Federal, State Law Enforcers Complete Bogus Business Opportunity Sweep

The Federal Trade Commission today announced Project FAL$E HOPE$, a federal and state law enforcement sweep targeting bogus business opportunities and work-at-home scams. The crackdown includes more than 100 law enforcement actions by the FTC, the Department of Justice, the United States Postal Inspection Service, and law enforcement agencies in 11 states. In four of the new FTC cases alone, consumers have lost more than $30 million.

“Bogus business opportunities trample on Americans’ dreams of financial independence,” said FTC Chairman Deborah Platt Majoras. “If a business opportunity promises no risk, little effort, and big profits, it almost certainly is a scam. These scams offer only a money pit, where no matter how much time and money is invested, consumers never achieve the riches and financial freedom promised.”

“When the states and the federal government, civil and criminal enforcers, all work together – sharing information, partnering resources, and coordinating our efforts – we can make very significant progress against these unlawful businesses,” said Peter D. Keisler, Assistant Attorney General for the Justice Department’s Civil Division. He went on to describe 23 fraud convictions obtained in 2006, and the sentencing of 25 defendants to a total of over 160 years’ imprisonment for causing over $86 million in consumer loss.

Project FAL$E HOPE$ includes new cases announced today, developments in existing cases, criminal convictions, and state actions, as well as new education materials for advertising sales staff on screening ads for bogus business opportunities.

Federal Actions: The bogus business opportunities targeted in the FTC cases include vending machines, ATM and Internet terminals, display racks for coffee and ink cartridges, Internet-based businesses, envelope stuffing, medical billing, and others.

The FTC today announced nine new cases:

The Results Group – Working out of a boiler room in Phoenix, the operation charged between $99 and $599 to build and host Web sites “affiliated” with the Web sites of Fortune 500 retail companies such as Amazon.com and Overstock.com. Consumers would make money when those retailers paid commissions for sales made through the consumers’ Web sites. In fact, the large retailers were unaware of any such affiliation, and consumers made no money. The FTC charged that the operation falsely represented that purchasers would receive substantial income as well as substantial assistance from an expert staff, and used false and misleading statements to encourage consumers to buy the business opportunity.

HBG Publications – Consumers were told that for their $40 “registration fee” they would get everything they needed from HBG to earn $7 for every envelope they stuffed for them, and that their $40 would be refunded after the first 100 envelopes. Instead, consumers received instructions on how to buy their own ads, and to collect $7 from each person who responded to their ads. The FTC’s complaint charged that HBG misrepresented that consumers were likely to earn a substantial amount of money and that they would pay consumers $7 for every envelope they stuffed. The court granted the FTC’s request for a temporary restraining order against the defendants, halted their misrepresentations to consumers, and froze their assets. The FTC thanks the Better Business Bureau of the Southland and UPSIS for their assistance in this case.

EDI Health Claims Network – The FTC alleged that EDI made material misrepresentations when it sold consumers its work-at-home electronic medical billing business opportunity. Consumers reported that EDI promised they would give them the name of their first medical billing client or lead lists of potential clients. In addition, EDI told them they could earn $1,200 per month with just one client. After consumers paid $5,985, EDI told consumers that they had to find their first client on their own, and to start by looking in the yellow pages. The vast majority of purchasers never found a single client, never processed a single claim, and never made a dime. The FTC also alleged that EDI failed to provide interested consumers with information required by the Franchise Rule. The court granted the FTC’s request for a temporary restraining order and asset freeze. Soon after, the defendants agreed to a preliminary injunction that bars EDI from selling its business opportunities.

Holiday Ink – The FTC charged that Holiday Ink sold ink cartridge display racks by misrepresenting that purchasers would earn a substantial income, misrepresenting the locations available for the racks, and using shills to reinforce those false claims. The FTC also charged the defendants did not provide complete and accurate disclosure documents, did not provide an earnings claim disclosure, and did not have a reasonable basis for their earnings claims. Consumers invested a minimum of $7,950 for three racks, up to $55,950 for 20 racks, to take part in the business opportunity.

Money Making Secret – These defendants put a new spin on an old scam by promising “Top 12 Programs to Make Big Money!” and charging consumers between $47 and $129 to access their “members only” Web site with their “money-making secrets.” The Internet-based programs were varied, including online survey programs, free government grant money programs, mystery shopper programs, and online data-entry programs. However, these programs did not exist, or did not offer quick and easy money with little time or effort as promised. The FTC’s complaint charges the defendants with making false and unsubstantiated earnings claims.

Route Wizard – 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 disclosure documents, as required.

