Crammers Settle FTC Charges (October 2001)

Scheme operators who deceptively advertised a free 800 number dating service and then worked with a so-called "billing aggregator" to "cram" unauthorized charges of $3.99 a minute onto callers' phone bills, have agreed to settle Federal Trade Commission charges that their scheme violated federal laws. The defendants will pay $20,000 in redress and will be barred from the illegal actions in the future.

In July 1998, the FTC filed suit against the operators of the scheme -- Online Consulting Group (Online), and David Peterson, its owner and president -- and the billing aggregator they used to insert their charges onto consumers' phone bills, International Telemedia Associates, Inc. (ITA), its owner, Arjuna Diaz, and its president, Gerard Engle. Billing aggregators act as intermediaries between vendors of various services and the local phone companies.

The complaint alleged that Online, ITA and their principals were billing consumers for unauthorized charges for "audiotext" services -- telephone-based entertainment programs -- "crammed" onto consumers' telephone bills, in violation of Section 5 of the FTC Act and the FTC's 900-Number Rule. In September 1998, the parties stipulated to a preliminary injunction to halt their illegal conduct. By that time, both ITA and Online had ceased operations, and ITA's creditors had filed an involuntary Chapter 7 bankruptcy petition against ITA. The FTC reached a final settlement with the Chapter 7 bankruptcy trustee for ITA. Under the terms of the agreement, the Commission received an allowed claim of $3.5 million in ITA's bankruptcy case. While the bankruptcy proceeding is still in progress, the FTC has received $700,000 so far and expects to receive additional moneys at the conclusion of the proceeding. Because consumers injured by this scheme cannot be identified, the defendants' ill-gotten gains will be disbursed to the U.S. Treasury. The FTC has also obtained a default judgment against defendant Diaz. The settlements announced today resolve the FTC's case with Engle, Online and Peterson.

The settlement with Peterson and Online bars them from offering any audiotext service via an 800 or toll-free number unless, before incurring any cost, the customer agrees to credit card billing. This measure ensures that consumers purchasing any telephone-based entertainment or information service from these defendants in the future will have the strong protections accorded credit card purchases under federal law. Peterson and Online are also barred from making any misrepresentations -- including misrepresentations that any such service is free -- in any audiotext or other telephone-billed transaction.

In addition, the settlement bars:

• misrepresentations that audiotext services have been provided to any telephone line;
• misrepresentations in billing descriptions -- such as misrepresenting that audiotext charges were for "collect" telephone calls; and misrepresentations that line subscribers are obligated to pay for telephone-billed transactions that they have not agreed to purchase or have not received.

Peterson and Online also are barred from violations of the FTC's 900-Number Rule. The settlement also requires clear and conspicuous disclose of the charges for their services. Finally, Peterson will pay a judgment of $10,000.

The settlement with defendant Engle bars misrepresentations that services have been provided or that consumers are obligated to pay for services they did not authorize. It bars the use of misleading billing descriptors such as "collect" or "long distance," and bars billing and collecting for charges incurred in violation of the 900-Number Rule. The settlement prohibits the use of a toll-free number to make collect calls back to consumers for audio information or entertainment services. Engle also will pay a $10,000 judgment.

Both settlements contain reporting and record-keeping provisions to allow the FTC to monitor compliance with the orders.

The Commission vote to approve the settlements was 5-0. The settlement was filed in United States District Court for the Northern District of Georgia.

Copies of the complaints and settlements are available from the FTC's web site athttp://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357). The FTC enters Internet, telemarketing and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies worldwide.