The Pemberton Gang - Internet Kiosks
At Trade Regulation Talk, Peter Reap writes, about the Pemberton Gang, Paul, Ferris and Margaret:
"Two corporations and three individual officers and directors of the corporations violated the FTC franchise rule by making insufficient disclosures to prospective purchasers of public access Internet kiosks sold by the companies, a federal district court in Miami has ruled.
The defendants were jointly and severally liable to purchasers of the business, for varying portions of the more than $48 million defrauded from purchasers of the businesses.
The business ventures sold by the defendants were "franchises" under the meaning of the rule, according to the court. The defendants provided some prospective purchasers with a Franchise Disclosure Document, acknowledging in the document itself that the kiosk businesses were business opportunity ventures subject to the franchise rule."
The complaint can be read here, and the reasons for summary judgment 
can be read here.
This would be an ordinary business opportunity fraud, misrepresentations about earnings, location assistance, the use of shills, and obscuring the corporate structure, except for one interesting fact.
Pemberton had constructed a "Franchise Disclosure Document" and distributed it to some if not all of the distributors. The disclosure document was deficient and the Judge found that:
" the basic disclosure document for Transnet failed to correctly identify all of the directors and executive officers of the corporate defendant, their business experience for the past five years, and litigation history. The disclosure document failed to identify Paul Pemberton even though he was one of the individuals who directed and controlled the operations of Transnet as regional director and director of sales and marketing. In addition, the Transnet disclosure document failed to disclose that Cartwright previously worked at and was Director of Operations at Nationwide.
In addition, Defendants' basic disclosure document failed to provide a statement disclosing the names, addresses and telephone numbers of any previous customers of either Nationwide or Transnet, as required by the Franchise Rule.
Moreover, Defendants did not provide a reasonable basis for its earnings representations, failed to disclose additional information including the number and percentage of prior purchasers known by it to have achieved the same or better results, and failed to provide prospective business venture purchasers with an earnings claim document containing information substantiating its earnings representations (constituting a reasonable basis for those earnings claims). "
The difficulty this partial disclosure document presented is that the usual way of dealing with business opportunity fraud is for the FTC to point out the lack of a disclosure document, which has an immediate remedy. The failure to deliver a disclosure document, essentially, allows the FTC to shut down the biz op and obtain restitution as a matter of law. No further facts are required.
In this case, however, the FTC was required to gather evidence from more than 30 distributors and present their evidence via affidavits. The defendants chose not to put in any material. But the FTC was put to greater cost and delay.
It will be interesting to see if the FTC, if biz ops start putting out disclosure documents, argues that a disclosure document that is so deficient is not a disclosure document at all, for the purposes of the Act. (This is the official position of the franchise bar in Ontario, for the most part. The FTC Franchise Rule is materially similar to the Ontario Franchise Disclosure Act.)
