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FTC Cracks Down On The Top Ten "Dot Cons" The FTC has currently trained over 700 consumer protection and enforcement officials in 20 different countries as part of this Internet consumer fraud initiative. Ronald R. Urbach Michael Abitbol e-mail this article URL On Tuesday, October 31, 2000, the Federal Trade Commission (the "FTC") released the results of a yearlong international sting operation entitled "Operation Top Ten Dot Cons," which targeted a raft of fraudulent Web sites. The FTC, Securities Exchange Commission, Department of Justice and United States Postal Inspection Service worked in conjunction with consumer protection agencies from 23 U.S. states and from countries such as Australia, Canada, Finland, Germany, Ireland, New Zealand, Norway and the United Kingdom, to institute a total of 251 law enforcement actions. The departments and agencies involved in the crackdown, collectively dubbed the International Marketing Supervision Network (the "IMSN"), developed and released a list of the Top 10 fraudulent Web sites which was developed based upon Consumer Sentinel, a worldwide database housing over 285,000 consumer complaints. The IMSN, which has appointed the FTC as its current president, consists of authorities from 29 different countries with the purpose of combating fraudulent marketing schemes and thereby ensuring consumer confidence in the world of electronic commerce. The FTC has currently trained over 700 consumer protection and enforcement officials in 20 different countries as part of this Internet consumer fraud initiative. The Top Ten Dot Cons as determined by the IMSN included Internet auction fraud, Internet service provider scams, Internet Web site design cramming and adult services cramming. INTERNET AUCTION FRAUD By far, the most serious offenders found in the FTC Dot Con crackdown were in the business of online auctions. A report from the National Consumer League's Internet Fraud Watch revealed that 79 percent of Internet fraud occurred via online auctions during the first nine months of 2000. The FTC filed four lawsuits in United States District Court alleging that various defendants received payments for electronic goods offered at e-auction sites, and never delivered the promised goods. One defendant, Computer By Us, Inc., placed various advertisements offering computers for sale through Internet auction sites. After the defendants accepted payment from the consumers who won the bids on the merchandise, defendants either failed to deliver the goods, failed to notify consumers that there would be a delay in delivery or failed to refund money to those that did not receive the promised merchandise. Some Internet auction sites, such as eBay, have taken action against this type of fraud and developed deterrent mechanisms. eBay provides users with feedback about those individuals with whom money will be exchanged and the Site also employs an internal anti-fraud team to track and prevent fraudulent activity. INTERNET SERVICE PROVIDER SCAMS Another popular scam revealed in the FTC report involved the illegal and unwilling switching of consumers' Internet service providers. One Internet provider, Cyberspace.com, LLC, mailed checks in the amount of $3.50 to various consumers with an "invoice-like" form appended to the check. Once the consumers deposited the check, they were automatically and unwittingly signed up for defendant's Internet service, and were subsequently charged $19.95 or $29.95 per month on their phone bills. According to the aggrieved consumers, it was "nearly impossible" to halt the fraudulent billing procedure. Since the filing of this lawsuit, the defendants have stipulated to permanent injunctions barring any future illegal billing. INTERNET WEB SITE DESIGN CRAMMING According to the Federal Communication Commission ("FCC"), "'cramming' is a term used to describe the practice of placing unauthorized, misleading, or deceptive charges on consumers' telephone bills. Entities that engage in cramming appear to rely heavily on consumer confusion over telephone bills to mislead consumers into paying for services that were not authorized or received." Recently, a number of fledgling business, charities and religious organizations fell prey to a new type of cramming. One defendant, Web Valley, Inc., called victim companies offering to design and host a Web page for a "free" 30-day trial period. The defendants did not disclose to the consumers that, in order to avoid a monthly charge of $19.95 or $24.95, the consumers would need to affirmatively cancel the service. Once a company accepted the free Web page, defendant would begin charging the business' telephone accounts without authorization. This particular kind of Internet cramming has collectively defrauded consumers out of approximately nine million dollars. ADULT SERVICE CRAMMING Unsurprisingly, fraud has become quite prominent in the online adult entertainment industry. One defendant, RJB Telecom, operated a series of adult-oriented Web sites that offered visitors the option of a $2.95 trial membership for five days of access, or a $29.95 monthly access charge. Many consumers claimed that defendants billed them for this service on their credit cards or debit cards without their knowledge or authorization. Visitors who tried to close out of the credit card screen were sent to a new screen that offered the consumer the option of paying for the adult Web service by phone. Visitors were then offered a "phone dialer option...which install[ed] a dialer program on the viewer's computer which disconnect[ed] the viewer's computer modem from the viewer's usual Internet service provider, dial[ed] an international telephone number and reconnect[ed] the viewer's computer modem, via an international call, to the Internet, opening at defendant's sexually explicit Web site." As a result, consumers were billed for the adult service via their monthly telephone bills, which listed the charges as toll charges for international long distance calls. Pending trial, the FTC has made motions requesting that the infringing Web sites be shut down, and their assets befrozen. The online porn business, which has been loosely regulated in recent years, will likely be subject to more frequent prosecutions in the near future. CONCLUSION To provide instant access to a multitude of valuable information regarding Internet fraud, the Federal Trade Commission has launched a new Web site at www.ftc.gov/dotcons. The Site gives consumer advice on how to avoid fraudulent Web deals and provides information about the types of fraud discussed above, in addition to other fraudulent Internet scams which make up the Top Ten list including health care fraud, telephone pay-per-call fraud, vacation fraud, investment scams, work-at-home scams and pyramid scams. The Site also provides consumers with an opportunity to submit complaints of Internet scams. Since more consumers are now utilizing the Internet as their main commercial marketplace, international fraud prevention efforts such as Operation Top Ten Dot Cons are becoming increasingly necessary to keep Web scammers from thwarting newly developing trust of the Internet. Jodie Bernstein, the Director of the FTC's Bureau of Consumer Protection stated that "[t]he Internet is revolutionizing the way we gather information, shop and do business.... This collaboration with law enforcement agencies, industry and consumers will create a climate where e-commerce can be conducted with confidence.... We want the dot con artists to know that we're building a consumer protection coalition that spans the globe." © 2001 Davis & Gilbert LLP       Davis & Gilbert LLP • 1740 Broadway • New York, NY 10019 tel: 212.468.4800 • fax: 212.468.4888   Privacy Policy • Terms & Conditions