Today, we announce Operation Trade Name Games, an aggressive assault on swindlers who conjure up images of sure and generous profits through ownership of carousels for displaying and selling stuffed toys, t-shirts and trinkets that bear the names of some of the most popular manufacturers today -- Disney, Warner Brothers, Coca-Cola, Pepsi, and the national and collegiate sports associations. The fraudulent telemarketing companies we sued in this campaign promised customers fantastic inventory and incomes of up to $100,000 and more a year for initial investments typically ranging from $10,000 to $20,000. But few if any consumers who bought business opportunities from these firms even made back that initial investment.
So far, the campaign has netted 18 enforcement actions, including successive actions by the Kansas Attorney General and the FTC against one of the largest of these scheme operators, Parade of Toys. The transcript of a videotape you have in your press packet illustrates the kinds of misrepresentations these firms make:
- about being affiliated with these well-known companies -- they aren't;
- about having access to thousands of hot, licensed products -- they don't;
- and about the earnings consumers will make -- they won't.
I am delighted to be joined today by Kansas Attorney General Carla Stovall. Her state's case against Parade of Toys was the initial action in the law enforcement campaign that we announce today. I also am very pleased to be joined by Sandy Litvack, who is Executive Vice President and Chief Operating Officer of The Walt Disney Company. Walt Disney provided invaluable information for our cases. Disney became concerned when its own patent and trademark infringement action failed to stop the fraud that we now have shut down.
Display rack business opportunities featuring Disney and other well-known trade named products are a burgeoning new twist on the vending machine and display rack distributorship frauds we've prosecuted in the past. The pitch is basically the same -- that an investor can buy a minimum number of machines or racks, and place them in profitable locations -- such as gas stations, gift shops, airports and hotels -- and then all they have to do is reorder, restock and collect their money. What's new is the product -- purportedly, investors will earn substantial profits because they will be selling products from the hottest companies in the market, and consumers will buy on impulse.
Classified ads in dozens of newspapers over recent months have led with bold headlines blasting the names of these well-known companies, insisting for example that "only those who demand to earn $100,000 a year or more" need call. Salespeople for the fraudulent firms often follow up by falsely implying that the carousel company is affiliated with or licensed by the well-known firm. Their goal is to lend credibility to what turn out to be outlandish claims about earnings an investor is likely to make. So far, the tactic has worked on literally thousands of victims.
Indeed, our investigations alone have turned up dozens who have sworn in court-filed documents that they made only pennies a day, or lost money, on the racks they purchased. We estimate that consumers nationwide have lost in excess of $50 million to these scams since the beginning of 1995. The villains in these dramatic scenes are the opportunists who exploit a recognized corporate name to sell an unworkable business.
Why are they unworkable? These business opportunities fail time and time again because they are sold by swindlers who are interested only in lining their own pockets, not in selling consumers a business that can succeed and make money. So, for example, instead of delivering toys and hats associated with the movie "Hercules" -- they're dumping out-of-date or defective merchandise. Take a look at these balloons -- they were returned -- unsold -- from a major retailer, and the package still has that retailer's price sticker on it. Then Parade of Toys acquired the package and sent it to one of their investors. So much for promises of hot, new merchandise.
In another of the FTC's six cases, the defendants charged distributors RETAIL rather than wholesale prices for inventory, leaving distributors unable to mark the prices up enough to make sales and still earn a profit. That same defendant allegedly neglected to disclose that they deducted approximately 30 percent of the initial investment as a "set up" fee before calculating the inventory to provide distributors. Some firms promise exclusive territories, but investors end up competing with neighbors. Many firms claim that locating companies can help investors place the racks in profitable locations. But given the inventory and other deceptive practices, we're told that this is just not the case. And investors may not realize that locating services can cost a couple of hundred dollars or more per location, for a high-traffic outlet -- and that's IF the locator can get the investor a good location given the merchandise they end up trying to sell.
The result of all of this is that very few, if any, distributors make the kinds of earnings they're led to expect, and many are faced with retailers who demand that they pull their carousels from the store -- still full of unsold products.
In addition to the law enforcement actions we announce today, Project Trade Name Games involves a massive education component launched in coordination with Disney, Coca-Cola, Pepsi, Warner Bros., and the Coalition to Protect the Advancement of Sports Logos. You'll see three consumer education pieces in your press packet -- the "Display Rack and Ruin" one was produced in cooperation with Disney. The FTC also has developed a special page on trade-named display rack scams on our website, at www.ftc.gov.
(Bernstein then introduced additional speakers.)
*This may not be an exact transcript of Bernstein's remarks.