The Financial Services Authority won its first successful prosecution against an operator of a boiler-room share scam yesterday but the fraud continues to wreak damage on unsuspecting small investors.
David Mason was sentenced to two years in prison and disqualified from being a director for six years after pleading guilty to 13 counts of unauthorised activity, one count of making false or misleading statements or promises, and three counts of money laundering.
Sentencing Mason, Judge HHJ Rivlin said: "I do believe the arrangements made by you were sophisticated. You caused distress, worry, frustration and in some cases serious disruption. You acted with blatant and, I would say, ruthless dishonesty, which was thoroughly reprehensible."
Mason's activities highlight the tactics used by boiler room fraudsters and the harm they inflict on innocent investors. Between November 2008 and May 2009, Mason organised cold calling and the sale of shares in EduVest Plc. During that time, he used bogus stockbrokers to con 32 people out of £270,000 in the belief EduVest would be listing on the PLUS stock exchange.
In classic boiler room style, share certificates were never issued, EduVest never listed and investors' funds were never put to use. EduVest was a sham company set up for the purpose of swindling credulous share buyers. Victims were cold called by the fake stockbrokers with typically respectable-sounding titles such as Hunter Rowe Financial, Bernam & Shore and Attlee Wurth Consulting.
To string victims along, Mason arranged for a letter from "David Brascombe" a fictional EduVest employee, to update investors on the company's supposed progress and reassure them that their investment was sound.
The FSA recovered the £270,000 but that sum is a drop in the ocean compared to the total size of the boiler room industry, which the watchdog estimates at £200m a year.
The FSA gets about 3,500 calls a year from people who have been contacted by boiler rooms, 1,000 of whom are victims with losses of about £20,000 each. Tracey McDermott, acting director of enforcement and financial crime at the FSA, says boiler rooms are "a major menace to the public".
She adds: "Like all boiler room fraudsters, Mason was dishonest and posed a very serious threat to honest investors."
The regulator reckons the £20m reported losses are only 10 per cent of the real scale of the crime because most victims do not report losses.
Boiler rooms work on a simple business model. Aggressive cold callers operating from outside the UK persuade individual investors to part with their money by investing in a worthless or non-existent company.
A common tactic is to manufacture a sense of urgency around the dud stock by telling the target investors that they only have a few days to buy a stake.
The fake brokers often target existing small shareholders and prey on retired people. But not all investors are novices and some with extensive backgrounds in business and finance have been snared.
Mason duped David Sinclair, head of corporate finance at Axiom Capital, into setting up EduVest as an investment vehicle to distribute investors' money to Mason and the other fraudsters. Mr Sinclair acted unwittingly and co-operated with the FSA. Through Axiom, he paid the £270,000 that went back to investors plus interest and some FSA costs.
The FSA fined Mr Sinclair £68,000 and banned him from holding a job of significant influence in the finance industry.