Boiler Rooms

In case anyone thought the movie ‘Boiler Room’ starring Giovanni Ribisi and Vin Diesel was nothing more than artistic license and great imagination, the movie was based on a true story and the term Boiler Room is, unfortunately, a real-world phenomenon.

What is a Boiler Room?

A boiler room is very much as depicted in the movie: a room filled with small workstations to maximize the number of people that can be fit in one small space with the goal to constantly cold call prospects and bombard them with high pressure sales tactics in order to sell them penny stocks as part of a “pump and dump” scheme.

Pump and Dump

Pump and Dump refers to manufacturing excitement in a stock such that prospects might be tempted into purchasing said stocks. Normally, the stocks that are pumped are thinly traded penny stocks which might only trade on Over The Counter markets (OTC) or on the Pink Sheet exchanges – in both cases these exchanges are lightly regulated and prime hunting grounds for deception. Share prices can be driven up quickly when there is light volume. The Dump happens when the boiler room stops hyping the stock to prospects and the “market” for the stock evaporates. Essentially the prospects are now left with the hot potato and no one to pass it too.

The boiler room may buy stocks that are all but defunct for pennies per share, and then create a market through calling hundreds and thousands of investors in order to drive up the price. Ultimately they will sell off their shares for maybe dollars per share, clearing a tidy sum in short periods of time. While the boiler rooms of the past were effected by cold callers, today more stocks are pumped and dumped via spam emails and internet chat forums. In fact, 15 year old Jonathan Lebed made almost $1 million dollars doing just this during the tech boom. He would buy a thinly traded stock and promote it on message boards. Readers of the forums would drive the prices up until Lebed sold at a handsome profit, at which point he would stop promoting the stocks. Eventually he was fined for part of his gains, but still walked away with around $500,000. He never admitted any wrongdoing and actually indicated that his behaviour is no different from fund managers and analysts appearing on TV voicing their opinions on stocks which they own.

Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 3 comments
  • Stocktrades

    Boiler Room was a great flick, you mention OTC and pink sheets, I was wondering what you think of the TSX-V?

  • Preet

    @Stocktrades – the venture is much more regulated than OTC and pink sheets, don’t have a problem with any so long as the investor understands what they are getting themselves into.

  • Stocktrades

    Thanks for the Response Preet, it would still be interesting to see some stats on how many companies on the TSX-V are around 5 years after their IPO.