Fighting Consumer
Fraud:
New Tools of the Trade
A Report from the
Federal Trade Commission
April 1998
FEDERAL TRADE COMMISSION - 1998
ROBERT PITOFSKY, Chairman
MARY L. AZCUENAGA, Commissioner
SHEILA F. ANTHONY, Commissioner
MOZELLE W. THOMPSON, Commissioner
ORSON SWINDLE, Commissioner
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
THE CHAIRMAN
Dear Reader:
1997 was an important year for law enforcement officials across the nation involved
in the fight against consumer fraud. The Federal Trade Commission filed over 50 lawsuits
against fraudulent operators and formed alliances with other consumer protection
authorities that resulted in 374 actions being filed by our law enforcement partners. Cases
filed by the FTC alone stopped alleged frauds that cost consumers over $185 million in
1997, and more than $747 million over the lifetime of the scams. These accomplishments
were enhanced by collaborative efforts with other federal agencies, state Attorneys General
and other state law enforcement agencies, and foreign governments, and cooperation
between civil and criminal authorities.
These law enforcement efforts were supported by a practical, plain-English
consumer education program conducted by the FTC, often with the collaboration of the
private sector. During 1997, the FTC and its partners disseminated over 7 million
publications, counted over 610,000 unique accesses to information on its web site, and
through mass media took steps to raise consumer awareness of the many facets of fraud.
The Commission’s major law enforcement and education initiatives of the year
addressed the actions of fraudulent telemarketers of investment offerings, crooks who
promised would-be inventors sophisticated market research and patentability studies, scam
artists who hoped to make their fortune marketing pyramid schemes, and fraud promoters
who claimed “scientific breakthroughs” for health products, peddled “guaranteed” work-at-
home business opportunities, and pitched international lottery ticket scams. One technique
they shared was using the Internet as an inexpensive and efficient way to reach vast
numbers of consumers.
Other scams depended on the unique features of the Internet. For example, some
consumers who surfed the Internet were hooked up to international pay-per-call lines
without their prior authorization. Other unwary consumers fell prey to unsolicited e-mail
with claims for get-rich-quick schemes and bogus investments.
The Commission’s actions to address Internet fraud represent a fraction of its total
anti-fraud effort. With its partners, the FTC has used technology for enforcement,
detection, deterrence and education. The Commission believes that its actions thus far have
been effective and offers this report in the hope that these collective efforts serve as a guide
for fighting online consumer fraud in the future.
By direction of the Commission.
Robert Pitofsky
Fighting Consumer Fraud
1
Executive Summary
Since the days of snake oil salesmen and medicine shows, fraud operators have
appealed to consumers’ concerns about health, financial security, and social acceptance.
Today’s con artists are pitching sure-fire cures, easy money, and self-improvement, but
they’re no longer confined to traditional venues to perpetrate their frauds. The Internet is
now mainstream, and it is allowing fraud promoters to mimic legitimate business more
convincingly—and reach potential victims more efficiently—than ever. The Internet is
quickly becoming the marketplace of choice for a host of deceitful pyramid schemers,
bogus work-at-home promoters, spurious health and weight loss claims, and a new
generation of fraud that uses increasingly sophisticated technology.
Some fraudulent promoters stick to traditional media to peddle exotic investments,
phony magazine and travel offers, and sham invention promotion services. Still others,
using fire and police charities as their cover, stay with the telephone to misrepresent that
the funds they collect from neighbors and local businesses will go directly to community
organizations.
The Federal Trade Commission therefore focused its enforcement and education
efforts on novel schemes as well as traditional scams. The FTC filed over 50 cases and
orchestrated 11 major “sweeps” with law enforcement partners in other federal agencies
and the states. These efforts resulted in an additional 374 state and federal actions. The
Commission also worked to achieve greater international cooperation to combat cross-
border fraud, step up criminal enforcement against those who violate FTC orders, and
broaden its education programs for consumers and business through cooperative efforts
with industry organizations, the media, and various Internet groups.
In 1997, cyberfraud accounted for a relatively small percentage of total consumer
complaints. But, with electronic commerce burgeoning and the number of people online
skyrocketing, it is taking on increasing importance for consumer protection authorities.
This report tells the story of the FTC’s 1997 experience with fraud in cyberspace: how it
occurs and how the agency has refashioned the “tools” of its trade to fight it.
Fighting Consumer Fraud
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Fighting Consumer Fraud
3
Consumer Fraud on the Internet
The Internet holds great promise for the American consumer. Originally the domain
of academicians, scientists, and the techno-elite, the Internet now offers an infinite array of
ideas, entertainment, and commercial products to every consumer with a computer and
modem. The installation of faster lines, better search engines, and more security for online
transactions surely will prompt even more consumer use.
By December 1997, 58 million adults (defined as ages 16 years and older) already
were online in the United States and Canada.
1
Of those, 48
million reported that they had shopped for product
information on the World Wide Web,
2
and as many as 10
million reported that they had purchased a product or
service online.
3
Internet advertising totaled approximately
$571 million for the first three quarters of 1997, a 263
percent increase over the same time period in 1996.
4
Analysts estimate that Internet advertising revenues could
reach $940 million in 1997 and $4.35 billion by the year
2000.
5
Consumers and commercial marketers are not the only
groups to see the value and power of the Internet. Con
artists also are online, hoping to take advantage of low
startup costs; the possibility of “real-time” immediate
payments; a nearly infinite number of places to “hide” from
law enforcement; unparalleled ability to mimic legitimate
business; and instant access to a global customer base.
Today’s fraud peddlers can confuse consumers more easily
through web sites that are as sophisticated and appealing as
those of many legitimate businesses.
Fighting Consumer Fraud
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This report details the FTC’s 1997 experiences fighting cyberfraud. It describes
examples of technology-based fraud and traditional fraud occurring over the Internet, and
explains how the FTC is using the Internet for law enforcement and consumer education.
