TIME: Almanac 1993/TIME Almanac 1993.iso/time/040389/04038900.019

Text File | 1992-09-23 | 9.3 KB | 190 lines

                                                                                BUSINESS, Page 38

Reach Out And Rob Someone


Scam artists who work the phones are bilking consumers of $1
billion or more a year

By Janice Castro


    When Dayton Searles heard the pitch, he figured he couldn't
lose. A telephone salesman representing a Las Vegas firm called
Vita Life told Searles that he had won a valuable prize. The
St. Paul retiree would receive a new car, a two-week vacation
in Hawaii, an imported French fur coat, a combination
television-VCR, or $3,000 in cash. To qualify, all he had to do
was buy some vitamins. Without a moment's hesitation, Searles
agreed to order an eight-month supply for $395. But when his
prize of a fur coat arrived 3 1/2 months later, Searles recalls,
"my wife took one look at it and was absolutely disgusted. It
was imported all right, and it was fur, but it was rabbit fur,
probably made from scraps off the floor. If you took a handful
of it, you could hear it crinkle."

    Searles was taken by a telemarketing scam, but he has
plenty of company. In the shadow of the fast-growing
telemarketing industry, which sold more than $100 billion in
legitimate products and services over the phone last year,
telephone swindlers are springing up like mushrooms. Telescam
artists are bamboozling consumers with pitches about everything
from fine art and exotic vacations to time-share condos and
precious-metals ventures.

    All told, the Federal Trade Commission estimates, con
artists working the phones got away with at least $1 billion
last year. Other fraud experts put the total as high as $10
billion. Legislators and law-enforcement agencies have stepped
up their efforts to disconnect the crooks, but at the moment
they are operating almost with impunity. Says William Sullivan,
chief of the Illinois attorney general's consumer-protection
division: "Lawyers, doctors, policemen -- every spectrum of
society is being taken in."

    New types of telemarketing cons are being hatched
overnight, sometimes abetted by front-page news that provides
a convincing sales pitch. After the 1987 stock-market crash
shook investor confidence in securities, con artists began
pushing such alternatives as rare coins, gold, oil and gas
leases, and diamonds. One Tulsa-based telemarketing company
cleaned up by selling shares in a "secret process" for
converting volcanic sand on Costa Rican beaches into gold. A
swindler who had been convicted of selling shares in a
nonexistent gold mine continued to solicit new investors from
a pay phone in his Wyoming prison.

    Con artists have found a highly receptive audience among
the millions of U.S. investors who routinely conduct stock and
bond trades over the phone with their brokers. Because it is
normal for legitimate brokers to solicit new business by making
cold calls, crooks posing as Wall Streeters have talked elderly
investors into borrowing heavily against their home equity to
buy into schemes touted as surefire. "We are confronted with a
national epidemic of truly staggering proportions," says John
Baldwin, president of the North American Securities
Administrators Association, a group of state officials who
regulate brokers and dealers.

    Fast-rising prices in the art market have inspired a hot
new trade in phony prints. Hundreds of people have paid as much
as $4,000, sight unseen, for "limited-edition" originals. The
FTC has sued Federal Sterling Galleries, a telemarketer in
Scottsdale, Ariz., for allegedly peddling photographs of
artworks as authentic prints by Salvador Dali.

    Millions of consumers have received postcards and telegrams
in a fast-growing sweepstakes con that is designed to prompt
them to call up the telemarketing crooks. "Mr. Quinn will
definitely receive a two-week, all-expenses-paid trip to
London," such an announcement begins. Winners are instructed to
call for information on how to collect their prize. But when
they do, they are informed that in order to "qualify," they must
join an expensive travel club and pay "handling fees" of $100
or more, or buy a companion ticket at an inflated price. After
the extra costs are added, such "free" trips usually cost more
than if they had been booked through a travel agent.

