PANEL DISCUSSION: Franchise Business Opportunities Advertising

MR. NORTON: I'm Larry Norton, Deputy Director at the Federal Trade Commission's Division of Marketing Practices. In that capacity, I am responsible for much of the enforcement, investigation, and litigation that the Commission does in the franchising business opportunity area.

As many of you know, over the last several years, business opportunity and franchise fraud has victimized tens of thousands of consumers who put their savings at risk in pursuit of the American dream. This victim pool is perhaps even more fertile in an economic time when many workers are being bought out or laid off and are looking to reenter the work force; where families are in need of an additional stream of income; or a second wage earner is reentering the work force.

Our panel this afternoon will talk about advertising for business opportunity and franchise fraud and how we identify it and what we can do, collectively and separately, to discourage it.

Clair Villano is Director of the Denver District Attorney's Consumer Fraud Division, a position she has held since 1981. She has been involved in business opportunity fraud prevention efforts since the late-1970's, when she headed a task force for the Economic Crime Project.

Shirley Rooker is President of Call for Action. She's been investigating fraud and raising public awareness as an activist and consumer for WTOP Radio here in Washington for their Call for Action Program since 1976.

Denise Cain is the Classified Credit Manager at USA Today. She is responsible for credit collections and billing customer service and classified advertising for USA Today, USA Today Baseball Weekly, and the USA Today Information Network.

I'll say a few words, and you'll hear from each member of the panel, and I am hoping that we have some time left to take some questions.

In the vast majority of cases involving franchise and business opportunity fraud, the calling card is a small classified ad placed in a major newspaper, often many major newspapers simultaneously on the same day or during the same week.

A couple of examples as typical as any, I think, illustrate the approach. First, during the week of March 6, 1994, 154 newspapers ran this ad: "Huge Profitmaker: $3,000 to $4,000 weekly income possible. All cash vending business. Prime groups available. Buy now and save. Zero down and qualified. Call Ed or Cindy or Lou at 1-800-192-1202."

This was an ad for what we came to call at the FTC, "the Wolf Group." The Commission sued them in South Florida last year for operating a business under dozens of business names in four different states, selling vending and game machine businesses to consumers who paid at least $10,000 to $15,000 and sometimes much more.

The catch for the Wolf Group operation is typical of this kind of fraud -- the promise that consumers are getting a turnkey business. You're going to get the product to stock the machine. Most importantly, there have been prearranged, preselected retail locations that we surveyed and we know are profitable. You're even going to get your own territory, and we're here to provide you ongoing support.

The consumer needs no special expertise or business acumen; the company supplies that. You only need to do the work of replenishing the product and collecting the profits. What consumers didn't get is a disclosure document providing basic information about that investment, as they're required to get under the Federal Trade Commission's Franchise Rule.

The profitable locations either didn't exist or they produced very little income. Multiple investors were staked out in the same exclusive territory. The so-called references that the company provided were phony, paid by the company to lie.

Likewise, on April 25, 1993, a single, major newspaper ran eight ads for a cluster of business opportunity frauds that were run from a single Boca Raton location. The ads furnished different 800 numbers and did not identify the names of the business, so there was no way for the consumer to realize that all eight were run by the same operation, the principal in that case being William O'Rourke.

Typical was this one: "Distributorship. Part-time income to $700 a week, full time to $1800 a week, and no selling, turnkey business. Simply restocking displays. Minimum investment $5800. Toll free 1-800-825-1129 24 hours." That one was for a car wax distributorship using the name RPAS. Similar ads placed by the same defendants were for a cosmetics business, for display racks selling lingerie, display racks for criminal repellent spray, cookies, popcorn, diet pills, and coffee. And those were about half of the display rack businesses that the O'Rourkes ran.

We've come to identify four hallmarks of ads run by fraudulent business opportunities. The first is a promise of big earnings, often very specific and extravagant, tied to a weekly or a monthly income, that can be earned on a part-time or a full-time basis.

The second is that they are most often for vending machines, for display racks, for some other proven concept. The popular ones now seem to be pay phones and medical claims processing for health care providers, and there are, of course, many others.

