In the Matter of Trans-Asian Communications, Inc.

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

FEDERAL TRADE COMMISSION and
PEOPLE OF THE STATE OF NEW YORK

In the Matter of

TRANS-ASIAN COMMUNICATIONS, INC., RAJ TELEKOM, INC., TRANS AMERICAN SYSTEMS, INC., and RAJESH KALRA

STEPHEN CALKINS
General Counsel

MICHAEL J. BLOOM (MB 7732)
RHONDA J. MCLEAN (RM 9140)
ROBIN E. EICHEN (RE 2964)
CAROLE A. PAYNTER (CP 4091)
ANN F. WEINTRAUB (AW 3080)
Federal Trade Commission
150 William Street, Suite 1300
New York, NY 10038
(212)264-1250, -1225, -1226

DENNIS C. VACCO
Attorney General of the State of New York

SHIRLEY F. SARNA (SS 9885)
MARY M. CARROLL (MC 5832)
New York State Department of Law
Consumer Frauds & Protection Bureau
120 Broadway, 3rd Floor
New York, NY 10271
(212) 416-8333
Attorneys for Plaintiffs

COMPLAINT FOR INJUNCTIVE AND OTHER EQUITABLE RELIEF

Plaintiffs, the Federal Trade Commission ("FTC" or "the Commission") and the People of the State of New York, by their attorney, Dennis C. Vacco, Attorney General of the State of New York, for their complaint allege upon information and belief as follows:

The FTC brings this action under Section 13(b) of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. § 53(b), to secure permanent and preliminary injunctions, enjoining the acts and practices complained of herein and providing for appointment of a receiver, rescission of contracts, restitution, disgorgement, and other equitable relief for defendants' unfair or deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), which prohibits deceptive acts or practices.
The People of the State of New York bring this action by their chief legal officer, the Attorney General of the State of New York, Dennis C. Vacco ("NYAG"). The NYAG brings this action pursuant to his parens patriae authority and pursuant to New York: Executive Law

§ 63(12) and General Business Law ("GBL") Article 22-A, to secure injunctive relief, restitution, penalties, and costs for defendants' repeated and persistent fraudulent and illegal conduct.

JURISDICTION AND VENUE

This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1331, 1337(a), and 1345 and 15 U.S.C. § 53(b). The Court has supplemental jurisdiction over the state law claims pursuant to 28 U.S.C. § 1367.
Venue in the United States District Court for the Southern District of New York is proper under 28 U.S.C. §§ 1391(b) and (c) and 15 U.S.C. § 53(b).

PLAINTIFFS

Plaintiff, the FTC, is an independent agency of the United States Government created by statute. 15 U.S.C. §§ 41 et seq. The Commission is charged, among other things, with enforcement of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), which prohibits unfair or deceptive acts or practices in or affecting commerce. The Commission is authorized to initiate federal district court proceedings to enjoin violations of the FTC Act in order to secure such equitable relief as may be appropriate in each case. 15 U.S.C. §§ 45(a) and 53(b).
Plaintiff, the NYAG, has parens patriae authority to bring this action to protect the citizens of New York State from harm resulting from the fraudulent and illegal business practices of the defendants and to safeguard the honesty and integrity of New York's marketplace. Additionally, the NYAG has authority under New York: (a) Executive Law

§ 63(12) which authorizes the NYAG to seek injunctive relief, restitution, damages, and costs against any person or business entity which has engaged in repeated fraudulent or illegal acts or otherwise engaged in persistent fraud or illegality in the conduct of business; and (b) GBL Article 22-A which authorizes the NYAG to seek injunctive relief, restitution, and penalties when any person or business has engaged in deceptive business practices.

DEFENDANTS

Defendant Trans-Asian Communications, Inc. ("Trans-Asian"), a New York corporation with its principal place of business at 1170 Broadway, New York, New York, promoted and sold prepaid phone cards to consumers directly and through distributors, including wholesale distributors and retail outlets. Trans-Asian has transacted business in the Southern District of New York.
Defendant Raj Telekom, Inc. ("Raj Telekom"), a New York corporation, a Delaware corporation, and a California corporation, with its principal place of business at 1170 Broadway, New York, New York, promoted and sold prepaid phone cards to consumers directly and through distributors, including wholesale distributors and retail outlets. Raj Telekom has transacted business in the Southern District of New York.
Defendant Trans American Systems, Inc. ("Trans American"), a California corporation, which maintains an office at 1170 Broadway, New York, New York, promoted and sold prepaid phone cards to consumers directly and through distributors, including wholesale distributors and retail outlets. Trans American has transacted business in the Southern District of New York.
Defendant Rajesh Kalra ("Kalra") is an officer, director, and/or principal owner of Trans-Asian, Raj Telekom, and Trans American. At all times material to this complaint, acting alone or in concert with others, he formulated, directed, controlled, or participated in the acts and practices of one or more of the corporate defendants, including the acts and practices set forth in this complaint. He has transacted business in the Southern District of New York.

COMMERCE

The acts and practices of defendants Trans-Asian, Raj Telekom, Trans American, and Kalra (collectively hereinafter "defendants"), as alleged herein, are in or affecting commerce, as "commerce" is defined in Section 4 of the FTC Act, 15 U.S.C. § 44.

