[Senate Hearing 105-453]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 105-453
 
            FRAUD ON THE INTERNET: SCAMS AFFECTING CONSUMERS

=======================================================================

                                HEARING

                               before the

                               PERMANENT
                     SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 10, 1998

                               __________

      Printed for the use of the Committee on Governmental Affairs

                              ------------

                     U.S. GOVERNMENT PRINTING OFFICE
46-902 CC                    WASHINGTON : 1998

_______________________________________________________________________
For sale by the Superintendent of Documents, Congressional Sales Office
         U.S. Government Printing Office, Washington, DC 20402





                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   FRED THOMPSON, Tennessee, Chairman
SUSAN M. COLLINS, Maine              JOHN GLENN, Ohio
SAM BROWNBACK, Kansas                CARL LEVIN, Michigan
PETE V. DOMENICI, New Mexico         JOSEPH I. LIEBERMAN, Connecticut
THAD COCHRAN, Mississippi            DANIEL K. AKAKA, Hawaii
DON NICKLES, Oklahoma                RICHARD J. DURBIN, Illinois
ARLEN SPECTER, Pennsylvania          ROBERT G. TORRICELLI,
BOB SMITH, New Hampshire               New Jersey
ROBERT F. BENNETT, Utah              MAX CLELAND, Georgia
             Hannah S. Sistare, Staff Director and Counsel
                 Leonard Weiss, Minority Staff Director
                    Michal Sue Prosser, Chief Clerk

                                 ------                                

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                     SUSAN M. COLLINS, Maine, Chair
SAM BROWNBACK, Kansas                JOHN GLENN, Ohio
PETE V. DOMENICI, New Mexico         CARL LEVIN, Michigan
THAD COCHRAN, Mississippi            JOSEPH I. LIEBERMAN, Connecticut
DON NICKLES, Oklahoma                DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
BOB SMITH, New Hampshire             ROBERT G. TORRICELLI, New Jersey
ROBERT F. BENNETT, Utah              MAX CLELAND, Georgia
           Timothy J. Shea, Chief Counsel and Staff Director
                     Mary D. Robertson, Chief Clerk
                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Collins..............................................     1
    Senator Glenn................................................     3

                               WITNESSES
                       Tuesday, February 10, 1998

Susan Grant, Director, National Fraud Information Center, Vice 
  President, Public Policy, National Consumers League............     5
Tatiana Gau, Vice President of Integrity Assurance, America 
  Online, Inc....................................................     9
Barry D. Wise, Certified Public Accountant, Victim of Fortuna 
  Alliance Internet Pyramid Scheme, Matthews, North Carolina.....    24
Hon. Robert Pitofsky, Chairman, Federal Trade Commission, 
  accompanied by Jodie Bernstein, Director, Bureau of Consumer 
  Protection.....................................................    31

                     Alphabetical List of Witnesses

Gau, Tatiana:
    Testimony....................................................     9
    Prepared Statement...........................................    62
Grant, Susan:
    Testimony....................................................     5
    Prepared Statement...........................................    45
Pitofsky, Hon. Robert:
    Testimony....................................................    31
    Prepared Statement with attachments..........................    78
Wise, Barry:
    Testimony....................................................    24
    Prepared Statement...........................................    75

                                APPENDIX
                              Exhibit List

* May Be Found In The Files of the Subcommittee
                                                                   Page
  1. GSlide presentation of Tatiana Gau, Vice President of 
  Integrity Assurance, America Online, Inc.......................   240

  2. GBackground material regarding Fortuna Alliance, including 
  printout of Fortuna Alliance Web Site as of January 1998, 
  miscellaneous news releases on Fortuna Alliance, and copy of 
  FTC v. Fortuna Alliance, et al., FTC Complaint, Temporary 
  Restraining Order and Stipulated Final Judgment................   267

  3. GSlide presentation of the Honorable Robert Pitofsky, 
  Chairman, Federal Trade Commission.............................   300

  4. GMemoranda prepared by Rena M. Johnson, Counsel, and Dennis 
  McCarthy, Investigator, Permanent Subcommittee on 
  Investigations, dated February 5, 1998, to Permanent 
  Subcommittee on Investigations' Membership Liaisons regarding 
  Internet Fraud.................................................   312

  5. GSupplemental Questions for the Record of The Honorable 
  Robert Pitofsky, Chairman, Federal Trade Commission............   351

  6. GSupplemental Questions for the Record of Susan Grant, 
  Director, National Fraud Information Center....................   355

  7. GSupplemental Questions for the Record of Tatiana Gau, Vice 
  President of Integrity Assurance, America Online, Inc..........   358

  8. GFederal Trade Commission, Bureau of Consumer Protection--
  Fighting Crime on the Internet (Material on law enforcement and 
  consumer and business education.)..............................     *

  9. GNational Fraud Information Center (NFIC) informational 
  sheet..........................................................   360

 10. G``Statistics Show Internet Fraud Rising,'' NCL Bulletin, 
  May/June 1997..................................................   361

 11. GSelected news articles on America Online, Inc..............     *

 12. GSelected news articles on Federal Trade Commission (FTC)...     *

 13. GSelected news articles on Internet fraud issues............     *


            FRAUD ON THE INTERNET: SCAMS AFFECTING CONSUMERS

                              ----------                              


                       TUESDAY, FEBRUARY 10, 1998

                                       U.S. Senate,
                Permanent Subcommittee on Investigations,  
                  of the Committee on Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:35 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Susan 
Collins, Chairman of the Subcommittee, presiding.
    Present: Senators Collins and Glenn.
    Staff Present: Timothy J. Shea, Chief Counsel/Staff 
Director; Mary D. Robertson, Chief Clerk; Rena M. Johnson, 
Counsel; Dennis M. McCarthy, Investigator; Lindsey E. Ledwin, 
Staff Assistant; Kirk E. Walder, Investigator; Bob Roach, 
Counsel to the Minority; Leonard Weiss; Nanci Langley; Marianne 
Upton; Lynn Kimmerly; Myla Edwards; Jeff Gabriel; Michael 
Loesch; Steve Abbott and Felicia Knight.

              OPENING STATEMENT OF SENATOR COLLINS

    Senator Collins. The Subcommittee will please come to 
order. This morning the Subcommittee begins its hearings on 
fraudulent schemes on the Internet. The Internet is emerging as 
a phenomenal tool of commerce and communication. One hundred 
seventy five countries are connected to the Internet, and 
approximately 50 million Americans use the Internet. By the 
year 2000, it is projected that there will be half-a-billion 
Internet users worldwide.
    There is no question that the Internet has been a boon to 
business. The remarkable ease and speed with which transactions 
can be conducted over the Internet provide businesses of all 
sizes with access to millions of customers. For example, I am 
familiar with a small, family-owned business in northern Maine 
that uses the Internet to market its delicious lobster stew. 
Without the Internet, this small business would never be able 
to afford the marketing costs in reaching millions of 
customers.
    For their part, consumers have the ability to engage in a 
variety of commercial activities across State and national 
borders, including shopping, banking and investing, all from 
the comfort, privacy and safety of their own homes. 
Unfortunately, those who would use the Internet to defraud can 
also work from the comfort, privacy and safety of their own 
homes or anywhere else, for that matter.
    Because it can be used to transfer text, pictures, and 
sounds, as well as money, credit card numbers, and personal 
information, the potential for criminal use of the Internet is 
infinite. Corresponding

to the explosive growth of the Internet, the number of consumer 
complaints of cyberfraud to the National Fraud Information 
Center has increased by nearly 300 percent in the past year. 
The Federal Trade Commission receives between 100 and 200 
Internet fraud complaints per month.
    Law enforcement officials are quickly learning that almost 
any crime that can be committed in the real world can also be 
committed in the virtual world. In fact, by using the Internet, 
criminals can target more victims more quickly, more cheaply, 
and with much less chance of getting caught.
    Through these hearings, the Subcommittee seeks to 
accomplish two goals. First, we hope to educate consumers about 
the potential for fraud on the Internet. While the Internet 
provides limitless opportunities for commerce and 
communication, the con artists who roam in cyberspace cause 
some consumers to avoid using the Internet to its full 
potential, much to the dismay of actual and potential online 
businesses.
    In order to combat fear of the unknown, consumers must be 
armed with the knowledge of how to detect online fraud and how 
to avoid becoming a victim. Consumers must also be confident in 
the knowledge that there is a sheriff in cyberspace to whom 
they can report Internet fraud when they encounter it and who 
will investigate their complaints.
    Our second goal is to determine Congress' proper role in 
the prevention and prosecution of online fraud. Congress must 
approach its role with caution. Too much regulation will 
hamper, if not destroy, the development of online commerce and 
the spirit of the Internet as a society of free and open 
communication.
    On the other hand, too little regulation or inadequate laws 
will erode consumer confidence to the extent that the full 
potential of the Internet as a vehicle of commerce and 
communication may never be realized. We begin this hearing 
keeping in mind the delicate balance that Congress must strike. 
This hearing is the first in a series of hearings focusing on 
fraudulent schemes being perpetuated over the Internet.
    The first thing that strikes you when you begin to examine 
Internet fraud is the old adage, ``The more things change, the 
more they stay the same.'' There is nothing new or unique about 
many of the frauds being committed with the Internet. Instead, 
what is happening is that such old-fashioned frauds as work-at-
home scams, pyramid schemes, fraudulent sweepstakes promotions 
and others have gone high-tech.
    Moreover, as the chairman of the SEC testified at a 
previous hearing held by this Subcommittee, the Internet 
provides the appearance of legitimacy at a far lower cost. In 
such cases, the type of fraud being committed is not new; 
rather, it is the use of the Internet as the means of 
commission that is new and that poses obstacles to law 
enforcement and traps for the unwary Internet user.
    In addition to these very traditional types of fraud, we 
will examine some not-so-traditional frauds that have spawned a 
new vernacular in Netspeak, with such labels as ``Trojan 
horses'' and ``sniffers.'' What is particularly alarming is 
that the inexperienced Internet user may not even realize that 
he or she has been targeted as a victim until well after the 
crook has absconded with the victim's money.
    We will hear today from three panels of witnesses. Our 
first panel will consist of the Director of the National Fraud 
Information Center of the National Consumers League and the 
Vice President of Integrity Assurance at America Online. These 
witnesses will describe the types of fraud prevalent on the 
Internet and give us some helpful advice on how consumers can 
protect themselves from becoming Internet fraud victims. Our 
next witness will be a victim of Internet fraud who lost 
thousands of dollars to a pyramid scheme that was ultimately 
investigated and shut down by the Federal Trade Commission. 
Finally, I am pleased that we will hear this morning from the 
chairman of the Federal Trade Commission, the lead Federal 
agency charged with protecting consumers from this type of 
illegal activity. The chairman will describe Federal efforts to 
combat Internet fraud.
    It is now my pleasure to recognize the Ranking Minority 
Member of the Subcommittee, the senior Senator from Ohio, 
Senator John Glenn, for any statement that he may wish to make.

