Reach Out And Rob Someone

By Janice Castro

When Dayton Searles heard the pitch, he figured he couldn't lose. A telephone salesman representing a Las Vegas firm called Vita Life told Searles that he had won a valuable prize. The St. Paul retiree would receive a new car, a two-week vacation in Hawaii, an imported French fur coat, a combination television-VCR, or $3,000 in cash. To qualify, all he had to do was buy some vitamins. Without a moment's hesitation, Searles agreed to order an eight- month supply for $395. But when his prize of a fur coat arrived 3 1/2 months later, Searles recalls, "my wife took one look at it and was absolutely disgusted. It was imported all right, and it was fur, but it was rabbit fur, probably made from scraps off the floor. If you took a handful of it, you could hear it crinkle."

Searles was taken by a telemarketing scam, but he has plenty of company. In the shadow of the fast-growing telemarketing industry, which sold more than $100 billion in legitimate products and services over the phone last year, telephone swindlers are springing up like mushrooms. Telescam artists are bamboozling consumers with pitches about everything from fine art and exotic vacations to time-share condos and precious-metals ventures.

All told, the Federal Trade Commission estimates, con artists working the phones got away with at least $1 billion last year. Other fraud experts put the total as high as $10 billion. Legislators and law-enforcement agencies have stepped up their efforts to disconnect the crooks, but at the moment they are operating almost with impunity. Says William Sullivan, chief of the Illinois attorney general's consumer-protection division: "Lawyers, doctors, policemen -- every spectrum of society is being taken in."

New types of telemarketing cons are being hatched overnight, sometimes abetted by front-page news that provides a convincing sales pitch. After the 1987 stock-market crash shook investor confidence in securities, con artists began pushing such alternatives as rare coins, gold, oil and gas leases, and diamonds. One Tulsa-based telemarketing company cleaned up by selling shares in a "secret process" for converting volcanic sand on Costa Rican beaches into gold. A swindler who had been convicted of selling shares in a nonexistent gold mine continued to solicit new investors from a pay phone in his Wyoming prison.

Con artists have found a highly receptive audience among the millions of U.S. investors who routinely conduct stock and bond trades over the phone with their brokers. Because it is normal for legitimate brokers to solicit new business by making cold calls, crooks posing as Wall Streeters have talked elderly investors into borrowing heavily against their home equity to buy into schemes touted as surefire. "We are confronted with a national epidemic of truly staggering proportions," says John Baldwin, president of the North American Securities Administrators Association, a group of state officials who regulate brokers and dealers.

Fast-rising prices in the art market have inspired a hot new trade in phony prints. Hundreds of people have paid as much as $4,000, sight unseen, for "limited-edition" originals. The FTC has sued Federal Sterling Galleries, a telemarketer in Scottsdale, Ariz., for allegedly peddling photographs of artworks as authentic prints by Salvador Dali.

Millions of consumers have received postcards and telegrams in a fast- growing sweepstakes con that is designed to prompt them to call up the telemarketing crooks. "Mr. Quinn will definitely receive a two-week, all- expenses-paid trip to London," such an announcement begins. Winners are instructed to call for information on how to collect their prize. But when they do, they are informed that in order to "qualify," they must join an expensive travel club and pay "handling fees" of $100 or more, or buy a companion ticket at an inflated price. After the extra costs are added, such "free" trips usually cost more than if they had been booked through a travel agent.

Other telescam artists pretend to be travel agents offering extraordinary discounts. In Illinois, Scott Walker and his mother started World Travel Vacation Brokers in their garage, mailing flyers to consumers around the country that promised Hawaiian vacations for just $29. Gullible customers who called in their orders received a voucher entitling them to book a trip through the agency, but at a cost of several hundred dollars more. By the time FTC investigators took the company to court, the outfit had taken in more than $6 million.

Telescam groups in several states employ a "grand prize" hook to sell useless water purifiers. Supposed prizewinners, who are advised by mail to call an 800 number for information, are told they will collect such awards as a diamond watch, mink coat and luxury car if they buy a $398 system that removes pollutants from drinking water. Consumers who buy the product receive a worthless contraption containing two small charcoal tablets. Worse, the prize never shows up.

Some scam artists pitch legitimate-sounding items over the phone at plausible prices, then send products that bear little resemblance to the descriptions. "Car phones," for example, turn out to be cheap telephones in the shape of a car. One "sewing machine" looks more like a stapler, and the "piano" fits in the palm of your hand. "Home stereo entertainment systems" turn out to be tiny radios, and "satellite dishes" look suspiciously like Chinese woks.

Most telemarketing crooks insist on payment by credit card. Reason: the vouchers can be cashed in at banks before the buyers have second thoughts. Moreover, purloined credit-card numbers enable con artists to compound the crime -- for example, by charging victims several times for the products they purchase over the phone. By the time the consumers receive a bill, the thieves have disappeared, often without shipping any products.

In a variation on this con, excited consumers who call to claim prizes after receiving you-are-a-winner letters are asked for their credit-card numbers and card-expiration dates "as verification." The new car or microwave oven never arrives. But before long, mysterious charges begin to show up on the cards. Joel Lisker, MasterCard's vice president for security and fraud control, & estimates that thieves using such methods skimmed at least $105 million from the $120 billion in U.S. credit-card transactions last year.

Fraudulent telemarketers are particularly hard to catch because they tend to keep their operations small. The typical setup is a "boiler room" in which a dozen or more employees reading from sales scripts feverishly work the phones, contacting hundreds of potential victims a day. Thousands of boiler rooms are located in the Sunbelt states stretching from Florida to California. At one point, so many sprang up in part of Fort Lauderdale that federal investigators dubbed the area "Maggot Mile."

Boiler-room operators in Nevada and California begin the day as early as 5 a.m., calling people on the East Coast. Then they work their way westward, taking advantage of the changing time zones to make the maximum number of calls. Consumers who call back with questions are invariably told that the salesman is in a meeting. Once stung, many victims are deluged with other offers. Reason: boiler rooms sell sucker lists to one another.

To elude detection by local authorities, these operations usually solicit only out-of-state targets. On rare occasions local officials are alerted by complaints from distant victims and manage to track the money trail back to the boiler room. But the crooks typically flee across state lines and start all over again.

So far, few laws stand in the way of these scams, partly because they have taken forms that were not anticipated when current statutes were written. In addition, laws covering such crimes as interstate wire fraud are difficult to use against the relatively small swindles usually worked on consumers. The FTC has now joined forces with consumer groups, telephone businesses, securities regulators and banking officials in an organization called Alliance Against Fraud in Telemarketing, which is pressing for legislation to curb telescams. A House bill under consideration would toughen FTC rules on telemarketing and allow state law-enforcement officials, as well as companies and individuals, to sue the crooks in federal courts.

Several states have passed tough new legislation. Utah and Florida have enacted laws against delivering deceptive sales pitches by phone. California set up stringent new licensing requirements for telemarketers. New York is considering a law that would give consumers three days to cancel a telemarketing purchase. But, say law-enforcement officials, the crooks keep inventing new schemes to ensnare unsuspecting people who pick up the phone. For now, the best defense is to keep in mind an old saying that covers any kind of deal: If it sounds too good to be true, it probably is.

With reporting by Mary Cronin/New York and Stacey Welling/Las Vegas, with other bureaus