Boiler room (business)

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For other uses, see Boiler room.

The term boiler room in business refers to a busy centre of activity, often telemarketing or other types of sales. It typically refers to a room where tele-marketers work, often selling stocks, and using unfair, dishonest sales tactics, sometimes selling penny stock or committing outright stock fraud. The term carries a negative connotation, and is often used to imply high-pressure sales tactics and sometimes, poor working conditions.

A boiler room usually has an undisclosed relationship with the company being promoted or undisclosed profit from the sale of the house stock they are promoting. The boiler room starts the process off as a bridge loan. When a small company is looking for financing, it looks to an investment bank to raise capital. Usually this is a legal procedure but most boiler rooms perform this function for companies that don't exist. After the managers of the boiler room invest money through the phony company or shell, they can either (A): Underwrite an initial public offering (IPO) or (B): back the phony company into a "shell" company that has gone out of business and no longer trades, usually on the OTC pink sheets or the Bulletin Board market that carry many small and thinly traded stocks.

The managers of the boiler room usually have close ties to the same owners of the company whose stock is being promoted. After the salesforce of the boiler room sells their clients on the idea of the IPO, they are not allowed to sell the shares that the customer invested. This is because there is no real "market" for the shares, so any shares sold before buyers are attracted would create a large loss in the price of the stock, due to it being thinly traded with no public support. Once the insider investors are in place, a boiler room promotes (via telephone calls to brokerage clients or spam email) these thinly traded stocks where there is no actual market. The brokers of the boiler room actually "create" a market by attracting buyers, whose demand for the stock drives up the price; This gives the people who originated the bridge loan/private placement or owners of the company enough volume to sell their shares at a profit, a form of pump and dump operation where the original investors profit at the expense of the investors taken in by the boiler room operation.

The U.S. Securities and Exchange Commission paints the following picture; ^[1].

“

The brokers sat "cheek by jowl" in a room the size of a basketball court. All of their desks were lined up side by side in rows. The firm held mandatory sales meetings every morning at 8:30 a.m. at which time sales techniques were demonstrated and scripts for the firm's "house stock" . . . were distributed. Brokers were expected to follow the scripts and only give customers the information they contained.

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Some traits of a boiler room include presenting only good news about the stock to be sold, and discouraging outside research by customers or brokers working there.

The term is likely to have originated from the cheap, hastily arranged office space used by such firms, often just a few desks in the basement or utility room of an existing office building. The term is a fitting analogy due to the secretive nature of these firms, the connections with the company they are promoting and the high-pressure nature of their activities.