In a massive crackdown that is the broadest federal-state coordinated effort of its type, the Federal Trade Commission and enforcement officials from 25 states today announced that they have taken more than 75 law enforcement actions actions so far against get-rich-quick self-employment schemes, including work-at-home scams, pyramid schemes often pitched on the Internet, and pre-packaged small businesses involving everything from vending machine frauds to sophisticated medical billing services.
The actions are the result of "Operation Missed Fortune," launched early last summer. This federal/state effort targets scam artists who capitalize on downsizing, the growth of computers in consumers' homes and other trends by promising people "proven" and "lucrative" opportunities to gain financial independence and to "be your own boss." The firms charge up-front fees ranging from $30 to tens of thousands of dollars. Officials said the fraudulent companies make false promises about high earnings, sometimes refer consumers to phony references or "shills" who give glowing, but false, reports about the business, and frequently fail to provide consumers with detailed business disclosure documents required by federal or state law. The FTC staff estimated that consumers lose tens of millions of dollars to get-rich-quick business scams every year. Officials will be filing more actions as part of this project in the coming weeks.
"When a business opportunity knocks, consumers today have to take more than a quick look before opening the door and investing," said Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection. "It's not easy to examine an offer thoroughly, especially when firms use phony references and offer detailed charts showing likely earnings. But the extra legwork could prevent substantial losses. One victim in an FTC case lost more than $70,000; others have lost as much as $40,000 or more each."
"Several factors are likely contributors to the exploding losses we're seeing today," Bernstein continued. "One is government and corporate downsizing that creates a pool of people searching for a safe place to invest their nest eggs; another is the Internet, a new way for con artists to dress up pyramids and other old schemes in new lingo so they can victimize vast numbers of consumers. New or not, some old advice applies: the promise of substantial earnings with minimal effort or training is a sure warning sign of fraud."
"Get-rich-quick self-employment schemes that promise a sure path to financial independence touch a chord in many of us, " said Mark Griffin, president of the North American Securities Administrators Association, Inc. (NASAA), which represents state securities regulators. "Unfortunately, the crooks behind the fraudulent scams are the only ones who get rich quick. The purpose of Operation Missed Fortune is to try and put a stop to these people whose victims, instead of getting rich quick, go broke quick."
Examples of the schemes targeted by Operation Missed Fortune include:
- a computerized medical billing business venture that promised consumers they could use their home computers "to earn up to $23,000 a year working only 28 minutes a day" processing insurance claims for doctors (P.M.C.S., Inc. of Great Neck, New York; actions against this firm were brought by the FTC, the Florida Attorney General's Office and its Department of Agriculture & Consumer Services, and the Tennessee Attorney General's Office);
- a pay telephone business opportunity that, for an initial investment of $12,756 to $41,320, sells consumers pay telephones that purportedly would generate annual income of as much as $28,560 per phone (ComTel Communications Global Network, Inc. of North Miami Beach, FL, an FTC case);
- a work-at-home job "program" which promised consumers that, for a one-time fee of $38.95, they could earn $200 to $1,000 a week assembling products at home, but that really consisted of a pamphlet containing the names and addresses of companies purporting to offer work-at-home opportunities, many of which required consumers to pay additional fees of $30-$40 in order to receive a start-up kit (Advantage Marketing Company, the business name of Ed Boehlke, of Pocatello, Idaho, an FTC case);
- a pyramid charity scheme, advertised on the Internet and in newspapers, which promised consumers that, for a $70 initial investment and a $50 per month fee, they could contribute to charity while making monthly returns as high as $89,700, which would be generated by the payments they get for signing up new members who, in turn, signed up additional new members (Global Assistance Network for Charities, or GANC, of Scottsdale, Arizona, an FTC case); and
- a company offering franchises for breathalyzers to be installed in vehicles driven by convicted drunk drivers in California, and that promised investors who paid $25,000 plus $5,000 for installation equipment that they could earn $288,648 per year from court referrals (Ignition Interlock Service Centers of Victorville, California, a California Dept. of Corporations case).
