FTC Cracks Down on Bogus Business Scams
BEWARE the promise of making a fortune in gum-ball machines.Skip to next paragraph
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That's the message the Federal Trade Commission (FTC) and state authorities are sending to would-be entrepreneurs.
Americans lose more than $100 million a year investing in bogus ''business opportunities,'' according to federal regulators and state justice officials.
In 1994, a coalition that includes the FTC, the North American Securities Administrators Association (NASAA), and many state attorneys general, launched ''Project Telesweep,'' an effort to crackdown on con artists.
Since its launch, the group's efforts have resulted in about 100 cases involving legal action in the United States.
This kind of business fraud has worsened in recent years as more people feel pushed to supplement their primary incomes or try to become self-employed, says FTC chairman Robert Pitofsky.
To educate entrepreneurs on bogus business deals, Project Telesweep kicked off a consumer-education campaign last week.
Most business-opportunity scams are advertised in the classifieds; a toll-free number is almost always listed in the ad. Callers are lured by telemarketing ''boiler room'' tactics, or wild claims that make the deal sound appealing. For example, a company involved in a case the Securities Division of the Maryland attorney general's office is handling claimed previous investors were ''making in excess of $200,000 in their first year in the business.''
Potential entrepreneurs are often turned over to an ''owner/manager'' who further pressures callers and encourages them to check out references about the business. Those references, however, are often given by ''singers,'' or people paid to give glowing testimonies about the venture. A ''closer,'' or an expert at closing the deal, will sometimes take over the transaction.
To avoid phony business deals - many of which involve vending machines, pay telephones, display racks, or amusement games - Project Telesweep recommends that investors:
* Be skeptical of ads with toll-free numbers and ones that contain little information.
* Review disclosure documents promoters are required to give investors.
* Call state organizations, such as the attorney general's office, to see if the firm has the required registrations.
* Talk to other investors, but look out for ''singers.''
* Research the type of business and if there is a demand in your area for that business.
''If it looks too good to be true, it almost inevitably is not true,'' says Joseph Curran, Maryland attorney general. This seems to be the best advice, he says, because even conscientious investors can end up with a bad business deal.
''I thought I was too smart to be duped by these people,'' says Larry Jenson, an ex-police officer from Oregon.
Mr. Jenson saw an ad in a reputable magazine to sell portable car alarms. He says he thought he was doing his homework when he called the Better Business Bureau and the magazine that carried that ad to check out the Maryland-based auto-accessories company promoting the venture.
The firm claimed that he could expect to make about 70 sales per television and newspaper ad he placed. But after Jenson decided to invest in the portable car-alarm business, the ''parts [the company sent] didn't work,'' he says. Jenson ended up making only one sale, but the customer returned the product because it didn't work - and he lost $1,500.
The onus of reducing fraud still lies largely with prospective investors, regulators warn. Operators are difficult to track down because people are often too embarrassed to report fraud, Mr. Curran says. In addition, many firms running scams change names every four to six months to elude both the law and investors' background checks.
(To file a complaint with the FTC, write to Division of Marketing Practices, FTC, Washington, DC, 20580, or call 202-326-2222. For more information about Project Telesweep and how to avoid fraud, write to Business Opportunities, NASAA, 1 Massachusetts Avenue Suite 310, Washington, DC, 20001 for a free copy of the FTC/NASAA Consumer Bulletin entitled ''Business Opportunity Fraud.'')