FTC disconnects alleged phone card scam

On June 2, 2008, a U.S. District Court ruled unanimously in agreement with the Federal Trade Commission's contention that several U.S.-based prepaid phone card developers and suppliers engaged in deceptive advertising and promotional activities that potentially ripped off consumers to the tune of millions of dollars.

In consequence, the U.S. Bankruptcy Court, Southern District of Florida ordered a temporary restraining order and a preliminary injunction against the companies to halt their alleged fraudulent marketing campaigns.

As part of the court's mandate, a temporary monitor was to be appointed to:

• Ensure the companies complied with the court's order
• Make sure the companies' corporate assets will not be missing when the FTC seeks "final relief"

The restitution in terms of a dollar amount the FTC intends to impose on the companies was not disclosed in the filing. But the FTC states that the bank accounts of one of the companies under question, Voice Prepaid, totaled $72 million in prepaid calling card sales in 2006 and 2007.

The allegations

The FTC accused Voice Prepaid, as well as four other East Coast companies working as what the FTC terms a "common enterprise," of engaging in deceitful advertising practices for prepaid phone cards marketed under names like Tree Monkey, Coffee Time Call Me Time and Dangerous Minutes!

The companies are Alternatel Inc. of Florida; G.F.G. Enterprises LLC (doing business as Mystic Prepaid) of New Jersey; and Massachusetts-based businesses Voice Prepaid Inc., Voice Distributors Inc. and Telecom Express Inc. The companies' operating officers named as defendants in the FTC's filing are Nickolas Gulakos, Moses Greenfield, Lucas Friedlander and Frank Wendorff.

The phone cards, marketed to immigrant communities in the United States, were for international calls to Central and South American countries, as well as Cuba and the African nation of Nigeria. But, according to the FTC, 88.5 percent of cards the FTC tested did not give test callers the amount of calling minutes promised on posters displayed at the POS where the cards were purchased.

Priced at $2 to $10 each, and available at news stands, self-service kiosks, convenience stores and gas stations in several East Coast states, the calling cards offered hundreds of minutes each to Panama City, Panama, or Rio de Janeiro, Brazil, for example. But when the FTC tested the cards by using them to place international calls, the cards averaged much less time than advertised, the FTC reported.

The fine print

Furthermore, the FTC contends the cards carried hidden fees, such as hang-up, maintenance and other fees, that could gobble up the minutes on the cards in short order. The FTC stated the fees were disclosed to consumers in tiny, hard-to-read print on the cards and in wording the FTC called "incomprehensible in any language."

The FTC alleged that the false advertising and the hidden fees associated with the cards were an integral part of the companies' business practices. E-mails obtained by the FTC reportedly reveal intentional deception on the part of company executives, such as increasing the amount of minutes advertised on posters while keeping the "delivered minutes" the same.

In the court filing, the FTC said the five businesses "develop, design, create, market and distribute" the cards. But the companies "do not provide the underlying telecommunications service for their calling cards – which they pay third parties to provide." The document can be downloaded at www.ftc.gov/os/caselist/0823012/080519alternatelmemo.pdf .

In March 2008, the FTC filed a similar complaint in the U.S. District Court for the District of New Jersey against Clifton Telecard Alliance One LLC, doing business as Clifton Telecard Alliance and CTA Inc. In that filing, the FTC alleged that CTA was not delivering the amount of minutes advertised for their calling cards.

Long distance prepaid calling cards are big business. Boston-based Mercator Advisory Group, a payments industry research and consulting firm, projected that approximately $3.7 billion will be loaded onto long distance prepaid calling cards in 2008, making the market a potentially lucrative one for scammers.

Editorial Note: This article first appeared in the Breaking News section of SellingPrepaid.com. To read more news and educational articles pertaining to the promising prepaid sphere, visit www.sellingprepaid.com.

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