The third hallmark is no selling, no experience required, no particular background in the area necessary, and the fourth one -- certainly the case where the business is a national fraud -- and that is an 800 number so that telemarketers can take the sale the rest of the way.

The injury caused by these kinds of frauds is staggering, whether you look at it on an individual level or in the aggregate. The two cases that I cited, the Wolf Group case and the case known as FTC vs. O'Rourke, caused in excess of $50 million in losses. The individual loss is really heartbreaking.

It is truly the stuff of lost American dreams, people who are placing their college funds, their buyouts for retirement, their life savings, have mortgaged their homes, and have placed, at a minimum $5,000, but often much more, and have lost their entire investment. And to meet these people is really to see how this kind of fraud shatters not just individual lives, but families.

Before turning things over to the panel, I wanted to throw out a few suggestions for discouraging this kind of fraud, a couple of which are currently in play and a couple of which I pose for later discussion.

One suggestion is already being done by a few, but unfortunately not many, newspapers. These newspapers publish consumer advisories in the business opportunity classifieds. Sometimes they appear at the very top of the ads, and sometimes they're interspersed with the business opportunity ads in the paper.

I'm told today that The Economist does this, but more close to home, the Hartford Courant does the same thing. It urges consumers to use great caution, to thoroughly investigate the business opportunity before investing, and recommends, if you're suspicious or concerned, that you contact state AGs or the Better Business Bureau before investing.

Interestingly enough, when we scoured classified ads, we found very few, if any, business opportunities advertised in the Hartford Courant. There is at least one newspaper we're aware of that lists the complete name and address for every business, which you rarely see in the prototypical business opportunity fraud ad. The Memphis Commercial Appeal does this.

Of course, it would help a consumer who saw that the address were the same for the six or seven O'Rourke companies; it ought to send a flag that the business -- the same company in the business of selling diet pills and car wax and lingerie -- might not be a legitimate business. It's especially helpful to law enforcement in terms of tracking these characters down.

Another suggestion, although we haven't seen it, is to require that the ad identify the product, so it would provide a bit more information before the consumer gets on the phone with the telemarketer and gets the high-pressure pitch.

And a last suggestion, consistent with the theme, is to prevail on classified ad departments to identify the flags that indicate a fraudulent operation. A call to the state fraud and business opportunity registration unit or to the local Better Business Bureau can often tell you not necessarily whether they are the subject of an investigation, but whether they are the subject of an existing lawsuit or state order. And the Better Business Bureau will tell you whether there have been complaints filed against them.

Let me close so we can try to leave some time for questions and turn things over to Clair Villano.

MS. VILLANO: I'm from Denver, Colorado. I am a member of NACAA, the consumer agency administrators group that represents local and state enforcement areas. Some of our members are one-person county offices, and some of them, like Doug Blanke, come from very large Attorney General offices.

We're the ones that see the real casualties. I mean, they come to our office. They find us. They don't leave long reports in the mail to get to us; they literally come to Denver, saying, "We invested in this vending machine company, and the locator is here, and we tried for eight months, and we still don't have any locations." And they drive all the way down from three states away to find out what's happening and try to knock on doors.

So, if I have a closer perspective, it's because it's hard to distance from them. I also think the reason I am here is that I am the voice of history. Remember the Business Opportunity Fraud Manual? This was 1978, just at the time the FTC Disclosure Rule was coming out.

We also worked with the FTC. The manual was the product of the Economic Crime Project, made up of representatives from economic crime units in district attorneys' offices. We took on a whole series of ventures, and this was the one that we ran out of Denver, trying to get the postal inspectors, the attorneys general, the Better Business Bureaus -- people like Call For Action -- together to do prevention of business opportunity fraud; to get legislation passed. (I'm sorry to say Colorado still doesn't have a fraud or business opportunity law).

The warnings in the 1978 "Biz Op Manual" sound the same today -- we tried to get people to think beforehand, before they invested their money.

