THE BIZOP NEWS

Several days ago, I attended along with twenty or so of my clients, a meeting with Chief of Police, a Crown Attorney, and senior Detective. The purpose of the meeting was to explain why fraud charges could not be brought against a noted franchisor fraud.

The key to the Chief/Crown's position was this: how could we prove to the Jury that the individual was a criminal as opposed to simply being a bad businessman?

However, in Grand Rapids, we have an excellent example of a Judge not buying the bad businessman excuse.

A judge did not buy John Sims' excuse that bad business led to the downfall of his ATM leasing company.

And his victims celebrated outside the courtroom after the judge exceeded sentencing guidelines and sent the once-prominent businessman to prison for up to 21 years.

'It shows crime doesn't pay,' said Steve Morin, who said his family lost more than $450,000. 'He deserves every day.'

Sims, 51, is headed to prison for 'lying, cheating and stealing' from people he was supposed to be working with in a legitimate enterprise, Kent County Circuit Judge Mark Trusock said Tuesday. State sentencing guidelines called for 10 to 28 months.

In all, Sims was charged with a series of scams that cost partners about $750,000.

'There is a pattern of criminality here,' Trusock said, referring to fake contracts Sims presented to partners. 'This is not someone going into business and, unfortunately, the business goes bad. It's lying, cheating and stealing, and that cannot be tolerated

ATM leasing frauds are ponzi schemes in which the fraudster shows fake leases to investors, which are supposed to be generating cash, and then uses the proceeds from new investors to pay out the old investors -hiding the fact that the leases were bogus to begin with.

Lying, cheating, and stealing. The three elements that push bad business practices into the realm of criminal behavior -in this case 21 years of criminal time.

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The Toronto Star had two excellent pieces on Franchise Fraud over the weekend, which are worth reading because they point some disturbing problems with Ontario's Franchise Disclosure Act.

In the first article, Rita Daly writes about an individual who purchased a cleaning franchise. Dozens of lives ruined after answering job ad

He had paid $7,500 – his life savings plus money borrowed from a friend – for work that never materialized. Devastated and destitute, Adams thought he was alone. But Countrywide, a Mississauga-based web of janitorial companies, has left a trail of debt and broken dreams stretching back to 2001.

Twenty-one individuals and families, tracked down by the Star, told near-identical stories of how they answered an employment ad, signed a contract with Countrywide, paid the business up to $12,000 for the promise of steady work, then lost their investment.

In desperation, many turned to small claims court. In Brampton alone, Countrywide companies have been sued at least 45 times since 2002, mostly unsuccessfully.

Given that this is a franchise, what recourse do these people have under the Ontario Franchise Act?

Well, as Rita Daly discovers they are some serious problems with trying to collect from the company. She writes about a couple that there hopes for refund were dashed

They wrote the letters five years ago, in the summer of 2002, following the bankruptcy of a company called Countrywide Maintenance Services Inc., a Mississauga janitorial business. Nearly 100 unsecured creditors lost money, many having paid thousands of dollars for the promise of office-cleaning jobs in the Toronto area.

"Please help us," wrote one woman who, along with her husband, paid $4,000 plus GST to Countrywide. "We have two kids to feed, car, house to pay rent. The money we gave was borrowed on our Visa."

The couple waited four months for cleaning work when they suddenly got notice the company had gone bankrupt.

Angst turned to anger, however, when some noticed Countrywide continued to do business from the same office and run the same employment ad looking for cleaners. Its trademark company, Countrywide Gleam Masters Inc., took over management, while a new firm called Countrywide Maintenance Systems Inc. resumed operation.

Cleaners tried and failed to get federal and provincial authorities and police to investigate further.

Today, Countrywide continues to operate and still complaints persist. Since the bankruptcy, the operation has, in fact, expanded into a web of incorporated companies, much like a franchise. It attracts investors or so-called "partners" who pay $12,000 to start their own cleaning companies, and who, in turn, are supposed to find cleaners or "subcontractors" who also pay a fee, often thousands of dollars, for the promise of work.

Ms. Daly suggests that there are "loopholes" in the Ontario Franchise Act, which allow this unfairness to continue. "There is no regulatory body to enforce the act, no rules governing contractual relationships and no penalties. Franchisees can demand a refund for no disclosure, but their only recourse is to go to court."

I have addressed the value of regulatory body to enforce the Act before, so I will simply repeat my observations about what should be done instead.

The Ontario Government could undertake to monitor Franchise and Business Opportunities trade shows, and ads for the same, to see that the participants actually have a real disclosure document.

The State of Florida routinely does this with trade shows in Florida; trade show promoters may be liable for misleading advertising otherwise. This is an important feature of due diligence that all states and provinces that license franchises should take.

Posted by michael webster at 2:15 PM | Permalink | Comments (0) | TrackBacks (0)

Why do such simple work at home scams continue to exist? They are one of the least clever con tricks around, and seemingly for very low stakes -the average pitch is for around $30. How do these cheesy scams continue?

Here is an interesting story which may shed some light on the problem, WNDU News on Premier Solutions

Premier Solutions is the most recent incarnation of a company that started out called Home Business System... in 2005, we filed a lawsuit...to enjoin that organization from taking part in these practices where they lied about how much money you could expect to earn," said Jim DePriest with the Arkansas Attorney General's Office.

But, despite the Arkansas Attorney General's lawsuit, the letters are still coming; and when Andrews called the number given on the letter he was greeted with:

"Hello, are you making this call because you would like the opportunity to make some money? If so, you've just come across an opportunity that could help you meet your needs…" said the woman’s voice on the recording for the envelope-stuffing scam.

The scammers still have everything up and running, and unfortunately, it huts people who need the money they lose.

"The victims tend to be elderly, because that's who stays at home. Or disabled in some fashion, and people who are looking to augment what might be a fixed income by working at home, so this a venerable part of the community," DePriest said.

What is the kicker on this?

"In April, the business was fined $1.3 million for more than 12,000 counts of deceptive practices in Arkansas. That money hasn't been paid."

No money paid, nobody in jail, and the scam continues.

Now you know all you need to know -scam criminals make money.

Posted by michael webster at 12:50 AM | Permalink | Comments (0) | TrackBacks (0)

Tracy Coenen has a good story about Barry Minkow and Pacific Wealth,

Barry Minkow Fraud Busting: Pacific Wealth Management

Is anyone surprised anymore when they learn about another fraud bust, courtesy of Barry Minkow and his Fraud Discovery Institute?

This time it’s Pacific Wealth Management. And it seems that the press has largely ignored this one. The SEC is alleging that Pacific Wealth Management was selling unregistered securities, with the investment offerings ranging from real estate to foreign currency. There were up to 800 investors who mortgaged their houses to invest with this company, and it is believed that they lost millions of dollars.

There is a nice frontloading story over at the Pink Truth,

Doing the Right Thing

I think many Mary Kay sales directors have convinced themselves that they are ‘working ethically.’ That they’ve made themselves believe that there is nothing wrong with the Mary Kay pyramid scheme and nothing wrong with the fact that almost all women will lose money in Mary Kay.

Here is an example of just such thinking. This Mary Kay sales director thinks she’s doing the right thing by ‘only’ having consultants purchase $1,800 or $2,400 of inventory when they start. Even though we all know that ‘part-time’ consultants don’t need that much.

At Entrepreneur, there is story about preventing inventor fraud

Protecting Yourself Against Scams and Crooks

It's a common story, yet it breaks my heart every time someone tells me their version: An aspiring inventor sends his or her product to an invention promotion company, pays a large fee (often their entire savings) and gets nothing in return. Not only have they been embarrassed, but they've also been depleted of the money they could've used to further develop their product.

Often these "firms" will charge thousands of dollars, promising to bring an inventor's product to market within a specified time period. They prey on the inventor's excitement and passion. These firms advertise on TV, radio, the internet, newspapers and in magazine classified sections. Their guarantee and promise of success is tempting.

Posted by michael webster at 12:23 AM | Permalink | Comments (0) | TrackBacks (0)

Here is a way to calculate the cost of due diligence for business opportunities, distributorship of vending machines in particular. Remember the adage that crime doesn't pay, when reading through the press release. The FTC's Press Release states that

Business Opportunity Marketers Pay $122,000 to Consumers to Settle FTC Charges: "Federal Trade An operation that was charged with deceptively marketing candy vending machine business opportunities will give back $122,000 to consumers who invested in it. The Federal Trade Commission charged that the operation lured consumers by falsely promising big incomes and prime locations for the machines, and hiring shills to reinforce the earnings claims.

The operation advertised that consumers could make “$1,710 per week” after buying its candy vending machine business opportunities and promised “prime locations” that had already been secured. Prices ranged from $7,000 to $59,000, and were supposed to include everything needed to start a business: vending machines; a recommended, professional locator service; and support to launch the business. The FTC’s complaint charged the operation made false earnings claims and deceptive representations about available locations, provided phony references, and did not provide complete and accurate required disclosure documents.

The orders announced today settle the charges against all of the defendants: Harvey Frank Milner, Richard M. Norcross, and Richard D. Norcross, as well as the companies – Route Wizard, Inc.; Liberty Routes, Inc.; Ready Routes, Inc.; RouteCrafters, Inc.; Ca$h Route$, Inc.; NovaStar Vending, Inc.; and Alliance Locating Co., Inc.

The orders prohibit the defendants from misrepresenting any business venture and prohibit false earnings claims or misrepresentations about locations. The orders prohibit the use of shills and prohibit the defendants from violating the Franchise Rule or the Business Opportunity Rule, including failing to provide a complete and accurate disclosure document to consumers, and failing to have a reasonable basis for any earnings claims.

Harvey Frank Milner and his wife, Janice Wood-Milner, will give up $42,000 – the total amount of money that they received from the scheme. Richard M. Norcross and his wife, Summer L. Norcross, will pay $30,000, based on their financial disclosures. Richard D. Norcross and his wife, Sasikant L. Norcross, will pay $50,000, also based on their financial disclosures. The wives of the defendants are not accused of wrongdoing, but have allegedly received ill-gotten gains and do not have a legitimate claim to them.

The orders for Richard M. Norcross, Richard D. Norcross, and the corporate defendants entered a judgment of $3,382,070.61 – the total amount consumers paid – against them, which is suspended, based on sworn financial disclosure documents. The order for Sasikant L. Norcross enters a judgement of $113,445 – the total amount she received – against her, which is also suspended. The suspended judgment amounts will be due in full, minus any payments already made by other defendants, if a defendant lied about his or her financial status.

I see, the fraud took in $3.3 m and the scammers paid .11 m, or about 3 cents on the dollar. Crime doesn't pay? Maybe not, but it sure seems rewarding.

Why do these frauds continue to exist? People will not pay $300 - $400 to do the proper due diligence -they know that there is only bad news.

How much would you have paid to have avoided losing 97% of your investment?

Posted by michael webster at 12:43 PM | Permalink | Comments (0) | TrackBacks (0)

In an update, the US Attorney announced that American Entertainment Distributor Salesman Charged with Fraud

R. Alexander Acosta, United States Attorney for the Southern District of Florida, and Henry Gutierrez, Inspector in Charge, Miami Division, United States Postal Inspection Service, announced today that criminal fraud charges were filed against two additional defendants in a scheme to sell DVD vending machines. The charges are part of a continuing crackdown by federal authorities on "business opportunity" fraud in South Florida that during the last several years has sent 60 people to prison.

A federal grand jury in Miami, Florida returned a Superseding Indictment that charged defendant Anthony Rocco Andreoni, 47, of Hollywood, Florida, with conspiracy, mail fraud, wire fraud, and money laundering in connection with his involvement in American Entertainment Distributors, Inc. ("AED").

The Superseding Indictment also charged defendant Russell G. MacArthur, Jr., with various fraud charges and with criminal contempt. MacArthur was originally indicted in 2005, fled to Costa Rica, and was recently extradited to the United States to stand trial. Andreoni had not previously been charged.

In addition, a criminal information was filed, charging defendant Neal Isanuk, 50, of Port St. Lucie, Florida, with conspiracy to commit mail fraud.

The Indictment states that MacArthur and Andreoni were the undisclosed founders of AED. Isanuk was a sales representative for AED. AED was based in Hollywood, Florida, and from 2003-2004, sold a business opportunity involving a DVD vending machine. More than 400 consumers throughout the United States lost $19 million in the scheme. According to the Indictment, AED exaggerated the business' potential profits, falsely promised to secure good locations for the machines, and referred prospective purchasers to phony "references" who were on AED's payroll. The purchasers paid AED $28,000 to $40,000 per machine.

Nine individuals connected to AED have already been convicted in connection with the scheme, including Russell MacArthur's brother, James MacArthur, the president of AED, who is serving a 10-year sentence.

Those charged in the Indictment face up to 20 years imprisonment per count on the fraud charges. The money laundering charges against Andreoni carry a 10-year maximum sentence. There is no statutory maximum penalty for criminal contempt. Isanuk faces a maximum of 5 years imprisonment.

Mr. Acosta commended the investigative efforts of the United States Postal Inspection Service. This case is being prosecuted by Patrick Jasperse and Douglas Stearn, Trial Attorneys, United States Department of Justice, Office of Consumer Litigation.

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Here is the advice that the FTC routinely passes out about how to Recognize Business-Opportunity Fraud

"The Federal Trade Commission (FTC) says that fraudulent business opportunities consistently rank in the top 10 categories in its database of consumer fraud complaints.

"Some scam artists are really sophisticated," says Dan Salsburg, attorney for the FTC. "They know exactly how to keep consumers from guessing the true nature of their business by rounding up phony references or creating misleading documents."

Salsburg says savvy consumers can learn to spot the telltale signs of fraud. For example, many fraudulent promoters send spam email or post Internet ads involving vending machines for candy, soda, snacks or personal care items; display racks for greeting cards, CDs, perfume or similar items; or opportunities to buy into medical-billing or envelope-stuffing businesses or activities related to the Internet.

Other tip-offs include claims of high pay in weeks or months for little effort ("work only hours a week"), as well as claims about working conditions like the ability to "set your own hours," "be your own boss" or "work from home." The opportunities cost $5,000 on average, Salsburg says.

According to the FTC, many business opportunities offered through the classifieds or via spam email have little chance of success -- for example, a business with little or no demand in the market; cheap, low-quality or outdated merchandise; poor customer service; and few, if any, locations."

The problem with this advice is that it wrong. (Also, Salsburg is completely wrong about the average biz op loss -the average pitch is for around $20k)

People who are get conned or defrauded are not lacking in rationality or reason.

The people I have interviewed over the years all felt that there was something wrong with the scheme -but for some reason, they overrode their gut concerns.

Why?

There are a number of reasons, but the basic pyschological mechanism is cognitive dissonance. Individuals who get cheated have made a commitment, which is often unknown to them, to the business opportunity or franchise. When they uncover problems with the scheme, they have a choice: give up the commitment or rationalize away the gut concerns. The latter choice enables fraud.

Here is a simple example. One client of mine was defrauded over almost $100k in a vending scam -nothing was delivered.

This client is very bright, and had uncovered a number of real problems with the scheme. I was quite impressed with the resulst of his due diligence.

But for him, purchasing this vending route was going to provide much needed economic independence from his family business obligations.

Therefore, every flaw in the scheme was indirectly an attack on this important value.

He rationalized, therefore, the flaws he discovered with his due diligence as attacks on his work ethic -this was a vending opportunity, surely hard work could overcome all the problems.

Well, all the problems except for not getting working machines and have no locations.

We will not stop fraud by treating the victims as somehow deficient in reasoning or rationality.

To attack fraud, we need to be more aware of the automatic compliance techniques that con criminals use.

We need to develop automatic and unthinking defences to these techniques.

Posted by michael webster at 7:49 AM | Permalink | Comments (0) | TrackBacks (0)

I am a big fan of Trade Associations, of all kinds.

Many people don't know that there iss a trade association for vending, National Automatic Merchandising Association, NAMA.

Here is a story from about vending fraud, from one of NAMA's website. Federal Judge Sentences Three In Vending Opportunity Scam @ Vending Market Watch News at AMonline.com

But what caught my attention was the editor's note.

"Editor's Insight: The Justice Department and law enforcement agencies are paying closer attention to business opportunity scams. Vending trade organizations should formally thank law enforcement agencies for these actions. Law enforcement professionals, like anyone, appreciate being appreciated.

The National Automatic Merchandising Association and many state organizations have supported efforts to warn consumers about these schemes, but there is no sure-fire way to protect people from their own poor judgment.

Because NAMA is involved in ongoing efforts to fight business opportunity scams, it is one more reason that operators should support their national trade association. 06-22-07 by Elliot Maras"

I have been involved in prosecuting, investigating, and warning about business opportunity frauds for over nine years. I have interviewed over a thousand people during that time. Over 95% of the victims were cheated by classic vending, payphone or ATM frauds. Not one of them knew about NAMA or the Canadian equivalent, CAMA.

Why is this? Well, NAMA's web page on business opportunity fraud is nothing more than a series of links to the FTC pages, without even any links to the 26 states who have business opportunity or seller assisted marketing plans. NAMA seems content to simply ignore the seamy side of their industry.

Business opportunity laws seem to be known only to regulators.

Posted by michael webster at 7:03 AM | Permalink | Comments (0) | TrackBacks (0)

David Phillips has an excellent due diligence article about iMergent Beware of iMergent's Sketchy Policies

Sales and marketing practices which are the subject of numerous State Attorney General investigations, a formal SEC investigation related to potential violation of securities laws (including the alleged disclosure of earnings forecasts to select investors, a Reg. FD ‘no-no’ ), and alleged accounting irregularities—all these price-busting concerns aside, the share price of iMergent, Inc. (IIG) has soared 95 percent in value during the last year.

Headquartered in Orem, Utah, the company sells its proprietary StoresOnline Pro software and training services, developed to help users build a successful Internet strategy to market products, accept online orders, analyze marketing performance, and manage pricing and customers. In connection with Internet software, iMergent also offers website development, website hosting, marketing and mentoring products and services.

iMergent typically reaches its target audience through concentrated direct marketing efforts to fill Preview Sessions, in which a StoresOnline expert reviews the product opportunities and costs. The sessions lead to a follow-up Workshop Conference, where experts train potential users on the software and services and encourage them to make purchases.

What potential distributors won't recognize is that the opportunity is subject to state and federal business opportunity laws or franchise laws.

Attending a workshop, paying $5,000 for the opportunity to do so, and then trying to sell services doesn't strike the average person as the purchase of a franchise. Or in the case of Utah, the buyer of a seller assisted marketing plan.

This is one of the biggest problems with the federal, state and provincial laws which are designed to protect individuals: the purchasers are completely unaware of the laws which are there for their protection -worse many of their advisors are also unaware of the requisite disclosure obligation.

Posted by michael webster at 6:09 AM | Permalink | Comments (0) | TrackBacks (0)

Here is an unusual story, a vending opportunity failure, which did not involve fraud.

WATERLOO --- When Ryan Madison started his business, Arquel Vending, four years ago, he just knew the business would flourish.

Black-owned businesses would flock to him as clients, to support one of their own, he figured. Other businesses would follow suit, preferring to have a local vendor's vending machines in their workplaces. Within three years, his business would grow from his first, single bulk machine to 100,000 bulk and snack machines. He would move the business from the basement of his home to its own physical location, and hire employees.

"And after the vending machines, I was going to buy a game room, because there's not really anything for the kids to do," Madison said. "And then I was going to open a restaurant, and then I was going to buy a building ...."

That was the plan. The reality was different.

He hasn't been able to add a new client in eight months. The business has about 100 vending machines, many of which are kept in the basement of his home, where he still runs the business from. The business is making enough money to support itself, but that's all. Madison has started working a second shift job at Ferguson Enterprises, and has started contemplating closing down his vending business.

When start-up businesses fail, it's for any number of reasons, said Mike Hahn, senior program manager with the Regional Business Center. Citing a recent study published by US Bank, Hahn cited the most common reasons for failure:

--- Not having a well-developed business plan.

--- Overly optimistic about sales and money needed.

--- Entrepreneurs don't recognize or acknowledge their weaknesses, and don't seek help in those areas.

--- Inexperience.

--- Poor at handling or understanding cash flow.

--- Starting out with too little money.

--- Improperly pricing product or service.

--- Poorly marketing the business.

--- Not understanding or ignoring the competition.

--- Focusing or relying too much on one customer.

--- Hiring the wrong people.

--- Micromanaging, or not being able to successfully delegate tasks to employees.

Posted by michael webster at 6:40 AM | Permalink | Comments (0) | TrackBacks (0)

ATM Scrip machines are similar to ordinary ATM's, but instead of dispensing cash they dispense scrip or dollars that can only be used in the merchant's particular location. For Canadians, this would be like an ATM machine which only dispensed Canadian Tire dollars. I can imagine that one use for such machines for a large retail environment which wished to sell its own coupons at a discounted rate, for example.

But what is terrific about their website is this copyscaped page on why most business opportunities fail. It is great, not just because ATM Scrip is agrees with what I have written about due diligence and location services, but the article puts the correct emphasis on selling. If you cannot sell a merchant on locating one of these machines, you should not be in the business. There is, outside of investing a public company, no such thing as passive investment in the ATM distributorship business. Nobody who can sell, needs to borrow money from you at 20 or 25%. This is hard for most people to understand, as they only focus on their supposed return from investing in a ATM distributorship. But think about it from the sellers point of view: he claims to have locations, but needs money to purchase the ATM's. He will pay you 20 to 25% on your investment, or loan to him. The obvious flaw here is that he should be able to obtain credit from a bank at significantly lower than 20 or 25 points, if there is a real business. But he cannot because there is no real business.