               OPENING STATEMENT OF SENATOR GLENN

    Senator Glenn. Thank you, Madam Chairman, and I want to 
commend you for holding this hearing. The tremendous expansion 
of the Internet as a vehicle of communication and commerce 
raises an array of important security, consumer and legal 
issues that need to be addressed if we are to tap the full 
potential of this new technology. I think it is important that 
this Subcommittee keep on top of the important issues in this 
area.
    Two years ago, the Subcommittee held a series of hearings 
about security in cyberspace. And today we look at a different 
but no less important topic, and that is consumer fraud over 
the Internet. The movement toward electronic commerce is a true 
cyberspace revolution. It has the potential to change the 
nature of the way people and firms conduct business. It can 
link millions of consumers and businesses, speed transactions, 
lower entry costs for new businesses.
    Already a majority of banking and security transactions are 
conducted electronically. Now more and more private citizens 
are buying, selling and banking over the Internet. One study 
reported that the Internet market exceeded $1 billion in 1995, 
and that is expected to grow by the year 2000 to more than $23 
billion. From $1 billion to $23 billion in just a 5-year 
period.
    However, a technological breakthrough that brings new 
opportunities often creates new vulnerabilities. The same 
characteristics that make the Internet a convenient medium for 
commerce also make it an attractive vehicle for con artists and 
illegitimate businesses. In December, 1996, a task force of 
Federal, State and local agencies, led by the FTC, surfed the 
Internet and identified 500 likely pyramid schemes. How long 
did that search take? They did that in just 3 hours. These were 
not proven cases, but they appeared to be cases where some sort 
of fraud or wrongdoing was underway. And that was in 3 hours. 
One can only imagine how many more were out there then and how 
many more have come online since.
    We will hear today from the National Consumers League 
reports of possible online and Internet fraud have increased 
from 32 per month in 1996 to 100 per month in 1997. If 
businesses and consumers lose confidence in transacting 
business electronically, the Internet's commercial potential 
will never be realized. Unfortunately, even a relatively small 
percentage of fraudulent activity can taint the entire medium 
and discourage its use among the general public.
    To maintain business and consumer confidence in electronic 
commerce, we must be able to effectively police the medium for 
illegal behavior. Today we will hear about the proliferation of 
fraud and the types of fraud being perpetrated. Some of them 
are the conventional schemes that are committed through the 
mail and over the telephone, and some are unique to the 
Internet. All of this begs the question of what can be done by 
regulatory and law enforcement agencies to prevent this fraud 
and apprehend and punish the perpetrators.
    Today we will hear what private and governmental agencies 
are doing to alert and educate consumers and what our 
regulators and law enforcement personnel are doing to apprehend 
and to punish the perpetrators. Do we need new legislation? We 
do not know. That is one thing we would like to determine from 
these hearings. Unfortunately, there are not a lot of easy 
answers. We cannot assume the traditional mechanisms used to 
control fraud in other communications media will be effective 
against Internet fraud.
    Control of Internet fraud raises some complicated, 
technical, jurisdictional, even constitutional issues. The 
Internet makes it easy for con artists to remain anonymous. The 
international nature of the Net facilitates international 
criminal activity which impairs prosecution even if the 
perpetrators are identified. Moreover, efforts to regulate and 
control conduct at the front end can often run up against 
constitutional issues of privacy and speech.
    And we are up against something here, too, in that--I want 
to emphasize the international nature of things. Even if we 
have constitutional problems in our own country here, it may 
not be against the constitution in some other country where 
some of this fraud is taking place. And how do we deal with 
that? So it is a very, very complex situation.
    Finally, the implementation of controls requires a delicate 
balancing act. Too much regulation could discourage electronic 
commerce and waste the tremendous potential offered by the 
Internet. Too little regulation could leave millions of 
consumers and businesses victimized by fraudulent schemes and 
erode confidence in electronic commerce.
    We need to explore how our law enforcement and consumer 
protection system can effectively react to this new type of 
crime within the legal and technical parameters that it must 
function. We should also discuss what responsibilities can and 
should be placed upon the Internet service providers, who are 
really the gatekeepers to the Internet. Do we need changes in 
current laws, rules or regulations? Are they adequate, but just 
inadequately enforced? How do we get into this and what kind of 
monitoring devices do we set up?
    The Governmental Affairs Committee has two responsibilities 
normally in a hearing like this; one is just vent this and let 
it be known so the publicity will let people be more aware of 
the problems and take their own methods of protection; and the 
second role of this Committee, of course, is to see if we need 
additional legislation or, if existing rules and regulations 
under existing law are inadequate, then we need to take action 
in that direction, also. So we will be investigating all these 
this morning.
    Madam Chairman, thanks again for having this hearing. I 
think it is much needed.
    Senator Collins. Thank you very much, Senator Glenn.
    I would now like to call our first panel of witnesses. I 
would like to welcome Susan Grant, the Vice President of Public 
Policy for the National Consumers League, and Tatiana Gau, the 
Vice President of Integrity Assurance for America Online, Inc. 
Ms. Grant is also the Director of the League's National Fraud 
Information Center and Internet Fraud Watch projects, which 
provide advice to the public concerning Internet fraud and 
reports of suspected fraud to appropriate law enforcement 
agencies.
    Pursuant to Rule 6, all witnesses who testify before the 
Subcommittee are required to be sworn. So at this time, I would 
ask you to stand and raise your right hand. Do you swear that 
the testimony you are about to give before the Subcommittee is 
the truth, the whole truth, and nothing but the truth, so help 
you, God?
    Ms. Grant. I do.
    Ms. Gau. I do.
    Senator Collins. Thank you. Because of time limits, I am 
going to ask each of you to limit your oral testimony to 15 
minutes, but any other materials you want to provide will be 
included in full in the hearing record.
    And, Ms. Grant, we will start with you, if you will please 
proceed?

     TESTIMONY OF SUSAN GRANT,\1\ DIRECTOR, NATIONAL FRAUD 
  INFORMATION CENTER, VICE PRESIDENT, PUBLIC POLICY, NATIONAL 
                        CONSUMERS LEAGUE

    Ms. Grant. Thank you, Madam Chairman, Senators. On behalf 
of the National Consumers League, America's pioneer consumer 
organization, I am pleased to provide you with information 
about the newest frontier of consumer fraud, the Internet. Some 
of the scams that we see, such as pyramid schemes, are as old 
as the league, and we will be celebrating our 100th birthday in 
1999. Others are new, as advanced technology has created new 
opportunities for legitimate marketing and, unfortunately, also 
for fraud.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Grant with attachments appears in 
the Appendix on page 45.
---------------------------------------------------------------------------
    The National Consumers League has a bird's-eye view of 
Internet fraud through our Internet Fraud Watch program. 
Created in 1996, the Internet Fraud Watch operates in tandem 
with our National Fraud Information Center, which was 
established in 1992 to fight telemarketing fraud.
    The Internet Fraud Watch and the National Fraud Information 
Center are unique programs that provide advice to consumers 
about telephone and Internet solicitations and relay reports of 
possible fraud to law enforcement agencies. Consumers can call 
our toll-free number, 1-800-876-7060, or they can visit our Web 
site at www.fraud.org for information that helps them size up 
telemarketing and Internet solicitations and avoid fraud.
    We receive an average of 1,500 telephone calls a week and 
an equal number of E-mails. We also receive dozens of letters 
from consumers every week, mostly asking for advice. By 
offering that advice in English and in Spanish, our trained 
counselors help to prevent consumers from becoming fraud 
victims.
    Another important function of our Internet Fraud Watch and 
National Fraud Information Center programs is to relay 
consumers' reports about fraud to law enforcement agencies. We 
submit those reports daily to the electronic database 
maintained by the Federal Trade Commission and the National 
Association of Attorneys General. Our own data system also 
automatically faxes consumers' fraud reports to over 160 
individual Federal, State and local law enforcement agencies 
according to criteria that those agencies have set for what 
they wish to receive. This alerts those agencies to scams that 
they may not even yet know about and provides them with the 
documentation that they need to shut down illicit operations.
    Our free consumer and law enforcement services are 
supported by the members of the National Consumers League and 
by contributions from concerned businesses and trade 
organizations that are concerned about telemarketing fraud and 
Internet fraud. We would welcome government support for the 
vital services that we provide. As has been alluded to before, 
fraud reports to our Internet Fraud Watch have tripled since 
its inception in 1996, averaging about 100 per month by the end 
of 1997.
    While this is probably just the tip of the iceberg, it 
enables us to provide you with a snapshot of the emerging 
problem of Internet fraud. In 1997, the top 10 subjects of 
Internet fraud reports were: (1) Web auctions: items bid for, 
but never delivered, value of items inflated, shills suspected 
of driving up prices; (2) Internet services: charges for 
services that were supposedly free, payment for online or 
Internet services that were never provided or were 
misrepresented; (3) general merchandise: sales of everything 
from T-shirts to toys, calendars to collectibles, goods never 
delivered or misrepresented; (4) computer equipment and 
software: sales of computer products that were never delivered 
or falsely advertised; (5) pyramids and multi-level schemes in 
which profits are really made from recruiting others, not from 
sales of goods or services to the end users and benefits of 
participation misrepresented; (6) business opportunities and 
franchises: empty promises of big profits with little or no 
work by investing in pre-packaged businesses or franchises; (7) 
work-at-home plans: materials or equipment sold with false 
promises of payment for piece work performed at home; (8) 
credit card issuing: false promises of credit cards, usually to 
people with bad credit on payment of an up-front fee; (9) 
prizes and sweepstakes: requests for up-front fees to claim 
winnings that never materialize; and (10) book sales, 
genealogies, self-improvement books and other publications that 
are either never delivered or misrepresented.
    Bogus investments, empty offers of travel, scholarship-
search scams, health fraud, and other abuses also abound on the 
Internet. I should hasten to add that there are obviously many 
legitimate offers for goods through auction sites, for multi-
level distributorships, for Internet services and other 
products and services on the Net. And that is precisely why it 
is so important to be aware of Internet fraud and to deter it.
    Con artists are lurking everywhere on the Net, in flashy-
looking Web sites, in classified ad sections, in unsolicited E-
mail, and even in chat rooms and news groups. In our written 
testimony, we provided some examples, including a magazine 
sales scam that involved E-mail solicitations disguised as 
testimonials from fellow members of news groups.
    We also described the technologies that have enabled new 
types of scams to emerge, like the Moldova case, in which 
consumers who downloaded a free viewer program to see pictures 
were unwittingly disconnected from their regular Internet 
service providers and reconnected to the Internet through a 
phone number in Moldova, resulting in huge international 
telephone charges.
    There is no limit to the creativity with which crooks seek 
to use new technologies to snare their victims. Those crooks 
are located everywhere on the Net. If we could have the chart 
of the company location,\1\ you will see that these are the top 
20 locations. They are in many States but also in other 
countries. The category of locations outside of the U.S. and 
Canada is at number 12, tied with Arizona. Ontario is number 13 
and British Columbia is number 20.
---------------------------------------------------------------------------
    \1\ Charts submitted by Ms. Grant appear in the Appendix on pages 
57-61.
---------------------------------------------------------------------------
    It is easy to hide who you are and where you are on the 
Internet, because you can supply false information to register 
a Web site and you can mask your return address for E-mail. 
Moreover, the Internet makes geographic boundaries meaningless 
in terms of the ability for consumers and sellers to 
communicate with one another. But geographic boundaries are 
still relevant to jurisdiction for prosecution, a fact that is 
well understood by con artists who take advantage of the fact 
that it is difficult or more difficult for law enforcement 
agencies to go after them if their victims are one place and 
they are located in another.
    Another difference between the physical world and 
cyberspace can be seen in the problem with auctions. Sellers 
can offer their wares to millions of potential buyers for a 
very low fee. But unlike physical auctions where consumers can 
actually touch the merchandise and actually verify that it 
exists before they bid on it, you cannot do that in a Web 
auction, nor can the auctioneer necessarily verify that the 
goods exist or that they are authentic.
    And there are also numerous private sellers that are 
selling through these Web sites, which raises several issues, 
including the fact that private sales are not regulated in the 
same way as sales by businesses. While the Internet opens the 
doors to honest individuals and small companies for low-cost 
entry into this new marketplace in cyberspace, it also provides 
ready access to people who are either inexperienced in business 
or who have fraudulent intent.
    Victims of Internet fraud can also be found in every State 
and other countries, as well. These are the top 20 locations of 
the victims. Obviously, we hear from victims not only in the 
United States, but number 8 is the category of outside of the 
U.S. or Canada. In general, victims can be found predominantly 
in the states that have the highest populations, not 
surprisingly.
    No one is immune to Internet fraud. We hear from consumers 
of all walks of life and of all ages. If we could have the age 
chart, please. While people in their thirties, forties and 
fifties are most likely to report Internet fraud to our 
Internet Fraud Watch, we also have received reports from 
youngsters of 17 and seniors of 78.
    Consumers pay for goods and services promoted through the 
Internet in a variety of ways. Alarmingly, cash is the fourth 
most frequent method of payment reported to our Internet Fraud 
Watch in 1997. This is dangerous because it leaves consumers 
with no documentation of the transactions and it obviously also 
allows crooks to avoid their tax obligations.
    Though consumers are more likely to pay with checks, money 
orders and cash than with credit cards, we generally encourage 
people to use credit cards whenever they are making substantial 
advance payments for products or services because of their 
ability to dispute the charges for non-delivery or 
misrepresentations.
    As more and more people go online, more consumer education 
is obviously needed to make people aware of the danger signs of 
Internet fraud and help them take advantage of what is on the 
Net without being victimized. Through our Web site and through 
other fora, various methods of public education that we 
conduct, the National Consumers League is leading the way in 
this effort. We also work with government and the private 
sector to get the word out to both consumers and to businesses 
about the proper use of the Internet as a tool for 
communication and commerce.
    And as more needs to be done on the educational front, so 
must law enforcement's ability to go after the cybercrooks be 
made easier. Cross-border cases pose especially difficult 
challenges to investigators and prosecutors because of the 
legal restrictions of information sharing between different 
countries, the expense of transporting witnesses and the 
complications of using different legal systems.
    Congress can help by removing any information constraints 
between the U.S. and other countries that still exist, setting 
up a fund to aid in cross-border actions, and supporting 
consumer and law enforcement services such as ours. We also 
believe that the Federal telemarketing sales rule should be 
expanded to cover the Internet. Many of the same disclosure 
requirements and prohibited acts could be tailored to fit 
Internet and online promotions. State law enforcement 
authorities would be able to go into Federal courts to obtain 
injunctions and judgments that would protect consumers in every 
State, as they can now for telemarketing fraud. And if the 
statute was amended to provide jurisdiction where either the 
victims or the perpetrators are located for State consumer 
protection authorities, it would enable them to go after crooks 
that are based in their backyards but are targeting consumers 
in other States, an occurrence that we see frequently.
    The promise of the Internet as a means of communication and 
commerce is dimmed by the presence of fraud. The National 
Consumers League is committed to working with Congress and 
others to ensure a brighter and safer future for the 
marketplace in cyberspace.
    Thank you.
    Senator Collins. Thank you very much, Ms. Grant.
    Ms. Gau.

    TESTIMONY OF TATIANA GAU,\1\ VICE PRESIDENT, INTEGRITY 
                ASSURANCE, AMERICA ONLINE, INC.

    Ms. Gau. Thank you, Madam Chairman and Senator Glenn. My 
name is Tatiana Gau, Vice President of AOL Integrity Assurance. 
Founded in 1985, America Online is the largest Internet service 
provider and has over 11 million members. I appreciate the 
opportunity to appear before you today to discuss how the 
industry is working to promote online safety and security and 
fight Internet fraud and abuse. Thank you for providing this 
forum to bring these important issues to the public.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Gau appears in the Appendix on 
page 62.
---------------------------------------------------------------------------
    At AOL, we are focused on preventing fraud on many fronts. 
To give you some insight into these initiatives, let me explain 
to you my department's mission. From log-on to log-off, AOL 
Integrity Assurance manages all of the company's safety and 
security measures in order to ensure the integrity of our 
member experience.
    The prevention of Internet fraud and the promotion of 
online security are critical to cyberspace. It is also critical 
to the future development of all interactive media. We believe 
that the principles of education, prevention, and cooperation 
are key to these efforts. Identifying and tackling Internet 
fraud and educating all consumers on how to protect themselves 
and enhance their online experience is our goal.
    We need to inform consumers how they can protect themselves 
and prevent purveyors of fraud and promote cooperation of the 
industry and with law enforcement. The vast majority of those 
who utilize the online medium are contributing positively to 
this vibrant community. Like any environment, however, the 
unfortunate reality is that there are individuals who aim to 
harm.
    As more and more new Internet users come online, combating 
fraud becomes even more important. These new users are not 
familiar with the technology and they require special 
protection and attention. Fulfilling the enormous promise of 
the interactive medium depends on consumers and families being 
safe and secure online. Online integrity, therefore, is a top 
priority both at AOL and across our industry. All of us with a 
stake in cyberspace security are focused on this issue, both 
pursuing their own strategies and working together.
    The Subcommittee has asked that I speak to you about the 
types of fraudulent scams that exist online. While it is 
difficult to provide you with a comprehensive list of these 
frauds, as the dynamics of the scams are constantly changing 
and evolving. I can provide you with a sampling of those that 
are most common. There are several different kind of scams that 
I am going to speak about. These include password scams, credit 
card scams, Web-based frauds and junk E-mail, commonly known as 
``spam.'' So let us begin with password scams.
    As you will see on the slide,\1\ there are two categories 
of password scams. There is overt password solicitation, which 
basically consists of social engineering tactics to lure a user 
into providing their password, and the concealed variety, where 
the user is not necessarily aware of the fact that what they 
are about to do is going to compromise their password.
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    \1\ See Exhibit No. 1, slide presentation of Tautiana Gau, America 
Online, appears in the Appendix on page 240.
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    The first example is a password ``phishing'' attempt via 
instant message. First of all, the term ``phishing'' has been 
developed in the Internet industry, P-H-I-S-H, kind of a 
takeoff on that, and it is now used quite widely.
    Senator Collins. I thought it was a band. [Laughter.]
    Ms. Gau. Instant messages are real time, one-on-one 
communications that can be transferred between one user to 
another, and they are private communications that only go to 
the designated recipient and they are real time. What scam 
artists often employ is a technique where they impersonate 
either a billing service representative of the Internet service 
that that user is accessing the Internet with, or they might 
take on the guise of a phone company representative coming up 
with some type of claim that there is trouble with your phone 
line, please provide your password. One of the things that AOL 
has done to try to raise awareness of this issue is on the 
window of the instant message, when it comes to you, there is 
actually a warning in red letters that states, ``AOL will never 
ask you for your password or billing information.''
    The next example via E-mail is very similar to the previous 
example I discussed in that they employ similar tactics, either 
as a billing service representative or a phone company rep or a 
security rep for the company, but they send it via E-mail. And 
these can sit in an E-mail box, can get mixed up with other 
personal mail, and when a user goes to read it, they may not be 
as vigilant as they should be in deciding whether or not they 
really should believe this and send in their password.
    A first example of concealed password scams is what is 
called the ``Diag.dat'', phishing via instant message. 
``Diag.dat'' is a file where the password is recorded on your 
computer, and different services have different names for that 
file. And what scams artists will do is they will send you an 
E-mail under the pretext that they have malfunctioning software 
and could you help them out and send them a copy of your file 
so they can get their software working again. And, again, the 
rule of thumb to follow here is not only do not accept things 
from strangers and if it sounds too good to be true, it 
probably is, but also do not give out things to strangers 
unless you really know what you are giving.
    The second example of concealed password solicitations are 
Trojan horses. Trojan horses are programs that come in 
attachments to E-mail that are sent to you under the guise of 
some type of beneficial offer for free: ``Here is a great new 
animated video. Download it and enjoy.'' And they take 
different approaches to try to entice the user to download it. 
And when the user does download it, in fact, at that point, 
they have become infected and have the potential of either 
having their password compromised or even having files deleted, 
a variety of different things, depending on the Trojan.
    This slide actually shows the area on America Online where 
we have posted safety tips for our members to understand what 
Trojan horses are and the telltale signs of Trojan horses, as 
well as linking them to an area where they can get special 
antivirus software that protects against Trojan horses.
    This is an example of a scam using a screen-saver approach. 
It states, ``Hey, this is cool. It's the latest coolarama 
screen saver. Download it and enjoy.'' Here the rule of thumb, 
of course, is to again be careful who you receive information 
from and do not download things from people you do not know.
    A second example of an approach to provide a Trojan to 
someone is to take on the guise of a software company. And in 
this situation, the scam artists will impersonate software 
companies and will send a message stating, ``This is the 
upgrade you have requested,'' or ``This is the upgrade that you 
need. Please download as soon as possible.''
    I will discuss three more areas of password 
vulnerabilities. All of these scams that I have mentioned via 
instant message and E-mail can also occur on Web sites. Fake 
log-in procedures can be posted on Web sites to try to entice 
you into entering your password and other information that they 
might be requesting. There are also Web sites that take on the 
appearance, say, of an Internet service provider billing or 
registration page where, in fact, they are asking for the 
member to provide their registration information along with 
their password.
    Password guessing is becoming more frequent in that recent 
studies have shown that approximately 60 percent of users on 
the Internet have insecure passwords in that they are either 
names of their spouses or words in the dictionary or names of 
their pets, whatever the case might be. And if a scam artist 
chooses to target one particular person, they can, in fact, 
just through raw attempts try to guess the password, entering 
and entering until they finally get in.
    Password cracking is a higher level of that kind of 
guessing in that scam artists use an automated program to 
actually, through brute force, continue to prompt a password 
field in order to try to get into the account. This is why, of 
course, it is so important for users to choose safe passwords 
for their E-mail accounts. In fact, the password is the key to 
the E-mail account. And this is an area where education on the 
part of consumers is greatly needed.
    Credit card and billing scams, there are two categories in 
this section. There are those scams that affect users and those 
scams that affect the services. Here is an example of a billing 
service scam, and this takes a similar approach as taken in 
password phishing in that this time it might say that the 
database is contaminated and your full name, address and credit 
card number and expiration date is needed in order to make sure 
your account will stay alive; if not, it will be turned off 
within 24 hours, usually taking some guise of that sort.
    A slightly more complex version of that is when the E-mail 
that is received by the user then links the user to a Web site 
where, as I mentioned previously, a Web site has been put up 
mimicking that service provider's design and layout to confuse 
the user so that they think, in fact, that this might be a 
legitimate site. And again, to prevent users from falling for 
these types of scams and to avoid their falling victim to them, 
AOL has posted warning messages on the E-mail screens, as well, 
again stating that AOL staff will never ask for personal or 
billing information.
    There is also another example of a billing scam that I will 
quickly mention, and that is an approach where you receive an 
E-mail that says you have won a prize, whether it is a laptop 
or a stereo or whatever the case might be. And the E-mail goes 
on to describe how wonderful this prize is. And then at the 
bottom of the E-mail, it says, ``So please reply back to us 
with your name and mailing address and include your credit card 
number to cover shipping and handling.'' And, of course, at the 
other end, the scam artist never sends the supposed prize and 
has the user's credit card number, and name and address, in 
their hands.
    Subscription fraud is the first example of scams that 
affect the services. Scam artists can obtain on the Internet 
programs that are called credit card generators, and what these 
programs do is create fake credit card numbers that can be used 
to sign up with online services. They can also forge their name 
and address and a variety of other things, and that is why it 
is so important for services to have strong registration 
processes, as well as them being real-time verification 
processes.
    In a lot of the business on the Internet, oftentimes the 
verifications are not done in real time; rather, they are done 
in 24 to 72 hours. And at that point, you have let the scam 
artist onto the service and have allowed him to spend 24 hours 
wreaking havoc on that service. This particular slide shows 
some of AOL's checks during the registration process.
    A second example of fraud that affects services or, rather, 
merchants, is transaction fraud. And here, again, scam artists 
are using the credit card generator numbers that they get from 
the Internet or using stolen credit card numbers. And, of 
course, in those cases, the user or the owner of that credit 
card may not realize that their credit card has been stolen 
until they receive the next monthly bill.
    One thing to keep in mind in both of these frauds is that 
these are not unique to online. These frauds occur in the real 
world, as well, whether it is signing up for a service or 
registering with a membership club or whatever the case might 
be--or making a purchase at a store. And, as we all know, in 
stores now they run immediate checks on your credit card 
number, and that is what needs to be done in the Internet, as 
