Boiler Room (business) - Business Structure

Business Structure

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 managers of the boiler room usually have close ties to the same owners of the company whose stock is being promoted. After the sales force 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 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:

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.

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.