From the July 1997 issue of Startups

How to recognize a fraudulent sales pitch before it costs you.

As she picked up her home-office phone in Naperville, Illinois, Barbara Brabec's first impression was that the man's voice on the other end held sincere concern. He claimed to be calling from Visa International, then said, "I'll bet you don't know that if you give your credit-card number out over the Internet, you can't get your money back after 24 hours." This sounded like news to Brabec, who listened further as the man described a type of credit-card insurance he was willing to sell her for $3 per quarter or $12 per year. When he asked for her credit-card number, Brabec's intuitive credibility alarm kicked in. "I don't know you," she told him. "I need to check out your business further." The man gave her a toll-free number to call back--but told her she could only call at certain times."When I asked about the times, he said he had to free up the computer to get my file online."

Today Brabec, author of Homemade Money (see "Worth Reading" on page 10 for ordering information), a book that includes a section about homebased-business fraud, laughs at how close she came to becoming the victim of a scam. "When I tracked it down, I found he was using a business name that belonged to someone else," she says. "During the phone call, I'd also temporarily forgotten that even if somebody gets access to your credit-card number and makes fraudulent charges, the maximum fee you pay is $50. So no one would need credit-card insurance."

Many experts believe there are more business scams today than ever--and that many of these scams con homebased-business owners out of millions of dollars each year. Perpetrators design scams to appeal to the common concerns of all homebased entrepreneurs and include truthful elements to make the scams seem plausible. Scam artists' pitches are designed to resemble authentic businesses as closely as possible--often with names similar to well-known, established companies. The following suggestions may help you identify--and protect yourself from--homebased-business scams.

Many work-at-home scams claim it's possible to easily earn hundreds of dollars per week at home, in your leisure time. While some work-at-home plans are legitimate, many are not, says Howard Shapiro of the Federal Trade Commission (FTC).

"Home-employment schemes are among the oldest kinds of classified advertising fraud," says Shapiro.

"Consumers deceived by these ads have lost thousands of dollars in addition to time and energy." He explains that many ads don't say you may have to work many hours without pay, or that there may be hidden costs. Countless work-at-home schemes require you to spend your own money to place newspaper ads, make photocopies or buy the envelopes, paper, stamps and other supplies or equipment you need to do the job.

Do Your Homework

Shapiro explains that legitimate work-at-home program sellers should tell you--in writing and for free--what's involved. He suggests asking a potential business opportunity seller the following questions:

  • What tasks will I be required to perform? "Ask the program sponsor to list every step of the job," says Shapiro.
  • Will I be paid by salary or straight commission?
  • Who will pay me?
  • How long before I receive my first paycheck?
  • What is the total cost of the pro-gram, including supplies, equipment and membership fees? What will I get for my money?

"The answers to these questions may help you determine whether a work-at-home program is legitimate, and guard against financial loss," says Shapiro.

Ask for samples, references and other information to help you make an informed decision.

Graham Mott, a realtor for twenty years, lost $30,000 to a scam in which he was supposed to sell coupon books that allowed people to buy music CDs and audiocassettes at a two-for-one savings. He believed he was buying a protected territory and would be the only master distributor in his native Colorado.

"I thought I could sell the books to schools and other organizations that needed fundraising," says Mott. "If I'd taken my product to the marketplace in advance, I would have discovered that the schools in my area had tried it three years before and it didn't sell. I'd also have found out that the company sold other distributorships in my area at the same time they sold mine."

Mott suggests asking for information about the service and conducting a market analysis. He says he was initially reluctant to tell others about his new business opportunity, feeling he risked "giving away the secret." Mott admonishes, "Don't be afraid to talk to friends, neighbors and competitors in similar industries. If it won't work, it's best to find out before you start."

He also advises being cautious about companies that pressure you to sign up today. "If the opportunity is real, the same offer will be available the next day, a month from now and probably a year from now," Mott says.

It's safer not to buy a business opportunity based out-of-state, Mott believes, because there's less recourse in the case of a scam. He initially tried to take the company that scammed him to court in his home state, because that's where he'd done business with them. When a Colorado judge threw his case out of court and ruled that he had to sue the company in its home state, Mott dropped the lawsuit.

"Even if I found an attorney in the company's home state to take the case on a contingency basis, it would still mean the extra expenses of travel, lodging and meals when I traveled [there] to testify," says Mott.

He suggests that if you choose to invest in a business opportunity, invest the smallest amount possible. While Mott paid $20,000 to be a master distributor, others lost only $1,000 or less.

Shirley Rooker is president of Call For Action, a national, nonprofit, consumer help line she has worked with in Bethesda, Maryland, for the last 21 years. She also compiles daily consumer reports for a nationally syndicated radio broadcast. Rooker relates one case in which a home-based-business owner who specializes in corporate personnel counseling lost her entire yearly advertising budget to a scam artist purporting to be publishing a directory of human resources companies for corporations. The book was never published. Another entrepreneur paid to be published in a directory for a union. The union knew nothing of the phony directory.

Rooker advises homebased entrepreneurs who receive such offers to follow up by asking for references. "If the references aren't with companies or other organizations that you feel sure are reputable and established, try also to check the credibility of the references," she says. "Some scam artists pay `shills' to give recommendations for them." Shills, or "singers," are usually friends or relatives of the scam artist. They earn their money by lying about the product you are hoping to buy. A singer probably only has samples of a product, but he'll tell a prospective victim he has 10 high-grossing stores handling it and he's considering purchasing enough product for 10 more stores, or a similar story.

Along with references, consult the Better Business Bureau (BBB) for previous complaints. Each state, within its attorney general's office, also maintains a department of consumer protection that monitors and investigates consumer complaints against businesses. The FTC also operates a public reference line that lists complaints against companies.

