Comment to the Erie County Consumer Protection Committee, New York Concerning Telemarketing Fraud

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
PREPARED STATEMENT
OF
FEDERAL TRADE COMMISSION
PRESENTED BY
RONALD WALDMAN
NEW YORK REGIONAL OFFICE
FEDERAL TRADE COMMISSION
TO THE
ERIE COUNTY CONSUMER PROTECTION COMMITTEE
ERIE COUNTY, NEW YORK
CHEEKTOWAGA SENIOR CITIZENS CENTER
CHEEKTOWAGA, NEW YORK
NOVEMBER 2, 1994
Mr. Chairman and Members of the Committee: I am Ronald Waldman, of the New York Regional Office of the
Federal Trade Commission. I am pleased to appear before you today to discuss telemarketing fraud. The views
expressed in this statement represent the views of the Commission. My responses to any questions you may have
are my own and do not necessarily reflect the views of the Commission or any individual Commissioner.
Telemarketing fraud is a matter of serious concern to consumers and the Commission. Consumers lose between $3
and $40 billion each year to fraudulent telemarketers.(1) Financial institutions lose an estimated $300 million a year
from merchant fraud associated with fraudulent telemarketing.(2) In response to this problem, the Federal Trade
Commission continues to devote significant law enforcement and consumer education resources to the problem of
fraudulent telemarketing.
Since the 1980's, the Federal Trade Commission has brought all available tools to bear on the war against
telemarketing fraud. The Commission has filed over 110 federal court actions against companies that had more than
a billion dollars in estimated aggregate sales. In these cases, the Commission typically obtains injunctions against
future fraudulent conduct and, when assets can be located, orders providing for redress to defrauded consumers. In
addition to these civil law enforcement actions, the Commission works with federal and state criminal law
enforcement authorities to prosecute fraudulent telemarketers for violations of criminal law. As a result of these
cooperative efforts, federal and state authorities represent a powerful united front against these harmful practices.
The most numerous single category of complaints is that concerning promotional sweepstakes.(3) This is a type of
deceptive telemarketing that targets individuals, particularly the elderly, rather than business. Promotional
sweepstakes complaints are almost three times more numerous than the next largest category of complaints, which
is so-called “advertising specialties.(4) In terms of the aggregate amount paid by complainants, promotional
sweepstakes are second only to gemstone scams.
The Commission has recently observed a sudden increase in “recovery room” scams. These so-called recovery
rooms contact consumers that have been victims of prior telemarketing scams, most often sweepstakes schemes.

The pitch typically used by recovery room telemarketers makes reference to the consumer's prior victimization,
sympathetically warns the consumer not to fall for unscrupulous telemarketing schemes again, and then falsely
represents that, for an upfront fee, the scammer will assist the consumer in obtaining a refund of the amount the
consumer initially lost.(5) In fact, the recovery room is simply defrauding consumers one more time and will not
engage in any such “recovery” efforts on their behalf. Currently, these operations appear to be targeting individuals
rather than businesses.
Fraudulent telemarketers, who traditionally preyed on consumers nationwide from bases such as Florida and
Southern California,(6) are beginning to “go global.” The globalization of telemarketing fraud mirrors the globalization
of the world economy, which has been spurred by technological advances in telecommunications and finance. Scam
artists in one country can now talk with ease to victims in another and move the proceeds of their fraud from one
country to another. Given these technological advances, the globalization of telemarketing fraud was probably
inevitable, but the trend may well pose serious new challenges to the Commission's efforts to combat telemarketing
fraud.
In the typical domestic telemarketing fraud case, the Commission investigates and brings a civil action in federal
district court, generally without notifying the telemarketer in advance. The Commission's initial goal is to halt the
ongoing fraud by obtaining a temporary restraining order and a preliminary injunction halting the challenged conduct
to prevent further injury to consumers during litigation over a permanent remedy. The Commission usually also asks
the court to freeze the telemarketer's assets without prior notice to preserve them for consumer redress if the
Commission ultimately is successful in the litigation.(7) In many cases, the Commission also asks the court to appoint
a receiver to marshall the telemarketer's assets and protect them from dissipation during the pendency of the action.
