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Unhappy Toy Story : Investors Are Dismayed to Learn That Disney Franchises Aren’t Good as Gold. Several Dealers Are Being Sued and Investigated

TIMES STAFF WRITER

Rachelle Bachman thought she had the business world by the tail when she paid $10,365 to become a home-based distributor of licensed Walt Disney Co. merchandise.

After all, Disney toys, watches, clothing and collectibles are perennial bestsellers in the $16.7-billion U.S. market for licensed movie and cartoon merchandise.

The working mom’s dreams of running her own business seemed within reach as she pictured Disney merchandise flying off her display racks with each new film and classic video release.

“I had been raised on Mickey Mouse,” said the Huntington Beach resident. “I thought, ‘What could possibly go wrong with Disney?’ ”

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Plenty, in what has turned into an unhappy toy story for Bachman and thousands of would-be entrepreneurs trying to cash in on the Disney “magic.”

From envelope stuffing to phone-card marketing, work-at-home ventures are tempting an increasing number of Americans searching for job security or extra income. Advertised at trade shows, through classified ads and on the Internet, some of these deals are legitimate, while others prey on inexperienced investors looking for financial independence, authorities say.

Amid this surge of self-employment opportunities, a fast-growing breed of companies with no connection to the Burbank-based entertainment giant have begun offering individuals a chance to start their own Disney products businesses.

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Selling Disney merchandise is “the ultimate high-profit business,” according to the marketing manual of one promoter who promises to supply the inventory, displays and know-how to launch even novices into the lucrative world of Disney memorabilia. “This just might be the world’s best investment,” crows another.

Purchasers envision themselves becoming mom-and-pop Disney Stores, selling the latest Disney merchandise on consignment through convenience marts and other small retailers.

In reality, many have found that they’ve paid anywhere from $10,000 to $50,000 for ubiquitous Disney knickknacks worth a fraction of that amount, including slow-selling items that competing retailers dumped from their shelves long ago.

“They never did carry anything from ‘Toy Story,’ which was in high demand,” said Tim Dillon, a struggling Northern California distributor who paid a Florida company $21,640 to set him up in the Disney products business. “But we could get plenty of ‘Hunchback of Notre Dame’ stuff that wouldn’t sell.”

Accused of swindling investors out of millions, companies such as Louisiana-based Kingdom of Toys, which sold Bachman her distributorship, have been hit with lawsuits, scrutinized by regulators and even become the target of FBI investigations.

Kingdom of Toys and other promoters have denied any wrongdoing and suggest that some disgruntled investors simply didn’t possess the business acumen to succeed.

Disney has expressed concern that its name is being used to entice people to invest in business opportunities it doesn’t endorse. Still, company officials say Disney can’t fully control where its 3,000 licensees sell their merchandise, and has only tenuous legal standing to pursue disreputable business opportunity promoters in court.

“It has been very frustrating for us,” said Disney spokesman Chuck Champlin. “But the wronged party is really the investors.”

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Still, Disney’s reluctance to take an aggressive stance, coupled with the public’s appetite for all things Disney, has produced a climate for these business opportunities to thrive, according to industry watchers.

At least a dozen companies have emerged selling distributorships for Disney-licensed merchandise, up from a handful just a few years ago.

“The attraction is tied to the Disney name,” said Kansas Atty. Gen. Carla Stovall, whose office in April seized a Rolls-Royce, a Land Rover and a Mercedes-Benz from two Kansas City-area companies--Parade of Toys Inc. and Wonderful World of Toys Inc.--whose principals are accused of fleecing investors out of at least $14.9 million.

“That’s their hook into these folks.”

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Authorities say the proliferation of questionable Disney products distributorships mirrors an upswing in business opportunity fraud nationwide. Exploiting the climate of fear and anxiety created by corporate downsizing, scam artists are finding ripe pickings among Americans looking to become their own bosses.

Since 1995, the Federal Trade Commission, working with state law enforcement agencies across the country, has launched two major crackdowns on self-employment ventures. The schemes run the gamut from pay-phone investments and Breathalyzer franchises to work-at-home medical billing operations and multilevel marketing scams.

Among the 75 businesses charged in the latest action were three companies selling Disney products distributorships. Authorities charged Parade of Toys, Florida-based American Marketing Inc., and the Texas company Universe of Toys with violating business opportunity laws as part of that 1996 sweep, dubbed “Operation Missed Fortune.”

