Tuesday, March 28, 2017
A Guide to Boiler Room Fraud
The latter part of this decade has seen a sharp rise in the number of ‘boiler room’ fraud cases brought before the Courts. These cases are undoubtedly serious both in terms of their impact upon the victims of the frauds and those who may be innocently caught up in the criminality and find themselves accused of a criminal offence.
I am currently engaged in a number of boiler room fraud cases. Each case has its own unique characteristics and factual circumstances but it is possible to look at common characteristics between the types of case and glean some important information about how the operation of the law in this area.
What is a boiler room fraud?
A boiler room fraud is a dishonest activity carried out whereby assets, commodities or shares are sold to members of the public at extreme over value. The items can vary but I have been involved in cases where the items sold have been diamonds, rare earth metals, carbon credits, shares in companies and shares in land (‘land bank’).
Although the commodity that is sold may change the method of operation of the fraud remains roughly similar.
Members of the public are ‘cold called’ by individuals claiming to have a good investment opportunity. No sales techniques are employed initially, merely the taking of details and the offer to send a brochure in the post. The brochure is sent out and some time later the customer is called by a ‘broker’, typically a person with a background in sales and in their 20s or 30s who will employ high pressure sales techniques in order to attempt to persuade the customer to purchase the investment opportunity.
Once the customer has purchased one investment they are often persuaded to buy more. A number of different sales techniques are used and what is common is that vast and lucrative returns are promised. Often the customer will be told that the company is FSA or FCS regulated when it is not.
Universally the items sold to the customer will not only fail to increase in value in the amounts claimed but will also not be worth anything approaching that for which it was sold. Sometimes the items sold do not exist at all. The customer will be left with either nothing at all or an item of nominal value and will typically not be able to realise their investment, being met with obstruction if they attempt to do so.
Often, a boiler room cycle will involve the staff and personnel moving between different companies selling different ‘assets’. Different factors will motivate the movement to a different asset class these will typically be:
- when the customer pool diminishes
- when a large amount of customers start want to realise the investments
- if the operation starts to come under scrutiny by the authorities
Who are the personnel in a boiler room fraud?
A typical boiler room fraud may have one or two ‘architects’ who run the fraud and are aware of the criminality. Obviously the facts of each different case will vary but in many cases the architect of the fraud will employ willing understudies who have no belief or suspicion that the business is illegitimate. This can include administrators, office managers, telephone staff and ‘brokers’/salesmen.
Often the prosecution in a case will seek to pursue a large number of persons involved in a boiler room fraud and cases with 10-12 defendants are not unheard of.
The prosecution in any fraud case will have to prove that the defendant was guilty of the charge levelled against them so that the Jury are sure or ‘beyond reasonable doubt’. Where a person is a broker on commission or an office manager the prosecution may have some difficulty in proving that these persons actually knew that the scheme and business was based in dishonesty.
I have represented a number of brokers in these situations where the company and goods sold bore all the hallmarks of legitimacy. The sales techniques used were high pressure but this is not unusual in many industries and as the materials were good enough to fool potential investors, some of whom were very sophisticated, it is not a surprise that the broker themselves thought that the product was legitimate.
In the absence of direct and clear evidence that those involved in the business knew that the whole operation was an illegal sham it can be very difficult for the prosecution to prove dishonesty to the requisite standard.
How is a boiler room fraud charged?
Boiler room frauds are almost always conducted on a large scale, and as such they tend to be charged under the Common Law offence of Conspiracy to Defraud.
The case of Scott v Metropolitan Police Commissioner, provides the classic definition of Conspiracy to Defraud:
“ ..it is clearly the law that an agreement by two or more by dishonesty to deprive a person of something which is his or to which he is or would be entitled and an agreement by two or more by dishonesty to injure some proprietary right of his, suffices to constitute the offence of conspiracy to defraud.”
