What looked like a good thing to many investors is coming under attack. The Federal Trade Commission has sued two of the major players for fraud. In its court papers, the FTC calls one of the operations a "classic boiler room" and an "assault on the investor's dollar," and the other, a business operation "permeated by fraud."
Both companies say they have done nothing wrong and are fighting the allegations. The president of one of them says, "All we were were aggressive marketeers; we took a very good idea to the public at large . . . and promoted it aggressively." The FTC believes that about $40 million was invested in a scheme that, the lawsuits allege, was less potentially profitable, and far riskier, than investors were led to believe.
The game is cellular telephones -- that new network for radio phones you can use from your car. The Federal Communications Commission is issuing two cellular licenses for every city, one of them to a telephone company. The other license is up for grabs. It will be chosen by lottery -- and that's the gimmick that has set off the gold rush.
Two companies -- American National Cellular (ANC) and The Cellular Corp. (TCC) -- have been aggressively selling "lottery tickets" in the form of expensive applications for the second cellular license. Investors paid $10,000 and up for thick and technical booklets containing the demographic, engineering, legal and financial information that the FCC required of applicants. (The cost to ANC of these basic documents, according to a preliminary report of the court-appointed temporary receiver: $1,200 each for the first 400 applications, then $800 each. ANC sold about 4,500 of them, and TCC 1,200, the FTC estimated.)
Celebrity Mike Douglas made a highly effective pitch for ANC, appearing in a smooth TV commercial and in newspaper ads to tell investors that the cellular lottery "could make you a wealthy person."
Why pay so much for a lottery? Because, the FTC asserts in its lawsuits, investors got the idea that they were virtually certain to win at least a piece of the pie.
Cellular licenses already have been awarded in the larger cities -- and almost everyone did, in fact, win a share. The applicants were mostly established communications companies. They got together before the lottery and formed what they called grand alliances to share in the licenses.
Over the past year, ANC and TCC have been urging individuals to enter the lotteries for the smaller cities. They implied -- say the lawsuits -- that, once again, grand alliances would be formed.
But in one of its key arguments, the FTC says that this is no longer true. Because the FCC has changed its lottery rules, and because thousands of investors are now entering the lottery, it will be harder for them to form a grand alliance or gain a substantial share in someone else's license.
ANC President Michael Godfree says his investors knew that the cellular lottery was a high-risk investment. But in the FTC complaint and in a state action against ANC by Arizona, sales presentations are quoted, saying such things as: "Everyone who has filed a qualified application so far has either walked away with a piece of a cellular market that will be worth in the eight figures within a few years, or taken a very tidy sum to sell out their interest."
In the FTC civil suits filed last month, the bank accounts of the companies and its principals were frozen. A receiver was sent into ANC to hang onto whatever funds are there.
An FTC lawyer says the agency asked for an asset freeze because of the backgrounds of the people involved. Two of the founders of ANC have felony convictions, according to the FTC complaints. One principal associated with TCC was for a time barred by a consent order from selling securities.
The FTC complaints say the companies "falsely represented" the value of the licenses they were selling. For one thing, ANC touted a "formula" supposedly used by Barron's, the investment magazine, to determine the value of any market. But, asserts the FTC, the claim that Barron's devised such a formula is false.
The court-appointed receiver found that ANC was "on notice from various third parties of misstatements being made by its brokers and in its video and printed advertising materials." TCC also faces an action by the Justice Department, alleging that its lottery applications are abusive tax shelters. An attorney for TCC says that all the charges against TCC are "totally unfounded."
The FTC wants the court to order refunds for ANC and TCC customers. But the preliminary report on ANC, from the temporary receiver, Robert Baker, says that not much money is left.
Satellite Systems Engineering, the independent firm that contracted to prepare the ANC applications, says it will file the applications that investors paid for. But it's a lottery they're unlikely to win.