Washington — On Nov. 10, a California court closed a case and opened a Pandora's box. The case involved a company that was selling gold to investors. Investors would send $5,000 in return for 133 tons of ``dump ore,'' that is, dirt that presumably had gold in it, but had been left unprocessed. The company, headed by William Mitchell Moreland (who was under indictment for grand theft in early 1986, when the investment plan was first advertised), would make use of new technology to reprocess the ore. It guaranteed investors 20 ounces of gold, which worked out to $250 an ounce, considerably below the world price of gold.
The California Department of Corporations, which enforces the state's securities laws, didn't like the smell of the offering. For one thing, Mr. Moreland needed to sell 30,000 tons of the dirt - raising $1.1 million from investors - before he could build the reprocessing plant to refine the gold. So in March 1986 the department, saying that Moreland was selling ``unqualified securities,'' ordered him to quit offering the investment.
Moreland appealed, and eventually won. With an eye to a recent federal court decision that overturned 40-year-old securities case law, a California court ruled last August that what Moreland was selling was not a security but a commodity, and thus the securities laws did not apply to this type of investment. In November, the California Supreme Court refused to review the case.
``What this has done is to make the enforcement of securities laws against mining scams virtually impossible,'' says William McDonald, chief of enforcement at the California Department of Corporations. ``As we speak, `boiler rooms' are switching in droves to Moreland-type offerings, because they know that neither the SEC [Securities and Exchange Commission] nor our department can make an effective securities argument against them.''
For such operators, the timing could not be better: The swings in the stock market have left investors queasy, searching for some tangible investment like gold to park their money. These are the people who are most susceptible to fraud.
No doubt about it, fraud is alive and pervasive in America. Financial chameleons change investment schemes to complement the stock market, social mores, the latest claims about diseases. At a recent conference here sponsored by the American Newspaper Association (ANPA), government watchdogs and advertising representatives discussed some of the latest trends in fraud, their frustration in stopping con artists, and the first computerized steps to track them down.
Fraud for yuppies
The latest twist in life-style fraud caters to Americans' penchant for traveling.
``Travel scams happen to be the highest-profile scam going on right now,'' says Tom McClure at the United States Postal Inspection Service, which regulates advertising through the mail. ``Yuppies are making more money, they're mobile, and because of airline deregulation, [the prices offered] are believable.''
The Federal Trade Commission (FTC) recently sued two travel companies in Chicago for deceptive advertising. One, called World Travel Vacation Brokers, sold air fares to Hawaii for $29; it did not disclose, however, that the traveler had to purchase hotel accommodations from World Travel. The accommodations were so expensive that they boosted the cost several hundred dollars, erasing the airline ``discount.'' In December, the court ruled in favor of the FTC.
Watch that second air fare
In the other case, Amy Travel Service offered one air fare to Hawaii and lodging for two for $329. The other air fare, however, was Y-class, which usually costs three to five times more than a normal coach fare, says Larry Hodapp, senior attorney at the FTC's division of marketing practices. The court has indicated some liability on Amy Travel's part, and a ruling is expected in a month, Mr. Hodapp says.
As baby boomers reach middle age, they've created a boom for the financial planning industry - and a market for scams. In 1985 there were some 10,000 financial planners registered with the SEC, says Stephen Jones at the Council of Better Business Bureaus. But as many as 200,000 people identified themselves as such.
``We've seen everyone from insurance salesmen to ... mutual-funds salesmen holding themselves out as financial planners,'' says Mr. Jones. ``All they do is try to sell you their product.'' A 1985 study suggested that investors lost $90 million to fraudulent planners that year.
Questionable businesses take advantage of economic downs as well as ups. In Dallas, where the economy is depressed and people are selling their cars out of distress, a new, in some states illegal, practice is surfacing.
Ron Belt, credit manager at the Dallas Morning News, says his paper has been receiving ads from a company that offers to buy a person's car and says it will make the payments each month. Then it turns around and leases the car. The trouble is, unless the lienholder (such as General Motors Acceptance Corporation) gives permission to transfer the title of the car - which is unlikely, Mr. Belt says - the original owner, not the company, is liable for any missed payments and damage to the car.
The original owner ``thinks he's free and clear of the obligation, but he may end up with the whole thing dumped in his lap,'' Belt notes. ``Not only would that be a tremendous obligation to make up the payments, but [missed payments] would hurt his credit rating.''
