Telemarketing: Many Lose as Scams Spread

WASHINGTON —  To thousands of Americans who wanted to invest in legitimate licenses for new cellular mobile telephone businesses, the prospect of riches seemed too good to be true.

According to the Federal Trade Commission, it was just that.

“I am a widow with two children and cannot afford to take this kind of a loss in income,” lamented Trudy Bullard of Mansfield Center, Conn., who invested $10,000 after succumbing to a high-pressure telephone sales pitch.

Lewis and Janet Garbe of Manti, Utah, said they mortgaged their home and borrowed money to make their $10,000 investment. And Robert J. Hanken of Westfield, N.J., said he turned over his savings after seeing television personality Mike Douglas endorse it as the “business opportunity of the century” in a TV commercial.

‘Near-Epidemic’ of Scams

“I thought it sounded like a good thing,” Hanken wrote to a court-appointed official after learning his savings were in jeopardy. “I’m just a hard-working mechanic in a garage and worked very hard and long to save $10,000.”

But although their investment instincts may have been sound--cellular mobile telephones for autos and other vehicles offer expanding business opportunities--Bullard, the Garbes, Hanken and about 4,000 other investors claim they were victims of one of the latest investment swindles.

The thriving use of solicitation by telephone, or telemarketing, has spawned scams in “near-epidemic proportions,” one expert says. Illegal “boiler-room” operations--so called from the 1920s when salesmen sat elbow to elbow in cramped offices promoting worthless stock by phone--may take in as much as $40 billion a year nationwide, some authorities say.

In the cellular mobile telephone case, each investor had sent thousands of dollars to a Los Angeles company, American National Cellular, which offered to provide engineering data about individual locations and to file license applications with the Federal Communications Commission. The FCC, in turn, would hold a lottery to determine who was actually awarded cellular licenses.

But the FTC alleges in a pending court case that American National Cellular had misled investors about the risks involved in the scheme. In addition, the company also had spent a sizable portion of investors’ money, according to court-appointed officials.

A number of these fraudulent telephone sales schemes, which involve investments varying from diamonds to oil and gas leases, have been operated out of Southern California, leading one observer to dub the region “the con man’s capital of the world.”

And despite the stepped-up efforts of government agencies to halt the scams, swindlers often escape with investors’ hard-won dollars.

Michael McCarey, assistant director of the FTC’s Bureau of Consumer Protection, says his agency has recovered $20 million in a number of cases that will be distributed to consumers, but “we are not able to recover all of the money because a substantial amount of it goes for (a fraudulent company’s) expenses, sales commissions and the extravagant life style of company officials.”

Concern About Fraud

Now, officials nationwide are concerned that telemarketing fraud will expand even further as more Americans seek ways to multiply their dollars and as business deregulation makes unusual investments--such as cellular technology--more commonplace.

To be sure, most telephone solicitations are legitimate. “It’s just another means of communicating with people,” says Donald R. Dunham, senior vice president of DialAmerica Marketing Inc. of Teaneck, N.J., the nation’s largest telemarketing firm. “It’s not just a means of selling swamp land in Florida. Today, it’s used to sell almost anything.”

Dunham says the explosive growth of telemarketing reflects the sophistication of telephone technology as well as the industries that use it. He estimates that DialAmerica Marketing makes 600,000 to 700,000 calls a week for customers varying from IBM to the children’s newspaper My Weekly Reader.

According to figures compiled by AT&T;, 80,000 U.S. companies spent $13.6 billion in 1984 on telemarketing phone calls and equipment, including telephone lines and computers. But by 1990, AT&T; forecasts, a total of 265,000 companies will use some form of telemarketing--an increase of more than 300%.

White-Collar Con Artists

But as legitimate use of telemarketing has proliferated, white-collar con artists also have taken advantage of telephone solicitation techniques, running scams with credit cards, or wrongly promising customers low-risk investments with quick, easy profits. Experts believe the recent trend in telemarketing fraud was spurred in the late 1970s and early 1980s, when interest rates were soaring and money was in short supply.

“The thing that’s amazing about this stuff is that a wide range of the public is stung, from unsophisticated consumers to bankers and lawyers who fall for outrageous lines and who should know better--but don’t,” says Joe Dawson, spokesman for the U.S. Office of Consumer Affairs.

Amanda B. Pedersen, acting director of the FTC’s Bureau of Consumer Protection, said consumers should be exceedingly wary of unsolicited phone calls offering investments.

But “if you initiate the phone call yourself, it’s a very different thing,” Pedersen noted.

