Get-Rich-Quick Self-Employment Scams

"Go broke quick!" That's the unfortunate truth usually learned too late by the thousands of people who fall victim every year to swindlers peddling a variety of money-making "opportunities." According to state securities regulators and the Federal Trade Commission (FTC), promises of a sure path to financial independence through work-at-home scams, pyramid schemes that assure certain income in return for an initial and sometimes recurring investment, plus a variety of other phony business opportunities and franchises are among the most prevalent tactics swindlers use to prey upon those needing supplemental income.

If you are a newly "downsized" worker, suddenly in possession of a large severance package, you are also a prime target.

Con artists often locate their victims through trade shows; telephone solicitations; television, radio, and print advertisements; and now even the Internet. They tell the prospective purchaser that interest by the public or a specific market niche is very high and that the window of opportunity will soon close. These promoters pressure investors to make a quick decision and hand over their money.

Get-rich-quick self-employment scams often promise exclusive territories and money-back guarantees. Many victims are assured that they will receive marketing assistance and that income is guaranteed to exceed the purchase price of the franchise, equipment, or software. But after they have paid, too often the eager investor learns that any training they have received is useless, the equipment or software necessary to conduct their new business does not work, supposedly secure leads produce no business, there is no 24-hour "hotline" to answer their questions, and guarantees are nothing but words.

If an organization offers to pay you commissions for recruiting new distributors, watch out! Most states outlaw this practice, which is known as "pyramiding." State laws against pyramids say that a multilevel marketing plan should only pay commissions for retail sales of goods or services, not for recruiting new distributors. Many victims of these scams sell first to their friends. Plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. When the supposed money-making opportunity goes belly up, most lose not only their money -- but also their friends.

A franchise or business opportunity may sound appealing, especially if you have limited resources or business experience. But you could lose a significant amount of money if you don't investigate a business carefully before you buy.

Examples

The following are a sample of the more than 100 cases from Operation Missed Fortune -- a joint enforcement sweep targeting get-rich-quick self-employment schemes conducted by state securities administrators, the Federal Trade Commission, and state attorneys general in early November 1996:

Ignition Interlock Service Centers of California markets a franchise that sells a patented analyzer to measure alcohol content of the breath. The devices are installed in vehicles to monitor and record the driving habits of convicted drunk drivers and are mandated in California for everyone convicted of a second DUI offense. Estimates are that 50,000 California residents will be ordered by courts to use such devices. According to documents provided by the California Department of Corporation, the initial fee is $25,000 for a franchise, plus an additional $5,000 for equipment necessary to install the ignition interlock systems. The company's advertising projects revenues of $288,648 per year for each franchisee by the third year. The documents do not disclose that competition in the industry is heavy. On November 4, 1996, Department of Corporations ordered the company to stop selling the franchises until they are properly registered.* (see note)

South Florida-based ComTel has marketed public pay phone franchises through newspaper advertisements and trade shows since 1994. According to the FTC's complaint, the company -- formerly known as Bell-Com Communications, Inc. -- sells franchises for between $12,756 and $41,320, depending upon the number of telephones that comprise a package. Prospective purchasers have routinely been told that they will earn between $180 and $250 per month per phone. The FTC's federal court complaint alleges that their phones do not generate anywhere near the guaranteed income represented by the company's ads, salespeople, promotional materials, or contract. ComTel's income this year is estimated at $4 million.

Creative Technologies International (CTI) is a dissolved Georgia corporation that advertised a business opportunity in the Washington Post offering the sale of vending machine business opportunities. The advertisement stated that the company's vending machines were designed to dispense Kodak products and film. Subsequently, a sales representative from CTI told an investigator from the Maryland Securities Division that the opportunity cost $15,600 for three machines, an initial inventory of cameras and film, and the services of a professional locator company. CTI's representative also told the investigator that the expected return per vending machine was $9,000 per year. CTI later mailed the investigator promotional materials containing a number of color pages that prominently display the name, address, and logo of the Eastman Kodak Company. The Eastman Kodak Company is not, however, affiliated in any way with CTI. CTI never filed the required disclosure statement about its business opportunity with the Maryland Securities Division.