Fighting Consumer Fraud
5
Law Enforcement Actions
The FTC has authority to combat fraudulent practices by bringing civil lawsuits in
federal district courts. These cases involve alleged violations of Section 5 of the FTC Act,
which prohibits unfair or deceptive acts or practices. Since 1994, the FTC has brought 26
law enforcement actions challenging fraud and deception on the Internet. Most of these
cases challenged deceptive claims that the FTC would pursue in any medium. To date,
only one FTC enforcement has involved the deceptive use of technology itself, but it is
only a matter of time before technology-based fraud becomes more prevalent.
The Hijack: A New Type of Fraud
FTC v. Audiotex Connection, Inc. introduced the
Commission to a form of fraud unique to the Internet.
Consumers who visited the site, www.sexygirls.com,
were prompted to download a purported “viewer
program” to see computer images for free. Once
downloaded, the consumer’s computer was “hijacked” as the “viewer” program turned off
the consumer’s modem speakers, disconnected the computer from the local Internet
access provider, dialed an international telephone number, and reconnected the computer
to a remote foreign site. The international call cost more than $2 a minute, and charges
accrued until the consumer turned off the computer. Consumers were charged for calls
made to Moldova, even though the calls went only as far as Canada. In some cases, the
charges to consumers ran into thousands of dollars.
The FTC confronted a dual challenge: mastering the technology and finding the
perpetrators in cyberspace. With help from both the private sector (AT&T) and
government (Secret Service), staff learned the intricacies of the viewer software, how to
use the Internet to find the scammers and their assets, and how to find aggrieved
consumers.
The Commission filed its complaint in February 1997, and stopped the operation
one month after receiving notice of the scam. The victims, over 38,000 consumers, are
Fighting Consumer Fraud
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Test Yourself #1
A promoter tells you he’s selling shares
in a partnership. You confirm that a
large, legitimate firm is making huge
profits in a similar business and its
stock is doing well. Your promoter says
only a few shares in his partnership
remain— and they’ll be gone if you
don’t send your money by wire transfer.
Buying into the next available
partnership opportunity will cost three
times as much.
$OLID F RI$KY F
Answers on page 24.
expected to share $2.74 million in redress from the Audiotex case—100 percent
compensation for their injury.
The Hype: Traditional Fraud and Deception on the Internet
Among the driving forces in the recent bull market are technology stocks in
general and Internet-related stocks in particular. Officials of the Securities and Exchange
Commission (SEC) and the North American Securities Administrators Association, Inc.
(NASAA) have identified the Internet as a major breeding ground for “pump and dump”
stock manipulations, penny stock frauds, and other securities schemes.
6
Meanwhile,
unregistered investments have mushroomed on the Internet. It was no surprise, then, to
find fraud operators who were trumpeting the riches to be reaped through online
businesses.
Money-Making Opportunities
In Project Field of Schemes, federal
and state law enforcement officials targeted
novel investment frauds. The Internet played
a prominent role in the sweep. For example,
the FTC’s case against Intellicom Services,
Inc. involved 12 corporate defendants and 10
individual defendants who promised enormous
profits from Internet access businesses and
Internet shopping malls. The FTC alleged that
telemarketers sold over $30 million in bogus
high-tech investments. In an offering they
called Home Net, the defendants offered
interests in a partnership to develop a “virtual shopping mall” where consumers
supposedly could view products and buy them from their home computers. Predicting a
track record like that of QVC and the Home Shopping Network, the defendants claimed
that the shopping mall was under construction, that they were locating merchants, and that
Home Net would feature live actors as hosts. They promised investors returns of up to
600 percent the first year.
Fighting Consumer Fraud
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Test Yourself #2
A promoter gives you names of several
satisfied customers around the country.
When you call, one claims to be an
attorney, another a small businessman,
and a third a retired professional. All
say they have received returns from
investing with the promoter and are
making profits.
$OLID F RI$KY F
Answers on page 24.
Meanwhile, other Intellicom defendants peddled an “Enternet” investment in
Internet Service Provider (ISP) businesses which provide subscribers access to the
Internet. Comparing their venture to Netscape and Earthlink, two well-known national
services that enable subscribers to access the Internet, the defendants allegedly claimed
investors would earn as much as a 207 percent return in the first two years. Like the
Home Net promoters, the Enternet group maintained a web site with hyperlinks to other
sites proclaiming that the ventures were “under construction.”
In both instances, the FTC alleged that the “constructed” site and the profits were
nonexistent. According to the FTC complaint filed in July 1997, the defendants skimmed
the proceeds, making it impossible for these ventures to succeed. The FTC, together with
the California Department of Corporations, filed suit against these operations, obtaining
asset freezes and preliminary relief. The SEC also filed suit against some of the
defendants, and the FBI served search warrants as part of the investigations.
Other Internet-related scams involve web sites that are luring consumers off-
line—into fraudulent telemarketing pitches. Another Field of Schemes target, Dayton
Films, involved the promoters of a movie
production offering who posted a web site
with a 32-page financial prospectus and a
toll-free telephone number. Telemarketers
allegedly told consumers who called that the
film’s director had won an award from the
prestigious Cannes Film Festival and had
averaged a 500 percent profit in his last 10
films—claims the FTC says are false.
Rosario Filosi, one of the defendants, has
agreed to a permanent injunction, including a
provision which bans him from telemarketing
activities.
Another Field of Schemes case, Coastal Gaming, involved telemarketers for a
casino ship venture who posted a web site inviting Florida tourists to visit their ship, The
Fighting Consumer Fraud
8
Dixie Duck. The FTC alleged that investors were told that they could expect a return of
100 to 300 percent on their investment from Coastal Gaming’s operation of this cruise
ship. In fact, in its few weeks of operation, the ship lost money virtually every time it
sailed. Earlier in the offering, Coastal Gaming telemarketers allegedly claimed the
company had purchased a luxury gambling cruise ship called The Midnight Gambler. They
also represented that Gloria Estefan, Dan Marino and the Hilton Corporation had entered
into agreements with Coastal Gaming to promote the good will and name of The
Midnight Gambler. The FTC alleges that Coastal Gaming never purchased the luxury
gambling cruise ship called The Midnight Gambler and had no contracts with celebrities.
