Articles Posted in FTC Consumer Protection Highlights

On June 12, the FTC asked the court to halt the deceptive practices and misrepresentations and to freeze the BurnLounge’s assets, pending a trial, to preserve them for consumer redress. On June 6, 2007, the FTC filed a complaint in the U.S. District Court for the Central District of California against BurnLounge, Inc. The complaint charged that BurnLounge held an illegal pyramid scheme by selling opportunities to operate on-line digital music stores. The FTC is seeking a permanent halt to the illegal pyramid practices as well as other illegal practices alleged in the complaint.

BurnLounge allegedly recruited consumers through the Internet, telephone calls, and in-person meetings by convincing them that they were likely to make substantial income. The consumers were sold so-called “product packages,” ranging from $29.95 to $429.95 per year. More expensive packages purportedly provided participants with an increased ability to earn rewards through the BurnLounge compensation program.

The BurnLounge compensation program primarily provided payments to participants for recruiting of new participants, not on the retail sale of products or services, which the FTC alleged would result in a substantial percentage of participants losing money.

On May 31, the FTC asserts that public agencies can help reduce the incidence and impact of identity theft. The FTC, in a discussion with the Ohio Privacy and Public Records Access Study Committee in Columbus, also affirms that government agencies should limit the amount of information they collect, restrict access to the information, and implement procedures to respond to data breaches.

The President’s Identity Theft Task Force was presented at the testimony delivering a comprehensive national strategy to combat identity theft. The plan, that has 31 initiatives the federal government should consider taking to combat identity theft, included recommendations on how to prevent sensitive data from falling into the wrong hands, to make such data less valuable to identity thieves by improving authentication, to ease victim recovery and to improve tools for effective criminal law enforcement.

The FTC’s testimony suggests that federal government agencies take steps to eliminate, restrict, or conceal the use of SSNs, often the key to identity theft, wherever possible. The suggestions to the federal agencies can be applied equally to government agencies at all levels.

On May 15, the FTC banned Elliot Krasnow from ever promoting or selling franchises or business opportunities ever again. Along with his company Netvertise, Inc, Krasnow returned $160,000 to consumers after the FTC charged that they used bogus earnings claims to lure franchisees into buying their Web services businesses, and failed to tell customers that the owner was under a previous FTC order for deceptively promoting rare coins.

Netvertise, Inc. and Elliot Krasnow allegedly violated federal law when they sold franchises for Web site design and promotion services to businesses. The franchises, which cost between $20,000 to $100,000, offered various Internet services to small and medium-sized businesses, including the construction and promotion of Web sites, use of e-mail marketing, and off-site data protection. The franchise included Netspace’s Search Engine Optimizing software, which they claimed would allow franchisees to create high-quality Web sites for clients that would appear on the first page of results from an Internet search engine.

Krasnow allegedly overstated the value of the Netspace software and misrepresented that franchisees would earn substantial incomes. The complaint also charged that the earnings claims were unsubstantiated and that the defendants provided consumers with defective disclosure documents. In 1990, Krasnow had to pay $400,000 and prohibited misrepresentations when dealing in rare coins. The franchise disclosure documents did not disclose this to franchisees as required by law. The defendants also did not provide franchisees with an earnings claim document even though they made earnings claims to potential buyers. In fact, even though they made oral representations, the defendants’ basic disclosure document said no earnings claims were made.

On May 8, the FTC banned a scammer from telemarketing and from selling any type of business program in the future. Richard C. Neiswonger, who boasted that consumers could earn a six-figure income if they purchased and used his $10,000 asset protection service business program, had previously been previously charged with falsely claiming that consumers would make a substantial income. Neiswonger had failed to disclose that his company’s references were paid for favorable reviews. An FTC order entered in 1997 barred those deceptive practices, but the scammer has violated the order by using the same deceptive business practices in his most recent scheme. In addition, he failed to disclose significant facts to consumers, especially his time spent in federal prison for money laundering and wire fraud – a violation of the FTC order.

