Information Superhighway Scams

“Paging all suckers!” That’s the real message from the fast-growing ranks of the investment scam artists hawking the latest generation of high-tech “information superhighway” swindles. According to state securities regulators and the Federal Trade Commission (FTC), scams featuring Federal Communication Commission (FCC)-awarded paging licenses and pay-per-call “900” numbers emerged in 1995 as among the most prevalent get-rich-quick investment “opportunities” peddled by high-pressure telephone con artists.

Over a quarter of the investment dollar losses reported to a federal-state database between March-October 1995 involved high-tech “information superhighway” scams, with paging licenses and 900 numbers among those reported most often. Individual investment losses reported by the FTC ranged from $2,900 to as much as $400,000. Among the victims: a house-bound, elderly Alexandria, VA., woman who was fleeced in four high-tech scams and lost her life savings of almost $100,000 earned over four decades of babysitting.

The new high-tech schemes are hyped by promoters who urge unwary investors to just sit back and ride the coattails of the information superhighway.” In reality, both paging licenses, which are awarded by the FCC, and pay-per-call 900 services are extremely speculative investment opportunities. While some paging licenses and 900 numbers make money, most do not. Nonetheless, the investment con artists preying on the public’s love affair with the “information superhighway” claim that paging licenses and 900 numbers are low-risk, sure-fire deals ideally suited to inexperienced or unsuitable investors.

In late 1995, the FTC and 22 state securities agencies who are members of the North American Securities Administrators Association (NASAA) responded to the alarming surge in paging license and 900 number complaints by establishing “Project Roadblock.”

On January 30, 1996, the FTC and state securities regulators from around the United States announced the results of their coordinated crackdown on the latest generation of high-tech, information superhighway scams. This massive effort yielded a total of 85 actions involving over a quarter of a billion investment dollars.

The following cases turned up by “Project Roadblock” illustrate the nature and extent of the pager and 900 number schemes that are sweeping the nation:

• The Arizona Securities Division reports that a California company selling partnership interests for $5,000 in a 900 number scheme told investors that their investments were backed by a U.S. Treasury bond that secures their principal 100 percent.” According to the FTC, the president of the company threatened to sue a 78-year-old woman when she refused to increase her investment in a 900 number limited partnership. The company falsely told investors that it had already set up “300 lines covering . . . you name it. They’ve all been set up throughout the U.S.” In fact, they had no such lines. Investigators found that all received funds were siphoned off to pay for sales commissions and expenses. One chart mailed to prospective investors suggested that if the partnership had 300 popular lines, somebody who invested $10,000 would get an annual return of $23,530.



• According to the FTC, a Florida telemarketing outfit pushing paging licenses not only falsely claimed to be a member of two trade associations, but also misled customers about the location of its offices. Telemarketers were instructed to say that they were calling from the company’s headquarters in the World Trade Center, when in fact, they were making calls from a boiler room in Broward County, Florida. Hapless investors in this scheme were told they would receive a “$1,000 a month” return on their investment.



• The California Department of Corporations reported that a retired couple and a welder were among the victims of four related California firms peddling high-tech partnerships in 900 numbers and other schemes. The state investigation found that the partnership promotions took in $19.5 million between August 1994 and the end of 1995. The state estimates that 85 percent of the proceeds were diverted to the promoters, either directly or for expenses. Though they were promised their money back within 16 months and long-term profits of $70,000 or more, the investors have not received back a penny to date.



• Another company was estimated by investigators to be roping in 10 customers a week for an estimated take of $200,000. Investors were conned into believing that they needed to purchase multiple pager licenses at $1,580 to $2,900 a pop. Telemarketers assured customers that their investments would have a “safe” three-to-one return in just two years. Investors also were told that they had to “decide and move quick,” because the company would “no longer be receiving applications” in a matter of days. Telemarketers also promised that the company would use its connections with paging operators to help unload investors’ licenses at a big profit.

The Growth of “Information Superhighway” Scams

For more than 10 years FCC-run lotteries and auctions to award licenses for various high-tech services have been exploited by con artists seeking to promote scams. (The Federal Communications Commission is not a party to these swindles; however, con artists seize on the Commission’s licensing award processes as a platform from which to promote their own scams.) While cellular telephone licenses were the most prevalent type of high-tech scam in the mid- and late-1980s, con artists moved on in the 1990s to wireless cable television and even more exotic technologies, including specialized mobile radio (SMR). In 1995, they moved to paging licenses and 900 numbers. With so many more people using pagers and the increasingly widespread promotion of 900 numbers, quick-buck operators have stepped in to get their piece of these red-hot consumer markets.