Operation Mousetrap was a law enforcement sweep that attacked
misrepresentations by invention promotion firms. The FTC filed suit against Davison &
Associates, alleging that the company claimed to prepare objective and expert analyses of
patentability and marketability of consumers’ invention ideas and claimed to have an
extensive database of corporations with whom they regularly negotiate licensing
agreements. Davison & Associates operated a web site allegedly representing that
inventions could be marketed profitably if the inventors would contract with a particular
invention promotion firm; however, consumers were never able to recover their
investment through Davison & Associates’ services.
In summary, the Internet is teeming with pitches to make easy money as legions of
“traditional” fraudsters search for new targets. Indeed, the Internet is a “target-rich”
environment. While the fastest-talking telemarketer may be hard-pressed to make more
than 150 calls a day, a scammer can e-mail thousands of individuals in less than an hour.
Consumers are likely to be inundated with e-mail solicitations in the future, and should
view unsolicited commercial e-mail with the same healthy skepticism they would use to
evaluate any other sales solicitation.
Fighting Consumer Fraud
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Test Yourself #3
A promoter sends you glossy materials
by overnight courier. An enclosed note
mentions that the business is
headquartered at the World Trade
Center in New York, and that offices
are located in Chicago, Los Angeles,
and Washington, D. C. A call to
directory assistance in those cities
confirms that the promoter has
addresses in each one.
$OLID F RI$KY F
Answers on page 24.
Pyramid Schemes
Like multi-level marketing programs, pyramid schemes provide financial incentives
to recruit new distributors. Pyramids compensate distributors almost exclusively for
recruiting other distributors; product marketing activities are merely incidental. Pyramid
schemes, unlike multi-level marketing plans, are generally prohibited because it is a
mathematical certainty that the pyramids will collapse when no new distributors can be
recruited. When the plan collapses, most people—except perhaps those at the very top of
the pyramid—lose their money. Unfortunately, the Internet offers a fast lane for pyramid
builders by facilitating large-scale recruitment in little or no time.
As part of the Field of Schemes
Sweep, the FTC brought two cases involving
alleged pyramid schemes. In FTC v. Rocky
Mountain International Silver and Gold, Inc.
(RMI), the FTC alleged that a pyramid scheme
masqueraded as a multi-level marketing
operation selling silver and gold coins.
Although RMI initially advertised the scheme by
direct mail, it abandoned this method in favor
of the Internet by the time the FTC filed suit.
Promising that “silver is your golden
opportunity,” the Internet advertisement
hyperlinked customers to RMI’s web site, which featured brochures, applications, and
participation agreements for recruiting new members. The FTC obtained a preliminary
injunction and asset freeze against RMI.
In FTC v. JewelWay International, Inc. (JewelWay), the FTC alleged that the
defendants ran a pyramid scheme via an Internet home page and group presentations. The
FTC charged JewelWay and six individual defendants with making deceptive earnings
claims. The claims induced an estimated 150,000 consumers to invest an average of
$1,000 each in an allegedly illegal multi-level marketing plan. The defendants offered
consumers the chance to earn up to $2,250 a week—plus bonuses—by participating in a
Fighting Consumer Fraud
10
Test Yourself #4
A promoter tells you on the phone that
the investment he’s offering is
expected to return about 30 to 40
percent annually within about a year -
and your entire investment in 18
months. You check the written
materials he sent and find a disclosure:
The investment is high-risk and you
could lose all your money. You don’t
find any written claims about the
returns.
$OLID F RI$KY F
Answers on page 24.
multi-level marketing plan to sell fine jewelry.
Consumers who joined the plan were told to
recruit two new representatives each. Last
June, the FTC alleged that the company paid
commissions based on the recruiting of new
participants, not the retail sale of products.
As a result, the FTC said, the defendants were
running an illegal pyramid scheme, not a bona
fide multi-level marketing plan. Last
November, the FTC settled charges against
JewelWay and its corporate officers in an
agreement requiring a $5 million redress
payment for distribution to injured consumers.
FTC v. Nia Cano, et al., filed in October 1997, showcased a new combination—an
alleged pyramid that used “spam,” or unsolicited e-mail advertising, to recruit distributors.
Nia Cano allegedly promised consumers huge profits for selling memberships in an
organization that issued credit cards with a credit limit of $5,000. Actually, the cards were
debit cards, which provide for payment for purchases by immediate withdrawals of funds
held in bank accounts. Consumers never received the credit cards. Distributors were
assured that they would earn $18,000 a month for signing up new recruits. Some
distributors then recruited down the line with unsolicited e-mail containing allegedly
deceptive claims. Interestingly, this case resulted from staff review of unsolicited
commercial e-mail and news group messages. Last October, the FTC obtained an
injunction, an asset freeze, and a court-appointed receiver over the business. An estimated
$2 million has been frozen in this case.
Health Claims
Health and diets are popular subjects on the Internet. Much of the content is
simply a free exchange of information, opinion, and conjecture unrelated to the
commercial promotion of particular health products or services. The Internet also hosts
thousands of commercial health promotions—not all of them legitimate.
Fighting Consumer Fraud
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Top 10 Lines From Fraudulent Investment Promoters
1. “We don’t make money unless you make money.”
2. “I know you get offers everyday from people who tell you they’re going to make
you rich. I can make it easy for you to make your decision based on actual
facts.”
3. “This opportunity is the best chance to make extra money for guys who work for
a living... guys like you and me.”
4. “I’ve been in the business for 20 years, and I can tell you this: I know no other
program that’s legal that’s so easy to afford and so easy to work that can bring
in this kind of big money from such a small investment.”
5. “I know this can work for you. I personally guarantee your success, right down
to the last penny.”
6. “Give me one percent of your trust. I’ll earn the other 99 when you see the
return.”
7. “Of course there’s a risk. There’s a risk in everything.”
8. “Sure we could finance this venture ourselves. But we’re trying to build a power
base for the future with folks like you.”
