To head off potential fraudulent marketing schemes,
state regulators are investigating several
companies efforts to mass market phone cards.
Companies such as Destiny Telecomm International
Inc., Oakland, Calif., and startup Fox Telcom Inc.,
Memphis, Tenn., are undergoing the investigations by
regulators in such states as
Alabama, North Carolina and Michigan.
Dennis Wright, an associate attorney general in
Alabama and chief of the states consumer affairs
unit, is reviewing marketing plans prepared by
Destiny for its 6,000 sales representatives in
Alabama.
"We are trying to ensure the [Destiny] program
... is not a pyramid scheme," Wright said. Destiny
whose automated phone system assures callers that
the company offers "the greatest business
opportunity on the planet right now" already has
500,000 independent sales representatives
nationwide.
Destinys national sales force is growing by
roughly 4,500 representatives per day, putting the
company on track to reach $200 million in sales by
the end of 1997, said Paul Matson, a company
spokesman. The company was formed in July 1994, and
now has 500,000 sales representatives and 450
employees, he said.
Pyramid schemes, also called Ponzi schemes, use
entry fees paid by new participants to reward
existing participants. These schemes can generate
large fees for the early participants who are paid
off with money put up by later investors. The
investment swindle typically collapses because of a
lack of investors or is shut down by regulators.
A SNAPSHOT OF PHONE CARD COMPANIES
COMPANY LOCATION FOUNDED SALES REPS 96 REVENUE
Destiny Telecomm International Inc. Oakland, Calif.
July 1994 500,000 $100 million
TeleCard Networks Inc. Escondido, Calif. May 1995
360,000 Not available
Strategic Telecom Systems Inc. Knoxville, Tenn.
March 1994 275,000 $150 million
Fox Telcom Inc. Memphis, Tenn. Nov. 1996 Few reps
Not available
Destiny has attracted the attention of state
regulators because it is the leading company in the
United States selling phone cards via independent
sales reps. This marketing arrangement is sometimes
called multilevel marketing and can be operated as a
pyramid if the companies charge sales reps a fee to
join, or if they sell the bulk of their products to
the sales force, rather than outside customers, said
state officials.
North Carolina began its investigation of Destiny
after receiving information that showed the
companys 15,000 reps had sold only 17,000 cards,
said Kristine Lanning, an associate attorney general
for the state. Moreover, many of these 17,000 cards
were bought by the representatives, each of whom had
to pay about $100 to join Destiny, she said. To
satisfy the states concerns, Destiny drafted
marketing plans in cooperation with officials in
Oregon and Michigan and is negotiating with
officials from Alabama, Florida and Kansas, said
William Hill, a lawyer for Destiny. Hill is a
partner at Donahue, Gallagher, Woods & Wood,
Oakland, Calif.
On Jan. 22, Destiny signed an agreement with
North Carolina that requires Destinys 15,000 North
Carolina representatives to sell 70 percent of their
phone cards to people who are not part of the
network, said Lanning. If Destiny fails to meet the
70 percent target, it must stop selling phone cards
to sales representatives and must halt recruitment
of new reps, she said. Destiny also paid $100,000 to
the state and promised to end a practice that pushed
sales representatives to buy multiple sales kits,
usually priced at $100, she said.
Because of the agreement with North Carolina,
"were back in business there," said Hill. "Wed
have a hard time doing business in the states if we
cant convince the attorneys general that we are a
legitimate organization," he said.
Under the North Carolina agreement, Destiny will
only charge its new sales representatives $25 for
the cost of registration paper work, said Matson.
"If one does not have to pay anything for the
privilege of selling the product, it is not a
pyramid," he said.
Overall, multilevel marketing companies such as
Destiny took in roughly 20 percent of the 1996
revenues gained by the fastgrowing phone card
industry, said Sandy Beshover, publisher of PCM
Magazine, a monthly magazine based in Matewan, N.J.
Nationwide, the industrys revenues grew from $800
million in 1994 to $1.4 billion in 1996, he
estimated. By 2000, the industrys revenues should
reach $5 billion, he said.
There are perhaps 30 multilevel networking
companies selling phone cards, said Beshover. The
industry is led by Destiny, Strategic Telecom
Systems Inc., Knoxville, Tenn., and TeleCard
Networks Inc., Escondido, Calif., and includes many
small companies such as Fox, he said.
These multilevel marketing companies are
spearheading the growth of the phone card business,
often by selling lowcost cards, he said. Companies
such as Destiny are selling cards for roughly 25
cents per minute of phone time, compared to the
price of roughly 40 cents per minute charged by the
larger phone companies, he said.
However, "the problem is that the [companies]
that grow up overnight looking for a quick buck are
hurting the image of the industry," said Beshover.
Companies such as Success Telecom, based in
Charlotte, N.C., have gone out of business, leaving
tens of millions of dollars in debts to phone
companies, sales reps and card purchasers, he said.
"Bad news travels a lot faster than good news."
State regulations can suppress fraudulent schemes
but can also prevent competition from newcomers,
said Beshover. For example, Fox Telcom has delayed
marketing until it works out a plan acceptable to
Alabama officials, said Priscilla Duncan, a
Montgomery, Ala.based consultant for Fox. "We are
trying to devise a plan that would promote sales and
keep recruitment [of sales representatives] to a
manageable level," she said. Unless sales
grow in step with recruitment, the company will run
afoul of state antipyramid rules, she said.
The regulations "require more research and more
expenditure of time and capital" before marketing
can begin, said Larson Elmore, Foxs product
development chief.