Complaints to the Central Bank about ‘boiler-room’ scams have doubled in the last month, so it is worth checking out unsolicited approaches by stockbrokers to make sure they are bona fide
WE ALL know that if something sounds too good to be true, then it most likely is. However, this does not stop us hoping that the call from the National Lottery claiming we have won a prize - even though we never even played it - is legitimate, or that the scratch card falling out of our magazine really will lead to a prize.
In this context, it is not surprising that ad-hoc phone calls from unfamiliar international stockbrokers can lead to otherwise canny investors parting with their money.
Over the past number of months, an increasing number of shareholders in Irish public companies have been approached by "boiler-room" firms offering to make them some quick money.
Indeed, last month the Central Bank reported a 100 per cent jump in the number of complaints it received from members of the public reporting such incidents. Numerous Irish plcs, including United Drug, have issued warnings to their shareholders urging them to be cautious about suspicious phone calls, while a spokeswoman for Glanbia asserts that "a number" of its shareholders have received such calls. So, how can you avoid falling into the trap?
Who are the scammers?
Typically, the companies are based overseas, with some of the more recent complaints relating to firms from the US, Japan, Switzerland, the UK and Germany.
However, those perpetrating the scam may purport to be fully authorised with an Irish address, and in some cases, have been found to adopt the name of fully legitimate companies.
As Ivan Murphy, head of corporate finance with Davy Stockbrokers warns, they often have a website which can appear real.
How do they select their targets?
It can seem a legitimate approach if a stockbroker rings you wanting to talk about your "1,500 shares in United Drug". After all, if they know your shareholding, then it is easy to think that they are who they say they are.
However, shareholder lists are publicly available. "Anyone is entitled to request the register of a public company," says Murphy.
As the Central Bank points out, "the fact that a caller may be aware of a person's shareholdings does not suggest that the caller is legitimate".
What is the scam?
It can take one of several different guises. You could be approached about an imminent takeover of a company of which you are a shareholder, with the stockbroker saying they need to buy up shares in a hurry on behalf of its acquisitive client.
They will offer a much higher price than the stock is currently quoted at, and it can appear to make sense in these times when newspaper reports are full of international private equity funds looking to pick up Irish assets.
"But in normal takeover circumstances, companies don't talk to normal shareholders like that," warns Murphy.
This offer is likely to come with a request for bank details or money upfront as a bond or other form of security, which will be accompanied by a guarantee to pay back the money involved if the sale does not go ahead. This advance fee is part of the scam and investors are unlikely to hear from the caller again.
Alternatively, the scammers might just be fishing for confidential information.
"They'll say this is so confidential that we would like to enter into a confidentiality agreement with you, so you won't discuss it with anyone else," says Murphy. He adds that you will then be asked to email them such an agreement, which involves disclosure of personal information, such as bank account information, which could be used for some other fraudulent purpose.
How much are Irish investors losing?
In the UK, it has been estimated that investors are defrauded of about £200 million (€250 million) a year by boiler rooms. While it is unclear exactly how much Irish investors are losing, given the insistence and regularity of these scams, you would have to imagine that they are regularly getting away with money from unsuspecting Irish investors.
Is any compensation available?
Investors who are defrauded out of their savings by an authorised financial adviser who turns out to be running a Ponzi scheme, for example, have recourse to the Investor Compensation Scheme. If you get stung by a boiler-room scam, however, you have no such recourse.
Established to offer compensation to investors in the event of the failure of an investment firm, the scheme only applies to firms that are members of the scheme - and, as the firms doing the scamming are unlikely to be even authorised in Ireland, they will hardly be members of the scheme. So, if you lose your money in the scam, you will not have anywhere to turn for compensation.
How can I check a firm's bona fides?
It is a criminal offence for an investment firm to operate in Ireland unless it has an authorisation from the Central Bank. The regulator publishes a regularly updated list of firms for which it has issued warnings (see central bank.ie), and prints these notices in daily newspapers.
So far this year it has issued 14 warnings against firms, compared with nine for the whole of 2011.
Most of this year's firms originated in the US and, given the importance of a name when trying to swindle an investor, most of them adopt monikers that would suit any stockbrokers - such as the Pinnacle Group or Pratt International KPO. As Murphy notes, firms operating boiler-room scams tend to look for "plausible names that sound vaguely authentic".
If I receive such a phone call, what can I do?
If in doubt, your first port of call should be the Central Bank, to verify whether the company is appropriately authorised in Ireland. You can check a list of authorised companies on the aforementioned website, or by calling 01-224 4000, and can similarly register a complaint through the Central Bank's website. Alternatively, you can obtain independent advice from a qualified adviser.
The Irish Stock Exchange recommends that you take the name of the person and organisation that has contacted you.
Remember, one scam often follows another. If you were unfortunate enough to get caught out in one scam, be careful not to fall for another.
It sometimes happens that after losing your money, you are contacted by another company offering to help you get it back. Of course, this third party will want you to pay a hefty upfront fee for doing so - and is likely to be the same firm that initially defrauded you.
Names to watch out for:
The Central Bank's blacklist 2012
Otis KPO, LLC
Hannover & Rothchild Consultancy
Russell Merger Group
Eldridge Financial
The Pinnacle Group
Walton Johnson & Co Corporate Services
Davidson Capital Partners
Quadrant Mergers & Acquisitions
Pratt International KPO, LLC
Monarch Wealth Consultants
Global World Mergers and Acquisitions
Elliott & Laurence Consultancy Group
Winchester Consultancy Group
Salamon & Tate Consulting Group
