STAFF SUMMARY OF FEDERAL TRADE COMMISSION ACTIVITIES AFFECTING OLDER AMERICANS JANUARY 1999-AUGUST 2001 The Federal Trade Commission is the federal government's principal consumer protection agency, with broad jurisdiction extending ove r nearly the entire economy, including business and consumer transactions on the telephone, the Internet, and elsewhere.(1) Under the Federal Trade Commission Act, Congress has directed the Commission to prohibit unfair or deceptive acts or practices (its consumer protection mission) and unfair methods of competition (its competition mission).(2) Much of the Commission's work addresses practices or industries that are of particular significance to older consumers. This Report describes those aspects of the Commission's work from January 1999 through August 2001. Section One describes recent Commission law enforcement initiatives within its consumer protection mission which are of particular importance to older consumers, including health care initiatives, financial practices initiatives, sales and promotional practices initiatives, and enforcement initiatives against fraud. Section Two highlights the Commission's consumer education program. Section Three describes Commission law enforcement initiatives within its competition mission, with a particular focus on law enforcement and other initiatives in the health care sector, the energy sector, the retail sector, and the funeral homes and cemeteries sector. Finally, Appendix I describes a comprehensive and ongoing initiative conducted by the Commission's Regional Offices during the October 2000 - August 2001 period -- in conjunction with other law enforcement agencies, AARP, Better Business Bureaus, social service agencies, media, and business and consumer groups -- to help educate and empower senior citizens to protect themselves from fraudulent operators. To provide a more general overview of Commission efforts to provide information to and secure information from both Congress and the general public, Appendix II lists Congressional testimony the Commission delivered from January 1999 to August 2001, while Appendix III lists Commission workshops and conferences conducted during the same period. TABLE OF CONTENTS The Consumer Protection Mission
THE CONSUMER PROTECTION MISSION It is critical that all consumers have accurate information about the costs and benefits of health care services, devices, drugs and related products. While health care is a subject of concern for all consumers, it is of particular concern to older consumers, their families and caregivers, and the Commission devotes substantial resources to preventing the dissemination of unsubstantiated or otherwise deceptive claims about the health benefits of particular products or services. Cases Addressing Health Claims for OTC Drugs, Devices, Foods, and Dietary Supplements The Commission is responsible for making sure that advertising about the health benefits of over-the-counter drugs, devices, foods, and dietary supplements is truthful, not misleading and substantiated by solid scientific support. The Commission closely coordinates its efforts in these areas with the Food and Drug Administration, which has primary responsibility for the safety and labeling of these products.(3) The most dramatic growth in health-related marketing has been in the dietary supplement industry, a category that includes vitamins, minerals, herbs and hormones. It is estimated that more than 100 million U.S. consumers use supplement products for a wide variety of health-related benefits. Older consumers may be particularly vulnerable to false or misleading claims about the safety and health benefits of OTC drugs, devices, foods, dietary supplements, and health care services because the marketing of such products and services often relates to conditions associated with aging. From January 1999 to August 2001, the Commission conducted a number of initiatives as part of its continuing efforts to ensure that consumers are presented with truthful and accurate information about the health benefits of such products. In June 1999, the Commission launched Operation Cure.all - a comprehensive law enforcement and consumer education campaign directed at protecting consumers from Internet health fraud -- and announced settlements of allegations that four sets of respondents made deceptive and unsubstantiated health claims concerning "miracle cures" for serious illnesses.
In April 2000, as the second part of Operation Cure.all, the Commission announced settlements with three sets of Internet companies arising from the firms' marketing of certain products as effective treatments or cures for diseases such as arthritis, cancer, diabetes, and AIDS.
In June 2000, as the third part of Operation Cure.all, the Commission announced the filing of a complaint in FTC v. Lane Labs-USA, Cartilage Consultants, Inc., I. William Lane, and Andrew J. Lane, Civ. Action No. CV-00-3174(WGB) (D. New Jersey)(announced on June 29, 2000). The U.S. District Court complaint alleged, inter alia, that the defendants made unsubstantiated claims about the efficacy of "BeneFin," a shark cartilage product, and "SkinAnswer," a skin cream, to prevent, treat and cure cancer.(4) The Commission approved two stipulated final orders for permanent injunction settling the complaint; both prohibit the defendants from representing without substantiation that BeneFin or any other shark cartilage product prevents, treats or cures cancer -- or that SkinAnswer, or any other glycoalkaloid product, prevents, treats or cures skin cancer -- and from making any unsubstantiated health-related claims about any food, drug or dietary supplement. The orders also prohibit the defendants from misrepresenting the existence, content or results of any tests, studies, or research in connection with the marketing of any food, drug or dietary supplement; and from misrepresenting that any government agency has evaluated the efficacy or safety of any food, drug or dietary supplement when marketing such product. In addition, the order against Lane Labs requires the firm to pay a $1 million judgment, with $550,000 to be devoted to consumer redress or disgorgement, and the remaining $450,000 to be used to pay for shark cartilage and a placebo in a clinical study of shark cartilage sponsored by the National Cancer Institute and Lane Labs. In June and July 2001, Operation Cure.all continued with the announcement of eight cases targeting companies marketing a variety of devices, herbal, products, and other dietary supplements as purported treatments or cures for cancer, HIV/AIDs, arthritis, hepatitis, Alzheimer's, diabetes, and many other diseases.
The Commission effected a number of other law enforcement actions addressing allegedly unsubstantiated or otherwise deceptive claims for dietary supplements during the period from January 1999 through August 2001.
From January 1999 through August 2001, the Commission also continued to pursue law enforcement initiatives against firms making unsubstantiated or otherwise deceptive claims for products other than dietary supplements, and for particular health care services. For example, in Novartis Corp., et al., Docket No. 9279, the Commission issued a complaint alleging that the respondents made unsubstantiated, material, and therefore deceptive representations that Doan's Pills -- nationally advertised analgesic tablets -- were more effective in relieving back pain than other over-the-counter pain relievers. Thereafter, the Commission issued an Opinion finding liability and a Final Order requiring the respondents, inter alia, to disseminate corrective advertising. On August 18, 2000, the Court of Appeals for the District of Columbia Circuit issued an opinion affirming the Commission Decision and Final Order. Similarly, in American College for Advancement in Medicine, Docket No. C-3882 (consent order issued on June 22, 1999), the Commission accorded final approval to a consent order -- settling allegations in an accompanying administrative complaint -- which, inter alia, prohibits the respondents from making unsubstantiated and false advertising claims that nonsurgical, EDTA "chelation therapy" is effective in treating atherosclerosis, and that the effectiveness of the therapy has been proven by scientific studies. The consent order also prohibits ACAM from misrepresenting the existence, validity, results, or contents of any test, study or research in connection with the advertising or promotion of chelation therapy. Last year, the Bayer Corporation launched a $1 million consumer education campaign to settle the allegations in a U.S. District Court complaint filed at the behest of the Commission in United States v. Bayer Corp., Civ. Action No. 00-132 (NHP) (D.N.J.)(settlement announced on Jan. 11, 2000). The complaint alleged that Bayer represented -- without substantiation and in violation of a previous FTC order -- that a regular aspirin regimen is appropriate for the prevention of heart attacks and strokes in the general adult population. The complaint alleged, in particular, that the claims at issue were unsubstantiated because some adults are less likely to benefit from a daily aspirin regime and because some may suffer adverse health effects from taking aspirin on a daily basis. Under the resulting consent decree, Bayer distributed a free brochure entitled "Aspirin Regimen Therapy: Is It Right For You?"; more than 500,000 copies of the brochure were distributed through doctors' offices. In addition, Bayer disseminated full-page print advertisements in major magazines promoting a toll-free number (1-800-332-2253) that consumers could call to order the brochure. The consumer education campaign was in part intended to help clear up possible confusion about the proper use and safety of aspirin in the prevention of heart attack and stroke. In addition, the consent decree requires Bayer to include -- in advertising that makes claims about the benefits of regular aspirin use for prevention of heart attacks or strokes -- a disclosure that states, "Aspirin is not appropriate for everyone, so be sure to talk to your doctor before you begin an aspirin regimen." The Commission pursued a number of other law enforcement actions against marketers of particular types of health care products and services. For example, in The Quigley Corporation, Docket No. C-3926 (consent order issued on Feb. 10, 2000), and QVC, Inc., Docket No. C-3955 (consent order issued on June 14, 2000), the Commission issued consent orders settling allegations that the respondents -- respectively the manufacturer of Cold-Eeze and Cold-Eeze brand zinc lozenges and the operator of the Home Shopping Network -- represented, without substantiation, that the lozenges can prevent colds and alleviate allergy symptoms. The consent orders prohibit the respective respondents from making the challenged representations without substantiation, for the products at issue or any other food, drug or dietary supplement. In addition, the consent order against Quigley prohibits the respondent from representing, without substantiation, that any food, drug or dietary supplement can or will treat, cure or prevent disease, or have any effect on the structure or function of the human body; the consent order against QVC imposes the same prohibition with respect to dietary supplements. Similarly, in FTC v. Worldwidemedicine.com et al., Civ. Action No. CV-S-00-0861-JBR (D.Nev.)(announced on July 12, 2000), the Commission approved stipulated final judgments and orders settling allegations in a U.S. District Court complaint that the defendants promoted Viagra and Propecia prescriptions by making false medical claims. The orders prohibit the defendants from misrepresenting medical and pharmaceutical arrangements; prohibit them from misrepresenting their use of credit card information; and prohibit them from misrepresenting any other material fact about the scope or nature of defendants' goods, services or facilities.(5) In SmartScience Laboratories, Inc., et al., Docket No. C-3980 (consent order issued on Nov. 2, 2000), the Commission issued a consent order resolving allegations that the respondents made unsubstantiated claims that their topical skin cream, "JointFlex," would eliminate significant pain due to disabling joint conditions, crushed vertebrae, herniated disks, and other conditions. The consent order prohibits the respondents from making claims about the efficacy of JointFlex or any drug or dietary supplement in reducing, relieving or eliminating pain from any source, or about the health benefits, performance, safety or efficacy of a product, unless they have competent and reliable scientific evidence to substantiate the claims. The consent order also prohibits misrepresentations about the results of tests, studies, surveys and research with respect to any product and would require that testimonials be truthful and not deceptive. And in ValueVision International, Inc., Docket No. C-4022 (consent order issued on Aug. 22, 2001), the Commission issued a consent order settling complaint allegations that the respondent, a cable shopping service, made unsubstantiated claims for a variety of weight loss, cellulite treatment, and anti-hair loss products on television and over the Internet. The consent order requires ValueVision to offer credit or refunds to certain purchasers of the covered products, and prohibits the respondent from making a variety of unsubstantiated representations for any food, drug, dietary supplement, cellulite-treatment product, or weight loss program. Cases Addressing Claims For Diet and Weight Loss Products and Services As part of its continuing effort to ensure that consumers get accurate and reliable information about weight loss products and programs, the Commission continued to implement "Operation Waistline," a coordinated, long-term consumer education and law enforcement program designed to alert consumers to misleading and deceptive weight loss claims, to steer them to accurate information about healthy weight loss, and to stop those promoters in the industry who violate the law.
