• Two Internet-based companies and their principals were permanently barred from misrepresenting any product or service on November 30, and will pay refunds to their consumer victims to settle Federal Trade Commission (“FTC”) charges that their business practices violated federal laws. In a complaint filed in February 2005, the FTC alleged that, in the course of marketing and selling Internet-based business opportunities via direct mail and telemarketing, the defendants, Wealth Systems, Inc. (“Wealth Systems”), Ecommerce Network.com, LLC, and their principals, Martin Wilson and Shane Roach, enticed consumers to become what the defendants called “Web brokers.” The FTC’s complaint alleges that the defendants claimed that consumers could earn $20,000 to $50,000 by purchasing “Web broker packages” priced from about $300 to $1,400 or more. Consumers received a mailing with testimonials from “Web brokers,” one of whom claimed to have made “over $300,000 in a little over a year.” According to the FTC, the defendants offered advertising “coaches” and advertising packages costing “as low as two dollars” to help purchasers. Once consumers purchased a Web broker package, the advertising coaches allegedly used high-pressure sales tactics to persuade consumers to buy advertising services from them, stressing the need to spend as much money as possible on advertising in order to make a profit. Some of the advertising packages cost tens of thousands of dollars. The defendants allegedly claimed that one person had earned more than $12,000 in a month, and another person had invested only $300 and was receiving his first earnings check for $680. As alleged in the complaint, few, if any, consumers who purchased the defendants’ business opportunity and/or advertising services made any money, and few consumers received refunds. According to the FTC, consumers were not given any pre-sale disclosure documents with information about Wealth Systems, such as names, addresses, and telephone numbers of Wealth Systems members and their earnings; or an earnings claim document stating a reasonable basis for defendants’ earnings claims; or the number and percentage of prior purchasers who had achieved results as good as or better than the represented earnings.
  • According to a study released on November 20 by the FTC, spammers continue to harvest email addresses from public areas of the Internet, but Internet Service Providers’ anti-spam technologies can block the vast majority of spam sent to these email addresses. The FTC staff report also found that consumers who must post their e-mail addresses on the Internet can prevent them from being harvested by using a technique known as “masking.” The agency studied three aspects of spam: e-mail address harvesting – the automated collection of e-mail addresses from public areas of the Internet; the effectiveness of spam filtering by ISPs; and the effectiveness of using “masked” e-mail addresses as a technique to prevent the harvesting of e-mail addresses. To conduct the study, FTC staff created 150 new undercover e-mail accounts – 50 at an ISP that uses no anti-spam filters and 50 each at two different ISPs that use spam filters. They then posted the e-mail addresses on 50 Internet sites, including message boards, blogs, chat rooms, and USENET groups where spammers might go to attempt to harvest the addresses. The study concluded that spammers continue to harvest e-mail addresses posted on Web sites, but addresses posted in chat rooms, message boards, USENET groups, and blogs were unlikely to be harvested. After a five week trial, e-mail addresses at the unfiltered ISP received a total of 8,885 spam messages. At the end of the same period, email addresses at one of the ISPs that uses filtering technologies received a total of 1,208 spam messages, and email addresses at the second ISP that uses filtering technologies received a total of 422 spam messages. The filter of the first ISP blocked 86.4 percent of the spam, and the filter of the second ISP blocked 95.2 percent of the spam. The study also tested whether using “masked” e-mail addresses prevents the harvesting of e-mail addresses and consequently reduces spam. “Masking” addresses involves altering an e-mail address to make it understandable to the recipient but confusing to automated harvesting software. For example, an e-mail address such as johndoe@ftc.gov could be altered to appear as john doe at FTC dot gov.
