Editor's Note: This article first appeared in SellingPrepaid E-Magazine, June 18, 2008, issue 08:06:B. For more information on the prepaid sphere, visit www.sellingprepaid.com.
Alleged prepaid phone card scams have been in the news lately. The Federal Trade Commission brought two lawsuits in the last few months against East Coast prepaid phone card companies that target immigrant communities. (For more information, see "FTC disconnects alleged phone card scam," posted June 9, 2008, under Breaking News on greensheet.com.)
And the Attorney General of Florida, Bill McCollum, reported June 11, 2008, that his office had reached an agreement with multiple companies which had allegedly engaged in deceptive advertising practices.
SellingPrepaid E-Magazine talked to Janis Kestenbaum, an Attorney with the FTC's Bureau of Consumer Protection, about the alleged scams in the multibillion-dollar industry.
SellingPrepaid: The FTC sued Clifton Telecard Alliance One LLC in March 2008 and, more recently, Alternatel Inc. and affiliated companies. Are all the companies in the two cases acting in concert with one another to allegedly defraud the public?
Janis Kestenbaum: They are not.
SP: But the alleged scams seem very similar.
JK: Absolutely. The allegations that we make are really almost virtually the same in the two cases: that basically the companies are lying to consumers about the number of calling minutes their cards provide and that they are failing to disclose, or adequately disclose, the fees associated with their cards.
The kind of conduct that is going on here is the same.
SP: When did the FTC notice the problem?
JK: I can't talk about when the FTC started looking into these companies. There's been a lot of attention in the media to the fact that there are allegations that this is a problem - that there are a lot of problems with deceptive marketing practices in this industry.
And you know, we're like other people; we read the paper; we are aware of that and are very concerned.
SP: Are these two cases just the tip of the iceberg?
JK: I'm not in a position to talk about whether we will be bringing other cases.
But what I can say is that we recognize there are allegations that this problem is not confined to the companies we've sued, that this is happening, and a lot of companies are engaged in these kind of deceptive practices.
We certainly hope our legal actions send a strong message to the industry as a whole.
SP: How did the FTC investigate the alleged scams?
JK: We had investigators do it. At the FTC, we do have an investigative staff. And they were the ones who were mainly responsible for going out and buying the cards. In many cases, they were the ones who tested the cards as well.
They went out there into stores, and they bought the cards. They took a look at what the posters were advertising the cards would deliver and what they did. ... They took pictures of the posters so we would have evidence of what the posters were saying.
Or, in some cases, they would ask the store clerk if they had an extra copy of a poster, and they would just get a poster. In that respect, they were acting like consumers, but then taking that extra step I'm sure a regular consumer wouldn't have occasion to do.
SP: When the investigators made calls with the prepaid phone cards, whom did they call?
JK: We were calling people in foreign countries. ... In a lot of cases, we were calling our colleagues at consumer protection agencies in foreign countries - people in El Salvador and other countries that were willing to help us out and help us do the testing.
SP: The FTC wants to make these companies change their advertising practices, but not shut them down. Why not?
JK: There is no reason why a company can't honestly market a prepaid calling card. It's a legitimate product; it has a valuable use; we just want the companies to be honest.
SP: You don't want to throw the guys in jail?
JK: We don't have the authority to do that, even if we wanted to, and we don't. No, we just have authority to bring civil cases and to get injunctions. And that's what we've gotten here [in the Alternatel case].
We've gotten a temporary injunction. As part of the final relief in the case, we're asking for a permanent injunction. And we're also asking for monetary relief in the form of either restitution to consumers or disgorgement of ill-gotten gains.
SP: Does the FTC have a dollar figure in mind?
JK: We do not yet. No. We will need to take a look at their financial records to find out a little bit more about what's actually going on here.
SP: As part of the injunctions in the Alternatel and Clifton cases, the FTC asked the U.S. District Courts to appoint temporary monitors. Who are they, and what do they do?
JK: The monitor serves as an agent of the court. And the monitor's job is to report back to the court on whether the defendants are complying with the court's temporary restraining order.
In the New Jersey case, the Clifton case, the judge actually appointed two individuals to serve as co-monitors. And it's actually a former state attorney general for the State of New Jersey and a former federal district judge from New Jersey who are serving as co-monitors.
In the Florida case, the Alternatel case, the court appointed a single individual to serve as the monitor, and she's a former federal prosecutor.
SP: Are monitors on-site at the phone card companies?
JK: Well, they're not stationed on-site. It's not like they've opened up offices at the defendants' places of business. They're charged with coming back to the court and reporting whether the companies and defendants are complying with the court's order.
They have broad authority in terms of how they get the information that they need in order to be able to make that report. And it's certainly within their rights to go on premises and look at any documents they want to look at or interview people. The monitors will do the job as they see fit. It's not really the FTC's call. But I'm sure they will do it through a variety of mechanisms.
SP: Who is being targeted by these alleged scams?
JK: Obviously, there's a wide range of consumers that purchase these cards. But the kind of consumer that's being targeted here is the recent immigrant, and that does make it especially disturbing - that these are people who may not have great financial resources and who are heavily depending on these cards in order to stay in touch with their friends and families back in the countries where they came from.
SP: Since these companies only distribute prepaid phone cards and buy the underlying phone service from long distance phone carriers, do you suppose a portion of the blame for these alleged scams falls on long distance carriers?
JK: I think that it's incumbent on all companies who are doing business and making representations to consumers to be honest.
SP: Aren't these carriers supposed to know who they are doing business with?
JK: I think anybody who puts a product out there and makes representations to consumers, it's incumbent on them to do business honestly and forthrightly and in compliance with the law.
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