9. “We’re talking about a cash cow here. But it’s going fast. I need your check
tomorrow at the latest.”
10. “I can’t be lying. There are laws against that.”
High pressure sales pitches may sound exciting, but as a rule, should be resisted.
Before you invest any money, take your time. Get a second opinion from a
professional you trust: a financial planner, an attorney, or an accountant. Finally,
research the company’s reputation. Call your local consumer protection agency and
the consumer protection agency in the city where the company is headquartered for
more information.
In SlimAmerica, a defendant with a history of using traditional media to scam
consumers is charged with using the Internet to make allegedly deceptive claims for a diet
product called “Super-Formula.” The defendant claimed that the product would “blast”
49 pounds off in 29 days, “obliterate” five inches from waistlines, and “zap” three inches
from thighs. Consumers spent $9.5 million purchasing the diet product before the FTC
intervened. The FTC filed suit in federal district court in Florida last January, obtaining an
asset freeze over $1.4 million, as well as other preliminary relief. A trial was held in
December 1997, and post-trial pleadings are pending.
Fighting Consumer Fraud
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Surf Days: Detection and Deterrence
While fraud artists obviously find the Internet an effective way to reach vast
numbers of potential victims, consumer protection authorities have found it also is an
efficient mechanism for deterrence. Recognizing that many Net entrepreneurs seem
unaware of applicable rules and regulations, the FTC has spearheaded a new approach to
alerting these entrepreneurs to how they can comply with the law. Organized “surf days”
prevent violations among naive or unsophisticated business people, and also alert scam
artists that the FTC and its partners are on the Internet beat.
To surf, the FTC Consumer Protection staff identifies a type of deceptive practice
that appears to be prominent on the Internet. Staff develops a protocol to find sites
displaying the practice. Staff then recruits a cadre of surfers (federal, state, and
international law enforcement agencies, and sometimes industry associations), sets a time
and date, and searches the Web for sites with troubling claims. Web sites matching the
profile for possible law violations are marked, downloaded, printed and sent to the FTC.
At the FTC, attorneys review the hard copy and identify sites that are most likely
to be violating the law. FTC attorneys send the operators of these sites an e-mail message
and/or a letter to alert and educate the operators about the FTC’s jurisdiction, what the
law requires of advertisers, and why the web site raises a red flag. The communications
do not state that the operator has violated the law, but warn that operators in violation of
the FTC Act may be subject to enforcement action. Included in the e-mail message is a
link to the FTC’s web page where site operators can learn more about relevant law and
requirements.
FTC investigators and attorneys, who have made follow-up site visits
approximately a month after surf days, have found that 18 to 70 percent of the
questionable sites had been eliminated or revised. If an advertiser continues to make
misleading or deceptive claims, staff may open investigations and pursue law enforcement
efforts.
The FTC’s seven surf efforts in 1997 (six of them inter-agency and one
international) identified thousands of questionable advertisements. These efforts included:
Fighting Consumer Fraud
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z A Credit Repair Surf Day, conducted with staff from the office of the
Attorney General of Illinois just before the Credit Repair Organization Act
became effective in April 1997. The Act prohibits credit repair organizations
from requesting or collecting a fee until they have performed the promised
services and protects consumers from unfair or deceptive advertising and
business practices by these organizations. This “mini-surf” found dozens of
firms charging fees based on the false claim that they can erase accurate
negative information from consumers’ credit histories. Each firm received an
e-mail message about the new federal credit law. Staff continues to monitor
electronic credit repair ads. (March 1997)
z A Business Opportunities Surf Day that uncovered several hundred Internet
sites making suspicious earnings claims for start-up businesses. One month
after sending instructive e-mails, staff found that nearly 23 percent of the sites
had removed their questionable earnings claims or their entire solicitation from
the Internet. (April 1997)
z A ScholarScam Surf Day, conducted with Commission staff and the office of
the Attorney General of New York. The surf targeted deceptive scholarship
offers. Commission staff sent notices to operators of 28 web sites, alerting
them that the Commission recently had filed suits against companies making
the same or similar claims about their ability to obtain scholarships for
students. As a result of the notices, 6 sites shut down or modified their claims
by the initial follow-up. (June 1997)
z A Coupon-related Business Opportunity Surf Day with the Coupon
Information Center, a non-profit organization that battles costly coupon fraud.
This effort disclosed unsupportable income claims by 31 work-at-home
coupon-clipping businesses. (August 1997)
z An International Health Claims Surf Day, conducted with government
agencies from the United States, Canada and Mexico, as well as private
organizations such as the American Heart Association and American Cancer
Society. The search focused on claims for products or services that promised
Fighting Consumer Fraud
14
to cure or prevent cancer, heart disease, AIDS, diabetes, arthritis, or multiple
sclerosis. The surfers identified more than 400 web sites, plus many Usenet
news groups that flaunted suspicious claims. FTC staff sent e-mail messages
to sites, alerting them that their claims require scientific substantiation,
requesting the substantiation as necessary, and letting them know how the FTC
acts to stop harmful claims. (October 1997)
z A HUD Tracers Surf Day, conducted jointly with the federal Department of
Housing and Urban Development, searched for web sites that falsely claimed
to be authorized by HUD to either trace money owed consumers as part of the
Federal Housing Authority (FHA) mortgage insurance refund program or sell
business opportunities to do HUD tracing. Law enforcement agents identified
330 web sites, news group postings, and bulk e-mail messages that included
questionable earnings claims or claimed to be affiliated with or authorized by
HUD. Site operators were told that if their claims could not be substantiated,
they could be violating the law. One month after the warnings were sent, 70
percent of the sites had been taken down or questionable material had been
changed. (November 1997)
z An International Internet Surf Day sponsored by the International Marketing
Supervision Network, an association of consumer protection agencies from
over two dozen countries. The Australian Competition and Consumer
Commission coordinated the international surfers while the FTC organized
U.S. participants including 23 states, the Securities and Exchange Commission,
and the Commodity Futures Trading Commission. Surfers in the U.S.
identified 168 web sites promoting possible pyramid schemes or business
opportunities. Possible pyramid sites received messages that explained the
distinction between multi-level marketing plans and illegal pyramid schemes.