Posted by michael webster at 9:19 AM | Permalink | Comments (5) | TrackBacks (0)

Entreprenuer has an interesting story called

It's Your Party: "

"When Tupperware parties first became popular decades ago, not many people could have predicted the longevity of the plastic containers--or the company itself, for that matter. Nor could anyone have predicted the groundswell of interest in today's breed of home parties, in virtually every industry imaginable--from power tools to beauty products to apparel. Home parties now account for about 29 percent of the more than $30 billion in U.S. direct sales, and there are 14.1 million direct-sellers in the U.S. Even big companies like The Body Shop and Crayola are getting in on the action and adding direct-selling arms to their existing operations.

The numbers are only expected to grow, according to Amy Robinson of the Direct Selling Association. "The majority of companies [joining the] DSA are party plan companies," says Robinson. "They are smaller, newer companies started by entrepreneurs from their basements in a lot of cases." These entrepreneurs are passing on their passion for entrepreneurship to people who want to start businesses of their own but don't want to start from scratch. The opportunities are there for the taking if you are prepared to research the one that's right for you--and if you're prepared for the hard work that accompanies any startup."

Unfortunately, the article gives individuals no due diligence ideas. It is worthwhile remembering why in the 1940's through to the 60's Tupperware was it.

First, after World War II, the only plastic products there were war issue and not consumer "ready". It was opaque, greasy looking, and had poor seals. Earl Tupper developed a new product plastic product - clear, with consumer appeal, and a with tight fitting top, based upon how paint cans were sealed. Such a product must have been an instant success, right?

No, the product fell stillborn and Earl Tupper's wonderful invention would have gone by the wayside, but for a meeting with Brownie Wise -the remarkable woman who was selling Tupper's product through home parties. People needed to see a demonsration of the product to over come their skepticism about plastic. It was critical for the acceptance of the product that the consumer be able to feel, touch and pick-up the product. Now does your home party product require a demonstration for acceptance by the consumer? If not, why isn't being sold through a catalogue? Things to think about before you start hawking vitamens, cosmetics, etc., to your friends and neighbours.

Posted by michael webster at 2:34 AM | Permalink | Comments (0) | TrackBacks (0)

Scammer Says Goodbye to False Claims about Greeting Card Business Opportunity

Not much, according to the FTC Press Release, "A businessman has settled Federal Trade Commission charges that he sold his greeting card display rack business opportunities by misrepresenting the potential earnings that consumers could make. The FTC also alleged he did not provide any disclosure documents to purchasers, as required. The settlement bars the businessman from making false earnings claims, using shills, and misrepresenting the profitability of secured locations in the future, and prohibits him from violating the Franchise Rule or Business Opportunity Rule.

Thomas E. Richardson, the man behind Mid-South Distributors, advertised his greeting card display rack business opportunities in classified ads in local newspapers, claiming that purchasers could earn as much as $65,000 a year. Based in Florence, Alabama, he sold distributorships in Georgia, Alabama, Tennessee, Mississippi, Florida, and Kentucky. Richardson promised potential purchasers that for an investment of $8,500 or more, they would receive everything they needed to start a business: an initial inventory of greeting cards, display racks for the cards, and profitable locations where he would supposedly place the cards and racks for the purchaser.

According to the FTC, consumers never earned anything close to the income levels they were promised. The Commission alleged that in almost every case, consumers made less than $100 per month. The highest earning purchaser only returned $2,006 for the entire year by investing in 20 locations. In addition, Richardson often did not provide his customers with the promised number of locations for their display racks. Typically, the locations he did provide were not in high traffic areas, and resulted in few greeting card sales for the consumers. Also, the FTC accused Richardson of not providing any of the disclosures that are required by the Franchise Rule."

These are the standard elements of a business opportunity fraud, the only thing a bit unusual is that Richardson was still using the classified ads. We see a lot more use of the internet, list brokering, and trade show attendance these days -the use of biz ops in the classifieds seems to be disappearing.

Posted by michael webster at 7:40 PM | Permalink | Comments (0) | TrackBacks (0)

According to the Department of Justices' Press Release, of May 25th, 2007

"R. Alexander Acosta, United States Attorney for the Southern District of Florida, and Henry Gutierrez, Postal Inspector in Charge, United States Postal Inspection Service, announced that defendants James Settembrino, Lee Samuel, Bernardo Susi, Charles Bohn and Benjamin Goss were sentenced today for conspiracy to commit mail fraud in connection with their activities at Cash Link Systems, Inc., of Hollywood, Florida. Settembrino was sentenced to a term of 57 months' imprisonment, 3 years of supervised release, and was ordered to pay $1,508,394.98 in restitution. Samuel was sentenced to a term of 46 months' imprisonment, 3 years of supervised release, and was ordered to pay $2,485,576.27 in restitution. Susi was sentenced to a term of 41 months' imprisonment, 3 years of supervised release, and was ordered to pay $1,762,789.90 in restitution. Bohn was sentenced to a term of 27 months' imprisonment, 3 years of supervised release, and was ordered to pay $685,460.64 in restitution. Goss was sentenced to a term of 4 months' imprisonment, 3 years of supervised release, and was ordered to pay $109,215 in restitution.

According to court records, the defendants and others engaged in the fraudulent sale of business opportunities through Cash Link Systems, Inc. Cash Link purported to sell cash-less ATMs to the public, along with assistance in establishing, maintaining, and operating a cash-less ATM business. Potential purchasers were told that after being placed in the locations provided by Cash Link, the cash-less ATMs would be used by members of the public, who would swipe their debit cards and receive a receipt. The receipt, in turn, could be taken to the location's cash register for cash or store credit. According to the defendants and their co-conspirators, a business opportunity purchaser would earn substantial profits from the ATM fees generated when members of the public used the purchaser's cash-less ATMs.

Cash Link promoted the business opportunities to consumers across the country through television commercials, the Internet, and other media, misrepresenting the profits that could be earned by purchasing a Cash Link distributorship, and urging consumers to call a telephone number that appeared in the advertisements. Potential purchasers were told that for a purchase price of approximately $12,000, Cash Link would perform the most difficult and time consuming part of the business by securing viable locations in which to place the cash-less ATMs. Consumers were also told that Cash Link would find appropriate, viable, and high-traffic locations to place the kiosks, relocate any kiosk that underperformed, and only sell distributorships in a limited geographic area. The defendants and others falsely represented to potential purchasers that they would earn their investment back in 12 months or less. The defendants and others fraudulently induced over 800 consumers to invest a total of approximately $15 million in Cash Link.

Settembrino, Samuel, Susi and Bohn were Cash Link salesmen who were paid to misrepresent Cash Link’s opportunity to potential purchasers. Goss served as an “outside locator,” hired to find high-traffic locations for purchasers’ cash-less ATMs.

In sentencing Settembrino, U.S. District Court Judge William P. Dimitrouleas found that Settembrino’s conduct at Cash Link violated a prior court order instituted as a result of a Federal Trade Commission case.

Mr. Acosta commended the investigative efforts of the Postal Inspection Service. This case is being prosecuted by Richard Goldberg, Trial Attorney, United States Department of Justice, Office of Consumer Litigation."

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Franchise Remedies: Franchise and Business Opportunity Fraud Richard A. Solomon writes, on his legal website, "Franchising and business opportunities have had their very bright success stories. They were always rare. They are even more rare now. There is a saturation of concepts such that most offerings are just knock offs of concepts that may be found all over the place. Worse, many franchise and business opportunity offerings today, especially the new ones, are nothing more than what would normally be considered a job, but described to make it seem like a business. Today around eighty percent of new franchisors fail. Those who bought those franchises usually lose their investment."

1. Franchising bright success stories have been rare, and even more rare now. Why, then do so many people fall for what Bob Purvin called "Franchising Fraud"? The idea that buying a franchise is relatively risk free? Part of the problem is what psychologists call the base rate problem - the vividness of the successful departures from the base rate of success is more striking than failures. A franchise system that failed, fails to register for very long in the collective memory. (See this thread at Blue Mau Mau on failed franchise systems.) For the same reason we hold dear our childish infatuations with jinxes, it is much easier to recall when the jinx worked than when it didn't.

2. Many franchise and business offerings today, especially the new ones, are nothing more than jobs, described to make it sound like a business. Again this is a very important observation. Why would a person pay for a job? Again, there is a psychological component to the decision making. The individuals looking at franchise opportunities looking for a change. They want and need to make more money than the current situation allows. Many times they have a severance of $X in hand. The rational decision should be between Option A -invest $X and get a new job for $Y and Option B- Buy a franchise. Unfortunately, Option A loses its attractiveness, not because it is a worse decision than Option B on a risk adjusted basis, but $Y is by comparison smaller than the earnings of their old job. To take Option A feels like failing, even if it is a superior decision to Option B. (There is a simple way to calculate the value of Option B from the franchise disclosure documents.)

3. Today around eighty percent of new franchisors fail. Those who bought those franchises usually lose their investment. Can you afford to lose your entire investment? Do you know how to calculate the potential risk of losing your entire investment? Do you know how to calculate your average gross earnings? If you don't have a clue about how to do this, then you are the person at the poker table wondering who the sucker is. It is you.

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Shoemoney reports that Rich Jerk Kelly Felix Selling The Empire To Avoid Bankruptcy - ShoeMoney™:

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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.

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A Crystal Lake business and its owner face civil charges alleging that they bilked customers out of at least $3,500 each in enrollment fees while violating both the Consumer Fraud Act and Business Opportunity Sale Law.

Attorney General Lisa Madigan on Monday filed a 21-page, two-count civil complaint against Insider Real Estate and Christopher Scanlan in Cook County Circuit Court.

Calls to Insider Real Estate, on McArdle Drive in Crystal Lake, went straight to voice mail. Messages left for the company were not returned Monday night.

According to the company's Web site, however, Insider Real Estate is committed to 'providing the best in real estate education and customer service.'

Madigan's complaint alleges that Scanlan, the founder and owner of Insider Real Estate, misled consumers into signing up for seminars designed to teach methods for profiting in the pre-foreclosure real-estate market.

Customers were led to believe that, by signing up for the course, they would get inside information that could help them make between $18,000 and $25,000 on an average transaction, the complaint alleges.

Instead, according to the civil complaint, the clients were given no inside information, but instead were trained to do networking for Scanlan and his property.

'Consumers are led to believe they are paying for an educational program,' the complaint reads. Instead, [Scanlan uses] the [Insiders Real Estate] program not to teach consumers about making money off the foreclosure market, but rather to deceive customers into paying $3,500 for the privilege of generating leads for the defendants."

At least six people have complained about the deal, according to the complaint. It also says Scanlan founded Insider Real Estate on Feb. 17, 2005, with the goal of advertising and offering for sale business opportunities regarding the pre-forclosure marketing to the public.

The complaint alleges that Scanlan and his company violated the Business Opportunity Sales Law by selling business opportunities without proper registration.

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A little over two years ago, Edward Teach wrote a nice little piece summarizing some of what we know about heuristics or rules of thumbs we use to make sense out of a confusing and contradictory world. Some of the experimental results appear to be quite odd.

For example, "Dan Ariely, professor of management science at MIT Sloan School of Management, conducted a mock auction with his MBA students. He asked students to write down the last two digits of their Social Security numbers, and then submit bids on such items as bottles of wine and chocolate. The half of the group with higher two-digit numbers bid "between 60 percent and 120 percent more" on the items, says Ariely." (my emphasis) Professor Ariely's webpage is here.

Anchoring on irrelevant or inaccurate data is prevalent. According to Ariely, "People don't know how much something is worth to them," he comments. An anchor helps them decide. Once a value is set, people are good at setting relative values, Ariely explains. But "it's very hard to figure out what the fundamental value of something is," he adds, whether it's an accounting system, a company's stock, or a CEO."

What does anchoring have to do with the new FTC Biz Op Rule?

Proposed section 437.4 c of the new FTC Biz Op Rule deals with the use of industry standards, such as the number of "vends per day". Business Opportunity sellers would not be able to use these statistics, unless the seller has "written substantiation that the industry standards are representative of the typical biz op purchaser." It is interesting that the FTC is alive to the abuse of this heuristic, but does not understand how the commitment heuristic will overwhelm the seven day cooling off period. We can only hope that the FTC will take the lead from California and publish the business opportunities disclosure documents.

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Richard A. Solomon is a Texas lawyer with over forty years of legal experience, including the areas of franchising and business opportunities. He has seven fraud tutorials on his website. Richard pulls no punches and I am going to quote some of what he said about business opportunities due diligence and fraud.

"The problem with which I am usually faced when a potential franchise investor comes to me for counseling is that the investor is already a totally pre-sold glob of quivering protoplasm, just itching to write that big check. Salesmanship is very aggressive here. Misrepresentations abound. A suggestion that what the client is enthused about may not be anything like it has been described is a very deflating event, and sometimes the client is so sold that the investment is made anyway, and the results occur that were predicted. By then it is either too late to get the money back for any number of reasons; the client no longer has money to hire a lawyer to seek redress anyway; and a terrible loss of money and emotional energy for the investor and for the investor's family simply destroys everything. The people selling these opportunities are very tough. The investor needs to have access to tough analytical resources to deal with it." (my emphasis)

Over and over again, I have emphasized that you cannot perform due diligence during the 10 or 14 day cooling off period you are permitted by law. If you start your due diligence after a trade show, then just go to a casino and bet your house on red - at least you will know where your money went.

What else does Richard have to say about due diligence?

First, get an expert franchise or business opportunity lawyer to review the distributorship materials, including all promotional materials.

"Inasmuch as I am convinced that there is a paucity of professional resources to which potential business opportunity investors have recourse in deciding upon such investments, this discussion is offered, not as the answer to due diligence issues, but as an eye opening warning. It is my hope that readers of this article will come to an awareness that what they read in a document is often the opposite or quite at variance with the expected meaning of the statements in normal experience, and that taking the documents to 'a lawyer' for review may be quite useless if the lawyer is not highly experienced in business opportunity vetting. The lawyer who does tax compliance, divorces, estate planning and personal injury work is certainly a lawyer in those areas, but probably not even remotely adequate for the vetting process of which we speak."

Second, beware of the offer of location assistance, the difference between what you were told orally and what the operator is contractually obligated to do.

"One of the selling points of any franchise or other business opportunity is site/location selection for your business. Often a potential investor will be told of a secret point system evaluating method that the selling company has developed, or other similar fairy tales. They may have a point system, but it is neither novel or unique or unusual. For most of franchising history, if you were thinking of investing in a fast food franchise, you needed only know that you had to be within half mile of a McDonalds. That's probably accurate even today. Whenever site location selection assistance is touted by a company asking you to invest in one of its deals, compare the bragging language of the sales/marketing statements against the language of the contract."

Third, getting back to the first point, get good and appropriate legal help.

"Every potential franchise or business opportunity investor has the ability to get on the Internet and find due diligence help from the many experienced franchise lawyers who maintain web sites and invite inquiries. It does not matter that any one of them may be located in another state or country. The issue is the scope of their experience to advise you about what you are thinking of doing. Ask them specifically about that experience, and keep on asking until you find the person who has the credentials to be of specific assistance to you. It does not matter if someone has been the high panjandrum of this or that credentialed honorific. Do they know what it is that you wish to do and have they sufficient experience in that or in things similar to that to be of assistance to you? You are not looking for someone to 'read the contract'. Hopefully you can at least read. Analyzing a small business ownership investment is far broader in its requirements than 'reading a contract'. It won't be cheap, but it will help reduce -- not eliminate -- many critical risks. In the final analysis, your success or failure will be a matter of your ability as a business operator."

This last point is very important, franchising and distributorship are not an industry, I may detailed experience on the business of ATM distributorships but have little knowledge about bakery franchises. Just ask. After all, it is your money.

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The FTC, on May 8th, 2007, announced that Richard C. Neiswonger, based in Las Vegas, Nevada, his business partner, William S. Reed, and their firm, Asset Protection Group, Inc. were Repeat Offenders Permanently Banned from Telemarketing and Selling Business Programs.

The con criminals told consumers that "told consumers with no sales experience that by purchasing their "APG Program" they would become well-paid business consultants selling APG’s "asset protection" services. For $9,800, consumers received training materials, a one-day training session, and a business affiliation with APG, which defendants claimed would provide consumers with carefully-screened "qualified prospective clients." Consumers were supposed to make money by selling APG’s asset protection services to clients who wanted financial privacy and wanted to make their assets less obvious to potential litigants or creditors. These services involved guidance on forming Nevada corporations and creating offshore corporations. The defendants promised consumers that they would readily make a six-figure income; the company even provided references that consumers could call who would back up their claims."

Now strange as it seems, the consumers were not provided with carefully-screened qualified prospects. Why would the defendants sell their sucker list for $9,800 if it really was filled with "qualified prospective clients."?

"In fact, consumers paid thousands of dollars for cold call lists, rather than pre-screened clients. Not only were they unable to achieve six-figure incomes, according to the receiver appointed to oversee the business, approximately 94 percent of the consultants failed to earn back their initial purchase fee for the program. Only one person ever earned a six-figure income, while hundreds of consumers lost money. The company’s references were, in fact, paid to deliver positive reviews of their experience. In addition, the 1997 order required that Neiswonger provide written proof to the FTC of a $100,000 performance bond to the Commission before marketing any program, which he failed to do while continuing to market his business opportunity program."

So why are some people always scammed by fraudsters? Because they cannot use the search button on the www.ftc.gov site: try "Neiswonger" on www.ftc.gov, for fun. You might find this interesting read.

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In a very interesting news article Melissa Mixon writes about how Sun City Texas residents cope with loss in investment scam.

The particular scam in question was Mobile Billboards of America. This was the classic securitization of a business opportunity fraud. The usual business opportunity fraud sells to distributors "turnkey" packages, for example the sale of ATMs and a location assistance. These business opportunities are frauds because if the seller had any real ability to locate ATMs, then they would not need your money.

The securitization of a business opportunity fraud takes the fraud to one more abstract level. Instead of selling ATMs and location assistance, the seller sells an "investment opportunity" -typically pitched as a high yield/low risk investment. The securitization of the ATM business opportunity fraud works by selling the investor on a stream of income from the ATMs that are located. In this case, there are no ATMs, not even third class machines, there is only a income stream which is funded by future investors.

The Mobile Billboards of America was the ultimate securitization of a business opportunity fraud - less than $10,000 of the money raised actually went to purchasing mobile billboards.

Melissa Mixon explodes a number of "known" myths about business opportunity frauds.

1. Business opportunity purchasers are not sophisticated. "They're an older group of people. If they haven't been scammed, they know someone who has, so these are cautious people out here," Culp said. "They haven't just fallen off the turnip truck."
   
2. The salesmen peddling the scams are always in the know. But "Ruark said he saw an advertisement for the billboard company in a professional publication that he and other insurance agents received. He said he responded to the ad and investigated the company before he started selling investments." Ruark eventually plead guilty to selling unregistered securities. "Ruark was sentenced to 45 days in the Williamson County Jail and 10 years of probation for each count and ordered to pay $138,100 in restitution. He's currently in jail."
   
3. Fraud is always "too good to be true". But Mobile Billboards "claimed to provide investors with the chance to buy advertising on semi trucks and get monthly payments for an annual return of 13.49 percent over seven years." While 13.5% is high, it is not an absurd rate of return for a novel scheme.

Of course, Mixon does report on the usual depressing news about fraud.

1. What can investors expect from a recovery? "Crawford said she doesn't know how much money Sun City investors will get from the restitution, but in cases of security fraud, "it's very rare that they get anything back."


2. And how forthcoming are the defrauded investors? "All but one of the victims would speak only on the condition of anonymity, saying they fear being targeted for other scams or losing their jobs."

All of this hardship could have been avoided if a single resident knew about the FTC requirement for business opportunity sellers to provide real disclosure to purchasers. Can you Google "business opportunity fraud"?

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Here is a fascinating story. Apparently the European version of the Direct Sellers Association,FEDSA, seeks "reform" of EU direct selling directive.

Reform of the EU Direct Selling Directive, what ever could that mean?

"With direct selling predicted to grow in the run up to 2010, many cosmetic companies such as Swedish based Oriflame and global company Avon make high sales revenue from the European market.

In response to this predicted growth, a meeting took place earlier this month between FEDSA chairman Richard Berry and Mrs Kuneva, European commissioner for consumer affairs to educate the EC on 'the role direct selling plays in strengthening the economies of EU member states'.

Berry highlighted the opinion that current consumer legislation imposes unreasonable restrictions on the significant sector of European trade, that brings in over €19bn in total annual sales, and called for an early reform of the legislation in a new harmonisation directive.

Many direct sales cosmetic companies, such as US business Mary Kay, are beginning to benefit from the recent upsurge in the direct sales trend in China, following the lifting of a ban imposed to halt scam door-to-door sales people.

Therefore the uncertain legislation in Europe could cause uncertainty over the future of the market as emerging areas, such as China, benefit from the majority of the growth in this sector."

So what is the problem with this legislation, according to the FEDSA?

"The legislation was originally designed to provide order-cancellation rights to consumers entering into substantial contracts at home. However, it has allegedly evolved and now causes unnecessary red tape for European based agents - resulting in an outright ban on direct sales in Luxembourg.

In the lucrative French cosmetics industry the directive denies the direct seller from collecting payment from the consumer before the end of the cooling off period and allegedly has unreasonably low thresholds for regulated contracts in all member states."

Well, here is an idea from across the big pond - FTC Business Opportunity Rule.

