PANEL DISCUSSION: Financial and Investment Advertising

MR. BARKER: My name is John Barker and I am Vice President of the National Consumers League and Director of its National Fraud Information Center. Our Fraud Center handles consumer complaints on fraud and also reports complaints to the Federal Trade Commission - National Association of Attorneys General's Electronic Fraud Database, where the information is then referred to federal, state, and local law enforcement agencies.

Approximately 12 percent of the complaints we receive deal with investment fraud. Many of the complaints derive from purely cold calls. Most originate with some sort of response to an advertisement, to a postcard, or to some other kind of solicitation.

About a year and a half ago, we asked Louis Harris & Associates to do a public opinion survey for us on the nature of consumer fraud and in particular certain types of frauds, which we found at that time to be prevalent. In dealing with investment fraud, I found that the typical victim was not, as one might suspect, somebody 75 or 80 years old, who is having trouble with the checkbook, but actually the 30 to 45 year old male with a college education.

We also found that most of the investment fraud victims were unfamiliar with investment terminology, and very few read the financial pages of the paper. The typical victim was unlikely to hang up when someone called with an investment deal, and was also very susceptible to reloading on the original investment.

We are very, very pleased to have a distinguished panel here today to talk about advertising and investments. The first person I am going to introduce is Bob Wilmouth, who is President of the National Futures Association. The NFA carries out many programs to educate the consumer about commodities investments.

MR. WILMOUTH: Thanks, John. The National Futures Association has a strong and continuing commitment to prevent fraudulent investment advertising in whatever ways we can prevent it, and whatever ways we can detect it, and in whatever ways we can punish it.

We are a congressionally-authorized self-regulatory body for the futures industry. Solely and simply, our job is protect the investing public who deal with the futures markets, who buy and sell futures contracts. We have nothing to do with those wild, and hairy, and woolly guys who are on the floors of the Board of Trade, who are pushing, and shoving, and shouting at one another discussing price.

We have one advantage that no other organization has. We are a self-regulatory body for the futures industry, and any firm or individual that sells futures contracts to the public must belong to our organization. They have no choice whatsoever. It is the mandate of law.

The NFA has an educational facet to help the public recognize and avoid investment fraud. But we also have a rule and enforcement facet that forces our member organizations to do what we think is proper and correct. For example, we have a compliance rule which specifically governs communications with the public in promotional material. In essence, it says that as a member of NFA you are specifically prohibited from any communication that is fraudulent, deceitful, high pressure, and in any way fails to give a balanced presentation about the risks and the profit potential, what those risks are, and how significant they happen to be.

On an ongoing basis, we review the material that our members put out for compliance with this rule. That is an integral part of our audit and our compliance program. We have taken a number of actions that range all the way from a fine of up to a quarter of million dollars for an infraction to the most effective one, expulsion. And remember, if we expel somebody from NFA who is in the futures business, they cannot do business anymore.

We allow our members to submit to us, in advance, advertising material and drafts of literature that they want to put out, to make certain that if there are any potential problems, they know them in advance. Most of the time, they do it voluntarily. But occasionally, we can issue an order saying "you have had questionable advertising material in the past, and we are not too satisfied with the way you do things, therefore we want you to submit that material to us in advance of its use."

The NFA also has a telemarketing rule, which we put in place just recently. We are trying to get rid of the boiler rooms. What we have found out over the years is that when either we or the Commodities Futures Trading Commission -- the independent government agency that oversees our activities -- shut down one of these operations, the salesmen who weren't named in the action start up business all over again in a brand new firm.

We now have a telemarketing rule which effectively says that if a firm employs a certain percentage of sales people who have previously worked for a firm that has been disciplined by NFA or the Commodity Futures Trading Commission, we are going to make then have some enhanced supervisory rules. One of those supervisory rules is that we can require a firm to tape record every sales solicitation that they make. The recordings must be made available to us in case of an audit. That has done a lot of good.

When this telemarketing rule went into effect in January 1993, exactly 1136 salesmen were subject to this enhanced supervision requirement because they had previously worked for another firm. Today that number is down to 745, so we are making progress.

We produce and distribute some detailed regulatory guides that cover compliance with our promotional material rules. We also have one other thing that is unique to us; we have a toll free disciplinary information hot line. If a firm has had any disciplinary history in the futures industry, we have them on file. If you call up and say, "I received a telephone solicitation from Peter B. Smart & Sons -- is this a good firm?", we can tell you about any disciplinary history that they might have had with us, the CFTC, or any of the exchanges. And that information is freely available. The number is 1-800-676-4NFA.