The Commission also initiated a law enforcement initiative addressing representations made for two dietary supplements -- "Fat Trapper" and "Exercise In A Bottle"-- in two infomercials. In FTC v. Enforma Natural Products, Inc., et al., CV 04376-JSL (CWx) (C.D. Cal.)(settlements announced on April 26, 2000), the Commission alleged in a U.S. District Court complaint that the defendants made false and unsubstantiated weight loss claims for the two supplements. The Commission simultaneously approved two stipulated final orders settling the complaint allegations, one of which required the defendants to pay $10 million in consumer redress. Both orders also: (1) prohibit the defendants from making unsubstantiated claims that any product, service or program causes or maintains weight loss or avoids weight gain without dieting or exercise, prevents fat absorption, increases metabolism, burns fat, or allows weight loss even if users eat high fat foods; (2) require the defendants to include with future weight loss claims a clear and prominent disclosure that reducing calorie intake and/or exercising more is necessary to lose weight; (3) require the defendants to have scientific substantiation for any claims about the health or weight loss benefits, performance, safety or efficacy of any product, service or program; and (4) prohibit the defendants from making false claims about the existence or results of any tests, studies or research. In a subsequent U.S. District Court complaint in FTC v. Steven Patrick Garvey, Garvey Management Group, Inc., Lark Kendall, Mark Levine, David Richmond, and Modern Interactive Technology, Inc., CV 00-09358-GAF (CWx) (C.D. Cal.)(announced on Sept. 1, 2000), the Commission alleged that Garvey and Kendall -- who appeared as co-hosts in infomercials for Enforma Natural Products such as the "Fat Trapper" and "Exercise in a Bottle" -- made deceptive weight loss claims for the products. Thereafter, the Commission approved a Stipulated Final Order and Settlement of Claims for Monetary Relief as to Lark Kendall (Nov. 15, 2000), which required her to assign to the FTC for consumer redress her right to collect money she is owed for her appearance in the first Enforma infomercial and which contains injunction provisions similar to those used in the Enforma Natural case. Recently, the Court granted in part defendants' motion for summary judgment on res judicata grounds. The Court was persuaded that the Commission's settlement in the Enforma Natural case precluded the Commission's case against defendants Modern Interactive, Levine and Richmond in the Garvey case. The Commission has moved for reconsideration of this ruling. The Court denied defendants' summary judgment motion as to defendants Garvey and Garvey Management Group, so that part of the case continues. FINANCIAL PRACTICES INITIATIVES The Commission enforces several federal credit statutes that affect more than 113 million consumers with credit cards and many millions more who apply for credit and loans. Credit fraud and other violations of credit statutes continue to affect consumers of all ages and income levels. Such abuses can be particularly devastating to seniors who rely on credit to augment their income, and who may be more receptive to credit offers that are "too good to be true." Home Equity Lending Abuses Cases Abuses in subprime home equity markets may disproportionately affect elderly borrowers because they are more likely to have equity in their homes.(6) The Commission has been active in challenging lenders who are engaged in abusive lending practices. These efforts include filing complaints and consent orders for alleged violations of the Home Ownership and Equity Protection Act ("HOEPA"), the Truth in Lending Act ("TILA") and its implementing regulation, Regulation Z, and the FTC Act. The Commission also has been working with the States to increase and coordinate enforcement efforts, and continues to implement extensive consumer education efforts designed to help consumers avoid potential home equity lending abuses. In January 1998, in FTC v. Capital City Mortgage Corporation (D.D.C.)(announced on Jan. 30, 1998), the Commission filed a U.S. District Court complaint against Capital City and its president, Thomas K. Nash, alleging that the defendants violated the FTC Act, the Equal Credit Opportunity Act ("ECOA"), the TILA, and the Fair Debt Collection Practices Act ('FDCPA"). The complaint alleges that the defendants engaged in deceptive and unfair practices against borrowers at the beginning, during and end of the lending relationship, in violation of Section 5 of the FTC Act. The complaint alleges that these deceptions included:
The complaint further alleges that, after foreclosing, Capital City would buy the properties at auction for prices much lower than the appraised value of the properties. the complaint also alleges that Capital City violated the TILA in various ways, including by understating the finance charge and annual percentage rate for particular loans.(7) The litigation in this matter continues. In July 1999, the Commission approved consent judgments in seven cases against subprime mortgage lenders around the country for alleged violations of the HOEPA, the TILA, Regulation Z, and the FTC Act. See FTC v. Cooper (C.D.Cal.); FTC v. Capitol Mortgage Corp. (D.Utah); FTC v. CLS Financial Services, Inc. (W.D.Wash.); FTC v. Granite Mortgage, LLC (E.D.Ky.); FTC v. Interstate Resource Corp. (S.D.N.Y.); FTC v. LAP Financial Serv., Inc. (W.D.Ky.); and FTC v. Wasatch Credit Corp. (D.Utah)(all announced on July 29, 1999). These cases were part of "Operation Home Inequity," a Commission law enforcement and consumer education campaign seeking to enforce HOEPA and curb abusive practices in subprime mortgage lending. The court orders in these cases included injunctive provisions prohibiting violations of the HOEPA, the TILA, Regulation Z, and the FTC Act. Moreover, six of the orders together require the defendants to pay consumer redress totaling $572,500. In addition, two of the orders require the covered defendants to obtain performance bonds before they offer or extend specified credit in the future; a third order bans the covered defendants from any future involvement with high-cost loans secured by consumers' homes. In October 1999, in Fleet Finance, Inc. and Home Equity U.S.A., Inc., Docket No. C-3899 (consent order issued on Oct. 5, 1999), the Commission issued a consent order settling charges that Fleet Finance violated the TILA, Regulation Z, and the FTC Act by failing to provide accurate, timely disclosures of the costs and terms of home equity loans (and other consumer credit transactions) to consumers and by failing to provide or to provide accurately information to consumers about their home equity rescission rights. In transactions in which Fleet Finance acquired or retained a security interest in the consumers' principal dwellings, the complaint alleged that the company failed to provide consumers with the right to rescind the credit transaction by, inter alia, (1) failing to provide consumers with notice of the right to rescind, and (2) waiving consumers' right to rescind, and disbursing funds, based on oral or other insufficient waivers. The complaint also alleged that Fleet Finance failed to provide consumers with all TILA required disclosures of the cost and terms of credit prior to the consummation of credit transactions, and failed to provide or provide accurately certain TILA disclosures, including the annual percentage rate. In addition, the complaint alleged that Fleet Finance failed to retain disclosures and rescission notices for two years, in violation of Regulation Z. The order required Fleet Finance and its successor companies, Home Equity U.S.A, to pay $1.3 million for consumer redress and administrative costs. The order also prohibited the entities from future violations of the TILA and Regulation Z and from various misrepresentations of credit costs and terms. In March 2000, in United States v. Delta Funding Corporation and Delta Financial Corporation (E.D.N.Y.)(settlement announced on March 30, 2000), the Commission secured a stipulated federal court order settling allegations in an accompanying U.S. District Court complaint against Delta, a national subprime mortgage lender. The Commission filed the complaint in conjunction with the Department of Justice and the Department of Housing and Urban Development, and it included allegations that this mortgage lender engaged in a pattern or practice of asset-based lending; that is, extending high cost loans based on the borrower's collateral -- in determining whether the borrower would be able to make the scheduled payments to repay the obligation -- rather than by considering the borrower's current and expected income, current obligations, and employment status. The complaint also alleged that the defendants included prohibited terms in HOEPA loans, such as certain prepayment penalties and increased interest rates after default; the complaint alleged that these practices violated the HOEPA, the TILA and Regulation Z. The stipulated order, inter alia, makes consumers harmed by Delta's HOEPA violations eligible for redress under an agreement between Delta and the New York State Banking Department; pursuant to this agreement, $12.25 million is available to compensate borrowers for various alleged state and federal law violations. The stipulated order also imposes injunctive relief under the HOEPA, the TILA, and Regulation Z. In July 2000, in FTC v. Nu West, Inc., et al. (W.D.Wash.)(settlement announced on July 18, 2000), the Commission settled charges that another subprime mortgage lender, Nu West, and its principal violated the HOEPA, the TILA, Regulation Z, and the FTC Act. The complaint alleged that the defendants failed to disclose to consumers material loan costs and other information at least three days before closing; included prohibited balloon payments and increased interest rate provisions in loan documents; and made prohibited direct payments to home improvement contractors, in violation of the HOEPA, the TILA, and Regulation Z. The complaint further alleged that the defendants failed to disclose or disclose accurately various loan terms, including the annual percentage rate, the finance charge, and information about the right of rescission. The stipulated consent decree enjoined future law violations, and required the defendants to pay more than $160,000 in consumer redress and to reform open loans to nullify prohibited provisions. In October 2000, in FTC v. First Alliance Mortgage Co., et al. (C.D.Cal.)(announced on October 4, 2000), the Commission filed a U.S. District Court complaint against First Alliance and two affiliate companies, which are among the nation's largest subprime home equity lenders. The complaint charged these companies with violations of the TILA, Regulation Z and the FTC Act. According to the complaint, the defendants target, through telemarketing and direct mail solicitations, homeowners with poor credit histories who may experience difficulty securing conventional home equity financing. The complaint alleges that the defendants' loan officers, through use of the "Track" -- a lengthy, thirteen-step sales presentation -- made misleading statements about material terms of the loan and the meaning of material information used in the TILA disclosure, in violation of the FTC Act. The complaint also alleges that the defendants misrepresented that the total amount borrowed, upon which interest accrues, is the amount financed that appears on the TILA disclosure statement, when, in fact, that amount does not include any fees financed by the borrower. In addition, the complaint alleges that the defendants misled consumers about the existence and amount of origination fees (typically 10 percent of the loan) and about the interest rate and monthly payments of their short-term "teaser rate" adjustable rate mortgages ("ARMs"). The complaint further alleges that the defendants did not have a reasonable basis to substantiate their claims that consumers will save money when consolidating debts through their loans. In addition, the complaint alleges that the defendants have failed to provide borrowers with ARM loans with information required by the TILA and Regulation Z which explains the ARMs. The complaint seeks an order awarding consumer redress and injunctive relief. In December 2000, in FirstPlus Financial Group, Inc. Docket No. C-3984 (consent order issued on Nov. 28, 2000), the Commission issued a consent order settling charges that FirstPlus's now bankrupt subsidiary, FirstPlus Financial, Inc., made misrepresentations in its advertisements for various credit products, including "high-loan-to-value" second mortgage loans and home equity loans. The Commission alleged that the advertisements misrepresented the amount of money that consumers would save when consolidating existing debts into a FirstPlus home equity loan. The Commission also alleged that the advertisements failed to adequately disclose key information about the loans. The consent order prohibited FirstPlus from misrepresenting its loan products, and required the company to use reasonable assumptions when creating savings comparisons, and to fully disclose all information necessary to evaluate those comparisons. In March 2001, in FTC v. Citigroup Inc., et al. (N.D.Ga.)(announced on March 6, 2001), the Commission filed a U.S. District Court complaint alleging that The Associates and successors Citigroup and Citifinancial engaged in systematic widespread abusive lending practices. The complaint alleges, in particular, that the defendants lured consumers into high cost debt consolidation loans through misleading statements and half-truths about what the costs would be; and [e]ngaged in numerous deceptive practices and other violations of law to induce consumers to take out or refinance loans with high interest rates, costs and fees, and to purchase high-cost credit insurance. The complaint alleges that the defendants used deceptive marketing practices, in violation of the FTC Act, by, in particular, representing that consumers would "save money" based on the false assumption of monthly payment savings for the entire loan term (even though current debts being consolidated were short term); comparing payments without taxes and insurance to current mortgage payments with taxes and insurance; failing to adequately disclose high fees and costs; and failing to adequately disclose balloon payments. The complaint also alleges that The Associates engaged in credit insurance packing in violation of the FTC Act by: automatically quoting a loan amount with a package of single-premium credit insurance products, called "total payment protection," added to the principal amount of the loan and financed (at rates usually more than 10 percent); misleading consumers into believing "total payment protection" was offered without additional cost (when in fact it sometimes involved thousands of dollars in extra costs); making misrepresentations about insurance coverage (such as failing to disclose that, in many instances, the length of coverage was shorter than the loan term); and making misrepresentations that consumers could cancel the insurance and secure a full refund (when only the cost of the premium is credited, not extra points paid or interest paid to date). In addition, the complaint alleges that The Associates used abusive and unfair debt collection practices in violation of the FTC Act, including disclosing the debt to third parties; calling the debtor at work after having been told not to do so; and making repeated phone calls. The complaint also alleged violations of the TILA (splitting a loan in two to avoid providing the right of rescission); the ECOA (failing to retain records); and the FCRA (using credit reports for impermissible marketing purposes). The case is now being litigated. Equal Credit Opportunity Act Cases Among other things, the Equal Credit Opportunity Act ("ECOA"), 15 U.S.C. § 1691 et seq., prohibits creditors from discrimination based on age in determining whether or not to extend credit. The ECOA's implementing Regulation B prohibits creditors from discounting or refusing to consider an applicant's income from a pension or other retirement benefit or from denying credit because an applicant, on the basis of age, does not qualify for credit-related insurance. The ECOA also prohibits discrimination based on the fact that an applicant's income is derived from a public assistance source, including Social Security, which is more likely to be received by the elderly. To help detect discrimination in mortgage credit based on age or other prohibited factors (such as sex or race), Regulation B requires mortgage lenders to take written applications for credit and to record the race/national origin, sex, marital status, and age of applicants. The ECOA also requires written notice to consumers of the reasons for a denial of credit. Where the adverse action is based on a report from a consumer reporting agency, the Fair Credit Reporting Act ("FCRA") requires the creditor to disclose this as well. The TILA requires that all borrowers receive accurate disclosure of the cost of credit. As noted above, in January 1998 the Commission filed suit in FTC v. Capital City Mortgage Corporation against a Washington, D.C. area mortgage lender. In addition to alleging violations of the FTC Act, the TILA, and the FDCPA, the complaint filed in that case also alleges that the defendants violated the ECOA and Regulation B. The complaint alleges, in particular, that "[i]n many instances, defendants' borrowers are minority and/or elderly persons living on fixed or low incomes in Washington, D.C., Maryland, and Virginia, who borrow primarily for personal, family, or household purposes." The complaint alleges that Capital City makes high interest rate (20 to 24 percent) loans to those borrowers and that the loans are often interest-only balloon loans in which a borrower, after making payments for the term of the loan, still owes the entire amount of the loan principal. These loans often are secured by the borrowers' homes and typically are made based on the worth of the home rather than on the borrowers' creditworthiness or income. The Commission complaint alleges that the defendant company and its president violated the ECOA and Regulation B by failing to take written applications for mortgage loans; failing to collect required information about the race/national origin, sex, marital status, and age of applicants; failing to provide written notice of adverse action; or -- when providing notice of adverse action -- failing to provide the applicant with the correct name and address of the Federal Trade Commission, the federal agency that administers compliance with the ECOA with respect to Capital City. The lawsuit is pending in the U.S. District Court for the District of Columbia, and in addition to the other relief described above, the Commission is seeking civil penalties and injunctive relief for ECOA violations. In May 1999, in United States v. Franklin Acceptance Corporation (E.D.Pa.)(settlement announced on May 13, 1999), the Commission approved a consent decree resolving allegations in a U.S. District Court complaint that Franklin, an automobile finance company, discriminated against applicants on the basis of the fact that an applicant's income derived from public assistance sources -- including certain Social Security benefits -- as well as on the basis of sex and marital status, and when taking adverse action on an application, failed to provide notice as required under the ECOA and the FCRA. The complaint in particular alleges that Franklin discriminated against applicants who derived their income from public assistance by discounting or refusing to consider such income. The complaint also alleges that, when taking adverse action on an application, Franklin failed to provide the applicant with written notification of the action taken, failed to disclose the specific reasons for the action taken or to disclose the applicant's right to request such reasons, and, when adverse action was based on a report from a consumer reporting agency, failed to provide notice as required under the FCRA. The defendants agreed to pay a civil penalty of $800,000, and to the entry of a permanent injunction. Debt Collection Practices Cases Each year, the Commission receives a large number of consumer complaints alleging harassing and abusive behavior by debt collectors. During the January 1999-August 2001 period, the Commission filed a number of law enforcement actions, and continued a number of other actions initiated in prior years, against debt collectors for violations of the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. §§ 1692-1692o. In February 1999, in United States v. Perimeter Credit, L.L.C. and Account Portfolios, Inc. (E.D.Pa.)