Fidelity ATM – The FTC charged that these scammers, selling ATMs, misrepresented the basic facts of their business opportunity: that purchasers would earn substantial profits; that the company had, or would have, secured locations for the ATMs within 45 days; that the ATMs would be installed and operational in the same time period; and that the company would provide substantial assistance, such as relocating underperforming machines. The complaint also alleges that they did not make required Franchise Rule disclosures and had no substantiation for their earnings claims.

Business Card Experts – BCE claimed in advertisements that consumers could earn $150,000 in their first year, and its sales representatives told consumers they could recoup their initial investment – between $10,000 and $25,000 – within three to five months. The FTC alleged that BCE used false and deceptive earnings claims and phony references to lure consumers into buying the dealerships, which gave consumers the right to sell color business cards and other materials produced by BCE.

Mid-South Distributors – The businessman behind Mid-South sold greeting card display racks by misrepresenting the potential earnings that consumers could make, according to the FTC. The FTC also alleged that he did not provide any disclosure documents to purchasers, as required. For an investment of $8,500 or more, purchasers were promised everything they needed to start a business: an initial inventory of greeting cards, display racks for the cards, and profitable locations where the defendant would supposedly place the cards and racks for the purchaser. The court granted the FTC’s request for a preliminary injunction against the defendants, halting their misrepresentations to consumers, and froze their assets.

In addition, the FTC is referring three new civil penalty cases to DOJ for filing:

Lifestyle Vending – These vending machines dispensed loose candy or sodas and snacks, and required a minimum investment of $5,495. Lifestyle Vending offered a lifetime warranty on the machines and claimed the recommended location service would relocate any machines for two years at the purchaser’s request. The complaint charged they failed to provide a basic disclosure document and made earnings claims without providing the required earnings claim document.

Universal Advertising – By spending at least $3,995, purchasers bought display racks that hold business cards and brochures. Universal Advertising touted the growth potential of their business opportunity and offered a “lifetime e-mail coaching guarantee.” The complaint charged they failed to provide a basic disclosure document and made earnings claims without providing the required earnings claim document.

Vend Direct – Vend Direct sold bulk candy vending machines, with packages starting at $5,995. The complaint charged they did not give an accurate and complete disclosure form to purchasers, and made earnings claims without providing the required earnings claim document.

The FTC also announced major developments in recent months in 13 cases:

Elite Designs – The operation promised consumers they could go into business selling jewelry, since they would supply consumers with jewelry, display racks, locations for the racks, all the paperwork they needed, and a full-time service staff. The complaint charged the defendants gave incomplete and inaccurate disclosure documents and did not have substantiation for earnings claims. To settle the charges, the defendants will pay $225,000, and the individual in charge is banned from ever again selling franchises or business ventures.

Wholesale Marketing Group – According to the FTC, the operation promised to pay consumers a substantial income, merely for stuffing envelopes or mailing brochures, without having to sell anything. After consumers invested $60 to $180, they learned they would be paid only if their mailings resulted in sales (and, even then, consumers never received any income). Four of the seven defendants charged in the complaint have settled the charges and cannot make misrepresentations during the sale or advertising of any product or service, and will give up essentially all of their assets.

Stefanchik – According to the FTC, the operation deceptively telemarketed and sold a business opportunity by representing that consumers would quickly earn substantial money in their spare time by using Stefanchik’s method for buying and selling promissory notes for mortgages held by private individuals. The FTC alleged that, contrary to defendants’ claims, virtually no one made money from the program, regardless of the time and effort they invested. The FTC charged the operation made false and unsubstantiated earnings claims, and falsely told consumers that their personal coaches had experience in the paper business and would be readily available to assist consumers with the program. Four of the six defendants charged in the complaint have settled the charges, agreeing to an order prohibiting future misrepresentations and violations of the Telemarketing Sales Rule.

USA Beverages – The defendants offered a coffee display-rack business opportunity. The order against one defendant permanently halts his misrepresentations. A default judgment against all the other defendants requires they pay $2,565,610.81. (See press release dated November 16, 2005.)

Network Services Depot – The defendants offered Internet kiosk business opportunities. The court granted the FTC’s motion for summary judgment, finding all the defendants liable for violations of the FTC Act and Franchise Rule, and holding defendants Charles Castro and Gregory High personally liable for restitution. (See press release dated April 6, 2005)

Medical Billers Network – The defendants offered a medical billing business opportunity. The court recently entered a contempt order against all of the defendants, finding them liable for violations of the preliminary injunction and ordering expanded financial discovery. (See press release dated February 22, 2005.)

