Boutique Investment firm cold called me offering me the chance to purchase stock in a private placement. Legit or scam?

Question

A week ago I got a cold call from someone doing "research about investment experience" which ended with "we might call you if a investment opportunity comes up". A couple of days ago a person from a "boutique investment firm/wealth management firm/brokerage house" called me, started talking about a particular stock (listed on NASDAQ and has been doing well last month), that this company with a market cap in 2B range got a exclusivity business deal of ~1B(this deal isn't public yet) and its stock is expected to go higher.

They said they were going to bid on the companies stock at a private placement (I think thats what he called it) by the company itself (not secondary markets, not IPO either). They were planning to bid at an amount which is ~80% of the current trading price, and they said they would try to bid at or below that amount, and if I verbally agree to invest then they will purchase some on my behalf, and I would have 3 days after that to settle (assuming they get the bid). They also had a stop loss order they set up for me so that worst case I only lose 10% of my money.

Now they did win the bid, apparently at the amount they told me and not lower. They were talking about how for new accounts they can only buy up to 2500 shares. I had to ask about a minimum and their minimum was 200 shares. Their commission was 1% per transaction. The person I was talking to was very open about the fact that he is earning that commission, that he "bought the list" (which contained my contacts I guess) and he was going through them to try and get more clients. Generally I felt they were quite open about any questions I had.

So now I have to fill their forms, send them my documents to create an account and then settle the money. They say I will be given an account on an online platform where I will be able to check on my holdings myself. To settle I need to transfer to a "stock transfer agent" or something similar, who would apparently transfer the commission to these guys and the actual share price to the company itself.

The company has a website, with a domain that is almost a year old. Its company address matches the phone code of the phone calls I got. It was a bunch of British guys in Japan. The stock transfer agent is just a 3 letter name, and if I try to look it up I can see it is a private company that is about a year old again in Hong kong, but that is about it.

So given all this I can't decide if it is a scam or if I am being too paranoid. Can someone help me understand if this fits a legit pattern or a scam?

Answer 1

I would be very leery of a boutique firm that is cold calling you, is relatively new and is located in Hong Kong. Unless you live in Hong Kong and you know the local financial regulations, etc., what's your recourse if there are problems with this firm?

I dealt with a number of such firms in the 1990's during the go-go days leading up to the the internet bubble when they were IPO-ing a lot of wallpaper. Many were in Boca Raton, Florida which in 1992 was dubbed the "Maggot Mile" by the NY Times for its abundance of bucket shops and boiler rooms. I also have a few friends who worked in more legitimate in boutique firms and I have seen the multiple hard and soft sell pitch scripts given to the brokers to help them convince an investor to take the plunge. They can be quite convincing.

Some of the comments you included remind me of that very old perfume commercial that said, "Promise her anything, but give her Arpège" (you're not getting Arpège). These comments are to win your trust, appeal to your greed and assuage your fear:

1. Of course the stock is expected to go higher. Why else would they be cold calling you?

2. The limit of 2,500 shares is something said to make you feel like this is a really good deal because the number of shares available will be limited.

3. Promising you that they employ a stop loss order so that the worst case scenario is a loss of 10% of your money is BS. A gap down in price could cost you far more.

4. Disclosing the commission and being open about your questions is all about winning your trust.

Keep these old market adages in mind:

• There are no free lunches

• If it sounds too good to be true, it usually is -

Don't let me talk you out of a possible money making opportunity. But I'd suggest that you need to do far more due diligence to determine if this is a legit opportunity. So far, it doesn't sound like one.

Answer 2

Do you qualify for a boutique investment firm? Do you have over 10 million in investable assets? Probably not. To me, that is a "duck quack".

They were talking about how for new accounts they can only buy upto 2500 shares.

That is right out of the movie Boiler Room. Quack #2. The perfect retort would have been to ask if this is Vin Diesel on the line.

The juxtaposition of the survey and the sales call, quack #3.

The likelihood at being able to purchase a stock at 80% below retail: 0.0001%. Quack #4.

I feel like this is probably a legitimate investment firm attempting to get you to use their full service brokerage fees. However, it could be worse. They could just take your money and run.

So beat them to the punch, keep your money and run. Rocky pointed out if it quacks, then it is probably a duck.

Answer 3

A week ago I got a cold call from someone doing "research about investment experience" which ended with we might call you if a investment opportunity comes up.

So what did you answer in response?