(settlement announced on May 13, 1999), Account Portfolios and its Perimeter Credit subsidiary agreed to pay a $300,000 civil penalty to settle Commission allegations that Perimeter violated the FDCPA by, among other things, making false and misleading statements and impermissibly contacting third parties about consumers' debts. In December 1999, in United States v. National Financial Systems, Inc. (E.D.Pa.)(settlement announced on May 13, 1999), the Commission secured a stipulated federal court order against a New York-based collection agency that allegedly violated the FDCPA through practices such as continuing to contact consumers at work after learning that the consumers' employers prohibited such contacts, and falsely implying to consumers that failure to pay their debts could result in arrest or imprisonment. The stipulated order required NFS to pay a civil penalty of $20,000, contained broad prohibitions against future FDCPA violations, and required NFS to inform consumers that they may stop the company from contacting them about the debt. In March 1999, the Commission amended the complaint in FTC v. Capital City Mortgage Corporation described above -- against Capital City and its owner, Thomas K. Nash -- to add in-house attorney Eric J. Sanne as a defendant. The original complaint alleged among other things that Capital City and Nash violated the FDCPA by falsely representing that letters from Sanne were from a third-party collector, making false and misleading representations when collecting loan payments, and engaging in unfair or unconscionable debt collection practices. The court permitted the Commission to add Sanne as a defendant based upon the Commission's discovery during litigation of hundreds of additional debt collection letters sent by the attorney. The Commission is seeking injunctive relief for the FDCPA violations, and while discovery in the case has now ended, a trial date has not yet been set. In August 1999, in Federated Department Stores, Inc., Docket No. C-3893 (consent order issued on Aug. 20, 1999), the Commission issued a consent order against one of the nation's largest retailers, settling allegations in an accompanying complaint that the company induced consumers who filed for bankruptcy protection to agree to reaffirm their Federated credit account debts in order to keep their Federated credit card and merchandise. According to the Commission's complaint, Federated falsely represented that these "reaffirmation agreements" would be filed with the bankruptcy courts, as required by law, and that consumers would be legally obligated to pay. Although the FDCPA does not apply to creditors such as Federated collecting their own debts, the Commission alleged that these practices violated Section 5(a) of the Federal Trade Commission Act. At the time Federated settled with the Commission, the company had recently entered into a settlement with a number of State Attorneys General. The consent order permitted the Commission to file an action to seek full redress if the refunds pursuant to the State settlements totaled less than $8.2 million, or if the Commission believed that Federated had failed to fulfill its obligations to make payments under its agreement with the States. The consent order also prohibits Federated from, among other things, misrepresenting that any reaffirmation agreement it obtains will be filed with the bankruptcy court. This matter is the most recent in a series of Commission cases involving major, nationwide retailers. The respondents in the other cases included Sears, Roebuck and Company; General Electric Capital Corporation; and May Department Stores Company. Consumers have received full redress for all monetary injury in these cases; the total redress provided exceeded $183 million in direct payments or reductions in cash owing. In July 2000, in United States v. North American Capital Corporation ("NACC")(W.D.N.Y.)(settlement announced on July 12, 2000), the defendant agreed to pay a $250,000 civil penalty as part of a settlement to resolve Commission allegations that NACC violated the FDCPA by, among other things, discussing consumers' debts with third parties such as the consumers' employers and co-workers; harassing consumers with obscene or profane language; and making false and misleading representations, such as that consumers' wages would be garnished and their property seized if they failed to pay. In addition to the civil penalty, the consent decree settling the Commission charges includes broad prohibitions of future FDCPA violations, and requires NACC to inform consumers it contacts in writing that they may stop the company from contacting them about the debt. SALES AND PROMOTIONAL PRACTICES INITIATIVES Mail Or Telephone Order Merchandise Rule Cases In issuing its initial Rule relating to mail order sales, the Commission noted that consumers with mobility problems, including older consumers, frequently order by mail. In 1994, the Commission extended the coverage of the Rule to include telephone sales; it is now called the Mail Or Telephone Order Merchandise Rule. During that rulemaking proceeding, AARP testified that, according to its consumer survey data, 27 percent of people aged 65 and older ordered products and services by telephone over a given six-month period. The Rule requires sellers to make timely shipment of orders; give options to consumers to cancel an order and receive a prompt refund or to consent to any delay; possess a reasonable basis for any promised shipping dates; and make prompt refunds. The Commission staff works closely with industry members and trade associations to obtain compliance with the Rule, and the Commission initiates law enforcement actions where appropriate. As part of "Project TooLate.com," the Commission staff initiated an investigation to determine whether online retailers failed to deliver goods when expressly promised during the 1999 holiday season, in violation of the Mail Or Telephone Order Merchandise Rule. As noted above, the rule requires retailers to ship goods by the date promised, or if no date is promised, within 30 days of receiving the order. If a company cannot ship as promised, it is required to provide notice to the buyer with a revised shipping date, giving the buyer the opportunity to agree to the delay or to cancel the order. The U.S. District Court complaints announced as part of Project TooLate.com alleged that seven "etailers" -- CDnow, Inc.; KBkids.com LLC; Macys.com, Inc.; Franklin W. Bishop d/b/a Minidiscnow.com; The Original Honey Baked Ham Company of Georgia, Inc.; Patriot Computer Corp.; and Toysrus.com, Inc.- violated the Rule by failing to send the required delay option notices, sending notices that were deficient, and in some cases making shipping representations without a reasonable basis. Six of the complaints also alleged that the defendants (except CDnow) failed to deem certain orders canceled in the absence of a notice, in violation of Section 435.1(c) of the Rule. In addition, four of the complaints (against KBkids.com, Macys.com, Toysrus.com, and Minidiscnow.com) alleged that the defendants took orders without a reasonable basis for their shipping representations, in violation of Section 435.1(a)(1) of the Rule. The consent decrees settling the complaints against six of the defendants required the payment of the following civil penalty amounts: Macys.com ($350,000), KBkids.com ($350,000), Toysrus.com ($350,000), CDnow ($300,000 (with $200,000 waived because of the firm's poor financial condition)), Patriot Computers ($200,000), and The Original Honey Baked Ham Co. ($45,000). The consent decree against the seventh defendant, Minidiscnow.com, required the firm to fully reimburse each consumer who had ordered, but not received, any of the company's products. In addition, Macys.com was required to fund an Internet consumer education campaign about the Mail Or Telephone Order Merchandise Rule consisting of banner ads that alert consumers that they have certain rights when shopping online. The decrees also contain injunctive provisions prohibiting future Rule violations. Funeral Services Cases and Other Initiatives A funeral can cost $10,000 or more. This expensive consumer purchase is often made at an emotionally difficult time, and often is a first-time purchase. The Commission's Funeral Industry Practices Rule (16 CFR Part 453) is designed to ensure that funeral providers give consumers timely information relating to the range of funeral goods and services offered and the prices charged. The Rule also requires funeral providers to make important disclosures to consumers inquiring about funeral goods or services. The FTC has used various enforcement approaches since the Rule became effective in 1984, including traditional investigations and test-shopping sweeps of funeral homes in various geographic areas. Over the last six years, in cooperation with State Attorneys General and AARP, the FTC has test-shopped more than 1,350 funeral homes. Since 1999, the FTC has organized test-shops of almost 500 funeral homes -- in New York, New Jersey, Connecticut, Illinois, West Virginia, Florida, New Mexico, Texas, and California, among others -- with the test-shopping being performed by FTC investigators, by state and local agency investigators, and in some instances by AARP volunteers. These test-shops are ongoing, and to date, 70 violators have been offered the opportunity to bring their funeral homes into compliance by enrolling in the FTC's non-litigation alternative, the Funeral Rule Offenders Program (FROP). The Commission, which reviews each of its rules and guides every 10 years, is currently reviewing the Funeral Rule. The Commission initiated the Rule review by publishing in the Federal Register a request for comment on many issues, including the continued need for the Rule, the Rule's costs and benefits, and whether substantial changes to the rule are necessary. In response to the Federal Register Notice, 153 comments were submitted from industry members, consumers, consumer groups, law enforcement agencies, and others. FTC staff are carefully reviewing the comments and other information contained in the Rule review record, and are preparing a recommendation for the Commission's consideration. In connection with the Rule review, the Commission held a public workshop, at which individuals representing a wide-range of interests and organizations, including AARP, participated. The FTC has also participated in other meetings and workshops relating to the funeral industry, such as the Senate Aging Committee hearings in April 2000, and AARP's Death Care Symposium in May 2000. Energy and Home Appliance Representations Cases One way older consumers try to save on expenses is by cutting down on energy use in their homes. In May 2000, Intermatic -- one of the country's largest manufacturers of consumer and industrial energy control products, including appliance timers and low-voltage outdoor lighting -- agreed to pay a $250,000 civil penalty to settle FTC charges that the company violated a 1979 Commission consent order. The 1979 order prohibited the company from making unsubstantiated claims that the use of its electric water heater timer (the "Little Gray Box") results in substantial savings on water heating bills. In United States v. Intermatic, Inc. Civ. Action No. 00-C50178 (N.D.Ill.)