Favorite movie The Wolf of Wall Street, Wall Street, and Boiler Room Highlight extreme cases of unethical (if not completely illegal) sales strategies used by shady brokers. But in reality, many brokers — both inside and outside the boiler house — still use this strategy to sell suspicious or inappropriate securities to unsuspecting buyers.
The legality of such sales fraud is a matter of interpretation and may vary depending on the state securities laws. In many cases, these strategies may violate US Securities and Exchange Commission rules 10b5-1 and 10b5-2, which cover the use of manipulation and deception to sell securities. The rules prohibit the use of any equipment, plan or technique to commit fraud; make any untrue statement or omission of material facts, or engage in deceptive acts.
The following are some of the bad sales strategies used by brokers, which may be illegal under federal or state law, or at least violate the Financial Industry Regulatory Authority (FINRA).
- An aggressive broker can help win business, but you should be careful when certain sales strategies cross the line and become illegal.
- FINRA supervises brokers and financial advisors to ensure that customers are not misled or deceived.
- Omitting important facts about investment, exaggerating performance figures, lying to customers or making unreasonable promises are all violations.
Promote blind buying
Many classic boiler room operations are sold through long-distance cold calls, and the middleman bites the bullet and sells as soon as a call is made. In doing so, brokers often neglect to provide potential customers with enough information to make the right investment decisions. These omissions are particularly deceptive when selling stocks in an unknown company with limited or no operating history without disclosing its lack of income or operations.
The omission of important facts when selling securities is a clear violation of Rule 10b-5.
Exaggerate past performance
Brokers may make misleading statements about their past performance records to gain potential clients’ confidence in their investment capabilities. For example, a broker might say that they recently sold stocks with triple-digit gains in just a few weeks, when in fact they did not sell the relevant stocks. These tracking records can be difficult to verify objectively, which makes lies especially insidious when trying to close customers over the phone.
False statements of material facts when selling securities also violate Rule 10b-5.
Ignore customer sustainability
FINRA Rule 2111 requires brokers to have a “reasonable basis for believing that the recommended trading or investment strategy is suitable for the customer.” Of course, those brokers who coldly treat new potential customers and promote one-size-fits-all securities do not conduct due diligence on their customers, nor do they Considered the suitability of the investment for customers. For example, micro-stocks sold in cold markets lack a reasonable basis.
Ignorance of applicability may not violate a specific part of Rule 10b-5, but it does violate FINRA’s rules and may result in penalties for brokers.
Use manipulative conversation
Brokers may use various manipulative selling techniques to persuade someone to buy securities.For example, movies The Wolf of Wall Street An example is highlighted where the sales script downplays a potential customer’s desire to ask their spouse before buying, saying: “I’m sure you haven’t reached today’s level by negotiating daily decisions with your wife.” This manipulates customers by playing with their ego.
These manipulative sales techniques may violate the manipulative practices provisions of Rule 10b-5.
Make outrageous promises
Brokers may advertise investments as guarantee or certainty, when in reality there is no such thing, especially risky securities. For example, brokers may describe merger rumors as “inside information” confirmed certainty, which may bring “multiple” returns to potential customers in the coming weeks. Of course, if the stock is already public or even strongly suspected, the transaction price will be higher.
These promises may violate the guidelines on deceptive behavior in Rule 10b-5.
The movie highlights extreme situations, but the talking boiler room operator is there. By understanding their manipulative strategies and high-pressure tactics, individual investors can avoid losing money to these unethical types or any investment professionals who only put their best interests in their hearts.