U.S. and Canadian Enforcement Authorities Announce "Field of Schemes" Campaign Targeting Upsurge in Number & Variety of Investment-Related Telemarketing Fraud
Investment fraud is spreading to new fields -- from movie productions to Internet "shopping malls" to breeding snails for snail ranching -- and more traditional investment scams, such as pyramid schemes, also are on the rise. Federal and state law enforcement officials are responding to this upsurge. Today, securities regulators from 21 states and two Canadian provinces, represented by the North American Securities Administrators Association, Inc. (NASAA), and the U.S. Federal Trade Commission (FTC) announced "Project Field of Schemes," a campaign comprising nearly 61 law-enforcement actions and a major consumer education component. Field of Schemes is designed to help mow down some of the newest hybrids as well as the age-old favorite telemarketing investment frauds that are bilking small investors out of an increasing share of the estimated $40 billion lost to telemarketing fraud every year, officials said.
"Swindlers are becoming more creative in how they steal people's money," said NASAA President Mark J. Griffin. "And with the rising bull market in legitimate stocks providing historic returns, too many people are willing to believe the unbelievable. Losses from these non-traditional investment schemes are outpacing the amount defrauded from consumers in all other kinds of telemarketing scams."
Teresa Schwartz, Deputy Director of the FTC's Bureau of Consumer Protection said: "The only ones to reap any profits in this Field of Schemes were the scam artists. Their tactics can be powerful and, unfortunately for consumers, quite effective. They tout high profits and make it believable -- claiming a track record of great success, guaranteed income, and that large companies are eager to snap up the investment. They package their claims in glossy publications and use high pressure sales pitches that emphasize the need to act quickly. In the FTC cases alone, consumers may have paid more than $150 million to the defendants."
The proliferation of fraudulent investment telemarketing in America is confirmed by representatives of the National Tape Library, a national library of audio tapes of telemarketing calls maintained to assist civil and criminal law enforcement agencies. According to NTL librarian Sally Bailey, "The portion of tapes attributable to investment schemes has been increasing constantly during the last two years. These schemes are definitely an enormous consumer problem." The Council of Better Business Bureaus also released statistics showing a 46 percent increase in complaints about various investment-related businesses from 1995-1996.
The FTC and NASAA said that the Federal Bureau of Investigation and the California Department of Corporations executed search warrants on defendants in three of the Field of Schemes cases in connection with their own investigations. In addition, the Securities and Exchange Commission announced a law enforcement action against defendants named in one of the FTC Field of Schemes' cases, and the Commodity Futures Trading Commission brought a case as part of the project.
A GROWING FIELD OF SCHEMES
Among the allegedly fraudulent scenarios uncovered by investigators in the law-enforcement actions announced today are the following:
- A film production company offered consumers a stake in family films being produced by an award-winning producer and director whose past films have generated 500 percent returns for investors. While the producer, Lyman Dayton, is an actual movie producer, the FTC alleged that neither he nor his films have won many of the awards claimed by the defendants; his films have generated substantially fewer profits for investors; and the defendants allegedly oversold the partnership units, thereby reducing each investor's stake in the partnership and raising the break-even point for the partnership.
- The Massachusetts Securities Division alleges that EZ-Score, a company that promotes itself as producing a basketball training machine used by athletes to better their game, has fraudulently taken investor money. According to the complaint, a 34-year-old Waltham woman saw the product demonstrated at a trade show in Boston. After being promised a return of 8 percent plus 600 shares of stock in the company, she invested $6,000. Yet three years later, the investor has not received any payment or securities and company President Richard Chipperfield has not returned repeated phone inquiries.
- A firm projected earnings of up to 600 percent a year on investments in a partnership that purportedly was ready to unveil a virtual shopping mall on the Internet for live, on-line shopping in a format comparable to television shopping channels. Contrary to those claims, consumers who invested were left with essentially worthless stock certificates because the defendants have depleted all but 15 percent of the investors' money and have delivered the remaining funds to a shell corporation, according to FTC charges filed in court. Further, the defendants did not turn over to the shell corporation any operational Internet shopping mall, the FTC told the court.
- The Pennsylvania Securities Commission has issued a Cease and Desist Order to Global Financial, doing business as GFI Financial, Inc., an organization that offered and sold "Commercial Promissory Notes" at $25,000 apiece, supposedly to finance and develop international projects. These included "constructing state of the art medical facilities in Hungary," a "water treatment facility in Zaire," and "roadways and infrastructures in war-torn Bosnia." The notes offered 10 percent interest.
- Telemarketers for two Sherman Oaks, California, companies projected as much as a ten to 1 return on investments in the unregistered common stock of a company raising $1.98 million to reopen a gold mine in La Plata County, Colorado. They allegedly misrepresented that the federal government confirmed that the mine contains millions of dollars worth of gold, and that the proceeds from the offering would be used to finance the purchase of mining equipment and for extracting and processing of the ore into gold. In addition, they falsely claimed that Exxon and Mitsubishi are interested in acquiring the mine, the FTC alleged. Investment units sold for $15,000 each.