At the end of the case, the court typically enters a permanent injunction against future fraudulent conduct. In
particularly egregious cases, some telemarketers have been permanently banned from the telemarketing business, or
have been required to post a hefty bond. Most orders require the telemarketer to pay monetary redress to injured
consumers or, where circumstances make payment of redress to injured consumers difficult or impossible, to
disgorge its ill-gotten gains. Final orders, whether entered following litigation or by consent of the defendants, are
enforced through the court's contempt powers.
In the domestic context, the Commission has had significant success with these legal tools. The Commission has
successfully used them not only against fraudulent telemarketers — the actual boilerrooms — but against individuals
and entities that do not deal directly with consumers, such as list brokers, credit card “factors,” and suppliers of travel
certificates, whose behind- the-scenes participation in those schemes is essential to their success. The globalization
of telemarketing fraud, however, creates problems that these tools were not designed to address.
Telemarketers may now be physically located in other countries and target American consumers. For example, the
Commission and other consumer protection agencies have received complaints from consumers about telemarketers
located in Canada who fraudulently sell gemstones and precious metals as investments. These foreign gemstone
telemarketers use the same types of pitches and techniques as fraudulent domestic telemarketers of dubious
investments. Telephone sales representatives use high pressure sales tactics to convince consumers to invest in
gemstones and similar products, promising big profits with few risks. They often promise, in addition, that the
products can be liquidated easily through the company's own “re-brokerage” services. Sometimes, the sales agents
claim there is a new buyer for the gemstones or metals a consumer has already bought, but the consumer must pay
additional money as a fee or commission or must buy additional investments before the first investments can be sold.
The result is that consumers generally end up with investments worth only a small fraction of what they paid, just as
in countless domestic-based telemarketing scams. Tens of millions of dollars have been lost to these firms. Canadian
law enforcement authorities recently announced arrests in several of these cases.(8)
Some foreign fraudulent telemarketers appear to hide the fact that they are not based in the United States. Some of
these firms use 800 numbers that connect United States consumers to boilerrooms located in Canada. Consumers
are not likely to expect that calling an 800 number would connect them to a foreign country. Even consumers who

understand that they are talking with someone in a foreign country may not understand the implications this may have
on their rights, or on the ability of the United States government to investigate and redress fraudulent practices.
There are real barriers to investigating foreign telemarketers who victimize consumers in the United States. Gathering
information about fraudulent telemarketers abroad can be difficult. Victims of foreign fraudulent telemarketers in the
United States may not know much about the telemarketers that defrauded them. Sources of information that the
Commission's staff normally turn to in a domestic investigation, such as former employees, local law enforcement
agencies, and informers, are less accessible in foreign countries. Even if those sources were inclined to supply
information, they are less likely to know of the Commission's existence, and the Commission's staff is unlikely to
know who they are. Moreover, the Commission's ability to use compulsory process may be ineffective to compel the
production of documents or sworn testimony of persons outside the United States.
Despite the legal and technical obstacles, cooperation with foreign law enforcement authorities sometimes yields
success. For example, one United States defendant in a telemarketing fraud case violated an asset freeze by
withdrawing $1.2 million from frozen bank accounts and fleeing overseas.(9) The Commission obtained an order that
he show cause why he should not be held in criminal contempt for his actions. When he failed to appear, the court
issued an arrest warrant. The defendant ultimately settled in Canada. Canadian customs officials learned of the arrest
warrant, which had been entered in law enforcement databases, and then learned that he had lied on his application
for entry into Canada. Canada deported him to the United States under circumstances that permitted him to be
arrested on arrival. He was then successfully prosecuted and jailed for his contempt of the federal court's asset-
freeze order.
