FTC Recovers $160,000 for Franchisees Who Bought Web Services Businesses

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.

The order announced today, which settles the FTC’s charges, bans the defendants from marketing or selling any business arrangement covered by the Franchise Rule or the Business Opportunity Rule. The defendants are prohibited from misrepresenting any business ventures or investment opportunities, including misrepresenting: the likelihood that purchasers will earn a
substantial income, the amount of income purchasers can expect to receive, the amount of income anyone who already purchased has received, and any risks involved. The order requires the defendants pay $160,000, which will be used for consumer redress. If the defendants misrepresented their financial status, they will be liable for the full judgment amount of $500,000. Another corporate defendant charged in the complaint, Netfran Development Corp., was dismissed as a defendant by the FTC on May 9, 2007.

The Commission vote to authorize staff to file the complaint was 4-0. The complaint was filed in the U.S. District Court for the Southern District of Florida on August 11, 2005. The court entered a temporary restraining order on August 17, 2005. After a trial November 14-16, 2005, the court entered a preliminary injunction. The Commission vote to authorize staff to file the stipulated final order was 5-0. The stipulated final order for permanent injunction was filed May 9, 2007.

NOTE: This stipulated final order is for settlement purposes only and does not constitute an admission by the defendant of a law violation. A stipulated final order requires approval by the court and has the force of law when signed by the judge.

Copies of the documents are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint in English or Spanish or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov/ftc/complaint.htm. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to more than 1,600 civil and criminal law enforcement agencies in the U.S. and abroad.