You Can't Cheat an Honest Man - James Walsh [114]
There are no laws specifically governing Internet use, so states are trying to use their laws to root out cyberspace hucksters who promote get-rich schemes, phony health cures and other scams. In 1996, Minnesota Attorney General Hubert Humphrey III became the nation’s first to file consumer fraud complaints against Internet firms. One involved a pyramid scheme that promised participants $157,900 in taxfree income. Illinois A.G. Jim Ryan, an established Ponzi scheme buster, described the Internet as an “unregulated and unmonitored territory where scam artists and other lawbreakers roam freely.”
Jim Jacobson, special assistant attorney general in the consumer division, said the state isn’t interested in regulating everything on the Internet, or in stifling free speech. “All we’re talking about here is exercising our normal powers to protect the public from fraud and false advertising in commercial activity,” he said.
Case Study: Western Executive Group
In October 1996, a federal judge issued a temporary restraining order against two Nevada companies for running an ATM investment Ponzi scheme that used an Internet website as part of its pitch for investment dollars.
U.S. District Judge George King froze the assets of Cash Systems USA Inc. and Western Executive Group Inc. (WEG). The SEC had asked for a court order to stop the two related companies from selling investor contracts for ATMs.
The suit, filed in federal court in Los Angeles, was one of the first SEC actions to implicate an Internet website with a Ponzi scheme. It was also one of the first to involve the newly deregulated ATM machines. A 1995 deregulation rule had allowed individuals to own the machines; until then, only banks and other financial institutions had been allowed to own them. “As of late 1995, you saw ATM’s only at banks,” said SEC spokeswoman Lisa Gok. “They had to be affiliated with a bank. Then there was deregulation and now you see these freestanding ATMs at even convenience stores.”
The SEC claimed that WEG offered investors ownership in a freestanding ATM for up to $24,000, promising returns of 17 percent to 20 percent each year for five years. Between September 1995 and October 1996, more than 130 investors bought WEG cash machines for $23,950 each and immediately leased them back to Cash Systems for placement in retail locations. The investors poured more than $3.5 million into WEG. The company returned about $815,000 in lease payments. But the SEC claimed this came from proceeds generated by new investors.
Most of the investment pitches were made by telephone salespeople. In typical Ponzi scheme fashion, WEG also held what it called “private investment seminars” and did mass mailings to potential investors. The company singled out retirement-age investors as targets. “All of these schemes tend to hit the retirement communities quite hard,” one SEC source said.
Adding a high-tech twist, WEG set up an Internet site to display pictures of the ATMs it deployed, as well as other promotional materials. Potential WEG investors were encouraged to visit the Internet site and “see for themselves” what the machines looked like and how the WEG program worked. Many people took the advice—and foolishly considered the material in the Internet site independent verification of what the telemarketers pitched over the phone. “It was really kind of sad. You had a lot of these older folks saying they’d investigated [WEG] on the Internet, when all they’d done was have someone download promo material from the company’s own website,” said one SEC source.
The SEC argued that, in return for the $3.5 million in investment dollars, WEG signed contracts to purchase 228 terminals. In fact, the company only purchased 119 machines and placed 41, most of them in retail locations in Florida. And only two of the machines in operation made enough money to cover expenses.
While the company’s promotional materials had mentioned potential transaction volumes of 100 transactions per day and a break-even point of 25 daily transactions, some of the terminals were registering