  • The FTC announced on November 23 that it found a high level of compliance in East Texas with the FTC’s Funeral Rule, which protects consumers from abusive practices in the funeral industry. In a recent sweep of funeral homes in the Tyler, Texas area, nine of the 10 funeral homes shopped were found to be in compliance with the rule. The FTC’s Southwest Region office test-shopped the funeral homes as part of the FTC’s ongoing nationwide law enforcement program. Under the program, FTC test shoppers visit funeral homes to see if they comply with key requirements of the law, such as providing consumers with an itemized general price list that contains mandatory disclosures and an itemized price list for caskets. The Funeral Rule is designed to ensure that consumers receive price lists and are told they can purchase only the goods and services they want or need for consumers. In January 1996, the FTC announced the Funeral Rule Offenders Program (“FROP”), a joint effort with the National Funeral Directors Association (“NFDA”), to boost compliance with the Funeral Rule. Under the FROP, funeral homes that do not give test shoppers itemized price lists in a prescribed time and manner may choose to enter the FROP program rather than face possible legal action, which could result in an injunction and civil penalties. If they choose FROP, they make a voluntary payment to the U.S. Treasury in lieu of civil penalties, and enroll in a program administered by the NFDA, which includes a review of price lists, compliance training, and follow-up testing and certification. Depending on the severity of the violation, funeral homes may be given the opportunity to resolve law violations through means other than through FROP or a formal law enforcement action, which could result in an injunction and civil penalties. Among those alternative means of resolving possible violations, a funeral home may receive a letter notifying the funeral home that it is not in compliance with the Rule and warning that future noncompliance could result in a monetary penalty.
  • A Costa Rican operation that used Voice over Internet Protocol (“VoIP”) services, shell corporations, aliases, and shills to con U.S. consumers into investing in a bogus business opportunity was halted by a U.S. District Court at the request of the FTC on November 16. The court issued a temporary restraining order barring the false claims, freezing the defendants’ assets, and appointing a receiver, who shut down the toll-free and U.S. phone lines used to market the scheme. The defendants used classified ads and a Web site to advertise their coffee display rack franchises. They claimed that in exchange for payments from $18,000 to $85,000, they would provide customers with what they needed to operate a successful coffee display rack business, including assistance in finding profitable locations for the racks. According to the company’s Web site, it was located in Las Cruces, New Mexico and had been in business since 1994. According to the FTC’s complaint, the scam actually was based in Costa Rica, but the defendants used VoIP services to obscure the location of the business and make it appear that they were operating from New Mexico. The complaint also alleges the company has been operating for months, not years, as claimed on the Web site. The FTC’s complaint alleged the defendants made false claims about earnings potentials, locations available for the display racks, and company-selected references. The complaint further alleged the defendants did not make certain disclosures required in the initial disclosure documents and in advertising that contained earnings claims. Representatives selling the franchises for the defendants claimed that consumers would make no less than $1,055.60 per week if they operated a 13-display rack venture.
  • The FTC announced on November 14 it had received a final court order barring several Canadian-based telemarketers from misleading U.S. consumers about their ability – for a fee – to shield them from other unwanted telemarketing calls, as well as various types of fraud, including bank fraud and identity theft. The defendants often operated under the guise of the FTC, another government agency, or a bank to convince elderly consumers to provide them with their bank account information. They then used this information to steal hundreds of dollars from each victim, using either direct electronic debits or “demand drafts,” which operate like a check but do not require the consumers’ signature. In reality, the FTC alleged, the defendants provided nothing at all for their $399 up-front fee and had no way to sign consumers up for the National Do Not Call Registry as promised. In July 2004, the FTC charged the defendants with operating a deceptive “consumer protection service,” engaging in telemarketing calls that targeted elderly consumers in the United States and promised to protect them from telemarketing and unauthorized banking. During the calls, the FTC alleged, the defendants often posed as government or bank officials in an attempt to trick consumers into disclosing their bank account numbers. They then used this information to debit money from the consumers’ accounts. The FTC alleged that the defendants stole some victims’ money even after the consumers specifically said they did not want the “services” offered. The FTC also charged the defendants with misrepresenting the cost of their products, sometimes telling consumers they were free, then automatically debiting $399 from their bank accounts. In other cases, they allegedly promised consumers a $500 credit to offset the $399 charge, or claimed they would deduct the $399 in small installments. In all cases, the defendants never received written permission to debit consumers’ accounts.
