By Steven J.J. Weisman
BOSTON — A recently story published here in TALKERS magazine described the problems coming from an advertisement on Tampa radio station WHPT “102.5 The Bone” on which talk host Drew Garabo endorsed a private investment fund that the Securities and Exchange Commission has deemed a fraud. The SEC obtained a temporary restraining order halting the marketing of the investment and has frozen the assets of Patrick O. Howard and the two companies he used to sell the private funds at the core of what the SEC is calling a scam. According to the SEC, Howard and his companies not only promised huge profits with minimal risk, but also represented that almost all of the money paid by investors would be used to purchase interests in the portfolio companies’ revenue streams and that all of the promised profits were backed by insurance.
However, the truth according to the SEC is that only $ 7.5 million of the $13 million invested was used to buy revenue streams from portfolio companies with the rest of the money used for Howard’s own personal expenses and unrelated business expenses. Making the problem worse according to the SEC, is that there was no insurance to back up Howard’s promises. The SEC even accuses Howard of sending falsified account statements to investors to cover up losses and paying off earlier investors with money obtained through newer investors, which is the definition of a Ponzi scheme. As for Patrick Howard himself, he was not even a registered investment adviser and therefore not authorized to sell any investments. A quick and simple search of the SEC’s wesite at www.investor.gov would have shown any potential investor that Howard was not a registered investment adviser as required by law.
The radio advertisements touting Howard’s phony investment promised returns of between 12% and 20% annually with minimal, if any risk and Drew Garabo personally endorsed the investment on the air.
So the question becomes what is the liability, if any, of the radio station and Drew Garabo, personally?
While they have rarely enforced actions against radio stations for misleading or deceptive advertising, the position of the Federal Trade Commission (FTC) is that radio stations that broadcast false and deceptive advertisements can be held liable not only when they are aware that the advertisements are false and deceptive, but even in situations where they were not aware, but should have been. In determining liability of a radio station for such false advertising, the FTC will consider the extent of due diligence done by the radio station before airing the commercial. It is not a good defense to merely claim ignorance of the falsity of the advertisement. It is the duty of the radio station carrying an advertisement with a claim that on its face sounds too good to be true to inquire into the legitimacy of the advertisement. Howard’s advertisement promising minimum returns of 12% with minimal or no risk is a claim that should have aroused suspicion on the part of the radio station, and while the FTC does not demand that radio stations become investigative bodies, it does require some level of inquiry into the legitimacy of the investment before airing such an advertisement. In this case, it would have taken only a few moments to go to the SEC’s website to learn that the man behind the investment wasn’t even registered as an investment adviser.
As for Garabo, if he was paid for endorsing the product, SEC and FTC rules would require that he disclose this fact in the course of the advertisement. In addition, FTC regulations found in 16 CFR Part 255.1 specifically require that endorsements must “reflect the honest opinions, findings, beliefs, or experience of the endorser.” Once again, the FTC would require that Garabo do his own research to determine whether the investment he was endorsing was legitimate. The regulations are quite clear that endorsements may not be made unless they are truthful. In this case, FTC rules require that Garabo do at least some investigation into whether the investment he touted was indeed legitimate, particularly where it promised a high return with little or no risk.
The lesson for all of us is that both radio stations and individual talk hosts endorsing products have a legal duty not to carry advertising or endorse products that we know or should have known are phony. We need to do our homework. We also have an ethical duty to not abuse the trust our listeners put in us.
Steven J.J. Weisman is a practicing attorney, legal editor for TALKERS magazine, a professor of Media Law at Bentley University in Waltham, Massachusetts and publisher of the website www.scamicide.com. He can be e-mailed at: firstname.lastname@example.org. Steven J.J. Weisman is available as a guest to discuss legal matters and the subjects of identity theft and scams.