Court Releases $1.6 Million to FTC in Adult Videotext Case

In a decision holding that it is unfair and unlawful to bill charges to consumers’ telephone numbers for such things as so-called “videotext” services – Internet-based visual entertainment – when the consumer has not agreed to purchase or pay for them, the Federal District Court for the Southern District of New York on September 17 ruled that Verity International Incorporated, Ltd. (VIL) and three other defendants are responsible for $1.6 million in unauthorized charges they caused to be billed to consumers between July and September 2000.

The court also ruled that representing to line subscribers that they owe charges for such unauthorized purchases is unlawfully deceptive. This decision provides consumers with strengthened protection against misuse of the telephone billing system, and makes clear that a consumer’s telephone number is not a proxy for actual authorization to purchase services other than basic telephone transmission services.

The decision allows the FTC to seek an order to release funds the court froze when the FTC filed its case in October 2000, with the potential to reimburse consumers for their losses. The court also found that the three other defendants that controlled or assisted VIL in the scheme are liable for an additional $16.3 million they wrongfully billed consumers between January and July 2000.

After receiving hundreds of complaints from consumers billed by the company for videotext services, in the fall of 2000 the Commission charged VIL, its owners Robert Green and Marilyn Shein, and defendants Integretel, Inc., and eBillit, Inc., with defrauding U.S. consumers. The Commission later amended its complaint to add Automatic Communications, Ltd. (ACL), a corporation used by Green and Shein to bill consumers earlier in 2000. The court decision announced today resolves the charges against the defendants, who continue to be barred from engaging in similar deceptive practices.
Case Background

In September 2000, the FTC’s Consumer Response Center began receiving numerous complaints about bills received for Internet videotext services. Based on these complaints, the Commission opened an investigation that led to charges being filed in early October 2000 against VIL and its principals, as well as the Integretel defendants, for their alleged involvement in an illegal multinational Internet billing scheme.

The FTC’s rapid-response investigation revealed that “dialer” software downloaded from teaser adult Web sites caused charges to be billed to consumers’ phone numbers. Many consumers who contacted the FTC had no idea why they were receiving the bills, and had not authorized the charges. Others discovered that a minor in their household – without their permission – had accessed the teaser sites and downloaded the dialing software. The dialer program allowed Internet users to access the adult content without any means of verifying that the user was the telephone line subscriber or was authorized to incur charges on the line subscriber’s bill. Once the dialer software was downloaded, it disconnected the consumer’s modem from its usual Internet service provider, dialed an international phone number to Madagascar, and reconnected the modem to the Internet from some overseas location. The line subscribers then began incurring charges on their phone lines for the remote Internet connection at the rate of $3.99 per minute.

The Complaint and Stipulated Final Order

In its complaint, the FTC alleged that although VIL’s bills, which were mailed by the Integretel defendants, deceptively represented that the calls reconnecting consumers’ modems to the Internet terminated in Madagascar, in fact they were “short-stopped” in London or some other location. Thus, line subscribers were charged the rates to Madagascar at $3.99 per minute, compared to about $.08 per minute to London.

According to the Commission, the Integretel defendants, working on behalf of VIL, mailed consumers bills based solely upon the automatic number identification (ANI) of the telephones that connected to the Web sites operated by VIL’s clients. The invoices included a toll-free number, which was answered by contractors of the Integretel defendants, that consumers could call if they had questions about the charges. After receiving the VIL bills, thousands of consumers flooded Integretel’s call center with complaints. The FTC contends that even though in many cases the Integretel defendants knew that the line subscribers denied authorizing the charges, they told them that all of the charges were valid and had to be paid. An Integretel representative conveyed this information to consumers, who were placed on hold while waiting to speak with the representative.

Based on this conduct, the FTC charged the Integretel defendants with: 1) billing line subscribers whose computer modems and telephones may have been used to access Internet Web sites by using the VIL defendants’ dialing program, but who themselves did not access the sites; 2) misrepresenting to line subscribers that they were legally obligated to pay for that access,
whether or not the line subscriber actually accessed the sites; and 3) misrepresenting on billing statements that calls for which the line subscribers were billed terminated in Madagascar, while they actually were short-stopped in London.

The U.S. District court for the Southern District of New York ordered a freeze on all money collected on the VIL bills on the same day the FTC filed its case. As a result, none of the $1,616,678 paid by consumers on the VIL bills was released to the defendants. The court later allowed the Commission to expand its complaint to cover defendants’ prior wrongful billing through ACL.

The Integretel defendants settled the Commission charges in late 2002, through a stipulated final court judgment that barred them from engaging in deceptive billing conduct (see press release dated November 26, 2002, http://www.ftc.gov/opa/2002/11/integretel.htm). The Integretel defendants also were ordered to release all claims to the $1.6 million consumers paid on the VIL bills, with the money transferred to an escrow account and held there until the conclusion of litigation against the remaining defendants.

The Final Court Decision

The final court decision, issued September 17, 2004, by the U.S. District Court for the Southern District of New York, allows the Commission to submit an order to dispose of the $1.6 million currently held in escrow and to ban VIL, Green, and Shein from participating in any capacity in the offering of audiotext or videotext services to U.S. consumer. The order also will place reasonable restrictions on ACL’s billing practices, and hold ACL, Green, and Shein liable for the $16.3 million harm they caused consumers in early 2000. Until the injunction becomes permanent, a preliminary injunction will remain in effect.

NOTE: Verity International, Ltd. is in no way affiliated with Verity, Inc., of Sunnyvale, California.

Copies of the final court order are available from the FTC’s web site at http://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), or use the complaint form at http://www.ftc.gov. 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.

(FTC File No. 002-3386; Civ. No. 00 Civ. 742)