THESE PHONES ARE OUT OF SERVICE

Here’s some good news for investors. The Securities and Exchange Commission isn’t devoting all of its attention to the Enrons, Adelphias and ImClones of the world. The Commission still has its eye on phony telemarketing schemes as well. That’s bad news for those telemarketers.

On August 6, 2002, the Commission filed four separate civil lawsuits, charging 81 individuals and entities with using telemarketing schemes to defraud up to 1800 investors out of more than $30 million.

The actions, filed in a New York federal court, allege that a nationwide network of telemarketers, calling themselves “Independent Sales Offices,” or “ISOs,” sold securities to hapless investors by making misrepresentations and failing to disclose hidden commissions.

As the following summaries indicate, the four complaints sound common themes:

• SECURITIES AND EXCHANGE COMMISSION v. HERITAGE FILM GROUP, LLC.

The SEC charged nine individuals and entities in connection with the fraudulent offer and sale of securities in three companies that develop medical devices and software for health care professionals. Between 1997 and 2000, the defendants allegedly raised over $13 million from approximately 670 investors, by falsely stating that the funds would be used to build the businesses, and promising that commissions would be limited to 12%. Instead, a substantial portion of the offering proceeds was used to pay undisclosed cash commissions to the telemarketers.

The defendants include the three issuers (Intracom Corporation, Hyperbaric Systems, Inc. and Surgica Corporation), their chief executive officers, an unregistered broker who operated a boiler room sales operation, and an attorney who helped effect the fraudulent schemes. 

• SECURITIES AND EXCHANGE COMMISSION v. EPHONE, INC

This scheme involved the use of boiler room telemarketers to sell shares of three companies purportedly formed to establish long distance telephone service over the Internet. Here again, the defendants allegedly misrepresented that investment funds would be used for business purposes. According to the SEC, approximately $1.2 million of the $2.9 million raised was used to pay commissions.

The defendants include the issuers (Ephone, Inc., Webphone, LLP and Newera Communications, LLP), their principals, individuals who orchestrated the offerings and unregistered telemarketers.

• SECURITIES AND EXCHANGE COMMISSION v. AMERICA IN-LINE CORPORATION, AMERICA IN LINE OF MOUNT SINAI, INC., and PETER RICCARDO.

The SEC charged America In Line Corporation ("America In Line"), America In Line of Mount Sinai, Inc. ("Mount Sinai") and Peter Riccardo ("Riccardo") with securities fraud in connection with a fraudulent private placement scheme that raised approximately $650,000. 

The Complaint charges that the defendants raised at least $650,000 through five unregistered offerings. The funds were supposed to be used to build a roller rink in Mt. Sinai, New York, but the offering materials misrepresented the commissions that would be taken out of the offering proceeds. In some case, investors were told that there were no commissions, while in other instances they were assured that commissions were capped at 8%. According to the Complaint, however, Riccardo, America In Line and Mount Sinai paid undisclosed cash commissions of 30% to unlicensed brokers, thereby substantially reducing the amount of funds available to develop and maintain the companies' business. 

It’s good to know that regulators are poised to crack down on telemarketers, but investors should set up their own first line of defense. Telemarketing crime has been estimated to costs consumers more than $40 billion per year. Experts say that at least $10 billion of those losses can be traced to phony investment scams.

So protect yourself. Here are a few suggestions for recognizing, and handling, unscrupulous telemarketers.

• If the telephone caller tries to convince you that there are no risks, just hang up the phone. You know that he or she can’t be telling the truth. Every investment has some risks.

• Don’t be pushed, cajoled or bullied to make an investment immediately. If you are curious about the investment, insist upon reviewing written materials, including audited financial statements. If the salesman insists on an immediate answer, give it – just say no.

• If you don’t want to receive unsolicited telemarketing calls, tell the caller to put you on the “do not call list.” If you then receive more calls from the same salesperson, or someone else offering the same investment “opportunity” contact your state Attorney General’s Office.

• Tell the caller you want to call back, and ask for his or her telephone number, address, and the name of the firm. If you don’t get the information, hang up. If you do get the information, contact your state or local consumer protection agency and see whether they have information about those telemarketers.

• Review any potential investments with a trusted financial advisor or attorney.

And remember. Before you invest, investigate.

About Hartley Bernstein: Hartley Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation.