Just been scammed? Don't fall victim to the recovery room scam

Published by Matthew Wall on 30 September 2010.
Last updated on 22 July 2014

lookout for fraudsters

A type of investment fraud, the 'recovery room' scam, has mushroomed, trading on the desperation of those who have already been defrauded – often of their life savings.

Recovery room fraud is a menacing spin-off of the notorious boiler room scam. Boiler room fraudsters employ high-pressure telephone sales techniques to con you into buying worthless, difficult to sell or even totally fictitious shares.

A recovery room scammer will then pose as a reputable firm that will help you recover the money you've lost. It will usually charge an upfront fee of between £1,000 and £2,000 – or more.

Because victims often fail to report the crime – being unwilling to admit they've been stung twice - this type of fraud tends to remain under the official radar.

When Moneywise contacted the National Fraud Authority, the centralised fraud reporting service, the spokesperson didn't even know what it was.

We had more success with the Financial Services Authority (FSA). Jonathan Phelan, the FSA's head of unauthorised business, says: "We've seen a significant increase in this type of fraud; there are now around 20 recovery room firms targeting UK investors.

"We estimate that around 30% of people who have lost money through a boiler room fraud will also fall victim to a recovery room fraud."

Operation Archway, set up by the City of London police to combat boiler and recovery room fraud, describes how recovery rooms work: "They will approach a victim of boiler room fraud and, for an upfront fee, promise to review their case and obtain reimbursement from a European Court fund or other legal avenue.

Fees are often taken over the telephone by credit card payment or through PayPal, and it is thought that the recovery rooms purchase names of victims from the boiler rooms themselves."

The scammers will often offer to operate on a no-win, no-fee basis or to refund administration charges if they fail to recover your funds – of course, such refunds almost never happen.

They will also often pose as legitimate organisations working in conjunction with Operation Archway, the FSA or the US Securities & Exchange Commission. But no government agency would ever contact you out of the blue.

A 'bogus' mistake

Danny Cox, head of advice at stockbroker Hargreaves Lansdown, says: "We hear about this type of fraud fairly regularly from our clients."

For example, 'Mrs B' was phoned by a firm with a name very similar to Hargreaves Lansdown and was told a mistake on her share certificate meant she owned a hundred times more shares in a particular company than she thought.

"For a fee, the so-called broker said it would put this right by selling the excess shares," Cox says.

"So she paid £6,000 in supposed 'share-dealing charges' and sent the share certificate to the firm. She never heard from it again."

According to Cox, Mrs B repeatedly faxed the firm's office – she had no telephone number. A couple of months later she got a call from someone claiming to be the 'share registrar' who said they had closed down the boiler room and picked up her faxes from its office.

"For a fee of £4,000, they promised to recover her original shares plus the fee she paid the boiler room. So she paid the required £4,000 – and the 'registrar' promptly disappeared."

Psychologists say Mrs B's behaviour is typical: give a victim the chance to regain losses that can amount to hundreds of thousands of pounds and it can be reasonably easy for conmen to convince them to stump up even more cash.

A research paper by the Office of Fair Trading and the University of Exeter psychology department, The Psychology of Scams: Provoking and Committing Errors of Judgement, found that "scam victims are led to focus on the high value of the alleged reward in comparison to the relatively small amount of money they have to send in order to obtain their windfall – a phenomenon called 'phantom fixation'."

There are several forms of the recovery room scam. For example, in the US, some firms have claimed to be representing wealthy clients who want to reduce their capital gains tax by buying up bad debt from fraud victims.

However, in the UK, the most common claim is that the firm will pursue a compensation claim for you through the courts.

Others pose as brokerages claiming to be able to sell the worthless shares you originally bought through a boiler room scam for an inflated price – if you re-register with them for a fee.

Shared address lists

Recovery room fraudsters don't just target boiler room scam victims either; they also look for people who've lost money through property investment clubs.

"When we've sent out letters to investors warning people about recovery room fraud," says Phelan, "one interesting fact to emerge was that many of them had also been contacted by property investment companies, which makes us think that these firms share their address lists."

Simon Harris, 52, from Rayleigh, Essex, who runs a number of hairdressing salons with his wife Gabrielle, lost in the region of £100,000 after falling for the sales spiel of property investment firms Inside Track and Instant Access Properties.

These companies, now defunct, promised big discounts on property developments in the UK, Spain and Florida. But they exaggerated the property values and likely rental incomes, leaving investors like Simon and Gabrielle thousands of pounds out of pocket.

