FTC Charges Seller of Prepaid Phone Cards with Deception, Causing Substantial Losses to Consumer

The Federal Trade Commission and the New York State Attorney General's Office today charged a seller of prepaid phone cards with deceptive practices that have resulted in heavy losses to consumers and distributors. Rajesh Kalra, through his corporations, Trans-Asian Communications, Inc., Raj Telekom, Inc., and TransAmerican Systems, Inc., offered consumers prepaid phone cards, which enable the purchaser to buy telephone time in advance. The companies, all based in New York, attracted consumers with promises of prepaid phone cards at extremely low rates. In fact, the FTC alleged, in numerous instances, consumers who bought these companies' phone cards never received the phone cards; received phone cards that were non-working or that became non-working; could not reach the company because numbers were continually busy; and were charged for time in excess of time actually used, for calls that were not completed, and in some instances for calls where none had been attempted.

The Commission is asking the federal district court in New York to issue a temporary restraining order halting the companies' fraudulent and deceptive practices pending a full hearing on the merits.

"Prepaid phone cards have become a critical part of many consumers' lives today," said Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection. "For millions of households without telephones, thousands of students, travelers, and those who may not have long-distance service, these cards are a simple and effective way to obtain telephone service that might otherwise be unavailable."

"As this lucrative and burgeoning industry grows, it holds all-too-much opportunity for quick buck artists who can sell cards to tens of thousands of consumers and then disappear without delivering on their promises. While many companies offering consumers prepaid phone cards are honest, companies like those charged today run the risk of discrediting the pay-per-call industry and depriving millions of consumers of a vital service they have come to rely upon," Bernstein added.

A prepaid phone card is a card that gives a consumer the right to exchange the card's monetary value for telephone calling time, often at specified rates. According to the FTC, some prepaid phone cards are issued by long distance carriers. Others are issued by companies that purchase long distance minutes at volume-discounted rates, either from long distance carriers or from other companies that have purchased volume-discounted minutes from the long distance carriers. Prepaid phone cards have been used abroad since the mid 1970s and were introduced in the United States in 1992. In the short time since they were introduced, according to the International Telecard Association, the industry's trade association, they have undergone astounding sales growth, from 15 million cards sold in 1993 to 200 million cards in 1995 to a projected 500 million cards in the year 2000. Corresponding dollar sales are $75 million in 1993, $1 billion in 1995, and a projected $4 billion in 2000.

Trans-Asian/Raj Telekom targeted their prepaid phone cards to members of the Indian-American community, which has been described as a "fast growing and extremely lucrative segment" of the U.S. telecommunications market, the FTC said. Using advertisements in Indian newspapers published in the U.S., its home page on the World Wide Web, and promotional displays in retail outlets, Trans-Asian and its codefendants attracted purchasers with the promise of prepaid phone cards enabling users to place calls to India and neighboring countries from anywhere in the U.S. at any hour of the day or night at extremely low rates. Most consumers purchased phone cards in $100 and greater denominations, the FTC said. The corporate defendants operated out of New York City.

The FTC and the NYS Attorney General's complaint detailing the charges in this case names Trans-Asian , Raj Telekom, Inc., Trans American Systems, Inc., and the managing officer and principal owner of all three companies, Rajesh Kalra, as defendants. According to the complaint, when a consumer called the toll free phone number in the defendants' advertisements to inquire about the purchase of prepaid phone cards, a representative reiterated the advertised claims of inexpensive minutes of calling time to India. The purchasers were told that the value of the card would be reduced only for calls made and at promised per minute rates and were told to send a check to the company for the total cost of the card. Consumers who called to obtain their cards were often put off for days or weeks with various excuses, despite the fact that their checks had cleared, the complaint alleges. In many cases, consumers or distributors received no benefit of their purchase because no cards were ever issued to them or the cards issued did not function. In other instances, consumers or distributors received cards that functioned initially, but inexplicably ceased to function after a short period of usage. Still other consumers were unable to ever reach the companies' toll free access numbers.

Many consumers who were able to connect with their intended call destinations found that their cards were reduced in value more rapidly than at the advertised per minute rates, through application of per minute rates greater than those advertised, for time in addition to connect time, or through imposition of other undisclosed charges. In addition, consumers often found that their cards were reduced in value for calls that were not completed or even despite non-use of their cards.

A free FTC brochure for consumers, titled "Buying Time: The Facts About Pre-Paid Phone Cards," provides additional information about consumers' rights and gives consumers tips on how to avoid scams.

Before purchasing a prepaid phone card, consumers should:

• Ask if the retailer will stand behind the card if the telephone service is unsatisfactory.
• Look for the rate for domestic and international calls on the card's package or on the vending machine. These rates may vary depending on where you call. If you can't find the rate, call the card's customer service number.
• The prepaid phone card industry is highly competitive. Beware of very low rates, particularly for international calls. They may indicate poor customer service.
• Look for disclosures about surcharges, monthly fees, or per-call access.
• Check on expiration dates.
• Look for a toll-free customer service number.
• Be sure the card comes with instructions that you can understand.
• Make sure the card comes in a sealed envelope or has a sticker covering the PIN.

The Commission vote to authorize the staff to file the complaint was 5-0. The complaint was filed in the U.S. District Court for the Southern District of New York on August 4, 1997. The complaint seeks a temporary restraining order, permanent and preliminary injunctions, and asks the court to enjoin the practices of the defendants and provide for the appointment of a receiver, restitution, and other equitable relief.

The FTC's New York Regional Office conducted the investigation with invaluable assistance from the Office of New York State Attorney General Dennis Vacco. The complaint was filed jointly by the FTC and the Attorney General's office. The Commission also was assisted by the Better Business Bureau serving Metropolitan New York, the New York City Department of Consumer Affairs, and the Office of District Attorney, Richmond County.

NOTE:  The Commission authorizes the filing of a complaint when it has "reason to believe" that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendants have actually violated the law. The case will be decided by the court.

Copies of the complaint and the FTC brochure will be available on the Internet at the FTC's World Wide Web site at http://www.ftc.gov or from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest FTC news as it is announced, call the FTC's NewsPhone recording at 202-326-2710.

(Civil Action No. 97Civ5764)
(FTC File No. 962-3208)