Of all the actions brought under Operation Missed Fortune (see attached list), 11 are FTC complaints filed in federal district courts around the nation. The FTC alleged in each of these cases that the defendants greatly overstated the earnings consumers were likely to make, and in five of its cases, that the defendants failed to give consumers key pre-purchase information required by the FTC's Franchise Rule. The FTC said this rule is essentially an anti-fraud rule designed to give consumers information about a firm, its financial and legal history, and current and former franchisees, that can help the consumer identify discrepancies or prior problems with the business opportunity before they pay any fee. The FTC is seeking redress for consumers in each of its cases, as well as injunctive orders prohibiting the defendants from making false earnings claims and, as appropriate, using phony references or other deceptive business practices and from violating the Franchise Rule.
Another 23 actions have been brought by NASAA members enforcing state securities laws. These include violations of anti-fraud statutes, failure to file disclosure documents, as well as failure to register franchises and business opportunities. The remaining actions include requests for injunctions filed in state courts, investigative subpoenas, cease and desist orders and other actions initiated by state Attorneys General or other state consumer protection officials.
In addition to this massive law-enforcement effort, Operation Missed Fortune includes a national consumer education campaign. As part of the campaign, an Investor Alert from NASAA, and five brochures, a consumer alert and a tip sheet from the Federal Trade Commission will be distributed free to consumers from law-enforcement offices and via the Internet at the FTC's World Wide Web site (http://www.ftc.gov). Consumers also can call the FTC for these brochures at 1-800-554-5706. Tips listed in the alert and the brochures include:
- Get any refund policy, including all restrictions and conditions, in writing before you buy;
- Check out the company with the consumer protection agency and Better Business Bureau in your state and in the state the company is headquartered to learn whether there are any complaints on file;
- Insist on seeing the company's evidence for earnings claims in writing;
- Be wary of any opportunity that sounds too easy; success generally requires hard work;
- If you're investing in a franchise, ask the seller for the Franchise Rule basic disclosure document. It should include 21 categories of information including corporate financial and legal history information, information about all fees and conditions for return of deposits; and the names and addresses of current and former franchisees in your area and the number of franchises terminated or not renewed the previous year;
- Beware of shills -- "decoy" references paid by a plan's promoter to describe their fictional success in earning money. Seek business addresses where possible so you can actually visit the site, and insist on a list of all individuals who have invested in the opportunity;
- Avoid any plan that includes commissions for recruiting additional distributors, because it may be an illegal pyramid scheme that ultimately must collapse for lack of new recruits. Many state laws prohibit pyramiding by allowing commissions to be paid only for retail sales of goods or services, not for recruiting new distributors;
- Beware of multilevel marketing plans, which sell through layers of distributors, that claim to sell "miracle" products, promise enormous earnings, or that ask new distributors to purchase expensive inventory without providing any inventory buy-back program; and
- For work-at-home plans, get specific information about the tasks you will perform; how you will be paid, by whom and when; the total costs and fees, and what you get for your money.
The FTC urged consumers to report fraudulent get-rich-quick self-employment schemes to the National Fraud Information Center, a project of the National Consumers League, at 1-800-876-7060, 9 a.m. to 5:30 p.m. (Eastern) Monday through Friday, or via the Internet at http://www.fraud.org (no period). Complaint information from the NFIC helps the FTC and state AGs track and identify fraud operators.
The Federal Trade Commission votes to authorize filing of its 11 cases were all 5-0, and the complaints were filed in U.S. District Courts as noted on the attached list.
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 the defendant has actually violated the law. Each case will be decided by the relevant court.
Copies of the list of Operation Missed Fortune cases and the "get-rich-quick" consumer education materials are available on the Internet at the FTC's World Wide Web site at http://www.ftc.gov (no period). These documents and the complaints in the FTC cases also are available 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.
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