Two arrested over £5m shares fraud

Nov 3 2007 by Paul James, The Journal

POLICE investigating a £5m share scam arrested two men after raiding a property in the North-East.

The pair were held in a Financial Services Authority (FSA) inquiry into so-called “boiler rooms”, which illegally target customers with cold-calling to sell overpriced shares, before vanishing with the proceeds.

Wednesday’s arrests follow an FSA investigation into Universal Management Services (UMS), which the FSA believes is taking payments on behalf of overseas boiler rooms.

The two men were held after raids by the FSA and police on at least one address in County Durham and sites in North Yorkshire and Hampshire.

About 800 investors in Britain are believed to have been affected and the FSA has frozen assets worth £5.45m.

The regulator launched the investigation after consumer complaints of high-pressure selling. The FSA said it suspected UMS – not registered as a UK company and unrelated to four other companies with similar names – had sent investors’ money overseas with the help of related operations GS Asset Management and Continental Administrative Services.

Victims who were cold-called by known boiler rooms were told to make cheques payable to UMS, the FSA said.

UMS was processing payments on behalf of six known overseas boiler rooms, which fall outside the FSA’s jurisdiction.

No charges have yet been laid, said the FSA, which is not releasing details of the men arrested and the addresses searched.

Under the Financial Services and Markets Act 2000, the charges brought would be of operating an unauthorised investment business.

But because UMS was not an authorised company, investors do not have access to the Financial Services Compensation Scheme or the Financial Ombudsman Service. FSA head of retail enforcement Jonathan Phelan said: “This is the first time we have taken this action and it shows that we will not hesitate to use our powers to protect consumers, including launching criminal investigations where appropriate.

“However, investors should always be cautious when they are cold-called by any firm promoting or offering to sell shares and should first check to ensure that the firm is authorised by the FSA.”

The known boiler rooms named by the FSA that have been involved with UMS include Trinity Finance International, Stanmore Advisory Group, Berkley Wyatt, Klein Group, GS Equity Group and Enterprise Analytics Ltd.

Customers of UMS or these other organisations can call the FSA on 08456 606-1234. The FSA said it would keep UMS customers informed as the investigation progressed.

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How it works

ADVICE from the North-East Fraud Forum, based at Northumbria Police’s Market Street station in Newcastle, is that boiler rooms are growing as a result of demographic trends and advances in communications.

The fraud is based on cold-calling investors and potential investors and takes two basic forms:

1. High yield investment opportunities.

These include deposits on a special inter-bank market with high rates of interest, exotic investments, especially obscure securities, with a high rate of growth, or exotic investments with a high rate of interest or other income.

Investors will be told they have been specially selected and will often be told returns are "guaranteed". Investors may be subsequently contacted and informed that their investment has increased significantly in value and offered further investment opportunities.

Initial income payments may be paid as an incentive to make further investments.

2. Buy-back of badly-performing investments.

Investors are offered the opportunity to sell poor investments at or above initial cost. The investments will frequently be overseas securities.

Before sale they will be informed that there are outstanding warrants or additional shares that must be bought and that there is a local tax liability to be met.

Once these payments are made, there is no further contact with the salesman, although they may be invited to make a payment to a shareholders’ action group to seek to recover the funds stolen.