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Robert Patrick reports on an odd story in STLtoday.

"A man jailed and fined a decade ago for scamming customers with a St. Louis based "get rich" program is in trouble again after a federal judge ruled that he violated a court order by lying to customers.

The man, Richard C. Neiswonger, and William S. Reed are partners in Asset Protection Group Inc., which took in $19.8 million from 2000 to 2006 by signing up almost 2,000 customers, court documents and testimony show. Asset Protection Group has an office in Las Vegas, but the earlier sales program had been based in St. Louis.

The customers were promised the chance to earn six-figure incomes selling Nevada and offshore corporations that supposedly shield buyers' assets from the IRS, law enforcement and "capricious federal judges."

Despite paying up to $9,800 apiece to peddle the program, the customers, known as consultants, got little in return, U.S. District Judge Stephen N. Limbaugh wrote in an order made public Tuesday."

The story is odd because in this case Neiswonger's previous fraud was very easy to discover. Go to www.ftc.gov and search on his name "Neiswonger". What you will find is this 1996 complaint against Neiswonger for selling a fraudulent business opportunity. From the complaint:

"Since at least 1993, defendants have marketed and sold business training courses and affiliations to consumers throughout the United States. Defendants S&K, S&K PC, Neiswonger and Kossmeyer (the "S&K defendants") sell a course and affiliation they market as "S&K Group." Defendants MRS, Neiswonger, Nancy Freeman and Marc Freeman (the "MRS defendants") sell a course and affiliation they market as "Medical Recovery Service." The courses and affiliations consist of a two-day training session, class manuals, computer software, a newsletter, a six-month (S&K) or one-year (MRS) period of support, and a national network of independent business consultants.

The S&K defendants offer consumers the opportunity to become business consultants, called "S&K associates," in two fields. The first field is capital acquisition, where the consultant applies for bank loans on behalf of clients and keeps a percentage of each loan as a fee. The second field is expense reduction, where the consultant helps clients identify areas where money could be saved and keeps a percentage of the savings as a fee. The S&K defendants represent to prospective purchasers that S&K associates earn client consulting fees from operating such a business, full-time or part-time, resulting in a six-figure income and/or a $150,000 income from one or two projects per month. The price of the S&K training and association is $12,900 payable by certified check at the beginning of the training session. S&K's president Carl F. Kossmeyer teaches the capital acquisition portion of the program."

This is one of those cases in which the simple due diligence step was not taken, in part I believe because of greed. I rarely say this, and I may be wrong, but I lack sympathy for individual who wanted a "chance to earn six-figure incomes selling Nevada and offshore corporations that supposedly shield buyers' assets from the IRS, law enforcement and "capricious federal judges." (For more on the tax scam angle, go to the Asset Protection board.)

The basic due diligence tip remains the same: search at the FTC for information about the distributor. If you find something, run away -and if not, keep looking.

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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.)

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Here is some poor due diligence advice from American Chronicle: Work From Home Business Opportunity.

The author starts out promisingly:

"While there is definitely work to be had and money to be made with a work from home business opportunity, finding the right work from home business opportunity for you will definitely require some legwork and preliminary research on your part. Why? Well, the unfortunate reality is that not every work from home business opportunity is legitimate. Often, a work from home business opportunity reels interested people in with a lot of lofty promises about unbelievable revenue streams without a lot of effort required on your part. "

How does the author suggest that you do your due diligence? How do you verify the earnings claims, alluded to? What information is legally required from these business opportunity sellers?

Unfortunately, our author reveal himself to be ignorant of the basic federal and state laws concerning business opportunities.

There is the requisite and absurd claim about the Better Business Bureau. "Find out as much as you possibly can about the work from home business opportunity you are thinking about pursuing. Investigate the owners, operators and current associates. Check out the Better Business Bureau or websites that specialize in identifying scams to find our about any potential negative experiences others may have had with this work from home business opportunity. "

Once again, I have to stress that the BBB has nothing to do with due diligence. The BBB is a system which attempts to resolve consumer complaints and keep track of the number of resolved complaints.

Our author knows nothing of the Federal Trade Commission's site on Business Opportunities scams or any of the individual State Business Opportunity Laws and shares his ignorance with the reader.

It is really quite pathetic, and would not be worth commenting on except for the fact that so many individuals looking at business opportunities live in the same space - ignorant of the how the Federal and State laws on business opportunities work on their behalf.

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The Fidelity ATM * Fidelity Bankard Business Opportunity Fraud is causing quite a stir over at a thread in scam.com.

Imagine how outraged the individuals might be on hearing that the defendants in this case have asked for $10,000 a month for living expenses from money that is currently frozen.

First, some background. According to the FTC Press release:

"The FTC charged that these scammers, selling ATMs, misrepresented the basic facts of their business opportunity: that purchasers would earn substantial profits; that the company had, or would have, secured locations for the ATMs within 45 days; that the ATMs would be installed and operational in the same time period; and that the company would provide substantial assistance, such as relocating underperforming machines. The complaint also alleges that they did not make required Franchise Rule disclosures and had no substantiation for their earnings claims."

(In a marked departure from the previous business opportunity sweeps, the FTC has actually published some of the material from the website.)

The defendants did not contest the injunction, and according to the Receivers' First Report approximately $900,000 was frozen. The Receiver calculated that approximately 100 distributors lost a total of $4.2 million, or an average of $40,000 per distributor. This is roughly slightly above the average take in a business opportunity fraud, but not that much above the norm.

On February 5th, 2007, the defendants sought to modify the consent order. The defendants' brought a motion to vary the injunction, in order to pay their living expenses, calculated at $10,000 a month. The defendants wanted $50,000, or living expenses for five months in order to tide them over until they found honest work. One of the defendants, Allison Steinberg, has a law degree. The defendants claimed to have no other sources of income and that some of the frozen funds were not as a result of their fraudulent activity.

The presiding Judge denied their motion, finding that their request was unreasonable and also denied the request for payment of attorney fees. Perhaps Allison will be her own first client?

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This is the FDI's new video on USANA. I have some problems with the what is being said, but on balance there are some important points that are raised.

The individuals assert that the emphasis was on recruiting because they knew that they couldn't sell the product, since it was overpriced. I have some trouble with this, if you knew that the product was not sellable, then how could you recruit people to sell the stuff?

I also have trouble believing that had the earnings claims been known, the couple would have saved their investment. It is clear that Jane was very excited about this opportunity, and I suspect that no amount of information would have cooled this ardor.

My concern is that Minkow is relying too much on the rational agent model; if Jane had just been given enough information, she would have not have lost her $5,000. "Doomed to fail"

The failure rates are important, but I don't believe that having knowledge about these failure rates is sufficient to prevent individuals from making these terrible investments. More about breaking the emotional attachment to these "phantom dreams" is needed.

Posted by michael webster at 10:43 PM | Permalink | Comments (1)

Barry Minkow and his researchers have brought to the forefront a number of serious issues which impact public companies which have network marketing as their business model.

Avon, Herbalife, Immunotech, Nu Skin, and Tupperware are public companies which use network marketing as the primary method of distributing their products.

Minkow and his researchers are asking a very simple question. If a public MLM company reports that it has X distributors working for it, then how do we calculate the value of this work force? We need to know the turnover rate of the distributors, how many are actually selling, and the average sales for each distributor, excluding their personal use.

USANA has reported that according to their internal survey, done 2 years ago, only 25% of its "distributors" actually join to sell the product. This should be of some concern, given the that the USANA website is largely devoted to expounding on the benefits of running a USANA business.

Importantly, for public disclosure, as Minkow in his response notes that "Moreover, this 75% statistic is found nowhere in Usana’s 10‐Ks or 10‐Qs, and has only been reintroduced because it appears to serve as a mitigating factor to failure and collapse rates that the company can no longer conceal based on the findings of our report. "

The USANA report is very important, even if it only comprised 48,000 distributors. We need to know exactly what questions were asked, the purpose of the survey, and whether other surveys of this nature were undertaken.

But taken on its face, USANA's admission that only 25% of its work forces is actually selling product is stunning. Imagine having a company in which only 25% of the workforce shows up to work.

If 75% of USANA's distributors are not selling product to customers, then why report them as distributors at all? Wouldn't the accurate figure be material to investors? Do analysts care about this material fact?

Well, at the recent conference call with analysts, Zac Bissionette reports "Fast-forward to Wednesday's conference call. Every question asked seemed to have a bullish slant, and assumed that the company was innocent. Questions centered around whether the company has seen an impact on sales from Minkow's report, and whether the company saw this as an opportunity to buy back more shares. I spoke with Barry Minkow about the conference call and he said, "I don't believe one thing they say" and also pointed out that "There was not one tough question allowed to be asked during the conference call."

Tracy Coenen has taken the trouble to illuminate in great detail her concerns about the entire USANA telephone conference with analysts. But, I would remain focussed on the essential question for all these public MLM companies: how many distributors do you have that are working at a business and how long on average do they work selling?

Posted by michael webster at 6:59 PM | Permalink | Comments (0) | TrackBacks (0)

A unscrupulous franchisee taking advantage of an unwitting franchisor? Whatever could this refer to? The actual sentence, in context, is from a recent Ontario Court of Appeal Case, Personal Service Coffee Corp. v. Beer.

"The other flaw with the respondents' argument is that it ignores the fact that, on the franchisee's own admission, he set up a competing business the very day he rescinded the franchise agreement with the appellant and he continues the very same business to the same customers whose names were provided to him by the franchisor and uses equipment provided by the franchisor. While I accept that the facts of this case are still in dispute, it is nonetheless clear that in some cases the respondents' position would allow unscrupulous franchisees to take advantage of inadvertent non-disclosure by unwitting franchisors. In my view, this would be an unacceptable result."

Inadvertent non-disclosure? By an unwitting franchisor? That would be novel. Are there novel facts in this case?

"The facts giving rise to the appeal are as follows. The appellant PSCC has carried on business throughout Ontario for fifteen years in the supply and distribution of coffee and coffee-related services to offices and businesses. The company loans or rents equipment such as coffee brewers to a customer in return for the customer's agreement to purchase all coffee products from PSCC. Such products include coffee, filters, cream, and filtered water. PSCC also sells a variety of brand name coffees and related products in addition to its own lines of coffee.

In the fall of 2002, the respondent Mr. Beer contacted PSCC with a view to becoming a dealer in Durham region. On October 28, 2002, Mr. Beer and PSCC executed a five-year dealership agreement. Mr. Beer paid PSCC an initial royalty fee of $10,000 and executed a $25,000 promissory note in favour of PSCC. He agreed to pay a monthly royalty fee of $100 and to purchase all inventory and equipment from or through PSCC. Training was to be provided by PSCC, and Mr. Beer was obliged to attend. Equipment leases were to be arranged through PSCC. In exchange, PSCC provided Mr. Beer with its list of existing customers and the value of the equipment being loaned or rented to those customers in Durham as at the date of the agreement. Mr. Beer had the right to use the PSCC trademark and systems, as well as the exclusive right to market them in Durham.

About one year later, on October 1, 2003, Mr. Beer executed a second dealership agreement for the Peterborough area on similar terms. He was permitted to pay the initial royalty fee of $10,000 over time.

On September 27, 2004, Mr. Beer, through his solicitor, served two notices of rescission on PSCC pursuant to the provisions of s. 6(2) of the Act. It is a matter of dispute between the parties as to what, if any, conduct on the part of PSCC precipitated Mr. Beer's decision to rescind the agreements. The notices came three days before the expiration of Mr. Beer's two-year right of rescission for the original Durham dealership agreement.

...

Mr. Beer admitted in cross-examination that he is operating a business "similar" to the one he carried on under the agreements with PSCC. He is competing with PSCC in the same business and is selling to the same customers that he serviced during the terms of the dealership agreements with PSCC."

But what should the penalty be for the franchisor doesn't know the law, doesn't know that he is peddling a franchise? The public policy behind the Arthur Wishart Franchise Disclosure Act is to protect the consumer by requiring or mandating the disclosure of relevant information. The failure to provide the disclosure document provides the failed franchisee with an expansive remedy: the franchisor must, within 60 days, repay the franchise fee, purchase inventory and supplies at cost, and make good any losses.

The Ontario Court of Appeal ignores this public policy and focusses on the losses for the "unwitting franchisor". A distributor who doesn't know the law, or care about informing his franchisees. But why isn't the loss of the franchisees' goodwill, ie its customers that it serviced, to be counted as a loss for which the franchisor has to compensate the franchisee for? The franchisor can either compensate the franchisee for the loss of goodwill, or compete with it in the same market. Neither remedy seems too harsh or unfair to the "unwitting franchisor."

(PSCC appears to treat its dealership agreement as non franchise business.)

Franchisees complain that their franchise agreement gives too much discretionary power to a franchisor. The pundits are not sympathetic and retort that the franchisee should have read the f....g agreement and disclosure. Read the document, know your rights, franchisees are told. Well, for "inadvertent non-disclosure" I have a similar retort: Read the f...g Arthur Wishart Act.

Posted by michael webster at 9:03 AM | Permalink | Comments (0) | TrackBacks (0)

A number of business models which appear to be different from the franchise model exist. For example, distributor, dealer, exclusive dealer, etc. These arrangements usually provide some exclusive territory to the purchaser, for consideration.

However, in Ontario, as with many other jurisdictions in North American, what people chose to call their business arrangement will not alter the legal character of that arrangement. Many sellers are not aware of their legal liabilities.

Many business arrangements are at law franchises. Lord and Partners, learned an expensive lesson about not knowing that they were selling a franchise.

As reported, last January, 2007, the Ontario Superior Court granted Doug Payne summary judgment in the amount of $71,683.73, before legal costs against Lord and Partners. Lord and Partners entered into an agreement with Payne Environmental in or around December 12th, 2002, in which "Payne Environmental was provided the exclusive right to show Lord and Partner products, accessories, parts and associated products in the territory of Mississauga East. Lord and Partners did not provide Payne Environmental with the disclosure documentation required by s. 5 of the Arthur Wishart Act at the time of execution of the agreement. It is also agreed that after signing the agreement, disclosure was not provided." (my emphasis)

Once you sell an exclusive territory, offer significant assistance, or exercises significant control, or provide location assistance or help with getting sales accounts, then you have probably sold a franchise. Although Lord and Partners doesn't look like McDonalds, it is a franchise nonetheless.

On Payne's motion for summary judgment, the Judge found that Lord and Partners had to pay the franchisee back the cost of the franchise, the cost of the equipment and compensate the franchisee for two years of operating losses.

Lord and Partners had a novel defence.

"Lord and Partners Ltd. has commenced a third-party claim against, Mr. Murray Box and Pallett Valo,LLP. In this action the plaintiff claims that Mr. Box, a solicitor with the firm of Pallett Valo, provided legal advice to the plaintiff and to the defendant from October to December 2002 concerning the franchise agreement. It is alleged that the legal advice of Mr. Box and Pallett Valo was relied on and acted on by the defendant. It is asserted that Mr. Box or Pallett Valo did not advise the Lord and Partners Ltd. that it did not comply with the disclosure requirements of the Arthur Wishart Act."

Payne Environmental's lawyer knew about the requirements of Arthur Wishart Act, but did not explicitly require the seller to comply with the Act, giving his client a free ride. If the franchise worked out within two years, do nothing. But if it didn't work out, rescind just before the deadline.

Should have the plaintiff's lawyer advised the defendant of the necessity of compliance with the Arthur Wishart Act? I believe that the answer is no, but he might have advised Lord and Partners to obtain their own legal representation. On the facts, it is not clear that the lawyer had any contact with the defendants.

But the point here is clear: if you are buying or selling a business in which there is going to be a continued relation, get proper legal advice as to whether it is a franchise or not. If you have bought a distributorship or dealership within the last two years, in Ontario or other jurisdictions, get an opinion as to your legal options.

Posted by michael webster at 9:04 AM | Permalink | Comments (0) | TrackBacks (0)

Dealers who bought Energy Automation Systems, "EASI", dealerships in Connecticut are able to rescind their dealership agreements, thanks to the fine work of the Connecticut Banking Commissioner, 'the Commissioner".

EASI had been selling business opportunity franchises in Connecticut since 2000, but had not registered with the Commissioner, nor had EASI provided to the prospective dealers the required disclosure documents.

In addition, EASI had made representations to the prospective dealers about what sort of income they could make as EASI dealers, but EASI had no reasonable basis for making these earnings claims.

As result, EASI consented to an order requiring that it reimburse any EASI dealer since 2000 and pay restitution. "The amount of restitution to be paid to each purchaser-investor electing rescission shall be determined via binding arbitration conducted in Connecticut under the auspices of the American Arbitration Association ("AAA") and in accordance with the rules of the AAA. The cost of such arbitration shall be borne by EASI. EASI shall file with the Division Director a copy of each demand for arbitration no later than five business days after such demand has been filed with the AAA. "

Note that the order requires the cost of the arbitration to be paid by EASI. This is a very favourable ruling for the EASI dealers in Connecticut, their entire legal costs in the arbitration will be paid by EASI. This allows the dealers to obtain the very best counsel and explore every avenue for restitution.

What happens if EASI conducts the arbitration but doesn't pay? The consent order provides for a sanction. "Should EASI fail to abide by the arbitrator's decision relating to payments due or owing to any affected purchaser-investor, the Division, in its discretion, may impose sanctions, including, without limitation, a monetary penalty of up to $100,000 against EASI, and EASI, through its execution of this Consent Order, knowingly waives notice and an opportunity for a hearing in connection with the imposition of any such sanction"

In addition to allowing all EASI dealers, from 2000, to rescind their contract with EASI, EASI also has to pay a $25,000 fine and agree to abide by Connecticut's Business Opportunity Law.

All in all, this is a terrific result for those dealers who were mislead by EASI and its agents about the profitability of the EASI dealership. The one difficulty is that order provides only for restitution and not for damages the dealer incurred trying to make the EASI dealership profitable. But that could depend upon how arbitrator rules on what constitutes restitution.

The order obtained by the Commissioner should be a model order for not only the other 20 states which regulate business opportunities, but also the FTC.

Posted by michael webster at 8:50 PM | Permalink | Comments (0) | TrackBacks (0)

" Two persons have agreed to settle Federal Trade Commission charges for their roles in a fraudulent business opportunity scheme targeted in early 2005 as part of "Project Biz Opp Flop," a crackdown on violations of the FTC's Franchise Rule, which requires that prospective franchisees must be given a full disclosure document about business opportunities they are offered, and Section 5(a) of the FTC Act, which prohibits unfair and deceptive acts or practices affecting commerce.

Jennifer Lynn Klotthor and her sister, Jaime L. Klotthor , a/k/a Jaime Valentine, were involved with the deceptive practices of World Traders Association Inc., a Nevada corporation, and several other corporate and individual defendants. According to a complaint filed by the FTC in January 2005, the defendants made false and deceptive promises to franchise purchasers who paid as much as $8,000 in return for access to overstocked merchandise, expert training in the surplus goods industry, and substantial income."

The developments in this business opportunity fraud, to date, can be read here.

Posted by michael webster at 9:11 AM | Permalink | Comments (0) | TrackBacks (0)

The English version of Chinaview.cn, Xinhua reported on a very interesting story, which raised the question of how to classify economic crimes.

The story is that: "The chairman of a trading company in northeast China has been sentenced to death after he was found guilty of raising 3 billion yuan (380 million U.S. dollars) from gullible investors for a bogus ant-breeding project between 2002 and 2005.

Wang Zhendong, board chairman of Yingkou Donghua Trading (Group) Co., Ltd. in Liaoning Province promised returns of 35 to 60 percent for the fictitious project under the name of Donghua Zoology Culturing Co., Ltd and Donghua Spirit Co., Ltd."

It is unfortunate that the mainstream press version of the story only reports the absurd side, content to focus on the bogus ant-breeding project.

For example, the focus in the Guardian is on why the bogus ant-breeding project is not so ludicrous, "Wang Zhendong tricked people into buying packages of ants for far more than they were worth, with promises that their owners would reap huge profits by using them to make wine, tea and medicines, the local media reported. Mr Wang's claims were not considered outlandish at first. In the southern province of Guangxi, bags of black ants are soaked in alcohol or steeped in tea and sold as natural remedies for such ailments as arthritis."

But this is not the real issue. The more serious and real issue is: when should an economic crime be treated no different than that of violent physical crime? China appears to have thought through the issue since it death penalty, "though usually reserved for violent crimes, it is also applied for nonviolent offenses that involve large sums of money or are deemed to have a pernicious social impact."

The AP story, which can be read at the Boston Globe, does mention in passing that "Fake investments and pyramid investment schemes have become common during China's transition from a planned economy to a free market. Chinese leaders have tried to eradicate the scams, fearing widespread losses could add to already percolating social unrest." But there is nothing more to the AP story about how the Chinese decided to include economic fraud as a capital punishment.

Michael Katz's article, over at the www.street.com, also makes passing reference to our own corporate villains. "If Bernie Ebbers and Jeffrey Skilling think the punishments for their corporate misdeeds were harsh, they should be glad they're not Wang Zhendong."

But, again, there is virtually no discussion about what makes an economic crime worthy of the same type of reprobation that we have for a violent crime.

In this case, was the suicide of an investor a factor?

How was the possibility of social unrest a factor?

Was the size of the fraud, $380 million, a significant factor? If so, does anyone want to verify that there was every that amount stolen?

It is time that we consider seriously the question of when an economic crime is in fact a violent crime, in principle no different than rape or murder.

