"Hello, this is Ryan Jansen calling from XXXX Capital Management, the research and advisory house based here in Frankfurt. You spoke to a colleague of mine in the early part of the year about your investments in the stock market." With this alias and these opening lines, I've been approaching thousands of people in the UK during the past month with the purpose of selling them shares in an American oil company.
The calls actually come from a small office space in Buenos Aires, Argentina - not Frankfurt. Inside, there are seven second-hand school desks, with an odd mix of worn-out office and kitchen chairs. Above the desks, cards and paper sheets are mounted on the walls. One agent encourages himself with a sheet that states: "You are John Connally, you're a broker, be a c*nt!!!" Some of the agents use headsets, others normal telephones. The noise of the agents, and of the ever-present Bloomberg Radio in the background, can be almost deafening.
An operation like this is commonly known as a 'boiler room', from where unauthorised sales agents persuade people to buy shares in the stock market. I ran into it through an advertisement in the Buenos Aires Herald. The names of the people called come from seemingly endless lists that are bought by the people who run the operation. Often, they are shareholder lists of specific companies. So if you own shares in publicly listed companies, it's quite likely you've received calls like this or will receive them in the future, because your name is out there.
The sales process follows a fixed pattern and for every phase there are extensive scripts. First, you are 'opened' with an introduction to the company: a classy-sounding name, based in Frankfurt. The company has a German address, a German phone and fax number - obviously patched through to Argentina - and an internet site, which is created to make the company appear trustworthy. The website is hosted in Malaysia. It looks professional, but in reality it's quite basic and gives only very general information. No names of staff or management appear, and the suffix 'Inc' is certainly not German.
In the opening pitch, a script is followed that claims that the company works for major corporate investors. Names that are dropped include Deutsche Bank, Credit Suisse and Barclays. "We compile reports on potential investments for these guys, sourcing the companies that are going to outperform the market and work out what level of return is to be expected on an investment." Then, you're told that: "We hold the right to share this information with a base of private clients, thus bridging the gap between the professionals and the smaller private investor such as yourself." One of the selling points is that "we charge our private clients at the back end, out of actual profit made".
It's important in the opening call that the 'brokers' get some information about the investment level that the client is accustomed to. The conversation continues with a bit of chit chat about your portfolio and investment strategy, leading to the final question: "How much do you put into a position when you like what you see?" This is used at a later stage to judge how many shares they can offer you. Some people are reluctant to give this kind of data, but many, without any hesitation, give all the information about their investments and securities.
Then, the opening call reaches its final stage. It's explained to you that, at this point, there are no recommendations, but the company is always researching and will keep you up to date with developments.
Opening is a time-consuming process, of hours dialling numbers and waiting until a fish finally bites. From my experience, around one person in 25 won't immediately hang up on you and will be receptive to a conversation.
The Friday call
The following call is brief and simple and always takes place on a Friday. "I'm sweeping up before the weekend, did you have a chance to take a look at the website? Any questions, any thoughts?" This often provides an opportunity to get a bit more informal, for instance by inquiring about plans for the weekend. Building a trusting relationship is the key to making the deal. The call is closed with the announcement that there still aren't recommendations but that something might materialise within the next week.
And yes, surprise, surprise, next Tuesday you receive the warm-up call. "We're going into a meeting tomorrow. It looks like we're going to be briefed on a position. It has yet to be decided if we're going to use it as a new client recommendation, but if this is the case, I'd like to have the opportunity to run it by you." At this point, many say that they're not planning on investing. It's then up to the sales agent to hold firm. "I just want to run it by you, it'll only take 10 minutes of your time. If you still decide you're not interested, that's your prerogative, but at least you can make an informed decision." Most reluctantly decide to agree.
Then comes Thursday. As agreed, you are called and asked if you have a pen and paper handy. What follows is a very comprehensive briefing about the company. In my case it was a tiny American oil company. It's stressed that it trades on the Nasdaq and that you can track it down by entering its ticker symbol on www.nasdaq.com or any financial website such as Bloomberg or Reuters.
The pitch starts with an extensive analysis of the crude oil market. This comes to the conclusion that high oil prices are here to stay and that oil producers in the US are currently well-positioned to realise record levels of growth, and that this is very much the case with this company. They have just unearthed 700,000 barrels of oil - and this follows the discovery of 4.7bn cubic feet of natural gas, just 50 miles off the Texas coast. The markets are yet to be made aware of this information and, consequently, the stock's current value is an absolute bargain. You're led to believe that the share will rise up to 30 per cent in a five-week period and increase up to 80 per cent in 18 months, when the time comes to sell out.
At this stage, you're being pressured enormously to buy at least something, if only to welcome you on board as a new client and to show you some performance. "It's a results business and we like to be judged accordingly." Not investing anything is not an option. One of the few rules in the boiler room is: never give up and don't end the conversation until they hang up on you.
The stock will initially grow substantially in value. On financial websites, you can see that this oil company I was pushing traded for less than $2 in April, while now (at the time of writing) it trades at $7.75. Clients who bought this share during this period saw growth of more than 300 per cent in some cases. These clients are obviously approached again with other proposals. In the weeks that these existent clients are being 'loaded', the sales volume at the 'brokerage' is more than $500,000, generated by only three sales agents.
The new shares these existing clients were sold were an online dating company and a development company that's about to produce an up-market tourist complex in Belize.