Richard C. Neiswonger, based in Las Vegas, Nevada, his business partner, William S. Reed, and their firm, Asset Protection Group, Inc., sold consumers their “APG Program” for $9,800, promising that it would result in a six-figure income. The company provided references that consumers could call who would back up their claims. Consumers also received training materials, a one-day training session, and a business affiliation with APG, which defendants claimed would provide consumers with prospective clients. Consumers were supposed to make money by selling APG’s asset protection services to clients who wanted financial privacy and wanted to make their assets less obvious to potential litigants or creditors. These services involved guidance on forming Nevada corporations and creating offshore corporations.

Consumers paid thousands of dollars for cold call lists, rather than pre-screened clients. Approximately 94 percent of the consultants failed to earn back their initial purchase fee for the program and only one person ever earned a six-figure income. The company’s references were, in fact, paid to deliver positive reviews of their experience. In addition, the 1997 order required that Neiswonger provide written proof to the FTC of a $100,000 performance bond to the FTC before marketing any program, which he failed to do while continuing to market his business opportunity program.

On April 27, the FTC settled charges against two companies for unfair and deceptive rebate practices. The FTC’s complaint against Soyo, Inc., a Nevada corporation, alleges that most of Soyo’s rebates were delivered late – in some cases, consumers had to wait a year or longer for their checks to arrive. The FTC’s complaint against the InPhonic, a Delaware corporation, alleges that, in connection with its advertised rebate offers, among other things, the company failed to provide promised documents needed to obtain rebates, to send out rebate checks in the time promised, and to disclose adequately certain material terms and conditions prior to purchase. The settlements bar the companies from similar violations in the future and require them to pay outstanding rebates to affected consumers.

Soyo, Inc. The FTC’s complaint alleges that Soyo made deceptive claims about its rebate program for computer motherboards and other consumer electronics products. After an investigation, the FTC found that thousands of consumers had submitted valid rebate requests since 2004 and had experienced delays, some for one year or more, in receiving rebate checks. Specifically, between October 2004 and March 2006, more than 95 percent of Soyo’s rebate checks were delivered to consumers later than 12 weeks after the date on which a valid request was postmarked. The average delivery time for the company’s rebates to consumers was about 24 weeks. The company was misrepresenting to consumers that the rebate checks would be mailed within a reasonable time, which was within 10-12 weeks after the postmark date of the program.

The FTC’s order prohibits Soyo from misrepresenting the time in which it will mail a rebate, as well as from failing to provide a rebate within the time specified, or if no time is specified, within 30 days. The order also prohibits Soyo from misrepresenting any material terms of a rebate grogram and contains a redress program that requires Soyo to pay out all the valid rebate requests is has that are past due.

On April 24, the FTC mailed out an additional 1,500 claim forms for reimbursement to consumers who may have been victims of identity theft due to alleged security lapses at data broker ChoicePoint, Inc.

In December, 2006, the FTC mailed claim forms to 1,400 consumers.

In 2005, ChoicePoint, which compiles and sells personal information, announced that it had sold information about many consumers to people who turned out to be identity thieves. The FTC, after some investigation found this to be the case. In the settlement between the FTC and ChoicePoint the company was required to pay $5 million to be used to reimburse consumers for expenses due to identity theft caused by ChoicePoint’s security breach.

On March 12, Kmart Corporation agreed to settle FTC’s charges that it engaged in deceptive practices in advertising and selling its Kmart gift card. Kmart will implement a refund program and publicize it on its Web site. This is the agency’s first law enforcement action involving gift cards.

According to the FTC’s complaint, Kmart promoted the card as equivalent to cash but failed to disclose that fees are assessed after two years of non-use, and misrepresented that the card would never expire. Kmart has agreed to disclose the fees prominently in future advertising and on the front of the gift card.

The FTC’s complaint alleges that since 2003, Kmart did not disclose adequately that after 24 months of non-use, a $2.10 “dormancy fee” would be deducted from the card’s balance for each month of inactivity, resulting in a $50.40 reduction from the card’s value if the card was not used for 24 months. In many instances, the FTC alleges, consumers did not learn of the fee until they attempted to use their cards. The FTC’s also alleges that since December 2005, Kmart’s Web site stated that the gift cards never expire, even though the dormancy fee caused cards valued at $50.40 or less to expire after two years of inactivity. As of May 1, 2006, Kmart stopped charging a dormancy fee on all Kmart gift cards.

