Major State-Fed Crackdown Targets Business Opportunity Scam "Epidemic"

$100 Million or More Lost Each Year to Phony Pre-Packaged Businesses; Scams Fueled By Rise of Self Employment, Decline of Job Security.

For Release

WASHINGTON, D.C., JULY 18, 1995

In an unprecedented federal-state assault on a growing national epidemic of "business opportunity" scams preying on would-be entrepreneurs, an estimated 100 firms across the United States now face legal action filed in the last two weeks by the Federal Trade Commission (FTC), the U.S. Justice Department, and grassroots business opportunity regulators in 20 state securities divisions and attorneys general offices.

Based on the findings of the coordinated enforcement effort known as "Project Telesweep," state and federal officials estimate that well over $100 million a year is being lost to these swindles promising quick, easy money in vending machines, amusement games, pay telephones, and display racks. Though business opportunity scams are not a new problem, the swindles have skyrocketed recently due to the introduction of high-pressure telemarketing tactics previously used to tout travel and sweepstakes rip-offs. Another contributing factor is the decline of the traditional American job, which has sent many people scurrying to find more security through self-employment or second incomes.

"We knew the problem was growing -- just three recent FTC cases generated losses totaling nearly $64 million -- and that the scam artists were changing their tactics to avoid traditional law-enforcement actions, so we had to change our tactics, too," said FTC Chairman Robert Pitofsky. "This nationwide problem is best addressed by an all-out, aggressive campaign taken on by committed consumer protection officials from across the nation, and that's the genesis of Project Telesweep."

Washington State Securities Division Administrator and NASAA Director Deborah Bortner said: "Bogus 'business opportunity' deals are flourishing in a changing job market in which more and more Americans want to be their own boss, need a second income to make ends meet, or have learned the hard way that old-fashioned job security is often a thing of the past. Our goal today in Project Telesweep is to try to put a stop to the swindlers who are literally looting the American Dream." NASAA is the national voice of the 50 state securities agencies responsible for grassroots investor protection in the U.S.

EXAMPLES OF BUSINESS OPPORTUNITY SCAMS

Lured by deceptive promises of independence and easy income, many would-be entrepreneurs are jumping into the arms of con artists who claim: "we are not just selling you a business, we put you IN business." The following Project Telesweep cases illustrate the nature and extent of the business opportunity fraud epidemic in America:

Major financial losses. A Pennsylvania woman responded to an advertisement for a pizza vending machine business opportunity. The promoter promised huge earnings and the best locations in the area. The woman ended up losing her entire investment of $72,000.

In order to make up the loss, she and her husband had to mortgage their home and sell off a dairy cow herd. They are now working multiple jobs in a struggle to avoid losing their family farm

Promises of instant riches. One trademark of a business opportunity scam is an overblown promise of easy money. In one ad for a pay telephone scheme, a promoter promises: "Get 96 sites for $7,795. Then Retire! Call 1-800/XXX-XXXX." A brochure for a Utah snack vending machine company reads: "Many People Earn $36,000\year in Income, But . . . Very Few Earn $30,000/year working only five-six hours per week." In another case, a promoter for a gumball machine business opportunity claimed that one operator had earned $14,000 from four machines . . . in just seven days!

Unproven concepts. A promoter touting a vending machine known as the "Alcohol Neutralizer" offered investors packages of five machines for $4,500. Installed in taverns and other places where liquor is served, the "Alcohol Neutralizer" was to dispense an herbal pill containing an active ingredient that was supposed to be able to reduce blood alcohol count (BAC) levels. Supposedly, the pills had been endorsed as safe and effective by the Food and Drug Administration and were backed up by the work of Harvard Medical School researchers. In fact, the FDA had taken action to stop the manufacturing of the pills and the Ivy League scientists in question denied ever having produced the supportive findings linked to them by the promoter. An independent study by an Indiana University scientist found that the herbal ingredient in the pills might actually keep BAC levels higher for a longer period of time than if a drinker had never taken the pill!

Tennessee Attorney General Charles W. Burson commented: "These scams really hurt. They inflict major economic hardship. Generally, when promises of profits seem to be exceptionally attractive or when there is a hard-sell to sign up immediately or risk losing the opportunity, just say 'no,' walk away, or hang up."

"The Department of Justice is committed to enforcing the full disclosure requirements mandated by federal law and to ensuring that persons selling business opportunities do not induce consumers to invest before they have all of the facts," said Frank W. Hunger, Assistant Attorney General in charge of the Civil Division, U.S. Department of Justice.

THE SURGE IN BOGUS BUSINESS OPPORTUNITIES

Business opportunities have received considerable attention in recent years, owing in large part to the decline of traditional job security and the large number of individuals who have lost jobs due to corporate downsizing. Many business opportunity deals offer the entrepreneur a pre-packaged small business. Typical business opportunities involve vending machines, amusement games, pay telephones, and display racks for such items as greeting cards and CD ROM computer software.

