FTC Cracks Down on Small Business Scams

Internet Cramming Is Costing Companies Millions

For Release

In a crackdown on operations that targeted hundreds of thousands of small businesses, "cramming" charges onto their telephone bills for services that were supposed to be free, the Federal Trade Commission has halted the illegal practices of Internet web site "service" providers who have caused millions of dollars in losses in the last 18 months, alone.

"Internet cramming has focused on small businesses like a laser," said Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection. "Thousands of small businesses have been ambushed by Internet crammers and it has cost that community millions of dollars in less than two years. Whether consumers signed up for this trial offer or not, they got billed for a service that was supposed to be free. Most were billed through charges that were crammed onto their phone bills -- charges that many found very hard to find. These operations rely on the fact that small businesses, in particular, may not have the rigorous ordering, accounting and bookkeeping procedures that larger businesses have put in place."

According to the FTC, the defendants hired telemarketers who targeted small businesses touting the business benefits of having an Internet presence and offering to design and host an Internet web site for the business for a "free" 30-day trial period. Some small businesses were told they were under "no obligation" after the trial period; but that they'd be billed at the end of trial period unless they canceled. Others were told that no charges would be incurred unless the business ordered the web site on a permanent basis and approved future charges. Other businesses refused to accept the free offer, but agreed to receive an information package. But small businesses were still charged for the "free" trial. Many were billed repeatedly, month after month, even those who had not agreed to accept the trial offer and those who had canceled.

Two defendants charged a set-up fee for the "free" trial, either failing to disclose the fee or falsely claiming that the fee would not be charged to consumers who canceled during the 30-day trial period, the agency charged. Some of the small businesses were told they'd receive a "welcome package" that would include a printed copy of the web site, instructions for accessing the web site and a phone number they could call to make changes to the site or to cancel the service. They were told the 30-day trial period would start when they received their welcome package. Some never received it and didn't realize their "trial" period had begun until charges started showing up on their phone bills or in invoices.

The FTC charges were filed against Wazzu Corporation, Jayme Amirie, Kenneth Gharib and Kirk Waldfogel of Fountain Valley, CA; Shared Network Services, LLC and Peter Westbrook, d/b/a 1st Page in Lodi, CA; and WebViper, LLC, Tigerhawk, LLC, Thomas J. Counts, Patrick C. Taylor, and Richard M. Bogdanas, individually and d/b/a Yellow Web Services. All Web Viper corporate and individual defendants are based in Montgomery, AL, except Richard M. Bogdanas who resides in Chalk Lake, TX.

In the Commission's case against Wazzu, a Federal District Court in Southern California issued a temporary restraining order prohibiting the misrepresentations alleged in the complaint. The defendants and the Commission's staff attorneys are attempting to negotiate a settlement that would address all of the complaint allegations. The parties have agreed to continue until July 19 the hearing on whether a preliminary injunction should issue.

In the Commission's case against Shared Network Services, the U. S. District Court in Sacramento issued a temporary restraining order prohibiting the misrepresentations alleged in the complaint. Without admitting liability, the defendants agreed to a Stipulated Preliminary Injunction, which was entered by the court on June 7. The parties are working towards a quick resolution of this matter to correct problems with defendants' telemarketing scripts, and to ensure that consumers who were wrongfully billed will receive refunds.

In the case against WebViper, the Commission has moved for a preliminary injunction before the federal district court in Montgomery, Alabama. The defendants allegedly invoiced small businesses and sent repeated demands for payment for web site services that were never authorized. The defendants and the Commission's staff attorneys are negotiating to resolve this matter.

In addition to the law enforcement initiative, the FTC has joined with the Small Business Administration, the Council of Better Business Bureaus, the American Chamber of Commerce Executives, the Yellow Pages Publishers Association and the National Federation of Independent Businesses to launch an education campaign. The FTC's Business Alert, "Website Woes: Avoiding Web Service Scams," highlights some common web service scams and offers tips on what small businesses can do to protect themselves, including:

  • Know your rights. If you receive bills for services you didn't order, don't pay. The law allows you to treat unordered services as a gift.
  • Review your phone bills as soon as they arrive. Be on the lookout for charges for services you haven't ordered or authorized
  • Assign purchasing to designated staff. And document all your purchases.
  • Train your staff in how to respond to telemarketers.
  • Buy from people you know and trust.

The campaign partners will disseminate the Business Alert to their colleagues, members, and other interested parties.

Wazzu and Shared Network Services represent the sixth and seventh FTC cases involving "cramming" since March 1998. The FTC has issued its Third Annual Fraud Report to Congress, "Fighting Consumer Fraud: The Case Against Cramming," The report says "Con artists have found the telephone billing and collection system to be a fertile area to defraud consumers. Taking advantage of changes in the telecommunications industry that began 15 years ago with the break up of AT&T, these stealth 'operators' are arranging to put charges on consumers' phone bills for services that were never ordered, authorized, received or used.... In only 18 months, cramming has climbed to the number five spot among the categories that generate the most complaints received by the Federal Trade Commission's Consumer Response Center. In fact, since October 1997, the FTC has received more than 10,000 complaints about cramming. The report tells the story of the FTC's response to cramming: how it occurs, the agency's enforcement actions, federal/state activities, proposed changes to the agency's 900-Number (Pay Per Call) Rule, and activities to educate consumers."

These cases were filed with the invaluable assistance of the Attorneys General of Alabama, Illinois, Minnesota, South Dakota and Wisconsin and the Better Business Bureau of the Southland, based in Colton, California, the Better Business Bureau of MidCounties in Stockton, California, and the Better Business Bureau of Central Alabama in Birmingham.

The Commission vote to file the complaints was 4-0. The cases were filed in U.S. District Courts for the Middle District of Alabama (WebViper), Central District of California, Southern Division(Wazzu), and Eastern District of California (Shared Network Services).

NOTE: The Commission files 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 defendant has actually violated the law. The case will be decided by the court.

Copies of the complaints, a free consumer publication, "Website Woes: Avoiding Web Service Scams" and the FTC's Third Annual Fraud Report, "Fighting Consumer Fraud: The Case Against Cramming," are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-FTC-HELP (202-382-4357); TDD for the hearing impaired 1-866-653-4261.

 

(FTC File No. P99-4409)

Contact Information

Media Contact:
Claudia Bourne Farrell
Office of Public Affairs
202-326-2181
Staff Contact:
Frank Gorman or Paul Luehr
Bureau of Consumer Protection
202-326-3282 or 202-326-2236