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Billed as the cutting-edge business of the ‘90s, distributorships featuring toys and clothing from Disney and other big-name licensors are just the latest twist on vending and display rack ventures that have been used to sell everything from pantyhose to computer software.

Promoters of these self-employment opportunities frequently advertise them as an easy way to make good money working just a few hours a week. They act as middlemen, selling inventory and display racks to distributors. Purchasers are responsible for getting the racks into stores, cleaning and restocking the displays and collecting money from the shop owners, who get a cut of the revenue on these consignment sales.

Retail novices like the familiar brand names and the low cost of entry compared to other start-ups. But even the best of these opportunities present big challenges for newcomers.

Promoters may not be able provide them with a steady supply of the best merchandise at the lowest prices. They may charge hefty start-up fees and typically deny refunds to distributors who can’t make a go of it. Likewise, purchasers may have a hard time convincing store owners to let them set up displays in their shops.

In addition, inexperienced investors too frequently are taken in by inflated earnings claims, phony references and other illegal misrepresentations presented in slick sales presentations, according to regulators and law enforcement officials.

“It’s a huge problem,” said Betsy Broder, an attorney with the Federal Trade Commission in Washington. “Fraudulent business opportunity salesman will lure consumers with whatever they think is the hot item at the time.”

And the hot product at present is Disney.

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When Sarasota, Fla.-area retiree John Hassmann spied an ad in his local paper touting a business opportunity with earnings potential of $100,000, he almost ignored it as another come-on until he saw the words “Disney licensed products.”

A former Disney licensee who once produced Donald Duck night lights at his small plastics company, Hassmann knew the rigorous standards required to do business with the Mouse, and the power of the brand to attract consumers.

“We had always liked Disney. They’re a successful, reputable company,” said Hassmann. “It seemed like a viable thing.”

At a late 1995 meeting at a Sarasota hotel, Hassmann said, a representative for Business Partners Inc., a Louisiana-based company doing business as Kingdom of Toys, boasted that it had a pipeline to just about every Disney product made.

The merchandise and display carousels Hassmann saw were top quality and the latest styles--Mickey Mouse bath toys, Pocahontas flashlights, Winnie the Pooh baseball caps and the like. Hassmann says a sales representative told him to expect earnings of at least $3,000 a year for each fully stocked carousel he purchased.

After visiting company headquarters in Louisiana, then checking references provided by Kingdom of Toys--including a distributor who claimed to be pulling in more than $80,000 a year--Hassmann withdrew nearly $50,000 from his savings to purchase 30 carousels and inventory.

“I was so convinced I could make a go of this,” Hassmann said.

Today, Kingdom of Toys is shuttered and mired in bankruptcy. Investors say they have been contacted by the FBI in connection with a criminal investigation of its principals.

Denied refunds, Hassmann and six other former distributors are suing the company’s top officers and salespeople, claiming Kingdom of Toys bilked them and more than 1,000 others out of at least $20 million.

Complaints listed in the lawsuit are similar to those made by investors in other Disney merchandise distributorships across the country.

The merchandise arrived late, and a locating company recommended by Kingdom of Toys to place his carousels in stores at $200 a pop “knew nothing about the area,” according to Hassmann. There was a huge discrepancy between the value of the inventory shipped and what Hassmann says he paid for.

Worst of all, the stuff just didn’t sell. Hassmann phoned the distributor’s references a second time to discuss his start-up troubles, only to find some of the numbers disconnected.

“It was a terrible feeling,” Hassmann said. “I knew I’d been had.”

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Back on the West Coast, Bachman was experiencing similar difficulties.

The items she received from Kingdom of Toys were authentic Disney-licensed products, all right. But instead of the latest movie merchandise and the attractive specialty goods shown at the sales seminar, Bachman was shipped old “Lion King” souvenirs plus loads of ubiquitous key chains, pencils, crayons, books and balloons--all available cheaper at the local drugstore by the time she took her markup.

Authorities say some companies selling these business opportunities have no consistent source of supply, relying on liquidators and close-outs to obtain their stock.

Which would explain why some of Bachman’s merchandise arrived bearing price tags from other stores. And why Kingdom of Toys never had access to more than a few dozen of the 10,000 items she heard about during the sales pitch.

“We could only get the stuff nobody wanted,” Bachman said. “I had a couple locations that never sold a dime’s worth.”