Well, we all felt that the FTC Disclosure Rule would save us. But now, those of us who have been around a while, know that disclosure often just gives more opportunities for people to be ignorant. They say, "Well, it's all there. You read it. You signed it. You knew. What's your complaint?" And, of course, people might have read it or maybe they didn't, but they certainly didn't understand it. Besides, by the time they got to that disclosure, they had committed in their hearts, for the most part, and they had moved from the naive-but-willing-to-be-educated category over into the true-believer category where it is very hard to stop them with information alone.

We have the idea in the consumer world that if we disclose or warn, we can cure everything. I really don't know what we can do once potential investors get to the true-believer stage.

Now, I'm going to change just a tad and say maybe we ought to forget about the ads. I mean, the ads are just the trigger. Here's where I think more harm is done -- and you all can't do anything about it, so you don't have to feel responsible.

The articles in the paper: "13 Colorado franchisers in top 500". "Denver group to run 75 Monterey Pop pastas." "Want to buy a franchise? Being downsized? Feeling stuck?" And here's another one with a success story -- a couple had the Mailboxes, Etc. franchise. In seven years, their $37,000 investment was sold for $370,000.

Maybe these stories and articles do more harm because they set up the kind of environment that makes people say, well, gosh, I read all these articles. I don't read articles about failures. I don't read articles about the ones who go down the tubes. What you read about are the success stories. Again, this may be more of a culprit than the actual little ad that's being run in the paper.

I do not blame the papers, and I'm very glad that the papers in our state will run little caveats which tell readers they can call for a free brochure on what to consider before investing. Whether people pay attention or not, I don't know, but I think it's responsible on the newspapers' part to let us advertise for free in their classified section. Thank you.

MS. CAIN: What I am going to talk about are the basic steps that media companies can take to help screen out fraud, and then what we do at USA Today. I conducted a sample survey of what my colleagues with other papers do, so I can give a broad-spectrum view of ad screening.

There are a few steps that you can take. One of them is to regulate ad copy. A second step is to regulate classifications. Within print media we have different classifications. We have business, and within business we have other categories, such as multilevel marketing. These are ways to force advertisers into a business opportunities section so that someone reading the help wanted can avoid these gimmicks.

Several media companies -- and at USA Today we do this -- request advertisers to fill out our credit application. We verify, for example, that they are in Dunn & Bradstreet. Is there a phone listing? We might even call their bank, if we have that information.

We also monitor reader complaints, and no other media companies do that. Once complaints start coming in, we monitor them, act on them, and pull ads, if necessary. Also, our credit department networks with other credit professionals.

In addition, some states have guidelines to help you regulate ad copy. For example, I know in New Jersey, they won't let you take advance-fee loan ads. In that case, you have a valid reason to refuse the ad. Questions? Q: Are the credit reports that you fill out available on request to law enforcement agencies? A law enforcement agency could gain a lot of information about the principals, the way the company works, and what bank accounts might exist by obtaining that information. What are your policies for releasing that kind of information?

MS. CAIN: We view that as proprietary. There's a degree of confidentiality implied when someone places an ad with you. Of course, we'll supply that information in response to a subpoena. MS. VILLANO: Our local papers are so good with us when we call. I mean, they don't give us hard copy, but informal networking.

MS. CAIN: We try to do what we can informally.

Q: What about consumer complaints? Are those treated differently, or are they still treated as proprietary?

MS. CAIN: It would still be proprietary. We would act on the complaint, as intermediary between the parties. We'd go to the advertiser and say, Mr. Smith is having a problem. He's not getting his product delivered. Can you rectify that? If you can't, you're out of the paper.

Q: What do you do when you cannot find out any information about an advertiser through your usual sources?

MS. CAIN: It depends on the situation. If it's going to raise a lot of eyebrows, then, technically, we'd pull the ad. If it's something we feel concerned enough about, that it might be fraud or would harm our readers in any way, then we would pull the ad. We also require the full company name and address in the ad copy. They have to submit to us an application, a copy of their business license, the package that they send to the consumer who will respond to the ad, and any kind of contracts or documents that the advertiser or the reader would need to sign.

