The recent crackdown on boiler room operations across the UK and Spain serves to highlight the continuing risk in investing in unknown companies that provide an attractive prospect of return. A cross-border police investigation spanning over a two-year period has recently culminated in the arrest of 110 boiler room fraudsters and the seizure of high value goods including an Aston Martin, Ferrari and a Mustang.
In February 2014, police conducted a series of raids in London, Barcelona, the US and Serbia, after investors worldwide have been sold bogus shares over the phone in a variety of markets including carbon credits, gold, renewable energy, forestry, eco projects, wine and land. Despite this ground-breaking operation, boiler room scams remain commonplace and investors remain exposed.
The on-going trial of John Manning, a former partner at Yorkshire law firm, Fox Hayes Solicitors, serves as a pertinent example. Mr Manning currently stands trial for allegedly promoting a bogus share investment scheme, whereby Spanish sales entities would sell shares in US listed companies to UK investors. The shares had restrictions on their resale for a 12 month period and were ultimately worthless. In return for Mr Manning’s endorsements, he purportedly received a slice of the investor funds.
With companies and individuals both lined up as potential targets of such schemes, the recent revelations highlight the requirement to balance the allure of high returns through share investment with the associated risks.
The boiler room deception is relatively simple. A fake broker will cold call an investor and propose they buy shares in a particular company which is either non-existent or whose shares are worthless. Often phone numbers are obtained from publicly available shareholder lists. In particular, public information about individuals who have sold shares in private companies are targeted as they are deemed to have disposable wealth and limited experience in share investments. If an investor becomes embroiled with a boiler room fraud, the fake brokers will often share the obtained contact details with other boiler rooms who may later attempt to fraudulently assist in selling the shares or recovering the lost investment.
Bogus advisers are becoming increasingly tech-savvy to add to their credibility. Last month an individual used LinkedIn to appear as a genuine employee of Aberdeen Asset Management whilst he defrauded customers. The appearance of legitimacy is increasingly multifaceted.
As well as issuing criminal proceedings against the offender, in order to recover their money lost under a boiler room scam, civil recovery options are open to the investor. However, it is important to act immediately upon discovery of the fraud and seek professional legal advice to maximise prospects of success.
If the investor has suffered loss after relying on the false advice of a bogus adviser, they could pursue an action in fraudulent misrepresentation. Alternatively, for example, if the boiler room operator and a representative of the purported investment company collude to con the investor, unlawful means conspiracy becomes pertinent.
In order to sustain any action, it is important that the victim has an evidence trail to rely on. Investors might want to consider:
- Retaining emails sent by bogus advisers who attempt to facilitate share investment
- Drafting attendance notes of telephone conversations with unknown advisers
- Noting the address/contact details of any adviser that comes forward
- Obtaining evidence of any payment for bogus shares
- Obtaining bogus share certificates
Victims of such scams should seek independent legal advice in this regard in order to facilitate such evidence gathering and to identify available causes of action.
Prevention rather than cure is essential to tackling boiler room fraud. Often, it will be too late to act once embroiled in a scam. Pragmatic prevention steps for boiler room scams include:
- Checking the Financial Services Register to see whether the adviser is authorised with the FCA
- Undertaking external and internal due diligence:
(a) Does the broker have a proven track record?
(b) Are they a member of a trade association?
(c) Can an independent party verify them?
(d) Carry out a company search
(e) Check the legitimacy of the broker’s trading and registered office address.
- Being cautious of unknown foreign brokers
- Checking the FCA list of firms known to be operating fraudulently
In particular, legal advisers can assist in the following ways:
- Due diligence – carry out specific company searches, locate directors and shareholders of target investment companies and trace assets
- nvestigations – uncover company structures and expose links between advisers and target companies
- Training – promote awareness of ‘warning signs’ to look out for and provide advice on those crucial initial steps to take when embroiled in a scam
For those legitimate financial advisers under the threat of online imitation, safeguards include:
- Taking charge of online reputations whether it be LinkedIn, Facebook or Twitter
- Locking devices and online accounts: changing passwords regularly and not relying on a one-password fits all approach
- Ensuring personal account information is not shared over public Wi-Fi areas
- Tightening up privacy settings
A good prevention tool for companies is to arrange regular fraud training for staff. The following methods are recommended:
- Seminars/briefings – provide specific tailored guidance for your online safeguards
- Update seminars – provide advice on recent trends of online fraudulent tactics and how to counteract such developments
- Hands-on training - implement the latest guidance into your systems
Whilst investors and legitimate advisers will welcome the recent arrests and crackdown on boiler room fraud, the threat remains real. Concerned voices have emerged requesting more action from law enforcement authorities to stop such scams, investigate those caught so far, and save others from being defrauded afterwards.
If you are unsure of the appropriate steps to take to either manage a potential boiler room threat, or pursue a fraudster to recover financial loss, DWF has specific expertise in advising in this area.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.