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Two companies and their principals committed unfair trade practices by billing unsuspecting telephone subscribers for access to pornographic Web sites that they never used, a federal judge has ruled. Southern District Judge Lewis A. Kaplan ordered two Bahamian corporations and two executives who he said are “at large” to pay the Federal Trade Commission almost $18 million for the false billings and for making false or deceptive statements to telephone subscribers who called to complain about charges wrongly billed to them. “In all the circumstances � ” Kaplan said, “ the Court finds that defendants represented that line subscribers were legally obligated to pay these charges irrespective of whether they used or authorized use of the services of defendants’ web sites.” The facts confronting the judge in Federal Trade Commission v. Verity International Ltd., 00 Civ. 7422, concerned the use of a billing method designed for customers who visited pornography sites but did not want to pay with their credit cards. The defendants were Verity International Ltd. and Automatic Communications Ltd., and the founders and former principals of both companies, Robert Green and Marilyn Shein. They have since become minority owners. Kaplan said they offered pornography Web site operators a billing service that used legitimate phone companies to charge customers for access “by including the charges on the telephone bills for the telephone lines over which customers accessed the Internet and describing the charges as being for telephone calls to Madagascar.” At least some of the bills were probably for computer connections to porn sites that were never made, Kaplan concluded. When customers called to complain about what were sometimes large bills for calls to Madagascar, they were met with stern demands for payment. Kaplan said there “were two fundamental problems.” “First,” he said, “the individuals who subscribed to the telephone lines to which the charges were billed often neither accessed, nor authorized anyone else to access, the adult content web sites. Their telephone lines were used by others, but defendants insisted on payment notwithstanding. Second, the telephone calls were not connected to Madagascar. Defendants’ arranged to have the calls ‘short-stopped’ in London, where they were connected to the web sites of their clients.” The Federal Trade Commission filed suit claiming unfair and deceptive practices under �5(a) of the Federal Trade Commission Act. Among several rulings he made leading up to a bench trial, Kaplan issued a preliminary injunction against the companies and held Green and Shein in civil contempt for failing to comply fully with the injunction. The judge said the companies’ billing practices “prompted thousands of complaints” to contractors, and many customers were unable to even reach a customer call center to register their displeasure. HARSH WARNINGS Callers who were told to wait for a customer service representative heard a harsh recording warning them they would face further collection activity of past due amounts and customer service representatives were also told to take a hard line. The FTC received a slew of calls about the practices, including 548 in one four-day period in 2000. “By the end of this billing disaster, 19,544 consumers who received a Verity bill paid $1,616,678 in response to bills that were mailed on Verity’s behalf,” the judge wrote. A total of 6,248 made an inquiry into the bill, with some receiving an adjustment of less than the full amount, he said. During the period between January 1999 and July 2000, when the defendants used AT&T to carry, bill for and collect on calls for Automatic Communications numbers, “defendants capitalized on the common and well-founded perception held by consumers that they must pay their telephone bills, irrespective of whether they made or authorized the calls being charged,” Kaplan said. And while the charges did not appear on the subscribers’ regular phone bills after July 2000, when Sprint was handling the traffic, he said “the Verity bills featured all the characteristics of, and conveyed the same message as, a regular phone bill.” Kaplan said the defendants argued that “subscribers were legally obligated to pay, irrespective of whether they accessed or authorized access to the services of defendants’ clients, under the filed rate doctrine, which holds that telephone subscribers are legally obligated to pay for calls made over their telephone lines regardless of whether the subscribers themselves made or authorized the calls.” Kaplan said the filed rate doctrine did not apply because the defendants “provided more than basic transmission service.” “They operated a system that effectively collected charges for web content,” he said, making it “an enhanced, not a basic, telecommunications service.” Moreover, the large number of adjustments granted to consumers who called to complain helped prove the FTC’s point that a good percentage of the billing was unjustified. The judge said the defendants also violated �5(a) by misrepresenting that the calls were terminated in Madagascar. DEFENDANTS ‘AT LARGE’ He went on to find Green and Shein, who “appear to remain at large,” individually liable for corporate violations of the FTC Act, saying they “orchestrated an elaborate scheme to cause phone bills to reflect” long-distance calls to Madagascar.” “In addition, Green and Shein have failed to show remorse for the consumer harm they inflicted,” he said. “Instead, they willfully have violated this Court’s orders and showed an intention to put assets taken from U.S. consumers out of the reach of U.S. authorities.” The judge, in addition to ordering a “broad, permanent injunction” directed Automatic Communications, Green and Shein to pay $16.3 million for payments made during the AT&T period, and Automatic Communications, Verity, Green and Shein to pay $1.6 million for the Sprint period. Lawrence Hodapp and David M. Torok represented the Federal Trade Commission. John J.D. McFerrin-Clancy and Jeffrey M. Eilender of Schlam Stone & Dolan represented the defendants.

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