(announced on May 24, 2000), the U.S. District Court complaint alleged that Intermatic violated the 1979 order by making unsubstantiated energy savings claims regarding the Little Gray Box; omitting the required dishwasher disclosure on the package and in advertisements; and omitting the required disclosure on the instruction sheets for the Little Gray Box. The complaint also alleged that Intermatic made false or misleading claims that tests prove the energy savings. The consent decree settling the complaint allegations required Intermatic to pay $250,000 in civil penalties, and prohibits the firm from making any energy efficiency, efficacy, benefits, mechanism of action or performance claims about appliance timing devices unless it possesses and relies upon competent and reliable scientific evidence to support such claims. The consent decree also prohibits the firm from misrepresenting the results of scientific tests in connection with any appliance timing device. The Commission also ensures that consumers can secure accurate information about energy usage levels for home appliances by actively enforcing its Appliance Labeling Rule.(8) The Rule requires manufacturers to disclose energy information about certain major household appliances, so that consumers can compare the energy use and efficiency of competing models. In particular, manufacturers of all covered appliances must disclose specific energy consumption or efficiency information at the point of sale in the form of an EnergyGuide label that is affixed to the covered product.(10) Required labels for appliances and required fact sheets for heating and cooling equipment must include an energy consumption or efficiency disclosure and a "range of comparability" bar that shows the highest and lowest energy consumption or efficiencies for all similar appliance models. Labels for refrigerators, refrigerator-freezers, freezers, clothes washers, dishwashers, water heaters, and room air conditioners also must contain a secondary disclosure of estimated annual operating cost based on a specified national average cost for the fuel the appliances use. The FTC Web site includes a number of brochures which explain to consumers the ways in which they can use the EnergyGuide labels to determine the energy efficiency of the appliances they purchase. Older consumers also are interested in devices that can improve their home environment, including those that address allergies or other health problems. In December 1997, in United States v. Alpine Industries, Inc., et al. (E.D. Tenn.)(announced on Jan. 5, 1998), the Department of Justice filed a U.S. District Court complaint on the Commission's behalf alleging that Alpine and its principal, William J. Converse, violated a 1995 Commission consent order. The 1995 order settled allegations that Alpine and Converse had misrepresented the effectiveness of the Alpine ozone generating "air cleaning" machines, and prohibited the respondents from making unsubstantiated claims for the devices. In November 1999, the District Court jury unanimously found that Alpine and Converse had claimed that Alpine products would prevent or provide relief from various health or medical conditions -- including allergies, asthma, sinus and breathing problems, emphysema, lupus, migraine headaches and an unspecified incurable eye disease -- without having competent and reliable scientific substantiation for these claims, and therefore had violated the 1995 order. In April 2001, the District Court issued a civil penalty judgment for $1.49 million plus interest and costs against Alpine and Converse. On July 11, 2000, the Commission presented testimony before the United States Senate Special Committee on Aging about scams involving living trusts. The testimony stemmed from an AARP study showing that ownership of living trusts among low income seniors is growing dramatically and disproportionately among middle- and upper-income seniors. Although living trusts are a legitimate estate planning tool, typically consumers with low income and small estates would not ordinarily need them. The Commission testimony described how living trust scams work, and how state and local bar associations may consider sellers of living trusts to be violating state Unauthorized Practice of Law statutes and state consumer protection laws. A new Consumer Alert, prepared for issuance with the testimony, warns about living trust scams and encourages consumers who believe they may have fallen for a scam to come forward and report their experience to the FTC or other authorities. ENFORCEMENT INITIATIVES AGAINST FRAUD The Commission's extensive law enforcement experience with fraud indicates that the elderly constitute a disproportionate number of consumer fraud victims; in some scams, 80 percent or more of the victims are 65 or older. The elderly often are the deliberate targets of fraudulent operators who take advantage of the fact that many older people have cash reserves or other assets to spend on seemingly attractive offers. Survey research conducted in 1998 by the National Consumers League's National Fraud Information Center ("NFIC") -- in cooperation with AARP -- provides a breakdown of the types of fraud which appear to be directed in particular to older consumers. In particular, NFIC found that while consumers aged 50 and older accounted for about 38 percent of the telemarketing fraud reported overall in 1997, the percentages were even higher in certain categories: magazine sales fraud [40%]; travel offers fraud [46%]; lotteries fraud [53%]; and credit card loss protection plans fraud [71%].(11) More recently, at the request of the FTC's Northeast Region, NFIC reviewed its year 2000 data, and indicated that it received a total of 1100 complaints from consumers aged 60 and older in 2000, and that the five largest categories of their complaints concerned Internet auctions [239]; prizes/sweepstakes [200]; magazines [182]; credit card loss protection [87]; and credit card issuing [46]. From January 1999 through August 2001, Commission enforcement activities have addressed traditional frauds -- including telemarketing fraud, prize promotion and sweepstakes fraud, advance fee loan scams, credit card loss protection fraud, and lottery scams and other cross-border frauds -- as well as those that are more contemporary, including Internet fraud and identity theft. The Commission is able to bring many of these schemes to a halt quickly, and often to obtain restitution for the defrauded consumers. The following discussion describes Consumer Sentinel and econsumer.gov -- two crucially important mechanisms for identifying fraudulent or otherwise deceptive schemes so that they can be targeted as quickly as possible - - and Commission law enforcement initiatives against a number of the most common types of fraud. A cornerstone of the FTC's ability to act quickly and effectively against fraud is access to up-to-date consumer complaint information. In late 1997, the FTC established Consumer Sentinel as a web-based law enforcement network.(12) The network provides law enforcement agencies in the United States, Canada and Australia with secure, password-protected access to more than 300,000 consumer complaints about telemarketing, direct mail and Internet fraud. Law enforcement agencies and private organizations contribute consumer complaints to the Consumer Sentinel database, which is searchable by criteria including the name, address and telephone number of a firm; the type of fraud; and the country and state or province of the consumer. The National Association of Attorneys General, the National Consumers League, Better Business Bureaus, the U.S. Postal Inspection Service, and Canada's Phonebusters are leading partners with the FTC in this project. One part of Consumer Sentinel, accessible only to law enforcement officials, provides - free - consumer complaint data and other intelligence about particular firms or individuals.(13) More than 320 United States, Canadian, and Australian law enforcement agencies have signed up for access,(14) which enables them to share information, avoid duplication of efforts and formulate rapid responses to new fraud schemes.(15) In addition to the site available only to law enforcers, Consumer Sentinel also has a website for the public;(16) consumers can file complaints electronically at www.ftc.gov, and thus channel information about potential scams directly to the FTC's Consumer Response Center ("CRC") and the fraud database. In addition, CRC counselors, who process both telephone and mail inquiries and complaints, enter complaints in Consumer Sentinel.