Last fall, postal worker Jack Lawrence watched with keen interest a television infomercial about investing in the "communications technology of the future." After calling an 800 number and receiving a packet on specialized mobile radio (SMR), which is used by taxis and trucking companies, he got a call from a Comcoa Ltd. salesman who made him the proverbial offer he could not refuse. For just $7,000 each, he was told, Comcoa would obtain SMR licenses for him from the Federal Communications Commission. That, said the salesman, would allow him to earn $8,400 annually per license by leasing the licenses to communications companies interested in setting up networks.
Over about three months, Lawrence transferred $98,000--his life's savings--to Comcoa. Eight of the 14 licenses he received appear to be virtually worthless because he has been unable to find buyers. Meanwhile the Securities & Exchange Commission charged Comcoa, based in Boca Raton, Fla., and its founder, Thomas Berger, 41, with fraud and selling licenses that the SEC considers unregistered securities.
Lawrence is just one of the many recent victims of information-highway robbery. For years, scamsters have seized on hot trends to peddle such risky investments as oil and gas leases and raw land to often naive investors. Now, boiler-room operators are popping up all over the country--from Boca Raton to Plano, Tex., to San Diego--to exploit burgeoning interest in info-highway technologies. Investors are often told they can earn returns of as much as 400% on their investment--usually a minimum of $5,000--in three to four years. In some cases, investors do come out with a profit. But authorities claim that there are many more losers than winners, for promoters all too often engage in such ploys as inflating estimates of potential returns and charging outrageous fees.
Although pitches vary widely, most focus on two quite legitimate technologies: SMR, a communications system that could rival cellular phones, and wireless cable television, in which TV signals are sent by microwave to special antennas. Wireless cable is a low-cost competitor to the $22 billion wired-cable industry. "These scams follow the headlines," says G. William McDonald, enforcement chief for California's Corporations Dept., which lately has spearheaded raids on that state's boiler-room operations. "There's so much out there about the prospects for the information superhighway that investors think they can't lose money."
STEPPED-UP CRACKDOWNS. That's wishful thinking. Federal and state regulators believe dozens of wireless cable and SMR promoters have illegally raised at least $200 million from thousands of investors nationwide. In recent months, they have stepped up crackdowns on these operations. The National White Collar Crime Center in Richmond, Va., estimates that since mid-1992 at least 26 states have ordered some 67 companies to halt sales of these investments. Within the last year, the SEC and the Federal Trade Commission have filed about a dozen cases.
Promoters of SMR deals usually charge investors thousands of dollars in front money to help them obtain SMR licenses, and later solicit more money to build the systems. In May, the SEC accused Comcoa and Berger, who was previously convicted of interstate transportation of slot machines, of promising to file applications and help lease licenses for $7,000 each. In fact, filing for an SMR license usually runs about $200, not including any additional services.
According to court documents, Comcoa raked in upwards of $16 million. About half the money was spent on sales commissions, and a court-appointed receiver is investigating what happened to the remainder. Comcoa denies that it made any promises to lease licenses, saying that it was merely filing applications, not selling securities, and was therefore not subject to SEC jurisdiction. However, in early June, a federal judge, in granting a preliminary injunction, rejected Comcoa's claims and called Ber-ger's testimony "incredible." Comcoa has been shut down, and a court-appointed receiver is negotiating to sell licenses held by its 1,500 customers.
WRONGDOING DENIED. Another questionable SMR enterprise is New York-based Metropolitan Communications Corp., which the FTC has alleged used misleading sales practices to bilk investors out of $28 million from the sale of 4,000 licenses. Operating out of 30 boiler rooms, Metropolitan promised to build SMR systems but rarely delivered, the FTC claimed. A Metropolitan affiliate "was unable technically or financially to put these licenses together," says FTC attorney Stephen Gurwitz. In January, the FTC shut down Metropolitan. Neither the company nor its attorney could be reached for any comment. In court papers, company President Donald Jackler and other defendants denied any wrongdoing.
One of Metropolitan's alleged victims is Judy Brown of Fort Worth, who used credit cards and a life-insurance policy to borrow most of the $28,000 she used to buy four licenses. While her mother, who bought two licenses, made a nice profit from the sale of one, Brown fears she and other investors "are still going to be losers." A receiver is negotiating with legitimate operators to sell the licenses held by Metropolitan's customers. The FTC's Gurwitz, while conceding that some licenses have been sold for a profit, says that in the Metropolitan case, "I think there will be substantial losses. Certainly the investment was misrepresented as an income-producing asset."
Promoters of wireless cable use a different pitch. They generally solicit what the SEC considers to be stock investments by telling prospective buyers that the wireless cable company they are promoting already has an FCC license but needs money to build a transmission tower and sign up subscribers and cable channels. According to the SEC, Vision Communications Inc., based in Newport Beach, Calif., promised a 400% return to buyers of shares in Wilkes-Barre-Scranton, which was supposedly developing a wireless cable system in those Pennsylvania cities.