Q: Do you get all of that up front?

MS. CAIN: Yes. In that particular category, "Financial Services." Under "Business for Sale," the advertiser has to be a preexisting business -- it cannot be a startup company, and the type of business has to be stated in the ad copy. Under all our other business categories, the product service must be stated in the ad copy. Free details have to be outlined.

Under distributorships, we encourage the company name in the ad copy, but we don't require it.

What do other media do? Most magazines don't have a lot of franchise or business opportunity ads running. You find more of the mail order health type of advertising.

Newspapers are a little different. There are a few that have really stringent policies. One is the Miami Herald. They actually have what they call a "policy queue" that all the ads have to go through. Their policy department views all ads before they are released. They heavily scrutinize the MLM advertising for pyramid schemes. In the State of Florida, franchisors have to register with the state, so they'll get the franchising number.

MS. ROOKER: I may be last, but I'm certainly not least. I'm actually going to talk to you today from two standpoints. First, I would like to tell you, just briefly, Call for Action is a private, nonprofit organization that's affiliated with radio and TV stations. In other words, they sponsor us in their community. So I'm going to talk about the messenger before I talk about the message, and I will address the issue from the standpoint of radio and commercial television.

I talked to a number of broadcasters when I was thinking about doing this panel and asked them, "What do you do about screening ads?" These are stations who have a great community conscience because they sponsor Call for Action as a community service. But what I heard from most of them was that they really do no close policing of ads, only if it's blatantly obvious do they not run it.

That didn't surprise me, quite frankly. What did surprise me were some of the comments that I got from the general managers, and their comments were -- in radio and television both -- "look, you have to realize that we're very different from the print media because we are regulated. And if someone calls us about an ad, we immediate investigate it because it's important to us, from the standpoint of our credibility as well as from our licensing, to make sure that we're not helping to rip off the public." I thought that was a very interesting perspective. I can tell you that, in dealing with ads on radio and television, we have found some stations less than eager to examine those ads and pull them off. So what they say may be slightly different from what they do, but I do know that they have a bit of a different concern than newspapers because there is always the threat of the FCC and their licenses.

I can also say that, from the standpoint of the consumer organization, radio and television stations have been more responsive than newspapers. I'm not quite sure why that is -- maybe it's because we're affiliated with them and they know more about us than perhaps newspapers do. But, at any rate, the best advice that I was given -- and I thought this made a whole lot of sense -- was from one general manager who said to me, "You should tell anyone who has a complaint about an ad they hear on radio or TV, don't call the sales manager, call the general manager, because the general manager is the one who worries about the license."

Media can also be a victim. One of the complaints that I heard from broadcasters who had inadvertently or knowingly accepted commercials that were not legit was that they end up paying the bill, because they don't get paid. They also lose credibility, and that is a concern to them. I do think money, as was stated this morning, is a big problem. The broadcasters who are less affluent are less likely to be really concerned about what they are running, and I guess that's a fact of life.

But let's look at the message. One of the things that makes me so angry -- and "angry" is a word I used advisedly -- is when I see scams that are set up to rip off disadvantaged people.

One of the worst cases that I've seen is a green card opportunity pitched to immigrants who want to get a green card. But it's also a money-making opportunity. You sign up, and then you get all of your friends to sign up to get into this data base to get a place in the green card lottery. What we have here is a lovely pyramid scheme that was propagated in a number of communities. Win a green card and make money. How can you lose? It's a terrible example, and they're putting up $279 to enter this green card lottery. Incredible.

One of the ones that took the prize, as far as I was concerned -- for being accessible to the most people -- was the one that said, "If you meet our unusual requirements, you can qualify for $5 million of venture capital." Now, what are their unusual requirements? Well, it's really unusual. You have to be over 18, honest, never imprisoned, and have $19.95 to start up. Unreal.

These are examples of things that you've probably heard about. What we're seeing at Call for Action are scams that are piggybacking on today's headlines, the current technology. Licenses for wireless cable, for example, or, more recently, business opportunities in developing wireless cable.