Rooker says if you're thinking of starting your own business, you might visit your local chamber of commerce, or the small-business department of your local university, to become more informed about whether a particular business is likely to succeed in your area, and how stiff the competition might be. Rooker also encourages anyone who has invested in a business opportunity or other investment that they feel may be fraudulent to call Call For Action at (301) 657-8260 for a free situation assessment and a list of actions to take to get their money back.

Not What They Seem

Be aware that the following business formats are frequently cover-ups for scams:

  • Business opportunities that require "registration" or "qualifying" costs up front. Most of these scams are assembly-oriented. Companies purport to offer an opportunity to work at home, assembling kits ranging from necklaces to electronic gadgets to Christmas ornaments. Others promise you'll make money by reading books or proofreading. Shapiro explains that, after requesting that you send for free information, these programs often require you to invest hundreds of dollars in equipment or supplies. All "assemble-at-home" programs have inspection or time clauses. If the business opportunity is fraudulent, the person running the scam can simply reject your work as being substandard or completed late, thereby voiding the money-back guarantee. "Unfortunately, no work is ever up to standard, leaving workers with relatively expensive equipment and supplies and no income," Shapiro says. "To sell their goods, these workers must find their own customers."
  • Envelope stuffing. "Now that companies can command computerized machines to stuff 10,000 envelopes with only a keystroke or two, why would they need to pay homebased workers to do it?" asks Cynthia Brower, a regional director at the National Homebased Business Association. This question applies to any business opportunity you might investigate. Consider asking the company why it is cost- and/or time-effective for them to hire employees from out of state.

Regardless of its illogical premise, the lure of stuffing envelopes to earn $1,000 per week is still alive and well in classified ads. Once a potential home-based worker pays a registration fee of $35, he receives a letter telling him to run an ad similar to the one he responded to: "Make $1,000 weekly stuffing envelopes. Send stamped, self-addressed envelope to . . ." In other words, he's instructed to perpetuate the same scam to which he just fell victim. "When it's too late, you find out the promoter never had any employment to offer. The only way you'll earn money is if people respond to your work-at-home ad," says Shapiro.

"When the main emphasis is to bring people into the program rather than sell the product," warns Rooker, "people who participate risk not only losing money, but finding themselves on the wrong side of the law for participating in pyramid schemes."

  • Selling non-existent secrets or lists of fake job opportunities. Mott explains that, in the classified sections of local newspapers and some national magazines, there are help-wanted ads for homebased workers that require calling a 900 number. "These teaser ads get you to call for information by making a long-distance call on a 900 number," he says. "In most cases, when you call the number, the position is already filled." If you call on a toll-free number, the company sells you on paying them an upfront fee. Once you've paid, there is little recourse. This ploy is especially distressing because the ads are often listed alongside sincere ads placed by reputable companies.
  • Fake invoices for products you never ordered or received. Aside from business-opportunity scams, there is an assortment of other business frauds that target homebased businesses. A typical example is the phony-invoice scam. In this scam, falsified invoices for classified ads or Yellow-Pages ads are mailed to potential victims, requesting payment as soon as possible. Many scam artists use the fingers-walking logo to give the invoice more legitimacy. Office products, health services, insurance and subscriptions to trade magazines are all subject to phony invoices. In a prevalent type of phony-invoice scam, con artists convince businesses to pay for overpriced laser printer cartridges they never ordered. Sometimes a friendly telemarketer will call first and ask for serial numbers and the like. When an invoice arrives with such information, the business owner or bookkeeper may feel inclined to pay it, particularly if the business has more than one employee who takes phone information. One way to avoid this scam is to keep a written record of everything you order and to check all invoices against this record. You should also guard against giving out personal information such as credit-card numbers, calling-card numbers and serial numbers over the phone.

Fight Back

"Complain to the responsible company as soon as possible. The longer you delay, the greater the chances that the company will move someplace else and start ripping off a bunch of new people," says Rooker. If possible, also stop your payment by calling your bank or credit-card company immediately. If the charge has already been put on your card, you can dispute it, under the Fair Credit Billing Act, and request a charge-back within 60 days of receiving your bill. To do this, immediately write to your credit-card company and include documentation such as a copy of your order, the date you ordered the material and the name and phone number of the company that sold you the goods.

Report the fraud to your local, state and federal consumer protection agencies, the BBB and the FTC. While the BBB can only check for local complaints about a company and can't tell you if a company is "good" or not, complaints are still a warning sign to investigate further. The FTC won't tell you if there have been complaints or that a company is currently under investigation, but will inform you if the agency has taken formal action against a particular company, Shapiro says. "Even if you can't get your money back," Rooker says, "your complaint could protect others."

Scam Alert

Shirley Rooker, president of Call For Action, a national consumer help line, says think twice if you are considering a business deal that includes any of the following:

1. A company refuses to give you references or send you written information about the offer.

2. A telemarketer acts as if he has done business with you before.

3. A "prize" is delivered by an alternative carrier, not the U.S. Postal Service; many con artists use alternative carriers in order to avoid postal-fraud charges.

4. A company representative requires you to act on an offer the same day.

5. A company asks you to pay a fee before you receive goods, services or information.

6. A telemarketer or a company advertising on the Internet asks for your calling-card number as identification for purchases, or your credit-card number to qualify you for a "prize."

Contact Sources

Barbara Brabec, P.O. Box 2137, Naperville, IL 60567, (630) 717-4188.

Call For Action Inc., 5272 River Rd., #300, Bethesda, MD 20816, (301) 657-8260.

Graham Mott, 4343 W. Ponds Cir., Littleton, CO 80123, (303) 797-6116.

National Association of Home-Based Businesses, P.O. Box 30220, Baltimore, MD 21270, (410) 363-3698.