Vision allegedly told investors that it owned licenses for 20 channels in that market. In fact, the FCC has licensed only 12 channels there, the SEC says. What Vision actually owned was only a right to take over the lease on 20 channels, including several unlicensed educational channels, says SEC attorney Judith R. Starr. Without those licenses in hand, investors couldn't possibly have made the kind of returns Vision promised, she says. "They had the rudiments of something there, but there was still a long row to hoe before they got to 400% returns."
In May, a federal judge ordered Vision liquidated after an SEC complaint charged the company, its principals--William L. Clemens Jr. and Michael Imbesi--and others with securities fraud and making false and misleading statements. The company, Clemens, and Imbesi neither admitted nor denied wrongdoing, but as part of a consent decree, Clemens and Imbesi will return to investors $550,000 they allegedly pocketed from the $4 million Vision raised for the project. It's not clear, however, how much money investors will eventually recoup. Says Vision attorney Howard Schiffman: "Vision entered into the settlement because it believed the settlement was the best opportunity for investors to recoup their investment."
Even with licenses in hand, making the kind of killing some wireless cable promoters promised investors is highly unlikely, regulators say. The big payoff is supposed to come within three to four years, after a viable subscriber base has been built and a communications giant such as Tele-Communications Inc. pays top dollar to take it over. But that's a risky bet, authorities say, because few of these systems have actually gone on the air. And those that have are struggling with small audiences and big expenses.
One reason, regulators say, is that most of the money raised goes to pay sales commissions and related expenses, leaving little for actual operations. Although the companies often disclose these costs, they typically fail to point out the impact on the business of these expenses.
A good example is San Diego-based Continental Wireless Cable Television Inc., whose assets were frozen in May by a federal court after the SEC charged the company and its top executives with defrauding investors of as much as $27.3 million. The suit alleges that the company told its 2,000 investors that their money would be used to develop wireless systems in Nashville and New Orleans. The SEC claims that only $6.8 million of the $34.1 million Continental raised was actually used to build the systems. According to SEC attorney Karen L. Matteson, at least $15 million went toward paying sales commissions and other expenses and another $11.7 million is unaccounted for. Investors also unwittingly underwrote $1.7 million in personal loans to Continental's top executives--Robin J. McPherson, Jay R. Bishop, and Gene R. Cardenaz, she says.
UP AND RUNNING. McPherson, Continental's president, denies the SEC's charges against Continental and says that the company was entitled to any money it received from investors. "As long as we fulfilled all of our obligations, what we spend the money on is our business," he says. A July 12 hearing is scheduled on the SEC's motion for a preliminary injunction against Continental to bar future violations of the securities laws. To Continental's credit, its Nashville Wireless Cable Television Inc. is up and running, with nearly 2,200 subscribers. But it is still too early to tell what profits, if any, investors will realize.
Although a few investors have come out ahead, others rushing to cash in on the info highway may not be so lucky. After wireless cable and SMR run their course, enforcement authorities predict, scam artists are sure to start pitching new generations of wireless technologies, such as long-awaited personal communications services, a mobile system for voice, paging, and transmitting data.
Meanwhile Lawrence, the Comcoa investor, is keeping his fingers crossed on his big gamble on SMR. "I'm hoping...[the licenses] will put me in the blue, because right now I'm in the red," he says. The odds are against him.
CRACKDOWNS Company/Location Amount raised Charges WIRELESS CABLE TV CONTINENTAL WIRELESS $34.1 million from 2,000 MAY `94 SEC accuses CABLE TELEVISION investors for systems in New top execs of San Diego, Calif. Orleans and Nashville defrauding investors of as much as $27.3 million PARKERSBURG $10.3 million from 740 MAY `94 SEC accuses WIRELESS LIMITED investors for franchise company of making LIABILITY in Parkersburg, W.Va. "false and misleading Las Vegas, Nev. statements"; assets frozen;case pending VISION $4 million from 300 inves- MAR. `94 SEC accuses COMMUNICATIONS tors for systems in Wilkes- company of selling Newport Beach, Calif. Barre and Scranton, Pa. unregistered secur- ities and misrepre- senting investment SPECIALIZED MOBILE RADIO METROPOLITAN About $28 million from JAN. `94 FTC accuses COMMUNICATIONS 2,500 investors company of deceptive New York, N.Y. trade practices COMCOA About $16 million from MAY `94 SEC accuses Boca Raton, Fla. 1,500 investors company of securities violations DATA: SECURITIES & EXCHANGE COMMISSION, FEDERAL TRADE COMMISSION REID HORN