Federal Court declares Managing Director of Photo Safe, Data Vault, ie Networks deceived small business investors

The Federal Court has declared that Mr Daniel Albert, the Managing Director of Photo Safe Australia Pty Ltd, Data Vault Services Pty Ltd and ie Networks Pty Ltd (all now in liquidation) misled and deceived 37 small business investors in a series of scams which offered prospective franchisees high returns that never materialised.

The Federal Court also declared that Mr Greg Zimbulis, sales manager of Photo Safe and Data Vault, engaged in similar conduct in breach of the Trade Practices Act 1974.

The declarations were made by consent following Australian Competition and Consumer Commission action.

The ACCC began legal proceedings against Mr Albert and Mr Zimbulis in April 2005 for their involvement in these franchising scams which the ACCC understands netted more than $3 million. The three so-called business opportunities were:

• Photo Safe which claimed to provide a service which saved customers' photographs to a compact disc and to an online album on the internet
• Data Vault which was set up to market a software product that stored computer files and emails at a secure, remote location
• ie Networks which was touted to provide coin-operated internet access terminals and mobile phone content download terminals in shopping centres and other popular locations.

Franchisees that signed up as Photo Safe or Data Vault distributors, for amounts of up to $160,000, or paid ie Networks for internet terminals made small returns or no returns at all.

Mr Albert admitted that he misled and deceived Photo Safe and Data Vault small business investors in breach of sections 52 and 59 of the Act by claiming that:

1. there were existing and potential markets for the Photo Safe service and the Data Vault products
2. significant amounts would be spent by Photo Safe and Data Vault franchisors on marketing and advertising the products and services
3. major national traders, including Australia Post, Harvey Norman and members of the Australian Newsagents Federation, had agreed to offer the Photo Safe service to the public
4. major national traders, including Dick Smith Electronics, Tandy Electronics, Officeworks, Harvey Norman and members of the Australian Newsagents Federation, had agreed to offer the Data Vault product to the public
5. the franchisor could secure the franchisees a number of retail outlets as customers for each distributor
6. high incomes would be generated by distributors who took up a distributorship, and
7. the products and services offered by the companies would be launched in the market on a particular date.
   

Mr Zimbulis also admitted to making representations 1, 2, 5 and 7 above in breach of sections 52 and 59 of the Act.

The true situation was significantly different to that represented by Mr Albert and Mr Zimbulis.  Whilst Photo Safe did launch on the market, there was only a minor marketing campaign, with most distributors making only minimal or no sales at all. Data Vault was never launched on the market.

Moreover, no retail arrangements had been reached with any national retailers to stock Photo Safe or Data Vault products or services.

Mr Albert also admitted to being knowingly concerned in contravening the Franchising Code of Conduct (section 51AD of the Act) by failing to provide prospective franchisees with disclosure documents and other information required under the Code.

Mr Albert admitted that he misled and deceived ie Networks distributors and contravened sections 52 and 59 of Act by claiming that the company:

• had an arrangement with the Australian Performing Rights Association to provide licensed product which customers could download from the terminals
• already had terminals operating in the market
• was a successful business, and
• was able to fulfil orders for terminals that had been pre-paid by customers.

In reality, ie Networks had no terminals to provide to distributors, no operational terminals in the market place and no contracts in place to provide material for downloading. Mr Albert admitted that he was knowingly concerned in the conduct of ie Networks when it accepted payments for non-existent terminals, in contravention of section 58 of the Act.

Whilst the ACCC sought broad injunctions to prevent Mr Albert and Mr Zimbulis from engaging in similar conduct in the future, these orders were not granted by the Federal Court.  However the Federal Court did order Mr Albert and Mr Zimbulis undergo trade practices compliance training and pay a contribution to the ACCC's costs.

"Small business investments and franchises have the potential to attract unscrupulous operators", ACCC Chairman, Mr Graeme Samuel, said today. "This makes it a priority area for ACCC enforcement.  Operators who make false claims about the profitability of small business opportunities risk getting sued by the ACCC.

"In this case, Mr Albert and Mr Zimbulis were not able to avoid action by the ACCC by hiding behind the liquidation of their companies. This reinforces the ACCC's commitment to pursue corporate executives and senior sales staff who are responsible for misleading or deceiving small business investors".