FTC slams alleged U.K. porn scam

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by Ben Hammer

(IDG) -- This past week, the Federal Trade Commission put a stop to a British company's alleged scam to bill more than 110,000 U.S. consumers for hundreds of dollars each in false long-distance charges for dialing into online pornography sites. The company could be forced to return tens of millions of dollars.

During the course of just a few days in mid-September, 642 consumers complained to the FTC that Verity International, located on the island of Sark in the English Channel, had wrongly charged them an average of nearly $225 for long-distance calls. The FTC filed a civil suit against the company on Monday in U.S. federal court in New York, and Verity received an order freezing its assets and preventing it from continuing operations.

The FTC complaint said Verity lured privacy-minded and underage online porn seekers by offering them a way to discreetly pay for online adult entertainment, through their phone bill rather than a credit card. The complaint said that in all of the more than 110,000 cases, the company told users they were being charged $3.99 a minute to call an adult entertainment site in Madagascar, when the call actually was routed through London at a rate of 8 cents per minute.

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The FTC is challenging Verity to prove in each case that the calls were authorized.

"We're trying to send a message to those people who are solely relying on the telephone number that has dialed your service that they need to get the line subscriber's permission first before billing them," said David Torok, an FTC attorney who is litigating the case.

Calls to Verity's lawyer, Joel Dichter, were not immediately returned. However, he did issue a statement insisting that all telecom services offered by Verity comply with FTC and FCC guidelines.

"All charges, including the exact price per minute of the international call, are fully and clearly disclosed to the consumer before the software can be used," the statement read. "The consumer must acknowledge and accept these charges several times by clicking on the screen."

The suit also names billing service Integretel of San Jose, Calif., which is charged with sending out the bills on Verity's behalf. Integretel CEO Joe Lynam said his company was unaware of the alleged scam and that it is working with the FTC to resolve the matter.

"We were completely caught by surprise," Lynam said. "We do a rigorous amount of diligence, but we can't turn over every stone."

The FTC suit hints at the significance of the online porn business as well as the problems it faces in gaining mainstream acceptance from the financial community. Despite the low profile of companies engaged in online adult entertainment ö few have sought public funding or venture capital -- porn might be the only form of online content that has proven profitable.

Based on the average disputed bill and number of users in the Verity case, the roughly $25 million in question underscores just how much money Internet adult entertainment companies can generate. The company already has collected $500,000 from consumers involved in the case, Torok said.

After receiving the complaints last month, the FTC, along with police, launched an investigation into Verity's activities. The agency discovered that a Verity software program was being downloaded onto user's computers from adult Web sites. That program apparently disconnects consumers' modems from their normal Internet service provider and dials a number in Madagascar, but then actually connects the computer to a number in London.

On Aug. 23, the FTC filed a separate civil suit against Crescent Communications, a company owned by the same principals of Verity, alleging that the company inappropriately billed consumers on their phone bills for accessing the Playgirl.com Web site. The company offered free tours of the site and asked people to give their credit card information for age verification. Instead of using it for that purpose, an agency spokesman said, the company issued $188 million in unauthorized charges from 1997 to 1999.

The FTC is requesting refunds for all consumers who did not authorize use of Verity's service, and also the balance of the difference between the $3.99 per minute that Verity charged for each minute its service was used and the 8 cents per minute it should have charged. A hearing will be held at the end of October to determine whether the restraining order against the company will be extended.

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