November 05, 2006

DVD Kiosk Scam

BOE and "Rapid Russel" get nailed by investigation. Nice story on on developments.

Davis Freeberg’s Digital Connection � Kiosks

With so much increasing interest in DVD kiosks, I guess I shouldn’t be suprised to see scam artists try to take advantage of people wanting to invest in this industry, but it’s still disturbing to see it happen nonetheless. Michael Webster of tracks consumer fraud issues, especially when it relates to franchise opportunities, and earlier this year he warned that the DVD kiosk industry was going to attract a lot of scam artists, in part because of the attention that Redbox’s success was bringing to the industry. At the time, I disagreed with him, but unfortunately, it turns out that he may be right and he has come across a sorid tale of DVD vending gone bad.

Like many scam artists the company went by many names. The “official” name of the company was American Entertainment Distributors, but they marketed their franchise as Box Office Express (BOE). By charging anywhere between $28,000 - $37,000 the company was able to bilk over 2,000 private investors out of $19 million in cash. After receiving multiple complaints about the company, the Federal Trade Commission stepped in and created a sting operation dubbed Project Biz Opp Flop.

During the course of their investigation, they learned that not only was BOE making wild claims about the profitablity of the machines, but that they were also claiming that they would place the machines for the investors without actually having distribution agreements lined up.

The company’s modus operandi was to advertise on infomercials, local newspapers and franchise industry publications. They sold the concept to consumers by promising them that they could work at home and the machines would generate $7,500 a month in income. If someone called in, they would overnight a sales presentation to them and would follow up in a day or two with a high pitched sale to close the deal.

When customers asked for references, they were given contact information of other sales people who were in on the scam. One rep testified that he would be paid an extra $200 for posing as a satified customer, while another BOE sales rep bragged that he had spent over $30,000 on voice distortion and satellite phones, so that it would be more difficult to track him down. In total there were 16 employees at the company, but from the legal filings it sounds like only 8 individuals may have been charged.

Once a fish was hooked, they would invite them to their office in Hollywood Florida where they would sign franchise paperwork and get the victim to wire money. The scam itself went on for about a year from 2004 - 2005 until the FTC shut down the business in their sting. In reading some of the first hand accounts on the RipOff Report, it’s heartbreaking to hear how much people lost and how important these savings were to them. While I certainly don’t blame consumers for falling for this scam, it is important to remember, for anyone considering investing in this industry, to know that it’s a high risk / high reward business and one that you shouldn’t bet the family farm on, regardless of the possibilities.

While these victims clearly did some level of due diligence, this case highlights the importance of making sure to do independent homework when dealing with a business that isn’t in the mainstream. This means more then just doing a google search or contacting the BBB, it means independently tracking down and verifying people who’ve transacted business with the company, using legal searches to see if the business has ever run into trouble before and contacting their manufacturers to verify that they are in good standing with their own business partners. Most importantly though, take your time and don’t be afraid to walk away if something doesn’t seem right.

One of the more interesting things that I noted while reading over the legal filings associated with this case, was that the sales were always high pressure and they needed to close immedietely. Any business that won’t allow a customer an opportunity to do their own homework first is an opportunity that is worth passing up. While BOE did actually ship DVD kiosks to customers, they did not provide them with the one’s advertised and they wildly overstated the profitability of the machines.

Since the Feds busted them, they’ve taken down their website, but you can still see a copy of one of their ads on a franchise board where they were fishing for unsuspecting victims. What I found interesting about their marketing was how they emphasized wanting to make longterm business relationships, but everything always moved so fast. Remember when people have to reassure you that they trust you, it usually means they don’t.

Posted by staff at November 5, 2006 08:55 PM