If you have agreed to buy shares, a magic moment follows in the boiler room in Buenos Aires. Everybody stops phoning and Bloomberg Radio is turned off. Now it is time for a different role play. One agent assumes the part of the 'compliance officer' and calls you in an atmosphere of absolute silence. Everything is being verified and the further proceedings are explained.
After the compliance call, there's an exuberant atmosphere in the room and the successful sales agent is congratulated about his catch. The money is not yet in, though. First you receive a contract by courier, after which you still have three days to enact the trade by wire, transferring the money to the US - time in which you can still come to your senses about this decision.
Around 80 per cent of people will transfer the money. If you're one of the other 20 per cent, you will be pressurised to follow through. You're told that the compliance call has been recorded and has legal value. They threaten with procedures from the legal department and you're even told that you could be "banned from the stock market". If you stick to your decision and don't pay, you'll never hear anything from the company again.
The shares that are being sold are presented as trading on Nasdaq. And, at first sight, this appears to be true because, as well as on the website www.nasdaq.com, you can track down the shares on any major financial website.
The shares in the companies are real, but they're not being traded on any regulated market and the price doesn't necessarily represent their real value. A report by the New York state attorney general on micro-cap stock fraud explains what's going on: the businesses are so-called 'micro-cap' companies, relatively small enterprises that give out over-the-counter (OTC) securities to raise capital. The stock is controlled by one or a small number of brokers who sell them over the telephone and many of those use a number of illegitimate techniques to inflate the stock.
Once bought, the stock is impossible to get rid of: no one will buy the shares and, of course, the broker that sold you them, if it's still operating, will not respond to your request to sell them.
The victims, in general, are the more decent, polite elderly men (and sometimes women) who listen to what you have to say without interrupting. They can't seem to imagine that it's all a big lie. They are under the impression that you are an experienced senior adviser working for a sophisticated pan-European research house. They're very vulnerable to the arsenal of arguments that are fired at them and the persistence of the sales agents.
At one point, a very friendly older man told me that he was so very sorry that he wasn't going to buy something because he just wasn't in a position to do so at that time. He assured me that the very next time he was planning on investing, he would contact me, because I had put in so much effort. Obviously, most of them are naïve, badly informed and trusting. But more experienced investors, who think they know what's going on out there, can also be conned.
The Financial Services Authority (FSA) has come to the conclusion that the typical victim of an investment scam is a middle-aged professional male with considerable investment experience. One of my clients appeared to know the ins and outs of the stock market quite well. He only realised what was going on at the very last stage of the process, after he had asked me if these were OTC securities and I - at that time, having no clue what he was talking about - reluctantly said yes. After which he kindly requested not to be contacted again anymore.
Another typical occurrence was with someone who had developed second thoughts after the deal was closed. He decided to have a conversation with his financial adviser, who, of course, warned him about these practices and convinced him not to pursue the transaction. Despite these warnings, after a considerable amount of pressure had been applied, he still decided to transfer the money because - as he stated - he was a man of his word.
There's little reliable information about exactly how many people are being conned by these sorts of operations, but the FSA says its helpline receives approximately 100 calls each month concerning boiler rooms. It has a list on its website with hundreds of known, unauthorised overseas companies, that are targeting UK investors. But there are hundreds more that aren't on the list and, if they do ever appear on it, within a week they'll have changed their name - probably within the week. A survey that the FSA conducted among its complainants concluded that the average loss was £20,000 - some reported losses were over £100,000. For these victims, there's no hope of ever retrieving their money. The fake company through which they bought the shares doesn't respond or doesn't even exist anymore - their money will probably be somewhere in an untraceable off-shore bank account.
- I worked in this boiler room for four weeks. In this time, I didn't conclude a deal with any client. If I had, I would have called the victims afterwards under my own name to warn them not to transfer the money.
The boiler room in Buenos Aires has been operating for approximately nine months. The current basic staff consists of four more-or-less experienced sales agents who work on a commission basis, earning 10-5 per cent of their sales. There is a constant search for new 'talent', but this seems quite difficult to find. Many newcomers disappear after the first week, when they find out they have to put in a lot of effort before they start making money. Their training programme consists of learning the scripts and listening to the experienced agents for a couple of days. Then they're told to just start calling people and to overcome their nerves by learning on the job. None of them has experience in the financial markets. Their knowledge is based on the written scripts and a limited set of arguments, often mounted on the wall above their desks.
The guy who runs the show - a stereotypical boiler-room agent - is a young Brit. He's obviously the most experienced and talented seller. Apparently, he ran into a boiler-room operation in Spain and discovered he was quite good at it. He decided to start his own operation in Buenos Aires, where the authorities are neither equipped nor interested in investigating and prosecuting this kind of small illegal enterprise, aimed at people overseas.
When he's on the phone, he seems to undergo a change of character. His facial expression and posture changes and he truly believes the things he's saying. This is, according to him, the trick: believe in what you're doing and saying. He encourages his people to create a resume for their characters. His own curriculum vitae states that he worked for six years at Cazenove in London, until he was headhunted by this firm.
After office hours, I asked my colleagues whether they found it difficult conning people, especially the nice ones. It tends to be the polite people who don't hang up on you instantly. The reactions of my co-workers were unanimous. Although aware that what they do isn't legal, they don't see themselves as real criminals. They consider it a role-playing game and are reluctant to think of the damage they do to real, and often vulnerable, people. Objections are brushed away with the argument that these are people with a lot of money, who have already invested in the stock market. They believe the so-called 'victims' know that they run the risk of losing money, and so are prepared to take the gamble.