Posted by michael webster at 9:20 AM | Permalink | Comments (0) | TrackBacks (0)

The Department of Justice, Southern District of Florida announced the conviction of some of the other participants in the Cash Links System business opportunity fraud.

"James Settembrino and Bernardo Susi pled guilty yesterday, while Lee Samuel, Charles Bohn and Benjamin Goss pled guilty today.

According to the charges, these defendants and others engaged in the fraudulent sale of business opportunities through Cash Link Systems, Inc. Cash Link purported to sell cash-less ATMs to the public, along with assistance in establishing, maintaining, and operating a cash-less ATM business. Potential purchasers were told that after being placed in the locations Cash Link provided, the cash-less ATMs would be used by members of the public, who would swipe their debit cards and receive a receipt. The receipt, in turn, would be taken to the location's cash register for cash or store credit. According to the co-conspirators' sales pitch, a business opportunity purchaser would earn substantial profits from the ATM fees generated when members of the public used the purchaser's cash-less ATMs.

The Information alleges and the defendants admitted that the defendants misrepresented the profits that could be earned by purchasing a Cash Link distributorship. Potential purchasers were told that for a purchase price of approximately $12,000, Cash Link would, among other things: perform the most difficult and time consuming part of the business - securing appropriate, viable, and high-traffic locations in which to place the cash-less ATMs; relocate any ATM that underperformed; and only sell distributorships in a limited geographic area. According to the charges, these representations were false." (my emphasis)

If these representations were true, then there would be very little risk to this venture. But if there is very little risk to this venture, you should expect a very low return on your investment.

The relationship between risk and reward is something that intelligent and informed people have trouble with, viz. identifying in an investment opportunity both the risk and reward. It is a bad thing if there are no apparent risks, but very large rewards. When you are offered something for nothing, somebody will get nothing for something. Can you guess who?

Posted by michael webster at 9:47 AM | Permalink | Comments (0) | TrackBacks (0)

Vampires, notwithstanding Buffy, don't really exist do they? But what then what accounts for the undead like quality of vending frauds?

In 2002, "The FTC's complaint against the defendants was filed in June 2002, as part of "Operation Busted Opportunity" - a coordinated attack on business opportunities and work-at-home fraud by the FTC, the Department of Justice (DOJ), and 17 state law enforcement agencies. According to the complaint, the defendants advertised their candy vending machines, called "Sweet Tooth Sam, the Money Making Man," on the Internet, in newspaper ads, and by telephone. The ads contained statements that prospective buyers would receive "500% Profits" or "$4000 per month." In addition, the defendants allegedly directed consumers to call "shill" references." (my emphasis)

Here is a description of who the business opportunity fraudsters were: "The Federal Trade Commission has accepted two separate settlements with the operators of a bogus business opportunity venture. In separate settlements, one settlement with Jesse Alper and the other settlement with Inspired Ventures, Inc., Victor Alper, I.V.I. Management Corporation, and Source Systems, Inc., the defendants are banned from marketing business ventures and from telemarketing. The FTC alleged that the defendants, based in Miami, engaged in deceptive business practices in the sale of their vending machines. I.V.I. Management managed the advertising for the scheme, and Source Systems supplied the bulk candy for the vending machines."

But in Southern Florida, there really is a fountain of youth, at least for criminals.

On January 31st, 2007, the Department of Justice Southern District of Florida had this Press Release: "R. Alexander Acosta, United States Attorney for the Southern District of Florida, and Henry Gutierrez, Inspector in Charge, Miami Division, United States Postal Inspection Service, announced that defendant Samuel Elmowitz entered a plea of guilty today in Miami Federal District Court to one count of an Indictment, charging conspiracy to commit wire fraud. A second defendant, Allen Fialkoff, was arrested on January 29, 2007 in connection with the same scheme.

Elmowitz worked for MasterVend Marketing, Inc. ("MasterVend), a North Miami Beach based company that purportedly sold candy and "snack and soda" vending machine business opportunities to consumers across the United States."

What was MasterVend selling? You guessed it, "Sweet Tooth Sam" vending machines. The indictment against the company can be read here.

What can we learn from this situation, other than using the internet to search on the name of vending machine being sold is a good idea? Well by googling "Sweet Tooth Sam" we find a number of vendors selling their mahcines. Checking on eBay is always a good idea, and we would learn that 25 Sweet Tooth Sam vending machines were available for $499.00.00. Quite a discount. Someone more optimistically is trying to unload 30 Sweet Tooth Sam vending machines for $2760. These would be really good people to have talked with before buying into the MasterVend scheme.

And in case you think this is the end, Eric Barros, listed as the director of MasterVend Marketing is also the director of Vendmasters of America, which appears to be advertising on this website. How very nice.

Posted by michael webster at 9:33 AM | Permalink | Comments (0) | TrackBacks (1)

Would you buy an ATM which promised not to deliver cash? It sounds like a pretty dumb idea, but in fact there is a big demand for this time of product. For example, Kioskmarketplace reported that,

"The U.S. Department of the Treasury has announced the successful installation of EagleCash at 12 U.S. Army bases in Iraq and Kuwait. EagleCash, the stored-value card program launched in partnership with the Department of the Army, safeguards and simplifies U.S. soldiers' cash management while stationed abroad. EagleCash's smart card technology eliminates coin, currency, scrip, vouchers, money orders and other paper payment mechanisms and replaces them with a card and touchscreen."

But every good idea has its fraud alter-ego, the shadowy version of the real.

Davis Freeberg, who has a terrific website discussing kiosks, and www.Kioskscams.com. alerted me to the latest in the Cash Links business opportunity fraud. I had written before about the sentencing of the principals in Cash Links, but the recent press release relates to new charges in the Cash Link business opportunity fraud.

"The Indictment alleges that Alberto Ferreiras was one of Cash Link's hidden owners and directors, and that he committed crimes at Cash Link at the time he was on release from other, unrelated criminal charges pending against him in the U.S. District Court for the Eastern District of New York. Ferreiras is charged with one count of conspiracy to commit mail fraud, and eight counts of mail fraud. The Indictment alleges that Leslie Rattet participated in the conspiracy to defraud as a Cash Link salesman, and that Rattet committed the offenses while on release from other, unrelated criminal charges pending against him in the U.S. District Court for the Southern District of New York. Rattet is charged with one count of conspiracy to commit mail fraud, and three counts of mail fraud. With respect to each count brought against them, Ferreiras and Rattet are alleged to have committed offenses while on release, under Title 18, United States Code, section 3147." (my emphasis)

The entire indictment against Cash Link's hidden owners, Alberto Ferreiras is here.

The press release goes and states "Prior to the filing of the present charges, four other defendants were convicted and sentenced for their federal offenses for their participation in Cash Link. Leonard Needelman, Cash Link's director of operations, received a sentence of 97 months' imprisonment. Alan Levine, Cash Link's president, received a sentence of 70 months' imprisonment. Jason Kowal, a fraudulent Cash Link reference, received a sentence of 77 months' imprisonment. Leland Balber, a Cash Link salesman, received a sentence of 42 months' imprisonment." (my emphasis)

Could a search of Florida database uncovered the fact that Alberto Ferreiras was Cash Link's hidden owner? Could one find the unrelated criminal charges against Alberto Ferreriras?

The last question is easy to answer. Using the United State Pacer system, searching all District Courts, you would have determined that there were two criminal charges in the State of New York against Alberto Ferreiras.

But the second question has a less than satisfactory answer. While Florida's corporate database is excellent, it cannot determine who is a hidden owner. If you searched it for "Alan Levine", as a director and officer, you would have noted the large number of corporations that Levine was a director of, making it likely that he was only a nominal director and officer of Cash Link Systems. Unfortunately, only a through going examination of the operation would have revealed who the true owner was.

Posted by michael webster at 8:33 AM | Permalink | Comments (0) | TrackBacks (0)

Lose your entire investment in business opportunities scams as outlined in the FTC's Project False Hopes, Bogus Business Opportunities. You won't have any money and therefore no money problems, by definition.

This type semantic trickery along with other deceitful advertising practices is the lifeblood of these scams. In this post, I want to analyze a recent vending fraud, show the correct due diligence -which is simple, but also explain who should be doing the due diligence.

Lifestyle Vending is alleged by the FTC to be a business opportunities fraud. The FTC has a civil case, and they have recommended that the Department of Justice also look into the allegations, from a criminal aspect. Here is a list of the recent criminal convictions in business opportunity frauds cases.

The FTC's complaint against Life Style Vending can be broke up into three main elements.

First, Life Style Vending is a type of business opportunity that the FTC regulates under the regulation known as the "Franchise Rule". The Franchise Rule has specific disclosures that must be made to the potential purchasers of the opportunity. Virtually, no investor thinks that they were buying a "franchise" and so it is not surprising that they or their lay advisors would not research this opportunity correctly.

Second, Life Style Vending made representations to the public about what they could expect to earn if they bought Life Style Vending's machines. For example, in a representative classified ad, the representation was that with 30 machines, one could earn potentially $50,000, yearly. No doubt Life Style Vending thought the semantic trickery of using "potential" saved them from making an outright lie. But, the Franchise Rule, or what it should be known as, the "Biz Op Rule", prevents sellers making earning claims without having a reasonable basis, which includes giving the name and number of individuals who have attained said earnings, and the percentages of distributors meeting or bettering that level of earnings.

Third, Life Style Vending did not provide purchasers with a basic disclosure document, a document which discloses much more about the opportunity, including a list of all the distributors of the vending machines.

So how could you have avoided this business opportunity scam?

Follow the four step program.

1. Identify in which states Life Style Vending placed its classified ads by googling its 800 number, 1 (800) 704-5414.
2. Locate all the states which require either business opportunity registration or franchise registration.
3. Write and obtain the required registration from all states in 1. which appear in 2. Don't worry about where you live, just see if the required registration is there.
4. If you get nothing from these state regulators, then you know that the opportunity is a business opportunity fraud. (If you do obtain the disclosure, you will have to take it to an experienced franchise attorney to evaluate it.)

Will this due diligence work? No. Not for the person hooked on the phantom dream presented by Life Style Vending. Cognitive dissonance will prevent new information from displacing the dream.

What can be done then? The four step program is for the advisors, friends, or spouses of the potential purchaser. Sometimes, these people have sufficient control over the purse strings to prevent a fraud. At the very least, they know how to evaluate a business opportunity. They do, now.

Technorati Tags: ftc, vending, due diligence, bogus business opportunities, criminal convictions, life style, scams, business opportunity, money problems, lifeblood, false hopes, department of justice, civil case, frauds

Posted by michael webster at 10:14 AM | Permalink | Comments (0) | TrackBacks (0)

For a number of years, Tupperware distributors were explicitly regulated as franchisees. Tupperware filed for the available exemptions, so that their UFOC is not available online. But there is doubt that, until 2004, Tupperware treated its distributors as franchisees, read the 2004 franchise exemption letter here.

I had a recent post about whether Mary Kay Directors were buying a franchise, as it is defined by the Federal Trade Commission, and I posted a comment to that effect.

The responses to me question about Pink Truth: Directors as Franchises are collected below, along with my response.

Comment 1:

"Micheal Webster

Maybe that is why in all these years the one thing that stays at such a low price is the starter kit----because they are trying to stay below the radar of FTC---less than $500, so that we are not considered a 'franchise'.

Most of the women on this site are BRILLIANT and I am still reeling at the vast amount of collective brainpower here.

I am much less business savy----BUT something about the $100 changing hands at the point of 'commitment'-----like "earnest money" in a real estate transaction.has always bothered me. It is not like the Starter kit is VITAL to our success----since the contents of this kit have changed COMPLETELY through the years----to now mainly just being a few tapes, some samples and a little product.

For some reason which I cannot figure out , it seems more like they need this $100 to comply with some kind of law----.or to make our CONTRACT BINDING----since maybe without the $$$--we could not be HELD to the contract. I don't know----just a thought.

Suzy Q.awesome piece and thanks for telling the truth-----that sure covers the last of the questions I had about what i was doing to make my director mad unintentionally."

Response 1:

I think that you are right. Mary Kay, along with other DSA members, seemed to focus on the low entry costs in their response to the FTC. I was not entirely persuaded by this type of reasoning as it ignored the high cost of being distributor or director.

Comment 2:

"Michael I also read your website with interest. I also wonder why people sitting with frontloaded prodcut aren't franchises. I've read several stories on this site and others where people are sending back upwards of $5,000 worth of product. That would seem like a "significant" amount in my book. But maybe I'm just cheap.

I've been thinking about this column since I read it. I couldn't stand the daily pressure of living like this, pink fog or not. How do you keep your sanity for goodness sake? I'd be a basket case before ending DIQ I'm afraid. There's no way I could handle this constant pressure day after day after day. Ridiculous to put yourself and your family in this much turmoil. IMHO, no amount of money would be worth that."

Response 2:

I also wonder if the FTC is persuaded that since the consultant or distributor can send back the product, for up to a year, whether there is a need for the FTC to assume jurisdiction. But it would appear that the new consultant or distributor would need to know just how many people in their position get stuck with unusable inventory after the year is up.

Comment 3:

"With a genuine franchise or exclusive distributorship, there is usually a lot of pre-screening to make sure you are ready for it.

McD's for example, requires you to have $200,000 and spend time at their headquarters learning how to run the business … RUN the business, not "work" it. And they do a lot of coaching the first few years because they don't make money unkless you sell product.

MK is not a franchise … it's a 'direct sales' business with 'multi-level comission structure'. Everybody buys from MK, but there are comissions based on your recruits."

Response 3:

I think that this is just a misconception about what a franchise is. McDonalds may do intense pre-screening, but that is far from the norm. To determine whether the Mary Kay director's opportunity is a franchise, you have to analyze the definition. For example, most people would be surprised to know that many vending opportunities fit the franchise definition.

Comment 4:

"Typically, franchises are little more particular about saturation of the market. My insurance business is a franchise. They would NEVER allow as many of us to be around as MK does. They are way too protective of their name and the likelihood of failure of the franchisees"

Response 4:

Again, encroachment is a very hot topic in the franchise world. Most of quick service restaurants give their franchisee no territorial protection.

Thanks again to all those who responded to my post. If you have further questions, you can post them here as comments or back on the Pink Truth website.

Posted by michael webster at 11:26 AM | Permalink | Comments (0) | TrackBacks (0)

Over at scam.com, there was an enlightening thread about Strategic Reseach Network, and its associated company Health Career Agents.

The longest thread was about Strategic Research Network.

Many of the posters recommended that individuals contact either the BBB or SEC.

What was surprising is that given reasonably in depth understanding of this business opportunity, virtually none of the posters were able to identify even one of the correct regulators, whose attention may engaged by this business opportunity.

Here are some cites from its website:

'Complete Training and Support

As an Owner/Operator we provide you with complete training and support. Sharing the secrets we've developed in using the agent approach to maximize the number of healthcare practitioner placements you can make.

Owner/Operators make an investment of $34,900 in starting their business. In exchange they receive:

Thirty days of remote training where Owners learn healthcare recruiting process, are educated on terms, specialties and procedures, and how to use our various software tools.

Two days of on-site training where we provide Owners with the training we feel needs to be delivered in person.

Detailed 90 Day Start-Up Plan that outlines what an Owner needs to do, everyday, to get their business up and running.

Four days of hands-on instruction at our training offices with the experienced recruiters on our staff.

Technology solutions (worth more than $20,000) including research software, email tracking tools, candidate management software, and healthcare news clipping software.

Website development, logo design, starter marketing material.

A PC with all software pre-loaded.

Ongoing healthcare recruiting support and assistance in making placements for the life of your business.

Ability to send ten Sales Consultants through training at no cost.

Revenue from your sales Consultant efforts as you build your organization.

Access to the Global Database to conduct shared placements with other Owners.

Ongoing supplemental training.

You are able to start out full-time or part-time, whichever you prefer, and your overhead costs -for a phone, fax, and high-speed internet connection - will be insignificant relative to your income potential.

More than anything, for their $34,900 investment Owner/Operators get a business with legitimate six-figure earning capacity and the flexibility to structure it around their life.'

This is the classic business opportunity franchise: but the website both promotes earnings claims, and the denies that you should be able to rely upon them.

I do not know whether the software and training is worth the $35k; but the seller of this business opportunity clearly does not understand that you cannot entice people into buying this type of opportunity by making representations about earnings levels, and then saying:

'IMPORTANT: There are no guarantees of income or income claims made by Health Career Agents. This or any other business endeavor involves risk. Health Career Agents does not receive financial records or reports from its Owner/Operators and does not track or make claims as to the percentage of Owners who succeed or fail. One should be thorough and patient in considering an affiliation with Health Career Agents as an OwnerOperator.'

Either do not make an earning's claim, or back it up with reasonable estimates. Health Career Agents is trying to have it both ways, which would generally offend most franchise and business opportunity seller disclosure laws.

Posted by michael webster at 4:33 PM | Permalink | Comments (0) | TrackBacks (1)

The FTC complaint filed against Fidelity ATM for an alleged business opportunity or franchise scam, according to ATM Marketplace.

According to the FTC, "these scammers, selling ATMs, misrepresented the basic facts of their business opportunity: that purchasers would earn substantial profits; that the company had, or would have, secured locations for the ATMs within 45 days; that the ATMs would be installed and operational in the same time period; and that the company would provide substantial assistance, such as relocating underperforming machines. The complaint also alleges that they did not make required Franchise Rule disclosures and had no substantiation for their earnings claims."

There are a number of interesting facets to this case.

First, the Receiver's First Report, which included strategies for recoverying losses, states there are approximately 100 distributors who have lost around $4.2 million. The Receiver has accounted for approximately $600,000 in cash, in two bank accounts.

The Receiver has also located about $460,000 in property, for a total of around 25 cents on the dollar.

Therefore, at this point the Receiver could return about 1/4 of each distributor's loss, which is larger than normal. But, what will happen?

Based on other receiverships that I have followed, it would not surprise me if the Receiver's fees exceeded that amount of cash located, the property sold for less than 15% of its value. The problem is that there is no one representing the distributors who can question the value of the Receiver's work present at the Court hearings.

Second, although the Receiver swears in its affidavit that its law firm is experienced in complex frauds, and has shut down the Fidelity ATM website, there are at least two other Franchise websites advertising for Fidelity, here and here, nearly a full month after the initial ex-parte application by the FTC. That is not encouraging.

Third, the Receiver complains about the transparency of the scamers's accounting records, but has so far failed to alert the distributors that they should obtain their own banking records and determine where their cheque was cashed.

Fourth, Ex-Parte Order seems to only include relief against one "salesman". It is unlikely that a single person could carry this out - there is likely three or four other individuals who were feeding the top "salesman".

I also wonder about the address on the whois for their corporate website, 1375 Gateway Boulevard Boynton Beach, FL 33426 US, as it doesn't show up in the pleadings at all.

Happy Holidays and New Year.

Posted by michael webster at 7:06 PM | Permalink | Comments (1) | TrackBacks (0)

Give your prospects a free lunch, and then pitch them for 6-8 hours on your product which doesn't work.

At least that is is what Office of the Illinois Attorney General who sued two Utah Companies for Misleading Promises is alleging. According to the press release,

"StoresOnline and Galaxy Mall both promise to provide everything consumers need to get an online business started, including software to set up a web page, access to online payment mechanisms, and training courses to pull it all together. But, according to Madigan's complaint, once consumers pay thousands of dollars for these services, the two businesses fail to fulfill their promises, leaving consumers with nothing.

Madigan's complaint specifically alleges that StoresOnline and Galaxy Mall, both based in Orem, Utah, lure Illinois consumers to a free lunch, where they encourage consumers to attend a "training session" to learn how to start a successful online business. However, the "training session", for which consumers pay a nominal fee, actually is a 6 to 8-hour sales presentation for the defendants' products. During the "training session", the defendants allegedly promise consumers:

*

that the products are easy to use and consumers will not need computer experience;

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that the contracts for the products provide for a three-day period during which consumers can cancel the contract and obtain a refund; and

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that the defendants will provide any assistance the consumers may need to start their online businesses.

In contrast to the sales pitch, the complaint alleges that:

*

the products are not easy to use, and even consumers with computer experience were not able to set up their online stores;

*

the defendants refused to cancel contracts and provide refunds, even when consumers attempted to cancel within the first three days; and

*

the defendants failed to provide the promised technical support for the products"

Apparently, 15 Illinois residents losts a total of around $90,000.

While I applaud the AG for brining this action quickly, I don't have the same applause for her preventive warning. "Consumers need to be very skeptical of any marketing efforts that promise easy access to the world of internet business," Madigan said. "If a sales pitch sounds too good to be true, it probably is. Consumers must be wary of unscrupulous businesses that prey on the desire to attain easy wealth through the internet."

These residents didn't find the sales pitch too good to be true, and in general scams do not self-announce themselves as too good to be true. So why didn't these individuals see through the deception? We don't know. We do know a couple of things, however.

First, it is unlikely that these individuals were very conversant with the internet. Had they googled "storesonline scam" they would have found the June 2005 warning from Australia, which raised serious doubts about the concept. Concluding, "Regrettably, instant wealth without effort is outside the reach of us mortals." In other words, at the free lunch, when you are promised something for nothing, having another helping of food, but leave quickly.

Second, we know that these individuals probably didn't pay for their online store with Visa or Mastercard, since they would have been able to charge back the purchase.

(Ironically, Ed Magedson of Ripoff Report fame, wrote a long piece explaining what a wonderful company Galaxy Mall was and how they had changed their spots.)