Let me guess: you either directly answered that you have little experience with direct investing or it became obvious that you have little personal experience with hands on investing. At the very least, you actually answered questions they asked. They probably also asked for details like your income level, current investment levels, home ownership, and liquid funds. For their "research".

If any of this is the case (including simply that you answered any of the "research" questions at all, including with "I'd prefer to not say"), then nothing else matters: you should stop right now, you shouldn't worry about any of the other details involved even, because you made yourself a mark for any number of scams by giving any type of information over that initial call which they took to indicate that you can get access to funds (even if not easily), you are in a position where making more money is tempting, and you don't have the experience to immediately recognize even a very basic exceptionally likely investment scam. Just assume that any other cold call "opportunities" you get from this point forward are all related to how to separate you from your money. It doesn't matter how good they sound, or how reasonable they sound.

There are so many ways this looks wrong (mostly covered in other posts) that it's not even worth debating what the actual scam is most likely to be (given that they're talking things like private placement while telling you about stop orders in the same context, my assumption is they'll just take your money and run, but they might also tell you that something happened, prices fell and the stop order couldn't go through fast enough and you lost this much, but they managed to save some of your money, but if you invest more they know they can make it all back and then some, and keep stringing you on for more money and longer). If you want to literally gamble, there are safer ways than this. Like casinos where you know the odds are against you and that the house probably cheats.

The SEC offers other material on helping to identify likely scams related to unregistered offerings, but my own caution would be this: from an information security standpoint, you have hopelessly compromised yourself as a target of interest by answering that first "research" call. Anything you get from here onwards from any party you are not initiating contact with or have no prior personal/business relationship directly with, you should just immediately assume is a scam of some kind and not worry about filtering through the evidence for/against: by comparison, that is all just a set of red herrings and distractions.

Don't tempt yourself. Stop now, don't answer any more calls like this, don't try to figure out if they're scams and just start assuming they all are regardless of the details.

Answer 4

A simple rule of thumb:

If someone is cold calling you asking for money, it's a scam.

If you don't have a relationship with someone and they want money from you then they are just going through the phone book looking for suckers.

Even if they are legit, and they are offering goods or services you are interested in, you can probably do better by shopping around.

Even if they are something like a charity you are happy to donate to, you should not do it over the phone (e.g. you should go to their website). Because you can not tell if the person on the phone is actually from that charity or a scammer claiming to be a charity.

Even with charity I would consider shopping around, sometimes the biggest, more well known charities put most of their budget in to marketing and executive salaries. You can probably find a charity which better aligns with your values and will put your donation to better use.

Answer 5

To add to what the other answers have already correctly pointed out, it seems extremely unlikely that a legitimate brokerage firm is going to buy any stocks on your behalf without you first making and funding an account. The order of operations is first, setup account; second, fund account; third, make trades (aka buy securities).

If a "firm" is telling you they're going to buy shares on your behalf because of a phone call you had with them before you give them your money then it seems unlikely that these assets exist in the first place.

Another red flag is that they're telling you they have non-public information. While this is a great way to convince you that a stock will go up, if it's true that means you could be guilty of insider trading.

To elaborate on Bob's point about a "gap down" making the stop loss ineffective. A stop loss order is one that automatically triggers a market order to sell stock if the market price of the stock goes down by a certain amount. A "gap down" means that the market price goes straight down to a much lower price without any trades in between the previous market price and the new one. Let's say you buy in at $100/share and have a stop loss to sell at $90. If the stock falls slowly to $91, nothing happens with your stop loss. If there are only very few bids around $89 and there are a lot of people with stop losses around $90 then it could easily be the case that your stop loss causes you to sell your stock at $75 (or any other number lower than $90). A "stop-loss" is really a misnomer since it implies that having one setup is guaranteed to stop your losses but if a stock is volatile, no such guarantee exists. If you're trading on supposed insider information which is really a pump and dump then it is even more likely than the average that this would happen. One thing you might hear about in stocks is that there is "support" or "resistance" at a certain price and that if it breaks through that price then it will often go much further. That idea goes hand in hand with gapping down. If your stock appears to have a lot of liquidity with low volatility in between, for example, $92 and $102 that doesn't mean once it breaches its "support" at $90 that it won't crash down to $75.

Answer 6

this deal isnt public yet

Insider trading is illegal in most countries.