Business opportunity promoters received messages emphasizing their legal
obligation to post truthful earnings claims, and to be able to substantiate those
claims. One month after the warnings were sent, 31 of the sites had been
Fighting Consumer Fraud
15
removed or modified to eliminate apparent misrepresentations. (November
1997)
Fighting Consumer Fraud
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Industry Education: Advisory Letters
Commission staff is often asked to provide opinions on the application of FTC law
to discrete situations. Such opinions are not binding on the Commission, but provide
guidance to businesses, particularly new enterprises seeking to conform their practices to
comply with FTC statutes, precedents and decisions. During 1997, two staff advisory
letters dealt with fraudulent and deceptive practices on the Internet. The letters were both
sent to Network Solutions, the company responsible for issuing the universal resource
locators (URLs—names that identify Internet sites). The letters addressed two instances
of deceptive URLs:
z During the July 4th weekend, more than 2.6 million Internet users, many of
them children, visited NASA’s Internet site at www.nasa.gov to view
pictures sent from Mars. Unfortunately, a commercial pornography site
registered the URL www.nasa.com. When Internet users looking for
pictures from Mars entered the word “NASA” in their search engine, they
were as likely to land on the porn site as the genuine NASA site. Both
NASA and the FTC received complaints from parents whose children were
deceived. FTC staff provided an advisory opinion to Network Solutions
stating that the site might be deceptive. Network Solutions subsequently
withdrew the www.nasa.com URL.
z The URL for Network Solutions is www.internic.org. An Australian
company, Internic Software, Inc. obtained the URL www.internic.com,
and used the site to pose as Network Solutions. Visitors to the copycat
web site could apply online for a URL, and were required to make an
electronic credit card payment of $250 as their URL license fee. Network
Solutions also offers online registration and collects payment online, but it
charges a $100 license fee. Although the Australian site operator
submitted the applications it received to Network Solutions with the $100
licensing fee, the would-be site operators who got URLs from the look-
alike site paid an additional $150. Commission staff issued an advisory
Fighting Consumer Fraud
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www.ftc.gov/bcp/conline/pubs/buspubs/busline.htm
letter to Network Solutions warning that the copycat web site might
mislead consumers and subsequently referred the matter to the Australian
Competition and Consumer Commission, which is now investigating the
practices of Internic Software, Inc.
Fighting Consumer Fraud
18
Teaser Site: www.ari.net/nordicalite
Consumer Education
The FTC works to stem unfair and deceptive practices through both law
enforcement and consumer education. Believing that the most effective consumer
protection is education, the FTC tries to alert as many consumers as possible to the tell-
tale signs of fraud. The agency’s information dissemination program is vital to the mission
of the agency. We work with a variety of “partners”—other federal agencies, state and
local consumer protection agencies, trade associations, professional organizations,
volunteer groups, corporations, Better Business Bureaus, the military, and extension
agencies, for example—and a variety of media—newspapers, classified ads, public service
announcements, bus placards, the Internet,
brochures, bookmarks, and puzzles, to
name a few.
Teasers and Tutorials
Too often consumers do not find
consumer protection information until it’s
too late. Using “teaser” web sites, the
FTC is trying to reach consumers before
they make a purchase or invest their
money. These “teaser” sites are Web
pages, accessible by major search engines
and indexing services, that mimic
fraudulent sites. Internet shoppers looking
for vacation deals, for example, may find
an innocent-looking site that offers a
money-saving, spectacular, luxury, dream
vacation.
7
A lovely sunset emerges.
Three clicks into the “come-on,” the FTC
seal appears. The site alerts consumers
that they can get scammed, and gives tips
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www.ftc.gov/bcp/conline/edcams/pyramid
on how to distinguish fraudulent pitches from legitimate ones. The site also links the
consumer to the Commission’s web site for additional information. The public has
responded favorably to these sites, and virtually all consumers expressed their appreciation
for the information.
8
The FTC also has devised Internet
tutorials in the form of interactive puzzles
and games to reinforce what consumers
have read on the FTC’s web site or in
their newspapers. For example, the Field
of Schemes investment fraud sweep,
(described on pages 6 - 10) included the
launch of an online quiz called “Test Your
Investment I.Q.”
9
A series of typical
telemarketing misrepresentations asks
consumers to define the investment
offering as “solid” or “risky.” Similarly,
the FTC, in connection with the Project
Mousetrap sweep against fraudulent
invention service promoters (described on
page 8), created an activity designed to
test the reader’s “Patent-ability”, which
was a crossword puzzle containing critical terms from the world of patents and idea
promotion.
10
The Commission has actively sought Internet companies and trade groups as
partners in educating consumers online. Many organizations are now circulating public
service messages on their Internet sites cautioning consumers to avoid particular scams,
and then “hot linking” them to the Commission’s web site for more information.
Commission staff also partnered with the North American Security Administrators
Association, Inc. (NASAA) to hold a real time online forum on the Internet in April
1997. Over 100 consumers participated in an electronic dialogue with state and federal
Fighting Consumer Fraud
20
experts about how to invest wisely in new business ventures or franchises. The
Commission posted the transcript of this “chat” session on its web site so that other
consumers could benefit from the exchange.
FTC’s Web Site and the New Interagency Consumer Site
Since April 1995, the FTC has maintained a much-visited web site, www.ftc.gov,
where consumers have availed themselves of a variety of information. The Commission
receives approximately 92,000 hits a day on this site. In October 1997 alone, the FTC
web site received more than 3 million hits. The site’s ConsumerLine page, which accounts
for about 30 percent of all the visitors, provides consumer alerts, online versions of all the
Commission’s consumer publications. The www.ftc.gov site was recognized many times
in 1997 as a “best of the Web” for ease of use and quality of information.