well, to ensure that no fraud is undertaken.
    There are a number of other Web frauds. Fake store fronts--
those are transaction frauds that affects users, where they 
enter a credit card number and the site is actually a fake. 
Virulent active content, Trojan horses, are different types of 
things that can be pushed onto your computer, and thus all 
users should be sure to have antivirus software and browser--
setting their browser security alerts.
    I am going to run through this very quickly, given the 
limit on time--just to move through, I have a number of 
examples of scams, the marketing scam, which is a weight-loss 
program in this case. And, again, typically in these 
situations, the product does not live up to its claims. Here is 
a get-rich-quick scam, make a million dollars from home, or in 
this case, make $800,000 from home. And, also, there are 
varieties of pyramid schemes, as well.
    Forged headers are what I call a category of identity fraud 
in that the sender of the E-mail has chosen to disguise their 
identity by using forged headers and thus making it difficult 
to identify that user. One important item that I would like to 
stress is that users are not without protection. AOL 
fundamentally believes that a combination of education and 
technology tools that we make available to our members are the 
answer to solving the fraud problem as it exists today. We also 
believe fundamentally that law enforcement needs to play an 
important role in this, and we have an ongoing relationship 
with law enforcement to cooperate on cases that come up.
    What I will run through here quickly are some of the tools 
that are available. Mail controls actually allow a user to 
designate who they can receive E-mail from in their account and 
who they cannot receive E-mail from, who they do not want to. 
It also allows them to block instant messages, and this is 
particularly useful for families that have children who are 
using the Internet, where they do not want their children 
exposed to these kinds of things.
    The file download alert is a warning against Trojan horses. 
This message pops up any time a member goes to download a file 
attached to E-mail that contains a Trojan horse. The 
Neighborhood Watch is both an educational area on America 
Online, but is also a centralized point to link to all the 
different tools that are available by AOL to their members, to 
customize their online experience.
    Notify AOL is our notification mechanism. Members send in 
reports of fraud that they either witness or fall victim to, 
and we have staff that monitors those reports 24 hours, 7 days 
a week, and will take action, such as terminating the account 
of the offender if appropriate and, if illegal, referring the 
matter on to law enforcement.
    Spam tools include AOL proprietary blocking technology 
against spam, as well as the mail controls that I discussed 
previously. Parental controls--this is a one-stop shopping for 
parents to set up again these accounts for their children that 
are customized so that their children are not exposed to things 
believed to be beyond their age level.
    And finally, in summary, I would just like to reiterate 
some of the safety tips that I mentioned through the 
presentation: Choosing a safe password and making sure you 
protect that password by not giving out the information to 
anyone. Similarly, do not give out personal information. Just 
like in the real world, you would not give out your Social 
Security number, you should not be doing it online. Do not 
download files from strangers or, as I like to call it, do not 
take candy from strangers. If a Web site is unfamiliar, look 
into the company's background before you do business with them. 
And perhaps most importantly, do not believe everything you 
read; if it sounds too good to be true, it probably is.
    Thank you.
    Senator Collins. Thank you very much, Ms. Gau.
    Ms. Grant, I would like to start with some questions to 
you. It was very helpful for us to have the list of the top 10 
Internet frauds that have been reported to you, but as you 
pointed out, legitimate businesses are also included in each of 
those categories. A lot of people order books through the 
Internet with very satisfactory results. Are there any warning 
signs that you can give the public for when it is likely that 
an offer is fraudulent within those top 10, because the 
difficulty is in distinguishing between legitimate online 
offers versus the fraudulent schemes?
    Ms. Grant. That is really difficult for consumers, and that 
is one thing that we try to help them with when they contact 
us. First, offers of things for free or for ridiculously cheap 
prices ought to be suspect. The Trojan horses that were 
referred to are one example of something that somebody is 
supposedly giving you as a gift. And you have to ask why; there 
is usually a string attached. If someone is trying to get you 
to buy expensive computer equipment for a very low price, you 
have to wonder why that is. Promises that you can make money in 
business very easily with little or no work have to be suspect. 
Promises that you can get huge returns on an investment with 
little or no risk are also suspect.
    Many of the same pieces of advice that we give for 
telemarketing fraud, we also give for Internet fraud, that it 
is illegal for somebody to ask you for a fee up-front to get a 
prize. That is an illegal lottery and something that should be 
a red flag to you. Some other warning signs are promises of 
loans or credit cards to people with bad credit because 
legitimate lenders and card issuers generally do not extend 
credit to people with credit problems. So we try to warn people 
that if someone is promising you that, it is probably not true.
    Senator Collins. My impression is that consumers who never 
would have fallen victim to a fraudulent solicitation if it had 
come in the mail or via the telephone will nevertheless be 
sucked in by one that is offered on the Internet, that somehow 
consumers are under the false impression that if something is 
on the Internet, it has been screened or it somehow conveys an 
aura of legitimacy.
    What makes consumers--first of all, would you agree with 
that? And, second, what makes consumers so susceptible to 
fraudulent schemes on the Internet?
    Ms. Grant. I agree with what you have said and I think that 
consumers also are under the same misconceptions with magazine 
and newspaper and television advertising, where they think that 
there is more screening than actually exists in most cases. But 
another part of this is that I think that consumers are seduced 
by the novelty and excitement of being on the Net and that they 
are not necessarily looking at these promotions with the same 
cold eye that they need to and that they would if somebody was 
knocking at their door and offering them something.
    Senator Collins. Despite all our best efforts to educate 
consumers, what should a consumer do if they feel they have 
been a victim of Internet fraud?
    Ms. Grant. Report it to our Internet Fraud Watch program, 
for one thing. They may also want to contact their own State 
attorney general or State securities commission, or whatever 
would be the appropriate agency locally for their problem. But 
the most important thing is to report it, because that is the 
only way that these kinds of fraudulent operations can 
ultimately be shut down.
    Senator Collins. Ms. Gau, does AOL encourage its customers 
to report fraudulent activities to you, and if so, what do you 
do if you get a complaint of that nature?
    Ms. Gau. We do indeed try to encourage our members to do 
that, and one of the ways in which we accomplish that is by 
putting promotion buttons on the welcome screen, which is the 
first screen that AOL members see when they sign on. And that 
button takes them to the Notify AOL area and provides them with 
guidelines on how to report frauds or different types of 
problems they may come across online.
    On the question of how do we respond to them, as I 
indicated previously, we do have staff that is there 24 hours, 
7 days a week, to respond to the reports. If appropriate, they 
will terminate the account of the offender, and if it is 
illegal, they will refer it on to law enforcement.
    Senator Collins. One reason consumers can get trapped in a 
fraudulent scheme is that a Web site looks so elaborate and 
looks so legitimate. Could you explain, as part of our efforts 
to educate consumers, how easy it is to set up a Web site and 
whether or not it is difficult to dismantle one once the fraud 
has been perpetuated?
    Ms. Gau. Yes. And perhaps in that regard I would like to 
quickly provide a response to one of the questions you asked 
Susan, in terms of is it because people are on their computers 
in the safety of their home that they fall victim to some of 
these scams? I would add to that the fact that in effect there 
is this false sense of security, of users who are on the 
computer in the safety of their home. Not only are they 
thrilled by this new medium and all the technologies that it 
offers, as Susan Grant mentioned, but also they believe that 
they are untouchable because the computer has been something 
that has been very familiar to people for many years, where you 
wrote your documents that nobody else could read. And so there 
is an assumption that that continues along, as well.
    Now, to answer your question directly, Web sites can be set 
up relatively inexpensively. It can cost as little as a couple 
of hundred dollars to set up a Web site. As far as dismantling 
Web sites, it all depends on who is the host provider for that 
Web site. In the case of certain domain names that are 
registered and where Web sites pop up on frequently, they even 
disappear themselves within a couple days because they do not 
want to stay up too long and they move around.
    If one needs to dismantle a Web site, like in some cases we 
have been alerted by our users that there is an Internet site 
out there that is collecting information under the guise of 
being an AOL billing page, we then contact the service provider 
that is hosting that Web site and ask them to take it down, 
obviously under the due diligence procedures and in legal 
compliance.
    Senator Collins. Ms. Grant, does the National Fraud 
Information Center follow up on the complaints that it refers 
to law enforcement agencies?
    Ms. Grant. No, we do not, and in fact we tell consumers who 
are contacting us that we will provide their information to law 
enforcement agencies, that we do not investigate it ourselves, 
and not to contact us again to find out the status of their 
report because we do not have that information. We really do 
not have the resources to follow up.
    We find out sometimes what agencies are doing with those 
reports because they will contact us to ask for more 
information or we will receive a press release saying that an 
enforcement action has been taken against a company that is 
very familiar to us.
    Senator Collins. Have you found that law enforcement 
agencies have--I realize you do not do actually follow-up--but 
in general, are they receptive to the complaints that you 
forward? Do you have an impression that they are investigated? 
My concern is that I think it is very confusing for consumers 
who are ripped off to figure out where to go and to figure out 
what is the right agency.
    As Senator Glenn pointed out, we have an unusual 
jurisdictional issue involving the Internet. We may be dealing 
with a fraudulent company that is not even located in the 
United States.
    Ms. Grant. Yes. Actually, last summer we surveyed the law 
enforcement users of our system to find out what they thought 
about our services in providing them with reports about 
telemarketing and Internet fraud. They said that the 
information was extremely valuable to them, not only to tip 
them off about things that they may not have even been aware 
of, but to give them information about victims and witnesses 
that could help them make their cases.
    So they are very appreciative of these services.
    One of the most difficult aspects of Internet fraud is that 
you have victims scattered so far, that it is often hard for an 
agency to find out about everything that is going on when 
consumers are most likely to contact their own local agencies 
