Business Opportunities and Job Placement Scams

"Self-employment schemes that promise a secure path to financial independence touch a chord in many of us. Unfortunately, the crooks behind the fraudulent scams are the only ones who get rich quick."

Mark Griffin,
President North American Securities Administrators Association
November 13, 1996

The Scope of the Problem

In the last 10 years, many Americans have shifted their work-related hopes to entrepreneurial or technological ventures that could help them launch small businesses. Fraud promoters target these consumers with false claims of lucrative franchise and business opportunities or stable employment, promising that their services will provide consumers sustained income. They have captured millions of dollars from consumers through these craftily marketed promises.(17)

Business Opportunity and Work-At-Home Scams

Fraud promoters develop business opportunity frauds and work-at-home scams that induce consumers to invest their own funds in start-up enterprises. These fraud promoters typically place work-opportunity ads in the classified sections of newspapers. Consumers who contact these advertisers then are sold "business plans" for enterprises such as operating vending machines, distributing products, or servicing pay phone and fax machines. They can supposedly capitalize and operate these businesses with minimal training to produce substantial earnings.

The very amount of capital requested can bolster the illusion that the business opportunity is a legitimate investment. Victims of these scams often believe they are investing in highly developed businesses. In fact, scam artists take the consumers' investment as profits and commissions, and provide them unprofitable business plans in return. The injuries to consumers can be devastating, not only in terms of the dollars they lose, but also in the time they invest in unprofitable enterprises. For example, one victim in a recent FTC case estimates that he spent $75,000 in an attempt to make such a business opportunity profitable.

The Franchise Rule

The Franchise Rule, issued by the FTC in 1978, requires each franchisor to give investors a disclosure document with 20 categories of information at least 10 days before the sale of the franchise.(18) It also imposes civil penalties on franchisors who fail to comply with the Rule. By 1996, the FTC had brought more than 125 cases against companies violating the Rule. In case after case, the FTC alleged that defendants made material misrepresentations, leading consumers into paying for business opportunities without telling them the true profitability and risk of the venture.

The Role of Computers and the Internet

Scam operators have seized upon computers and the Internet as new vehicles to promote and operate deceptive businesses. Scams now operate from home pages, as fraud promoters communicate across cyberspace, luring consumers into a variety of fraudulent business opportunities.

Home computers, also, provide a base for fraudulent business opportunity promoters. Fraud promoters who once had to buy machinery and inventory, such as vending machines or pay telephones, now need only software and manuals to promote a new business venture.

Job Placement Scams

In 1996, job placement scams also targeted consumers with work related concerns. Like most fraudulent business opportunity promoters, job placement scam artists routinely place "Help Wanted" ads in national newspapers. Many of these ads are indistinguishable from advertisements placed by legitimate job search agencies and other employers. Scam artists typically target college graduates and other professionals with false claims about their success at placing clients with Fortune 500 companies, the federal government, and major commercial travel carriers, such as cruise ships and airlines. In fact, these schemes rarely provide jobs. Many of the promoters who run the schemes refuse to refund the bulk of the processing and finder's fees they charge consumers; others use consumers' personal financial information to debit their bank accounts or charge their credit cards without authorization or providing any services.

FTC Actions

The FTC combined multiple federal and state civil law enforcement actions in July 1995 in Project Telesweep, when the agency and several states used a variety of law enforcement remedies to target nearly 100 franchise and business opportunity companies that marketed their ventures deceptively and often took in tens of thousands of dollars per consumer. By December 1996, the Justice Department also had obtained 19 consent judgments representing more than $200,000 in civil penalties against targets of Project Telesweep. The FTC obtained many injunctions stopping the practices and preventing the defendants from defrauding consumers out of millions of dollars more each year.

Operation Missed Fortune

In November 1996, the FTC and more than 25 state Attorneys General and securities regulators followed Telesweep with Operation Missed Fortune, 75 law enforcement actions focusing on three kinds of home-based businesses: multi-level marketing programs; franchise and business opportunity ventures; and work-at-home operations. The Operation Missed Fortune defendants succeeded by pitching a common lie: Substantial up-front investments would produce even bigger earnings, whether the scheme was an envelope-stuffing business or a complex medical billing software operation. This law enforcement effort confirmed the need for many law enforcement agencies to work simultaneously to stop millions of dollars in ongoing fraud.

Project Career Sweep

On the job placement scam front, the FTC brought seven law enforcement actions against nine companies and 16 individuals who falsely promised to obtain jobs for consumers through employment-search schemes. Working in conjunction with the FBI, the U.S. Postal Inspection Service, the U.S. Office of Personnel Management, the Better Business Bureaus, and state and local law enforcement authorities, the FTC obtained injunctions stopping the fraudulent practices in each case. By the end of 1996, these efforts had produced more than a million dollars in refunds for tens of thousands of consumers.(19)

The FTC brought three of the cases (FTC v. Metro Data, et al., FTC v. Regency Services, et al., and FTC v. Linc II, et al.) in the U.S. District Court in Orlando, Florida, where bogus employment telemarketing operations have proliferated since the early 1990s. In conjunction with the FTC's cases, the U.S. Attorney's Office for the Middle District of Florida secured federal grand jury indictments of six telemarketers of fraudulent employment services, charging them with 99 counts of mail and wire fraud, conspiracy, and money laundering.

How successful were these efforts? Authorities in Florida report that complaints about fraud perpetrated by the telemarketing community have dropped significantly since the FTC's actions. According to Dolores Liberatore, Director of Trade Practices for the Better Business Bureau of Central Florida, "job placement services were our leading source of consumer complaints for several years. Since the FTC initiated these actions this June, we have received very few complaints against companies in this field." And according to Jacqueline Dowd, an Assistant Attorney General for the State of Florida and the head of the Orlando Division of Economic Crimes, "the volume of complaints against employment service companies has slowed to a trickle since last June."

Fraud promoters know that consumers seeking work or supplemental income are eager to believe promises of lucrative business opportunities, work-at-home ventures, or guaranteed job placement. As a result, these schemes may never disappear completely from the fraud marketplace. Broad-based law enforcement and education efforts must continue to target this persistent type of fraud.