QTX – The defendants offered a work-at-home craft assembly business opportunity building bead houses. The court entered a preliminary injunction against one of the defendants, Juan Matos, doing business as QTX, halting the misrepresentations. (See press release dated September 27, 2006.)

McLain – A purported former preacher, his two sons, and his companies sold a healthcare business opportunity promising consumers millions of dollars if they participated in an alleged network of Medicaid providers. The FTC charged the defendants’ business model would have required participants to break numerous state and federal laws. In addition, the FTC charged that defendants did not provide the assistance they promised consumers and that they violated the Franchise Rule. The defendants agreed to a preliminary injunction, halting their operations. (See press release dated July 31, 2006.)

Cornerstone Marketing – The defendants offered location services for consumers’ terminals and display racks. They agreed to a preliminary injunction, halting their misrepresentations. (See press release dated July 19, 2006.)

Success Vending Group – The court ordered the defendants to pay almost $9.3 million after finding that they duped consumers into paying for vending machine business opportunities. The court also banned all of the corporate defendants, and three of the four individual defendants, from selling business ventures. The fourth individual defendant was prohibited from violating the FTC Act and the Franchise Rule. The relief defendant in the case was ordered to pay more than $560,000. A relief defendant is not accused of wrongdoing, but has allegedly received ill-gotten gains and does not have a legitimate claim to them. (See press release dated May 9, 2005)

Sun Ray Trading – The defendants sold fraudulent work-at-home envelope stuffing schemes via spam and multiple Web sites. A judgment was entered against two individual defendants barring future misrepresentations and violations of the CAN-SPAM Act, and requiring them to turn over frozen assets. (See press release dated June 13, 2006)

Internet Marketing Group – The defendants offered phone card and Internet kiosk business opportunities. The settlement prohibits future misrepresentations and violations of the FTC Act, the Franchise Rule, and the Do Not Call provisions of the Telemarketing Sales Rule. The corporate defendants turned over all of their remaining assets, and two individual defendants paid more than $197,000. (See press release dated May 30, 2006.)

World Traders Association – The defendants offered a surplus-goods business opportunity, where consumers paid for access to overstocked or discontinued merchandise, training, and lead lists of clients who would want to purchase the goods. The FTC charged that the defendants never made good on their promises. Judgments were entered against two of the six individual defendants. The FTC's case against two of the remaining defendants was stayed because of a pending criminal prosecution. The Commission’s case against the remaining defendants is scheduled to go to trial in May 2007. (See press release dated March 23, 2006.)

DOJ also obtained numerous criminal convictions as part of the sweep, putting business opportunity scammers behind bars. In the past year, USPIS was active against business opportunity scams perpetrated through the mail, obtaining cease and desist orders, restitution, and other remedies.

[See attached lists of FTC, DOJ, and UPSIS cases.]

State Enforcement Actions: State law enforcement actions were announced by the Arizona Attorney General’s Office; California Attorney General’s Office; California Department of Corporations; Connecticut Department of Banking, Securities and Investments Division; Florida Department of Agriculture & Consumer Services; Indiana Attorney General’s Office; Kentucky Attorney General’s Office; Louisiana Attorney General’s Office; Maryland Attorney General’s Office, Securities Division; Texas Attorney General’s Office; Washington State Department of Financial Institutions, Securities Division; and Wisconsin Department of Financial Institutions. The Wisconsin Department of Agriculture, Trade and Consumer Protection also personally warned consumers to beware of bogus business opportunities.

[See attached list of state enforcement actions.]

New Education Material: The FTC has new guidance for publishers, offering them help to screen out deceptive ads for business opportunities. The alert, “Ads for Business Opportunities: How to Detect Deception,” suggests advertising sales staff to give an extra look at ads that make claims such as:

“No risk! Guaranteed” “Quick and Easy!” “Earn $2,000 a month.”

The FTC alert warns that legitimate business ventures involve risks, start-up businesses require a lot of work to get off the ground, and that the law requires earnings claims in ads be accompanied by the number and percentage of previous purchasers who achieved the income.

Consumers should visit the FTC’s Web site at www.ftc.gov/bizopps for information in English and Spanish on spotting and avoiding business opportunity scams. The site includes an e-card consumers can use to warn their friends about business opportunity scams.

NOTE: The Commission files a complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendant has actually violated the law. The case will be decided by the court.

NOTE: A 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 related 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 (bilingual counselors are available to take complaints), 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 thousands of civil and criminal law enforcement agencies in the U.S. and abroad.