about their own problems. If the perpetrator is located in one 
State, but the victims are all in another State, then the 
attorney general's office in the State where the perpetrator is 
located may not be hearing about that. The consumers may be 
complaining to the attorneys general in their own States.
    Senator Collins. Ms. Gau, how do the con artists that use 
spam as their weapon get the addresses, the E-mail addresses, 
of their victims?
    Ms. Gau. They do so in a variety of ways. They can obtain 
programs on the Internet that are called harvesting programs, 
and they can go into a chat room and, in effect, harvest or 
copy all of the screen names or the E-mail names of the people 
in that room. They can also use this tool to collect names off 
of message boards, off of member directories for different 
service providers, and collect a mass of names to which they 
can send their E-mail.
    Senator Collins. I would like to now turn to what may be 
some additional remedies to this problem. Ms. Grant, in your 
testimony, you suggested that the FTC's telemarketing sales 
rules should be made to apply to online and Internet 
promotions. And we have the chairman of the FTC here today, so 
I am going to ask him about your suggestion. Could you please 
explain a little bit more to us about what the rule provides 
and how expanding its scope would help combat Internet fraud?
    Ms. Grant. The rule basically has two parts; one is a set 
of required disclosures and the other is prohibited practices. 
Just to use sweepstakes and prize offers as an example, there 
are certain disclosures that are required concerning the odds 
of winning and the values of the prizes and so on, which would, 
I think, be properly applicable to Internet promotions that 
involve prizes and sweepstakes.
    There are also a host of prohibited practices, for 
instance, asking for a payment up-front to extend credit or a 
loan. Again, I think that such a prohibition for Internet and 
online promotions would make sense. A lot of the same types of 
scams that we see on the Internet are things that have been 
long-time abuses in telemarketing fraud and that the 
telemarketing fraud rule was promulgated to prevent and to give 
law enforcement agencies more tools to prosecute.
    Senator Collins. Do you believe, Ms. Grant, that online 
providers such as AOL should also be doing more to educate 
consumers up-front about the possibility of fraud and to do 
more referrals to law enforcement? Is there an obligation that 
they should undertake, as well?
    Ms. Grant. I think there is. I think that most of the major 
Internet service providers are stepping up to the plate, as AOL 
is, and doing that through the educational messages that were 
demonstrated here today and reporting those problems when they 
hear about them to law enforcement agencies. There are, of 
course, a vast number of providers out there and not everybody 
is stepping up to the plate and helping to become part of a 
solution here.
    Senator Collins. I appreciate very much the specific 
regulatory and law changes that you both included in your 
testimony. I am going to turn now to Senator Glenn for his 
questions.
    Senator Glenn. Thank you very much. Senator Durbin could 
not be here this morning. He has done a lot of work in this 
area and is very interested in it. He is on Judiciary, and they 
are having some hearings or meetings on the tobacco situation, 
and so he could not be here this morning.
    But his staff gave me something a moment ago that I was not 
even aware of. We now even have magazines out, Internet 
Shopper, that I had not seen before, and I was just leafing 
through it here. I was not reading a cowboy story or something 
up here. I was looking through this. [Laughter.]
    And I am amazed at some of this stuff. I was not aware 
until this moment about the extent of some of this. We have 50 
national companies and thousands of Internet service providers 
listed in here State by State. I count 65 in my own State of 
Ohio, and 50 national. Illinois has, I think, more than that. I 
did not count them, but probably 80 or so in Illinois, where 
Senator Durbin is from, of course.
    And I am going back to the office and click in on one of 
these. It says, ``Click and win 1,000 roses, Valentine's Day 
coming up, www.,'' and I will not give the rest of it. But this 
has gone beyond anything that I was even aware of, even with 
the briefings that I received for this hearing. I had not seen 
that particular magazine before and I am not recommending 
everybody go get a subscription.
    These things, you know, ``Click and win 1,000 roses for 
Valentine's Day, detail and registration at,'' and gives it. 
That is it, that is pretty seductive.
    Ms. Grant. That could be legitimate.
    Senator Glenn. Could be.
    Ms. Grant. But I do not know as I would smell those roses 
yet. [Laughter.]
    Senator Glenn. Could be. But if everybody who clicks in is 
expected to win 1,000 roses, they have a lot of roses going 
out. And Annie is going to like that once I get back to the 
office and click in on that. But we knew this was big stuff, 
and it is even bigger than I realized it was when the Chairman 
planned these hearings.
    Do we need stiffer civil and criminal penalties on these, 
Ms. Grant?
    Ms. Grant. I am always in favor of stiffer civil and 
criminal penalties. I think you need to hit white-collar crooks 
in the pocket.
    Senator Glenn. But you have to get a balance here. 
Someplace you get into personal rights and constitutional 
rights and things like that. Are we at the point where we 
shouldn't go further, or are we way short of that point and 
need more legislation?
    Ms. Grant. Even in telemarketing, there are ongoing 
discussions about enhanced penalties for targeting certain 
vulnerable populations or for certain really egregious 
violations. And I certainly think, especially if we are talking 
about fraud, if we are talking about intentionally robbing 
people of their money, that those people ought to be put in 
jail.
    Senator Glenn. Now, Ms. Gau, you look at it from an 
industry standpoint. Do you think we need more regulation? I 
know the industry has preferred to look at this that they can 
self-regulate, and yet the record has not been very good in 
that regard.
    Ms. Gau. We do, in fact, believe that education and 
technology tools are the way to provide consumers with real-
time information that can allow them to protect themselves when 
they go online.
    When it comes to the role of the government, we believe the 
government does need to play a role, just as they do in the 
real world, the off-line world, in protecting consumers against 
fraud. And Congress should thus appropriate the necessary 
resources to the agencies that are charged with enforcing anti-
fraud statutes.
    We would agree that enhancing penalties would be a 
beneficial way to deter other criminals from conducting such 
activities, but we also believe that one needs to take a look 
at the juvenile issue, because a number of the scam artists 
that are perpetrating these frauds are, indeed, juveniles.
    Senator Glenn. Well, OK. The Internet service providers 
have been termed as being the gatekeepers, and many consumers 
who use the Internet will form their opinions of the medium 
through the relations that they have with the ISP's. And I 
guess you folks have about as much control about what goes on 
the Internet as anyone, and yet the track record hasn't been 
all that good for the industry.
    I don't know when you came with America Online, but it is 
discouraging to read that three of the largest ISP's, including 
America Online, were charged by and settled with the FTC for 
engaging in practices that I would look at as being similar to 
the consumer scams we are talking about here today.
    Let me just run through them real quickly here:
    Offering free trial subscriptions and not adequately 
disclosing that consumers would be billed as subscribers after 
the trial period unless they affirmatively canceled their 
membership. I wouldn't want to be treated that way, and I don't 
think you would either. In mail, years ago, some businesses 
would send a gift through the mail and then they billed you for 
it unless you paid the postage to return it. Well, we have 
corrected that through the years, and that is not done now.
    Another one was debiting checking accounts before receiving 
authorization to do so. I don't want anybody debiting my 
checking account, and you wouldn't either, unless I gave 
specific permission to do it.
    Failing to give consumers advance notice of the amounts to 
be transferred from their accounts.
    Now, America Online was also cited for failing to 
adequately inform consumers that 15 seconds of connection time 
was added to each session. Well, I don't know how major these 
things are. I know that they were settled somehow with FTC. I 
don't know how they were settled or what the penalties were. 
And maybe this didn't happen on your watch. But when the 
leaders in the industry are being hauled up for things like 
this, we have got a major problem. What are we going to do 
about it?
    Ms. Gau. Well, my first comment would be to say that we 
have, indeed, corrected those problems in that we are providing 
more disclosure on exactly the policies. And I think that that 
is very dissimilar from the fraud that is occurring on the 
Internet where it is strangers that approach you----
    Senator Glenn. Well, it is a different level. I will grant 
you that.
    Ms. Gau. You may recall that one of my safety tips was not 
to do business with a Web site or a service, even, if you don't 
know that company's background. And there, really, I do believe 
that, in fact, we were not adequately, perhaps, disclosing all 
these specifics to our consumers, but we have rectified that at 
this point.
    Senator Glenn. Well, this showed a mind-set of what they 
were trying to do, maximize the money coming in and don't worry 
about whether the person was being treated fairly or not, it 
seems to me. Has that mind-set been changed now so that you are 
looking at it from the consumer's standpoint? You are a 
consumer, too.
    Ms. Gau. Yes.
    Senator Glenn. If you call and you get a service from 
somebody, you don't want to be treated like that. Has this all 
been corrected now? And how are we handling this?
    Ms. Gau. Absolutely. This is being corrected, and it 
actually was one of the reasons for my appointment at America 
Online in late 1996. It was to create the position of integrity 
assurance in that area----
    Senator Glenn. Very good.
    Ms. Gau [continuing]. As part of the assurances to members 
that they are being looked out for and actually acting as 
somewhat of an ombudsman for members.
    Senator Glenn. Well, I hope your being brought on has 
corrected all this, and I hope you are keeping them on a mind-
set that looks at it from the consumer's standpoint. Because if 
this goes on like this, I can guarantee you we are going to 
have tough new regulations and tough new standards, and we will 
have to set up a big enforcement group, we will expand FTC, and 
we will do all sorts of things, whatever we have to do, because 
this is the wave of the future. This is not a little thing 
where we are going out on the Internet momentarily and all the 
Internet stuff will pass away in a year or two. We are just at 
the beginning of the Internet way of doing business and 
financial transactions.
    So if the companies don't police themselves, they are going 
to get policed. I will tell you that right now, and you can 
carry that back. If the same people are in charge that let this 
stuff happen to begin with, then bringing you on as one person 
down below in the hierarchy isn't going to correct the problem, 
if the mind-set of everybody else is that they are out to skim 
what they can off the people. And that is from one of the 
biggest companies in the business.
    Ms. Gau. I would again like to reiterate that those issues 
have been corrected, and, indeed, moving forward, they are 
situations that are not going to happen again.
    Senator Glenn. Just those three or four things that I read 
off, were estimates ever made or did FTC prepare any estimates 
of what consumers lost as a result of these practices? Because 
as I understand it, no recompense was made, no payback was made 
to people that were dealt with unfairly. Is that correct?
