Exposing Boiler Room Scams: A Guide for Whistleblowers

A boiler room scam is essentially an illegal operation that uses high-pressure sales tactics to sell risky, and sometimes unregistered investments. Using phone calls, SMS, email and social media, these types of operations generally target novice or vulnerable investors looking for quick profits.

The most common types of investments sold out of a boiler room are often penny stocks. These stocks are often priced at less than $5 per share. And with a bit of good news, can skyrocket in price, leading to potentially large gains.

If you’re an insider of a boiler room or a victim with strong evidence of fraudulent behavior taking place, you may be eligible for a substantial monetary reward from the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC).

Continue reading to learn more about how to identify a boiler room operation and the SEC and CFTC whistleblower reward programs.

This term refers to the time in which these scams were often conducted in a basement or the boiler room of an office building. When someone imagines a boiler room, they think of a room with a lot of heat and high pressure – like the sales tactics used in such operations.

However, given the advances in technology, these types of operations are no longer conducted in such rooms. They can be done in an office building, a private residence, or wherever an boiler room operation can be efficient while remaining undetected.

The pump and dump is the main tactic of a boiler room operation. Its main goal is to sell a large volume of penny stocks through misinformation and excitement, essentially “pumping” up its value. Once the price of the stock has reached the operators desired peak, operators will then “dump,” or sell their shares, making huge gains and leaving all other investors “bag holding” with an illiquid stock that has little to no value.

Boiler rooms (as portrayed in the movie Wolf of Wallstreet) utilize unsolicited telephone calling as it’s main method of selling. This is because operators can use aggressive sales tactics to pressure “investors” into buying quickly. Legitimate brokers do not typically call or sell a stock in this manner. Below are a few pitches a boiler room operator might use:

• Guaranteed High Returns: “Get in on [Company X] early! Analysts are predicting a 400% increase in the next year. That’s a chance to turn your $1,000 into $4,000!”
• Risk-Free Offers: “This is a can’t-miss opportunity. Our research team has uncovered a hidden gem, and we’re so confident, we’ll buy back your shares at double the price if you’re not satisfied within 30 days!”
• Limited-Time Deals: “The price of [Company X] is about to go public! Get in on the pre-IPO surge at just $0.20 per share, but this offer ends in 24 hours!”
• Exclusivity: “We have a limited number of shares available for select investors like yourself. Don’t miss out on this ground floor opportunity to be an early investor in the next big thing!”

These are just a few examples. Boiler room operators are constantly changing their pitches and tactics, testing which ones work and which do not. The key point to remember is that: if it sounds too good to be true, then approach the investment with skepticism, especially regarding penny stocks.

A variety of fraudulent scams may be run through boiler-room schemes. This can include binary options fraud, advance fee fraud, and microcap fraud.

Due to the nature of ongoing investigations and confidentiality, it’s difficult to provide examples of cases that involve whistleblowers. What can be said though, is that many boiler room scams go unreported, and whistleblowers are vital to uncovering them.

• SEC Obtains Emergency Relief to Halt Pre-IPO Stock Fraud Scheme by Unregistered Broker-Dealer (2023): Defendants, including persons barred from the brokerage industry, allegedly sold shares they didn’t own, and pocketed more than $75 million. Press Release
• SEC Obtains Final Judgment Against Vuuzle Media Corp. and Affiliated Individuals and Entities In Connection With Over $25 Million Offering Fraud (2023): The SEC alleged that between 2016 and 2022, Vuuzle and Flynn raised more than $25 million from investors using a boiler room of salespeople based primarily in the Philippines and employing high-pressure tactics. Press ReleaseSEC Announces Charges in Massive Telemarketing
• Boiler Room Scheme Targeting Seniors (2019): The SEC brought fraud charges against 13 individuals allegedly involved in two Long Island-based cold calling scams that bilked more than one hundred victims out of more than $10 million through high-pressure sales tactics and lies about penny stocks. Press Release

The SEC website has a searchable database of enforcement actions. You can filter by date range and search for keywords like “boiler room,” “microcap fraud,” or “penny stock fraud.” This will give you a list of recent cases, though specific details might not mention whistleblowers.

Insiders or victims of a boiler room scam can report this illegal activity to the Securities and Exchange Commission (CFTC) or the Commodity Futures Trading Commission (CFTC). Awards are available to those with specific, timely, and credible evidence in which over $1 million in sanctions is ordered. The awards range between 10% and 30% of the money collected.

The SEC and CFTC programs also offer protection from retaliation for those who provide information about potential securities violations to the SEC or CFTC.

Whistleblowers can submit a tip anonymously using the SEC’s online TCR portal; and if they are reporting to the CFTC their TCR portal. But to receive an award, whistleblowers must have an attorney represent them in connection with their tip.

Your information could be vital, as it may be the missing piece that helps the SEC or CFTC investigate a scheme which can protect other investors from losing their hard-earned money.

To learn more about these programs and how to report fraud, please read our FAQs below.

Do you have original information about a potential boiler room operation? Our firm specializes in protecting whistleblowers and holding fraudulent investment schemes accountable. Our team includes former SEC commissioner and Acting Chair, Allison Herren Lee, who is now Of Counsel at the firm, and Stephen M. Kohn, world renowned whistleblower attorney and advocate. We offer free and confidential consultations to discuss your situation. Contact Kohn, Kohn and Colapinto today and let us help you bring justice to light.