Technorati Tags: illinois consumers, galaxy mall, free lunch, storesonline, orem utah, madigan, training session, promises, illinois attorney general, utah companies, payment mechanisms, successful online business, set up a web page, thousands of dollars, prospects

Posted by michael webster at 3:25 AM | Permalink | Comments (2) | TrackBacks (0)

One of the more interesting phenomena is the rise of consumer social networks, which attempt to warn other consumers of bad opportunities.

They range from the well-known, like www.ripoffreport.com, to many less well known sites.

At this website, they are claiming that the debit/credit card distributor Monex Canada Is a Scam! There are a number of testimonials, what appear to sworn statements about Monex. It is hard to tell if these are significant complaints, and the website does not appear to be updated since December, 2005. (See my prior post on Monex.)

Now how much attention is the Monex scam blog getting?

It is hard to tell, since it does not have its own separate web domain.

On the other hand, according to alexa, the Monex Group website receives very little traffic.

Monex does advertise at www.BusinessExchange.ca, so it would seem that they are still in business - perhaps they care very little about what is being said about them?

According to the Overture keyword tool, nobody is searching for information about the Monex Group.

It is important to maintain a consumer website, otherwise your information looks faded and suspect. The product of a mere rant.

Technorati Tags: monex, ripoffreport, debit credit card, social networks, web domain, sworn statements, group website, phenomena, alexa, consumers, testimonials, blog, traffic, canada

Posted by michael webster at 2:28 PM | Permalink | Comments (0) | TrackBacks (0)

FTC Competition Director to Announce Federal and State law enforcement sweep targeting bogus business opportunities and work-at-home scams.

The Federal Trade Commission, Department of Justice, and U.S. Postal Inspection Service will announce a federal and state law enforcement sweep targeting bogus business opportunities and work-at-home scams. The press conference on Tuesday, December 12 at 10:30 a.m. will announce more than 100 law enforcement actions and new education materials. Consumer guests who invested in bogus business opportunities will also be telling their stories.

One bogus business opportunities sweep was done in June 2002, called appropriately "Busted Opportunity". Another one was done in February, 2005 called Biz Op Flop. Any bets that we will see exactly the same type of fraud as we saw four years ago, with the method of operation?

Technorati Tags: bogus business opportunities, work at home scams, law enforcement actions, state law enforcement, enforcement sweep, ftc, postal inspection service, new education, competition director, department of justice, education materials

Posted by michael webster at 12:14 PM | Permalink | Comments (0) | TrackBacks (0)

China in or around 1998 had banned all multi level marketers a rash of pyramid scams.

According to officials, "The MPS official said pyramid sellers had had a very negative impact on social stability. He said that some organizers had achieved psychological mastery over members, violating the law and basic ethics by repeatedly brainwashing them with distorted facts."

Some consumer groups, like the Pyramid Scheme Alert, argue that the well established mlm companies operating in North America are guilty of this practice.

It would be very hard to read Eric Scheibeler's book on Amway/Quixtar without have some very serious doubts as to whether the Chinese were correct about the "psychological mastery" of the members by the pyramid sellers.

Notwithstanding, WFAA.com |is Reporting the Mary Kay is Open Business in China. Perhaps Pink Truth will have to get a Chinese translation?

Posted by michael webster at 11:34 AM | Permalink | Comments (0) | TrackBacks (0)

Multi Level Marketers warn that "In its present form, the FTC's proposed regulation would be devastating, if not fatal, to the direct sales industry," says Keith B. Laggos, publisher of Network Marketing Business Journal, who also warns the change could drive the entire U.S. economy downward into a recession., according to David Wilkening's article Will the proposed FTC multilevel marketing rules crash Tupperware's party?

Tupperware is an odd candidate for inclusion in this article.

Why? Well, for many years Tupperware sold exclusive territories to its distributors and was regulated as a franchisor. The sale of exclusive territories, along with the right to sell a name brand, brought it within the jurisdiction of the FTC's Franchise Rule.

As a franchisor, Tupperware had a very high level of disclosure obligation - much higher and costlier than what is being proposed by the FTC for Business Opportunities. Tupperware is also a public company, with its own costly disclosure and controls. The proposed FTC rule should not cause them any serious extra expense.

As discussed at the Pink Truth, the disclosure requirements by the FTC may not do anything to alleviate some of the relationship issues sales consultants have with Mary Kay, for example. Sales consultants apparently are being urged to pay up to $5,400 to for their start up inventory. Several experienced Mary Kay sales woman believe that this is far too high an inventory level to start with.

But there is something else odd here: if a sales consultant spends more than $500 in six months for the right to sell a name brand product, and there is the offer of significant assistance to the sales consultant from Mary Kay, then prima facie Mary Kay is selling franchises and its sales directors are franchise brokers, unless the a purchase of inventory at wholesale prices.

How, for the purposes of the FTC Rule, does one determine what the wholesale price is of a product which is never sold in a retail store? Is Mary Kay giving its product at their cost to its sales consultants? Doubtful, so how much of a $5,400 “full Mary Kay” store might be considered a franchise fee, for the right to sell Mary Kay products?

What is the rationale for requiring the franchise fee to be greater than $500? The FTC described the rationale this way. 'The record supports the proposition that the rule should focus upon those franchisees who have made a personally significant monetary investment and who cannot extricate themselves from the unsatisfactory relationship without suffering a financial setback. Implicit in the concept of franchising, as viewed by the Commission, is the assumption of a financial risk by a franchisee in entering into a franchise relationship.'

Well, if you have $5,400 worth of stock that you find out that you cannot sell, and a disclosure document might have revealed that 90% of sales consultants were in the same boat, isn't this a significant monetary investment that the FTC should be protecting? Why wait for Spring, regulate now.

Posted by michael webster at 8:10 AM | Permalink | Comments (0) | TrackBacks (0)

There have been convictions and restitution orders in the Pantheon business opportunities fraud.

"Jeffrey Kuba, a/k/a "Jeffrey Cooper" was sentenced to one hundred and eighty-eight (188) months' imprisonment, three (3) years of supervised release, and ordered to pay $18,064,018.78 in restitution. Blake Ladenheim was sentenced to sixty (60) months' imprisonment, three (3) years of supervised release, and ordered to pay $1,944,805 in restitution. Michael Press was sentenced to thirty-four (34) months' imprisonment, three years of supervised release, and ordered to pay $1,962,645 in restitution."

The Department of Justice, Southern District of Florida Press Release can be read here.

Pantheon also known as the Internet Machine company was the classic business opportunity fraud. "Potential purchasers were told that for a purchase price of approximately $18,000, Pantheon would, among other things:

1. Perform all the legwork of the business;

2. That the purchaser only needed to plug in the kiosk and wipe it down periodically; find appropriate, viable, and high-traffic locations to place the kiosks; relocate any kiosk that underperformed;

3. Place national advertisements on the kiosk;

4. Only sell distributorships in a limited geographic area.

Further, Pantheon salespeople falsely represented to potential purchasers that they would earn their investment back in nine months to a year."

On the fact of it, these representations sound terrific because the risks of the business appear to be all borne by Pantheon. But if they are bearing on the risks, why do they need your money to buy the machines? The venture has no apparent risks - which is the biggest risk of all, that the real risk is hidden away from the investor.

The one thing that everyone should take away from the briefest of introductions to modern economic market theory is: risk and return are inversely correlated, a high return signals high risk. A guarantee of performance which appears to take away that high risk, is in fact a riskier guarantee. Performance will very likely fail.

Technorati Tags: restitution orders, pantheon, imprisonment, business opportunity fraud, 3 years, Jeffrey Cooper, Blake Ladenheim, business opportunities

Posted by michael webster at 1:33 PM | Permalink | Comments (0) | TrackBacks (0)

This blawg is devoted to demolishing several myths about fraud and consumer education. Here are the top seven myths about fraud.

First, fraud do not self-announce. It would be too good to be true if all frauds were too good to be true. Only after the fact does a fraud reveal itself as too good to be true.

Second, never use the BBB to investigate fraud. The Better Business Bureau is a franchise which attempts to resolve consumer complaints. It has no investigative or regulatory power. Do not rely upon them.

Third, don't be a Wason. A Wason is someone who only looks for evidence which confirms his or her own views. Ask not what is in favour of your beliefs, but ask instead what would make you believe differently.

Fourth, a mind is wonderful thing to ignore. Listen to your gut. And run like hell if your tummy is troubling you.

Fifth, the Government is not there to help you out of a bad bargain. If you make a bad deal with criminals, nobody is coming from the Government on a white horse to give you your money back.

Sixth, receivers are very bad news. Kiss your investment good-bye - the vultures are going to suck it dry.

Seventh, there is no seventh myth, six just doesn't sell.

Technorati Tags: better business bureau, run like hell, listen to your gut

Posted by michael webster at 6:36 AM | Permalink | Comments (0) | TrackBacks (0)

In the American Entertainment Distributors business opportunity fraud, the U.S. Attorney announced that "a jury convicted Edmond Grigorian and Cesar Menendez after a two-week trial before United States District Court Judge Jose E. Martinez, in Miami, Florida. The defendants were convicted of fraud charges in connection with a scheme to sell a business opportunity involving DVD vending machines."

The two were jailed immediately and held over for sentencing, scheduled for January 4th, 2007. There is a mandatory restitution order, and it will be interesting to see what monies, if any were recovered for the investors.

American Entertainment Distributors was the classic business opportunity scam. "Evidence introduced during the trial showed that AED sold the DVD vending machine business opportunity by using baseless and wildly exaggerated profit projections. In addition, AED falsely promised to secure good locations for the machines, falsely claimed that the machines were reliable and easy to operate, falsely promised to provide long-term customer service, and referred prospective buyers to phony references. Undercover tapes introduced during the trial showed that both defendants knew that they were using false information to lure people into the deal. Most of the consumers paid $36,500 to AED for the machine and the promised services."

It would be interesting to listen to the tapes, but they are unavailable on the Pacer system.

I suspect the DVD Kiosks will become the weapon of choice for business opportunities frauds as the use of DVD Kiosks become more common in the marketplace.

For very interesting reading, on the other hand, regarding the legitimate Kiosk marketplace, I highly recommend Davis Freeberg's blog.

Technorati Tags: vending machine business, business opportunity fraud, business opportunity scam, vending machines, american entertainment, mandatory restitution, aed, fraud charges, jose e martinez, profit projections, classic business, sell a business, menendez, united states district court, edmond

Posted by michael webster at 5:33 PM | Permalink | Comments (3) | TrackBacks (0)

A constant theme here has been the clash between the techniques of compliance, which rely upon psychological mechanisms, and the law of due diligence, which regulates fraud relying upon the fictitious rational person. The statutory law of due diligence, as opposed to the common law on misrepresentation or deceit, has developed two techniques to deal with those who lie to the public for profit: the seller has not registered with the appropriate authorities, or the seller cannot use as a defence to its deceit to the public that the public did not rely upon what the seller said.

One good example of this clash was discovered by Daniel Kahneman, a Nobel Prize winner in Economics and the late Amos Tversky. In a very clever and compelling experiment, Kahneman and Tversky showed that individuals will treat irrelevant information as an important anchor. If we don't know anything about a subject, we will use even random information to "help" us make a decision.

What does anchoring have to do with business opportunities frauds or scams? How do scammers take advantage of anchoring? How does the law of due diligence deal with anchoring?

Here is a typical use of anchoring. This seller of a vending distributorships has an "earnings" estimate on their website. The ordinary purchaser has no idea whether 10 machines will sell 2 servings a day - but, it sounds reasonable.

So the purchaser anchors on 20 sales per day and so the representation that they will earn25% return on investment seems reasonable. But even if the purchaser typically decides to play it "safe" and reduces the 20 sales by 1/2 or a 1/3 -to a 12.5% or 8% return, it still sounds pretty reasonable.

But, the reality is that a purchaser is should equally subjectively indifferent to whether the sales are 20/day, 20/week, or 20/month. Do the math as if those three states of nature were of equal probability.

Unfortunately, the scammer knows that purchaser will anchor on the sales per day and make the decision accordingly. The law of due diligence requires earnings estimates to have a reasonable basis but in general the law has no requirements on how this information is presented to the public.

But, in an important change, the FTC has proposed to make this type of earnings estimate subject to the new Business Opportunity Rule and has proposed that a certain version of anchoring be deemed an deceptive marketing practice.

Technorati Tags: nobel prize winner, due diligence, daniel kahneman, deceit, rational person, clash, statutory law, amos tversky, common law, psychological mechanisms, misrepresentation, anchor

Posted by michael webster at 1:33 PM | Permalink | Comments (0) | TrackBacks (0)

A Vending Distribution Fraud -Business Opportunity Fraud was shut by the Attorney General of Kentucky, Friday October 20th, 2006.

Like the usual suspects, "National Snack Products, Inc., and Dennis Roberts offered Kentuckians a potential income of up to $50,000 per year for 4 to 6 hours work per week and an initial investment of $8,900. At least two Kentucky consumers spent over $13,000 each purchasing vending machines in response to the advertisement."

Kentucky is a registrant state, and according to the Attorney General, he is "committed to protecting the public from the operators of get-rich-quick scams ... "Legitimate business opportunities requiring an investment over $500 are required to register with my office, provide a bond and disclosure documents. People need to remember that if it sounds too good to be true, it probably is." This last remark is gratuitous and should be stricken from the regulator's language. It simply isn't helpful as we know that it would be too good to be true that scams and frauds self-announce.

It would be more helpful if the Attorney General would take steps make sure that disclosure documents were public and accessible over the internet. According to the FTC's website on registrant states, the number the FTC has for the AG's office doesn't even work.

Here is the Consumer Protection website for Kentucky as it relates to business opportunities, neatly categorized under "scams".

Here is their first tip: "Ask if the business opportunity is registered with the Attorney General's Office and verify that information with the Attorney General's Office."

Terrific, now why cannot I get that information from their website? What possible policy reasons exist for keeping the information private. None.

What is their next tip?

"Check with the Kentucky Attorney General's Office and the Better Business Bureau for complaints filed against the company offering the business opportunity. Also check with the state in which the company is located." Without a warning of the limitation of this search, viz. no news is not good news, this tip is extremely misleading and should be removed or drastically modified.

However, the rest of the tips are pretty good - if the world, for potential distributors, was made up of completely rational individuals who were not prone to confirmation bias, the Wason effect, and chasing phantom dreams. Which it isn't.

Technorati Tags: legitimate business opportunities, vending machines, business opportunity fraud, disclosure documents, attorney general, distribution fraud, snack products

Posted by michael webster at 10:35 AM | Permalink | Comments (0) | TrackBacks (0)

A singer, a person who provides fake references or testimonials for a business opportunity fraud, involved in the Cashlinks fraud was sent to prison yesterday.

According to R. Alexander Acosta, United States Attorney for the Southern District of Florida, and Henry Gutierrez, Postal Inspector in Charge, United States Postal Inspection Service:

"Jason Kowal, was sentenced today for conspiracy to commit mail fraud in connection with his activities at Cash Link Systems Inc., of Hollywood, Florida. Kowal, of Dania, Florida, was sentenced to a term of 70 months' imprisonment, 3 years of supervised release, and was ordered to pay $1,828,370.61 in restitution."

Singers are a key element in any franchise, business opportunity, or distributorship fraud because of the role they play in allowing social proof to influence the investor's decision making.

Singers are fake references provided by the criminals to the victims. Like all singers Jason Kowal was not a distributor and simply lied for pay, providing false testimonials.

Singers are also known as shills. In one rather poor choice of fake testimonials, the criminals tried to use the Attorney General of Texas as a shill for their opportunity. They were caught.

The FTC's new proposed Business Opportunity Rule would make the use of shills or singers illegal. It also produced a guide on endorsements and testimonials used in advertising.

But why do testimonials work? We have all seen these one name testimonials on blatantly fraudulent websites touting some herbal remedy or new money making scheme. Nobody pays any attention to them, do they?

Shills work because canned laughter works. Nobody likes canned laughter, we all say we hate it. But the scientific evidence is that the we all laugh louder and longer when canned laughter is present. We are primed to laugh. Shills, singers, and other testimonials prime us to act as if we were wildly successful, even as we know it is all nonsense.

Technorati Tags: mail fraud, franchise business opportunity, business opportunity fraud, singers, southern district of florida, hollywood florida, states postal inspection service, postal inspection service, r alexander, social proof, postal inspector, united states attorney, link systems, united states postal, distributorship, dania, acosta, restitution

Posted by michael webster at 3:09 PM | Permalink | Comments (0) | TrackBacks (1)

The Competition Bureau took five years to shut this website down, which "used testimonials" from people who did not exist. Strangely, this is not legal.

Five years on the job and no restitution to any consumers.

On the other hand, the Competition Bureau did receive a $100,000 fine. Nice work.

But, why do testimonials work? Here is a marketing guru's take on testimonials:

"Most of us would rather act on a referral from a friend than make a purchase based on a sales pitch alone. We want to know that the product actually works before we take the leap to buy, and we're bound to put more trust in someone who has already used the product successfully than the person trying to convince us to buy it."

I agree that this is a psychological truth, but it really doesn't make any sense as a decision strategy. Why is it so compelling to "act on a referral from a friend"? Especially when it can be easy to fake the testimonials?

Technorati Tags: job seekers, competition bureau, testimonials, sales pitch, psychological truth, restitution, leap, guru, salaries, referral, promises, consumers, marketing

Continue reading "How to Avoid Believing Weird Things" »

Posted by michael webster at 9:05 AM | Permalink | Comments (0) | TrackBacks (0)

According to "R. Alexander Acosta, United States Attorney for the Southern District of Florida, and Henry Gutierrez, Postal Inspector in Charge, United States Postal Inspection Service, announced that defendant, Melvin Webman, was sentenced earlier today by United States District Court Judge Cecilia M. Altonaga in Miami, Florida to a term of 102 months in prison and a term of three years of supervised release."

What did Mr. Webman do which resulted in a 102 month prison term?

Well according to the indictment,

"Webman and others engaged in the solicitation of investments through CheckMate Financial, Inc. to support a supposed mobile check cashing operation. Webman and others fraudulently induced investors around the country to invest in CheckMate Financial. Webman and others misrepresented that CheckMate Financial had at least one mobile check cashing unit that was in operation cashing checks in Florida. In fact, however, CheckMate Financial did not have a mobile check cashing unit that was in operation cashing checks in Florida, or anywhere else" (my emphasis)

Now how do you sell the idea that you have a mobile check cashing unit? What sort of sound does this truck make? "Come out, come out, bring out your checks"?

But there is in fact a serious business story that can be told: the Unbanked of America and how to service them. The fraud criminal will use the terms, concepts, and words used by these authorities to construct an illusion which has just enough tissue to survive a surface look.

Posted by michael webster at 2:50 PM | Permalink | Comments (0) | TrackBacks (0)

Is your lawyer insured for negligence?, ask the PointofLaw Blog. In particular,

One of the most basic and relevant disclosures a lawyer can make to clients is whether he is covered by professional liability insurance or not. Somehow the legal profession has been slow to grasp this point, even while its members take the lead in enforcing rather more stringent consumer disclosure laws aimed at other occupations and professions. About one-third of states have decided through their regulators to require this disclosure from members of the bar, but in California -- the same state that goes to truly loopy lengths to require disclosures of essentially imaginary consumer risks -- a large body of lawyers argues that it's just too onerous."

Apparently in California, up to 20% of lawyers do not carry malpractice insurance and their clients are not aware of this.

Why is this very troubling for purchasers of franchises, business opportunities, or other distributorship agreements? These contracts usually require disclosure documents in order to allow the purchaser and his or her attorney to perform proper due diligence. But if the attorney can carry out this review without any skill or knowledge, then the California consumer is without proper recourse, ironic given that California has very strict franchising and business opportunity laws! (In Canada, it is a condition of being licensed to have at least $1 million insurance coverage.)

Technorati Tags: consumer disclosure, disclosure laws, professional liability insurance, malpractice insurance, distributorship agreements, lawyers, lawyer, california, members, loopy, legal profession, onerous, stringent, occupations, negligence, regulators, professions, franchises

Posted by michael webster at 10:27 PM | Permalink | Comments (0) | TrackBacks (0)

The Department of Justice announced that "defendant Eric Bridges pled guilty today before United States District Court Judge Jose E. Martinez in connection with his participation in fraudulent business opportunity sales at a firm called Pantheon Holdings, a/k/a Internet Machine Company ("Pantheon"). Bridges pled guilty to charges of conspiracy to commit mail and wire fraud and to substantive mail and wire fraud counts.

Three other defendants, Jay Mayne, Sanford Gold, and Kathy Eidelstein, previously pled guilty in connection with the same scheme. Mayne pled guilty to conspiracy to commit mail and wire fraud on June 30, 2006. Gold pled guilty to conspiracy to commit mail and wire fraud, and to substantive mail and wire fraud counts, on August 5, 2006. Eidelstein pled guilty to conspiracy to commit mail and wire fraud, and to a substantive wire fraud count, on August 5. The defendants face a maximum statutory term of imprisonment of twenty (20) years per count, a possible fine, and mandatory restitution.

Sentencing for Mayne is scheduled before United States District Court Judge Jose E. Martinez for September 11, 2006; sentencing for Sanford Gold and Kathy Eidelstein is scheduled for October 15, 2"

Technorati Tags: wire fraud, mail, pled, conspiracy, commit, substantive, mayne, district court judge, pantheon, bridges, united states district court, united states district, fraudulent business, jose e martinez, internet machine, states district court, department of justice, imprisonment, sanford, defendant

Posted by michael webster at 11:22 AM | Permalink | Comments (0) | TrackBacks (0)

Net Based Business Opportunities: Are They Just Flop-Oportunities? After a diet of steady skepticism, it is easy to believe that virtually no internet based opportunity exists, unless it is a scam or a fraud. But consider carefully the warning by the FTC, in this brochure:

However, the Federal Trade Commission (FTC) says that many of these business opportunities are scams that promise more than they can possibly deliver.

The scam artists lure would-be entrepreneurs with false promises of big earnings for little effort. They pitch their fraudulent offerings on the Web; in e-mail solicitations; through infomercials, classified ads and newspaper and magazine "advertorials"; and in flyers, telemarketing pitches, seminars, and direct-mail solicitations." (my emphasis)

This is the critical element of a scam or fraud: the promise of something for nothing, or for very little effort. If there is just one due diligence method you learn, internalize this one. When you come across a business opportunity: are you being told that a) this is something anyone can do, b) the profits are locked in or guaranteed, and c) it is easy. Just something for nothing: perpetual motion machines don't exist and neither do perpetual money machines.

Technorati Tags: mail solicitations, business promoters, ftc, false promises, business opportunities, internet access, scam artists, infomercials, kiosks, skepticism, pitches, internet based, scams, telemarketing, flyers, federal trade commission

Posted by michael webster at 10:50 AM | Permalink | Comments (0) | TrackBacks (0)

What State Offices can you get information regarding Business Opportunity Disclosure Laws?

"Twenty-six states have business opportunity laws. Most of these laws prohibit sales of business opportunities unless the seller gives potential purchasers a pre-sale disclosure document that has first been filed with a designated state agency.

State business opportunity laws typically cover every imaginable type of business opportunity that might be offered. If a business opportunity seller is not required to provide pre-sale disclosures by the Franchise Rule, these disclosures will almost always be required by the laws of the states listed below.

The disclosures required by state business opportunity laws differ, and usually provide more abbreviated information than the FTC’s Franchise and Business Opportunity Rule requires. However, most of these laws provide important rights and remedies for business opportunity investors, including required security bonds to cover investor losses.

If you are considering purchasing a work-at-home or other business opportunity, and reside in a state with a business opportunity law, we encourage you to find out more about the protection provided by your state statute before you invest."

This last bit of advice is, unfortunately, useless or likely to be misunderstood. You cannot phone, write, or communicate by email with these State Offices and expect them to vet your favourite business opportunity, nor will they direct you to any specific attorney or lawyer for assistance. Nor does it mean anything if the business opportunity is registered with the State Office. And I certainly would not rely upon the provision of a bond to cover my losses, either.

Generally, the point of knowing what information you are entitled to allows you with confidence to ask for and demand that information. Probably the most important information to demand is a list of "prospective" purchasers so that the cost of due diligence can be shared among the group. You won't pay much more than $500 if there is a good chance that the $500 will turn out to reveal very bad news.

Posted by michael webster at 10:32 PM | Permalink | Comments (0) | TrackBacks (0)

Looking for Energetic, Reliable and Honest People: Why?At the turn of the century, in Chicago, the Yellow Kid would advertise for "reliable and honest individuals looking for a business opportunity". He reasoned that he needed someone who was shady, looking for something for nothing. He was looking for mooches, much like the Ascot International scammers.

Who answers ads for "energetic, reliable, and honest people"?

Someone who wants their public self image to be energetic, reliable and honest - but is thereby also signaling to the outside world that they are neither energetic, reliable nor honest. Energetic people don't respond to business opportunity ads, they have better things to do. Only people who require their public self image to be energetic, reliable and honest will respond. Having testified to the world as to their honesty, they then feel that they can backslide in the honesty department - which makes them ripe for mooch bait.

Technorati Tags: honest people, energetic people, business opportunity ads, public self image, ascot international, honesty, scammers, shady, ripe

Posted by michael webster at 1:09 PM | Permalink | Comments (0) | TrackBacks (0)

Business Opportunities and Job Placement Scams and How they Work. A business opportunities criminal demands a large amount of capital, $19,900 is the new minimum number, up from $9,900 in the late 90's, for ATMs, vending machines, internet kiosks, or other self serve kiosks. The FTC notes that:

"The very amount of capital requested can bolster the illusion that the business opportunity is a legitimate investment. Victims of these scams often believe they are investing in highly developed businesses. In fact, scam artists take the consumers' investment as profits and commissions, and provide them unprofitable business plans in return. The injuries to consumers can be devastating, not only in terms of the dollars they lose, but also in the time they invest in unprofitable enterprises. For example, one victim in a recent FTC case estimates that he spent $75,000 in an attempt to make such a business opportunity profitable."

But, once you have decided, because of the money that you have previously spent, that this is a real business, you will continue to try to fool your gut by spending more money. The brain believes that the continued investment in the scam will soothe the rumblings in the gut - which by the way is screaming "run away, run away."

Technorati Tags: internet kiosks, ftc case, business opportunity, business opportunities, vending machines, scams, consumers, unprofitable business, business plans, scam artists, job placement, atms, bolster, illusion, legitimate, invest

Posted by michael webster at 9:22 AM | Permalink | Comments (0) | TrackBacks (0)

The Investment Opportunity versus the Regulator

Technorati Tags: ontario securities commission, real estate investment, investment opportunity, due diligence, osc, popularity

Posted by michael webster at 8:08 PM | Permalink | Comments (0) | TrackBacks (0)

What are the three elements of misleading advertising, according to the FTC?

"First, there must be a representation, omission or practice that is likely to mislead the consumer. (Practices that have been found misleading or deceptive in specific cases include false oral or written representations, misleading price claims, sales of hazardous or systematically defective products or services without adequate disclosures, failure to disclose information regarding pyramid sales, use of bait and switch techniques, failure to perform promised services, and failure to meet warranty obligations.)

Second, we examine the practice from the perspective of a consumer acting reasonably in the circumstances. If the representation or practice affects or is directed primarily to a particular group, the Commission examines reasonableness from the perspective of that group.

Third, the representation, omission, or practice must be a "material" one. The basic question is whether the act or practice is likely to affect the consumer's conduct or decision with regard to a product or service. If so, the practice is material, and consumer injury is likely, because consumers are likely to have chosen differently but for the deception. In many instances, materiality, and hence injury, can be presumed from the nature of the practice. In other instances, evidence of materiality may be necessary. (my emphasis)"

Although the FTC confuses or rather conflates two different legal concepts, reliance and proximate cause, their statement about deception is useful for the tip about warranties. Typically, consumers believe that if a business oppportunity has a guarantee or warranty, then this makes the purchase of the business opportunity safer or less risky.

This reasoning confuses the legal meaning of "guarantee" with the psychological connotation of "guarantee". Legally, if A guarantees B's debt's then what is relevant is A's creditworthiness. If A is less creditworthy than B, then A's guarantee is legally pointless. But psychologically, we all believe that a guarantee lessens risk. Fraud criminals know this and pitch pointless guarantees to us, taking advantaging our our natural reaction to believe that guarantees are removing risk.

Technorati Tags: ftc, omission, perspective, warranty obligations, bait and switch, defective products, mislead, deceptive, pyramid, disclose, promised services

Posted by michael webster at 7:18 PM | Permalink | Comments (0) | TrackBacks (0)

Franchise Fraud Returns 10 cents on the dollar

Elliot Spitzer is rightly regarded as a very tough commericial litigator who extracts very large settlements for the State of New York. But when faced with the standard business opportunity fraud, the AG was only able to extract 10 cents on the dollar.

The lesson here is that the price of poor due diligence, even with the very best litigation team, is 90 cents on the dollar. The purchasers of this franchise lost 90% of their investment. I wonder what they spent on due diligence?

Technorati Tags: franchise fraud, due diligence, business opportunity fraud, dollar, elliot spitzer, litigation team, litigator, extracts, lost, 10 cents

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The Texas Business Opportunity Act provides a number of required disclosures:

Disclosure Requirement

Under the Texas Business Opportunity Act, the seller must provide you with the following information at least 10 days before you sign a contract or turn over any money to the seller:

The names and addresses of all persons affiliated with the seller in this particular business;

A copy of a current financial statement of the seller;

A complete description of the actual services the seller agrees to perform for the purchaser;

If training is promised, a complete description of the training, length of training, and cost of travel or lodging during the training;

If services are promised in connection with placement of equipment or products, the full nature of the services and the nature of agreements to be made with the owners or managers of business locations;

If the seller or his or her representatives have been adjudged bankrupt or have been subject to a judgment in a civil suit involving fraud or embezzlement during the past seven years, he or she must tell you;

If the seller makes representations about sales or earnings potential, he or she must disclose both the total number of people participating in the business opportunity for the past three years and the total number of people who have actually achieved the represented sales or earnings within the past three years.

Cancellation. The seller must give you the following statement in writing as part of the disclosure requirement: If the seller fails to deliver the product, equipment, or supplies necessary to begin substantial operation of the business within 45 days of the delivery date stated in your contract, you may notify the seller in writing and cancel your contract. (my emphasis)

Imagine how powerful this information would be if it was public, and could be tested by independent third party agents. It is of no use if only disclosed 10 days before the purchase as there is not sufficient time to conduct the due diligence properly.

Technorati Tags: texas business, opportunity act, business opportunity, business locations, current financial, financial statement, bankrupt, purchaser, disclosure, judgment

Posted by michael webster at 11:30 AM | Permalink | Comments (0) | TrackBacks (0)

What is up with the Mobile Cheque Cashing Business Opportunity Scam?

So here is how to make $15,000 with Mobile Cheque Cashing. Start with $150,000, hold back 10%, and invest in Mobile Cheque Cashing, go to jail, visit Scott Rose.

Since "according to the evidence presented at trial, Rose and others solicited investments through CheckMate Financial, Inc., to support a supposed mobile check cashing operation. The evidence showed that Rose and others fraudulently induced investors around the country to invest in CheckMate Financial. Rose misrepresented that CheckMate Financial had mobile check cashing units that were in operation cashing checks in Florida, when, at the time these representations were made, CheckMate Financial did not have any mobile check cashing units operating in Florida, or anywhere else.

The evidence showed that potential investors were told that CheckMate Financial had established routes for a mobile check cashing unit to cash checks at places such as job sites in order to provide onsite payroll check cashing benefits for employees. The evidence also showed that CheckMate Financial did not have established routes, did not have an operational mobile check cashing unit, or a license from the State of Florida to cash checks. In addition, the evidence showed that investors relied on Rose’s statements to invest in CheckMate Financial’s supposed mobile check cashing operation."

Technorati Tags: mobile check, cheque cashing, scott rose, checkmate, cashing checks, check cashing, cash checks, business opportunity scam, invest, investors, florida, investments

Posted by michael webster at 9:12 AM | Permalink | Comments (0) | TrackBacks (0)

Federal Trade Commission There are a number of ways that the FTC, or Federal Trade Commission, can be used effectively in your due diligence and research about business opportunities. But, first let us be clear on how you cannot use their expertise: like all regulatory bodies they are not going to give a recommendation one way or the other about the opportunity. Don't expect the FTC to give you free legal advice - something for nothing.

How can you use their expertise? Basically, you want to review past scams, for example this list of State Actions against Business Opportunities Scams, and check for similar frauds or scams. Here is another summary of the recent 2005 Federal Trade Commission actions against the sellers of business opportunities. Most business opportunities scams or frauds do not develop full blown, they have been carefully crafted, changed, and added to. They are the big cons, of our day. But unlike the charming Paul Newman and Robert Redford in the movie The Sting, based on David Mauer's book, there is little to admire about these psychopaths.

Only if you are completely sure that the business opportunity is not similar to one of the criminal schemes that the Federal Trade Commission has prosecuted should you take the next step in contacting the company for their disclosure document.

Technorati Tags: federal trade commission, business opportunities, scams, paul newman, free legal advice, frauds, robert redford, due diligence, ftc, regulatory bodies, state actions

Posted by michael webster at 9:04 AM | Permalink | Comments (0) | TrackBacks (0)

Getting timely and relevant information from Google is not straightforward, as I wrote about earlier discussing the Kirk Wright fraud searches on Google. In summary, those looking for information on Kirk Wright from Google were pointed to a very small and insignificant story of mine. For a reputed $180 million hedge fund fraud, Google should be able to do better.

I have discovered another interesting thing about my Google searches - they default to Google.ca, whether I want them to or not. For example, I searched the term "business opportunities" on Google.ca, checking the "entire web" selection. The search was for "business opportunities" was repeated on Google.com. The number one ranked website on Google.ca for the term "business opportunities" is www.pin.ca, a commericial real estate brokerage located in Victoria, British Columbia. The number one ranked website f Google.com is for the term "business opportunities" is Dana Carlson's www.business-opportunities.biz. I have used www.alexa.com to rank their daily reach.

Which would you rather be: the exciting red line or the boring blue line?

Continue reading "Why you can be too popular?" »

Posted by michael webster at 10:18 AM | Permalink | Comments (0) | TrackBacks (0)

Practice. Practice. Practice.

Business opportunities scam are long cons, as opposed to short cons. They involve planning, obtaining a mooch list, and refining the script. Pantheon Holdings, an internet kiosk business opportunities scam, demonstrates how a great deal of the planning works. The individuals charged in in this internet kiosk scam, according to the Government's Notice of Intention to Use Other Crimes as evidence in the upcoming trial, scheduled for late August, 2006, the defendants worked with the following business opportunities scams.

Blake Landenheim worked with Ameri P.O.S. Mark Pelle worked with AmeriTel, AmeriCard, and other business opportunities frauds. Kathy Edelstein worked for Teleking and Debit Corporation. Michael Press worked at Global Resources. Other defendants also worked at business opportunities frauds in which the defining characteristic was that consumers lost most if not all of their money.

How do they get away with this? How can these con criminals continue to scam and defraud the public?

Technorati Tags: business opportunities, internet kiosk, kiosk business, frauds, pantheon, americard, practice business, edelstein, global resources, ameri, pelle, scams, blake, crimes, intention, consumers

Continue reading "What makes for a Successful Business Opportunities Scam?" »

Posted by michael webster at 9:06 AM | Permalink | Comments (0) | TrackBacks (0)

One of the typical deceptive practices used by business opportunity sellers use is to parade the "big earners" out for display. The FTC has proposed several ways of dealing with the deceptive marketing practice. But since the late 70's Amway has been forced by the FTC to state that over half Amway recruits make nothing and the rest average $64/month. I don't know how current these numbers are, but it doesn't seem to make a difference to Amway's ability to recruit.

Let us suppose that that the above numbers were accurate: 50% of Amway recruits make nothing and the average earnings of the other 50% are $64/month. Why could Amway continue to sell this opportunity? Is there some simple cognitive failure among recruits that accounts for them discounting or ignoring these earning claims?

Technorati Tags: amway, ponzi scheme, deceptive practices, deceptive marketing, ftc, extrapolate, opportunity sellers, business opportunity, scheme works, discounting, induction, cognitive, recruit, earning, suppose, earnings

Continue reading "Who Else wants to be Rich?" »

Posted by michael webster at 10:09 PM | Permalink | Comments (0) | TrackBacks (0)

One of the major themes on this site has been to trust your gut when it comes to business opportunity due diligence. The mind can too easily be swayed by con criminals waving the phantom dream which becomes more real than the actual coin of the realm. However, over at the Harvard Business School, Max Bazerman and Deepak Malhotra argue that when it comes to negotiating, we should not trust our intuition and rather rely on a rational checklist.

Their argument proceeds by analogy: just as visual illusions are compelling but wrong, so is relying on intuition when it comes to negotiation. The particular illusion they use is from Roger Sheppard's book Mind Sights: Original Visual Illusions, Ambiguities, and Other Anomalies (W. H. Freeman, 1990). (Roger Sheppard is also known for his auditory illusions: a rising pitch which seems to go up forever.) The seduction of these illusions are that even when you know the answer - for example, that the two tables are the same- it doesn't change your visual judgment that one table is bigger than the other. In terms of social influence, Cialdini calls this a click-whirr inference.

Cialdini and others point out that we need responses to our click-whirr inferences, especially when dealing with con criminals. But is the Bazerman/Malhotra approach correct for business opportunity due diligence? Do we need to be more rational? Or do we need quicker intuitive responses?

Technorati Tags: visual illusions, auditory illusions, harvard business school, due diligence, intuition, business opportunity, ambiguities, deepak, anomalies, analogy, seduction, criminals, negotiation, rational

Continue reading "When Not to Trust Your Gut." »

Posted by michael webster at 9:49 PM | Permalink | Comments (0) | TrackBacks (0)

Charles E. Edwards, the founder of ETS Payphones, has been ordered by a Judge not to violate "Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Edwards consented to the entry of the final judgment without admitting or denying any of the allegations of the Commission's Complaint."

Now since according to the SEC's complaint, "alleged that Edwards and ETS engaged in fraud in the offer and sale of unregistered securities in the form of investment contracts, and alleged that the defendants promoted a massive fraudulent scheme through the use of insurance agents and over the internet, in which ETS raised more than $300 million from more than 10,000 investors. The investments involved the sale of payphones, which were leased back from the investors in exchange for a fixed rate of return. In fact, the investment program was a Ponzi scheme. On February 23, 2006, Edwards was sentenced to 13 years incarceration and restitution of $320,397,837 based on his earlier conviction on 83 counts of wire fraud, money laundering and conspiracy to commit money laundering." (my emphasis) was there any reason to close this barn door so long after the horse had left? Perhaps it has to do with recovering ETS fund for all those investors, in which nothing was delivered to the investors by the receiver.

Technorati Tags: ets payphones, securities exchange act, securities act of 1933, edwards, ponzi scheme, securities exchange act of 1934, investors, sale, investment contracts, investment program, final judgment, insurance agents, fraudulent, sentenced

Posted by michael webster at 1:50 PM | Permalink | Comments (0) | TrackBacks (0)

Section 437.5 of the FTC's proposed business opportunity rule lists 18 prohibited practices, a) to r). Since four of these practices contain conjunctions, I believe that there are actually 22 deceptive practices, and since Simon and Garfunkel didn't pen a song about 22 ways to leave your lover, I call this thread 26 Ways to Leave Your Money.

Kim Klaver asked me to post the entire list of 22 deceptive practices, which are from the Federal Registrar Vol. 71, No. 70/Wednesday, April 12, 2006.

Here is the list, which I have taken the liberty of writing in plain English, or a plain as I can be.

1. Tell a prospective distributor that they have contracted out of the protection offered by the FTC Biz Op Rule.
2. Provide, orally, visually, or in writing information inconsistent with the disclosure document.
3. Provide, orally, visually, or in writing information with inconsistent with the earnings claim document.
4. Include in the disclosure document more information than is required by the FTC Biz Op Rule.
5. Provide misleading information about the gross, net income or profits, that other prior purchasers have earned.
6. Tell a prospect that the FTC or some other government prevents the seller from making an earnings claim.
7. Fail to make available to prospects written substantiation of the seller's earnings claims.
8. Fail to make available to the FTC written substantiation of the seller's earnings claims.
9. Provide misleading information about how commissions, bonuses, incentives and other rewards are paid.
10. Misrepresent the essential nature of goods being sold by the prospect.
11. Provide misleading information about the nature of support that the prospect will receive.
12. Tell the prospect that the seller, lead generator, or locator will likely find customers, accounts or locations.
13. Misrepresent the seller's refund or cancellation policy to the prospect.
14. Fail to provide the refund or cancellation, when the terms in 13 are meet.
15. Advertise the distributorship as an employment opportunity.
16. Offer the prospect an "exclusive" territory, when the terms of the territorial protection are not exclusive.
17. Offer the prospect an "exclusive" territory that intersects another territory assigned to another purchaser.
18. Tell the prospect that some trademark holder, or government agency directly or indirectly endorses the opportunity.
19. Misrepresent to the prospect that some reference, ie shill, has is a purchaser of the opportunity.
20. Misrepresent to the prospect that some reference, ie shill, can provide an independent reliable report about the company.
21. Fail to disclose that you have paid your references.
22. Fail to disclose that you have personal relationships with your references.

This is my rendering of the proposed practices into plain English, but please consult the FTC Business Opportunities Rule.

Technorati Tags: deceptive practices, disclosure document, simon and garfunkel, prospective distributor, ftc, inconsistent, conjunctions, kim klaver, biz op, business opportunity, earnings, liberty

Posted by michael webster at 3:10 PM | Permalink | Comments (0) | TrackBacks (2)

The secret will apparently remain unknown, as the FTC announced today that a "U.S. District Court has barred a purported former preacher, his two sons, and his companies from selling a healthcare business opportunity promising consumers millions of dollars if they participated in an alleged network of Medicaid providers. In fact, according to the Federal Trade Commission complaint, the defendants' business model would have required participants to break numerous state and federal laws.

Using "healthcare conferences"at hotels and convention centers across the US, the defendants promised consumers that they would receive "guaranteed" Medicaid patients and would receive help from the lawyers, doctors, and other professionals on their staff in establishing their healthcare businesses. The FTC charged that the defendants misrepresented the assistance they would provide and that participants could legally earn money from the business, and did not provide participants with the required disclosure statement and earnings disclosures for a franchise. A U.S. District Court has granted a temporary restraining order, prohibiting the defendants' from continuing their deceptive business practices, freezing their assets, and appointing a receiver. "

According to the complaint in the FTC lawsuit, "the defendants failed to disclose that their business model would expose participants to either criminal or civil monetary penalties, as it would violate numerous federal and state laws. The complaint also alleges that they misrepresent that purchasers could legally make substantial earnings, and that they will receive assistance in establishing and managing their business venture. Finally, the FTC charged that the defendants failed to provide purchasers with the required disclosure statement and made unsubstantiated earnings claims."