    Ms. Gau. My understanding is that, in fact, there were 
settlements made, but I don't know the specifics of them.
    Senator Glenn. Did FTC make an estimate of that, do you 
know?
    Ms. Gau. I don't know.
    Senator Glenn. OK. We will ask and see if they have any 
estimates on that later when they testify.
    Recently, America Online went to court to stop a junk 
mailer that threatened to publicize the addresses of all 5 
million customers of American Online if your company did not 
allow it to send junk mail. That sounds like the worst kind of 
extortion, with the customers as the innocent victims. Luckily, 
it sounds as if you were successful in stopping the firm.
    Could you tell us about that case and explain how the 
company was able to obtain the E-mail addresses? And I would 
like you also to address, once it had them, did it in turn sell 
them to others? Is this a scheme where one company sells to 
another, to another, to another, and so the fact that you have 
corrected it with one company, the horse is out of the barn, 
and it may have gone to half a dozen companies eventually? Is 
that correct?
    Ms. Gau. Yes. The site collected the names of AOL members 
through harvesting techniques, as I explained previously.
    Senator Glenn. Yes.
    Ms. Gau. Not only do they pass them on to other spammers, 
but they also sell them via spam. In those cases, you will 
receive an E-mail, saying, ``Want to grow your business? Send 
$25, and we will send you 5 million screen names you can send 
your promotion material to.''
    So, in fact, there is this constant continuing circle of 
spammers to spammers, and then also selling those lists to 
individual users as well.
    Senator Glenn. Do all the ISP's have a policy or do most of 
them have a policy of selling their customer list to others?
    Ms. Gau. I am not familiar, no.
    Senator Glenn. How about America Online? Do they sell their 
customer list to others or rent them?
    Ms. Gau. No.\1\
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    \1\ See Exhibit No. 7 for clarification of this answer which 
appears in the Appendix on page 358.
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    Senator Glenn. Either one?
    Ms. Gau. Not anything providing the actual identity of the 
user in terms of their screen name on AOL.
    Senator Glenn. I am not sure what you mean by that. Say I 
am going into business, could I contact America Online and 
could I get a list of people? Or how would I do that? Would I 
buy them?
    Ms. Gau. No, you could not.
    Senator Glenn. I could not. Could I rent them?
    Ms. Gau. No, you could not.
    Senator Glenn. From the accounts I have read, it sounds 
like an ISP already has the authority and technical capability 
to refuse to send out unsolicited E-mail and to enable its 
subscribers to block it. Is that correct?
    Ms. Gau. That is correct.
    Senator Glenn. What standards do you apply when deciding 
whether or not to send out unsolicited commercial E-mail? What 
is the criteria?
    Ms. Gau. What is the criteria for AOL in deciding to send 
out?
    Senator Glenn. What standards do you apply when deciding 
whether or not to send out unsolicited commercial E-mail?
    Ms. Gau. We apply the concept of a previous existing 
business relationship or, in fact, that if we have to send mail 
to our members, it is because we have a member relationship 
with them.
    Senator Glenn. Well, what is your business relationship? 
What does a business relationship consist of, then?
    Ms. Gau. I am sorry? Excuse me.
    Senator Glenn. Define business relationship.
    Ms. Gau. A pre-existing relationship in which either a 
transaction has occurred or there is an ongoing business 
relationship.
    Senator Glenn. Well, OK. So if anybody had come in online, 
if anybody had tapped in and used your service at all, then 
they could be the subject of having unsolicited E-mail sent to 
them in the future because you have had a business relationship 
with that person. Is that correct?
    Ms. Gau. Perhaps I would like to make a clarification. What 
I am discussing right now is mail that AOL might send to its 
members. I am not discussing mail that comes from the Internet 
which is of a spam nature, and junk E-mail. Mail that AOL sends 
to its members consists of advisory notices about different 
things relating to the service, letters from Steve Case, the 
chairman and CEO, and materials of those sort that are meant to 
enhance the member experience, but they are, if you want to 
call them, unsolicited.
    Senator Glenn. There have been some recent articles about 
AOL subscribers being the targets of E-mail scams to steal such 
things as account numbers, passwords, credit cards. In one scam 
to obtain credit card numbers, a perpetrator pretended to be 
AOL's Member Services Department and had a fake letter from 
AOL's chairman.
    Do you know how the con artists were getting your 
subscribers' addresses? And how do you guard against that?
    Ms. Gau. The example you just mentioned was one of the 
examples that--types of examples I illustrated in my 
presentation. The scam artists harvest names, again, for these 
types of scams, collecting names from people in chat rooms, 
member profiles, message boards, whatever the case might be, 
and then, in fact, target the individual.
    Senator Glenn. Let me address this to both of you. Should 
there be a requirement in law or by regulation that requires 
ISP's to screen commercial sites more carefully, to set some 
criteria and make them screen for those criteria?
    Ms. Gau. At AOL we do, indeed, engage in screening 
processes with the commercial sites that are allowed to be set 
up within the AOL environment. As far as the Internet is 
concerned, when users go out onto the Internet, they, in fact, 
are entering areas where AOL does not have control over those 
sites.
    Senator Glenn. Ms. Grant, do you think there should be 
requirements, certain criteria set by government, that they 
would have to adhere to in screening commercial sites more 
carefully?
    Ms. Grant. We have long advocated that newspapers and other 
forms of media that have advertising do a better job of 
voluntary screening. I am not sure how feasible it would be to 
actually screen everything on the Net except perhaps things 
that are just within a certain proprietary service, like AOL. 
But I think that if a better job of self-screening isn't done, 
maybe that is something we should look into in the future.
    Senator Glenn. Should the ISP's be required to report 
customer complaints to the FTC?
    Ms. Grant. I think with the consumer's permission they 
should. When consumers report fraud to us, we tell them that, 
with their permission, we will report this information to law 
enforcement agencies.
    Senator Glenn. Ms. Gau.
    Ms. Gau. I would absolutely agree that we would need the 
member's consent to forward the message on. But we do, indeed, 
refer any illegal activity to law enforcement, so I think that 
the combination of both of those would be a good step.
    Senator Glenn. Well, there were already two pieces of 
legislation introduced that deal with unsolicited commercial E-
mail, and given the proliferation of this activity and the 
technical and consumer problems it creates, there is likely to 
be even more legislation proposed unless the problem is 
controlled.
    You people are more familiar with this than I am, 
certainly, and I presume the Chairman, also. But what do we 
need to do? What do you suggest at this point? Ms. Gau.
    Ms. Gau. Unfortunately, spam is constantly changing in 
terms of the techniques that they use to attack Internet 
service providers. They are using ever-changing techniques, 
whether it is changing the source addresses from which the spam 
is coming or forging headers to disguise where the message is 
actually coming from, that make it extremely complicated not 
only to create effective blocking software that would, in fact, 
prevent any spam from getting through, but also poses problems 
for some of the legislation currently being proposed as the 
dynamics are continually changing and they will continue to 
change, and next week we probably will have one more problem to 
deal with.
    Senator Glenn. Could ISP's levy extra fees on those who 
want to send unsolicited commercial E-mail? Would that control 
it?
    Ms. Gau. We are not in favor of unsolicited commercial E-
mail, so that is not something that we are looking at right 
now.
    Senator Glenn. Well, just to sort of summarize here--and I 
know I am probably over my time, Madam Chairman--let me just 
say that the issues are how much we are going to regulate to 
protect those interests, who will regulate, and are we moving 
fast enough. Two big concerns are consumer protection and 
individual privacy. And I don't know whether we ought to 
require opt-in systems so businesses can't collect personal 
information unless the consumer first gives his or her 
permission. Maybe we are coming to that one of these days. I 
don't know. And children, we haven't dealt with that one at 
all, didn't even question on that. Kids have far more computer 
knowledge than I have, I can guarantee you that, and they are 
into these things all the time. And what happens if someone 
says go get daddy's credit card and do whatever? How do we deal 
with children? That is another big one here.
    I don't know how long the FTC wants to wait on self-
regulation by the industry before we step in with other 
regulations, but that is what is coming if the industry doesn't 
do it itself.
    Thank you.
    Senator Collins. Thank you, Senator Glenn. I want to 
commend you for your probing questions on this very important 
issue.
    I just want to second your comments about the need for the 
ISP's to set a very high ethical standard. If they are going to 
be the ones that are helping to educate consumers about fraud, 
certainly their own activities have to be above reproach, and I 
think that is an excellent point.
    Senator Glenn. I have to leave early. I am going back to 
get those thousand roses for Annie. [Laughter.]
    Senator Collins. Could I have a few?
    I just have one final question for Ms. Grant. Ms. Grant, we 
had hearings last year on fraud in the securities industry, and 
we are starting to see the Internet used as a medium for that 
kind of fraud. And I know that you have a long history, the 
league, in this area.
    I propose to the industry as well as the Chairman of the 
Securities and Exchange Commission that there be adopted what I 
call a zero tolerance policy so that if a licensed individual 
in the industry commits a serious breach of ethical standards 
or a fraud, that that individual be banned from the industry 
forever, because what we have seen is rogue brokers going from 
firm to firm.
    Do you think that such an action would be helpful in trying 
to curb the use of the Internet for securities fraud?
    Ms. Grant. I think it probably would. I think that more 
action has to be done to keep repeat offenders from victimizing 
consumers both in the physical world and in cyberspace.
    Senator Collins. I want to thank you both very much for 
your testimony today and your cooperation with our 
investigation. We very much appreciate your being here.
    Ms. Grant. Thank you.
    Ms. Gau. Thank you.
    Senator Collins. Our next witness is Barry Wise, a 
certified public accountant and a certified fraud examiner, 
from Matthews, North Carolina.
    Mr. Wise unfortunately was a victim of a pyramid scheme 
conducted over the Internet. I very much appreciate his 
willingness to share his experience with us. It shows that even 
an individual with financial training can become a victim of 
cyberspace fraud. So we very much appreciate your being here.
    As I explained earlier, pursuant to Rule VI, all the 
witnesses who testify before us are required to be sworn in, so 
I would ask that you stand and raise your right hand. Do you 
swear that the testimony you will give to the Subcommittee will 
be the truth, the whole truth, and nothing but the truth, so 
help you, God?
    Mr. Wise. Yes.
    Senator Collins. Thank you.
    We look forward to hearing your testimony today. Because of 
time constraints, including an upcoming vote, I would ask that 
you limit your testimony to 10 minutes, and we will put your 
prepared statement as part of the hearing record.
    Please proceed.

