Article

Anatomy of a kiosk suit

An investment that sounded too good to be true was just that according to a lawsuit filed against kiosk developer Web Booth Inc. and the McDonald's fast-food chain.

May 23, 2002

For investors, it must have seemed like a can't-miss investment. For a fee of $14,250 to $24,950, they could enter the world of interactive technology with the opportunity to reap the benefits of a strong advertising platform. Better yet, the investment involved one of America's best-known brands.

The technology was public access Internet kiosks. Located at McDonald's restaurants nationwide, the kiosks would attract customers with free Web access, which would in turn attract advertising. Kiosk development firm Web Booth Inc., through its sales associate Emerging Business Concepts Inc., sold the kiosks. The kiosks were then leased back to Waterstones Ltd., which would maintain them and sell advertising. The investors would then receive a guaranteed annual return on the kiosks from Waterstones.

But for 179 investors, the investment has become a painful financial lesson. On May 1, the investors filed suit in Los Angeles Superior Court against McDonald's, Web Booth, Waterstones, and Emerging Business Concepts, seeking actual and punitive damages.

At the heart of the suit is $8.2 million that Web Booth received from the plaintiffs as part of the planned deployment of thousands of Internet-access kiosks at McDonald's nationally.

In reality, 40 kiosks were deployed, all in northern California.

John Perry, the principal owner of Web Booth and president of Waterstones, absconded last December after withdrawing the remaining funds from Web Booth's bank account. The Federal Bureau of Investigations is investigating Perry's disappearance through its Los Angeles office. Laura Bosley, Los Angeles bureau media officer, said the FBI does not comment on pending investigations.

Both Web Booth and Waterstones have vacated their offices in Los Angeles. Cincinnati-based Emerging Business Concepts has gone out of business and its principal owner, Brian Wright, filed Chapter 7 personal bankruptcy on April 27. Wright said he had assets of $200,000 and liabilities of $380,000.

"This is a classic Ponzi scheme," said B. Daniel Lynch, the Pasadena, Calif.-based attorney representing the plaintiffs. In Ponzi schemes, companies pay early investors out of money invested by later parties, essentially shuffling money around until the stream of investors dries up.

The suit alleges fraud, negligent misrepresentation, and unfair business practices. Of the 179 plaintiffs, 160 of them reside in North Carolina. The others reside in California, Florida, New York, South Carolina, Tennessee, and Virginia. Some of the plaintiffs were advised to invest in the scheme by a now-defunct investment firm in the Charlotte, N.C., suburb of Lake Norman, according to the Charlotte Observer.

The defendants have 45 days to answer the charges.

The history of a deal

Web Booth offered investors the chance to either invest in the kiosks or, for $7,500, in gumball vending machines. In promotional material distributed by the company, the McDonald's logo was prominent on the kiosks pictured. McDonald's was mentioned frequently in the literature, which claimed that part of the proceeds would be donated to Ronald McDonald House Charities.

Emerging Business Concepts served as a middleman according to Wright, purchasing the kiosks from Web Booth, then selling them at a 10 percent to 20 percent markup.

"(Investors) would buy the kiosks from us and then do whatever they wanted with them," he said, despite the suit's contention that the machines were leased back to Waterstones.

Web Booth kiosks were placed in McDonald's restaurants in northern California starting in early 2001. The suit alleges that McDonald's and Web Booth planned to install Internet kiosks in 150 Southern California restaurants in early 2002. Thousands of kiosks were planned nationally. During a McDonald's-sponsored convention in Palm Springs, Calif., in October of 2001, Web Booth pitched the kiosks to a group of McDonald's franchisees.

According to the suit, Web Booth and McDonald's discussed the project throughout 2000, with Web Booth projecting monthly profits of $10 million to McDonald's once thousands of kiosks had been deployed. Web Booth provided user statistics to McDonald's. Papers filed with the suit showed that during the week of July 22 to July 28 of last year, a Web Booth kiosk at a McDonald's in Sacramento, Calif., had 119 user sessions for a total of 3,651 page views. But the suit contends that there was never any advertising revenue.

"In truth and fact, Web Booth produced far fewer Internet kiosks and obtained far fewer advertising vending machines than the numbers which were sold to plaintiffs," the suit states. "Moreover, there was in fact virtually no advertising income, which necessitated paying plaintiffs' monthly lease payments from income from the more recent sales of Internet kiosks and advertising vending machines, in the manner of a Ponzi scheme."

Wright said that he and one of the plaintiffs in the case, Rod Garner, became suspicious that something was wrong last December, but by that time it was too late.

"Myself and Rod Garner had talked and we agreed that something wasn't right," he said. "We'd call out to Southern California and we'd get one excuse after another. We decided we were going to fly out there a week before Christmas. But then we got a phone call from a Web Booth employee saying the doors had been locked."

Tarnished arches?

The suit contends that McDonald's should be considered a joint venture partner in the project with Web Booth, making McDonald's legally responsible for Web Booth's actions in the venture.

"The interesting thing, I think, is what McDonald's will say," Lynch said. "They've known about the case. I've talked with them over the last two or three months, so this was no surprise to them. We'll see what their response is."

However, the suit never mentions the presence of a signed contract between McDonald's and any of the other defendants. In addition, no McDonald's officials are specifically identified as taking part in meetings with Web Booth or agreeing to any contractual terms.

The suit contends that, "a relationship arose from agreements, both express and implied from the circumstances, between McDonald's and Web Booth, to undertake common objectives for the benefit of both."

Lynch said elements of the deal should have alerted McDonald's, such as Web Booth signing a generous contract with McDonald's that freed the fast-food chain to assume all the intellectual property rights to the program.

"They should have known from their people that (Web Booth) wasn't making any money," he said. "They were drawing all these expenses, but they had all this money. They had to know John Perry didn't have $20 million just on his own.

"With the contract they had, they could have stolen the concept, the naming rights, everything from him," Lynch added. "Why would he do something like that unless he was a Ponzi artist?"

Lynch said McDonald's was formally served with the lawsuit on or around May 21. McDonald's attorney Brad Block did not return phone calls asking for comment on the lawsuit.

In trouble before

This is not the first time Web Booth's practices have come under suspicion. In 1999, securities officials in Pennsylvania and Wisconsin cited Web Booth and Perry for employing unlicensed agents to represent the company in those states. In both cases, Web Booth hired agents to offer public Internet access kiosk lease agreements to investors in those states.

In the Pennsylvania case, Wright was named as one of the principals of Future Communications Inc., which was cited for serving as Web Booth's agent in the state. According to a summary order filed by the Pennsylvania Securities Commission on May 13, 1999, attendees at a seminar in the state were encouraged to invest a minimum of $10,250 in Web Booth kiosk programs. Checks were to be made out to Future Communications, which also encouraged attendees to sign a services contract and become an agent in the program.

But Wright said the Pennsylvania and Wisconsin cases should not be considered pertinent to the lawsuit.

"That was more for the manner they were being sold; it wasn't the company. We checked with some attorneys and they came back and said we had to file as a business opportunity company," said Wright, who added that he shut down Future Communications and then launched Emerging Business Concepts.

While Wright is named among the defendants in the case, he expressed nothing but sympathy for the plaintiffs and said his life and reputation had also been damaged by Web Booth's actions.

"Certainly I hope they win," Wright said of the plaintiffs. "I know John Perry hurt a lot of people, including myself and my family and a lot of people in North Carolina."