(17) Since Consumer Sentinel went online, the Commission has upgraded the capacity of the database and enhanced the agency's complaint-handling systems by creating and staffing a new toll-free consumer helpline at 1-877-FTC-HELP, and by adding several new functions to Consumer Sentinel. The "Top Violators" report function allows a law enforcement officer to pull up the most common suspects and schemes by state, region or subject area. The "Auto Query" function permits an investigator to create an automatic search request, which can be set to run daily, weekly, or monthly. If new complaints come into Consumer Sentinel that match the search criteria, Consumer Sentinel automatically alerts the investigator via email. The "Alert" function allows law enforcers to communicate with each other and minimize duplication of their efforts. Yet another new function enables searches of Commission court orders online. In 2000, Consumer Sentinel received more than 100,000 consumer complaints, and the database now holds more than 300,000 consumer complaints. Consumer Sentinel receives data from other public and private consumer organizations, including 64 local offices of the Better Business Bureaus across the nation, the National Consumers League's National Fraud Information Center, and Project Phonebusters in Canada. Additionally, a U.S. Postal Inspector has served as the program manager, and the U.S. Postal Inspection Service just signed an agreement to share consumer complaint data from its central fraud database with Consumer Sentinel. Finally, the FTC recently signed an agreement with the Department of Defense to collect consumer complaints from men and women serving in the military through a project called "Soldier Sentinel."(18) Building on Consumer Sentinel, and as an important part of its effort to protect seniors and other consumers, the FTC works closely with foreign governments. One example is a pilot project called econsumer.gov, a joint effort of the Commission, agencies from 12 other countries and the Organization for Economic Cooperation and Development ("OECD") to gather and share cross-border e-commerce complaints.(19) This project will allow law enforcers from around the world to access a database of consumer complaints specifically about cross-border Internet transactions. It has two parts: a public Web site at www.econsumer.gov, and a restricted access law enforcement site. Consumers worldwide can visit the public Web site and use one of four languages (English, French, German, and Spanish) to enter e-commerce complaints about foreign companies;(20) to secure important consumer information on topics such as shopping safely online; and to secure contact information for consumer protection agencies in the participating countries. Moreover, links to the site provided by other organizations substantially enhance its accessibility to consumers. Thus, for example, AARP provides a direct link from the Web Resources section of its Web site to econsumer.gov, noting that it provides consumers with "tips for shopping online, advice on Internet auctions, links to many international consumer protection agencies, and more." Law enforcement agencies from participating countries will have access to the complaints through the restricted access, password-protected law enforcement Web site. This site also will allow government officials to communicate with consumer protection law enforcers from other countries, to notify each other of ongoing investigations, and to receive information about recent actions. Telemarketing Fraud Cases In conjunction with Section 5 of the FTC Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act(21) gives the FTC specific additional powers to combat telemarketing fraud. As prescribed by the Act, in 1995 the Commission promulgated the Telemarketing Sales Rule ("TSR"),(22) implementing the requirements of the Act; imposing a number of general requirements upon all telemarketers; and prohibiting specific fraudulent or potentially fraudulent practices. From January 1996 through September 4, 2001, the Commission (or the U.S. Department of Justice, acting on its behalf) filed 124 law enforcement actions alleging Rule violations, including 66 filed during the January 1999-September 4, 2001 period. Approximately 75 percent of the 124 cases have been concluded, producing injunctions against misrepresentations and future violations of the Rule; outright bans on some or all forms of telemarketing in some cases; monetary judgments totaling approximately $155 million for consumer redress;(23) and civil penalties totaling approximately $777,000. Through these efforts, the Commission has stopped major fraudulent telemarketing and related operations that have bilked consumers out of hundreds of millions of dollars. Moreover, the Commission conducted extensive law enforcement "sweeps" with State Attorneys General, State securities officials, the FBI, the United States Postal Service, and other agencies, and has developed alliances with new law enforcement authorities to coordinate additional actions against fraudulent actors. An important component of these cooperative efforts is the ability to pursue both civil and criminal law enforcement actions against particularly egregious telemarketing scams. Under this approach, once the FTC concludes its civil case against a group of telemarketers engaged in particularly egregious practices, it refers the matter to state and federal prosecutors, who may determine whether to file criminal charges against the defendants as well. Prize Promotion and Sweepstakes Fraud Cases Older Americans often are the targets of fraudulent prize promotions and sweepstakes, egregious types of fraud usually conducted through telemarketing or direct mail. In 1999, approximately 24 percent of the complaints logged into Consumer Sentinel pertained to prize promotions, sweepstakes, and gifts. In a typical scheme, telemarketers make unsolicited calls or mail notification cards to consumers stating that they have won a valuable prize, such as a vacation, car, cash or jewelry. Consumers are told that before they can redeem their prize, they must purchase certain products and submit payment for nonexistent shipping, taxes, customs, or bonding fees. Some schemes never provide consumers with any prize or gift; others provide inexpensive items, often called "gimme gifts" or "cheap gifts." These schemes clearly violate the TSR, which requires telemarketers, in any prize promotion, to disclose that no purchase or payment is required to win a prize, and to provide information about the odds of winning the prize and how to participate in the promotion at no cost.(24) Prize promotion fraud continues to be a significant problem for seniors and other consumers, and remains one of the top five categories of complaints reported in Consumer Sentinel.(25) The Commission continues to address this type of fraud through efforts such as Project Prize Fighter, a Commission sweep targeting bogus prize promoters which was publicly announced on July 13, 2000. The sweep produced 24 law enforcement actions against more than 40 defendants in 9 states.(26) In one of the cases, FTC v. Cory Banks, Civ. Action No. CV-0011218-CM (RZx)(C.D. Cal. Announced July 13, 2000), the Commission filed a complaint alleging that the defendants contacted and represented to consumers that the defendants were holding prize winnings for them; and advised the consumers that to secure the winnings, they would have to pay a fee for research, reporting, confirmation and document delivery. The Commission also alleged that the defendants failed to provide anything to consumers who sent in their money; and refused to make refunds to the victims. The Commission secured a temporary restraining order, preliminary injunction, and asset freeze against the corporate and individual defendants, and is seeking consumer redress. More recently, on January 5, 2001, the FTC announced Project Mailbox IV, a nationwide coordinated law enforcement effort and consumer education initiative targeting deceptive mail offers, unsolicited faxes and e-mail "spam." This initiative produced a total of more than 300 law enforcement actions during the October 1999 - September 2000 period. During that period, offers using deceptive sweepstakes and prize promotions led the list of the Project's law enforcement actions. The FTC and its partners in this project -- 49 State Attorneys General, the Postal Inspection Service and the SEC -- thus far have filed a total of more than 180 lawsuits against these types of scams. As a result, millions of dollars have been returned to consumers, many of them elderly, who had been taken in by such offers. Since the Commission and its law enforcement partners began their annual Project Mailbox efforts in October 1997, the Project has thus far resulted in a total of approximately 500 law enforcement actions. Advance Fee Loan Cases In advance-fee loan cases, telemarketers seek out people with bad credit and offer them loans or credit cards in exchange for fees paid up-front. Most advance-fee loan telemarketers persuade consumers to pay the up-front fee by telling them that they are certain or nearly certain to receive loans. Fees range from $25 to several hundred dollars. Telemarketers often assure consumers that they will receive a refund in the unlikely event that a loan is not forthcoming. After paying the fee, however, those who are offered loans typically never receive them, and those who are offered credit cards usually receive only a standard application form or generic information on how to apply for credit cards. Consumers often have difficulty contacting the telemarketers for a refund. The Telemarketing Sales Rule prohibits these practices.(27) From January 1999 to August 2001, the Commission initiated and conducted two phases of "Operation Advance Fee Loan," a law enforcement program targeting corporations and individuals that promise loans and credit cards for an advance fee but never deliver them.(28) On August 12, 1999, the Commission announced that it had filed four U.S. District Court complaints addressing alleged advance fee loan scams. For example, in FTC v. American Consumer Membership Services, Inc., and Darryl Smith, (N.D.N.Y. 1999), the complaint alleged that the defendants fraudulently telemarketed advance fee credit cards to low income consumers and those with credit problems, but provided consumers who paid a $69 fee nothing more than credit card applications with lists of banks to which they could apply for secured or unsecured credit cards.(29) In this case, the Commission filed a motion for a preliminary injunction; in the other cases discussed in note 28, the District Courts involved issued temporary restraining orders to halt the deceptive practices at issue and freeze the defendants' assets, pending trial. On June 20, 2000, the Commission announced the second phase of Operation Advance Fee Loan, which included five cases filed by the Commission, 13 actions taken by State Attorneys General and/or other State officials, and three criminal cases filed by Canadian law enforcement authorities against Canadian advance fee loan scam operators who preyed on Canadian and American citizens. For example, in FTC v. Financial Services of North America, the complaint alleged that the defendants misrepresented that consumers who paid a fee of $69 to $99 in advance would receive a guaranteed credit card -- and that the consumers' bank accounts would not be debited, or would be debited only for authorized amounts -- but provided consumers who paid the fee nothing more than discount purchasing club memberships and credit card applications.