Mark Seamster, an attorney for Kingdom of Toys, blames the company’s operating difficulties on its rapid expansion. He admits some purchasers were dissatisfied, but said it was only a small fraction of the overall distributor base. And he denies that distributors were promised financial success.

“It was a legitimate enterprise that provided distributors with a product,” he said. “A business opportunity is just that. There were no guarantees.”

Distributor complaints aren’t limited to Kingdom of Toys.

Kathy O’Neil of Minnesota borrowed against her retirement savings to purchase her failed Disney products business, only to find that nearly half of her $22,000 investment went to start-up fees charged by Florida-based Carousel of Toys USA Inc.

Likewise, Kansan Steve Schmitt is paying $300 a month on a home equity line he and his wife used to finance part of their $20,000 Disney business purchased from Parade of Toys.

Shoplifters have been more plentiful than paying customers, forcing him to pull four of his nine carousels from stores. He’s considering donating the remainder to charity because his average profit of 87 cents a day barely covers gas money to service the accounts.

“We’ll be dust before this thing pays for itself,” Schmitt said.

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Regulators, law enforcement agencies and disgruntled investors have begun taking action.

Bachman last year got a portion of her money returned after the California attorney general’s office found that Kingdom of Toys wasn’t registered to do business in the state when she purchased her distributorship.

In April, the Kansas attorney general’s office lodged civil charges against Parade of Toys and Wonderful World of Toys alleging they inflated earnings claims, sold “exclusive” territories to multiple distributors and used other “deceptive and/or unconscionable” practices to dupe at least 900 investors.

In addition, the FBI is investigating the two companies, while distributors in April filed a class-action suit against businesses and individuals that provided references for the companies.

Meanwhile, angry investors wonder why Disney, renowned for its fierce protection of its copyrights and trademarks, hasn’t moved aggressively against companies trading on its name.

Promoters of licensed merchandise distributorships are careful to state in their disclosure documents that they are not connected to or sanctioned by Disney.

But disgruntled distributor O’Neil, a tireless crusader who has pushed state and federal authorities to investigate these enterprises, says Disney could be doing more.

“It’s their name, damn it,” says a frustrated O’Neil. “How can Disney not care that this is going on?”

Disney spokesman Champlin says the company is very concerned that some companies may be exploiting the Disney name to harm consumers.

Rather than chase these operators in court, which Champlin says proved ineffective in the one case the company pursued, he said Disney has been working quietly with regulators and law enforcement agencies.

“We have not been indifferent. We’ve been on this since Day One,” Champlin said. “The good news is that we’re confident these discussions are going to lead to more action.”

While some failed entrepreneurs blame Disney for their woes, others say the entertainment giant can’t be held responsible for companies that have figured out how to appeal to investors’ own greed.

“Let’s face it, I was trying to trade off their name. Disney never came to me,” said Frank Scaduto, a Florida resident who is suing Parade of Toys alleging breach of contract, misrepresentation and other fraudulent practices. “I’m not sure if there is anything they can do.”

Consumer advocates say informed investors are the best defense against fraudulent self-employment schemes. They encourage would-be entrepreneurs to do exhaustive, independent background checks on the companies making these offers--and never to rely on the good name of the merchandise being sold.

“People think it must be legitimate because the products are Disney,” said Robert Ward, assistant attorney general for the state of Michigan who has investigated complaints in that state. “That’s exactly what the bad guys are counting on.”

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Avoiding the Traps of Bogus Businesses

The Federal Trade Commission is receiving an increasing number of complaints about prepackaged business opportunities offered to consumers as money-making investments. The agency says to beware of companies that:

* Make wild and unsubstantiated claims about potential earnings, including claims about “proven” money-making concepts

* Suggest no business experience is necessary

* Rely on high-pressure telemarketing sales techniques to pressure someone into turning over money

* Make assurances about good locations for vending machines or display racks, or assistance of a professional locater

* Hype references handpicked by the company instead of providing a list of all current business-opportunity owners in the region

* Fail to provide prospective investors with complete documentation containing pre-sale disclosure about their experience, lawsuit history, audited financial statements and proof of earnings

Before Buying Check into:

* Business experience of the company and its directors

* Any lawsuits brought against the company by previous buyers

* Total number of previous buyers, including names and addresses of those in your area

* Company’s balance sheet for most recent fiscal year and an income statement and statement of changes in financial position for three most recent fiscal years

* How the company substantiates claims about potential earnings or earnings of other buyers

Source: Federal Trade Commission; Researched by JANICE L. JONES / Los Angeles Times


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