The Federal Trade Commission has won court orders against three companies and related individuals charged with making a variety of deceptive claims in two separate schemes to market investments in a new wireless communications technology called Interactive Video and Data Service (IVDS). The FTC alleged that, in each scheme, the defendants used a variety of "information superhighway" related claims to induce consumers nationwide to invest thousands of dollars each in this new technology. Because the defendants have diverted most of the consumers' money to their own operations and profits, the FTC alleged that investors face a substantial risk of losing most, if not all, of their investment.
In the first case, the FTC filed its charges against:
-- Chase McNulty Group, Inc., based in St. Petersburg, Florida, and which has sales offices in Boca Raton and West Palm Beach, Florida, and in Englewood, Colorado; and corporate officers E. Lee Elliott, Jeffrey D. Trotter, and Anthony L. Rick; and
In the second case, the FTC filed its charges against:
-- Digital Interactive Associates, Inc., which has offices in Denver, Colorado, and Fort Lauderdale, Florida; Market Logistics Group, Inc., based in Orlando, Florida; and David J. Dambro, Michael Dambro, Terry K. Vickery, Douglas F. Mallach, Carlo Anneke, and Vikki A. Lucas.
Federal district courts in both cases have issued temporary restraining orders which, pending the outcome of hearings on the cases, prohibit all of the defendants from continuing to make any of the allegedly deceptive marketing claims; in the Chase case, the court also appointed a receiver to manage the corporate defendants' financial affairs and froze the assets of the defendants. The FTC is seeking permanent injunctions and refunds for investors.
IVDS technology will allow consumers who subscribe to send and receive data by wireless transmission through units linked to their television sets. IVDS cannot broadcast a moving video image, but can be used for ordering merchandise shown on TV, banking, viewer polling, games or other purposes. The Federal Communications Commission uses an auction process to award two IVDS licenses per market to the highest bidders and, to date, has awarded licenses in the nation's 300 most-populous markets. IVDS may be offered to the public in some markets by the end of the year.
In recent years, the FTC has targeted numerous schemes offering investments in opportunities to acquire FCC licenses to operate and to develop various types of wireless communications systems, including cellular telephones, wireless cable, and specialized mobile radio systems. These are the first two FTC cases in the IVDS area.
According to the FTC complaints detailing its charges in these two cases, the defendants advertised investments in various partnerships to obtain IVDS licenses and develop IVDS systems through written promotional materials, radio commercials, and via telemarketing sales presentations. The FTC charged that the defendants falsely represented the kinds of returns consumers could expect on their investments, the value of the licenses and the systems to be developed, the level of services IVDS license- holders can offer, and the amount of risk they faced.
In the Chase McNulty case, the defendants represented -- falsely, the FTC charged -- that the majority of the money they collected from investors would be used for FCC-related services supposedly required in order to bid for and receive a license. Consumers paid $5,000 to $6,000 for each partnership share they purchased, the FTC alleged. The FTC further alleged that the defendants misrepresented to investors that they would not have to provide significant additional funds for building out the system because the defendants purportedly had third-party financing.
In the Digital Interactive case, the FTC charged the defendants with failing to disclose that one partnership will pay $5.3 million for a 90 percent interest in an IVDS license that was sold for $290,000 by the FCC in July 1994. The FTC also charged that the Digital Interactive defendants failed to disclose that the partnerships likely will need millions of dollars in additional capital. Also in this case, the FTC alleged that the defendants falsely represented that the completed systems would face little competition from other interactive television service providers.
Finally, in both cases, the FTC alleged that the defendants should have disclosed to investors that most of the money they raised went to pay the costs of their telemarketing operations and their profits.
The partnerships in the Chase McNulty case are called Interactive Capital Group (ICG) and Interactive TeleMedia Group (ITG). ICG conditionally has won licenses to operate systems in Bradenton, Florida; Provo, Utah; Kenosha, Wisconsin; and South Bend-Mishwala, Indiana. The partnerships in the Digital Inter- active case are called IVDS Interactive Acquisition Partners (IIAP) and Charleston Interactive Television Partners (CITV). IIAP has licenses for Atlanta, Georgia; Minneapolis-St. Paul, Minnesota; and Kansas City, Missouri-Kansas. CITV will pur- portedly acquire a license for Charleston, South Carolina.
The FTC filed its complaint against the Chase McNulty defendants in U.S. District Court for the Middle District of Florida, Tampa Division. On April 5, 1995, the court issued a temporary restraining order, including an asset freeze and an order appointing a receiver over the company. On April 18, the defendants stipulated to a preliminary injunction continuing the asset freeze and receivership.
The FTC complaint against the Digital Interactive defendants was filed in U.S. District Court for the District of Colorado, in Denver. That court granted a temporary restraining order on April 7, and scheduled a hearing on the FTC's request for a preliminary injunction for April 28.
The Commission votes to file the complaints were both 4-0.
The Pennsylvania Securities Commission, the Florida Comptroller's Office, the Colorado Securities Division and the Office of the Securities Commissioner for the State of Kansas provided assistance to the FTC in these matters.
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. These complaints are not findings or rulings that the defendants have actually violated the law. The cases will be decided by the relevant court.
The FTC has issued a consumer brochure offering tips and cautionary notes on "Investing in Interactive TV Licenses" which is available for free. Copies of the brochure and the complaints are available from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580.
FTC File Nos. Chase McNulty -- 942 3252; Civil Action No. 95-524-T25E
Digital Interactive -- 942 3344; Civil Action No.95-Z-754