When John Cummings decided to become an entrepreneur last year, he had little idea he’d lose money in an alleged scam. Like many unsuspecting proprietors, Cummings was bilked out of thousands of dollars when he became involved with Accent Marketing, an outfit just outside of Mobile, Alabama, that sells vending and gaming machines.
“I was looking for a way to increase my income,” says Cummings, a 44-year old mortgage broker who lives in Stockbridge, Georgia. “My partner and I visited the company’s headquarters. We were impressed by the management and by the game machine they had, which was supposed to be the next Pac-Man.”
Cummings was so taken with the product that he purchased $36,000 worth of machines. As part of the agreement with Accent, Cummings paid another $2,000 to a company-approved “locator company,” a firm that places machines in venues such as bars and arcades. “We were the first ones in the Atlanta area to have these machines,” he says, “so we thought we could place them easily.”
Cummings says he and his partner thought they’d see a 600% return on their money after one year. Accent’s ads had promised customers they could earn as much as $18,000 a month from the game machines. But for Cummings, the machines never made it out of his garage. Shortly after he reached out to the locator company provided by Accent, it folded. When Cummings complained, Accent gave him the name of a second company, which Cummings says gave him fraudulent information.
Accent then agreed to replace the games with candy vending machines, which Cummings believed would net him higher profits. But before the deal was done, the Federal Trade Commission (FTC) stepped in. “In early 2002, we had just received our second batch of candy machines when time ran out. The FTC got a court order to freeze all of Accent’s assets, charging that it was just a scam.”
The move against Accent was part of a year-long sting operation conducted by the FTC, the U.S. Department of Justice, and 17 state law enforcement agencies, which had been targeting business-opportunity and work-at-home scams. “In the case of Accent Marketing, we couldn’t find anyone who had made nearly as much money as the company claimed its investors would make,” says Michael Mora, an attorney with FTC’s Bureau of Consumer Protection. “We have obtained an injunction and brought a civil case against the company.”
Unfortunately, one federal-state sweep is unlikely to stop such rip-offs. “During an economic downturn, people are vulnerable to these schemes,” says Mora. “If people are out of work and having a difficult time finding a new job, investing in a business may sound very attractive.”
Cummings is just one of thousands who has been fleeced by this new wave of operators. In today’s sluggish economy, more people than ever are vulnerable to swindles and Ponzi schemes. A number of unemployed and underemployed professionals have been eager to create their own jobs or supplement their incomes. Many have become susceptible to frauds set up to look like bona fide business opportunities.
AN ARRAY OF SCHEMES
For months BLACK ENTERPRISE researched these schemes and how swindlers targeted victims and then pocketed their hard-earned cash. Knowing how these scams work can help you avoid getting ensnared in a con artist’s trap.
FTC’s Mora places scams into two categories:
Work-at-home scams. How often have you seen ads promising thousands of dollars for working at home in your spare time? If you’ve answered one, you may have been a mark in a work-at-home scheme. These con jobs tend to require less in the way of up-front cash and, as the name indicates, lure people intrigued by the idea of working from home.
Work-at-home scams rank No. 2 on the National Fraud Information Center’s Top 10 List, right behind bogus credit card deals. In fact, the Council of Better Business Bureaus fielded more than 460,000 inquiries regarding work-at-home offers in 2001, up 70% from 2000. The organization has also received roughly 20,000 complaints in 2001, up 20% from 2000. “I don’t know of many work-at-home offerings that are genuine,” says Susan Grant, director of the National Fraud Information Center, a project of the Washington, D.C.-based National Consumers League. “Very few companies are going to hire you and set you up with customers the way these promoters often promise. The bottom line is that there’s no way to easily make money by staying home. No one is going to pay you for stuffing envelopes.”
Business opportunity schemes. Generally, these are frauds where investors can lose more than $500. “People
might buy overpriced equipment or software packages to go into business,” says Mora. “Investors are given false and misleading ideas as to how much money they can earn. Often, phony references are given to show that others have been successful. After they put their money into the deal, investors find out that there’s no real demand for that product or service.”So what types of scams are derivative of work-at-home and business opportunity cons? They fall into the following subcategories:
Vending machines. As Cummings learned, bogus companies lure victims into paying thousands for vending machines — often at marked-up prices — then offer to help place them in retail establishments. Usually, the purchasers have to place the machines themselves or eat the cost.
Assembly work-at-home. These schemes require you to invest hundreds of dollars in instructions and materials. Then you’ll spend many hours of your time producing items such as baby booties or toy clowns for a company that has promised to buy them. Once you’ve purchased the supplies and completed assembling the product, the company often decides not to pay you because your work does not meet certain “standards.” Often, victims are stuck with merchandise that’s impossible to sell.
