• FTC Shutters Biz-Opp Scam
  • April 20, 2005
  • Law Firm: Manatt, Phelps & Phillips, LLP - Los Angeles Office
  • The Federal Trade Commission has charged two groups of California-based defendants with scamming hundreds of consumers into buying "Internet kiosk" business opportunities with promises of heady profits. One group has agreed to a settlement in which it will give up claims to more than $1.5 million seized by the FBI in the course of the investigation; the case against the other group is ongoing.

    The FTC filed complaints against Edward Bevilacqua, Bikini Vending Corp., 360 Wireless Corp., and MyMart, Inc. (collectively, the "Bevilacqua Entities"), who have agreed to settle FTC charges; and Charles Castro, Elizabeth Castro, Gregory High, Phillis Watson, Network Services Depot, Inc., Network Marketing, LLC, doing business as Network Services Marketing, LLC, Net Depot, Inc., Network Services Distribution, Inc., and Sunbelt Marketing, Inc. (collectively, the "Castro Entities").

    According to the FTC, the defendants sold "Internet kiosk" business opportunities to consumers nationwide. The freestanding kiosks housed a computer and a mechanism to accept payments. The Internet kiosks were designed to allow the public to access the Internet, for a fee, from locations such as hotels, bowling alleys, restaurants, casinos, and convenience stores. Consumers were promised profitable locations, a guaranteed monthly income generated by the kiosk usage, and annual returns of 12 percent or more. According to the FTC, more than 450 consumers purchased thousands of kiosks.

    The Castro Entities sold the Internet kiosks for $4,000 to $7,000 per unit, and the Bevilacqua Entities agreed to install, manage, and service the kiosks. Consumers were led to believe they owned the Internet kiosks at the designated locations and that the businesses would be managed by the Bevilacqua Entities.

    The FTC alleged the venture was like a Ponzi scheme since some purchasers received monthly payments not from the revenue generated by the kiosk usage, but by using the initial payments from new purchasers, leaving most buyers holding worthless interests in nonexistent kiosks.

    The settlement announced on April 7, 2005, permanently bars the Bevilacqua Entities from promoting or selling any business venture or franchise, and from profiting from any sales of those ventures by other entities. The settlement also bars the defendants from making deceptive or misleading claims about any product, and from knowingly providing third parties with deceptive information for the purposes of marketing a product or service. In addition, the order contains a total judgment of $18 million, suspended due to Mr. Bevilacqua's inability to pay, which will become due if it is found that he misrepresented his financial situation.

    Significance: Ponzi schemes are particularly nefarious because at least some purchasers will see "returns" from their investment (which are actually initial payments from new purchasers). The purchasers will then talk up the scam (not knowing it's a scam, and not realizing where the money is really coming from), convincing others to invest as well.