Technorati Tags: federal trade commission, medicaid providers, medicaid patients, ftc, consumers, federal laws, healthcare business, healthcare conferences, healthcare businesses, business model, business opportunity, earn money, preacher, promising

Posted by michael webster at 3:21 PM | Permalink | Comments (0) | TrackBacks (0)

Who the Heck is Annie McGuire? Ms. McGuire runs a site designed to educate people about fraud. What is interesting about her site, among many things, is her own story. How a well educated, reasonably well-off, intelligent person appears to have lost over $1 million of her money and others falling for scams which "I could have avoided every last bit of what happened had I only stopped believing and stopped implicitly trusting long enough to pose the right questions to the right sources - starting with my own common sense. I should have listened to my own personal Jiminy Cricket when I heard his tiny voice saying that something was fishy. That's easy to say now, of course." (my emphasis)

It is not entirely clear from her narrative how she managed to ignore her own concerns.

I wish that I could recommend the websites as a favourite. But while the website is interesting, its layout is fairly confusing and could probably do with a makeover, there is no blog, rss, or even forum. This is odd in a site which wants to assist fraud victims since what fraud victims need to hear from each other that it wasn't their fault for being robbed.

Technorati Tags: jiminy cricket, intelligent person, tiny voice, fishy, trusting, scams, makeover, common sense, narrative, confusing, listened, heck, educate, annie, pose, fraud, rss, blog, lost

Posted by michael webster at 4:17 PM | Permalink | Comments (2) | TrackBacks (0)

The U.S. Attorney for the Southern District of Florida announced that "that defendant Thomas Kling was sentenced to prison in connection with a fraudulent scheme to sell DVD vending machines. United States District Court Judge Jose E. Martinez on Thursday sentenced defendant Thomas R. Kling to two years and nine months in prison and ordered him to pay $ 296,700 in restitution to the victims.

Kling was a sales representative at American Entertainment Distributors, Inc. ("AED"), a Hollywood, Florida-based company that fraudulently sold more than $19 million of DVD vending machines to consumers across the United States in 2003-2004. To sell the machines, AED used baseless and wildly exaggerated profit projections, falsely promised to secure good locations for the machines, falsely claimed that the machines were reliable and easy to use, exaggerated the company's longevity, and used phony references." (my emphasis)

Which of these five falsehoods is the easiest to discover? Which of the five falsehoods could reasonably be caught by a decent business opportunity due diligence checklist?

Technorati Tags: thomas kling, united states district court, united states district, vending machines, florida based company, hollywood florida, aed, defendant, sentenced

Continue reading "Business Opportunity Fraudster sent to Jail in Southern Florida" »

Posted by michael webster at 10:58 AM | Permalink | Comments (0) | TrackBacks (0)

On June 28th, 2006, the FTC filed a lawsuit against a locating company, which "promised customers they would secure "profitable locations" in "high volume" or "high traffic" areas. One pitch promised locations in "sports bars, night clubs, grocery stores . . . convenience stores . . . gift stores in large hotels . . . restaurants . . . golf courses and country clubs . . ." The companies charged consumers $150-$6000, depending on the number and types of locations they were hired to find. In fact, the companies often did little or nothing for their customers. Many times they failed to find any locations for vending machines and display racks, or did not find as many as they had been hired to find."

Now what makes this just a silly business? Why on its face can no such "location finding" business exist?

Technorati Tags: vending machines, bars night clubs, ftc, convenience stores, gift stores, grocery stores, country clubs, display racks, hotels restaurants, traffic areas, sports bars, payphones, atms, golf courses

Continue reading "Locating Services - No such number, no such zone" »

Posted by michael webster at 10:31 PM | Permalink | Comments (0) | TrackBacks (0)

Florida Agriculture and Consumer Services Commissioner Charles H. Bronson announced today the arrest of a formerly married couple who allegedly collected more than $193,000 from 23 investors for candy vending machines and delivered nothing in return.

According to the complaint, "the pair are accused of operating a registered business opportunity company by the name of Kandy Kidz Inc., of North Miami Beach, which offered investors an opportunity to make a living by purchasing and operating candy vending machines. Representatives of the company told investors that the company would provide the machines, candy and stickers that they could place on their machines indicating that they were affiliated with a Texas charitable organization that searches for missing children. The company solicited investors by advertising in various newspapers and publications throughout the country". (my emphasis)

This is a very common feature of fraudulent business opportunities, the suggestion that they are affiliated with some charity. What this does is to dull the sense of skepticism of the consumer by transferring the goodwill we all have towards charities to the fraudulent scheme. Assuming that the charity exists, does it have any duty to prevent it's good name from being usurped?

Technorati Tags: candy vending machines, fraudulent business opportunities, investors, north miami beach, opportunity company, business opportunity, charitable organization, florida agriculture, kandy, bronson, kidz, stickers

Posted by michael webster at 11:12 AM | Permalink | Comments (0) | TrackBacks (1)

A year and a half ago, the Federal Trade Commission, the Department of Justice, and the U.S. Postal Services launched a coordinated attack on various fraudulent business opportunities. According to the press release, "Business opportunity and work-at-home fraud causes substantial consumer injury. In the FTC's cases alone, the defendants caused tens of thousands of consumers to lose a total of more than $100 million." (my emphasis)

Similarly, "In June 2002, the FTC, Department of Justice, and 17 state law enforcement agencies launched "Project Busted Opportunity," a law enforcement sweep targeting fraudulent work-at-home and business opportunity operations."

One item of interest in both sweeps is that the stipulated judgment in Associated Records Distributors,"with defendant Russell MacArthur bans him from advertising, promoting, or selling any franchises or other business opportunities, or from owning or working for any entity that engages in those activities. The settlement also prohibits MacArthur from making any material misrepresentations in connection with the sale of any goods or services and from violating the Commission's Franchise Rule."

Associated Records "sent unsolicited commercial e-mail and placed ads in newspapers throughout the country representing that "People just like you are making $150,000 per year! What are they doing? Going around to popular stores in their local area, and restocking shelves of the HOTTEST SELLING products ever!" According to the FTC, consumers who responded to the advertisements reached a telemarketer who falsely promised potential investors a profitable business opportunity operating display racks offering compact discs and audio cassettes for sale in retail locations, and stated that they would recover their initial investment within three or four months. The FTC alleges that the defendants also falsely promised to find profitable locations for the music display racks, and referred the potential investors to phony references paid to lie about their success. (my emphasis) I see, a stock clerk can make $150,000 a year.

Why is Mr. Russell MacArthur of special interest?

Technorati Tags: business opportunity, business opportunities, law enforcement agencies, state law enforcement, department of justice, ftc, tens of thousands, postal services, stipulated, russell macarthur, fraudulent

Continue reading "Project Biz Op Flop" »

Posted by michael webster at 10:30 AM | Permalink | Comments (0) | TrackBacks (1)

Kahneman and Amos Tversky are well known for their interesting puzzles in rational choice and their clever challenges to rational choice theory.

Typically, their examples involve seeing the same problem from two different perspectives which draw out two very different choices.

Here is one of my favourite examples.

Consider the following problem. In a population of 600 individuals, serious viral infection has taken place. There are two courses of action possible.

A: You can cure 400 individuals for certain.

B: You can cure 600 individuals, but with only 75% certainty.

As you are thinking about your decision, a new medical program becomes known. It offers the following choices.

C: You will doom 200 individuals for certain.

D: You will doom no individuals, with 75% certainty.

Which do you choose, A over B and D over C? This is the typical choice pattern. Faced between curing 400 people for sure and a 25% chance of failing to cure anyone, take the sure thing. But when faced with having to lose some individuals, perhaps it better to take a risk to save everyone.

Now it takes no great imagination to see that choice A is the same a choice C, and B is the same as D for a population of 600. If you cure 400 people for certain, then 200 people were doomed for certain. The same with with B and D.

But having seen the equivalence of A and C and B with D, it is still hard to resist the framing effects: when faced with sure gains, be risk adverse; when faced with sure losses, be risk seeking.

Why is this relevant to distributors who have lost money in business opportunities scams?

Technorati Tags: rational choice theory, daniel kahneman, nobel prize, doom, choices, typical choice, viral infection, professor daniel, amos tversky, vernon smith, medical program, new medical, clever, puzzles, perspectives, economics

Continue reading "Why Biz Op Distributors Fail to Recover Their Losses" »

Posted by michael webster at 10:04 PM | Permalink | Comments (0) | TrackBacks (0)

Here is an example of a biz op script, from court files from Southern Flordia.

[W]e put people in the business owning and operating pay phone routes. Now, we are direct partners with AT&T, Lucy, so we provide you with the locations and the installation . You'd have a guaranteed return on each phone . Minimum investment would be $15,000 . . . . We're the largest distributor of pay phones in the country. We're direct partners with AT&T, Lucy, so we provide you with locations and the installation . You'd have a guaranteed return on each phone . . . . Now, the minimum investment to get started is $15,000. That would be for a seven-phone route, up and running. That includes seven phones, seven locations , installation and line activation . . . . Okay, now, the locating company that we work with in your area offers a minimum guarantee of $300 per phone per month . And the way the guarantee works, Lucy, if for any reason one of your phones does not generate the $300 . . . they will move you to a new location for absolutely free of charge. But I can tell you this, like I said, these areas are monitored and they pretty much know what they're making . . . . Okay? So, if you started out on a seven phone route, you'd be averaging around $2100 a month . . . . And if you'd be interested in receiving the information, Lucy, I'd take down your information and then I would put you on the line with the territorial director for your area. . . . Okay, hold the line for me one moment. I'm going to put the territorial director on the line for you, and he' s going to go into a little more detail with you, okay?

Here is how we count the fraud.

One, how many times is "Lucy" mentioned, in an effort to establish a relation? Four, and four "Okays", which cannot be responded to.

Two, how many times is "guarantee" or "free" mentioned, in a effort to minimize risk? Five.

Three, who is mentioned as their partner, in an effort to obtain reputational capital? At&T, their direct partner.

Four, what is the actual request? "If you are interested in receiving more information .." You commit yourself to a larger agenda by simply asking for more information.

Five, what is the earnings claim? Average $2100 a month means that I will earn my investment back in 8 months. Even if I only get 1/3 of of what they say, being conservative, I will earn my investment back in 2 years.

Reality? No phones, no money, minimum loss of $15,000, humilation, and loss of face. Not priceless.

Technorati Tags: lucy, guarantee works, minimum guarantee, minimum investment, biz op, pay phones, flordia, southern, reason, pay phone

Posted by michael webster at 10:44 PM | Permalink | Comments (0) | TrackBacks (0)

The US Department of Justice reports that "Clark B. Sampson and Donald P. Manfredonia, were sentenced on June 20, 2006, on charges arising from their activities at Public Telephone Corporation ("PTC")" PTC was a fraudulent business opportunity involving the sale of public payphones.

"Sampson was sentenced to a term of 77 months' imprisonment and Manfredonia was sentenced to a term of 30 months. Both defendants were also sentenced to three (3) years of supervised release following their terms of imprisonment. At sentencing, U.S. District Court Judge Patricia A. Seitz emphasized the seriousness of the crimes, warning that their conduct had torn at the basic fabric of society, weakening the ability of people to trust one another." (my emphasis)

"According to evidence introduced during their trial, defendants Sampson and Manfredonia solicited customers throughout the United States to purchase business opportunities involving payphones, customarily offering a package of seven (7) payphones for $15,000. To effectuate their scheme to defraud, the defendants made material false statements concerning, among other things, the expected profits of PTC's payphones. Among other misrepresentations, the defendants falsely stated that PTC was in partnership with American Telephone & Telegraph and that a Wall Street investment firm supported PTC's claims of profitability. In addition, the defendants provided potential customers with false references for them to call regarding PTC's profitability. Sampson was responsible for individual sales of approximately $695,000, making him the highest producing PTC salesman. Manfredonia had sales of approximately $130,000". (my emphasis).

Technorati Tags: sentenced, public payphones, manfredonia, sampson, us department of justice, fraudulent business, district court judge, ptc, imprisonment, public telephone, purchase business, business opportunity, business opportunities, justice reports, seitz, department of justice, torn, crimes, fabric

Posted by michael webster at 8:03 PM | Permalink | Comments (0) | TrackBacks (0)

US Franchise News has some bad advice about how to do due diligence about franchises and business opportunities. Unfortunately, it is typical of the type of due diligence many franchisees and biz op purchases engage in. The US Franchise News starts, however, promisingly enough stating:

"No federal or state agency or private organization can tell you whether a company is legitimate or operates in good faith. The FTC or the Better Business Bureau can report on whether consumers have complained about a company. But, operators of fly-by-night franchise and business opportunity scams know this, and may change the name and location of their company every few months to avoid a record of consumer complaint." (my emphasis)

That should be the end of the story: no agency, full stop, can tell you whether a company is legitimate. Surprise, surprise you have to buy this information.

But no, the story goes on to suggest:

"If you want information about consumer complaints from the FTC, request it in writing. Address your request to;

Freedom of Information Act Request

Federal Trade Commission

Washington, D.C. 20580.

Please identify your letter as a "FOIA Request" and include (1) your name, address and daytime phone number, and (2) the name and address of the company you are asking about"

Note this recommendation is completely at odds with the first observation that the"fly-by-night franchise and business opportunity scams know this, and may change the name and location of their company every few months to avoid a record of consumer complaint"

It would be just too good to be true if there was an agency that gave you out free information on reputations of franchises and business opportunities. Just too good to be true.

Technorati Tags: franchise news, surprise surprise, due diligence, better business bureau, business opportunity scams, legitimate, unfortunately, ftc, consumer complaint, business opportunities, consumer complaints, biz op, private organization, fly by night, franchisees, franchises

Posted by michael webster at 10:57 PM | Permalink | Comments (0) | TrackBacks (0)

Almost 25 years ago, J. Edward Russo and Paul J.H. Schoemaker wrote "Decision Traps: The Ten Barriers to Brilliant Decision-Making and How to Overcome Them". I believe that the book is out of print, but there are plenty of used book sellers who have it. Two of their decision traps are particularly prevalent amongst business opportunities or distributorship purchasers: a) overconfidence,"failing to collect key factual information because you are too confident in your assumptions and opinions., b) shortsighted shortcuts, relying inappropriately on "rules of thumb" such as implicitly trysting the most readily available information or anchoring too much on convenient facts."

Here is how these two decision traps end up cost purchaser a great deal of money. A person will attend a trade show and see an admittedly neat idea: it may be a new internet kiosk or atms located in casinos. The individual will self generate a great deal of excitement about the opportunity, forgetting that over optimism is only required for implementing a well researched out decision,and is no substitute for careful, skeptical and through examination. Being over confident can be a good thing, but only after you have been more than skeptical, asked all the right disconfirming questions, and identified and removed the anchors in your assumptions.

Given this, does the the new FTC rule help, hinder, or is neutral with respect to purchasers of business opportunities?

Technorati Tags: traps, used book sellers, internet kiosk, admittedly, rules of thumb, neat idea, distributorship, anchoring, atms, purchaser, prevalent, russo, shortcuts, assumptions, business opportunities, casinos, excitement, confident, brilliant

Continue reading "Decision Traps and Due Diligence" »

Posted by michael webster at 4:02 PM | Permalink | Comments (0) | TrackBacks (0)

When the Attorney General of West Virginia shut down Coupon Connection of American last July, 2005, it marked the end of a very pathetic business opportunity fraud that operated for at least six years. CCOA promised to sell to distributors books of coupons that they could in turn resell to consumers and make a profit. Here is the archive of the CCOA website.

The first complaint about CCOA was handled in a tragic-comic fashion by David Horwitz, of the Horwitz fights back fame. Due to his interventions, the distributor only lost 80 cents on the dollar. Nice work.

The full story of Donald Farmer's, the principal behind CCOA, fraud is told by the West Virginia's AG here.

How could consumers have protected themselves against this fraud? Buying coupons to resell sounds perfectly reasonable, a middle man we are all used to. But what is wrong with the picture?

Technorati Tags: business opportunity fraud, ccoa, west virginia, middle man, vending machines, coupons, consumers, coupon connection, comic fashion, atms, kiosks, pathetic, interventions, fights

Continue reading "Coupon Connection of America - The Anatomy of a Business Opportunity Scam" »

Posted by michael webster at 10:02 PM | Permalink | Comments (0) | TrackBacks (0)

Here is a quick look at the news stories involving OneSource ATM, as of June 21, 2006.

Technorati Tags: news stories, onesource atm

Posted by michael webster at 1:40 PM | Permalink | Comments (0) | TrackBacks (0)

Universo Foneclub and the other defendants have recently filed their answer to complaint, the complaint brought by the SEC.

The answer or defence is startling for its brevity: the defendants deny everything and take no opportunity to explain their actions in a more favourable light.

Well, at least the Foneclub defendants are not spending excessive legal fees.

Technorati Tags: brevity, universo foneclub, deny, sec

Posted by michael webster at 10:10 AM | Permalink | Comments (1) | TrackBacks (0)

There are a number of people who have complained that they have been ripped off by the business opportunity, National Imaging Distributors. The website no longer exists, but the google cache can be read here.

One distributor, an Anne from Florida, states:

Finally in February 2006 I wrote a letter to Jack Teitelbaum CEO and told him that I wanted a full refund or I would expose his scam to every reporter and State agency in the State of Florida.

Not 1 hour after I faxed the letter I got a phone call from Jack and a meeting was arranged at their office in Tamarac.

During the meeting we were informed by Teitelbaum that a refund was not possible because he was having some financial problems and did not have the money to refund. He assured us that he would be able to deliver the machines but he had a great location in a university for us to go into but they had to send the paperwork to their legal department so it would take a few weeks. At this point we decided to take the chance and hope to get into business, so we waited.

Mike the locations manager called me every week with an update but then during the beginning of May the calls stopped and I would leave messages but never got a call back.

Last week I faxed another letter to Teitelbaum and did not receive a reply. I drove to their office only to find a big sign on the door that says the company is closed and to send any inquiries to Box 25204, Tamarac, Fl. 33319.

The bottom line is this. What Teitelbaum did is FRAUD! He stole my money and he stole money from lots of other people. We were shown fraudulent location agreements to steer us into doing business with them. Once they got our money. The locations no longer existed.

Teitelbaum needs to be in jail. If you have been ripped off by these guys you need to file with the appropriate state agencies listed asap.

Anne then goes on to ask individuals to contact among other regulators: Consumer Protection Services, which enforces the Florida Biz Op rule?

What is odd, from a due diligence point of view about Anne's letter?

Technorati Tags: state of florida, google cache, state agency, tamarac, business opportunity, paperwork, ripped, National Imaging Distributors, ceo

Continue reading "National Imaging Distributors" »

Posted by michael webster at 11:03 PM | Permalink | Comments (0) | TrackBacks (0)

The Florida Department of Agriculture announced that "Florida Commissioner of Agriculture and Consumer Services Commissioner Charles H. Bronson has won a $2.2 million dollar judgment and a civil fine of nearly $1 million dollars against Global Resources, Inc., a now defunct business opportunity seller. The Department also took action against the owner, Stewart Pope of Pinellas County."

Global Resources, a spinoff of Pantheon, was the typical new technology biz op scam - promises of locating or distributing internet kiosks. I have already explained before why there is no business of locating vending or internet kiosks.

Although, Commissioner Charles Bronson may be very happy with his paper judgment of $3.2 million dollars, those people who were robbed and waiting for real dollars are less than pleased. A number of them are trying to join together to try collect on these restitution orders.

But there was a simple due diligence test that would have alerted the potential investors that something was wrong. What was it?

Technorati Tags: internet kiosks, global resources, charles bronson, department of agriculture, florida department, business opportunity seller, defunct business, due diligence, judgment, pinellas county, biz op, restitution, pantheon, vending

Continue reading "Global Resources, A win for consumers?" »

Posted by michael webster at 9:15 PM | Permalink | Comments (0) | TrackBacks (0)

John Tifford, a partner with the firm Piper Rudnick, has a focussed overview of the FTC's new proposed business opportunity rule. It is worthwhile to review it in full. Mr. Tifford demonstrates keen dry wit when he notes that 'the FTC has significantly reduced the amount of required disclosure that sellers must provide to prospective purchasers. This new trade-off between expanded coverage and reduced compliance burdens is likely to set the stage for a spirited rulemaking proceeding." (my emphasis) Since the Direct Sellers Association has, in the past, vowed not to be regulated by the FTC, I imagine that the rulemaking will be spirited indeed.

(For a sample of the DSA's concerns see this site by another laywer, Jeffrey A. Babener.)

Mr. Tifford does not offer an opinion as to whether the new rule will reduce fraud or not.

Since the rule making process is over 10 years old, perhaps the spirits we are talking about are 20 year old bourbon and the like.

Technorati Tags: ftc, piper rudnick, dry wit, dsa, jeffrey a babener, compliance burdens, laywer, bourbon, business opportunity, worthwhile, spirits, disclosure, prospective, fraud

Posted by michael webster at 12:11 AM | Permalink | Comments (0) | TrackBacks (0)

Many individuals who first learn that some 23 states and 3 provinces provide them with some protection against fraudulant sellers of business opportunities fail to take advantage of the wealth and diversity of the state and provincial regulations. For example, even if the business opportunity is not in, say, the State of Illinois's jurisdiction, it does not make their statutory filing requirements irrelevant to your due diligence. Why is this? Well, the Illinois Business Opportunity disclosure document gives you some good questions to ask. It gives you a nice checklist to fill out. Illinois requires the biz op seller to state his or her qualifications for this particular industry or business, for example. Florida requires the driver's licenses as proof of identification, which is fairly clever.

