How a Simple Secret in Due Diligence could have Saved the Day.
The FTC announced, May 15th, 2007 they had recovered $160,000 for Franchisees Who Bought Web Services Businesses. Although the press release doesn't say so, it is unusual for the FTC to recovery anything from a business opportunity fraud -by the time they get sufficient complaints, the fraud has run its course and the "sales" criminals have scurried back into their holes.
What is interesting about this case is it shows how a simple exercise in proper due diligence could have saved the day.
According to the press release,
"A company and its owner will return $160,000 to consumers and are banned for life from promoting or selling franchises or business opportunities. The Federal Trade Commission charged that they used bogus earnings claims to lure franchisees into buying their Web services businesses, and failed to tell customers that the owner was under a previous FTC order for deceptively promoting rare coins.
The FTC charged that Netvertise, Inc. and Elliot Krasnow violated federal law when they sold franchises for Web site design and promotion services to businesses. The franchises, which cost between $20,000 to $100,000, offered various Internet services to small and medium-sized businesses, including the construction and promotion of Web sites, use of e-mail marketing, and off-site data protection. The franchise included Netspace's Search Engine Optimizing software, which they claimed would allow franchisees to create high-quality Web sites for clients that would appear on the first page of results from an Internet search engine.
According to the FTC's complaint, the defendants misrepresented that franchisees were likely to earn substantial incomes and overstated the value of the Netspace software. The complaint also charged that the earnings claims were unsubstantiated and that the defendants provided consumers with defective disclosure documents. In 1990, an order entered against Krasnow required him to pay $400,000 and prohibited misrepresentations when dealing in rare coins. The franchise disclosure documents did not disclose this to franchisees as required by law. The defendants also did not provide franchisees with an earnings claim document even though they made earnings claims to potential buyers. In fact, even though they made oral representations, the defendants' basic disclosure document said no earnings claims were made."
Here is the simple secret: 1) Figure out who all the directors of Netvertise, Netspace and the other related companies are. 2) Simply search at www.sec.gov, or at www.ftc.gov searching for information about the directors. In this case, you would have found the 1989 FTC case against Elliot Krasnow. A huge red flag!
Is this all way too easy, after the fact research? No. Look at this thread, in franchise-chat, started in February, 2005 shows exactly how and in real time I saved two investors from losing their money. A simple secret, which you ignore at your peril.
