Educational values of the regulatory microscope

Educational values of the regulatory microscope

Goldstein, Linda

Unfortunately, the legitimate telemarketing industry was dealt a harsh blow in April when the FTC announced it had brought fraud charges against several boiler-room operations. Most prominent of these was Operation False Alarm, an FTC initiative in conjunction with all fifty states that addressed fraudulent fund-raising activities for law enforcement charities. While readers of this article are surely not of this ilk, these cases should function as a wake-up call that the telemarketing industry is still under a regulatory microscope. Likewise, consumer confidence in reaction to these cases should not be undervalued. From the silver lining perspective, these cases are instructive because they provide an opportunity for legitimate telemarketers to learn how scams are perpetrated and to educate and inform their employees on how to deal with the negative consumer perceptions caused by these and other scams.

On April 9, the FTC with all 50 state attorneys general, announced an attack on badge-related fund-raising activities. The regulators alleged that perpetrators targeted both consumers and small businesses by claiming their donations would support drug-abuse education programs, purchase bulletproof vests for police, and aid the families of fallen officers. These solicitations were made over the phone and through the mail. Small businesses that were solicited to take out ads in publications that purportedly focused on law enforcement, public safety or similar themes were subject to aggressive collection tactics after they realized that the publication was a hoax, or had limited distribution, and withheld payment. Worse, the FTC announced that thousands of small businesses all over the country paid unauthorized invoices for unordered advertising in these publications.

The largest case was brought against a Phoenix company, Southwest Publishing, and its president, for allegedly soliciting donations on behalf of various nonprofit law enforcement, firefighting and veterans organizations through a nationwide network of 25 telephone rooms. The FTC sought and obtained an asset freeze and appointment of a receiver to take charge of Southwest and related companies.

A Houston company, Southwest Marketing Concepts, doing business as The Journal – The Voice of Law Enforcement, and its president, were alleged to have fraudulently solicited small businesses by mail and phone to buy advertising in a publication that purportedly supported crime fighting and drug abuse prevention. The company also represented to small businesses that they had previously authorized advertising for which they were obligated to pay, and should they not pay, their credit rating would be at risk. Similarly, three unrelated Fort Wayne, Indiana companies were charged with soliciting small businesses to purchase advertising in booklets that supposedly enjoyed widespread distribution in the businesses’ local area. Businesses that refused to make such purchases were barraged with false invoices and harassing collection calls.

In addition, the FTC announced on April 8 that it had settled a telemarketing case involving false invoices for unordered merchandise. The FTC alleged that Michael McGowan, doing business as Amna Medical Products Corporation and Industrial Chemical Corporation, had sent unordered merchandise to businesses and not-for-profit organizations, billed them for such merchandise, and then harassed them for payment. From boiler rooms in Pittsburgh and Union City, New Jersey, McGowan’s employees would cold call a business or organization to find out the name of an employee, then ship – or in some cases not ship – merchandise, and then bill the company, claiming the employee had ordered such merchandise.

Cases such as this are important because in almost every new business-to-business telemarketing call, a seller will attempt to make contact and establish credibility with a procurement officer or other employee with purchasing responsibility. Establishing these types of relationships are not made any easier when schemes such as this are brought to light. Therefore, it is imperative that salespeople are educated as to what scams are out there and how they should react when a prospective customer is reluctant to offer information or becomes confrontational.

These cases are indicative of the FTC’s continued commitment to vigorously prosecute fraudulent telephone practices. For the legitimate industry, these cases are disturbing because they continue to taint its image. By educating the public and your own employees, you can at least hope to curb the pervasiveness and meteoric rise in telephone fraud.

Linda Goldstein is a partner in the law firm of Hall Dickler Kent Friedman & Wood LLP, and is also head of the firm’s advertising, promotion and new media law department. She represents advertising and sales promotion agencies nationwide and serves as a special advertising counsel to Fortune 500 and leading consumer product companies. Ms. Goldstein was assisted in the preparation of this article by Al art S. Roth, an associate with the New York law firm of Hall Dickler Kent Friedman & Wood.

Copyright Technology Marketing Corporation May 1997

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