UK investors warned over new share scam

The Financial Services Authority has today warned UK investors about a new type of share scam.

The scam involves fraudsters ringing up potential investors and offering them a "fantastic opportunity" to invest in a UK business.

While similar scams have been around for a while, they tend to offer shares in overseas firms. This new development of using legitimate UK businesses (which have generally also been conned) reassures investors as they can look up who they are buying into.

Additionally, these "boiler room" scams use high-pressure sales techniques, and in the majority of cases the shares being sold are worthless and the boiler room vanishes - along with the investor's money - after the deal is done.

"This is a new money-making scam by boiler rooms. It is particularly worrying, not only because investors are being enticed to pay over the odds for the shares but the UK company whose shares are being sold by a boiler room could potentially face financial losses and damage to its reputation," said David Mayhew, acting director of enforcement at the FSA.

"Regardless of where the company is based, investors must be sure they know who they are dealing with before they part with their money. A UK company may feel like a safer prospect to investors, but if they are buying shares through a boiler room, which will not be authorised by the FSA, they will not get the benefit of the UK compensation and complaints schemes," he added.

In a typical scenario for the new scam, a boiler room approaches a small UK business and proposes raising capital by selling £100,000 worth of shares on their behalf.

The boiler room says it will take 60 per cent as their fee, leaving the small company with £40,000. However, the boiler room then cold calls UK investors to sell the shares at anything from ten to 100 per cent above the agreed price, takes their fee and vanishes.

In some cases the investor is able to demand a refund from the UK company, which could then be forced to pay back the full price of the shares sold, even though it only received a percentage of the takings.

Mr Mayhew added: "If the boiler room is taking a large percentage of the funds raised, many small companies would struggle to refund investors with the full price that was paid for the share. Both investors and the small company will be left considerably out of pocket.

"We recommend that UK companies approached with a capital-raising idea consider seeking their own independent legal advice and check who they are dealing with before they allow them to sell shares or find potential investors on their behalf."

The FSA has a website offering information and advice on boiler rooms.

It can be found here.