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DVD Vending Machine Fraud

Vanessa Blum reports on the sentencing submissions in the Russell MacArthur business opportunity fraud, the American Entertainment Distributors:

"A once in a lifetime opportunity." "A part time business that earns a full time income." "Call now!" "Don't miss out!"

The late night television ads for the Box Office Express DVD rental machine peddled a dream. But it didn't take long for customers of the Hollywood firm to realize they'd been sold an empty promise.

In some cases the machines never came. Sometimes they arrived but didn't work properly. Those that functioned would never yield impressive profits.

Today federal prosecutors are asking a Miami federal judge to sentence the founder of American Entertainment Distributors Inc. to 23 years in prison for conspiracy, fraud and violating a court order banning him from selling business opportunities. Russell MacArthur, 43, pleaded guilty to those charges in February

Business opportunity fraud is the least analyzed of all white collar crimes.

This is unfortunate, as many investment and franchise frauds rely upon the tricks that are perfected by the business opportunity criminal.

The classic business opportunity fraud is designed to last only for a year or so. As MacArthur said:

"MacArthur, who had split from American Entertainment to start another venture, told the informant, Steven Mishkin, that he planned to shut down within one year.

"You don't stay open too long, you don't get greedy," MacArthur said. "You start to see the complaints coming in, you know it's only a matter of time, you open another ... room and do another product. Done."

The elements in a business opportunity fraud are:

1. Shills or testimonials to lend an air of legitimacy.

2. Implausible earnings claims which anchor expectations.

3. The reliance on outside symbols of authority to confer respectability.

4. The substitution of a business idea for a real business operation.

In the classic business opportunity fraud, these elements are clearly present. In the more sophisticated business frauds such as Enron, these elements are harder to spot.

But they are all there. Which is why we study the more accessible fraud - if we cannot prevent business opportunity frauds, we have little hope of preventing future Enrons, and no hope at all of deflating asset bubbles.

Full post as published by Misleading Advertising Law on May 17, 2008 (boomark / email).