(30) Credit Card Loss Protection Fraud Cases Unscrupulous telemarketers pitching worthless credit card "protection" packages often prey on unwary consumers, including many older consumers, who fear that their credit cards are at risk. In fact, the TILA and Regulation Z provide that consumers cannot be held liable for more than $50 for any unauthorized charges submitted to a credit card account.(31) To address these types of misrepresentations, on October 30, 2000, the Commission filed complaints against six groups of companies and their principals as part of a nationwide enforcement sweep called "Operation Protection Deception."(32) For example, in FTC v. Consumer Repair Services, Civ. Action No. 00-11218 CM (RZx)(C.D. Cal. Announced Oct. 30, 2000), the Commission complaint alleged that the defendants used boiler rooms nationwide, or in Canada, to sell consumers credit card protection packages that in fact, provided no protection at all; misrepresented to consumers that they could be liable for hundreds, if not thousands, of dollars in unauthorized charges; and misrepresented that thieves could secure consumers' credit card numbers over the Internet and use these numbers to rack up unauthorized charges. The complaint further alleged that the defendants billed consumers between $259 and $400 for the "service" when they accepted the offer; charged those consumers who declined the offers; and refused to grant refunds to consumers who attempted to cancel the "protection." In this case and in the cases against five other sets of defendants in Operation Protection Deception, the Commission secured temporary restraining orders with asset freezes against each defendant, their associated businesses and their principals, and the appointment of temporary receivers; and sought consumer redress, including the refund of all illegally billed charges. More recently, following an investigation coordinated with the British Columbia Ministry of Attorney General, the Federal Bureau of Investigation ("FBI") and the Royal Canadian Mounted Police ("RCMP"), the Commission filed a Section 13(b) complaint in FTC v. OPCO International Agencies, Inc., Civ. Action No. CO1-2053R (W.D. Wash. Announced Feb. 7, 2001), alleging that the defendants fraudulently marketed credit card loss protection and debt consolidation services, primarily to seniors, in violation of the FTC Act and the TSR. The complaint alleges that when marketing credit card loss protection services, the defendants misrepresented their identity to imply an affiliation with a consumer's credit card issuers; used scare tactics to market their programs -- such as telling consumers that their credit card numbers were accessible to criminals via the Internet, and that unless they purchased "protection" services, they could be held liable for unauthorized charges -- and typically charged $299 for their "protection" services. When marketing debt consolidation services, the defendants allegedly told consumers that for $397, they would obtain a low-interest loan that could be used to consolidate their credit card debt; instead, however, consumers received only a list of banks offering low-interest credit card loans. The complaint further alleged that, in addition to telemarketing directly through their own call centers, the defendants provided products, scripts, customer service and credit card processing services to others engaged in deceptive telemarketing. Finally, the complaint alleged that the defendants often posted charges on consumers' credit cards without their authorization; misrepresented their refund policy; and failed to promptly, clearly and conspicuously state, as required by the TSR, that the purpose of their call was to sell goods or services. The District Court granted the FTC request for preliminary relief by issuing an ex parte temporary restraining order and asset freeze against the defendants. The Commission is further seeking a permanent injunction and other equitable relief, as the court deems warranted.(33) Lottery Scams and Other Cross-Border Fraud Cases In the mid 1990s, senior citizens in the United States began receiving increasing numbers of solicitations from fraudulent telemarketers operating from Canada. Telemarketing fraud perpetrated against U.S. consumers by Canadian telemarketers has become a serious problem. In 2000, 71 percent of the cross-border complaints collected in Consumer Sentinel -- more than 8,300 -- were registered by U.S. consumers against Canadian companies.(34) Such U.S. consumer complaints accounted for reported dollar losses of $5.3 million in 1999, $19.5 million in 2000, and a projected $36.5 million in 2001, based on the number of complaints received thus far in 2001.(35) The highest number of complaints from U.S. consumers against Canadian companies concern sweepstakes, advance-fee loans, lotteries, and Internet auctions. Sweepstakes and related prize promotion complaints accounted for 51 percent of the complaints; advance-fee loan complaints accounted for about 24 percent and lotteries accounted for about 6 percent. Moreover, 61 percent of the dollar loss U.S. consumers reported from sweepstakes, advance-fee loans, and lotteries overall involved Canadian companies. While Internet auctions also accounted for about 6 percent of these complaints, they accounted for only about 1 percent of the dollar loss. Of course, cross-border fraud is not a one-way problem: About 12 percent of the cross-border complaints added to Consumer Sentinel in 2000 were registered by Canadian consumers against U.S. companies; leading complaint categories included travel, Internet auction scams, and sweepstakes. In the past 10 years, FTC legal actions have resulted in the return of more than $730,000 in redress to more than 2,700 Canadian consumers. The Commission has developed and implemented a number of strategies to combat cross-border fraud. The FTC Act gives the agency jurisdiction over cross-border consumer transactions; in particular, Section 5(a) of the FTC Act gives the Commission authority to prohibit unfair or deceptive acts or practices "in or affecting commerce,"(36) and Section 4 of the FTC Act defines "commerce" to include that "among the several States or with foreign nations."(37) Commission jurisdiction under the FTC Act extends to the TSR, which the Commission can enforce "in the same manner, by the same means, and with the same jurisdiction, powers, and duties" it has under the FTC Act.(38) As a result, in a number of instances, the Commission has enforced the TSR against Canadian telemarketers calling consumers in the U.S.(39) In the typical cross-border lottery scheme, telemarketers offer consumers the opportunity to "invest" in tickets in well-known foreign lotteries -- such as those in Canada and Australia -- without disclosing that buying and selling foreign lottery tickets is illegal in the U.S. Consumer Sentinel statistics indicate that 62 percent of U.S. consumer complaints about lottery scams are against Canadian companies, which reportedly caused more than $1.2 million in losses. In response, the Commission and Canadian authorities have initiated a number of law enforcement actions against cross-border lottery con artists that target elderly U.S. consumers. In November 1998, for example, the Commission and the Attorneys General of Arizona and Washington filed a civil complaint in Win USA Services Ltd., Civ. Action No. C98-1614Z (W.D. Wash. Nov. 1998), alleging that the Canadian telemarketers convinced consumers to send them hundreds or thousands of dollars by promising them that they were likely to win, were "guaranteed" to win, or had already won a foreign lottery. The complaint sought a permanent injunction prohibiting the defendants' lottery telemarketing activities, and restitution to consumers or disgorgement of ill-gotten gains and civil penalties, where appropriate. The investigation was conducted in cooperation with the Royal Canadian Mounted Police and the British Columbia Ministry of Attorney General, which filed suit against the same defendants in a British Columbia court. That court later imposed an asset freeze and appointed a receiver, pending trial. In April 2001, the U.S. District Court issued a summary judgment order that, inter alia, prohibits the defendants from selling tickets, chances, interests or registrations in any lottery to U.S. residents, and from selling any product or service to U.S. residents in a way that violates the FTC Act, the Telemarketing Sales Rule, or the Arizona and Washington consumer protection statutes. Under a stipulated final judgment and order filed on February 5, 2001, the defendants will pay $500,000. In a related development, Alvin Cordeiro, doing business as Quick-Checks, agreed to settle FTC charges that he violated the FTC Act and the TSR by providing "substantial assistance and support" to the Canadian telemarketers, including the WinUSA defendants. In FTC v. Alvin Cordeiro, Civ. Action No. C01-20109-EAI (N.D. Cal. filed Feb. 7, 2001), the FTC alleged that Cordeiro provided account debiting services to process demand drafts through U.S. banks, and that he knew, or consciously avoided knowing, that the telemarketing scheme was fraudulent and violated federal law. The TSR prohibits a person from providing substantial assistance to a telemarketer when the person "knows or consciously avoids knowing" that the telemarketer is violating certain provisions of the TSR.