  TESTIMONY OF BARRY D. WISE,\1\ CERTIFIED PUBLIC ACCOUNTANT, 
 VICTIM OF FORTUNA ALLIANCE INTERNET PYRAMID SCHEME, MATTHEWS, 
                         NORTH CAROLINA

    Mr. Wise. Actually, I have already learned a lot from what 
I have heard.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Wise appears in the Appendix on 
page 75.
---------------------------------------------------------------------------
    Madam Chairman and Members of the Subcommittee, my name is 
Barry Wise, and it is my pleasure to be here today to share my 
experiences with you of being defrauded by a company known as 
Fortuna Alliance.\2\ I am currently employed by the Duke Energy 
Corporation as a senior internal auditor. I am also a certified 
public accountant and recently became a certified fraud 
examiner. Obviously I wish I had become a certified fraud 
examiner when I was considering my investment with Fortuna 
Alliance.
---------------------------------------------------------------------------
    \2\ See Exhibit No. 2 for background material on Fortuna Alliance 
which appears in the Appendix on page 267.
---------------------------------------------------------------------------
    I am also a husband and a father of two young children. The 
intention of my investment with Fortuna was meant to benefit my 
children's future, not the financial heartache that resulted 
instead.
    I would also like to express my appreciation to the Federal 
Trade Commission at this time for the help that they have given 
with this case.
    In April of 1996, I was told by a colleague that a company 
known as Fortuna Alliance was advertising on the Internet. The 
company was supposedly offering a good investment opportunity 
with a high rate of return. My associate informed me that he 
knew of a person who had already received some return on the 
investment, so it must be legitimate. I later discovered that 
this person had some type of relationship with the founder of 
Fortuna Alliance and the return on investment probably was 
nothing more than bait money to create an air of legitimacy to 
the scheme.
    I visited the Fortuna Alliance Web site as well as numerous 
other individual sites that had been created by its members. 
These members were people who had already invested with Fortuna 
and were actively recruiting new investors which would be 
directly to their benefit. The Fortuna Alliance site explained 
that each membership would pay out a maximum of $5,000 per 
month when a matrix of approximately 300 was filled with names 
of new investors. The matrix was supposedly based on their 
``unique mathematical formula: The Fibonacci Sequence.'' The 
Web site informed that Fortuna was about to begin a massive 
advertising campaign to solicit new members; therefore, I would 
not have to recruit anyone or do anything to get a return on my 
investment. I would not have to work at filling up the matrix 
because Fortuna Alliance's advertising campaign would 
accomplish that for me. However, the recruitment of new 
investors was encouraged because that would fill up the matrix 
faster, which in turn would initiate a flow of money to Fortuna 
Alliance members.
    Another part of the Fortuna Alliance business was a co-op 
through which products and services would be sold in the 
matrix. I understood that a commission would be paid to me for 
any purchases made in the co-op by people in my matrix. It 
should be noted I never received any literature from Fortuna 
that explained what goods were for sale and how to purchase 
them. Fortuna stated there was a money-back guarantee of my 
entire initial investment if after 90 days I was not completely 
satisfied for any reason. The offer really made me feel that I 
had nothing to lose with this potentially lucrative investment.
    In late April of 1996, after carefully studying the Fortuna 
Alliance Web site and several of the individual member sites, I 
decided to make an investment. I purchased 15 elite membership 
at $250 each and two premier memberships which cost $600 each. 
My total investment was $4,950 which I hoped would result in a 
monthly income check from Fortuna Alliance. Fortuna insisted 
that I pay this investment by money order or certified check 
only. When I received a very elaborate package of investment 
information from Fortuna for each of my memberships, I read 
this information carefully and continued to understand I did 
not have to actually do anything to receive a return on my 
investment.
    Shortly after purchasing these memberships, I tried to call 
Fortuna Alliance several times in order to verify my investment 
was properly recorded in their computer system. My telephone 
calls were always answered by an automated voice system that 
never connected me to an actual person.
    In late May 1996, I was roving the Internet while working 
on a project with the search word ``fraud.'' During this 
search, I came across a notice by the Federal Trade Commission 
that Fortuna Alliance had been shut down for operating an 
illegal pyramid scheme and making false claims. I immediately 
sent a letter to Fortuna Alliance requesting a refund of my 
money. They never refunded any of the $4,950 initial 
investment. I also filed a claim with the Federal Trade 
Commission.
    Upon discovering that I had been the victim of a fraud via 
the Internet, I started to do some investigation on my own. I 
determined that in order to be a legitimate multi-level 
marketing company, commission needs to be paid on actual goods 
and services sold. Fortuna Alliance was supposedly going to pay 
commissions only based on one-time fees paid to purchase a 
membership--in other words, money was just being funneled to 
people at the top of the pyramid. During my research, I noted 
several other companies on the Internet which appeared to be 
operating illegal pyramid-type schemes.
    In the spring of 1997, I received a letter from Gilardi & 
Company in San Rafael, California. Gilardi & Company had been 
appointed by the Federal Trade Commission to be the claims 
administrator for Fortuna Alliance. The correspondence I 
received from Gilardi & Company indicated that my account 
consisted of only three elite memberships, when I had actually 
purchased 15 elite membership and two premier memberships. 
Evidently, Fortuna Alliance's records of my purchases did not 
properly account for my entire investment. I subsequently filed 
a claim of $4,950 with proper documentation to Gilardi & 
Company. In a telephone conversation with representatives of 
Gilardi & Company, I determined that my claim of $4,950 was 
accepted and verified by them as accurate.
    Shortly after my dealings with Gilardi & Company, I 
received a letter from Fortuna Alliance which stated they had 
been cleared of all charges and were continuing to do business 
as Fortuna Alliance II. They also encouraged me not to request 
a refund and continue to invest with Fortuna Alliance II. I 
disregarded this letter and its message as being completely 
bogus.
    It is my understanding that the Federal Trade Commission 
has collected enough funds from Fortuna Alliance thus far to 
cover 60 percent of investors' claims. On January 6, 1998, the 
court issued a compliance order that would allow over 8,600 
Fortuna Alliance members to begin receiving partial refunds 
which would cover approximately 60 percent of their individual 
claim amounts.
    I appreciate this opportunity to share my story. This 
concludes my statement. I would be pleased to answer any 
questions.
    Senator Collins. Thank you very much, Mr. Wise.
    Let me start by just clarifying some of the facts in this 
case. This essentially was a pyramid scheme--is that correct? 
Where there was an effort to recruit a lot of investors and 
eventually it was going to collapse?
    Mr. Wise. That is right.
    Senator Collins. Did you ever recover the nearly $5,000 
that you invested?
    Mr. Wise. No, but it is my understanding per a conversation 
with Gilardi & Company that on February 11, 60 percent of that 
money will be mailed to me. And it should be on its way 
shortly.
    Senator Collins. So you hope to recover about 60 percent of 
your initial investment due to the action taken by the FTC?
    Mr. Wise. At least at this time. I am not sure what the 
outcome is going to be between them and the Federal Trade 
Commission as far as recouping the other 40 percent. But I do 
know that the Federal Trade Commission is aggressively pursuing 
that remaining 40 percent.
    Senator Collins. How much experience did you have using the 
Internet prior to your dealings with Fortuna Alliance?
    Mr. Wise. I think prior to that I had had Internet service 
for about a year, but not a whole lot of experience using the 
Internet.
    Senator Collins. Had you had experience with investing via 
the Internet prior to your dealings with Fortuna?
    Mr. Wise. No, I had never invested on the Internet. And I 
never will, also.
    Senator Collins. Did it cause you--were you more concerned, 
did you have a higher level of wariness that you were dealing 
through the Internet rather than in person with a financial 
advisor, for example?
    Mr. Wise. Not really, because an individual had told me 
about it and plus they had one Web site of their own and 
probably numerous other Web sites that were out there by some 
of your individual investors, which sort of added a legitimacy 
to what was going on.
    Senator Collins. You have mentioned that there were these 
other Web sites.
    Mr. Wise. Right.
    Senator Collins. It is my understanding that Fortuna 
Alliance instructed its investors to create their own Web 
sites. Is that correct?
    Mr. Wise. That is my understanding.
    Senator Collins. And that was a means of soliciting new 
members to try to sustain the pyramid a little bit longer. Is 
that correct?
    Mr. Wise. Yes. At the time, I pulled up all the individual 
Web sites, just did a search word ``Fortuna,'' and I think 
there were probably three or four complete pages that would 
come up. When a search engine would pull up Fortuna, you would 
see page after page of just nothing but Fortuna, Fortuna, 
Fortuna. And you would go to another page, and you would see 
more lines of Fortuna. So there were numerous Web sites out 
there.
    Senator Collins. Did the existence of all these other 
related Web sites confer to you a certain legitimacy of the 
enterprise? Did it reassure you that it must be legitimate or 
otherwise why would there be all these Web sites?
    Mr. Wise. Yes, that did, plus they also had a 90-day money-
back guarantee, which I guess at that time added some 
legitimacy. But in hindsight, money-back guarantees really 
don't mean anything.
    Senator Collins. That certainly seems to have been the 
case.
    You discovered that you were a victim of fraud really by 
chance. Is that correct?
    Mr. Wise. That is right. I don't think if I had searched--
had been on the Internet with the search engine ``fraud, I 
don't even know if I would have ever known about it.
    Senator Collins. What did the FTC statement say that you 
chanced upon when you were browsing on the Internet?
    Mr. Wise. I can't recall the exact--what the FTC said. I 
just know once I hit that search engine, there was a big alert 
that came up, and it gave a lot of details of what the Federal 
Trade Commission did as far as what they had. They had raided 
their complex. They had been shut down, could not do business 
anymore, and they were in the process of legal action against 
Fortuna.
    Senator Collins. So the FTC site specifically identified 
Fortuna Alliance as a fraudulent enterprise that it was taking 
action against?
    Mr. Wise. That is right.
    Senator Collins. And had it not been for your stumbling 
across the FTC's fraud Web site, do you think you would have 
discovered that you were a victim of fraud as quickly?
    Mr. Wise. No.
    Senator Collins. You stated that you received a letter from 
Fortuna Alliance indicating that they had been cleared of all 
charges and urging you not to request a refund. And it is my 
understanding that this letter was written after action was 
taken against the company by the FTC.
    Did you report that additional letter that you received to 
the FTC?
    Mr. Wise. I did not. In hindsight, I probably should have, 
but the reason I didn't, because I know that the FTC at that 
time was aggressively pursuing Fortuna and had already one 
legal action against them.
    Senator Collins. As a consumer, did you find it troubling 
that Fortuna Alliance could make such claims and so quickly 
could emerge with a new identity as Fortuna Alliance II?
    Mr. Wise. Yes. I would have had more concern if they would 
have set up business in the realm of the United States. But 
when they set up Fortuna Alliance II, they did that outside of 
the country, which really makes----
    Senator Collins. So this was an offshore enterprise?
    Mr. Wise. Right, which really makes it difficult to do 
anything with anybody that does something like that.
    Senator Collins. Again, I see a parallel with the hearings 
we held on securities scams where a rogue broker will go from 
one firm to another, set up a new base of operations, and it 
becomes difficult to track and catch these individuals.
    Did you try to use the information resources of the 
Internet to do some background research on Fortuna Alliance 
prior to or at the time of your investment?
    Mr. Wise. No. I will have to plead ignorance to that.
    Senator Collins. Given your experience--and, again, I would 
emphasize that you are much more sophisticated than a lot of 
people who are doing investments via the Internet. You are a 
CPA. I know how prestigious a designation that is. And yet you 
got trapped.
    I guess I have two final questions for you. One, why do you 
think you did get taken in? And, second, what advice would you 
have for other consumers so that they can avoid the kind of 
fraudulent investment that you made?
    Mr. Wise. I was mainly taken in with the 90-day money-back 
guarantee, which, like I said earlier, I now know means 
absolutely nothing. They were obviously offering a good return 
on the investment. Probably greed comes into play, which in 
turn clouds your thinking ability to a certain extent.
    As far as the normal investor or anybody on the street, as 
long as they know that to be legitimate, especially in a multi-
level marketing scheme like this, commissions need to be paid 
solely on goods or services that are sold. If they knew that, 
that would probably eliminate at least some of the people that 
would get involved in an illegal pyramid scheme.
    Senator Collins. Thank you very much, Mr. Wise.
    Senator Glenn.
    Senator Glenn. Thank you very much, Madam Chairman.
    I was interested in some of the material that Fortuna 
Alliance sent out where even an educated person like yourself, 
an auditor, who is familiar with accounts and how these things 
work, you could be drawn into something like this. And the 
company has all the things down there, ``no recruiting 
necessary, no investment, no''--a whole bunch of things, just 
on and on and on here. And then its latest publication talks 
about how the FTC came in with armed people and so on, and the 
company says down here it has made some changes ``to protect it 
from interference by governmental agencies of any country,'' 
and so on.
    The gist of this is these people are so brazen, they have 
now set up Fortuna Alliance II.
    Mr. Wise. That is right.
    Senator Glenn. It is offshore, I guess. Where is it based 
now?
    Mr. Wise. I have no idea. I have sort of disconnected 
myself from them. [Laughter.]
    Senator Glenn. You are not a new investor----
    Mr. Wise. I would like to add one other thing that I 
thought was, to me, almost amusing at the time that the Federal 
Trade Commission went in and raided Fortuna. Based on my 
knowledge, there was a good percentage of Fortuna Alliance 
memberships that were so--became so, I guess, sucked in with 
Fortuna that they were actually, I guess, mad at the Federal 
Trade Commission for shutting down Fortuna and were sending, I 
guess, letters and complaining about the Federal Trade 
Commission as being a tyrannous-type organization, which in 
hindsight that was far from the fact in this particular case.
    Senator Glenn. Well, they say here that Fortuna Alliance 
offices in the United States were ``raided by armed members of 
a U.S. regulatory enforcement agency known as the Federal Trade 
Commission.'' I didn't know the Federal Trade Commission went 
around packing guns, but maybe they do now. [Laughter.]
    Maybe we will get some testimony on that a little bit 
later. Fortuna Alliance was forced into receivership by order 
of a Federal judge and so on. But they have opened up again 
offshore. That is the point I am making.
    Mr. Wise. Right.
    Senator Glenn. They have opened up again. They are still 
going, and I guess they are back on the Internet and didn't 
even change their name except they now make it Fortuna Alliance 
II. And, ``The new Fortuna Alliance II will be similar to the 
original Fortuna Alliance in most ways. It was very good as it 
was, and the primary reasons to change any part of it are, one, 
to protect it from interference by governmental agencies of any 
country; and, two, to take advantage of all the founder, Augie 
Delgado''--that sounds great--``and executive team learned from 
this most devastating experience at the hands of a brutal U.S. 
regulatory agency, the Federal Trade Commission,'' and so on.
    And the one that I like, too, is they have--this is in 
their quotes, ``a unique mathematical formula: The Fibonacci 
Sequence.'' At least the first syllable is right, the ``fib'' 
part, anyway.
    Mr. Wise. That is right.
    Senator Glenn. We know that. So, anyway, these things, you 
squash them here and they pop up somewhere offshore, I guess.
    We are on five lights up there, and I know we have got to 
vote, Madam Chairman, but this is very interesting, and I hope 
it gets enough publicity that people are not subscribing to 
things like this.
    Senator Collins. Mr. Wise, I do want to thank you very much 
for sharing your experience. It certainly is a cautionary tale 
for all of us, and we appreciate your willingness to come 
forward.
    Thank you very much.
    Mr. Wise. All right. Thank you.
    Senator Collins. We are now in the middle of a vote, and I 
expect a second vote back to back. So I regret to inform our 
next witness, with great apologies, that we are going to need 
to take a 15-minute recess. But we will resume in 15 minutes.
    Thank you.
    [Recess.]
    Senator Collins. The Subcommittee will be back in session. 
I apologize for the delay. We were on Senate time, which I have 
yet to get used to, and the vote was held for a couple of 
Senators, so I apologize for the delay.
    Our final witness this morning is the Hon. Robert Pitofsky, 
the chairman of the Federal Trade Commission. The chairman's 
testimony will provide the Subcommittee with an overview of the 
roots of Internet fraud from the Federal perspective, as well 
as a discussion of the FTC's civil enforcement action and 
consumer education efforts.
    I would note that the FTC's enforcement led to the 
dismantling of the pyramid scheme about which the previous 
witness just testified. It is my understanding that the 
chairman may wish to have an individual accompany him, and I 
would at this time introduce Jodie Bernstein, the Director of 
Consumer Protection, and anyone else that you would like to 
have, Mr. Pitofsky, we would welcome their participation.
    As I have explained, pursuant to the rules of the 
Subcommittee, all witnesses who testify are required to be 
sworn, so I would ask that you stand and raise your right 
hands.
    Do you swear that the testimony you are about to give to 
the Subcommittee will be the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Mr. Pitofsky. I do.
    Ms. Bernstein. I do.
    Senator Collins. Thank you.
    Again, Mr. Pitofsky, my apologies for the unavoidable 
delays. I know you have a busy schedule, and I appreciate your 
willingness to participate in these important hearings. And I 
would ask that you proceed with your statement.