  • On November 10, the FTC staff sent warning letters to 34 Web site operators making claims that products advertised as natural alternatives to hormone replacement therapy would prevent or treat diseases, such as cancer, heart disease, or osteoporosis. The warning letters advised these sellers that their marketing claims may be illegal. The letters, sent to Web sites identified through an FTC Internet surf, warned that any health-related claims must be supported by competent and reliable scientific evidence. Another 16 sellers received letters from the U.S. Food and Drug Administration warning them that their business practices may violate FDA law. The Web sites were identified during a FTC Internet surf of sites making claims that their hormone replacement therapy alternative products – for example, progesterone creams, sprays or dietary supplements containing plant-based hormones – could cure diseases or prevent them. The letters noted that the FTC staff was not aware of any competent and reliable scientific evidence to support claims that the types of products advertised could prevent, treat, or cure cancer, heart disease, or other diseases, prevent osteoporosis, or increase bone density. They also emphasized that according to FTC case law, all health claims – including claims about the safety of natural hormones – must be supported by reliable scientific evidence. The letters offered guidance to the businesses, pointing them to the FTC publication Dietary Supplements: An Advertising Guide for Industry, on the FTC’s Web site at http://www.ftc.gov/bcp/conline/pubs/buspubs/dietsupp.htm and Frequently Asked Advertising Questions: A Guide for Small Business, on the FTC’s Web site at http://www.ftc.gov/bcp/conline/pubs/buspubs/ad-faqs.htm. FTC staff strongly advised the marketers to review their advertising and promotional materials, and to revise or delete any false, misleading, or unsubstantiated product claims.
  • On November 9, Stewart Finance Company, seven related companies, and their principals agreed to settle FTC charges that the companies deceived consumers, many of them elderly, by, among other things, packing optional products such as accidental death and dismemberment insurance and membership in roadside assistance clubs onto small personal loans of $500 or less. The settlement requires the companies to shut down and to agree to the entry of a $10.5 million judgment in the FTC’s case. The companies will liquidate their assets in federal bankruptcy court and through a federal district court receivership. Because the companies also owe amounts to other creditors, the FTC does not expect to collect the full amount of its judgment against the defendants. Monies the FTC receives through the bankruptcy and receivership will be combined with amounts due from certain individual defendants and directed to a consumer redress fund. In a complaint filed in September 2003, the Commission alleged that the defendants deceptively induced consumers to purchase expensive add-on products ancillary to the loan, to participate in a free “direct deposit” program that was not in fact free, and to incur additional costs and fees by repeatedly refinancing their loans. The complaint also alleged that the company failed to provide consumers who were denied loans with federally required “adverse action” notices, and took unlawful security interests in borrowers’ household goods. According to the FTC, the Stewart companies violated the FTC Act, the Truth In Lending Act, its implementing regulation, Regulation Z, the Fair Credit Reporting Act, and the FTC’s Credit Practices Rule. In addition to defendants Stewart Finance Company and the late John Ben Stewart Jr., the FTC’s complaint named Stewart Finance Company Holdings, Inc.; Stewart National Finance Company, Inc.; D & E Acquisitions, Inc.; Preferred Choice Auto Club, Inc.; Stewart Insurance, Ltd.; and J & J Insurance, Ltd. The complaint also named Mr. Stewart’s wife, Janice Stewart, and his two sons, William Joseph Stewart and John Benjamin Stewart III. The family members of John Ben Stewart Jr., the deceased company owner, were joined solely as relief defendants and were not charged with any wrongdoing. The stipulated final order permanently bars the Stewart companies and their principals from participating in any lending or direct deposit business.

Authored by:
Camelia Mazard