SEC Charges Infomercial Operators With Pyramid SchemeThe Securities and Exchange Commission has filed a civil complaint against Commercial Express LLC, a producer of DRTV spots, its parent company, Progressive Financial, and 18 co-defendants, alleging they operated a pyramid scheme using investments in infomercial media. Commercial Express and Progressive Financial are located in Santa Monica, CA.
Also mentioned in the complaint are principal owners of Commercial Express and Progressive Financial, Joel A. Fein, Timothy M. Hazzard, Mark D. McClafferty, Grace Na, Gerald Naughton, Glenn Popovich, and Bill W. Whitely (a.k.a. Will Dunayer).
The companies sold "media units" to investors at $5,000 per unit, with the understanding that the money would be used to purchase infomercial air time and that investors would receive a portion of profits from infomercial product sales.
"Virtually every distribution and principal payment made to investors came exclusively from funds invested by later investors rather than funds generated from the sale of products," the SEC charges in the complaint. "This was not disclosed to investors."
The defendents have not responded to the complaint and could not be reached for comment. They have also not hired an attorney, according to the SEC.
Judge Richard P. Matsch of the U.S. District Court in Denver granted a preliminary injunction on Nov. 20 against Whitely, who owns Westar Network and Nexgen, two of the companies that sold securities on behalf of Commercial Express. As of press time, the court had not set its next hearing date.
That injunction is only against Commercial Express, although the SEC is also seeking injunctions to prevent Commercial Express, Progressive Financial and their selling subsidiaries, along with the directors and employees of the companies, from selling securities as unregistered broker-dealers.
The SEC charges in the complaint that the defendants used "hard sale" telemarketing techniques in what the SEC calls a "boiler room" operation. "[Boiler room] is a term used to describe a small work space where telemarketers are crammed into small workstations and are given a leads list and a script to solicit investments," explained Robert Intartaglio, assistant regional director of the Central Region of the SEC.
The sales tactics raised more than $15 million between August 1997 and September of this year, according to the complaint, with only $1.4 million of that used to purchase infomercial media. Sales agents received as much as 60 percent of each investment in commissions, the SEC states, adding that "this was not disclosed to investors."
The SEC is attempting to reclaim any profits obtained illegally by the defendants.
"What generally happens is that the companies either pay in full or a percentage of every dollar or they show they can't pay, in which case they may face civil litigation filed by the investors," said Intartaglio.
Executives of Commercial Express and Progressive Financial are also charged with falsely stating to investors that Creative Entertainment Group Inc., a DRTV production company in Los Angeles that acted as a consultant to Commercial Express, had taken over its operations and was obligated to pay investors.
"Creative Entertainment never owned Commercial Express and has no responsibility for fulfilling obligations and projections made to investors," the complaint charges.
To further legitimize its claims of making money with its infomercials, Commercial Express allegedly told investors it had contracts with DRTV companies including QVC Inc., West Chester, PA; Direct to Retail Inc., Boca Raton, FL; and Blagman Media International Inc., Los Angeles, and that it had actual air dates for products on QVC.
According to the complaint, "the only entity with such a contract was Creative Entertainment Group. As such, CEG was under no obligation to use that contract to benefit Commercial Express and it was false to state that Commercial Express had such an agreement."
Robert Blagman, president of Blagman Media, who was asked to testify on behalf of the SEC against Commercial Express, described the episode as a "nightmare."
"I've gotten calls from people who lost a lot of money," he said. "I've had to refer them to the commission. It's really terrible that this has happened."
Rob Williams contributed to this report.