UK: Boiled Dry

Richard Alderman, Director of the Serious Fraud Office, has pledged to protect vulnerable consumers in the UK from fraud 1, with a special emphasis on targeting ever-increasing boiler-room scams. But how will he do this? David McCluskey and Ruth Lane of Peters & Peters discuss potential problems in recovering victims' funds.

Scale of the problem

Fraud is estimated to cost the nation UK£14 billion a year 2 of which UK£500 million is said to be lost to organised boiler room operations 3. Although many varieties of the scam exist, they share many features and principally involve the sale of non-existent or nearly worthless shares at grossly inflated prices, by a combination of deception and high pressure sales tactics.

In March this year, Paul Gunter and his daughter, Zibiah, were arrested in Florida for allegedly defrauding more than 15,000 British pensioners out of US$70million (UK£35 million) 4. It is claimed that the father-and-daughter-team hijacked the identities of at least 54 dormant publicly-traded companies, before selling bogus shares to pensioners in Britain. Each now faces a prison sentence of up to 95 years and fines of up to US$140 million.

The so-called "stockbrokers" in these scams are nothing if not persistent. In a survey conducted by the FSA in 2006 5, many respondents reported that they were called repeatedly to encourage them to invest. Whilst 15% of victims purchased shares during their first call, nearly half the victims (49%) were called four or more times before they succumbed. 23% of all respondents (regardless of whether they purchased any shares) said that they received calls from the same boiler room for more than six months.

Targets and techniques

Those most likely to be targeted by, and fall victim to, boiler room scams were usually male, over 51 years old, with a long investment history. On average, respondent victims had lost UK£20,000 although losses of over UK£100,000 were reported by some individuals.

Boiler room operations frequently target established investors by obtaining their names from publicly available shareholder lists. When a former fraudster "Robert Clarke" revealed the tricks of the trade in The Guardian last year, he said that Anglian Water's shareholder list had circulated around all 50 boiler rooms that existed in Barcelona at that time 6.

Clarke revealed that he would tell cold-call targets that they had responded to a marketing survey in the past year. Most victims would say that they could not remember the survey, which would allow Clarke to continue with his script.People were asked how much they could afford to invest to ensure that they were "sucked dry" whilst under the illusion that their savings would be protected. If they had previously lost money from investments, they were reassured that they would recover their loss many times over through the new shares they were being sold.

For added authenticity, boiler rooms often call themselves by a name that mimics an established finance house and the shareholder will be asked to transfer their money to a legitimate-sounding bank.

Locked-in

Variations on the theme are limited only by imagination. Some boiler rooms sell "regulation S" shares in US companies. These are banned to US investors but can be sold to non-US residents without the obligation to provide them with a prospectus. Unlike ordinary shares (and usually unknown to the target) they cannot be sold on until 12 months after purchase. The fraudsters sometimes buy the stock themselves to give the price an artificial boost, although the victims cannot benefit from the rising price due to the trading restrictions. At some point the boiler room will sell all of its stock and move on. The shares fall back to a price much less than originally paid for them 7.

Money up-front

Another type of "advance fee" fraud targets shareholders in small UK companies, with the caller allegedly calling on behalf of a large overseas client. He explains that his client wishes to buy enough shares to gain a controlling majority in the UK firm, and is prepared to pay a premium over the market rate. The victim is told that the overseas client needs to take out a 'bond' to protect itself against the risk of failing to buy enough shares, with the victim being asked to contribute to a proportion of the cost (up to thousands of pounds) to be repaid once the sale has gone through. Again, the boiler room will disappear once the contribution has been made 8.

Profit both ways

A more recent tactic which has been encountered involves duping both the investors and a small business. A boiler room approached a legitimate Bulgarian property development company and offered to raise capital by selling the company's shares to investors. The shares were then sold to the victims at a price much greater than that agreed with the company, for around eight times their value. The boiler room kept the majority of the proceeds and disappeared.

Good money after bad

Then there are the "recovery room" operations, whereby boiler room victims are telephoned by a "new"operation promising to get their money back by taking over the shares they have been landed with, in exchange for an upfront fee. It doesn't take much imagination to know what happens next.

