Thousands of entrepreneurs who buy into businesses to own and service in-store carousel racks that display Disney, Warner Bros., Coca-Cola, Pepsi or other trade-named plush toys, t-shirts and trinkets are getting taken for a ride on a long and often profitless track, according to federal and state law-enforcement officials. The Federal Trade Commission, the Kansas Attorney General, and seven additional states today announced "Project Trade Name Games," an aggressive assault on swindlers who conjure up images of sure and generous profits through ownership of carousels displaying products licensed by well-known companies.
The problem, officials say, is that the business opportunities are sold by unscrupulous marketers who sometimes charge distributors retail instead of wholesale prices to fill their carousels, making promised profits unlikely; often deliver out-of-date or leftover inventory rather than the promised newly-released products; and regularly disappear when consumers complain about being unable to find profitable locations for the carousels or about missing or misrepresented merchandise. As a result, almost all distributors experience sales well below their expectations and many face demands from retail outlets to remove the carousels while they're still full of unsold products.
The "Trade Name Games" campaign so far has netted 18 enforcement actions against companies and their principals involved in this business. The campaign also involves a massive education component launched in coordination with industry members whose trade names have been used by scam artists to sell the bogus business opportunities. These include The Walt Disney Company, Warner Bros., The Coca-Cola Company, Pepsi-Cola Company, and the Coalition to Advance the Protection of Sports Logos (CAPS), which has as members The Collegiate Licensing Company, Major League Baseball Enterprises, NBA Properties, Inc., NFL Properties, Inc., NHL Enterprises, Ltd., and Starter Corp.
"Despite typical claims that distributors will sell hundreds of dollars worth of products every month, our investigations have turned up dozens of victims who have sworn in court documents to have made only pennies a day, or lost money, on investments typically ranging from $10,000 to $20,000," said Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection. "We estimate that consumers have lost in excess of $50 million to these scams since the beginning of 1995. The villains in these dramatic scenes are the opportunists who exploit a recognized corporate name to sell an unworkable business."
Bernstein continued: "Display rack business opportunities featuring trade-named products are a burgeoning new twist on the vending machine and display rack distributorship frauds we've prosecuted in the past. The pitch is basically the same -- that an investor can buy a minimum number of machines or carousels, place them in profitable locations, such as gas stations, gift shops, hotels and airports -- and then all they have to do is reorder, restock and collect their money.
What's new is the product. Purportedly, investors will earn substantial profits because they will be selling products from the hottest companies in the market to consumers who will buy on impulse," Bernstein said.
"While hundreds of consumers nationwide were losing their life's savings by investing in a toy distributorship company we targeted, my consumer protection division found company officers driving around Kansas City in luxury cars, wearing furs and dripping in diamonds," Kansas Attorney General Carla Stovall said. "The company cleverly deceived consumers into believing they could make hundreds of thousands of dollars selling toys, when in fact only the company made money. I'm pleased to be part of this national effort to stop unscrupulous marketers from preying on innocent consumers." Other states involved in the project are California, Illinois, Iowa, Maryland, Michigan, Oklahoma, and Washington.
"We at Disney have been fighting this issue for about two years, since we first began hearing from concerned investors. We have explained to countless potential investors that we do not have relationships with these companies," said Sandy Litvack, Executive Vice President and Chief Operating Officer of The Walt Disney Company. "The fact is: companies like Disney and other licensing companies do not manufacture and sell product -- except through company-owned outlets or through major retailers. . . . Statements by the promoters that Disney approved of this activity are simply not true."
The defendants named in the six FTC cases brought as part of "Trade Name Games" are:
In each of these cases, the FTC is seeking court orders that would prohibit the defendants from engaging in similar law violations and, in all but Parade of Toys (where the Kansas action seeks redress), require them to pay redress to injured consumers, where possible, or civil penalties. Trials on the cases will be scheduled in the coming months. State actions in Project Trade Name Games were brought to enforce state business opportunity registration, securities or antifraud statutes.
Complaints detailing the alleged law violations in the FTC cases are a compendium of nearly identical schemes. The defendants all placed ads in newspapers touting part-time distributorships selling well-known licensed products. Many of the ads explicitly sought individuals who "insist on earning $100,000 or more." When prospects called the 800-numbers in the ads, marketers usually invited them to attend a sales seminar or one-on-one sales pitch in their area. Seminar speakers typically touted the high earnings that prospects were likely to make owning a business where the products "sell themselves." Speakers also allegedly made claims along the lines that profitable locations for the carousels could be obtained easily in local retail outlets, and that the businesses are a snap to run on a part-time basis because they require only reordering, restocking, and collecting the profits.
