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