Then Suddenly, They’re in Misadventure Land

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 in-store 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?’ ”

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. Some of these deals, which might be advertised at trade shows or through classified ads, are legitimate, but others prey on inexperienced investors looking for financial independence, authorities say.

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

Selling Disney merchandise is “the ultimate high-profit business,” according to the marketing manual of one promoter, which 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 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, are being scrutinized by regulators and are even targets 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. But company executives 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,” Disney spokesman Chuck Champlin said. “But the wronged party is really the investors.”

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 firms 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 luxury cars from two Kansas City-area firms--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.”

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

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

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

Distributorships featuring toys and clothing from Disney and other big-name licensors are just the latest twist on 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 are attracted by the familiar brand names and the low cost of entry compared with other start-ups. But even the best of these opportunities present big challenges for newcomers.

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

In addition, inexperienced investors may be taken in by inflated earnings claims, phony references and other illegal misrepresentations offered in slick sales pitches, according to regulators and law enforcement officials.

“It’s a huge problem,” said Betsy Broder, an attorney with the FTC. “Fraudulent business-opportunity salesmen will lure consumers with whatever they think is the hot item at the time.”

And the hot item at present is Disney.

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When John Hassmann, a retiree in the Sarasota, Fla., area, spied an ad in his local newspaper 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,” Hassmann reasoned. “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 firm doing business as Kingdom of Toys, boasted that the company 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 the company headquarters in Louisiana and 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 account 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 proceedings. 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 firm’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 he paid for it, Hassmann says.

Worst of all, the stuff just didn’t sell. Hassmann said he phoned the distributor 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, she’d been shipped old “Lion King” souvenirs, plus loads of 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 acknowledged that some purchasers were dissatisfied, but he said they constituted a small fraction of the overall distributor base. And he denied 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 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 of credit 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, he said, forcing him to pull four of his nine carousels from stores. His average profit of 87 cents a day barely covers gas money to service the accounts.

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 bought her distributorship.

The Kansas attorney general’s office lodged civil charges in April 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 firms. Distributors filed a suit in April seeking class-action status against businesses and individuals who provided references for the companies.

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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, who has pushed state and federal authorities to investigate these enterprises, says Disney could be doing more.

“It’s their name, dammit,” O’Neil said. “How can Disney not care that this is going on?”

Disney’s Champlin said the company is very much concerned that some may be exploiting the Disney name to harm people. But rather than chase these operators in court, which proved ineffective in the one case the firm did pursue, Champlin 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.”