The offence contains two key elements: that the conspiracy involved dishonesty and that if the conspiracy was participated in, the victim's property rights would be harmed. The proving of the offence does not require the defendants' actions to directly result in the fraud; merely the agreement to participate in the commission of the crime will suffice.
Any boiler room fraud can alternatively be prosecuted as a Fraud by False Representation under the Fraud Act 2006. The elements of this offence are made out if there is a false representation made dishonestly with the intention for the defendant to cause gain for himself or loss to another.
Prosecutors prefer to charge the offence of Conspiracy to Defraud however as it can attract higher sentences and is easier to prosecute. This is permitted in law: Section 12 of the Criminal Justice Act 1987 provides that common law conspiracy to defraud may be charged even if the conduct agreed upon will involve the commission of a statutory offence such as Fraud by False Representation.
However, Lord Bingham said in R v Rimmington and R v Goldstein (2005) UKHL 63:
I would not go to the length of holding that conduct may never be lawfully prosecuted as a generally expressed common law crime where it falls within the terms of a specific statutory provision, but good practice and respect for the primacy of statute do in my judgment require that conduct falling within the terms of a specific statutory provision should be prosecuted under that provision unless there is good reason for doing otherwise.
The prosecution would usually contend that ‘good reason’ would amount to the size and complexity of the fraud.
Defences to a charge of fraud
As with any fraud case the prosecution has to prove dishonesty and as outlined above, this can be very difficult when the person involved is merely a ‘cog in the machine’. Subordinate individuals such as office managers, IT, personnel and brokers may find that they have an excellent defence to any charge brought against them.
If the charge is one of conspiracy, the prosecution must prove that the defendant was an active and knowing participation in a criminal enterprise. Again, the extent of the knowledge of any defendant in respect of the matters in issue in the case will be very relevant to the question of guilt or innocence.
Finally, the prosecution must prove that the activity itself was illegal. In other words, in certain situations the selling of assets is not by itself illegal. The fact that the asset does not go up in value as much as the customer would like it to does not in itself make the selling of the asset illegal. Often the market in commodities can be complex and unpredictable. Some assets can fluctuate wildly in price. Therefore, the fact that investors may have lost money does not automatically mean that the sale is a fraud. The prosecution will have to prove that the asset in question had little or no inherent value and was not able to increase in value. This will often be disputed and can be the subject of conflicting expert evidence. Again as with all facets of the case the prosecution must prove the matter so that the jury are sure. If there is any doubt, then the benefit of the doubt goes in favour of the defendant.
The collection of evidence
As time passes material which can be of assistance to the defence can become more and more difficult to obtain. The prosecution can gain much material by way of production orders from financial institutions. The material which goes to support a defendant’s account can often be in the form of witnesses to material events, records such as emails and personal correspondence and photographs, travel records etc.
It is essential that if an individual is under investigation or suspects that they may be under investigation for a boiler room fraud they gain expert legal advice as soon as possible. The quicker that action is taken to preserve evidence and testimony the better the chances are of securing a good result. I have lost count of the number of times that a defendant has mislaid a piece of evidence or lost contact with a crucial eyewitness in circumstances where they could have preserved the evidence had they known to do so earlier.
The various types and issues involved in boiler room frauds are too numerous and complex to deal with in this article. However, what is clear is that the mere fact that a defendant is indicted or arrested on a boiler room fraud case does not mean that a guilty verdict is bound to follow.
Boiler room cases involve a large body of evidence and this evidence will need to be expertly analysed as would the ‘unused material’ in the case to see if there is material which will actively go to help a defendant’s case. Also the prosecution will often need to be served with targeted disclosure requests to ensure that the defence have all the material that they need to fight the case.
If you are accused of a boiler room fraud you may wish to ensure that you have expert and experienced representation. Quentin Hunt is a leading Barrister with a background in the financial services industry who is very experienced in this sort of case. He can be contacted for a no obligation conversation about any ongoing case or investigation.