Ideally, the vending machine, display rack or other item is located in a high-traffic area, such as a mall, airport, or bowling alley. The operator is responsible for cleaning and restocking, and collecting the money. The promoter is responsible for providing the machines or racks, finding locations, relocating machines when necessary, and providing replacements.

Always quick to seize on a new way to make an illicit buck, con artists have picked up on the changes in the traditional American job market. The result: fraudulent telemarketing operations are now pushing overhyped or worthless small business deals on unsuspecting entrepreneurs, individuals looking for a second income to make ends meet, and people who have lost jobs and cannot find replacements for them.

Investigations show that business opportunity scams are most often promoted at trade shows and through small ads that appear n the classified sections of newspapers and magazines. Once touted almost strictly on a face-to-face basis, business opportunities are increasingly being promoted through slick telemarketing. Most of the schemes:

  • Use classified ads that urge the prospect to call an "800" number.
  • Make wild and unsubstantiated claims about potential earnings. Include claims about "proven" concepts.
  • Suggest that no experience is necessary.
  • Promise exclusive territories.
  • Rely on high-pressure telemarketing sales techniques to pressure a victim into turning over his or her money.
  • Make assurances about good locations for vending machines or display racks, or the assistance of a professional locator.
  • Hype references handpicked by the company (instead of providing a list of all current business opportunity owners in the region).
  • Fail to provide prospective investors with a complete disclosure document containing pre-sale disclosures about their experience, lawsuit history, audited financial statements, and substantiation for any representations made about earnings.

STEPS YOU CAN TAKE TO PROTECT YOURSELF

The Federal Trade Commission and the North American Securities Administrators Association are now making available a free brochure, "Business Opportunity Fraud" in conjunction with the massive state-federal assault on business opportunity scams. Key advice contained in the brochure includes:

  • Be skeptical about earnings claims that sound too good to be true. The "bait" on the "hook" of a business opportunity scam is that a person with no experience may be able to work only a few hours a week and earn $50,000, $100,000 . . . or more . . . a year. The truth is that making money almost always requires hard work . . . and lots of it.
  • Exercise caution when it comes to newspaper and magazine ads that contain little more than glowing promises and an "800" number. This is very likely a "come-on" pitch to lure you into calling a high-pressure telemarketing boiler room operation! Keep in mind that just because an ad appears in a reputable newspaper or magazine does not mean that the information it contains is accurate or legitimate.
  • Obtain and review the required disclosure document before money changes hands. Keep in mind that business opportunity and franchise promoters are required to present you with a disclosure document before you sign a contract or pay a fee. If this document is not made readily available, beware!
  • Make sure that the business opportunity has complied with applicable state registration laws. Even if a business opportunity promoter complies with the laws in your state governing such deals, there is no guarantee that you will make money. However, it is one easy way to screen out bogus operators who are trying to "fly below radar" in order to evade detection by regulators.
  • Talk to current investors . . and watch out for "singers." You should always take the time to speak with several people who are current investors in the business opportunity that you are considering. The disclosure document must contain a list of the business opportunity's current operators. But be on your guard! A scheming promoter of a bogus business opportunity may line up "singers" who provide phony testimonials. You should visit their business sites, as well.
  • Research the business and the market. Make sure that you have a clear grasp of how the business opportunity will work and what demand (if any) there is likely to be in your territory. Don't rely only on glowing promises from telemarketers who claim that consumers are clamoring to get your product. In one case where a business opportunity claimed to have a "worst case" net return of $1,220 a month, investigators found that the investor who was doing the best only made about $200-$300 monthly.
  • Get professional advice if you need it. Don't lose your life savings just because you failed to spend a few hundred dollars to talk to a lawyer, an accountant or other expert. These people will sometimes be able to spot key details that you are missing. Since they are not caught up in your dream and hope for success, outsiders are also in a better position to review a business opportunity from a neutral vantage point.

To file a complaint with the Federal Trade Commission, write to: Division of Marketing Practices, Federal Trade Commission, Washington, D.C. 20580. Or call: 202/326-2222. Free information on business opportunities and franchising is available from the International Franchise Association, 1350 New York Avenue, N.W., Suite 900, Washington, D.C. 20005. The FTC also has other publications available to the public on business opportunities and franchises.

For the complete set of tips and more detailed information about the findings of "Project Telesweep," consumers can write for a free copy of the FTC/NASAA Consumer Bulletin entitled "Business Opportunity Fraud."

Write to:
Business Opportunities
NASAA
1 Massachusetts Avenue, Suite 310
Washington DC 20001

This news release and the Consumer Bulletin are also available on the World-Wide Web (WWW) of the Internet. The uniform resource locator (URL) for the FTC's home page is: http://www.ftc.gov

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FOR TV STATIONS: VNR DETAILS

A video news release (VNR) outlining the federal-state crackdown on business opportunity schemes will be available on July 18th at 1-1:15 p.m. EDT, Telstar 401, Channel 3, audio 6.2/6.8.

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