BACKGROUND

Prepaid phone cards are cards or code numbers that embody a right to exchange the card's monetary value for telephone calling time, often at specified rates. The United States market for prepaid phone cards has experienced extremely rapid growth, with approximately 200 million cards sold in 1995, corresponding to a dollar volume of approximately $1 billion.
To use a prepaid phone card, the caller dials a specified toll free number. He or she then is prompted to enter a Personal Identification Number ("PIN"), after which the caller typically is given a voice response system-generated statement of the remaining value of the card. The caller then enters the number to be called and the call is placed. The switching facility through which the call is routed monitors the time from the moment the party called has answered the phone until either party to the call has hung up or been disconnected (hereinafter "connect time") and reduces the value of the card as charges are incurred. The card user generally is given a warning when the remaining value of the card has fallen below the cost of two minutes of calling time at the then applicable rate.

DEFENDANTS' MARKETING AND SALES ACTIVITIES

From early 1995 to at least February 1997, defendants marketed and sold prepaid phone cards to consumers directly and through wholesale distributors and retail outlets. Defendants targeted their prepaid phone cards to Indian-American consumers, who have been described as a "fast growing and extremely lucrative segment" of the United States telecommunications market.
Consumers who purchased directly from defendants rather than from a distributor usually were given, in lieu of an actual card, a toll free access number and a PIN number, use of which purportedly would enable the user to exchange the account's monetary value for calling time to India at a specified per minute rate, generally ranging from $.36 per minute to $.59 per minute. (Hereinafter the term "card" is used to refer to prepaid phone cards and to PINs furnished in lieu of cards.) Most purchasers of prepaid phone cards from defendants bought cards having a monetary value of at least $100, although some consumers who purchased from distributors bought actual cards having a monetary value of $25 or $50.
In marketing their cards, defendants disseminated or caused to be disseminated to consumers and distributors through national Indian newspapers, their World Wide Web site on the Internet, point-of-sale posters, and other means, advertisements that tout the low cost of using their prepaid phone cards to place calls to India and neighboring countries at any time of the day or night. Defendants' advertisements include, but are not necessarily limited to, the attached Exhibits 1, 2, 3, and 4. Among the statements made in these advertisements are:

A. "What's in a Name!

RAJ . . .

169 min./ . . . $80 . . . ." (Advertisement for Raj Telekom in India Abroad, April 5, 1994 issue (emphasis in original); Exhibit 1.)

B. "CALL INDIA

39¢" (Advertisement for Trans-Asian in India Abroad, September 22, 1995 issue (emphasis in original); Exhibit 2.)

C. "$25 WORTH OF CALLS FREE

FREE ONE MONTH CALLING TO INDIA

CALL INDIA 39¢ per minute (few restrictions apply)" (Advertisement for Trans-Asian in India Abroad, February 2, 1996 issue (emphasis in original); Exhibit 3.)

D. "CALL INDIA 36¢ PER MINUTE

$66.20 FOR 170 MINS. TO INDIA

120 Days Money Back Guarantee"

(Advertisement for Raj Telekom in India Abroad, October 25, 1996 issue (emphasis in original); Exhibit 4.)

When a consumer or distributor called the toll free phone number in 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 and, in some instances, offered free calling time as an incentive to the purchase of a card with a greater monetary value. Prospective purchasers were told that their cards would be reduced in value only for calls made and at promised per minute rates, and that if they had problems with the card, they could call Trans-Asian and receive credit. The representative typically then told the consumer or distributor to send a check to Trans-Asian for the total cost of the cards to be purchased. Purchasers awaiting receipt of cards from defendants were usually told to call back in a week or two, after their checks had cleared, to receive their cards.
Consumers or distributors 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. Often they were told to wait an additional 48 hours for their cards to be "activated." 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 that inexplicably ceased to function after a short period of usage.
Still other consumers were unable to reach defendants' toll free access number due to constant busy signals, preventing them from entering their PINs or placing calls.
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, many consumers found that their cards were reduced in value for calls that were not completed or even despite non-use of their cards.
Consumers or distributors who called defendants' customer service number seeking assistance or redress were largely ignored or orally abused. In the comparatively few instances when defendants agreed to provide a replacement card or other adjustment, the replacement often was not delivered or was faulty.
Despite notice and knowledge of numerous unresolved consumer and distributor complaints, defendants continued to advertise, market, and sell prepaid calling cards, and continued also to make false and misleading representations and to deny assistance, replacement cards, or refunds to injured consumers.

VIOLATIONS OF SECTION 5 OF THE FTC ACT

Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), prohibits unfair or deceptive acts or practices in or affecting commerce.
As set forth below, defendants, individually or in concert with others, violated Section 5(a) of the FTC Act by misrepresenting material facts in connection with the offer and sale of prepaid phone cards.