Quick as a flash, the money's gone

The FSA has detected over 100 unauthorised investment firms selling into this country 9. In our experience, boiler rooms seldom operate within the UK, firstly to stay out of reach of the FSA and secondly to make lines of accountability and traceability of funds as opaque as possible. Investors are almost always asked to transfer funds out of the jurisdiction and often out of the EU. In a flash, recovery becomes altogether more complicated. For authorities and individuals alike, tracing fund flows across borders invariably takes far longer than the days or even hours the investors' money takes to make the trip. The Crime (International Cooperation) Act 2003, which governs Mutual Legal Assistance evidence requests made both to and from the UK, contains clauses that provide for the recognition in the UK of overseas freezing orders (technically, an 'evidence freezing order') but the particular sections have yet to come into force 10. For a UK investigating agency to do likewise it is dependent on the existence of a bilateral treaty or convention in the target territory 11.And even where the legal framework is in place, it usually lacks one vital ingredient: speed.

Civil recovery – no panacea

Pursuing a civil recovery route would not necessarily fare any better. The critical factor in obtaining evidence to support a freezing order and persuading a court to impose one before the funds leave the jurisdiction is, again, fleet-footedness. The much vaunted worldwide freezing order that the High Court seems to be willing to grant victims of fraud is only effective in foreign jurisdictions where the courts deign to enforce the order 12. In some jurisdictions, the requirements for local enforcement are so onerous that they are tantamount to starting proceedings afresh. Local knowledge and legal expertise are key to being able to move swiftly. It would be unwise to think that fraudsters do not consider these factors as well; boiler rooms are usually highly efficient, organised and agile operations, which set up and close down their operations at a moment's notice and whose owners and beneficiaries operate under levels of anonymity that make it very difficult to link them with the activity in the first place.

Self-defence

The FSA website says that shareholders and other consumers can avoid becoming victims of boiler room fraud by (a) checking that anyone offering to sell them shares is authorised by the FSA; (b) reporting to the FSA any company from which they receive cold calls to sell shares; and (c) hanging up the telephone if the caller persists.

There are many ways of checking out whether people are who they say they are – and just as many ways of fooling people. Determined and resourceful fraudsters are not above, for example, hiring lookalikes and actors to film fake news items to give authenticity to the value of the 'product' they are selling. The most useful advice is the simplest – the old adage, "if it looks too good to be true, it probably is" was never more relevant.

Finally, previous boiler room victims often air their grievances on the message boards of financial advice websites such as www.thisismoney.co.uk or www.fool.co.uk . For individuals considering whether to make an investment, a quick internet search could save them much heartache.

It will be interesting to see how the Serious Fraud Office proposes to go about recovering funds in boiler room cases: arriving too late with a freezing order is merely akin to slamming the stable door really hard once the horse has bolted. If the focus is instead to be on education and prevention, we hope it would not seem too churlish to point out that the FSA seem to be doing an admirable job in this area already.

This article first appeared in the Dec/Jan 09 issue of Fraud Intelligence

Footnotes

1. See articles in Accountancy Age www.accountancyage.com/ accountancyage/news/2216653/sfo-chief-standsfirm- 4004463 and The Telegraph (8 September 2008) www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/ 09/09/cnfraud109.xml

2. City of London Police estimate www.cityoflondon.police.uk/ CityPolice/ECD/

3. House of Commons debates 15 May 2008: www.theyworkforyou.com/ debates/?id=2008-05-15b.1635.0

4. See City of London police website: www.cityoflondon.police.uk/ CityPolice/Media/News/15000_british_victims_of_boiler_roo m_fraud.htm

5."Typical boiler room victim loses £20,000, warns FSA" June 2006 www.fsa.gov.uk/pages/Library/Communication/ PR/ 2006/053.shtml

6."Lifting the Lid on Boiler Room Scams", The Guardian, www.guardian.co.uk/money/2007/feb/03/ scamsandfraud.moneysupplement3

7."The Great British Share Swindle", 21 March 2008 http://news.bbc.co.uk/1/hi/business/7306363.stm

8."Important Information on Share Investment Scams" www.shareview.co.uk/markets/Pages/boilerroomscams_jun0 8.aspx

9. A list can be found on the FSA's website at www.fsa.gov.uk, although boiler rooms change their names frequently so any list is unlikely to be fully up to date.

10. See the Crime (International Cooperation) Act 2003, ss20-27.

11.There is a Framework Decision on execution in the EU of orders freezing property or evidence: 2003/577/ JHA 22 July 2003, Official Journal L 196, 2 August 2003. Implementation is uneven (as can be seen with the UK, above).

12.Whether by the Hague Convention or otherwise.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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