(40) According to the FTC complaint, drafts representing more than 37 percent of the total dollar volume of Win USA sales presented to Quick-Checks for processing were rejected on submission to consumers' banks; moreover, of the amounts successfully debited from consumers' accounts, drafts representing another 30 percent were later returned or reversed at consumers' request. The complaint alleged that these high rejection and return rates "should have signaled to Cordeiro that there were fundamental problems with the Win USA telemarketing efforts." Under the terms of the consent decree, Cordeiro is prohibited from providing substantial assistance or support -- including but not limited to customer payment processing services -- to anyone who offers or promotes foreign lottery sales to U.S. citizens. The decree also prohibits Cordeiro from assisting any telemarketer who violates the FTC Act or the TSR, including those who make false statements; fail to disclose material restrictions or conditions to receive goods or services; or fail to obtain customers' express verifiable authorization of payment. Two additional Commission complaints filed in U.S. courts also challenged Canadian-based telemarketing companies selling foreign lottery tickets to U.S. residents. In FTC v. Windermere Big Win International Inc., No. 98C 8066 (N.D. Ill. Sep. 7, 1999), the FTC's case was joined with a parallel case filed in Canadian courts by the Department of Justice's Office of Foreign Litigation, which sought and obtained an injunction freezing the defendants' assets in Canada (issued by an Ontario Provincial Court in December 1998). In October 2000, the U.S. District Court entered a redress judgment for $19.7 million, and Canadian litigation is pending for recovery of any available redress funds. The FTC filed a second action in U.S. District Court against another Toronto-based lottery scam in FTC v. Growth Plus International Marketing, Inc., et al., Civ. Action No. 00C7886 (N.D. Ill. Filed Dec. 18, 2000). The complaint alleges that the defendant telemarketers targeted elderly consumers, inducing them to buy shares in a Canadian lottery ticket or series of tickets at prices ranging from $39 to almost $600, by telling them that their chances of winning the lottery were very good, and by relating stories of U.S. consumers who purportedly played through their firm and won. The complaint also alleges that the defendants told consumers they were sponsored by, affiliated with or registered with the Canadian government to sell the lottery tickets. The complaint alleges that the defendants falsely represented that it is legal to buy and sell foreign lottery tickets in the U.S., a violation of the FTC Act and the Telemarketing Sales Rule, and failed to disclose -- prior to collecting money from consumers -- the material fact that the sale of and trafficking in foreign lotteries is a crime in the U.S., also a violation of the TSR. The Commission has asked the court for a permanent injunction against the illegal activity and for restitution for consumers. In 1999, investigators for the Royal Canadian Mounted Police Project Emptor effort learned of a new lottery scheme, in which consumers were purportedly sold government savings bonds issued by the National Savings Bank of England. Bond holders were supposedly entered in a monthly lottery in which all the bond interest is awarded to a few bond holders. While such bonds do exist, telemarketers in Canada are not authorized to sell them and, because the bonds have a lottery feature, it is illegal to sell them in the United States. As a part of Project Emptor, the Commission filed U.S. District Court complaints in FTC v. B.B.M. Inv., Inc., No. C00-0062 (W.D. Wash. filed Jan. 13, 2000), and FTC v. Canada Prepaid Legal Serv., Inc., No. 00-CV-02080 (W.D. Wash. filed Dec. 11, 2000).(41) Subsequently, in FTC v. NAGG Secured Investments, Civ. Action No. CV00-2080Z (W.D. Wash. Filed Dec. 11, 2000) the Commission filed a U.S. District Court complaint alleging that the defendant telemarketers, operating under a variety of names, called consumers and guaranteed substantial monthly payments between $5,000 and $12,000 in return for a one-time payment of up to $5,000. Alternately, the telemarketers called claiming to be marketing bonds -- in some cases British Premium Savings Bonds -- the purchase of which would purportedly qualify consumers for cash prizes, monthly cash payments or bond investments with the chance to participate in monthly drawings for cash prizes. Consumers then received mailings that included a purported British National Premium Savings Bond certificate and other documents indicating that their names or bond numbers would be entered into the Premium Savings Bond program's monthly drawings for cash winnings. In fact, the consumers who paid the defendants received nothing of value. The FTC also charged that some of the defendants placed unauthorized charges on consumers' credit cards and in some instances, simply charged consumers' credit card accounts without ever having contacted them. Internet Fraud Cases The growth of the Internet and ecommerce has been explosive; the number of American adults with Internet access increased from approximately 88 million in mid-2000 to more than 104 million by the end of the year.(42) Increases of that magnitude have led to corresponding increases in ecommerce. The Census Bureau of the Department of Commerce estimated that in the fourth quarter of 2000 -- without adjusting for seasonal, holiday and trading-day differences -- online retail sales totaled $8.686 billion, an increase of 67.1 percent from the fourth quarter of 1999.(43) For all of 2000, ecommerce sales were an estimated $25.8 billion, some 0.8 percent of all sales.(44) An estimated 40 percent of Americans over the age of 50 own personal computers; of these, 72 percent can access the Internet.(45) Senior citizens communicate with children and grandchildren through email, peruse websites for news and entertainment, and use the Internet to research travel, investment and business opportunities. Not surprisingly, the boom in ecommerce also has produced an increase in online fraud and deception. While the Commission received fewer than 1,000 Internet fraud complaints in 1997, it received more than 8,000 in 1998, and more than 25,000 in 2000. Indeed, in 2000, roughly 26 percent of all fraud complaints that various organizations added to Consumer Sentinel related to online fraud and deception.(46) Since 1994, the Commission has filed 182 Internet-related lawsuits against more than 593 defendants. Through these lawsuits, the Commission secured orders enjoining further operation of the illegal schemes at issue, requiring the payment of more than $180 million in redress or disgorgement,(47) and freezing assets worth millions of dollars in cases that still are in litigation. The Commission's U.S. District Court actions alone have prevented further consumer injury from Internet schemes with estimated annual sales of more than $250 million.(48) The Commission and other law enforcement agencies face a host of novel challenges in their efforts to combat fraud and deception online. Traditional scams -- such as pyramid schemes and false product claims -- can thrive on the Internet; in addition, the Internet enables con artists to cloak themselves in anonymity. Law enforcement authorities must act much more quickly to stop newly-emerging deceptive schemes before the perpetrators disappear without a trace. And because the Internet transcends national boundaries, law enforcement authorities must be more creative and collaborative to successfully combat online fraud. Operation Top 10 Dot Cons is one of the Commission's most recent examples of extensive and creative law enforcement to protect seniors and other consumers from Internet fraud. The initiative, publicly announced on October 31, 2000, was a broad "sweep" of fraudulent and deceptive Internet scams, carried out in a year-long law enforcement effort. Altogether, the FTC and four other U.S. federal agencies,(49) and consumer protection organizations from nine countries(50) and 23 states(51) initiated and announced 251 law enforcement actions against online scammers. The FTC filed 54 of the cases. The top 10 Internet or online scams, identified through an analysis of complaint data in the Consumer Sentinel database, were:
Using complaint data from its Consumer Sentinel network (described on pages 13-14), the FTC and the other law enforcement agency participants to identify not only the top 10 types of online scams, but also the specific companies generating the largest numbers of complaints about each of those types of scams. These companies became the targets of investigations, and ultimately, the defendants. Consumer Sentinel data enabled the Commission and its partners to obtain and develop evidence against these targets from individual consumers whose complaints had been included in the database. Four of the FTC complaints filed in U.S. District Court charged the defendants with operating Internet auction scams; that is, the defendants allegedly advertised computer software and electronic consumer goods at various online auction sites and took cashier's checks or money orders in payment, but never delivered the goods. In three of those cases, the FTC secured orders freezing the defendants' assets for consumer redress purposes; in all four, the FTC sought permanent injunctions against violations of the FTC Act and the Mail Or Telephone Order Merchandise Rule. In a fifth FTC case, the U.S. District Court complaint alleged that the defendants mailed $3.50 "rebate" checks to consumers. When consumers cashed the checks, they unwittingly agreed to allow the defendants to serve as their Internet Service Provider. The complaint alleged that the defendants then placed monthly charges on the victims' telephone bills, and made it nearly impossible for the victims to cancel future monthly charges and get refunds. The Commission secured a stipulated permanent injunction in this case prohibiting the billing behavior in the future, and initiated an effort to determine the amount of consumer redress that the defendants should be required to pay. Five other U.S. District Court complaints filed by the FTC addressed "web cramming." In that practice, firms bill consumers for website pages they don't know they have. Typically, the scammers targeted small businesses and not-for-profit organizations, called them and offered "free" web pages, and then billed the victims, on their telephone bills, without authorization. Settlements with five of the defendants produced consent decrees prohibiting web cramming and related practices; a settlement with a sixth defendant also requires the payment of more than $3 million in consumer redress. The FTC also announced the filing of a U.S. District Court |