Some stockbroker firms have "house stocks" that they are contracted to sell or that they use their stock brokers to sell to artificially boost the price of the stock.
These "house stocks" are often with low revenues and negative or low earnings.
The house stocks are sold through high-pressure "boiler room" sales tactics with exaggerated claims of potential stock price increases.
A stockbroker may be liable to a customer if he misrepresents material facts or fails to disclose material facts to the investor in the sale or recommendation of an investment.
How Stockbroker Illegal Sales Schemes Work?
Certain organizations and their stockbrokers generally establish credibility through misrepresentations about themselves and their organizations.
In the initial series of calls, these brokers will make a relatively small investment recommendation in a well-known reputable company with a steady and rising stock price.
Shortly after this initial transaction, it is not uncommon for the first broker to refer the client to a "senior account executive" that has the "experience and expertise" to handle the client's accounts.
In reality, the second broker is generally a seasoned, skilled, high-pressure salesperson. After the initial transaction, the stockbrokers in these organizations will only recommend house stocks.
The Telephone Rings ...
It happens to all of us. The telephone rings as you're sitting down to dinner, relaxing with family or friends, or putting the kids to bed. A stranger is selling something. Is there help or trouble on the line?
It's Known as "Cold Calling"
For many businesses, including securities firms, cold calling serves as a legitimate way to reach potential customers. But sometimes serious trouble and financial losses await you at the other end of the line.
Dishonest brokers may pressure you to buy a bad investment, or the investment might be a scam.
What Are Signs of Trouble?
Honest brokers use cold calling to find clients for the long term. They ask questions to understand your financial situation and investment goals before recommending that you buy anything.
While you may find their cold calls annoying, honest brokers who follow the cold calling rules are acting within their rights.
Dishonest brokers use cold calling to find "quick hits." Some set up "boiler rooms" where high-pressure salespeople use banks of telephones to call as many potential investors as possible.
These strangers will hound you to buy stocks in small, unknown companies that are highly risky, or sometimes, part of a scam.
Aggressive cold callers speak from persuasive scripts that include retorts for your every objection. As long as you stay on the phone, they'll keep trying to sell. And they won't let you get a word in edgewise.
Beware of stock brokers who pressure you to buy before you have a chance to think about or investigate the "opportunity."
Watch out for dishonest brokers who tell you about a "once-in-a-lifetime" opportunity, especially when the caller bases the recommendation on "inside" or "confidential" information.
Don't fall for stock brokers who promise spectacular profits or "guaranteed" returns ...
If the deal sounds too good to be true, then it probably is.
Some cold callers wait before turning up the heat. In their first call they'll try to build your trust by describing their firm's past successes and the high quality of its research. The callers might ask permission to call again if an "exciting" deal comes along, but won't pressure you to buy.
In their second call they'll whet your appetite, telling you about a fabulous deal they think they can get you into. In their third call they'll urge you to buy now or miss out!
Dishonest stock brokers lure new customers by encouraging them to purchase well known, widely traded blue chip stocks. After you take the bait, they may pressure you to invest in small, unknown companies with little or no earnings. These stocks tend to be very risky and thinly traded, leaving more investors with losses than profits.
Although they may not say so, dishonest brokers who push you to invest in a small, unknown company often work for firms that own large amounts of the stock.
Their firm may have been involved in the company's initial public offering. Or the firm may "make a market" in the stock, which means it buys and sells the stock for its own account.
If only one firm or a small group of firms makes a market in the stock, the price can be manipulated and may not reflect the true value of the company.
Dishonest brokers often pump up the prices of their house stocks until they get rid of their own holdings at high prices. But when they stop promoting the stock, the price falls, and investors lose their money.
What if I Want to Invest?
Never buy an investment based simply on a telephone sales pitch!
A wise investor will always slow down, ask questions, get information about the investment, and investigate the background of the firm and stockbroker.
Take notes so you have a record of what the broker told you, in case you have a dispute later and before making a final decision and handing over your hard-earned money, take the time to investigate.