Paging licensing scams begin when a salesman offers to secure a license that covers a paging frequency in a portion of the U.S., such as a major city. While the FCC bars paging license applicants from obtaining licenses for speculative purposes, scam artists neglect to mention this detail when dealing with investors. The high-pressure application mills ask for between $1,000 and $12,000 per license, promising investors that they will be able to easily re-sell or lease licenses to large paging operators for an enormous profit. Many of the illicit firms even suggest that they will be able to assist in marketing the licenses.

Pie-in-the-sky profit projections made to unwary investors range from $1,000 a month to several hundred thousand dollars over the long term. The idea that an enormous profit can be made on the re-sale or lease of the license is without foundation. While a fast-buck telemarketer may say otherwise, market experts will tell you that a paging company won’t lease or buy a paging license owned by someone else in order to build its customer base.

In pay-per-call-900 number scams, high-pressure telemarketers encourage you to purchase an interest in an “information provider” partnership. Instead of owning a 900 service outright, investors are pooled into partnerships, much like the investment arrangements made regarding oil & gas wells, equipment leases, and real estate. Typically, investors are not told the real costs for which information providers are responsible, including leasing special telephone lines, paying for national promotion, and forking over fees to any endorsers used in “infomercials” or other advertisements. In a highly competitive marketplace, the vast majority of information providers end up losing money . . . far from the 250 percent annual return that con artists are so quick to claim is a “cinch.”

So, why does anyone invest in paging licenses and 900 numbers? When it comes to the illicit schemes, the potential investors are never given the real facts about the substantial risks involved. According to the FTC, a firm operating out of New York City and selling paging licenses took in more than $1 million in sales during 1995. One of its telemarketers referred to paging licenses as a way to ride “the coattails of the information superhighway.” “While the risk is minimal,” the salesman warned that this opportunity is “very competitive,” and that “if you don’t move on this, it will be like throwing money out the window.”

Tell-Tale Signs of Info-Scams

How can you tell a legitimate high-tech investment opportunity from one that is a scam? The “Project Roadblock” investigations by state securities agencies and the FTC identified the following common themes:

• Unsubstantiated claims about sky-high earnings potential.



• Most of your investment goes to commissions and fees for the salesperson and the principals of the firm.



• Reliance on vague hype about the “information superhighway” as a can’t-lose ticket to quick riches.



• Downplaying (or no mention whatsoever) of the major risks involved in the investment.



• False claims about the likelihood of quick profits by “flipping” your investment, such as a major paging operator who supposedly will pay top dollar for your license.

Steps You can Take to Protect Yourself

The best way to avoid falling victim to the new generation of “information superhighway” scams is to research any potential investment thoroughly. Anyone considering an investment in paging licenses, 900 numbers, or any other high-tech scheme would be well advised to following these steps:

1. Check out earnings claims. The rule is simple: the greater the return, the higher the risk.



2. Make sure that the company is complying with applicable state and federal laws and regulations. If you are being sold a paging license or 900 number interest as an investment, it (and the company selling it) should be registered with your state’s securities agency. Don’t take a telemarketer’s word for it -- check it out for yourself!



3. Don’t take it for granted that a company has already set up “900” numbers or is experienced in reselling paging licenses. You should always take the time to separate the sales pitch from the facts.



4. Don’t fall for high-pressure telephone sales tactics. High-tech con artists love to play upon the notion that new technology creates an expanding market for a brief time, and that you must get in right away. If someone is trying to sell you something, but claims you can’t take the time to check it out . . . hang on to your money and walk away.

Even though state and federal agencies are available to help you, it is important to recognize that, once your money is gone to an “information superhighway” scheme, it is probably gone for good! That’s why it is so important to check things out first and . . . even then . . . proceed with the utmost caution.

For Help and More Information

If you want to check out a potential high-tech information superhighway scam, contact your state securities division. If you need the phone number, call the North American Securities Administrators Association at (202) 737-0900. In the U.S., NASAA is the national voice of the 50 state securities agencies responsible for investor protection and efficient capital formation.

You may also want to file a complaint with the Federal Trade Commission. To do so, write to: Division of Service Industry Practices, FTC, Washington, D.C. 20580. Or call (202) 326-2222.

Issued January 1996