The dream of making a personal fortune in the newly competitive long-distance telephone business is attracting thousands of believers all over the country. They are promoting -- to their friends and neighbors -- an aggressive new sales scheme called Starcom. It is praised by its creators as a money-making multilevel marketing opportunity, and damned by its detractors as a pyramid-sales scheme.
Starcom is serving telephone customers in 11 states (Arizona, Arkansas, California, Colorado, Kentucky, Louisiana, Minnesota, Oklahoma, Tennesee, Texas and Washington), according to one of its lawyers, John Claro of Oklahoma City. But the Fort Worth-based company has run into legal trouble in at least three states -- Kansas, Minnesota and Texas -- where Starcom signed consent agreements (without admitting to wrongdoing), promising to refund money to certain customers and to pay civil penalties.
Starcom has just been cited for contempt in Kansas for violating the previous agreement, according to Neil Woerman in the attorney general's office there. Hearings are pending Oct. 11 in Texas on whether Starcom violated the agreement it reached with that state last February.
Nevertheless, Claro says that the company is forging ahead. "It's hardly ever a problem to comply with the eccentricities of interpretation of local statutes, once you know that's what they want," he says.
Starcom has been recruiting telephone subscribers by offering them an unusual deal. You pay $100 to sign up for long-distance telephone service, which Starcom buys from wholesale sellers of telephone lines. You pay another $50 if you want to become a Starcom salesperson. (Formerly, a single $150 fee covered both.) The new salespeople also buy assorted promotional materials from the company.
Sam Simon, head of the Telecommunications Research & Action Center in Washington, D.C., says there appears to be no strong advantage to buying Starcom's phone service all by itself. "Other telephone companies don't charge big sign-up fees," he says. And Texas authorities allege that company salespeople have been overstating the amount of money consumers could save by using Starcom instead of American Telephone & Telegraph, MCI or the other major long-distance services. (Starcom says that its customers save up to 50 percent.)
But the big attraction of Starcom seems to be its money-making potential -- called by president Glenn Beadle "a vehicle to secure your financial future." In classic pyramid fashion, Starcom pays participants a commission and bonus for each new customer and salesperson they sign up. If "their" salesperson then signs up customers and salespeople of his or her own, the original participant earns commissions on the second salesperson's customers, and then on the customer's customers, all the way down to the fifth generation.
"The marketing part of the program appeared to us to be illegal" under state law, says Don Johnson of the state attorney general's office in Minnesota. "The only reason people paid the full $150 was to get into the program and have the right to sell to others."
Starcom salespeople also have been charged with exaggerating how much new salespeople could earn.
Originally, some or all of the money that Starcom subscribers paid up front was supposed to be refundable if they quit. But Stephen Gardner of the Texas attorney general's office says that those deposits were used as operating capital for the company, so couldn't be repaid fully if mass refunds were demanded.
Starcom has rewritten its business plan to eliminate refunds. But Claro recently told Gardner that the company couldn't obtain the $300,000 bond demanded to protect the potential refunds of earlier customers in Texas.
Starcom's future, at this point, is unclear. Technical troubles recently caused a shutdown of its telephone service in many states, but Claro says that these problems are being corrected. He adds that for the time being, Starcom is not recruiting new salespeople but expects to start again soon.
Having your own business -- especially one you can operate from home, on your own time -- is the dream of millions of Americans. But the plain fact is that big-money business opportunities don't, in the normal course of things, drop into your lap for $150. And your chances diminish if your main interest is the money you hope to make by signing up other salespeople rather than by selling the service itself.