There are a couple of things that we have been thinking about doing. We are considering making the advertising pre-review -- which we offer to our members -- available to the media. We cannot tell any publisher or broadcaster what they can air and what they can print, but we could offer some advice and tell them whether advertising would meet our rule standards.

Second, we are working on a very brief and concise leaflet -- possibly in the form of a little check list -- that can be used by the media to evaluate futures investment advertising material. Hopefully, it can serve as some kind of a guide in identifying material that may be troublesome. And we welcome any suggestions or ideas of how we could we could be helpful in any other way. Thank you.

MR. BARKER: David Weiss is President of the Better Business Bureau of Cleveland. In that same Harris survey that we did approximately eighteen months ago, we found that the Better Business Bureau had a 27 percent recognition factor among adult Americans. And now, David Weiss.

MR. WEISS: Thank you very much. I feel a little bit sandbagged here today. I thought that I would be the only Better Business Bureau representative. I show up, and the head of the NAD is in the morning session. And the grand poobah of all Better Business Bureaudom is the luncheon speaker. I am happy that they both got the opportunity to tell a little bit of our story.

I know how difficult it is to review ads, and what a difficult position media representatives are in when reviewing ads. On the other hand, I have seen an awful lot of ads running in all of the media that are clear indications that dollars sometimes speak louder than ethics when it comes to advertising acceptance. And about 25 percent of the infomercials I see on television fall into that category.

As Jim Bast mentioned, our roots are in ad review. We were monitoring and exposing investment offers back when the only form of broadcast media was Morse code. We really are a valuable secret service to all of the media representatives. We make many of the tough calls that the media either cannot make or feels like they cannot make, especially in many retail and service classifications.

We are the ones who are bringing most of the challenges to comparative pricing claims on a day to day basis. Local performance claims, questionable layout and composition, under-selling lowest price claims, and on and on. This is where we are our strongest. And we have actually started banding together to operate regionally and nationally to bring before NAD some of the kinds of cases that they have not traditionally reviewed. Cases like the Walmart case, or the Color Tile buy-one-get-four-free case.

We are very, very strong in this area. This is an area frankly where I think the media is understandably weakest in its screening efforts. These are the close calls. These are the cases that are not clearly covered by laws. Or if arguably illegal, not high on the list of enforcement priorities. And the media with some justification has a hard time refusing some of these ads.

After decades of vigilance work, the Better Business Bureaus on the local level got involved in reporting services, issuing reliability reports on companies active in our respective markets, and on charities and soliciting donations. And it is this reporting service that has become very, very relevant to many of our friends in the media.

We gather information and issue reports now on companies that about 15 million people a year are asking us about. And many of these people, we know, are responding to ads on television, in the print media, and now even in the electronic media. So let me talk a little bit about the kinds of direct assistance that the Better Business Bureaus can provide to media representatives. In response to one question this morning, we do not want media representatives calling our public lines for information on companies that are considering advertising. Certainly, if they simply want to hear the report. And many of us have automated systems, so the busy signal problem isn't what it used to be, at least in some markets. But, I would hope that media representatives who try to establish personal relationships with either executive directors of the local Bureaus or the top operations people get their direct lines, and call them directly.

The report on a company does not often tell the whole story, and frankly, we will not always have a report on, for example, a brand new company, which many of the suspect outfits are. We don't develop reports about companies until people start asking us about them. We are not omniscient, and we are not out trying to make work for ourselves. We certainly have got plenty of it.

So if you call about a company that we don't have a report on, first, we will contact the market where the firm is ostensibly located and see if they have developed some information on the organization. If they do not have information, which is likely in many cases, we probably will be familiar with the advertiser's industry. We will have some idea of what the nature of this offer is all about. If it is suspect, we can tell the media that. We can help the media ask the right questions to help detect questionable offerings.

We cannot prove that a company is operating unethically or that an offer is necessarily illegal. But if it looks suspicious, we will send them a letter and ask some fairly tough questions. If the company answers them in good faith, then we will no longer be suspicious. But we ask questions like "substantiate this claim, give us the names of satisfied customers, give us the names of various suppliers," as appropriate to the nature of the offering.

If the Better Business Bureau cannot help, we can always refer media representatives to the appropriate regulatory agencies.

Another technique that some media representatives use is to consider asking advertisers in certain classifications to become listed or registered with the Better Business Bureau, which is a lot different than being a member of the Better Business Bureau. In Cleveland, I know that our daily newspaper will not accept an ad from traveling sales crews that are recruiting salespeople from our area unless they register with the Better Business Bureau. That means that they will come in, and they will fill out our business profile. And we will have some information to help us get a little bit of a slant on the situation.

We can call Bureaus in cities where these folks have operated. We can do some cross-checking to see if we have information about the principals involved with other questionable ventures. It doesn't have to be traveling sales crews. It can be somebody who wants to run an advanced fee loan offer, or any kind of a credit promotion, or even employment offers.

Most of the stuff that I see in the job-listing heading are ads I would probably not want to see anywhere. But if you must run the ad, at least run it in job listing. I am talking about the ad that reads, "Make money reading books," and what you receive is a list of publishers, who will probably laugh you out of the room when you show up and tell them that you would like to make $35,000 reading their books on a desert island while you lay in the sun. Or the ad proclaiming available postal positions, which is just a ruse to sell the postal testing booklets. Or ads promising high earnings with no experience, which is almost always going to be some kind of a job list. Jobs in Kuwait, jobs in Australia.

These are all questionable kinds of offers. And when you put them into the help wanted section, you are really appealing to the most desperate job seekers who are running through help wanted in good faith looking for employment. Throw them into a job listing classification. Keep the multi-level marketing ads out of the help wanted section. If an investment is needed, they belong in another category, if anywhere. I think that the classification is very, very critical.

And finally, I would suggest for the folks from the newspapers, use public service messages for those bad ads that you don't catch. Encourage consumers to call the Better Business Bureau for information on various types of financial or employment offers. I would encourage a newspaper to publicize their own telephone number. As the Tarp study says, you want to encourage folks to complain to you.

And I just want to finish by preaching that I really think that most advertisers want to do a good job. Solid screening isn't going to result in a loss of significant ad revenues, especially when all of the bad debts start adding up. And the effort pays dividends by building employee pride and a socially responsible community image in the media's marketplace. Thank you.

MR. BARKER: Thank you very much, Dave. A few of us have been up in Chicago the last few days where the Federal Trade Commission has been holding workshop conferences geared at coming out with a telemarketing sales rule by August 16th. And the conference work shop generated a great deal of heated discussion. But I think all of us -- consumer people, public interest groups, attorneys general, and industry -- agreed on one thing. And that is that the people who were up there running it from the Federal Trade Commission were conscientious and fair.

Bob Friedman is a member of the group from the Federal Trade Commission who was there. He is Assistant Director of the Bureau of Consumer Protection. And in my opinion, he is the type of person that gives regulators a good name. He is going to talk to us about his agency's role in the area of advertising fraud. Bob.

MR. FRIEDMAN: Thank you, John, for those kind words. I spent the last fifteen years involved almost exclusively in investment fraud litigation. The FTC is a civil law enforcement agency, and our cases are not criminal. But we have played an active role in bringing cases in the investment fraud area.

When I was asked to participate in this conference, I had a couple of questions. First, since most of my work involves telemarketing, I wasn't sure what I could offer concerning the subject of media screening. I would love to have every telephone call screened. But I also understood that was not the media's responsibility. When I first got involved in this area, I saw much more advertising, primarily in print. Some of those ads led to some of the best cases we brought. So I guess I had a little bit of a conflict thinking about media screening, too. Because my most enjoyable experiences were finding the full page ad, realizing that this had to be a fraud, and bringing a case, even though we never had a single consumer complaint. That is not uncommon with investment frauds. If you think about a Ponzi scheme -- which is basically where they take the money from the newest investors and pay off the earlier investors -- everybody is happy for awhile. And you don't get complaints until the whole thing goes down.

We still see that quite frequently in investment fraud. At the sessions this morning, people were talking about complaints. We have never focused on the existence of complaints in the investment fraud area because we have recognized that there may be very sophisticated schemes in which consumers will not realize for some time that they have been victimized.

Nonetheless, it is obvious that the media could play an important role, by looking at the claims, and asking whether this could possibly be true. If this were true, why wouldn't everybody do this, why wouldn't everybody be investing in these things. Basic questions about risks, returns, and quick profits are all very useful ways of looking at investment advertising.