COUNT I

Defendants falsely represented, expressly or by implication, that consumers or distributors of their prepaid phone cards would, promptly after defendants' receipt of payment, receive cards enabling consumers to make prepaid calls to India from the United States. In fact, many consumers or distributors did not receive prepaid phone cards promptly after defendants' receipt of payment, received non-working cards, or received cards that became non-working before their monetary value had been exhausted.
Defendants falsely represented, expressly or by implication, that consumers or distributors of their prepaid phone cards would receive toll free access numbers enabling consumers to make prepaid calls to India from the United States. In fact, despite numerous attempts, many consumers of defendants' prepaid phone cards could not place calls using their cards because defendants' toll free access lines constantly were busy or had been disconnected.
Defendants falsely represented to consumers or distributors, expressly or by implication, that defendants' prepaid phone cards would be reduced in value for minutes of calling time only after the party called had answered the phone and until either party to the call had hung up or been disconnected. In fact, in numerous instances defendants' prepaid phone cards were reduced in value for incomplete calls (such as disconnects and calls generating busy signals), and in many other instances they were reduced in value for no apparent reason and despite non-use.
Defendants falsely represented to consumers or distributors, expressly or by implication, that their prepaid phone cards would be reduced in value only at the advertised per minute rates. In fact, in numerous instances defendants' prepaid phone 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.
Defendants falsely represented, expressly or by implication, that they would, within a reasonable time after request, provide dissatisfied consumers or distributors with refunds or with viable replacement prepaid phone cards in exchange for nonfunctioning prepaid phone cards. In fact, in many instances, defendants refused to provide dissatisfied consumers or distributors with refunds or viable replacement prepaid phone cards within a reasonable time after their requests.
Defendants' false and misleading representations, as set forth above, constitute deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a).

COUNT II

In connection with the marketing and distribution of their prepaid phone cards, described in Paragraphs 14 through 17 above, defendants provided wholesale distributors and retail outlets with one or more of the following:

a. pre-printed posters for in-store displays; and

b. nationwide newspaper advertising naming their retail outlets.

By and through the acts and practices described in Paragraphs 27 through 31 and Paragraph 33 above, defendants provided distributors with the means and instrumentalities to engage in deceptive acts or practices such as those set forth in Paragraphs 27 through 31 above, thereby engaging in, and continuing to engage in, unfair or deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a).

VIOLATIONS OF NEW YORK STATE LAW

COUNT I

Section 349 of GBL Article 22-A prohibits deceptive acts or practices in the conduct of any business, trade, or commerce or in the furnishing of any services in New York.
By engaging in the acts and practices alleged above, defendants repeatedly and persistently engaged in deceptive business practices in violation of GBL § 349.
Pursuant to GBL § 349(c) the NYAG has not served pre-litigation notice upon defendants because he finds that it would not be in the public interest to give such notice and opportunity.
Defendants' violations of GBL § 349 constitute repeated and persistent illegal conduct in violation of Executive Law § 63(12).

COUNT II

Executive Law § 63(12) authorizes the Attorney General to seek injunctive relief, restitution, damages, and costs against any person or business entity which has engaged in repeated fraudulent or illegal acts or otherwise engaged in persistent fraud or illegality in the carrying on, conducting, or transacting of business in New York.
By reason of the acts and practices alleged above, defendants have engaged in repeated and persistent fraudulent conduct in violation of New York Executive Law § 63(12).

CONSUMER INJURY

Defendants' violations of Section 5(a) of the FTC Act, GBL Article 22-A, and Executive Law § 63(12) have injured, and will continue to injure consumers. As a result of defendants' unfair or deceptive acts or practices, consumers throughout the United States have suffered substantial monetary loss. Absent injunctive relief by this Court, defendants are likely to continue to injure consumers and harm the public interest.

THIS COURT'S POWER TO GRANT RELIEF

Section 13(b) of the FTC Act, 15 U.S.C. § 53(b) and 28 U.S.C. § 1367 empower this Court to grant injunctive and other relief to prevent and remedy violations of the FTC Act and New York: GBL Article 22-A and Executive Law § 63(12); and in the exercise of its equitable jurisdiction this Court may award redress to remedy the injury to consumers, order disgorgement of monies resulting from defendants' unlawful acts or practices, and order other ancillary equitable relief.

PRAYER FOR RELIEF

WHEREFORE, plaintiffs respectfully request that this Court, as authorized by Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), and 28 U.S.C. § 1367, and this Court's own equitable powers:

(1) Enjoin defendants permanently, preliminarily, and temporarily from violating Section 5(a) of the FTC Act, GBL Article 22-A, and Executive Law § 63(12) in connection with the advertising, offering for sale, sale, or other promotion to consumers or distributors of prepaid phone cards and substantially similar or related goods or services;

(2) Award such relief as the Court finds necessary to redress injury to consumers resulting from defendants' violations of Section 5 of the FTC Act, GBL Article 22-A, and Executive Law § 63(12), including, but not limited to, rescission of contracts or refund of money, restitution, and disgorgement of unlawfully obtained monies; and

(3) Award plaintiffs statutory penalties, the costs of bringing this action, and such other and additional relief as the Court may determine to be just and proper.

Dated: , 1997

Respectfully submitted,

STEPHEN CALKINS
General Counsel

DENNIS C. VACCO
Attorney General of the State of New York