However, these investors soon became the targets of a second round of fraud. Simon explains: "About a year ago, I was phoned by a company called European Mediation, claiming that there was a European fund to compensate investors like me.

"For an up-front fee of £1,300 and a share of whatever it managed to recover, it said it would take up my case with the European Court."

But having already had his fingers burnt, Simon was on his guard. "Alarm bells began ringing, so I started to ask a few questions – such as why it needed money upfront," he says.

"The guy was clearly flummoxed – it was like he was reading a script. None of it rang true and I didn't fall for it. But it didn't stop the firm ringing my mobile several times afterwards.

"Then, just last week, out of the blue, I had a call from someone looking for people who'd lost money through another of these property investment companies, IAP Global.

"He mentioned this mythical European compensation fund again. When I started asking questions, he hung up straight away. I haven't heard from him since."

Simon adds: "It's obvious these guys sell on customer contact lists to other fraudsters. I didn't fall for it, but I've heard about other people who have. They don't want to talk about it though, because they feel so stupid." 

The difficulty with property investment is that, unless it's a collective investment scheme, it won't be regulated by the FSA. However, pooling investor money to buy land – 'land banking' – does fall under its remit.

"We've been through around 70 land banking companies trying to spot fraudsters", says Phelan. "Sometimes this type of business is fully legitimate; at other times they're trying to sell you land in Sites of Special Scientific Interest, for example, or on 45-degree slopes – land that can never be built on."

Investor awareness

Recovery room fraud has taken off because the recession has made investors much more cautious about the stockmarket generally.

There's less money around, making it more difficult to operate the boiler room scam successfully, so fraudsters have had to resort to more ingenious ways of fleecing victims.

The FSA estimates that the average loss per investor through boiler room fraud is £20,000, or £200 million nationwide each year, and the best estimate of the average loss through recovery room fraud is £1,200, or £5 million in total.

"It's a very shady world," warns Phelan. "I really can't comprehend the attitude of these scammers – they are defrauding often very vulnerable people who aren't particularly well off."

So how are the authorities doing in the fight against recovery room fraud? "The FSA can't attack boiler room firms that operate abroad, so we have to use other tactics.

One of these is to constantly warn investors not to take cold calls about shares. Earlier this year, we sent warning letters to around 50,000 people we knew were on a list of targets used by fraudsters," says Phelan.

The FSA will also make investors aware of suspected fraudulent companies by adding them to a list on its website (fsa.gov.uk).

In June it announced it had recovered and returned £260,000 to victims of boiler room scams. And in January the City of London police busted a British gang operating in Barcelona thought to have ripped its victims off to the tune of £20 million.

But these are still early days in the fight against the boiler room's sister scam, the recovery room. The first step will be to turn the spotlight on this area, bringing it into public view, and warn investors of the perils of falling for the plausible conman. Forewarned is forearmed.

Protect yourself

The recovery room fraudster's tool of choice is the telephone, so one simple measure you can take is to opt out of receiving unsolicited calls via the 'Stay Private' service (stayprivate.org) run by Consumer Focus.

Also, you should never give your bank details to anyone over the phone or via email, and never agree to pay money upfront for a fraud-recovery service.

If you suspect you've been contacted by a recovery room, check the name of the company against the FSA's databases.

It lists firms that are authorised to carry out financial services in the UK and also those that have been proscribed or suspected of acting fraudulently (fsa.gov.uk/pages/doing/regulated/law/alerts/index.shtml).

If the firm isn't registered, you won't be protected by UK complaints and compensation law should you be unfortunate enough to fall for its blandishments.

Even if the firm is registered, don't accept what it tells you at face value. Fraudsters will often use the names and registration numbers of legitimate companies, knowing that investors may check against the FSA database.

So you should also carry out further checks – establish that the postal address really exists, for example, and that the contact number is real.

Can you get your money back?

As the firms pushing the recovery service are mostly based abroad - typically in the US, Spain or the Far East – they are not regulated by the Financial Services Authority (FSA), so you won't be protected by the Financial Ombudsman Service or Financial Services Compensation Scheme.

Nevertheless, the FSA claimed in June that it had been successful in returning £260,000 to investors defrauded through boiler room scams. And if you paid the upfront fee for a recovery room service by credit card you will at least be covered by Section 75 of the Consumer Credit Act, which covers any losses over £100.

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