Seller of Prepaid Phone Cards Settles Charges with FTC and New York State Attorney General

A seller of prepaid phone cards has agreed to settle the Federal Trade Commission’s and the New York State Attorney General’s charges of deception in the advertising and sale of prepaid phone cards. According to the Commission, Rajesh Kalra, through his corporations, Trans-Asian Communications, Inc., Raj Telekom, Inc., and TransAmerican Systems, Inc., operating in New York City, attracted consumers with promises of prepaid phone cards at extremely low rates. Consumers, however, often never received their prepaid cards or could not get through to designated access numbers, the FTC alleged in a complaint filed on August 7, 1997 in federal district court. In addition, according to the complaint, many of the cards’ personal identification numbers ("PINS") did not work or stopped working before the card’s value was depleted. In other instances, the FTC alleged, the card’s value was reduced too quickly. The proposed settlement announced today would prohibit the defendants from making any misrepresentations; requires a $1,000,000 performance bond before Kalra can market prepaid phone cards; requires a $40,000 payment; and imposes a $1 million judgment if he is found to have misrepresented any material financial information provided as a basis for the settlement.

Prepaid phone cards embody a right to exchange the card’s monetary value for telephone calling time, often at specified rates. According to the FTC, some prepaid phone cards are issued by long distance carriers. Others are issued by companies that purchase long distance minutes at volume-discounted rates, either from long distance carriers or from other companies that have purchased volume-discounted minutes from the long distance carriers. Prepaid phone cards have been used abroad since the mid-1970s and were introduced in the United States in 1992. According to the industry’s trade association, International Telecard Association, they have undergone astounding sales growth, from 15 million cards sold in 1993 to 200 million cards in 1995 to a projected 500 million cards in the year 2000. Corresponding dollar sales are $75 million in 1993, $1 billion in 1995, and a projected $4 billion in 2000.

Trans-Asian/Raj Telekom targeted their prepaid phone cards to members of the Indian- American community. Through advertisements in Indian newspapers published in the U.S., its home page on the World Wide Web, and promotional displays in retail outlets, Trans-Asian and its codefendants attracted purchasers with the promise of prepaid phone cards enabling users to call India and neighboring countries from anywhere in the U.S. at any hour of the day or night at extremely low rates. Most consumers purchased phone cards in $100 and greater denominations, the FTC said.

According to the FTC and the NYS Attorney General’s complaint, when a consumer inquired about the purchase of prepaid phone cards, the defendants’ representatives reiterated the advertised claims of inexpensive minutes of calling time to India. The purchasers were told that the value of the card would be reduced only for calls made and at promised per-minute rates and were told to send a check to the company for the total cost of the card. The complaint alleges that consumers who called to obtain their cards were often put off for days or weeks with various excuses, despite the fact that their checks had cleared. In many cases, consumers or distributors received no benefit of their purchase because no cards were ever issued to them or the cards issued did not function. In other instances, consumers or distributors received cards that functioned initially, but inexplicably ceased to function after a short period of usage. Still other consumers were unable to ever reach the companies’ toll free access numbers to ask about delivery of their cards.

The proposed settlement would prohibit Kalra from advertising or selling prepaid phone cards or related products or services unless he first obtains a performance bond in the principal sum of $1,000,000. If he does participate in this business again, he and his corporations would be prohibited from misrepresenting that (1) consumers or distributors of their prepaid phone cards will promptly receive cards or personal identification numbers and toll free access numbers immediately after they are paid; (2) Kalra’s prepaid phone cards or PINS will be reduced in value for minutes of calling time only commencing after the party called answers the phone and until either party to the call hangs up or is disconnected; (3) Kalra’s prepaid phone cards or PINs will be reduced in value only at the advertised per minute rates; and (4) he will, within a reasonable time after request, provide dissatisfied consumers or distributors with refunds or with viable replacement prepaid phone cards in exchange for nonfunctioning prepaid phone cards.

The defendants also must pay $40,000. The settlement further would establish $1,000,000 as the total amount they would be liable for should the Commission or the Attorney General’s office determine it necessary to reopen the case and the Court finds that there was false or omitted material information in defendants’ financial statements.

The proposed settlement also contains record keeping and other compliance requirements.

A free FTC brochure for consumers, titled “Buying Time: The Facts About Pre-Paid Phone Cards,” provides information about consumers’ rights and gives consumers tips on how to avoid scams.

Before purchasing a prepaid phone card, consumers should:

• Ask if the retailer will stand behind the card if the telephone service is unsatisfactory.
• Look for the rate for domestic and international calls on the card’s package or on the vending machine. These rates may vary depending on where you call. If you can’t find the rate, call the card’s customer service number.
• The prepaid phone card industry is highly competitive. Beware of very low rates, particularly for international calls. They may indicate poor customer service.
• Look for disclosures about surcharges, monthly fees, or per-call access.
• Check on expiration dates.
• Look for disclosures about surcharges, monthly fees, or per-call access.
• Be sure the card comes with instructions that you can understand.
• Make sure the card comes in a sealed envelope or has a sticker covering the PIN.

The FTC and the Office of New York State Attorney General filed the settlement in the U.S. District Court for the Southern District of New York on March 17, 1998. It is subject to the approval of the judge. The Commission vote to file the settlement was 5-0.

NOTE: The Stipulated Final Judgment and Order for Permanent Injunction is for settlement purposes only and does not constitute an admission by the defendants of a law violation. Judgments have the force of law when signed by the judge.

Copies of the judgment and the FTC brochure, titled “Buying Time: The Facts About Pre- Paid Phone Cards,” are available from the FTC’s Consumer Response Center, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-3128; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC’s World Wide Web site at: http://www.ftc.gov

(Civil Action No. 97 CIV. 5764) (MBM)
(FTC File No. 970 076)