- The Missouri Securities Division charges Millennium Processing Systems of Newport Beach, California, with unregistered sale of securities and employing an unregistered agent. Millennium offers ATM terminals that not only can conduct credit card and smart card transactions, but also charge and recharge prepaid phone cards. A salesperson described the investment as being "a ground floor opportunity on the cutting edge of new emerging technology in the telecommunications and electronic banking industries." The investment was described as yielding a 33 percent annual return for four years, after which time the initial investment would be returned, equaling a minimum profit of 132 percent.
- Consumers who visited the website of a Tucson, Arizona, company read that they could earn up to $2,250 a week by participating in a multi-level marketing program purportedly to sell fine jewelry. The FTC alleged that this was really a pyramid scheme where most of the consumers who paid from $250 to $2,750 can only make money by recruiting others to sell, not by actually selling jewelry. Pyramid schemes always collapse, the FTC said, and only those participants at the very top -- usually the perpetrators -- earn any money.
- The British Columbia Securities Commission has permanently banned Goldman Stanley Consultants, Inc. and three associated companies from participating in the securities market. Using a storefront office, the four companies illegally distributed to B.C. residents foreign exchange contracts, securities that carry substantial risks. The Forex contracts were sold without a prospectus by unregistered individuals. In addition, trading activity was not carried out as represented to clients, account statements were falsified, and funds were misappropriated. Andy Chan, who controlled all four companies, was banned from participating in the securities market for 30 years and required to pay a $100,000 penalty.
Other schemes targeted as part of Field of Schemes involve communications technology, "error" stamps, foreign construction projects, digital fingerprint identification technology, precious metals, Internet-related investments, and oil-drilling scenarios.
States and provinces that have brought cases include: Alabama, Arizona, Arkansas, British Columbia, California, Idaho, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts, Mississippi, Missouri, Montana, Ohio, Pennsylvania, Quebec, South Carolina, Virginia, Washington, and Wisconsin.
In the cases brought by the FTC, the agency is alleging that the defendants violated the FTC Act, which prohibits unfair and deceptive practices, and is seeking court orders prohibiting the defendants from engaging in similar deceptive practices and requiring them to pay redress to injured consumers. In addition, in some of the cases, the FTC alleged violations of its Telemarketing Sales Rule which, among other things, prohibits telemarketers from misrepresenting any material aspect -- including the risk, liquidity, earnings potential or profitability -- of any investment opportunity. Violations of the Telemarketing Sales Rule can lead to civil penalties of up to $11,000 per violation.
TIPS FOR INVESTORS
The consumer education component of Field of Schemes warns consumers about the hottest investment scams being pitched today, and recommends that consumers call the FTC's Consumer Response Center at 202-326-3128 to report suspected frauds. According to FTC brochures and a NASAA Investor Alert, consumers can best protect themselves if they are:
- Listening for the phony sales pitch, which often includes projections of big profits in a short time; claims that little, if any, risk is involved; offers of a ground-floor opportunity for realizing a better return than on another investment; and pressures consumers to act now because the market is moving;
- Skeptical about unsolicited phone calls regarding investments, especially from out-of-state salespeople or companies of which they have never heard;
- Wary of testimonials from references who may have been paid by the fraudulent companies to claim that the investment brought them sudden wealth, and which may signal a Ponzi scheme where promoters use the money from new investors to pay high returns to early investors;
- Cautious about firms that offer partnerships, because fraudulent promoters generally structure deals to siphon off most of the investors' money, and never intend to turn over a functioning business; and
- Watch out for multi-level marketing programs where recruiting new participants, rather than product sales, are emphasized.
Copies of materials associated with Field of Schemes are available as follows:
The FTC brochures -- "Facts for Consumers: Investment Risks" and "Consumer Alert--How to Avoid Losing Your Money to Investment Frauds" -- and the complaints in the FTC cases are available from the FTC's web site at http://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.
Information about cases taken by state and provincial securities agencies, copies of the NASAA Investor Alert, and a transcript of NASAA President Mark J. Griffin's statement to the media are available on the NASAA website at http://www.nasaa.org. The NASAA Investor Alert also can be obtained by writing to: Field of Schemes, NASAA, One Massachusetts Avenue, N.W., Suite 310, Washington, D.C. 20001; or by calling toll-free 1-888-84-NASAA.
Federal Trade Commission
Brenda Mack, 202-326-2182
Bonnie Jansen, 202-326-2161
North American Securities Administrators Association
Scott Peterson, 202-737-0900
Craig Budnick, 202-737-0900