United States agencies combating international telemarketing fraud also cooperate with foreign authorities on the
criminal front. If a foreign-based telemarketer is criminally indicted for wire or mail fraud in the United States,
extradition proceedings may be instituted to bring the responsible parties to the United States to face criminal
charges. This procedure is not available to the Commission, which has only civil law enforcement authority.
Nevertheless, the Commission intends to continue to make every effort to encourage the criminal prosecution and
extradition of fraudulent foreign telemarketers by providing all possible assistance to the appropriate criminal
agencies.
Notwithstanding the difficult problems caused by the globalization of telemarketing fraud, the Commission has been
working actively to alert consumers in the United States to the dangers of dealing with foreign telemarketers. For
example, in the last year the Commission issued a “consumer alert” concerning the Canadian gemstone
telemarketers, warning consumers to use extreme caution when presented with such investment offerings. The staff
of the Commission currently is preparing a consumer alert concerning Canadian telemarketers who sell the metal
indium as an investment. Consumer information alerts like these are distributed to at least 10,000 key information
sources throughout the United States, including state and local government offices, national consumer and business
organizations, Better Business Bureaus, and universities.(10)
Congress has recently authorized stronger action against telemarketing fraud. The Telemarketing and Consumer
Fraud and Abuse Prevention Act(11) directs the Federal Trade Commission to issue regulations about telemarketing
by August 14, 1995. The regulations will define “deceptive telemarketing acts or practices,” which will include “acts or
practices of entities or individuals that assist or facilitate deceptive telemarketing, including credit card laundering.”
The Act also provides for other rules about unsolicited telemarketing, empowers state attorneys general and private
individuals who are harmed to bring suits to enforce the new rules when they are issued, and authorizes stronger
penalties in telemarketing enforcement actions brought by the Commission itself.
The Federal Trade Commission is committed to combating the telemarketing fraud that preys on consumers in the
United States in all its guises, whether domestic or international. On behalf of the Commission, I thank the Erie
County Consumer Protection Committee for the opportunity to present the Commission's views on this troubling
problem.

(1) House Committee on Government Operations, The Scourge of Telemarketing Fraud: What Can Be Done Against
It? H.R. Rep. No. 421, 102nd Cong., 1st Sess., at 7 (December 18, 1991).
(2) Patrick Michela, “You Have Already Won … ”: Telemarketing Fraud and the Need for a Federal Legislative
Solution, 21 Pepp. L. Rev. 553, 577 (1994).
(3) The Commission has brought a number of cases against allegedly deceptive telemarketing sweepstakes
promotions. See, e.g., FTC v. Denny Mason, CV-S-93-135-PMP (D. Nev. filed Feb. 22, 1993); FTC v. Sierra Pacific,
CV-S-93-134-PMP (D. Nev. Filed Feb. 22, 1993); FTC v. Pioneer Enterprises, Civ. No. CV-S-92-615-LDG-RJJ (D.
Nev. filed July 20, 1992).
(4)” An example is a pencil inscribed with a logo or motto.
(5) A story by reporter Hattie Kaufman broadcast on “CBS This Morning” on September 15, 1994, provided excellent
insight into the workings of the recovery room scam. This report highlighted a sting operation, conducted by the Idaho
Attorney General's Office, targeting Las Vegas recovery rooms. The broadcast included the audio portion of the
recovery pitch delivered to a state investigator posing as a prior victim.
(6) The Scourge of Telemarketing Fraud: What Can be Done Against It?, supra n. 1 at 10.
(7) Courts have the power, under equitable principles of law, to freeze the assets of defendants who may be liable to
pay consumer redress under Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b). E.g., FTC v.
H.N. Singer, Inc., 668 F.2d 1107 (9th Cir. 1982).
(8) 50 Arrested in Cut-Rate Jewelry Scam, Toronto Star, June 3, 1993, at A3.
(9) FTC v. American National Cellular, Inc., et. al., No. 85-7375 WJR (C.D. Cal., filed November 12, 1985).
(10) Approximately 28,000 copies of the Canadian gemstones alert have been distributed.
(11) Pub. L. No. 103-297, 108 Stat. 1545 (1994).