You Can't Cheat an Honest Man - James Walsh [19]
Wireless cable is another example of an idea that makes more sense to investors than it should. Many people think they know the cable industry because they watch a lot of ESPN and HBO. “It was the largest mix of people I’ve ever seen,” says a southern California perp who sold bogus wireless cable securities in the early 1990s. “When you’re selling gold or real estate, you get wealthier people who think they know what they’re doing. In wireless cable, you get all kinds. Doctors and dentists, sure. But also truck drivers and people working retail. They’re greedy. They might have heard Peter Lynch or somebody say ‘invest in things you understand.’ And they think they understand TV.”
The State of the Crooked Art: Pre-paid Telephone Cards
As the 1990s wore on, consumer complaints and SEC investigations chased many Ponzi perps out of the wireless cable business. Many moved into a field in which the technology issues were much more basic—but popular demand was much greater: long distance telephone service.
The deregulation of AT&T was a shining moment of 1980s smallgovernment ideology. It allowed companies like MCI and Sprint to become billion-dollar giants and drove down the cost of most long distance telephone service. It also created dozens of small long distance companies that focus on finding cheap, aggressive ways of marketing their services. In short, the long distance telephone business became a commodity market, in which price drove market share.
While investment-oriented Ponzi schemes do best in industries with big mark-ups and profit margins, sales-oriented pyramid programs do well in fields with thinner margins. This is one of the most important distinctions between the two. And it’s the reason that some of the most devoted Ponzi perps have experience running either kind of scheme. They size up a market, a company and a population—then start an investment- or sales-oriented scheme based on which will work best, accordingly.
When an industry transforms from a regulated monopoly (or near monopoly) to a price-driven commodity market, legitimate multilevel marketing mechanisms will flourish. They’re cheap and relatively effective1. Where legitimate multilevel marketing schemes flourish, illegal pyramid schemes—their black sheep relatives—will follow.
In early 1995, the Better Business Bureau of San Diego County warned that southern California residents were being exploited by a multilevel marketing operation that was engaged in the long-distance phone business.
The company was Irvine-based National Telephone & Communications (NTC). Its corporate parent was Incomnet, a publicly-traded company also based in southern California. NTC sold long-distance telephone service and prepaid cards which allow people to make calls from public telephones. It also sold distributorships for selling the service and cards. Critics claimed that it cared more about selling distributorships than signing up actual long-distance customers.
1 For more detail on multi-level marketing and its uneasy relationship with Ponzi schemes, see Chapter 14.
For $95, a person could become an NTC distributor. But distributors were strongly encouraged to pay $495 to attend Long Distance University, a “leadership course.” (According to an NTC newsletter, the course was “a requirement for becoming an area marketing manager.”) Finally, for another $700, a distributor could become a “certified trainer”—and sell distributorships to other people.
The BBB was concerned that Incomnet made its money from a pyramid scheme—not from selling long-distance service. About 24 percent of Incomnet’s 1994 revenue came from fees paid by distributors and trainers. “Based on our investigation, we believe the average sales rep for NTC can expect to make less than $100 a year,” said Lisa Curtis, president of the San Diego BBB. Curtis went on to say that ethnic groups—primarily Hispanics