    Other telescam artists pretend to be travel agents offering
extraordinary discounts. In Illinois, Scott Walker and his
mother started World Travel Vacation Brokers in their garage,
mailing flyers to consumers around the country that promised
Hawaiian vacations for just $29. Gullible customers who called
in their orders received a voucher entitling them to book a trip
through the agency, but at a cost of several hundred dollars
more. By the time FTC investigators took the company to court,
the outfit had taken in more than $6 million.

    Telescam groups in several states employ a "grand prize"
hook to sell useless water purifiers. Supposed prizewinners, who
are advised by mail to call an 800 number for information, are
told they will collect such awards as a diamond watch, mink coat
and luxury car if they buy a $398 system that removes pollutants
from drinking water. Consumers who buy the product receive a
worthless contraption containing two small charcoal tablets.
Worse, the prize never shows up.

    Some scam artists pitch legitimate-sounding items over the
phone at plausible prices, then send products that bear little
resemblance to the descriptions. "Car phones," for example,
turn out to be cheap telephones in the shape of a car. One
"sewing machine" looks more like a stapler, and the "piano" fits
in the palm of your hand. "Home stereo entertainment systems"
turn out to be tiny radios, and "satellite dishes" look
suspiciously like Chinese woks.

    Most telemarketing crooks insist on payment by credit card.
Reason: the vouchers can be cashed in at banks before the
buyers have second thoughts. Moreover, purloined credit-card
numbers enable con artists to compound the crime -- for example,
by charging victims several times for the products they
purchase over the phone. By the time the consumers receive a
bill, the thieves have disappeared, often without shipping any
products.

    In a variation on this con, excited consumers who call to
claim prizes after receiving you-are-a-winner letters are asked
for their credit-card numbers and card-expiration dates "as
verification." The new car or microwave oven never arrives. But
before long, mysterious charges begin to show up on the cards.
Joel Lisker, MasterCard's vice president for security and fraud
control, estimates that thieves using such methods skimmed at
least $105 million from the $120 billion in U.S. credit-card
transactions last year.

    Fraudulent telemarketers are particularly hard to catch
because they tend to keep their operations small. The typical
setup is a "boiler room" in which a dozen or more employees
reading from sales scripts feverishly work the phones,
contacting hundreds of potential victims a day. Thousands of
boiler rooms are located in the Sunbelt states stretching from
Florida to California. At one point, so many sprang up in part
of Fort Lauderdale that federal investigators dubbed the area
"Maggot Mile."

    Boiler-room operators in Nevada and California begin the
day as early as 5 a.m., calling people on the East Coast. Then
they work their way westward, taking advantage of the changing
time zones to make the maximum number of calls. Consumers who
call back with questions are invariably told that the salesman
is in a meeting. Once stung, many victims are deluged with
other offers. Reason: boiler rooms sell sucker lists to one
another.

    To elude detection by local authorities, these operations
usually solicit only out-of-state targets. On rare occasions
local officials are alerted by complaints from distant victims
and manage to track the money trail back to the boiler room. But
the crooks typically flee across state lines and start all over
again.

    So far, few laws stand in the way of these scams, partly
because they have taken forms that were not anticipated when
current statutes were written. In addition, laws covering such
crimes as interstate wire fraud are difficult to use against
the relatively small swindles usually worked on consumers. The
FTC has now joined forces with consumer groups, telephone
businesses, securities regulators and banking officials in an
organization called Alliance Against Fraud in Telemarketing,
which is pressing for legislation to curb telescams. A House
bill under consideration would toughen FTC rules on
telemarketing and allow state law-enforcement officials, as well
as companies and individuals, to sue the crooks in federal
courts.

    Several states have passed tough new legislation. Utah and
Florida have enacted laws against delivering deceptive sales
pitches by phone. California set up stringent new licensing
requirements for telemarketers. New York is considering a law
that would give consumers three days to cancel a telemarketing
purchase. But, say law-enforcement officials, the crooks keep
inventing new schemes to ensnare unsuspecting people who pick
up the phone. For now, the best defense is to keep in mind an
old saying that covers any kind of deal: If it sounds too good
to be true, it probably is.


-- Mary Cronin/New York and Stacey Welling/Las Vegas, with other
bureaus