‘Boiler Rooms’ Still Draw the Naive

Want to hear about an investment guaranteed to double your money in six months with virtually no risk? An opportunity that is a “sure thing” to give you a sevenfold return in 12 years?

Sorry. No such high-return, risk-free investments exist, at least not legally. Nonetheless, hundreds of thousands of unwary investors are led to believe that they do and are fleeced by con artists pitching such investments over the telephone.

Investors nationwide lose $10 billion a year--or the equivalent of $1 million an hour--to such high-pressure “boiler room” telemarketing operations hawking anything from precious metals to land leases to cellular phones, says the North American Securities Administrators Assn., an organization of state securities regulators.

Newer scams pitch such things as penny stocks, stocks usually costing below $1 but whose real value is nothing. They also offer prizes or free trips, but require you to pay hefty membership fees that more than pay for the “free” items.

As part of a major crackdown, securities regulators from seven states over the past two weeks raided a dozen such boiler room operations in the greater Los Angeles area. This area has come to be known as the nation’s boiler room capital for its preponderance of scamsters attracted by the Southland’s weather and living conditions but preying on victims in all 50 states. Authorities called the raids the biggest multistate attack on boiler rooms ever.

“Southern California is to investment fraud what Colombia is to cocaine,” says Doug Mays, Kansas securities commissioner and enforcement chair for the state regulators group.

Some members of Congress are trying to enhance crackdown efforts by sponsoring a bill that would give state regulators greater powers to bash boiler rooms.

But despite these and other stepped-up actions, the boiler room problem is likely to persist as long as investors are uninformed and susceptible to letting greed overcome common sense.

Newspapers such as The Times have reported tips on how to spot and avoid such scams many times before, including in this column. But they are worth repeating as long as the message still isn’t getting through.

Here, then, are some tips, courtesy of the North American Securities Administrators Assn. and other authorities:

- Avoid any deal promising unusually high returns with no risk. Let your common sense prevail. If a risk-free, high-return investment existed, whoever discovered it would keep the secret--and the profits--to himself and certainly wouldn’t tell you about it. There simply is no such thing as a legitimate investment with above-market returns without above-market risk. The higher the return, the higher the risk.

For example, investigators report that some investors in an oil and gas partnership sold by an unregistered Los Angeles-area boiler room were told that there would be little or no risk to their principal, which was guaranteed to return 17% in the first year and up to 25% in following years. Such investments are not risk-free, as one woman found out when she received just $44 in income payments on her $25,000 investment.

However, even if you invest anyway and initially get back a nice profit, still beware. Scamsters operating so-called Ponzi schemes often use money collected from other investors to pay you, as a way of coaxing even more money out of you.

- Be wary of deals involving delays of more than a few weeks for delivery of your investment. This is a classic red flag. Scamsters selling precious metals or other investments may in fact never use your money to purchase the intended investment.

- Avoid investments you do not understand. This rule applies to any investment, even to those pitched by reputable firms. It is particularly true of investments pitched to you by total strangers.

- When hounded by high-pressure tactics, hang up. Many shysters want you to commit your bucks fast, before you develop second thoughts. They will say their deal is just about sold out, and that you have only a limited time to get in.

But beware also of soft-sell tactics. Some scamsters are using friendly approaches in which they first try to get to know more about you and your kids, dog, etc. They won’t pitch their wares until much later, after they’ve won your trust.

- Do not make an immediate decision. Ask questions and get written information first about the firm, salesperson and investment.

However, even if you do get written materials, that is not enough. Many con artists have prepared elaborate, slick brochures touting their investments. But they usually fail to disclose potential risks in the investment.

If you get such a brochure, have a trusted lawyer, accountant, investment expert or knowledgeable friend take a look before you cough up big bucks.

- Contact your local securities authority to see if the firm is registered to sell investments in your state. In California, telemarketing firms doing business in the state must register with the state attorney general’s office. For information, call that office’s public number at (213) 736-2457.

For information on California broker-dealers and investment firms that don’t necessarily use telemarketing, check with the state Department of Corporations, at (213) 736-2481 in Southern California, (415) 557-3812 in Northern California and (916) 445-8027 in the Sacramento area. They also can tell you if they have taken any public actions against those firms.

However, be aware that a firm’s registration is no guarantee that it will not swindle you. Call your local Better Business Bureau to see if other investors have complained about the outfit.

- Be wary of advertisements in newspapers and other publications that give little or no information other than a toll-free “800” number.

- Do not give your credit card number over the phone to strangers.

- Do not invest more money to those promising to “make good” on your earlier losses; they will just rob you for more.

- If you have been swindled, or suspect that an unscrupulous operator has called you, take the name and number of the salesman and the firm and report it to your state securities office.

In California, that is the state Department of Corporations, at (213) 736-2502 in Southern California and (415) 557-3679 in Northern California. In other states, call the North American Securities Administrators Assn. at (202) 737-0900 to get the phone number or address of the appropriate agency.

Bill Sing welcomes readers’ comments and suggestions for columns but regrets that he cannot respond individually to letters. Write to Bill Sing, Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.