On February 28, Nicholas C. Albert, an affiliate Webmaster who used the allure of “free” music downloads to spread malicious computer code, is settling FTC charges he violated federal law. The defendant, who was paid to distribute the code by the company that developed it, will give up all of his ill-gotten gains and is permanently bared him from interfering with consumers’ computer use, including distributing software code that tracks consumers’ Internet activity or collects other personal information, changes their preferred homepage or other browser settings, inserts new toolbars onto their browsers, installs dialer programs, inserts advertising hyperlinks into third-party Web pages, or installs other advertising software. He is also prohibited from making false or misleading representations; prohibited from distributing advertising software and spyware; and is required to perform substantial due diligence and monitoring if he is to participate in any affiliate program. Albert will also give up his ill-gotten gains – $3,300.

According to the FTC complaint, Albert was deceptive when he bundled Enternet Media’s malware with “free” music made available to bloggers and others at his Web sites: iwebtunes.com and iwebmusic.com. Bloggers who selected a music file from Albert’s site also received a bundled piece of java script code that caused their blogs to display Enternet Media’s deceptive software installation boxes. Then, whenever a consumer landed on a blog that had downloaded files from Albert, the consumer would not only hear music, but would also see the pop-up.

Enernet Media’s code would automatically install when the consumers downloaded the offer for free browser upgrades. The FTC alleged that the code interfered with the functioning of the computer, and was difficult for consumers to uninstall or remove. In addition, the code tracked consumers’ Internet activity, changed their home page settings, inserted new toolbars onto their browsers, inserted a large side “frame” or “window” onto browser windows that in turn displayed ads, and displayed pop-up ads, even when consumers’ Internet browsers were not activated.

On February 2, a Canadian telemarketer that falsely claimed it could reduce U.S. consumers’ credit card rates, was stopped by a federal court.

The FTC’s complaint alleges that the defendants have sold credit card interest rate reduction services since December 2005, claiming affiliation with consumers’ credit card companies. The defendants promise to effect credit card rates between 4.75 percent and 9 percent, thus saving consumers at least $2,500, and that if consumers do not save that amount their money will be refunded. The complaint also alleges that the defendants engaged in Caller ID spoofing, causing consumers’ caller identification services to display telephone numbers that do not belong to the defendants, but rather to innocent victims whose telephone numbers are misappropriated.

The defendants sent consumers promotional materials with promises to reduce their interest rates, and a “financial profile form” that the consumers had to mail back for $675 plus $20 for shipping and handling. The form asks consumers to list their current balance, credit limit, interest rate, and suggested minimum payment for each of their credit card and other debts, as well as their social security number and other personal information.

On January 8th, a payment processor violated federal law when it debited, or tried to debit, more than $9.9 million from consumers’ bank accounts – at $139 each – without their approval. According to a complaint the FTC filed in federal court, Nevada-based InterBill Ltd. acted on behalf of a fraudulent enterprise known as “Pharmacycards.com.” In 2004 the FTC charged Pharmacycards with debiting millions of dollars from consumers’ checking accounts, without their consent, for nonexistent discount pharmacy cards.

InterBill’s business is processing payments for merchants, including those its industry considers “high risk,” such as online gaming and mail and telephone marketing. Using consumers’ names and bank account information provided by Pharmacycards, InterBill debited thousands of consumers’ accounts despite indications that the operation was bogus. Consumers had no contact with InterBill or Pharmacycards before money was taken from their checking accounts.

According to the complaint, InterBill did not follow its own guidelines for new merchants before doing work for Pharmacycards, including collecting information, checking references, and verifying a physical address. Pharmacycards provided a London, England, mail drop as a business address and conducted all of its business by pre-paid, virtually untraceable cellular phones and free, anonymous e-mail and facsimile accounts. The Pharmacycards Web site provided a toll- free customer service number that was answered at a call center in Montreal, Quebec, Canada and a fake address in British Columbia, Canada. Pharmacycards operators used the identity of a Cyprus corporation and directed that their funds be wired to a Cyprus bank account.