because the US authorities are looking into certain other brokers mis-selling this type of share. We may begin selling them again once this has been resolved — although we would only ever recommend them to investors looking for high-risk investments.”
But Jackson is not the only investor to contact The Sunday Times after losing money by investing in Regulation S shares with Pacific Continental.
Many were persuaded to invest after checking the firm was authorised by the FSA.
John Peters, a 46-year-old aerospace engineer from Plymouth, said: “Pacific Continental first called me in 2003. Its staff used aggressive selling techniques similar to the sort of calls I regularly receive from offshore companies. But I thought an FSA-registered company would be okay. Consequently, I was convinced to invest a few thousand pounds in a US company.
“I was then bombarded with calls offering the same sort of stocks, but refused to make further investments. This proved wise as my holding recently filed for bankruptcy, and I think many of the others I was offered have gone the same way.”
Investors who lose out after buying Regulation S stocks from an authorised company can take their cases to the FOS, although their complaints will only be upheld if they prove the investments were mis-sold.
But Pacific Continental denies misleading people about the risks or using hard-sell tactics to convince investors to buy Regulation S shares.
Griggs said: “We never cold-call new clients and they are always given every opportunity to back out of a deal. Instead, we advertise on the internet and target investors in small companies with mailshot campaigns.”
The FSA website, however, lists both these forms of marketing in its warning about boiler rooms, which states: “The first time you hear from such firms could be by post or e-mail, or they might advertise their services over the internet.”
Hughes said: “We understand that Pacific Continental has not sold Regulation S stocks since September, but we don’t comment on individual authorised firms, so I can’t say any more.”
Visit www.fsa.gov.uk for a list of suspected boiler rooms.
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