Envelope stuffing. There are several variations on this type of scheme, most of which require you to spend money on advertising and materials. Actual envelope stuffing, though, is hard to come by. According to officials at the U.S. Postal Inspection Service, the envelope-stuffing operations of most businesses use sophisticated mass-mailing equipment. The Inspection Service “knows of no work-at-home promotion that ever produces income as ‘alleged.'”
Multilevel marketing. Such companies ask you not only to sell their wares but also to find other sellers. This can be a legitimate form of business — take for example the pink Cadillac-driving Mary Kay reps. On the other hand, illegitimate pyramid schemes can resemble legit sales operations. An obvious difference is that the emphasis is on recruiting others to join the program instead of selling the product. Unless you find others to join, you’ll wind up warehousing overpriced merchandise.
Online business. Here, you pay for a useless guide to work-at-home jobs — a mixture of computer-related work such as word processing or data entry, and envelope stuffing or home crafts scams. If you get a computer disk, it’s probably a worthless list of free government Websites and business opportunities that require more money.
Sheila Adkins, associate director of public affairs for the Arlington, Virginia-based Council of Better Business Bureaus, says the Internet is increasing exposure to all types of scams. “We see the same things as before but they’re reaching more people over the Internet. If you’re looking for a possible business opportunity, don’t be fooled by fancy graphics on a Website.”
Online bulletin board ads may be disguised as casual conversations, warns J. Steven Niznik, a technical guide at www.about.com. “It may appear that a few people just got together to discuss the ‘wonderful opportunity’ they’ve found,” he says. “Sometimes the people p
osting the inquiries are nothing more than ropers (there to rope you in) in cahoots with the scammers.”
DETECTING SCAMS
Online or off, certain features are common in these rip-off schemes. “Be cautious of ads that incorporate eye-catching words and phrases such as ‘free,’ ‘no work,’ ‘no special skills required,’ and ‘get out of bed when you want to,'” says Niznik. “What type of business truly gives away anything for free or hires lazy, no-account, unskilled employees?”
But the biggest clue that a work-at-home offer is a scam is when a company requests your dollars. “Legitimate employers don’t charge you to work for them, period,” says Niznik. “To avoid falling victim, never pay up-front fees or do business with companies that operate exclusively by phone, mail, or e-mail.”
Similarly, Mora advises would-be investors to watch out for promises of earning large amounts of money in a short time with little effort. Most solid investments, from securities to franchises, provide prospectuses and allow you to engage in substantial due diligence. Don’t even think about putting a single cent into a prospective venture unless a company provides you with adequate information. “In some types of offerings,” says Mora, “earnings claims must be disclosed. Prospective investors must be told how many others have made money. Even if such disclosure is not required by law, you should ask for it. A sponsor’s failure to provide it may be a good tip-off that you’re dealing with a scam.”
Make sure you get references as well as check with organizations such as the Better Business Bureau. “Do your own homework to
find out if there’s a market for your work, or a market for the product or services offered by a certain type of business,” says Grant. “Check with your state and local consumer protection agencies, too. Before you make an investment in a business, have an attorney or CPA look it over.”Federal agencies can offer critical assistance. Take Cummings. The FTC helped him find a legitimate locator company, which is placing his candy vending machines.
Unlike Cummings, however, most victims aren’t fortunate enough to realize a happy ending. If you don’t heed the telltale signs of scams, your dreams of financial security can easily turn into bank-account-draining nightmares.
WHAT TO DO IF YOU’RE RIPPED OFF
If you think you’ve been scammed by a business opportunity or work-at-home offer, it’s possible to get your money back. If a company refuses to refund your investment, contact the following agencies:
- Your local Better Business Bureau (www.bbb.org/library/ workathome.asp)
- Your local or state consumer affairs agency
- The U.S. Postal Inspection Service (www.usps.com/postal inspectors)
- Your state’s attorney general’s office or the attorney general’s office in the state where the company is located.
SOURCE: COUNCIL OF BETTER BUSINESS BUREAUS
Avoiding Scam Artists
Making the distinction between a business opportunity and a con game may come down to asking the right questions. The Federal Trade Commission suggests asking the following questions of work-at-home promoters; many apply to anyone offering a business opportunity. Make sure you get the answers in writing:
- What tasks will I have to perform? (Ask the program sponsor to list every step of the job.)
- Will I be paid a salary or will my pay be based on commissions?
- Who will pay me?
- When will I get my first paycheck?
- What is the total cost of the program, including supplies, equipment, and membership fees? What will I get for my money?
After you get a response, decide whether it makes sense to proceed. If the answers are elusive or not forthcoming, find yourself another way to make some money. If you get satisfactory answers, go to the next level of due diligence — references and government agency filings. As you go through the process, make sure you have a topflight attorney, accountant, and financial advisor.