‘Boiler Room’ Sales Pitches Burn Buyers
The company, Kimberly International Gem Corp., had two basic sales pitches. One was for people who might be persuaded to buy its investment-quality gems, the other for people already identified as holding investment diamonds, who might be persuaded to send them in for presentation to potential buyers--Arab sheiks, they said. Both offers came in by telephone, and both ended badly for the consumer: The “fine gems” were inferior and overpriced, and diamonds that were sent in disappeared forever, replaced by comparatively inexpensive garnets.
Both also were stopped by the law. The Justice Department just won convictions against Kimberly’s principals for interstate wire fraud in the “diamond take-away program,” including six years in jail and ordered restitution of $450,000 to the victims, who “ran the gamut,” says federal prosecutor William Fahey in Los Angeles, “from surgeons and managerial types to little old ladies.”
‘Boiler Room’ Scam
This is a high-ticket version of a “boiler room” scam, in which commission salesmen sit at banks of phones calling potential marks. Usually the victims are asked to buy something--anything from a $49.95 Las Vegas weekend to an investment in precious metals or Alaska land for many thousand dollars, but always in a deal that seems too good to pass up. “It’s amazing,” says Albert Shelden, California deputy attorney general in San Diego, “how people will write a check for $30,000 to $40,000 to someone they’ve never met.”
Often there’s a twist: The victim will get a prize or something “free” if he buys something else--in one recent scheme, the purchase of a $500 box of pens to qualify for a Lincoln Continental--or send $20 or $30 to cover costs of handling, shipping or “certification.” Usually, too, they’re pressed to buy immediately “because the salesmen wants to close right then,” says Dale Sekovich, a Federal Trade Commission investigator in Los Angeles. “They don’t want to give you time to think about it.”
The result, says Sekovich, can be “out-and-out theft, where they get your money and never give anything, or you get something, but not the value you originally perceived.” Sometimes the customer doesn’t know what happened until the bill comes: “Everyone says, just say no and hang up the phone if you’re being sold something,” says postal inspector Larry Johnson in Burbank. “The problem is, you may not know you’re being sold something, or you thought you said no.”
Such telephone scams have multiplied in recent years with the growth of telemarketing. “The numbers of people that can be reached by telephone is so much greater,” says Sekovich, “and it’s cost-efficient. They use WATS lines, purchase mailing lists, hire people on a commission basis.”
Heavy Concentration
Practitioners seem to be concentrated in Southern California, home to an estimated 85% of the boiler room operations in the United States, says Johnson. There are various theories why: California’s traditional reputation as a land of easy money; West-to-East time zones, which give California-based telephoners several early morning hours of night-rate calls to the East, and a pool of hungry salesmen in the concentration of actors and students.
Unfortunately, scam operators have been hard to catch, although many go after them--city attorneys, district attorneys, attorneys general, the Justice Department, the FTC and the postal service, which has jurisdiction if just one item goes by mail--an order, invoice, payment, even just “a lulling letter” to explain the delay, says Johnson.
But such frauds are hard to prosecute because the operators do “give something for the money,” says Johnson, and the transaction was oral and unwitnessed: If the salesman says the victim misunderstood, it’s one word against another. Typically, also, says Se kovich, such operators “take the money and run, while customers wait and wait, figuring there’s a delay in the shipment. By the time we’d start getting complaints, they were gone.”
One answer may be new “boiler room laws”--such as California’s, which went into effect in January. “Telephonic sellers” doing business in or from California now must register annually with the state attorney general, providing, among other things, names and home addresses of their principals and salesmen and samples of their sales pitches. Businesses otherwise regulated or situated “in such a way that they won’t disappear,” says Shelden, are exempt--newspapers, for example, or companies registered with the Securities and Exchange Commission or licensed by the state. Telemarketers whose actual sale doesn’t take place over the phone are also exempt.
Registration alone, of course, doesn’t prove compliance with laws against fraud and deception, but the law “gives the A-G’s office the ability to keep track of these people,” says Sekovich. “Most register because failure to register is itself a violation.” Investigators no longer need a critical mass of complaints or a proven pattern but can “respond to the very first complaint,” says Shelden, “and go in to see if they’re registered. If there’s a problem with their sales pitch, we can do something, or if the sales pitch they’re using is different, it’s a violation.”
Ironically, such scams should be among the easiest for consumers to defend against, without time-consuming investigation or careful study of small print. In short, “you probably shouldn’t do business over the telephone with people you don’t know,” says Fahey. If some offers seem too good to pass up, it’s also true, says Sekovich, that “the vast majority are too good to be true.”