Building on the success of its home page, the Commission solicited other agencies
to create a new consumer site at www.consumer.gov. The Securities and Exchange
Commission (SEC), the Consumer Product Safety Commission (CPSC), the Food and
Drug Administration (FDA), and the National Highway Traffic Safety Administration
(NHTSA) are original partners in the development of the web site. The United States
Department of Agriculture (USDA), the Department of Education, the Department of
Health and Human Services (HHS), the Federal Deposit Insurance Corporation (FDIC),
Housing and Urban Development (HUD), the Federal Communications Commission
(FCC) and the Environmental Protection Agency (EPA) also have joined the
“consortium.” This site provides the public “one-stop shopping” for federal information
on consumer issues ranging from auto recalls to drug safety to information resources for
investors. Additionally, the site’s ScamAlert! provides current information on fraudulent
and deceptive practices in the marketplace. This feature appears on each page as
necessary, and contains law-enforcement information and tips to avoid scams.
Fighting Consumer Fraud
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www.consumer.gov
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Conclusion
With nearly 60 million adults already online in the United States and Canada, 10
million of whom have purchased goods or services online, cyber-advertising burgeoning,
and numerous new commercial sites opening daily, it is safe to say that the Internet has
“arrived” as a medium for commerce. Of course, the Internet poses many challenges
beyond the mere control of fraud, not the least of which is the potential invasion of
privacy. Maturing technologies—cybercash, encryption methods, advanced search
engines, and blocking technologies, to name a few—are beginning to allay consumer
concerns and converging to open the door to massive Internet commerce. The FTC is
working to meet the challenge this new medium poses for safe and secure transactions.
Much of the opportunity for honest Internet entrepreneurs, however, may be lost if
consumers fear commerce on the Internet due to fraud. It is in all our interests—business,
government, and consumers—to place a high priority on preserving the safety of the
Internet.
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1. CommerceNet and Nielsen Media Research, Electronic Commerce on the Rise According to
CommerceNet/Nielsen Media Research Survey, Dec. 11, 1997 (visited Jan. 22, 1998)
(http://www.commerce.net/news/press/121197.html). Another 1997 survey estimated the number of children
(defined as under age 18) online at 9.8 million. Interactive Research Report, Vol. 4, No. 5 at 1, May 1997
(discussing results of FIND/SVP’s 1997 American Internet User Survey).
2. CommerceNet/Nielsen Media Research Survey, supra note 1.
3. Id.; Yankelovich Partners, Retailing Potential on Internet Stronger than Suspected Finds Yankelovich
Cybercitizen Report, Mar. 27, 1997 (visited Jan. 22, 1998)
(http://www.yankelovich.com/Information/Press_Releases/970327.HTM) (finding that 23% of users ordered and
paid for a product over the Internet, i.e., “transacted” business online).
4. Internet Advertising Bureau Announces Third Quarter Advertising Revenue Reporting Program Results
(visited Jan. 22, 1998) (http://www.iab.net/news/content/new%20/1211report.html).
5. Jupiter Communications, Online Advertising Report, Aug. 22, 1997
(http://www.jup.com/digest/082297/advert.shtml) (figure includes directory listings and classified advertisements).
6. Joseph Cell III and John Reed Stark, SEC Enforcement and the Internet: Meeting the Challenge of the Next
Millennium—A Program for the Eagle and the Internet; The Business Lawyer (May 1997); NASAA brochure,
Cyberspace Fraud and the Small Investor.
7. EZ Travels (http://www.ari.net/travelog/eztrvl-1.htm).
8. Other teaser web sites include: EZ-Toys (http://www.ari.net/eztoyz) (“at least $100,000" in a sure-fire, business-
opportunity venture selling toys carrying well-known licensed brands); The Ultimate Prosperity Page
(http://www.ari.net/prosper) (glowing testimonials support claim that consumers will “earn $60,000 to $100,000 in
your first month.”); and NordiCaLite (http://www.ari.net/nordicalite/) (weight loss without diet or exercise—”no
dangerous pills, no special diet meals, no expensive doctor visits and no more rabbit food”).
9. (http://www.ftc.gov/bcp/conline/pubs/invest/quiz/testiq.htm)
10. (http://www.ftc.gov/bcp/conline/pubs/briefs/invntbrf.htm)
Endnotes
Fighting Consumer Fraud
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Test Yourself: Answers
1. RI$KY. Even before they’ve sold the first share of stock, scam artists tell investors
that only a few shares are left. But high-pressure sales tactics generally mean high-risk
investments, and investing thousands of dollars without adequate time to research the
offering is always risky. Don’t let any promoters fool you by equating their ventures
with those of large corporations. The only track record that matters has to do with the
specific venture you’re considering.
2. RI$KY. The people you talked with may be “singers” paid by the company to give a
good recommendation. Even if references are investors and exactly who they say they
are, a promoter may be paying them special “dividends” - to induce them into giving
positive references.
3. RI$KY. Anyone can rent luxury office space - even fraudulent promoters. But it’s
more likely that they have a “mail drop” at a luxurious address - a rented box for
receiving mail that is forwarded to another location. In fact, each of the “offices” may
be a mail drop, an apartment, or even a boiler room. As for glossy promotional
materials, they are essential tools of the trade. Scam artists know that these materials
may be your main source of information; they’re willing to spend money to lend
credibility and sophistication.
4. RI$KY. Get profit projections in writing. Ask for evidence of the promoter’s profit
projections and try to confirm them with independent sources. If written materials say
you could lose all your money, believe it. Investing is risky. If the talk is rosy but the
written materials paint an ominous picture of the risk, trying to recover any money
you’ve invested could be difficult.
