The Federal Trade Commission has negotiated a settlement agreement with Student Assistance Services, Inc. and other defendants who ran an alleged scholarship search service scam. The settlement would require the payment of approximately $340,000 into a refund pool, ban the defendants from selling scholarship-related services ever again, and require each individual defendant to post a $75,000 bond before engaging in a telemarketing business or assisting others in such a business. This case was one of seven filed by the FTC in August and September 1996 as part of "Project $cholar$cam," a law-enforcement and consumer-education campaign to protect college-bound students and their families from fraudulent scholarship search services that "guarantee" that customers will receive a minimum amount of scholarships -- usually $1,000 -- in return for up-front fees ranging from $10 to $400. Student Assistance Services charged a fee of $179, the FTC said.
The agency's Project $cholar$cam advice to consumers on how to avoid getting scammed was two-fold: no legitimate search service will guarantee that consumers will receive a scholarship, and refund guarantees often have conditions attached that make it nearly impossible to get back the up-front fee. The FTC followed up Project $cholar$cam by joining with the New York Attorney General's office to notify 25 operators of websites offering scholarship services that they may be engaged in deceptive or unfair practices. Various law enforcers had identified the sites as containing many of the "6 Signs Your Scholarship Is Sunk" claims included on a poster created as part of the $cholar$cam consumer education campaign. The FTC staff said the websites will be revisited soon and that further action may be taken thereafter if warranted. The FTC staff also said that Mark Kantrowitz, operator of the Financial Aid Information Page sponsored by the National Association of Student Financial Aid Administrators, has noted a significant decline in the number of scholarship search services guaranteeing students a scholarship since $cholar$cam was launched. New industry partners that have joined the education campaign since September 1996 include Olan Mills, which distributed posters to 5,000 high schools in 27 states, and the National Association of College Stores and the College Board, which are distributing 2 million bookmarks with the $cholar$cam warnings through college bookstores and high school counselors' offices.
The defendants in the latest $cholar$cam case to settle are Student Assistance Services, first incorporated in 1994 as Student Financial Services, Inc., of Plantation and Fort Lauderdale, Florida; Fred Markowitz and Donald McGovern. In announcing the case last fall, the FTC noted that the Oregon Attorney General's office secured an Assurance of Voluntary Compliance Order against the defendants on Aug. 22, 1996.
According to the FTC's complaint detailing the allegations, the Student Assistance Services defendants sent more than 1 million postcards to high school and college students advertising scholarship services and listing an 800 number. Company telemarketers told consumers who called the number that, for a $179 up-front fee, the service could find "unclaimed" scholarship and grant funds from private companies, and guaranteed to refund the $179 fee if the student did not get at least $1,000. The FTC alleged that consumers received either nothing at all, or a list of "sources" for financial aid for which the students had to apply on their own or which, in fact, were contests, loans or work-study programs. Many sources were no longer available or not suitable for the student, the FTC alleged. Students seeking refunds had to apply in writing to each source on the list and provide rejection letters; even then, many did not receive refunds, according to the complaint. Many sources do not provide rejection letters, making it impossible to fulfill the refund requirements, staff said.
Upon filing of the FTC complaint in federal district court, the court granted the FTC's motion for a temporary restraining order halting the challenged claims and freezing the defendants' assets. Later, the defendants agreed to a preliminary injunction continuing the conduct prohibitions and asset freeze. Today's settlement, if approved by the court, would end the litigation.
Under the proposed settlement, all defendants would be permanently banned from promoting or selling college scholarship services. The order also would prohibit them from making numerous misrepresentations, and includes a general prohibition against misrepresentations of material fact in connection with the marketing of any product, service or investment of any kind. In addition, the order would require the defendants to obtain either written or tape-recorded oral permission before withdrawing money from a consumer's checking account or billing charges to his or her credit card. The proposed settlement also would require Markowitz and McGovern to post bonds in the amount of $75,000 before engaging in any telemarketing activity, and would prohibit them from violating the FTC's Telemarketing Sales Rule. That rule requires telemarketers, among other things, to give consumers detailed information up front about the costs and restrictions of any telemarketed product or service. Finally, the conduct provisions in the settlement would bar the defendants from assisting other entities or persons to engage in the prohibited conduct.
The monetary provisions of the settlement would make Markowitz and McGovern jointly liable for the payment of $270,000 for redress (these funds are now frozen by the preliminary injunction) within 10 days, and McGovern liable for another $30,000 within nine months. The settlement also includes a $2.5 million judgment against the corporate defendants; the FTC said an additional $42,000 in frozen corporate funds would be turned over to the redress fund under this judgment. Consumers will be receiving a partial refund of they fee they paid the defendants.
Finally, the settlement includes various record keeping and reporting provisions that would assist the FTC in monitoring the defendants' compliance.
The Commission vote to approve the settlement for filing in court was 5-0. It was filed this morning in U.S. District Court for the Southern District of Florida, Fort Lauderdale Division, and requires the court's approval to become binding.
NOTE: This consent judgment is for settlement purposes only and does not constitute an admission by the defendants of law violations. Consent judgments have the force of law when signed by the judge.
Copies of the documents associated with this case as well as consumer education materials in the Project $cholar$cam campaign are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.
(FTC File No. X960120)
(Civil Action No. 96-6995-Civ-ROETTGER)
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