FTC, others crack down on vending machine schemes

Federal and state officials are gradually cracking down on one of the nation's most frequently used investor frauds, involving vending machines. The schemes sound like three easy steps to turn some after-work hours into supplemental income; first, buy bulk orders of such things as stuffed animals, candy, or other snacks from a company promising big profits; then keep a number of supposedly well-located vending machines or display racks in stores stocked with these supposedly fast-selling items. The stores owner where the machines or racks are located gets a cut, but you get substantial profits as sales mount.

Unfortunately, Step 3 often never happens. The profits claim proves to be elusive. The vending machines or racks often are located in stores with few customers, and the items may be overpriced or unpopular. Investors are left with losses of $5,000 to $15,000 and sometimes are left trying to get refunds from companies that have disappeared.

Although there are many legitimate companies selling legitimate goods through vending machines and display racks in stores, there are also many unscrupulous firms.

Arthur Del Negro, with the National District Attorneyhs Association says this type of fraud is one of the most frequent nationally, based on citizen complaints, the money involved, and the potential people affected.

The schemes are "one of the most cynical types of rip-offs" because they prey on people who "attempt to be industrious and make ends meet," says John Tifford, of the Federal Trade Commission.

But the FTC last year adopted a rule forcing all promoters of such selling to fully disclose information about their business, including a justification of their claims for high profit. Profits claims must be substantiated wherever made.

An attorney with the International Franchise Association calls it a good rule for an area that has been "ripe with rip-offs."

The first FTC case being prosecuted under the law involves the provision of pizzas and small pizza ovens in bars in California.

And NEw york has just joined 15 other states that, in the past three years, have passed legislation regulating vending machine supply transactions.

During the year the new FTC rule has been in effect, there has been a drop in the number of complaints from ripped-off investors, more consumer inqueries about vending machine and similar transactions, and more companies filing disclosures, says Tifford.

At the state level, incidents of this kind of fraud seem to have "leveled off ," says Claire Villano, director of a national clearinghouse on the topic.

Her program is run by district attorneys in the Denver metropolitan area in connection with the National District Attorney's Association. The information is shared with some, 300 law enforcement agencies.

No one knows how many cases of this kind of fraud, there are each year, but Janet Wheeler, of the clearinghouse staff, estimates that "way less than 10 percent are pursued [prosecuted] properly."

She advises would-be investors to obtain the free pamphlet "Promises -- Check 'Em Out" from the Economic Crime Project, 666 N. Lake Shore Drive; Suit 1432, Chicago, Ill. 60611.

Lacking that, investors should demand to see in writing details of what is promised and proof claimed profits.

Two Bismarck, N.D., investors apparently disregarded such precautions. Each invested some $5,000 to become the "sole" distributor of some stuffed animals and dolls. They bought orders but found the items were overpriced and in little demand.

The two "sole" distributors met by chance one day and shared their tales of woe. The state halted their supplier's business and tried to collect the investors' money. But the firm had moved to New York and closed.