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Appendix A
Federal Trade Commission Consumer Fraud Actions Filed in
Calendar Year 1997
Law Enforcement Sweeps and Multiple Filings
Project False Alarm: The FTC joined with state Attorneys General Offices or other
agencies from all 50 states to target the allegedly deceptive activities of certain for-profit
fundraisers who misrepresented ties with police departments, fire fighters, and other
community organizations. FTC actions included:
FTC v. The Century Corp.,
Civ. No. 1:97 CV 0130 (N.D. Indianapolis, IN. Complaint filed 4/7/97)
FTC v. The Dean Thomas Corp., et al.,
Civ. No. 1:97 CV 0129 (N.D. Indianapolis, IN. Complaint filed 4/7/97)
FTC v. Image Sales & Consultants,
No. 1:97-CV-131 (N.D. Indianapolis, IN. Complaint filed 4/7/97)
FTC v. Leon Saja d/b/a Southwest Publishing,
No. Civ. 97-0666 PHX SMM (D. Ariz. Complaint filed 3/31/97)
FTC v. Southwest Marketing Concepts, Inc., et al.,
Civ. No. H-97-1070 (N.D. Tex. Complaint filed 3/31/97)
“Field of Schemes” Investment Fraud Sweep: The FTC joined with the North
American Securities Administrators Association (NASAA), state securities regulators of
21 states, the SEC and CFTC, and other agencies to bring 61 law-enforcement actions
against telemarketers of investments and pyramid schemes. FTC actions stopped over
$150 million in fraudulent sales from offerings ranging from gold-silver mines to Internet
“virtual shopping malls.”
FTC v. Coastal Gaming, Inc.,
No. 97-4571 JSL (RNBx) (C.D. Cal. Complaint filed 6/23/97)
(investments in gambling cruise ships)
FTC v. Dayton Family Productions, Inc., et al.,
No. CV-S-97-00750-PMP (LRL) (D. Nev. Complaint filed 6/20/97)
(investments in movie productions)
Fighting Consumer Fraud
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FTC v. Equifin International, Inc., et al.,
No. 97-4526 DT (CWx) (C.D. Cal. Complaint filed 6/20/97)
(postage stamps and other investments)
FTC v. Gulfstar Corp., et al.,
No. 3-97-CV1508-G (N.D. Tex. Complaint filed 6/23/97)
(deceptive practices in sale of oil drilling investments)
FTC v. Intellicom Services, Inc., et al.,
No. 97-4572 TJH (Mcx) (C.D. Cal. Complaint filed 6/23/97)
(Internet shopping malls and other high-tech investments)
FTC v. JewelWay International, Inc., et al.,
No. CV97-383 TUC JMR (D. Ariz. Complaint filed 6/24/97)
(pyramid scheme)
FTC v. Rocky Mountain International Silver and Gold, et al.,
No. 97-WY-1296 (D. Colo. Complaint filed 6/23/97)
(pyramid scheme)
FTC v. Sweet Song Corp.,
No. 97-4544 LGB (JGx) (C.D. Cal. Complaint filed 6/20/97)
(gemstones as investments)
FTC v. Tippecanoe Mining, Inc.,
No. 97-4543 (C.D. Cal. Complaint filed 6/20/97)
(gold and silver mining ventures)
Project Mousetrap: The FTC, joining with the Pennsylvania and Florida Attorneys
General Offices, brought seven lawsuits against sellers of allegedly bogus “invention
promotion” services, alleging that firms made false claims regarding likely success. These
firms are believed to have sold over $100 million since the early 1990's. FTC cases
included:
FTC v. American Invention Associates, Inc., et al.,
No. 97-1114-A (E.D. Va. Complaint filed 7/14/97)
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FTC v. Davison Associates., Inc., et al.,
No. 97-1278 (W.D. Pa. Complaint filed 7/15/97)
FTC v. Eureka Solutions,
No. 97-1280 (W.D. Pa. Complaint filed 7/15/97)
FTC v. National Idea Network, et al.,
No. 97-1279 (W.D. Pa. Complaint filed 7/15/97)
FTC v. National Invention Services, Inc., et al.,
No. 97-3459 (MTB) (D.N.J. Complaint filed 7/14/97)
Operation Trip Up: The FTC joined with 12 state Attorneys General to target a wide
range of alleged vacation frauds and to implement an extensive consumer education
program. Cases were filed against alleged scams ranging from run-of-the-mill vacation
certificate telemarketers and timeshare resellers to novel variations of travel fraud,
including deceptive airline flight offers pitched to immigrants, and a new type of scam
called a travel agent “credential mill.” FTC cases included:
FTC v. Robert Dolgin d/b/a Design Travel,
No. C-97-0833 MHP (N.D. Cal. Complaint filed 3/10/97)
FTC v. Gold Crown Express, Inc.,
No. 4:97-0532-12 (D.S.C. Complaint filed 3/3/97)
FTC v. Travel Bahamas Tours, Inc.,
No. 97-6181-Civ-Ferguson (S.D. Fla. Complaint filed 2/26/97)
FTC v. World Class Network,
No. SACV-97-162-AHS(EEx) (C.D.Ca. Complaint filed 2/28/97)
FTC v. Your Travels and Tours, Inc.,
No. 97-10574WGY (D. Mass. Complaint filed 3/12/97)
Operation Trade Name Games: The FTC joined with the Kansas Attorney General’s
Office and seven additional states to bring over 18 enforcement actions against sellers of
allegedly fraudulent business opportunities involving the ownership of carousels displaying
products licensed by well-known companies. In many cases, sellers deliver defective or
outdated merchandise or charged retail rather than wholesale prices and purchasers are
seldom if ever able recover their investments. FTC cases included:
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1
A number of the cases in Compaña Alerta, though fraudulent in nature, were styled as administrative
settlements and therefore are not listed or tabulated in this Report. For simplicity’s sake, the Report lists only
federal court cases brought under the authority of section 13(b) of the FTC Act.
28
FTC v. Carousel of Toys USA, Inc.,
No. 97-8587 (S.D. Fla. Complaint filed 7/29/97)
U.S. v. Global Toy Distributors, Inc., et al.,
No. CV 97 5350 (E.D.N.Y. Complaint filed 7/30/97)
FTC v. Parade of Toys, Inc., et al.,
No. 97-2367-GTV (D. Kan. Complaint filed 7/25/97)
U.S. v. Toys Unlimited International, Inc.,
No. 97-08592 (S.D. Fla. Complaint filed 7/29/97)
FTC v. Unitel Systems, Inc., et al.,
No. 3-97CV1878-D (N.D. Tex. Complaint filed 8/1/97)
Campaña Alerta: The FTC joined with officials from the Mexican government, the Food
and Drug Administration, and seven state Attorneys General in an effort to prevent
fraudulent advertisements directed at Spanish-speaking consumers. Of the five FTC cases,
one was filed as a settlement in federal court—FTC v. Mountain Springs, et. al. No. 97-
4649 (Jgx) (C.D. Cal. Complaint filed 6/25/97).
