• On July 29, the Federal Trade Commission (“FTC”) issued its ninth quarterly announcement summarizing the agency’s enforcement efforts against telemarketing fraud and abuse. The quarterly enforcement update lists significant case developments in 22 federal district court cases occurring between May and July 2005. A Web page containing the “Quarterly Update for July 2005” also contains a list of enforcement actions involving telemarketing that have seen developments since October 1, 2002, with links to press releases related to each of these actions. The Web page also contains information about 165 actions involving the use of the telephone to market goods or services. This information covers cold-call outbound telemarketing, as well as inbound calls generated from advertisements or other solicitations to purchase products or services. The quarterly enforcement update can be found on the FTC’s Web site at: www.ftc.gov/bcp/conline/edcams/telemarkfraudenforcement/update05jul.htm. The telemarketing fraud and abuse enforcement Web page can be found at: www.ftc.gov/bcp/conline/edcams/telemarkfraudenforcement/index.html. In addition to helping consumers learn about the Commission’s enforcement actions, the Web page and the quarterly enforcement update provide consumers with easy access to information about the specific frauds and abuses perpetrated using telephone calls and the types of matters prosecuted by the Commission, including matters brought under the Telemarketing Sales Rule and its National Do Not Call Registry. 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.

• The FTC won a $10.2 million judgment against a debt- collection operation, National Check Control, and its principals on July 28. The amount represents the largest judgment in FTC history for violations of the Fair Debt Collection Practices Act (“FDCPA”). In addition, a federal district court judge permanently banned the defendants from engaging in debt collection in the future. In a complaint filed in May 2003, the FTC alleged that the defendants violated the FDCPA by harassing and threatening consumers with claims that they owed money for checks returned for insufficient funds. The defendants made repeated phone calls, sent threatening letters, and falsely threatened that consumers could face civil or criminal charges if they did not pay the debts. The FTC alleged that, in many cases, the consumers did not owe the money, or owed far less than the defendants claimed. At that time, the court entered a temporary restraining order freezing the defendants’ assets. In addition to the ban on debt-collection activities and the $10,204,445 judgment, the court banned the defendants from violating the FDCPA in the future, including harassing consumers with repeated phone calls, obscene language, or threats of legal action; misrepresenting the amount a consumer owes; failing to notify consumers of their right to dispute the debt; and misrepresenting that the person contacting the consumer is a lawyer. The defendants are further barred from selling or transferring any consumer accounts. In order to satisfy the monetary judgment, the court ordered the defendants to turn over all of their assets. It is not yet clear how much money actually will be available for redress.

• On July 27, the FTC provided the Senate Special Committee on Aging with a report detailing patterns of complaints regarding fraud and identity theft from consumers age 50 and older. Testifying for the FTC, Lois Greisman, Associate Director of the Division of Planning and Information in the FTC’s Bureau of Consumer Protection, said that in 2004, consumers age 50 and over reported $152,000,000 in fraud losses to the agency. After identity theft, Internet auction fraud is the top category of fraud complaints for consumers both over and under 50 years. Greisman said, however, that FTC data showed that older consumers more frequently fall victim to some types of fraud. According to the testimony, the FTC received 650,000 fraud and identity theft complaints in 2004 – 85 percent provided the consumer’s age and approximately a quarter of those complaints – 145,895 – were from consumers age 50 and over.

• The FTC, advancing its fight against scams targeting the Hispanic community, announced six law enforcement actions during the Hispanic Law Enforcement and Outreach Forum in Phoenix, Arizona on July 26. The cases target deceptive marketing for a range of products and services, including work-at-home business opportunities, disease cures, and weight-loss supplements. The Hispanic Law Enforcement and Outreach Forum was hosted by the FTC, the U.S. Postal Inspection Service, and the U.S. Attorney’s Office in Phoenix as part of the FTC’s ongoing effort to expand outreach into the Hispanic community and bring local law enforcement and Hispanic community leaders together in the fight against fraud. It is the latest in a series of workshops that aim to identify local problems and discuss ways to address them; facilitate open dialogue with local government, consumer groups, and members of the Hispanic community on issues affecting Hispanic consumers; and share consumer education resources to help local communities conduct outreach about fraud and how to report it. Previous workshops were held in Chicago, Dallas, and Miami, with another event planned in Los Angeles for later this year. At the workshop, the FTC also announced a new educational outreach partnership with Arizona State University-West Campus, where the workshop was held.

• On July 25, the Federal District Court in Newark, New Jersey, entered a final default judgment against NorVergence, Inc., that immediately resulted in the cancellation of 1,600 contracts with the company valued at more than $47 million. The judgment is the result of a November 2004 FTC complaint charging NorVergence with defrauding consumers through misleading claims that it would provide them with dramatic savings on their monthly telephone, cellular, and Internet bills. The court found that consumers signed a set of applications and agreements with a total price equal to the promised monthly payments over five years. Most of the total payments were allocated to rental agreements for a “Matrix” or “Matrix Soho” device that supposedly would provide the promised costs savings. In reality, the Matrix was just a standard integrated access device, commonly used to connect telephone equipment to a long-distance provider’s lines. The Matrix Soho was essentially a firewall. The Matrix boxes cost between $200 and $1,550. The total cost to the consumer was $7,000 to $340,000, with an average cost of $29,291. The price of the rental agreement had nothing to do with the cost of the Matrix, which itself was an incidental part of the promised services. NorVergence had an estimated 9,400 Matrix rental agreements totaling over $275 million. Other than the 1,600 contracts cancelled by this judgment, NorVergence sold its rental agreements shortly after they were signed to over 40 finance companies for cash. These sold contracts were not immediately affected by the default judgment. An unknown minority of these contracts were sold to finance companies for only a part of their typical five-year term.

• In a crackdown on operations that illegally expose unwitting consumers to graphic sexual content, the FTC charged seven companies with violating federal laws requiring warning labels on e-mail that contains sexually-explicit content on July 20. U.S. District Court suits filed against three operations seek civil penalties and a permanent bar on the illegal marketing. Settlements with four other operations imposed $1.159 million in civil penalties. The settlements bar the illegal marketing practices in the future and require that the defendants monitor their affiliates to ensure they are not violating the law. The FTC’s Adult Labeling Rule and the CAN-SPAM Act require commercial e-mailers of sexually-explicit material to use the phrase “SEXUALLY EXPLICIT:” in the subject line of the e-mail message and to ensure that the initially viewable area of the message does not contain graphic sexual images. The Rule and the Act also require that unsolicited commercial e-mail contain an opportunity for consumers to opt out of receiving future e-mail and provide a postal address, among other things.

Authored by:
Camelia Mazard
202-218-0028
cmazard@sheppardmullin.com