However, in the FTC case against Carousel of Toys, for example, the FTC alleged that the defendants charged investors retail cost for their initial inventory, rather than wholesale cost, and failed to disclose that fact. In addition, they allegedly represented that the $10,000 (minimum) investment fee was for the purchase of display carousels and inventory, but neglected to state that they deducted approximately 30 percent as a "set up" fee before calculating the amount of inventory to provide distributors. According to the complaint, distributors were told they could expect sales of $200 to $400 per week per display rack, or an annual income of $50,000 to $100,000. Few, if any, achieved such earnings, the FTC charged.
In addition, investors have complained that these firms provided inventory that was returned -- unsold -- by major retailers; that they could not get the best locations for their carousels because large chain stores can get the merchandise directly from the trademark owners or their official licensees; that the exclusive territories they were promised were invaded by other, unwitting, investors; and that given all the up-front costs and undesirable merchandise, they could not mark their prices up enough to recoup their costs and still offer their merchandise at competitive prices, the FTC said.
In all six FTC cases, the Commission alleged that the defendants violated its Franchise Rule, a pre-purchase disclosure rule intended to give potential buyers key information about a business opportunity, including the legal and financial history of the seller and its principal officers. The rule requires franchisors to provide a detailed document containing this information prior to sale and, where franchisors make claims about the earnings of franchisees, to provide another document containing the substantiating evidence for those claims. The FTC charged that the defendants in these cases either failed to provide these documents at all, or that their documents were incomplete, inaccurate or untimely.
One of the key pieces of information required in the basic disclosure document is a list of prior purchasers who live in a potential buyer's area. Officials said one of the best steps potential business buyers can take to protect themselves is to visit the business locations of every person who has bought the business opportunity in the past.
"We often find that business opportunity sellers pay phony references, or 'shills,' to rave about the business and to repeat -- sometimes verbatim -- the earnings claims being made by the sellers," Bernstein said. "So potential investors really have to do some legwork in order to avoid 'display rack and ruin.' While a shill might tell you he's getting plush toys from the 'Hercules' movie, for example, a visit to the site of an actual franchisee might lead you to a box full of key chains from an older movie."
Other tips for consumers included in the materials unveiled today include:
These tips are included in the FTC's "Going to Display Rack and Ruin" brochure (produced by Disney) and an FTC brief on this issue. All are available on the FTC's web site at www.ftc.gov and also from its Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. These materials also are being distributed by the FTC's industry partners in Project Trade Name Games.
The Commission votes to bring the six cases it announced today were 5-0. The FTC filed the cases in federal district courts, as noted below. Two cases -- Toys Unlimited and Global Toy Distributors -- alleged Franchise Rule violations only and were filed at the FTC's request by the Department of Justice. The FTC received assistance in this project from the U.S. Attorneys for the Eastern District of New York and the Southern District of Florida.
NOTE: The Commission files a complaint when it has "reason to believe" that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. A complaint is not a finding or ruling that defendants have actually violated the law. These cases will be decided by the courts.
Copies of the complaints are available from the FTC's web site at www.ftc.gov and also from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.
FOR FTC CASES: FILE NOS. / COURTS, CIVIL ACTION NOS. / STAFF CONTACTS
Parade of Toys, et al
962 3302 / U.S. District Court for the District of Kansas, in Kansas City, 97-2367-GTV / David Newman, San Francisco Regional Office, 415-356-5270
Unitel Systems, Inc, et al
972 3107 / U.S. District Court for the Northern District of Texas, Dallas Division, 3-97CV1878-D / James E. Elliott or Thomas Carter, Dallas Regional Office, 214-979-9350
Carousel of Toys, et al
972 3112 / U.S. District Court for the Southern District of Florida, in West Palm Beach, 97-8587 / Lawrence Hodapp, 202-326-3105
Global Toy Distributors, et al
972 3104 / U.S. District Court for the Eastern District of New York, in Brooklyn, CV 97 4350 / Laurie Meehan, 202-326-3755
Toys Unlimited International, Inc., et al
972 3105 / U.S. District Court for the Southern District of Florida, in Fort Lauderdale, 97-08592 / Joanna Crane, 202-326-3258
FOR CASES BROUGHT BY STATE PARTICIPANTS
California -- Matt Ross, 916-324-5500; Albert Shelden, 619-645-2089
Illinois -- Lorrie Coral, 312-814-2532
Iowa -- Erica Brown, 515-281-4441
Kansas -- Mary Horsch, 913-296-2215
Maryland -- Frank Mann, 410-576-6357
Michigan -- Chris DeWitt, 517-373-8060
Oklahoma -- Gretchen Harris, 405-280-7700
Washington -- Deborah Bortner, Securities Administrator, 360-902-8760