Although most of the scams in Operation Missed Fortune were developed to trick you into handing over large amounts of money, others set their sights on smaller amounts. They are, nevertheless, just as illegal.

The Global Assistance Network for Charities (GANC) is alleged to be a fraudulent pyramid scheme. Based in Arizona, GANC promises that by joining, members will donate to worthy charities and at the same time "earn" well-over $89,000 per month. Marketed primarily on the Internet, GANC has its own home page. According to the FTC complaint, its principals post invitations at Internet newsgroups for others to visit their home page, e-mail or telephone requests for more information, and to ask for more information through a fax-on-demand phone number. In order to join, victims pay an initial fee of $70 and $50 per month thereafter. Members designate in excess of ten percent of their "earnings" to charity. Yet these "earnings" are allegedly based solely on the number of people each member recruits. There is no product -- only a monthly newsletter distributed by GANC.

Progressive Media, operating out of Washington state, preys on college students in the U.S. and Canada by advertising in college newspapers, Rolling Stone, Entertainment Weekly, in college bookbag stuffers, and flyers. According to the federal complaint, in one version, the ads promise that for a fee of about $50, students can enroll in a program that will land them a seasonal job paying up to $3,000 per month on a cruise ship, in the Alaskan fishing industry, or with other employers. Free meals, free or low-cost housing, and transportation to the employment locale are also included. Students who call are told they are guaranteed the job of his or her choice or Progressive will refund their money. But, the FTC alleges, those who paid the fee allegedly received only a paperback book listing the names of companies in cruise, fishing, other industries, few or none of which employ seasonal labor.

Before You Invest In Any Business Venture, Take the Following Steps:

Check out the company with the state securities agency or attorney general's office not only in the state where you live, but also in the state where the company is headquartered. These organizations can tell you if the company is registered, if necessary, and if they have any consumer complaints about the company on file.

Ask current owners or employees about their experiences with the company. Don't accept a list of references selected by the company as a substitute for a complete list of franchise or business opportunity owners.

Get all promises in writing. Any promises you hear should be written into the contract you sign.

Ask for the details of the company's refund policy before you buy. Get that in writing, too.

Investigate all earnings claims. Talk to others who have purchased the opportunity to see if their experience verifies the claims. Demand to see the company's basis for its claims in writing. Be skeptical in judging whether the claims are backed up.

Listen carefully to sales presentations. Be wary of any opportunity that sounds too easy. The thought of "easy money" may be appealing, but success generally requires hard work.

Be wary of buying if company representatives either try to evade your questions -- or ignore them altogether.

Ask for the disclosure document if you're investing in a franchise. This document, required by law, should provide detailed information to help you compare one business to another. If the company has no disclosure document -- beware!

Ask a lawyer, accountant, or business advisor to read any disclosure documents and proposed contracts. Entering into any business opportunity generally requires a substantial investment.

Resist high pressure sales tactics. Buying a business opportunity is a big, expensive decision. Take time to think it over.

For more information...

The securities agencies in 21 states regulate business opportunities and/or franchises. They include California, Connecticut, Hawaii, Illinois, Indiana, Iowa, Maine, Maryland, Minnesota, Nebraska, New York, North Carolina, North Dakota, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Virginia, Washington, and Wisconsin. If you need a phone number, call the North American Securities Administrators Association (NASAA) at (1-8888-4-NASAA). In the U.S., NASAA is the national voice of the 50 state securities agencies responsible for investor protection and efficient capital formation.

If your state is not included in this list, call your state attorney general's office.

You may also want to file a complaint with the National Fraud Information Center at (800) 876-0760.

November 1996