The hottest area in investment fraud involves emerging communication technology, such as wireless cable and other FCC licenses. These all involve proposals for consumers to get in on the ground floor of emerging communications technologies, and participate in wonderful new businesses. Typically, they are quoting stories related to people and famous companies that are investing in this new area. And, of course, the stories rarely have anything to do with the particular technology that they are offering. But this is the most prevalent telemarketing investment fraud sweeping the country today. When I was getting ready to come to this conference, I talked to some of the attorneys who work in this area. I discovered that advertising is becoming more prevalent. Typically radio ads, radio infomercials, and television infomercials are used to get consumers interested in the deal.

Because they are selling "pie in the sky" dreams, it is often difficult to spot specific claims. But on the other hand, you realize that this is a proposal to invest money, and you have to ask yourself well, if this is a great investment, why is there no discussion of what the risks are?

If I could get one message out to people from the media who are looking at these things, it would be look at the old risk-and-return comparability. There is no such thing as a free lunch in investments. If there are high returns, and of course all of these people quote high returns, then there has to be high risk.

What you typically will find are claims of wonderful returns, fabulous returns, 70 percent in the first year, and 100 percent in the second year, 400 percent in two years, whatever. You say, "but where is the risk?" You cannot make those kinds of returns without risk. If you could, everyone would do it.

It is a question of balance. You should see a discussion of serious risk, such as "you could lose all of your money; we may never get this business off the ground; this business requires enormous amounts of additional capital, and we have to raise that capital." Typically, you won't find that information, because these people don't register securities. If they registered the securities, you would find those disclosures.

We had a case involving stamps sold as an investment. And they used radio infomercials all over the country. I got hold of a transcript and on the first page it said the wife of the promoter was pretending to be a talk show hostess. She says, "Ron, tell our listeners, what conservative investment" (meaning no risk or little risk) "in a billion dollar per year industry has appreciated 39 percent each year for the past fourteen consecutive years?" This radio infomercial goes on for fifteen more pages, but you don't need to go on any further than that. This tells you everything you need to know. I wish somebody could tell me about an investment that would have made me 39 percent each year for the past fourteen consecutive years.

They also used radio infomercials to sell animated cels from motion pictures as an investment. And you find exactly the same thing in their radio infomercial for that -- promises of 40 to 50 percent rate of appreciation every year since 1980.

If questions had been asked, and substantiation was requested to back up these types of claims, this probably would not have happened.

MR. BARKER: We have about ten minutes for questions and discussions.

Q: A question for Dave Weiss. You mentioned that you encouraged people to contact you if they had a question about an ad. Do any Cleveland area media actually do that; and if so, do you follow up at all to find out what the results of their questioning of a particular ad might be?

MR. WEISS: Many times when we report back to them, we will get a good indication of how they are going to handle that ad. Mostly, it is the classified people from the newspapers. They will make a point of not telling the advertiser why they are refusing it. That is their right, that is about all they will say.

MR. WILMOUTH: One thing that I have noticed is that we now find some cable outlets which run a continuous disclaimer across the bottom of the screen that says "paid advertising," or "infomercial," or something like that.

Q: John, at the beginning, you read off a number of statistics of people who have been deceived by advertising concerning investing, and a number of them seem to be college educated people in their thirties. What is the best method you think is to educate them as to know the best way to invest?

MR. BARKER: We counsel people to be very careful about responding to telephone solicitations for investments, simply because there is no substitute for dealing face to face with the broker, somebody you know and somebody who is aware of the suitability and appropriateness of the investment. There is no substitute for dealing with somebody who does know what he or she is doing, and can advise you accordingly. So we take a rather hard line and say don't respond by telephone.

Q: Mr. Weiss, you mentioned earlier that the business can be listed for purposes of filing without actually being a member of the BBB, is that right?

MR. WEISS: That is one of the misperceptions out there. Better Business Bureaus report on members and non-members. If it were only members, they would be companies that would meet our standards. And I wouldn't have anybody jumping down my throat over a bad report that we were issuing.

Q: Do you trigger an inquiry when you get a call?

MR. WEISS: Most Bureaus base the decision to develop a report on a threshold of activity. In our case, three inquiries in any twelve month period will trigger a report. Or, we contact the Bureau in the headquarters city of the company, and get the report from them, and put it in our file.

MR. BARKER: Well, thank you all very much. You are a very good audience.