Answer 7

Picking stocks in the first place is risk-prone enough, as John Bogle discusses in his seminal book "Common Sense on Mutual Funds".

But to let a cold-calling stranger pick them for you??? That's just nuts. This voice on the phone is not an altruistic person. They are calling you because they profit if you buy!

Now if they were just after the sales commission, then it wouldn't matter to them which stock, annuity or mutual fund they put you in. They want you in this stock because they make yet more if you buy it! The usual way this is done is a pump and dump scheme.

Or they could steal your money outright, or otherwise scam outlandish fees off of you. Letting someone else pick your broker for you is a mistake. Pick your own broker.

The fact that they're doing it in Hong Kong (if that's even a fact??) means you're dealing with a different sort of law entirely. Hong Kong was conveyed from the UK to the People's Republic of China in 1997. The old UK style law remains, but only at the pleasure of the PRC. So your ability to pursue these people if they are swindlers won't be as good as it might be if they were in Canada or Germany. And you can bet that's why they're there (if they're there).

Answer 8

Even if it's not actually a scam, treating cold-callers as if they're scams is a good idea.

That means you don't need to do any due diligence, just walk away without giving them any personal information. Over the phone you don't have the time to process even a genuine offer. If you're intrigued, you can always look them up in reputable sources online. You'll probably find either: they're too good to be true -- scam; or they were trying to hard-sell a bad deal.

Answer 9

"Paranoid" you are not. Very much the opposite.

If you had a good deal like that and it was real, you would invest all you can pawn, borrow, loan, mortgage or steal into that stock, right?

And if you were selling on commission, you want the sucker to buy as much as they want and then some, because that is where your money comes from. Would you rather phone once for 100,000 shares or 40 times for 2500 shares each? Time is money!

Does the behavior of that "company" make sense if their plan is to get as much commission money as possible?

Or does their behavior make a lot more sense if their real plan is to abscond with your money? People with serious money know scams and due diligence (and if not, they have the school of hard knocks to teach them real quick) and have a staff that keeps an eye out for them.

Cold calling more 'ordinary' people, putting them under pressure (limited amount, selling out fast, ...) pretending to be in for the long haul ("Why would you say we want to abscond with your money? We want to get to know you because we are in for the long haul ..." when even in the long haul 1% is much less than 100% right now), trying to win your trust, ...

Remember: Scammers have no problem at all lying through their teeth and telling you what you want to hear.

Answer 10

Most Stock Exchanges have rules about quoted companies offering shares to the public. A publicly-traded company is generally restricted by those rules to offering its shares for sale to the public only through that Exchange.

A public company is in point of fact one whose shares are traded on a public stock exchange, whereas a private company is one whose shares are not traded through a public exchange. Where shares are being offered to you other than through the Exchange on which they are quoted, that could be a breach of the rules of the Exchange, particularly if done by the company itself.

A company must issue a Prospectus (under the disclosure regulations) before it can sell shares through the Exchange in London or New York, and a public listed company can't normally trade its shares there without one, nor can it generally trade them privately as well as through the Exchange.

A private placement could breach the rules on the New York exchange, or in London, or in Frankfurt. If it is taking place in or through the Hong Kong exchange that might be because it could be illegal in the United States, as the Securities Act of 1933 tightly restricts those persons who may lawfully be offered stock in that manner in America: if you live in the USA then unless you have a net worth exceeding one million dollars it is unlikely that you could qualify as an 'accredited investor' such as to give you exemption under Regulation D of the Securities Act.

I don't understand how it would be possible for an 'accredited investor' to require financial advice from us on this forum: if you were such a person you would already know all about this. If you have never heard of Regulation D but live in the US then you should probably be speaking instead with the Securities and Exchange Commission (SEC) in the USA, or an independent stock broker, for advice before proceeding further.

The arrangement you have described appears to have features which might be designed to get around the 1933 Act and the protection it's intended to provide for investors, by involving an exchange outside the USA and by placing the 'boutique' between the company placing the shares and yourself as the investor.

Note that if a company registers a sale of securities to a 'boutique', and the latter seeks to resell those securities, it must still either file a registration statement with the SEC or find an available exemption. So the mere fact that the 'boutique' stands between the company and the investor does not of itself entirely negate the protection of the Securities Act.

More worrying is the lack of clarity as to where the shares are actually traded, on NASDAQ or in China, since the involvement of an extra-territorial exchange is potentially a major issue based on what the OP has described.