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State-Federal Crackdown on Phony Business Opportunities

March 6, 2000  -

Securities officials at the Connecticut Department of Banking announced today that they have joined with the Federal Trade Commission (FTC), the Department of Justice and over 20 other states in a special project to crack down on business opportunity scams that annually bilk consumers out of millions of dollars.

"Investors seeking a helping hand in starting their own business too often get taken to the cleaners by con artists who over-exaggerate potential earnings and fail to deliver on what they promise," State Banking Commissioner John P. Burke said. "The business dreams of too many would-be entrepreneurs are sadly turned into nightmares."

Burke reported that his agency issued two recent administrative actions against business opportunity promoters. He said, "Connecticut will not tolerate unlawful activity. Dishonest promoters should know that the department will seek penalties to the full extent of the law."

On February 28, the banking department issued a cease and desist order against Ameritel Payphone Distributors Inc. based in North Miami, Florida for allegedly offering and selling payphone systems to at least six Connecticut investors even though the business opportunity was not registered as required by state law. The order prevents Ameritel from doing business in Connecticut and seeks to impose a fine of up to $10,000 for the alleged violations of state business opportunity laws. A hearing on the imposition of the fine is slated for April 11.

The banking department isn’t the only securities regulator scrutinizing the activities of Ameritel. The FTC sanctioned the firm for unfair or deceptive practices in connection with the payphone business venture. According to the FTC, Ameritel made false and misleading representations to the investors regarding how much income would be earned in the business venture and promised to provide profitable locations where investors could place the payphones. Few if any, locations were provided to investors.

The banking department also brought administrative action against a number of other Florida-based entities it claims offered Connecticut investors unregistered business opportunities. On February 28, Home Buyers of America, Inc., Home Buyers Training Corporation, both of Orlando, and First Resource, Inc. of Lake Mary, were ordered to cease and desist from conducting business in Connecticut. Also named in the order was Robert A. Blair, president of Home Buyers.

Based on complaints received by his agency’s Securities Division, these companies, Burke explained, were collectively involved in marketing promotions that offered and sold training manuals and knowledge investors could use to begin a real estate investment business. As part of the business venture, investors were told to find foreclosed property sites and report the locations to the company. The company would then purchase the property and reward investors for their efforts. Investors complained they found foreclosed properties using the procedures and guidelines provided by the company but that the company never bought any of the property.

According to Burke, the venture should have been registered as a business opportunity with his agency and investors should have been given a disclosure document containing, among other things, a listing of officers and directors, the risks associated with the program and the number of investors who succeeded in the program. Burke said he plans to impose a fine of up to $20,000 based on the allegations against the companies. A hearing is set for April 25.

Burke commended the Securities Division for its involvement in "Project Biz-illions$," the name given by state and federal securities regulators to the coordinated attack on traditional business opportunity scams. More than 60 cases have been filed nationwide against fraudulent business opportunity promoters as a result of the crackdown. Investigations show that fraudulent business opportunity scams are typically promoted today through classified advertising sections of daily newspapers or on the Internet. Promoters peddle pay phone and vending machine routes and work-at-home schemes such as medical billing opportunities. Most of the ads promise big earnings, possibly on a part-time basis, adding that no selling or other experience is necessary. Typical ads read as follows:

  • "Medical Billing. Work from home – full or part time. From $24 to $50K+ per year. Home computer required. CALL NOW."
  • "OWN PAYPHONES. $10K plus monthly potential"
  • "1000 Envelopes = $4,000. From Home! $4 per envelope you stuff GUARANTEED! FREE Info. Call now."

According to regulators, however, these schemes rarely pan out and, instead, can cost consumers thousands of lost dollars.

As a warning to consumers, the banking department and major daily newspapers have cooperated for some time by publishing public service messages in business opportunities classified ad sections that urge potential investors to contact the state agency for information.

Burke said the first step for any investor should still be to contact his agency to check whether a potential business opportunity is registered. The department’s Securities Division can be reached by calling (860) 240-8230, by writing to 260 Constitution Plaza, Hartford, CT 06103-1800 or by visiting the Internet. Burke added, "Investors should remember, however, that even if a business opportunity promoter complies with every applicable law, there is no guarantee that an investor will make money."

Burke strongly recommended that potential investors thoroughly review the business opportunity’s disclosure document and contract before buying. Carefully review the portions that deal with business risks; the business experience of the company and directors; history of lawsuits, including those alleging fraud; fees to be paid and conditions under which fees and deposits will be returned; balance sheets for the three previous years; and substantiation of earnings claims.

The banking department suggests consulting with an attorney or accountant, preferably one with experience in the area, before committing to a deal. "Even the most experienced entrepreneurs never enter into an important business relationship without consulting a team of professional advisers," Burke said.

As a further guide to analyzing a potential investment, the banking department has a free publication, "Understanding Business Opportunity Investments," that provides a comprehensive checklist of items investors should consider before risking their money. Copies of the publication can be requested from the agency or accessed on the department’s web site.