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BOOK EXCERPT

10.22.99  
Fabulous "High-Tech" Business Opportunities that Will Cost You Dearly
Excerpt from Fraud! How to Protect Yourself from Schemes, Scams, and Swindles

Did you hear the one about the time machine? There's this guy who says he's starting a new high-tech company. To get it off the ground, he needs money, so he starts selling stock in the company, Time Machines, Inc. of the United Kingdom. He says the product this company is going to produce [is] a super-high-tech product that can travel forward and backward in time. He doesn't quite have the technology he needs yet to make the time machine work, so he tells his potential investors that he's going to create a Web site that's so sophisticated that someone in the future will see it, travel back in time, and give him the technology he needs.

Pretty funny, huh? It's not a joke though. This is an actual fraud that a con artist perpetrated over the Internet. People often believe that any investment that is high tech has to be successful. Considering how some of the new high-tech companies of the near past have performed, why shouldn't they think that? Look at Microsoft. Look at Cisco Systems. Look at Dell Computer Corp. And we can't forget eBay, Inc. Their share price gains have been astronomical. What we don't hear about is the dozens of other high-tech companies that have gone out of business or generated practically no returns to their investors.

In a high-tech investment, the first problem is that you may not have a complete grasp of the industry or product. Then the excuses you receive as to why an investment isn't producing may be [so] complicated that you have no idea whether they're valid. The con artist doesn't worry about the facts. He just has to be convincing. The onslaught of high-tech scams began in the 1980s when wireless cable services were developed.

A THREE-PHASE SCAM CONCEPT. The first phase is the lottery scam. In the 1980s, the Federal Communications Commission (FCC) began issuing licenses to provide new communications services through auctions or lotteries. The first were for wireless cable services. There were tens of thousands of applicants for a fairly small number of licenses. News of these lotteries was in the headlines at the time. That made the lotteries the perfect vehicle for a scam.

The con artist's pitch in this phase is that if you give him $5,000, he'll put you in the FCC lottery. You'll be successful because, he says, he knows how to file the lottery application and deal with the strict technical requirements. Once the license is purchased, the con artist will manage it for you. You just collect the money. Or he may say you can be one of the partners in the entity he's formed to purchase the licenses. In many cases, the con man never even submitted an application. He took the money and ran. In others, he may have submitted the application but charged the investor far more than what the process cost and pocketed the difference. A license is only permission to use the airwaves. The owner still has to develop a communications system in compliance with FCC rules.

The build-out is the second phase of this scam. The pitch is that the company contacting you already owns a valuable license and is ready to do a build-out of the wireless cable service. It needs several million dollars to build a transmission tower and sign up subscribers. Therefore it is forming a partnership or limited liability company in which you can invest. Once again, your money is gone.

Phase three is the recovery room scam. You get a call from some very sympathetic person who feels terrible that those awful people stole your money in a lottery scam and a build-out scam. If you give this person five thousand dollars, he'll either get your money back for you or turn your bad investment into a good investment by taking over the company and making it work. You guessed it. Bye-bye, money.

As other high-tech products were developed and licenses auctioned off, the con artists have created new scams by applying these three phases to the new technology.

OTHER BOGUS BUSINESS "OPPORTUNITIES." There are other scams that focus on high-tech products. You may receive a call from someone wanting to set up a 900 phone number for you. You pay $25,000 and he'll handle the very technical work of obtaining the 900 number and setting it all up. You'll then collect a certain amount of money from each call received.

In this scam, the con artist does indeed set up the 900 number for you. You can call it yourself and check it out. Part of the problem is that you paid $25,000 for something that in reality should cost about $500. It's an easy process and takes very little expertise. The other problem is that he told you you'll collect a certain amount of money from each call. But what if there aren't any calls? People need to know the number exists. The only way they can know that is if it's advertised. The con artist hasn't mentioned anything about marketing because he isn't planning on doing any. By the time you realize there's a problem, the con artist's phone has been disconnected.

PROTECTING YOURSELF. If you decide to pursue a high-tech opportunity, follow all the rules for investigating any investment. If the offer is to purchase a license at auction, ask the following:

-Has the FCC scheduled such an auction?
-Will the license permit the service that person proposes?
-Is the company making the offer registered to bid?

Obtain a copy of the company's audited financial statements to see if it can afford the license and the build-out. If the license comes from a private source, ask the FCC what it originally cost and who purchased it. Ask if there have been any enhancements that would make the license more valuable than it was when first sold. Ask the promoter how much of the investment goes to commissions and fees.

High-tech fraud is a constantly moving target. It's difficult to prosecute, and you probably won't get good results if you report it. If the investment doesn't make sense, there's probably something wrong. Common sense and that gnawing feeling in your stomach may be telling you something. Be sure to listen.

Marsha Bertrand is a writer specializing in investment, finance, and business topics. She is the author of The Consumer Guide to the Stock Market and A Woman's Guide to Savvy Investing. She has worked as director of shareholder relations at Allnet Communications Services and managed a portfolio of limited partnerships and publicly traded funds at a well-known investment firm.

Reprinted and excerpted with permission from Fraud! How to Protect Yourself from Schemes, Scams, and Swindles
By Marsha Bertrand
Copyright 2000, Marsha Bertrand
All rights reserved
Reprinted with permission of Amacom, a division of the American Management Association International, New York, N.Y. www.amanet.org
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