How do you know if you have fallen into the nets of an investment fraudster, an online scam or an untrustworthy CFD broker? All these scams work according to the same playbook; step by step, the investor, who is actually a prey, is lured into the trap.
Phase 1: the positive phase
In the first stage, the investment fraudster does not show his true face, but presents himself as friendly and helpful as possible. He asks many personal questions, and connects by telling something about himself as well. Meanwhile, he learns a lot about his client, who is actually prey. For example, how much savings the customer has available to invest: from the perspective of a “scammer,” that is the maximum loot he can score. We see that investments with untrustworthy firms (almost always complex financial products, such as CFDs) develop positively in the first phase. In this way, the client is enticed to put in more and more: after all, it is lucrative because the investments are doing well, and the broker seems trustworthy (and has not yet shown its true nature). Many positions are open for a long time; occasionally a profit is taken on an investment, and that money is then reinvested in a new “trade.” A small withdrawal or refund is sometimes allowed upon request; the background to this is that it allows the boiler room to show that it is trustworthy. It is time for the second phase when the investment fraudster notices that the customer becomes more cautious because he does not want to put in all his savings.
Phase 2: deploying margin calls
In the second phase, the “account manager” must use other methods to elicit additional deposits. A well-known trick is the so-called margin call. The investor is called and told that the investments are falling so the increased value of the account is at risk. In order to maintain the results, additional deposits must be made as soon as possible. In reality, things are different; the investments were extremely risky from the beginning and are going to decline, so it is wise to sell the investments as soon as possible to reduce the loss. But that advice is precisely not given. Often the margin call trick is repeated a few times. The investor is pressured to make additional deposits, and nothing remains of the friendly tone of the first phase. The investor is trapped: he deposits more and more, and the consequences of loss become greater and greater, so fear increases, an emotion to which the fraudster cunningly responds by squeezing out even more additional deposits. The investor now has nowhere to go. Incidentally, the margin call phenomenon occurs in all investments with borrowed money, and so it is not the case that a margin call always means premeditated fraud. Typically, however, boiler rooms do not clearly explain that the risks are very high because borrowed money is being used. In the terminology of case law, this course of action involves “unfair trade practices.” The court can order the broker guilty of this to repay the deposit.
Phase 3: evaporating the investments
In this third stage, the account collapses and the investor suffers the blow of losing the deposit. This is usually due to swaps (unexpected costs). This is also usually the stage when the investor realizes that he or she has been deceived. A well-known ploy of investment fraudsters is to blame the victim (“blame the victim”). For example, it is claimed that the loss is due to the investor for not following advice. In reality, the fraudster directed the course of the investments by manipulating the duped. The broker executed his plan and pocketed the investor’s deposit.
Phase 4: Recovery plan
Many duped people drop out after the third stage; if they don’t already realize that this is a sophisticated scam, there is simply no money left to start over because all the savings are in there (some duped people are even forced to borrow money and end up in debt). But a small group of victims reengage with the fraudsters who employ a new trick. The next chapter by which the boiler room will try to get the duped once again to deposit money into the bottomless pit is called “recovery plan.” Better guidance is promised, such as through a senior account manager. This will ensure that the losses incurred are made up. Sometimes the boiler room makes a gesture by depositing an amount into the account itself, if the investor does the same, so that a higher amount is supposedly available for new investments. In reality, the boiler room deposit is fictitious, and is an empty gesture; it is again about keeping deposits going. In the end, this last round also ends negatively and the investor once again loses his deposit. Phase 4 is actually a repetition of the preceding chapters of the playbook.
Phase 5: Recovery agency
After the preceding stages, the boiler room has definitely fallen through, and the aggrieved party will no longer want to do business. The boiler room must then come up with an entirely different way to get the victim to pay again. A well-known trick is for the victim to be contacted by another organization that promises to help claim the lost money back. Read more about this so-called “recovery fraud” here.
Manipulation via software?
Through boiler rooms you never buy real stocks, but either nothing at all, or financial products whose value is tied to the price of something else (for example, a currency rate, the price of a commodity or a stock index). In fact, it is not an investment but a speculation (or gamble) on a change in a stock price. This also involves leverage, or leverage, which magnifies the effect. This leads to the question of whether manipulation via software is a part of the box of tricks. In any case, we can say that after dealing with more than 60 cases, we actually always see that investments rise in the first phase, fall slightly in the second phase and collapse in the third phase. That’s notable, though. Indeed, criminal trials have been held abroad in which it has been proven that certain firms are supplying sham software to brokers. There is also evidence that these software firms get a share of the revenue, so they have a stake. But that is not to say that it is strategically wise to make this argument in litigation; rather, it may be wise to bet on other arguments that are easier to prove.
What can we do for you?
If after reading this blog you are under the impression that you have been caught up in the nets of a fraudulent investment firm, we can help you determine what kind of firm you are dealing with. Please note that we do not give investment advice, only advice on the type of company you are dealing with, based on the facts you tell us. If you face the third stage where investments evaporate, we may be able to help you recover your deposit through the courts. Here you can read a blog about lawsuits that have led to success.
Our specialist: Marius Hupkes