Aggressive Sales Pitches

Experts such as Jack E. Swagerty, assistant chief postal inspector, who has 100 postal inspectors trained as crime prevention specialists, say boiler-room operators pitch anything and everything: office supplies, charity donations, boats, television sets, motorcycles and computers, as well as investments in gold or silver bullion, gemstones and oil and gas leases.

Customers are solicited by telephone with aggressive sales pitches by salesmen who can earn 20% to 30% commissions. After the first call, customers usually receive slick, misleading promotional material by mail, followed by frequent, repeated calls designed to destroy their sales resistance. Salesmen encourage victims to send money directly to their offices and often send couriers to collect cash.

Indeed, contemporary telecommunications, telemarketing, electronic mail and COD deliveries “make these computer-age con games alarmingly easy to play,” says Rep. Gerry Sikorski (D-Minn.), who heads the House Post Office and Civil Service investigations subcommittee.

“Today, you can get pitched from Southern California--the con man’s capital of the world--or from Miami’s ‘Maggot Mile,’ ” a strip where con men are known to operate, Sikorski said at a recent House hearing.

Fraud Task Force

In an attempt to stem the flood of fraudulent telephone sales companies moving west, the U.S. attorney’s office in Los Angeles formed a Fraud Task Force by calling on state, local and federal law enforcement agencies to share information and coordinate their efforts.

At the state level, California Assemblyman Robert Frazee (R-Carlsbad), last year authored a bill that requires owners of telephone sales firms to submit a detailed registration form to the state attorney general’s office. They must provide a copy of the sales script used and describe the odds of winning the prizes they offer, among other things.

The law took effect Jan. 1. So far, about 300 companies have registered. And the forms themselves reveal that some companies are operating illegally and “outrageously,” according to Assistant Atty. Gen. Herschel Elkins.

Some of the larger investment scams nationwide have been associated with legitimate activities that have resulted from business deregulation decisions made by the federal government. In one instance, fraudulent businesses promised customers they could win oil and gas leases in a lottery conducted by the Bureau of Land Management--but in fact, the lottery, since suspended, was for land the government believed had no such deposits.

Cellular Telephones

The most recent widespread example of this type of scam has been in the developing area of cellular telephones, as Bullard, the Garbes and Hanken found.

Two Kinds of Licenses

In 305 metropolitan areas, the FCC awards two kinds of licenses to build and operate cellular telephone systems. One license automatically goes to a telephone company, while the other is granted to a non-telephone company. After deciding the licenses for the largest cities, the FCC in 1984 initiated a lottery system for smaller markets nationwide--and applications increased dramatically.

It was after the FCC began receiving complaints about American National Cellular that the FTC investigated and went to court last fall to freeze the company’s assets and to get a restraining order to prevent false statements by the company.

In just over a year, according to papers filed with the FCC, the business sold 4,793 license applications and took in $23,967,500. Fees ranged from $5,000 for one application up to $150,000 for a “blue chip” application for licenses in 30 markets.

A High-Risk Investment

And according to potential customers such as Bullard, the company said investors were guaranteed at least part of a highly valuable, easily marketable license to operate a cellular phone system--but it did not mention that lotteries are a high-risk investment, nor that cellular systems rarely produce profits in their first years.

Last November, after the FTC won the court orders it sought against the company, a court-appointed receiver discovered the company’s bank accounts contained less than $1 million of the money collected from investors.

What happened to the rest of the $23,967,500? The receiver’s initial investigation found “the apparent siphoning off of more than $2.4 million from ANC to a partnership comprised of ANC principals” Joseph Steingold, Earl Serap and Michael G. Godfree. An attorney for the partners, Daniel Raiskin of Los Angeles, refused to comment on the allegations.

When officials searched for company bank accounts after the court order, they found that $800,000 had been suddenly transferred out of the United States to a Netherlands bank. The finding, contained in court documents, also noted that Serap, American National Cellular’s former chairman, had “fled the U.S. for a hitherto undiscovered foreign location.”

$10,000-a-Month Rent

And although many license applications eventually were prepared, the bulk of the remaining money went toward a big staff and huge commissions, radio and TV ads, and other operating expenses that included $10,000-a-month rent on offices in Century City.

Although the vast majority of investors in American National Cellular may never see their money again, there is still hope that some will actually receive the licenses for which they applied. All but 1,200 of the applications sold by the firm now have been filed with the FCC, and attorneys are negotiating to have the rest accepted.

Nevertheless, FCC lotteries on Monday and on May 5 that will determine who actually wins a license will represent a sad conclusion for most who dared to turn over their cash--and their dreams--for a chance at getting rich quick.

“I kind of think I lost my money,” Bullard said, not too hopefully, in an interview. “I guess you live and learn.”