Government Alleges False Earnings Claims, Use of Shills as References
The Federal Trade Commission has won a court order temporarily halting the sale of pre-packaged small businesses consisting of display racks of computer software products by firms that the FTC alleges have used false earnings claims and “shills” as references to induce people to pay from $7,995 to nearly $80,000 for a distributorship. According to the FTC, few if any consumers made the $3,000 a month promised by the defendants or even recovered their initial investment. Pending a hearing on the case, the court has prohibited the challenged practices, and frozen the corporate defendants’ assets and appointed a receiver to manage the firms. The FTC also has taken over the defendants’ home page on the World Wide Web, so that consumers who access the page automatically will be linked to information about the FTC’s case.
The FTC complaint detailing the charges in the case names Infinity Multimedia, Inc. and Quality Marketing Associates, Inc., both of Pompano Beach, Florida, and corporate owners and officers William B. Chappie (who uses a number of other names as well) and Joseph Anthony Wentz. The defendants have been selling their distributorships since at least April 1995, the complaint states. One home page address where the defendants can be located is http://www.netexpress.net/infinity/ The defendants provide distributors with certain CD-ROM titles, typically charging a price from $6 to $21 per title, and recommend that distributors establish retail prices from about $12 to $39 per title. The defendants also identify and pay for the services of locating companies to help distributors place the racks in stores.
The FTC in recent years has brought charges against numerous firms using false promises or deceptive means to sell vending machine and display rack distributorships, and cautions consumers to make every effort to verify claims made by the company about earnings, location assistance and sales, and to visit the actual locations of machines or racks owned by the firms’ reference distributors. In this case, the FTC charged, the defendants induced consumers to buy a distributorship by falsely stating that:
- distributors could reasonably expect to make a specified amount of earnings, such as $3,000 a month or sales of two to three CD-ROM titles a day;
- distributors would recover the amount they invest in the distributorships and the initial inventory; and
- all consumers who have invested in the defendants’ business opportunities continue in profitable operation.
Moreover, the FTC charged, the defendants’ references had not, as stated, purchased one of the distributorships. The FTC also charged that the defendants imposed undisclosed time restrictions on their promise that they would exchange any CD-ROM titles at the distributors’ discretion. In addition, the FTC charged, the locating companies are not typically successful in placing display racks in profitable locations, contrary to the defendants’ representations.
The FTC also charged the defendants with violating the Franchise Rule, a pre-purchase disclosure rule that requires franchisors to give potential franchisees a detailed disclosure document containing information about the franchise and its directors, including their litigation history, the full cost of the business, and the names of former franchises that consumers can contact. The defendants allegedly failed to provide the reference information as required, including statistical data about the number of franchisees terminated or not renewed by the defendants. The rule also requires franchisors who choose to make earnings claims to provide franchisees with a document containing substantiation for those claims, and the FTC charged the defendants with failing to provide the earnings claims document.
The FTC is seeking an order that would prohibit the defendants from engaging in the challenged practices, require them to comply with the Franchise Rule in the future, and require them to pay redress to distributors. A hearing on the FTC’s motion for a preliminary injunction, which would extend the conduct prohibitions and asset freeze pending the outcome of a trial on the matter, will be scheduled shortly. The FTC’s Denver Regional Office is handling this case, and received substantial assistance from the Office of the Comptroller for the state of Florida and the California Attorney General’s Office.
The FTC vote to file the complaint was 5-0. It was filed under seal on June 24 in U.S. District Court for the Southern District of Florida, Fort Lauderdale Division. The seal was lifted yesterday afternoon.
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. The complaint is not a finding or ruling that the defendant has actually violated the law. The case will be decided by the court.
The FTC has developed free brochures for consumers with tips on avoiding business opportunity fraud and information about the data potential investors are entitled to under the FTC’s Franchise Rule. They brochures are titled “Business Opportunity Fraud: Vending Machines and Display Racks,” and “Franchise and Business Opportunities.” Copies of them, along with the complaint in this case, 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. FTC news releases and other materials also are available on the Internet at the FTC’s World Wide Web site at: http://www.ftc.gov
(FTC File No. 952 3355)
(Civil Action No. 96-6671-CIV-Gonzalez)
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