1
Operation Peach Sweep: The FTC, along with eight state Attorneys General offices and
various local law enforcers and consumer and civic organizations, participated in a law
enforcement effort focusing on telemarketers who target consumers nationwide from
Georgia-based boiler rooms. FTC cases included:
FTC and State of North Carolina v. Resort Sales Group, Inc., et al.,
No. Civ. 3:97cv382-MU (W.D.N.C. Complaint filed 7/9/97)
FTC and State of Arkansas v. Surechek Systems, Inc.,
No. 1 97-CV-2015 (N.D. Ga. Complaint filed 7/9/97)
Operation Magazine Sales Project: The FTC and Attorneys General from five states
targeted magazine marketers who allegedly bilked tens of thousands of consumers out of
millions of dollars. The telemarketers used a variety of schemes, from phony prize
promotions to offers of “prepaid” subscriptions.
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FTC v. Mag-Topia, Inc., et al.,
No. SACV 97-447 AHS (ANx) (C.D. Cal. Complaint filed 5/1/97)
FTC and State of New Jersey v. National Scholastic Society, Inc.,
No. 97-2423 (D.N.J. Complaint filed 5/13/97)
FTC v. S.J.A. Society, Inc.,
No. 2:97CV472 (E.D. Va. Complaint filed 5/97)
ScholarScam Project: The FTC, following up on its Fall 1996 “ScholarScam” sweep,
brought simultaneous actions against two sellers of allegedly spurious scholarship services.
One case also alleged false accreditation by an allegedly bogus scholarship accreditation
service.
FTC v. National Grant Foundation, et al.,
No. 97-8836 (S.D. Fla. Complaint filed 11/3/97)
FTC v. National Scholarship Foundation, et al.,
No. 97-8836 (S.D. Fla. Complaint filed 11/3/97)
Project Mail Box: The FTC, U.S. Postal Inspection Service, the National Association of
Attorneys General (NAAG), 25 state Attorneys General Offices, local law enforcement
officials, and AARP brought 190 law enforcement actions against fraudulent direct mail
schemes targeted to senior citizens. FTC brought a case in FTC v. AKOA, Inc., et al.,
d/b/a National PC Systems, No. 97-7084-LGB (McX) (C.D. Cal. Complaint filed 9/25/97)
(deceptive mailings billing for unordered computer service contracts).
Operation Yankee Trader: The FTC targeted deceptive practices and Franchise Rule
violations in the sale of vending machine business opportunities. Three states joined in the
sweep, contacting unregistered business opportunities who had solicited residents in their
states. The FTC brought a case in FTC v. Stillwater Vending, Ltd., et al., No. 97-386-JD
(D.N.H. Complaint filed 8/7/97) (alleged exaggerated earnings claims and other
misrepresentations in sale of candy vending machines as business opportunities).
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Stand-Alone Cases
FTC v. David L. Amkraut,
No. 97-0354-RSWL (BQRx)(C.D. Cal. Complaint filed 1/17/97)
(unfair and deceptive practices in services offered in connection with the immigration
lottery for “green cards”)
FTC v. Audiotex Connection, Inc.,
No. C-97-0726 (E.D.N.Y. Complaint filed 2/12/97)
(deceptive practices in sale of www.sexygirls.com and other Internet sites)
FTC v. International Direct, Inc., et al.,
No. 397CV00721 PCD (D. Conn. Complaint filed 4/16/97)
(deceptive practices and violations of Mail Order Rule in sale of sundries through credit
card bill inserts)
FTC v. Licensed Producers USA, Inc.,
No. 97-938-CIV-ORL-22 (M.D. Fla. Complaint filed 7/30/97)
(violation of Franchise Rule)
FTC v. MJS Financial Services, Inc.,
No. 1:97-CV-3087-ODE (N.D. Ga. Complaint filed 10/9/97)
(deceptive practices and violations of Telemarketing Sales Rule in sale of advance fee
credit cards)
FTC v. Nia Cano d/b/a Credit Development Int’l & Drivers Seat Network,
No. 97-7947 IH (AJWx) (C.D. Cal. Complaint filed 10/28/97)
(deceptive practices in offering unsecured credit cards via pyramid scheme)
FTC v. Pacific Rim Pools et al.,
No. C97-1748R (W.D. Wash. Complaint filed 11/7/97)
(deceptive practices and Telemarketing Sales Rule violations in sale of foreign lottery
tickets)
FTC v. Slim America, Inc.,
No. 97-6072 Civ-Ferguson (S.D. Fla. Complaint filed 1/27/97); No. 97-4494 (11th Cir.)
(deceptive practices in sale of weight loss pills)
FTC v. Tracker Corp. of North America,
No. 1-97CV2654-JEC (N.D. Ga. Complaint filed 9/11/97)
(deceptive practices in sale of credit card protection services)
Fighting Consumer Fraud
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FTC and State of New York v. Trans-Asian Communications, Inc., et al.,
No. 97 Civ. 5764 (S.D.N.Y. Complaint filed 8/4/97)
(deceptive practices in sale of prepaid telephone cards)
FTC v. Raymond Urso, et al.,
No. 97-2680 CIV-Ungaro-Benages (S.D. Fla. Complaint filed 8/19/97)
(deceptive practices and violations of Franchise Rule in sale of display rack business
opportunities)
FTC v. Woofter Investment Corp., et al.,
No. S-97-00515-LDG (RLH) (D. Nev. Complaint filed 4/24/97)
(deceptive practices and violations of Telemarketing Rule in cross-border sale of foreign
lottery tickets)
