Fraudulent Business Opportunities
December 19, 2003 -
State Banking Commissioner John P. Burke today warned Connecticut residents about potentially risky or fraudulent business opportunities that are again re-surfacing to victimize unsuspecting investors. These days many people are shying away from the stock market, and since banks and financial institutions are paying lower yields, investors are more vulnerable than ever to investment scams.
In the return of a popular 1970s business scam, an Oklahoma promoter of worm farms recently convinced hundreds of farmers, including several Connecticut residents, to invest by guaranteeing them high returns for easy labor. Rather than running a legitimate enterprise, however, Oklahoma authorities ultimately found that the promoter was perpetuating a Ponzi scheme on his victims. A "Ponzi scheme" is one in which promoters pay high dividends to initial investors by using the money raised from new investors.
"Investors should be on the alert," said Commissioner Burke. "While there are many legitimate business opportunities, there are also business scams that are run by shady promoters who take advantage of consumers by promising no-risk, guaranteed investments. Unfortunately, if something sounds too good to be true it usually is."
According to the department's Securities Division, now-defunct B & B Worm Farms, of Meeker, Oklahoma, persuaded Connecticut investors with such promises. Investors claimed that B & B supplied the initial worms, and promised to buy back worms that were produced by the contract farmers and sell them to industrial users, such as home gardeners and nurseries, who find these earthworms useful because they transform garbage and other waste into an organic fertilizer.
According to Oklahoma state regulators, at first B & B held up its end of the contract and paid the farmers as promised. Eventually, however, the worms that were purchased by these contract farmers were not re-sold by B & B for a profit but were sold to newly signed worm farmers. In time, earnings were not achieved by reselling the worms but from the investments made by subsequent potential worm farmers. This process is known as a Ponzi or pyramid scheme.
Securities regulators in Oklahoma soon learned that B & B had not legally registered its business opportunity in that state, and required the company to cease business activity. Similarly, B & B did not register its business opportunity under the Connecticut Business Opportunity Investment Act. In January 2003 Gregory Bradley, B & B's founder, died unexpectedly. Farmers stopped getting paid and the company filed for Chapter 7 bankruptcy.
One Connecticut woman, who claims to have lost $65,000 and her home, is among the list of creditors who have filed a claim against B & B in bankruptcy court. In 2002, after seeing a local newspaper advertisement, she took out a home equity loan to invest $30,000 in the company's worm enterprise. B & B sent her 750 pounds of worms and agreed to reimburse her for expenses. The company also assured her that she would receive a commission. She rented space to grow the worms, and bought cages, a dump truck and other necessary equipment to start her business. In March 2003 she found out the business was a scam.
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Most investment opportunities must be registered in the state where they are sold. In Connecticut, the Department of Banking's Securities Division is responsible for regulating these types of business opportunities. Commissioner Burke urges investors to contact the department's Securities Division before investing to find out if a potential business opportunity is registered. Call (860) 240-8230, or toll-free 1-800-831-7225, or write to the Securities Division at 260 Constitution Plaza, Hartford, CT 06103-1800.
The North American Securities Administrators Association estimates that securities fraud costs investors billions of dollars each year. Unfortunately business scams have been around for many years and continue to exist in a variety of shapes and forms. Some common investment schemes to look out for include the sale of pay phones, vending machine leasing, and many "work at home" promotions.
Commissioner Burke advises potential investors to thoroughly read the business opportunity disclosure document and contract before buying a business or franchise. The disclosure document includes financial statements which investors should carefully examine to determine the sellers' strengths and weaknesses. The document may also alert investors to possible risk factors including prior business failures and/or possible criminal convictions or bankruptcy adjudications of the seller's executive officers and directors.
Commissioner Burke also recommends consulting with an attorney or accountant prior to signing any document related to the business opportunity. Burke said, "We are talking about your hard-earned money, so be sure to consult with a professional and be clear about both the guarantees and the risks for your investment."
"You can protect yourself from becoming a victim by being fully informed about any investment," said Commissioner Burke. "And of course, be certain the business is registered with the state."
As a warning to consumers, the Banking Department and major daily newspapers have cooperated by publishing public service messages in business opportunities classified ad sections that urge potential investors to contact the Securities Division for information.
The Banking Department also has a free publication, entitled, "Understanding Business Opportunity Investments," which provides a comprehensive checklist of items investors should consider before risking their money. Copies can be requested by calling the agency at 1-800-831-7225, or by going on-line.