No fun for the media, either
The consumer binge can leave print and broadcast media holding the bag as well, says James Ralph, vice-president of ANPA Credit Bureau Inc. One case illustrates the stakes.
Just before Christmas, Mr. Ralph got a call from several newspapers that were concerned about an advertising order they had received from a company in Florida.
``I didn't like the look of the ad,'' which trumpeted Sony VCRs and $400 Canon cameras for $125, Ralph recalls. The name of the company was not in the Credit Bureau Inc.'s files, nor was it listed among Florida's corporations. Over the next 24 hours, five of Ralph's employees called member newspapers, only to find that papers all over the country had received orders for the same ad. Ralph figured newspapers stood to lose between $660,000 and $1.5 million if, as he suspected, the advertiser were a fraud planning to skip paying the newspapers.
A few papers had received checks to pay for the ad, and when Ralph checked with the bank, he was told that there was only a few thousand dollars in the account.
Since consumers were to send their money to a post office box, the US Postal Inspection Service was alerted. Given the blatancy of the fraud, it was able to cut through the often-cumbersome paper work and seize the contents of the postal box the next day, as checks for VCRs and cameras began rolling in. (The advertiser got wind of the investigation and reportedly fled to Venezuela.)
Public gullibility about financial fraud pales next to what the consumer will swallow about health products.
``Diet Vision Glasses'' were a big hit three or four years ago: The glasses, which had one green lens and one red lens, were supposed to be so disorienting that the wearer would lose his or her appetite. Another diet product, the $300 ``Accuform'' ear mold, was touted to suppress one's appetite.
``Sometimes you wonder why we're out there protecting people who wll pay $300 for something to stick in their ear,'' sighs C.Lee Peeler, an associate director at the FTC.
A recent poll by Louis Harris & Associates found that a fourth of those surveyed used one of 15 questionable products; 36 percent had bought questionable arthritis products.
Fake AIDS therapies
The newest, and experts say the most frightening, trend in health fraud is products and services related to acquired immune deficiency syndrome. ``We have an epidemic of AIDS huckstering going on,'' says John Renner, chairman of the Midwest Council Against Health Fraud. He figures millions of dollars were spent on fraudulent AIDS therapies last year.
The most obvious frauds involve so-called ``cures'' - vitamins, chemicals, even injections of hydrogen peroxide, that at best are unproved and at worst keep patients from seeking professional medical treatment. The Food and Drug Administration figures there are 40 underground ``clinics'' practicing questionable treatments.
And then there are the services and products that lull people into thinking they are safe. One dating service claims all its clients are AIDS-free - a guarantee considered impossible, given the incubation of the virus. Other companies sell home kits to test for AIDS, usually just a needle that must be taken to a doctor for analysis.
Catching con artists is like nailing jelly to a wall. At the conference, Larry Murphy, general credit manager at the New York Times, noted that one operator got 200 phone numbers over six months so that the Times's computer could not trace the new number to him. The phone company, for privacy reasons, will not reveal the name behind the phone number.
Moreover, fraudulent advertisers use time to their advantage, placing their ads an hour before deadline and leaving newspapers few spare minutes to check them out. And by the time the scam is uncovered by the authorities - the paper work alone can take weeks or months - the scammer is gone.
Computers (slowly) to the rescue
The biggest complaint at the conference, however, was that the media have no central place to check out a questionable advertiser. Only in one area - commodities fraud - is there some centralized information. The National Futures Association, an industry group, has a computerized list of known fraudulent commodities dealers, including their aliases. (The association's toll-free number is 800-621-3570.)
Enforcement against fraud is split up among more than half a dozen government agencies. For example, if the FTC wants to see if a person or company is being investigated, an investigator would have to call the attorney general's office in every single state.
Painstakingly, the government is trying to centralize the information. Under a pilot program started last fall, the FTC is getting information about current investigations on one computer data base. The first step is to put the 50 attorneys general offices on line. So far, nine states are on line, says Michael McCarey, who is heading the project for the FTC. By the end of 1988, he hopes to have 20 states.
Today it takes days to get a complete history and investigatory status of a con artist, says Mr. McCarey; when all the states are on line, such a search would take 15 minutes.
Eventually, the data base will give federal law enforcement agencies access to each other's data, including the Federal Bureau of Investigation, the Justice Department, the SEC, the Commodity Futures Trading Commission, and the Postal Inspection Service. ``But getting the whole system on line will take years,'' McCarey notes.
And until then, experts can only offer a simple piece of advice:
Let the buyer beware.