Now there is one trap with this checklist and every checklist. Who should fill it out and ask the questions?

Technorati Tags: state of illinois, illinois business, business opportunity, due diligence, disclosure document, ask, business opportunities, biz op, scammers, bogus

Continue reading "Illinois Biz Op Checklist" »

Posted by michael webster at 10:39 PM | Permalink | Comments (0) | TrackBacks (0)

In Florida, the seller of a business opportunity is regulated by the Florida Department of Agriculture and Consumer Services. It has some terrific advice, and probably the most important is this:

"No state or federal agency can tell you whether a particular business is legitimate. Although this state requires that sellers register their business opportunity with the state before they may lawfully advertise or sell here, compliance does not guarantee that the seller is a legitimate company. However, if a seller has not registered, its failure to comply with the law may be a red flag warning about deceptive business practices. To avoid getting burned by a scam, you need to beware, and to do everything you can to check out the seller's claims before you purchase, including checking on whether the business opportunity is registered. If you don't, you may lose your life savings, as many thousands of consumers already have. Even the best legal remedies too often cannot recover your investment from a company that is here today and gone tomorrow. Can you afford that risk?" (my emphasis.)

Although very important, it will be ignored by 98% of the individuals who purchase a biz op. Why?

Technorati Tags: florida department of agriculture and consumer services, business opportunity, deceptive business practices, legitimate company, state, terrific advice, department of agriculture, red flag

Continue reading "Florida Biz Op Checklist" »

Posted by michael webster at 10:12 PM | Permalink | Comments (0) | TrackBacks (0)

Purchasing a business opportunity is generally fraught with risk because of the large amount of fraud associated with business opportunities. Indeed, the Direct Seller's Association complained bitterly about the scope of the new FTC Rule on Business Opportunities because they didn't want to be associated with the term, "business opportunity". It is really saying something when the MLM crowd does not want to associate with you because you are too scummy!

Entreprenuer published a checklist on how to do due diligence on business opportunities, which I am going to reprint because it is generally pretty bad.

1. Make an honest evaluation of yourself and your abilities. If you've been behind a desk for many years, will you be happy calling on businesspeople and selling them an intangible service? If you've been a field salesperson for years, will you be satisfied selling snack foods behind a counter?

This is hopeless, what does it mean to make an "honest evaluation"?

2. You must run your business enthusiastically. Will you be happy introducing a new product or an unusual service that the public knows nothing about? Can you generate excitement for an item not nationally advertised?

This is again foolish, anyone can generate enthusiasm. Why do you think you got conned into this scam - well, were the marketers at the trade show enthusiastic?

3. You must have complete knowledge of the product or service with which you are involved. If the parent company gives you little or no training in technical or management know-how, be wary of the business opportunity. If the licensor-seller has organized all the operating knowledge into a standard operating manual, look with favor upon this business opportunity.

If the licensor has standard operating manual, you are not going to get a look at it until you have made your purchase.

4. Make a market evaluation of the product or service to be offered. Is the time right to introduce it to the public? Is there a need for this type of item, and what is its potential in relation to competition?

How does one do a market evaluation for the products?

5. Find out how many buyers have been in the business successfully for a respectable period of time. A legitimate business opportunity will even provide you with phone numbers of other buyers, so you can verify that they're generally satisfied with the opportunity and that the seller is capable of fulfilling his or her promises.

The only sensible observation, but without pointing out that many state Seller Assisted Marketing Plan legislations requires this information.

6. Check the training and experience required to run the business properly. Is there a suitable curriculum of training? What is the scope of training? Does your background fit its requirements?

How can you find this out before paying the fee? What disclosure is required prior to any payment from the purchaser?

7. What is the company's profit ratio to sales; to time and service requirements; and to the financial leverage requirements? Can you make more in another type of business?

No, the one thing that is important from the seller's income statement is the ratio of income from distributor sales to product sales. How much does the seller make from the sale or real products versus selling hopes and dreams, ie other distributorships?

8. Do you have to work more hours to make the same amount you do now? Can you invest the same amount in the business opportunity yet operate a larger operation and get a better return on investment?

Not bad, but what is the correct calculation here.

9. Check with current operators to see how they're making out. Are they happy with their businesses? What problems do they have, if any, that are common to all units sold?

How do you get this list if the seller says its "confidential"?

10. Research company's history. Is it a new firm with little expertise and experience? Is it an older firm whose regular products have satisfied customers for years? Are the business opportunities all offshoots of their regular business?

Again, what sources of free information would allow you to do this?

11. Is there financial strength and strong credit behind the business opportunity? Can the licensor-seller give you an escrow agreement to deliver a building, equipment, leasehold improvements, inventory, etc., as the unit is made ready for your use? Check out the bank references given by the licensor-seller; discuss the company's financial strength with the appropriate managers.

Worthless, the scam biz op seller will have excellent trade credit references until they fold up their tent and flee into the night.

12. Evaluate the policies and plans of the company with the associations and business groups in which the parent company or seller is involved.

How would you do this?

13. The Better Business Bureau will give you a report if others have lodged previous complaints against the company.

Wortheless, the BBB is not equipped to detect fraud.

14. Having an attorney, accountant or business consultant conduct an in-depth study of the company may be an excellent idea.

How would you pick the correct expert?

15. Visit the headquarters of the licensor-seller. Talk to the personnel and the training director. Visit the original prototype of the business being sold. Evaluate other outlets. Expose yourself to the other outlets' products and services to determine the quality dispensed.

Next to worthless, visiting the headquarters will only confirm your commitment to the scheme.

Technorati Tags: honest evaluation, business opportunities, ftc rule, business opportunity, due diligence, snack foods, entreprenuer, term business, intangible, salesperson, hopeless, mlm, reprint, fraud, scope

Posted by michael webster at 9:33 PM | Permalink | Comments (0) | TrackBacks (0)

OneSource Financial presents in a interesting picture as we can compare their FTC Disclosure document to what various state corporate documents show about the company. Remember that the FTC or State Disclosure document is not checked for its accuracy by any government official. It is up to you to conduct the background check using the document and other sources of information.

What are the warning signs with this document?

1. Item 16 is supposed to tell you the number of biz ops sold, repurchased, and/or cancelled. This is to give you an idea about the chances of success of the biz op. This Item 16, while technically correct as of January 2005, says nothing about how many biz ops have been sold. The disclosure is completely deficient.
2. Item 2 is supposed to provide details on the owners of the biz op seller. None of the details about corporate management match up with corporate filings from the California and Nevada.
3. Item 14 is completely contrary to the representations made to the investors in Colorado.
4. Finally, the financial documents are deficient because there is no income statement, which you tell you if the seller was making more money from selling biz ops than from selling ATMs.

Technorati Tags: biz ops, biz op, state disclosure, disclosure document, ftc, warning signs, background check, onesource, corporate documents, documents show, government official, contrary, nevada

Posted by michael webster at 7:16 PM | Permalink | Comments (0) | TrackBacks (0)

The FTC's new business opportunity rule is intended to deal with illegal pyramid schemes, such as the late, and possibly lamented, Bioperformance, recently shut down by the Texas AG. (For some excellent court video, see the following stories and accompanying video.)

According to the FTC, one of the problems with an illegal pyramid scheme is that the scheme does not clearly disclose to the individual at the beginning how many people have dropped out and therefore earned no money. While this seems laudable, will it work in practice? The MLM has to update its disclosure document every 4 months, but surely there will be reporting lags. In the case of Bioperformance, we learned that the company's owners made $5 million in approximately 5 months, leaving only 10% in earnings to be shared with the rest of the other "lucky" distributors. Thus, the proposed disclosure might not protect anyone until it is too late.

What might be a better requirement, or use of the disclosure document?

Technorati Tags: illegal pyramid scheme, illegal pyramid schemes, disclosure document, ftc, texas ag, lags, business opportunity, new business, disclose, mlm, earnings, lucky

Continue reading "FTC Business Opportunity Rule" »

Posted by michael webster at 3:21 PM | Permalink | Comments (0) | TrackBacks (0)

Valerie Killifer writing for that ATM Marketplace has a story on individuals who may have been burnt by an ATM business opportunity, "an ATM venture which promised $1 on every transaction, with placements guaranteed to turn between 240 and 450 transactions per month." (my emphasis) Last September, a pair of distributors sent $41,000 to One Source Solutions LLC, a California-based ATM placement company. This again is the standard securitization of a business opportunity fraud. that Pantheon engaged in. A Denver paper and previously reported this fraud in late May, 2006. The Court Order referred to in the story can be read here.

The rest of the article discusses other ATM scams, and a securities regulator opines that nobody should be investing in one of these companies, unless the company is operating under the aegis of the SEC. The latter advice is relatively worthless and only expresses the typical frustration regulators have when facing frauds that should have been avoided. "If they would have only phoned us." is the typical lament. Unfortunately, this disguises two uncomfortable facts: a) individuals purchasing unregistered securities, don't know that the investment is a security, and b) security regulators do not give advice out about the quality of the investment.

The article lists (3) warning signs:

"You will receive a high return on your ATM investment." -- The higher the return, the higher the risk

"The investment is guaranteed. You can't lose money." -- No investment can make that claim.

"We will place the ATM in a high-traffic location, like a casino, airport or convenience store." -- Know the specific location, since many of those high-volume sites have already been cherry-picked.

But there other specific warning signs for this company. What are they?

Technorati Tags: atm placement, business opportunity fraud, pantheon, securities regulator, source solutions, securitization, california based, frauds, aegis, scams

Continue reading "ATM Fraud and Due Diligence" »

Posted by michael webster at 11:27 AM | Permalink | Comments (0) | TrackBacks (0)

Several weeks ago, the FTC announced that it had ordered the Internet Marketing Group to pay consumers $15 million in relation to a business opportunities scam that started in August 2001. According to the FTC's first press release in 2004, "A federal district court in Tennessee has stopped a common enterprise of seven corporations and five individuals from continuing to operate an illegal business opportunity scheme which has marketed telephone calling cards and multi-purpose public access Internet terminal business ventures to consumers nationwide since August of 2001. In their sales seminars and promotional materials, the defendants made false and unsubstantiated earnings claims, and misrepresented their cancellation and refund policies. The defendants failed to provide consumers with timely, complete, and accurate disclosure statements and earnings claims documents as required by the Franchise Rule. In addition, the defendants' telemarketing campaign resulted in numerous violations of the FTC's "Do Not Call" provision of the Telemarketing Sales Rule (TSR)."

How much actual money, coin of the realm as opposed to judgment dollars, were returned to consumers? Not much according to the FTC, "The order announced today enters a $15 million judgment against the corporate defendants, who have few remaining assets. Their remaining assets, however, will be turned over to the FTC. The orders for each individual defendant also enter a $15 million judgment against each person, suspended based on their inability to pay. Gannon, however, will pay $99,500 and Hatch will pay $97,875.78. If the individual defendants made misrepresentations on their financial statements, then they will be liable for the full $15 million judgment." (my emphasis)

So approximately $200,000 will be paid by the defendants and the receiver's final bill is not due. For three years, this business opportunity scam ran openly, sucked $15 million dollars from the American public, but nobody is going to jail and consumers aren't going to receive a dime. This is much better than robbing banks.

Technorati Tags: public access internet, consumers, internet marketing group, telemarketing campaign, ftc, earnings, terminal business, illegal business, business ventures, business opportunity, internet terminal, franchise rule, sales seminars, disclosure statements, calling cards

Posted by michael webster at 9:12 AM | Permalink | Comments (0) | TrackBacks (0)

According to Court documents, the trial for individuals associated with Pantheon Holdings is as follows:

"ORDER Setting Criminal Trial Date And Pretrial Schedule as to Jay Mayne, Blake Ladenheim, Mark Pelle, Kathy

Eidelstein, Michael Press, Sanford Gold, Jeffrey Kuba, DePierre, Eric Bridges Reset Calendar Call for 1:30 p.m.

on 7/6/06 for Jay Mayne, for Blake Ladenheim, for Mark Pelle, for Kathy Eidelstein, for Press, for Sanford Gold,

for Jeffrey Kuba, for Frank DePierre, for Eric Bridges ; Jury Trial for 7/10/06 for Jay Mayne, for Blake Ladenheim,

for Mark Pelle, for Kathy Eidelstein, for Michael Press, for Sanford Gold, for Kuba, for Frank DePierre, for Eric Bridges.

Posted by michael webster at 9:56 AM | Permalink | Comments (0) | TrackBacks (0)

As the result of a letter from the Direct Sellers Association, dated May 5th, 2006 the FTC has decided to extend the comment period on its new Business Opportunity Rule to July 17th, 2006. The DSA had asked for a 90 day extension because of the purported serious and negative impact that the new rule would have on the direst selling community. The FTC declined to extend the comment period for a full 90 days apparently since the DSA did not point to any particular change which it was concerned with.

At the hearings in 1997, it is my recollection that the DSA was adamantly opposed to having any public disclosure of its customer or client's list. The feeling among the DSA was that these was confidential information and these sellerss could easily be approached by a rival direct selling group and induced to change sides, even if the "rivals" were not in the same field. The oppositon by the DSA to being regulated was fairly blunt at the time.

Technorati Tags: dsa, ftc, public disclosure, confidential information, business opportunity rule

Posted by michael webster at 11:05 AM | Permalink | Comments (0) | TrackBacks (0)

The SEC has announced that they have obtained a temporary restraining order against Universo Foneclub alleging that the Foneclub was pyramid scheme. According to their press release: "The Commission's papers charge Sanderley R. De Vasconcelos and Victor Sales with promoting a pyramid scheme known as "FoneClub" that targets Brazilians and Brazilian-Americans living in the area of Framingham, Massachusetts. The Commission alleged in its complaint that the defendants falsely promised members of the Brazilian community that they would earn substantial sums of money by paying approximately $2,000 to $5,000 to become members of a company referred to as the FoneClub that purportedly sells prepaid telephone calling cards through a multi-level marketing structure. However, the complaint alleged that the defendants, who have emphasized to potential investors that neither they nor the company will earn profits from the sale of phone cards, are in reality luring victims into a pyramid scheme in which its members only make money through the recruitment of new members. The complaint alleged that the defendants emphasized in their sales pitch, which was given in Portuguese, that God wanted the Brazilian community to prosper financially and that the FoneClub would provide the opportunity for it to do so." (my emphasis)

According to the SEC complaint, the defendants actually told the individuals they were recruiting that there was no way to make money by selling the FoneClub products and they could only make money by bringing in new marks, or sorry, new recruits. I suppose that they cannot be prosecuted for deception, stupidity explains why this scam lasted only from April, 2006. I suppose that many of the Brazilians wanted to know which members of the their community God wanted to prosper financially?

Here is some corporation background on the company and directors. Here are the directors in Universo Foneclub, which merged with Universo Gospel US Inc, earlier this year. None of the directors of the later company have been charged by the SEC, and only two of the directors of Universo Foneclub have been charged.

Congratulations to the SEC and all involved for shutting this down within several months of its existence.

Technorati Tags: pyramid scheme, phone cards, calling cards, promised members, multi level marketing, framingham massachusetts, brazilian community, brazilians, vasconcelos, restraining order, sums, universo, press release, victor

Posted by michael webster at 9:04 PM | Permalink | Comments (2) | TrackBacks (0)

Recently, the AG for Illinois announced a consumer alert about a cheque cashing scam. I had posted some further information about this consumer alert, but I want to analyze how if at all the new FTC Business Opportunity Rule would have dealt with this case. Let's look at some of the players, innocent players who are necessary to enable this scheme. First, there has to be an ISP or two involved to host the website for the bogus charity. Second, there has to be a bank which will accept the cashier's cheques and clear them before they detect that they are forged. Third, there has to be a second bank which accepts the individual's personal cheque, clears it and sends the funds overseas. Finally, there has to be a respected source of job postings in order for the "donations handler" position to gain credibility. Each one of these institutions plays a role as a gatekeeper, preventing fraud or scams is part of their public and regulatory duty; in some cases, these public duties actually give rise to a duty of care to a particular individual with whom they are transacting.

How does the new FTC Business Opportunity Rule assign public duties to these institutions, which are necessary elements of the fraud? (The institutions are necessary and likely innocent players.)

Technorati Tags: cheque cashing, personal cheque, consumer alert, job postings, gatekeeper, cashier, ftc, clears, bogus, scams, business opportunity, cheques, credibility, analyze, fraud, innocent, charity

Continue reading "Anatomy of a Cashier's Cheque Scam and the New FTC Business Opportunity Rule" »

Posted by michael webster at 7:21 AM | Permalink | Comments (0) | TrackBacks (0)

A number of individuals have either commented or emailed me to ask about the value of their ETS payphone shares. The company still exists, but does not trade on any stock exchange. It does file with the SEC and you can read about some of their filings here. Although there is a receiver in place, there is no point in contacting the receiver as they will not answer specific questions about the value of your shares.

The receiver recently suffered a legal set back when it tried to sue the banks and trust companies which lent money to the purchasers of the ETS stock. The Appellate Court ruled that the receiver lacked standing to pursue this action. "The Trustee has the right to petition the United States Supreme Court for review of the Eleventh Circuit's decision and intends to do so."

In February, 2006 the company voted to wind down its operations and sell its asset to Empire Payphones and rename ítself "Payphone Wind Down Corporation." This is from their SEC filings: "Pursuant to the Asset Sale Agreement, the Company has agreed to sell substantially all of its assets used in its payphone business to Empire. Under the Asset Sale Agreement, the purchase price aggregates $4.5 million and will be paid in installments, some prior to the consummation of the transaction, as follows: (i) $250,000 in cash on November 1, 2005, (ii) payment of certain commissions under assigned contracts not to exceed $2.4 million in the aggregate and (iii) $1.85 million in cash, payable in monthly installments of $132,143 commencing December 1, 2005, with any remaining balance being paid at the closing of the transaction." However the monthly payments will be offset by payments to Empire: "In order to provide for the funding of operational losses of our payphone business pending consummation of the Asset Sale Agreement, the Company and Empire entered into the Management Services Agreement. Under the Management Services Agreement, Empire has agreed to provide to the Company management services and fund operational losses of our payphone business, subject to the oversight of our Board of Directors. In consideration for its management services and the use by us of Empire's affiliates' resources, Empire shall be entitled to receive a management fee calculated at the end of the initial term of the Management Services Agreement and at the end of any renewal term in the amount of the first $400,000 of excess revenue, after repayment of, among other amounts, all expenses of operation and any advances made by Empire to fund operational losses plus 50% of any excess revenue above $400,000. We shall receive the remaining 50% of excess revenue above $400,000. For use of Empire's affiliates' resources during the term of the Management Agreement, the affiliates shall receive a monthly resource fee of $92,000."

Any money left in the company will be distributed to the shareholders upon the final wind up date. It does not look very promising, I am afraid.

Technorati Tags: sec filings, stock exchange, payphone, lent money, ets, shares

Posted by michael webster at 8:18 AM | Permalink | Comments (7) | TrackBacks (1)

The FTC's proposed Business Opportunities Rule will expand the reach of the FTC to explicitly cover fraudulant multi-level marketing scams such as Bioperformance. By eliminating the condition in the Franchise Rule that the investor had to purchase $500 in order to be covered by the Rule, receive the appropriate disclosure document, the new Business Opportunities Rule will cover those cases in which the initial purchase was less than $500. But would the new rule have stopped the Bioperformance scam, faster than the AG of Texas?

One of the main hooks in the Bioperformance was not the use of the internet, but rather the travelling show or what I called pep rallies. How many of these shouting, happy people, were actually shills? The proposed Business Opportunities Rules, 437.5(q) addresses the problems of shill, paid testimonials. The seller would not be allowed to represent that someone, a locator, employee, or some other third party, owned one of the bizops. Second, the seller would not be allowed to represent that some independent third party, such as a broker, could provide them with a list of "satisfied customers."

Although this is a good start, it would have been better to attach the liability to both the seller and the shill - the shills as a group enable the fraud and should be also be liable for their misrepresentations.

Technorati Tags: pep rallies, business opportunities, franchise rule, multi level marketing, ftc, disclosure document, new business, initial purchase, happy people, shill, scams, hooks, travelling

Technorati Tags: pep rallies, business opportunities, franchise rule, multi level marketing, ftc, disclosure document, new business, initial purchase, happy people, shill, scams, hooks, travelling

Posted by michael webster at 8:23 AM | Permalink | Comments (0) | TrackBacks (0)

On May 22nd, 2006 the SEC announced that "the Honorable K. Michael Moore, United States District Judge for the Southern District of Florida entered a default judgment of permanent injunction against Jean Fritz Montinard (Montinard) for his involvement in an affinity fraud that targeted members of the Haitian-American community in Miami through local radio programs and presentations to Haitian-American church congregations." The default judgment means that Mr. Montinard likely chose not to defend the SEC action.

The SEC started their action against Focus Financial Associates Inc and some of its directors in June, 2005. The SEC alleged that "from February 2002 to July 2004, the Focus Companies and their principals raised approximately $6 million from about 600 Haitian-American investors living in South Florida. The Defendants offered twelve-month term notes that purportedly generated "guaranteed" annual returns of 15 to 20%. The Defendants told prospective investors that the funds they invested would be distributed to companies operating under a related "Focus" name, including an airline providing direct flights between Miami and Haiti, a tax return preparation service, a chiropractic center, a landscaping service, an auto dealership, and two auto repair shops, among others."

What are the chances that any of these busines