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Our purpose here today is to report that we have been successful in stopping one of the most insidious scams the Federal Trade Commission has ever seen. At our request, a federal district court judge in New York has issued a temporary order halting a high-tech fraud that we believe threatened consumers' willingness to travel on the information superhighway. This scam has generated numerous complaints, many from parents with Internet-savvy children, who have incurred hundreds of thousands of dollars in illegal phone charges.

We filed charges in our case against a group of New-York based defendants, including Audiotex Connection; Promo Line; and three individuals. We allege that they have run a variety of Internet web sites featuring what they call "free adult entertainment." Here's the scam: when consumers surfing the 'Net came upon one of the defendants' websites, they saw a message stating that, before they could go in, they had to download what the defendants called a "special viewer" program called "david.exe." Unbeknownst to consumers, what this program turned out to be was a ploy to secretly disconnect them from their local Internet service provider -- say, America Online, for instance -- and then reconnect them to a phone number assigned to Moldova, a country near the Black Sea bordering Romania.

Even more insidious, this is essentially a "stealth" scam -- consumers are kept in the dark because the software program also turns off their modem speakers so they cannot hear either the disconnect, or the dialing of the international phone number. It gets worse: once the program is activated, it does not disconnect the international call when consumers leave the defendants' web sites to visit other web sites, or even when they sign off the Internet and turn to other computer activities such as word-processing. Thus, once they download or activate the "david.exe" program, consumers start racking up international calling charges of more than $2 per minute, and they keep racking up those hefty charges as long as their computers remain turned on. The phone bill you see beside me shows the damages: these bills were often the very first notice consumers got that they'd been massively scammed.

The defendants get their cut in this illegal-billing scheme from the Moldovan phone company, which we believe gives them a share of the proceeds from the calls. But here's yet another hidden component of this scam: the calls apparently never made it to Moldova! Rather, they went to a computer in Canada, which, of course, has much lower long-distance rates than Moldova for calls from the United States. Nonetheless, consumers were charged the higher Moldovan rates.

Clearly, the existence of this software program severely risks the confidence of any consumer going online on the Internet. And it highlights a serious problem that these emerging technologies can pose for law-enforcement. But there's a good story to tell here, too. Because the technological advances that fraud artists often exploit first, before they're recognized and used by legitimate industry, are the same advances that are available to us in the law-enforcement community. And make no mistake about it -- we're using the Internet in our investigations. Indeed, because of the Internet and the high-speed information and search services it offers, we were able to track down and file charges against these defendants extremely quickly. This very rapid pace allowed us to obtain a court order freezing their assets before they could abscond with the proceeds of their illicit scheme. The defendants have not even received some of their money as yet, and we are going to do all we can to make sure that money never reaches them. As in previous cases involving emerging technologies, this case is an example of the FTC acting quickly to prevent wide-scale misuse of a sophisticated telecommunications technology to defraud consumers.

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* This may not be an exact transcript of Bernstein's remarks.

 

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