I got a call from a dentist in Omaha just recently, and his question was, "I've been approached by a group starting a wireless cable operation in the Omaha area. Supposedly, they already have the license. They want me to invest between $10,000 and $20,000," depending on what level he wanted to be in the project, and he said, "They have guaranteed me that we're going to make all this money. They are telling me how easy it's going to be to sell wireless cable."

Well, here was a classic case of people who had not revealed anything about what the risks were for the business opportunity. Wireless cable has competition from cable and public television and commercial television.

Additionally, the FTC recently brought a case against a group that was claiming they could help people enter lotteries to win a license to operate the kind of communications channels that taxicabs and police cars use. They were ripping consumers off for $7,000 each. There was about $20 million lost to this fraud, which is totally incredible.

But the media probably does help, as Claire said, because we hear about all these things, we read about opportunities, and we all want to get on the bandwagon; we want to make money.

I do have some specific complaints about what we see at Call for Action. Our organization is set up in 25 cities, and we have an office here in Washington that handles complaints from consumers in areas where we don't have offices. We hear from consumers all over the country, so I think we have a pretty good sense of what's going on out there.

Consumers are calling up and saying, "I responded to this ad. It had an office address there. It sounded like it was so legitimate. It used a suite number."

Why can't we eliminate the use of suite numbers when it's a mail drop? Some states have. I think Maryland has. I don't know what you all do in Colorado, but I think that this would make it a lot clearer that we're dealing with a post office box. There's nothing wrong with post office boxes, but let's make it clear to a consumer that address on Pennsylvania Avenue is a mail drop and not an office next to the White House. That gives it a whole different feeling in the consumer's mind.

Q: What are you suggesting, Shirley?

MS. ROOKER: That we not allow them to use suites when it's a post office box.

Q: I had to investigate a company, and they listed themselves as being located on Fifth Avenue in New York. So in a phase of the investigation I found out that they bought a New York address and a New York phone number, but the calls were going into Miami.

MS. ROOKER: Yes. Call forwarding, where they sound like they're in one place, and they are not. Also, I would encourage the media -- radio, television, or print -- to make a telephone number available, so that when a consumer has a complaint, they know where to call. I can tell you how frustrating it is for Call for Action people, who have more resources than the average consumer, to figure out who to complain to.

Is there some way that a large newspaper that has a lot of classified ads could publish a number where consumers could call? Would it be too much to publish that number in the advertising section so that they don't have to try to figure out where in the world they're supposed to go to get help? They usually advertise the telephone number to call to place ads; but for help in complaints, no. Why not make it easy for consumers to complain? If nothing else, you can at least acknowledge that complaints exist.

I think that all of us need to encourage consumers to complain. One of the things that we had at Call for Action that really gets me is people saying, "Well, I don't want to complain about it. I don't want to call them. It's not much money." I'm thinking, garbage. It's all money. It all counts. You should complain.

Q: They are embarrassed, oftentimes.

MS. ROOKER: They are embarrassed, but we have to make it easier for them. And certainly I would like for Call for Action to be able to find someone to contact at USA Today. We have really not had a major problem with you all, although I have to tell you we did order something from one of your ads. It was a business opportunity to set up a sex line. We're going into business. They don't call us Call for Action for nothing. Thank you for your time.

MR. NORTON: Let me take just one last comment from the back of the room.

Q: I'm with a law enforcement agency. If USA Today has a complaint about some business opportunities, they say they pull the ad. But we are not getting this feedback in our agency, at least we haven't been, and I was just wondering is it a policy not to turn it over?

MS. CAIN: We don't have a policy, per se. Typically, what happens is, unless we're approached by law enforcement agencies, we don't disclose that information. I would say that's true for any media. It's like there is this barrier between us where information is just not exchanged.

Q: I guess this is more of a plea that if, in fact, you are concerned enough to pull an ad, then, obviously, you're not getting any revenue. It would be real helpful to law enforcement because when we get to them there's no money left and they are in another state with another name.

MS. ROOKER: I'm going to suggest that maybe if they don't want to call you, that they send the consumer to Call For Action, and we'll call you.