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The ad in the respected newspaper was enticing: Invest $35,000 in vending machines and make more than $7,500 a month. Accent Marketing, the Alabama company hawking this business opportunity, even promised to line up 25 bars and restaurants eager to have the machines installed.
One young working mother in Maryland with two young children and a cabdriver husband saw the vending machine offer as the perfect way to spend more time with her kids while still earning good money. Before investing in the business, she did her research. She called the Better Business Bureau (BBB) to confirm that there were no complaints against Accent; she called the three referrals Accent gave her, who all said they were raking in money with the machines; she even went to Alabama to visit the company headquarters. Everything checked out, so she was delighted when the 25 machines arrived just before Christmas 2001.
"That's when everything fell apart," says Dale E. Cantone, an assistant attorney general for the state of Maryland. "She went to deliver the machines to each of the 25 locations provided by Accent, and every one turned her down -- some angrily." The three referrals turned out to be shills. And the victim had squandered her family's money on useless machines that no one wanted.
Sadly, stories of business opportunity fraud like this are all too common, with nearly a million incidents in 2004 alone. That's why in February 2005, Maryland and 13 other states, the Federal Trade Commission (FTC), the U.S. Postal Inspection Service, and the Department of Justice joined to take action against nearly 200 companies in Project Biz Opp Flop, a nationwide crackdown on these rip-offs. Gone are the days when all the scam offers were for Popsicle-stick crafts or the proverbial "stuffing envelopes": The bust included not only vending machine schemes but other now-common scams, such as medical billing systems, Web site businesses, and Internet kiosks. The FTC estimates that tens of thousands of people lost more than $100 million to just the 16 operations that the FTC helped bust.
The victims of business-opportunity scams can ill afford the thousands of dollars that they invest: Many are stay-at-home moms or out-of-work dads. Sometimes they take out loans or borrow from retirement funds to invest. "Again and again I hear of people who lost their jobs, unwittingly invested their severance in scams, and lost it all," says Eileen Harrington, deputy director for the Bureau of Consumer Protection at the FTC. "People try to do the right thing for their families and are completely taken."
These would-be investors are lured by promises of healthy income, flexible hours, and the chance to make their own success rather than be a cog in the corporate wheelhouse. One former scammer told investigators he persuaded potential investors by comparing the money his customers made to the earnings of real-estate agents. "But real-estate agents have to go out in the elements, drive everywhere, work seven days a week, and wait for things to happen," he would continue. "[Our] affiliates enjoy working at home, setting their own schedule, and making things happen on their own terms."
Scammers also exploit fears of job insecurity, offering their targets a supposedly safer, more secure alternative. "You can no longer expect large corporations, or any business for that matter, to provide job security or a steady paycheck (Enron, Tyco, WorldCom, to name a few)," argued a brochure touting Money Movers Inc., a phony Florida company selling change-making machines. To bolster the appearance of legitimacy, scammers are increasingly paying for impressive promotional packets and slick Web sites as well as sophisticated ads in newspapers and magazines and on cable television.
Citing these strategies, Harrington emphasizes that the people who fall for these schemes are neither naive nor careless. "The companies' techniques are really good," she says. "If it were easy to spot scams, they wouldn't succeed as often as they do." Fortunately, no matter how savvy the scammers' pitches get, certain red flags will always give away their game. Here are the tip-offs:
Guaranteed results: Scam artists overcome our reluctance to take risks by promising results. "These opportunities are pitched as guaranteed money-making ventures that people can do in their spare time," says Harrington. Take Money Movers Inc. Their literature claimed they had "developed a foolproof business plan that is so simple anyone can follow it and realize their financial goals." In reality, running any business is hard work and never a sure thing. Walk away from any company offering guarantees.
We've done the legwork: Most of us wouldn't know how to find places that want vending machines or locate doctors who need computerized medical billing services -- largely because established corporations usually have the lock on this kind of distribution. But business-opportunity scammers promise they have qualified customers lined up for your services. "The truth is that there's a very limited market for these products," says Kenneth L. Jost, assistant director of the Office of Consumer Litigation with the Justice Department. Anyone who promises customers eager to buy is probably lying.
Just talk to our satisfied customers: Most scammers will encourage you to call other buyers they claim have made big bucks with them. Usually these references are paid to lie: One former scammer testified that his boss sometimes paid him an extra $200 to pose as a satisfied customer. In just one month he persuaded consumers to invest $150,000. Another scammer, who worked for American Entertainment Distributors, a company selling DVD rental machines, bragged that he had spent $30,000 on a voice changer and satellite phone to disguise his voice and location when he talked to unsuspecting customers. How can you protect yourself against such tricks? Rather than trust company referrals, demand a list of the firm's current investors. Legitimate concerns should have a disclosure document that includes audited financial statements, lists of current franchisees and the company's officers, and any litigation history, Jost says. And take the time to visit one of the company's franchisees in person to see the business in operation.
Ask the Better Business Bureau about us: Many scam businesses are members in good standing with the BBB, which is part of the scam. "These firms join the BBB, sell for six months and then go out of business," says Jost. "By the time complaints roll in, they're on to something else."
The time is now: Scam artists apply pressure to close the deal as quickly as possible so that you don't have time to investigate, seek advice, or think better of your decision. One salesman told investigators he would promise to put certain locations on hold for the person on the line "emphasizing that I could hold the locations only until they received our packet of materials because there were other people calling from the same area." If you are considering a franchise purchase, patience is a virtue. In fact, the FTC's Franchise Rule, which applies nationwide, requires franchisers to wait at least 10 business days after a prospective customer gets the disclosure statement before they take any money.
We've been at this for years: Most of these companies tell you that they have years of experience. In truth, their game is to set up shop, rip off as many consumers as possible, and then file for bankruptcy before complaints are filed with the authorities. "You don't stay open too long, you don't get too greedy," Russell MacArthur, a promoter with American Entertainment Distributors, told a government informant. "You stay open for a year, tops...[then] you do another product." Unfortunately, determining how long a business has been around can be difficult, especially since scammers sometimes buy the names of existing legitimate companies.
So what's an aspiring entrepreneur to do? Before investing in any business, run the opportunity past your banker, your accountant, or a trusted relative or friend with business experience, as well as a lawyer, who can spot fine-print limitations and loopholes in any contract the company may ask you to sign. You should also check in with someone in your state attorney general's office who has experience with scams. "And never invest in a business opportunity that isn't licensed by its state," says Cantone. "If you have a problem, you'll have little recourse." If you do get taken for a ride, report it to the state attorney general's office or the FTC. You can sue, but suing an out-of-state company on your own is difficult and expensive.
The complaint the woman in Maryland filed did help put Accent Marketing out of business, and as a result of Project Biz Opp Flop, 16 individuals have received jail sentences. The courts have ordered restitution of $18.5 million to more than 2,000 victims. How much of that will actually be collected is anyone's guess, however. Of the Maryland mother and other Accent Marketing victims, Cantone says, "At the end of the day there was no money available to any of the people who invested in this business opportunity -- not even pennies on the dollar." Unfortunately, he adds, "that is also typical." Your best protection is not to fall for a scam to begin with.
Originally published in Ladies' Home Journal magazine, March 2006.