 TESTIMONY OF HON. ROBERT PITOFSKY,\1\ CHAIRMAN, FEDERAL TRADE 
COMMISSION, ACCOMPANIED BY JODIE BERNSTEIN, DIRECTOR, BUREAU OF 
                      CONSUMER PROTECTION

    Mr. Pitofsky. Thank you, Madam Chairman. I am delighted to 
be here, and I want to compliment the Subcommittee for holding 
hearings on this important and, I think, sometimes somewhat 
neglected subject, and that is, marketing fraud on the Internet 
and in this country generally.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Pitofsky and additional copy 
submitted for the record appears in the Appendix on page 78.
---------------------------------------------------------------------------
    With your permission, I would like to submit my full 
testimony for the record and just summarize it this morning.
    Senator Collins. It will be included in the record in its 
entirety. Thank you.
    Mr. Pitofsky. And may I introduce Jodie Bernstein, who is 
director of our Bureau of Consumer Protection, and who is in 
charge of enforcement in this area, and also very active on the 
consumer education front.
    As you know, the FTC is the primary agency at the Federal 
level authorized to challenge fraud and deception. We do so 
under Section 5 of the Federal Trade Commission Act, which 
outlaws unfair and deceptive acts and practices in commerce. 
Section 5 gives the Commission the authority not only to combat 
fraudulent activity by issuing administrative cease and desist 
orders, but also by going directly into Federal court to seek 
injunctive relief and consumer redress.
    We have noted several times already this morning that the 
Internet is growing by leaps and bounds.\2\ Fifty-eight million 
potential consumers are already online, and we expect Internet 
commerce to grow exponentially over the next few years. Online 
advertising is expected to grow to $4.35 billion by the year 
2000, and as Senator Glenn's reference to the Internet Shopper 
pointed out, online commerce is growing. We think it might be 
as much as $220 billion by the year 2001.
---------------------------------------------------------------------------
    \2\ See Exhibit No. 3, slide presentation of the Honorable Robert 
Pitofsky, Chairman, Federal Trade Commission which appears in the 
Appendix on page 300.
---------------------------------------------------------------------------
    In this expanding marketplace, consumers often will receive 
new goods and services faster and at lower prices. They will 
receive more information to make informed decisions. In 
general, I think of the Internet as a pro-competitive, pro-
consumer opportunity.
    We also know, however, that the growth of the Internet will 
generate an increase in fraud and deception. To combat these 
problems, we will combine traditional law enforcement with new 
types of consumer and business education.
    The Commission has already brought over 25 Federal actions 
against deceptive and fraudulent activity on the Internet. That 
has just occurred in the last year and a half or so. Most of 
these cases have involved old wine in new bottles, traditional 
types of scams that have migrated to cyberspace. For example, 
we have seen credit repair scams and business opportunity 
schemes, that look very much like the traditional programs that 
we have seen in telemarketing and elsewhere.
    It has also given new life to a kind of fraud that we 
thought we had virtually wiped out 10 or 15 years ago, and that 
is the pyramid fraud. In one of the largest Internet cases, 
which has been discussed, the Commission sued Fortuna Alliance 
to halt an alleged pyramid scheme that took more than $7 
million from consumers.
    We have also pursued more sophisticated schemes on the 
Internet, and you heard about the Audiotex case where the 
Commission sued a Web site operator that allegedly hijacked 
consumers' computer modems and silently placed very expensive 
international telephone calls to a Moldovan telephone number. 
That is a former republic of Russia. And, of course, consumers 
ended up with very large telephone bills at the end of the 
month.
    In addition to law enforcement, the Commission has fought 
Internet fraud through aggressive consumer education because, 
in the long run, consumer education really is the best way for 
people to protect their own interests. The Commission has used 
technology on the Internet to establish informative Web sites 
and teaser pages. The Commission home page receives over 
100,000 visitors per month and provides consumers with access 
to everything from fraud alerts to Federal court pleadings. The 
public can easily find information either by clicking into a 
category like Consumer Line or by placing simple key words into 
our search engine.
    The Commission also has established another Web site with 
other Federal agencies. This site provides one-stop shopping 
for people with consumer questions about automobile recalls, 
drug safety, other topics. And we have tried to reach out to 
consumers through educational teaser pages.
    The ``Ultimate Prosperity Page'' is an example of a teaser 
site posted by the Commission. It mimics an online business 
opportunity scam promising high earnings for little or no 
efforts. Clicking through this site, a consumer will eventually 
arrive at the last page, which states, ``If you responded to an 
ad like this, you could get scammed.'' This page warns 
consumers about fraudulent business opportunities and provides 
a link back to the ftc.gov Web site for more information.
    The Commission also fights Internet fraud by reaching out 
to businesses, especially new entrepreneurs who may be entering 
the marketplace for the first time and may not know the basic 
principles of consumer protection law. We have pursued 
partnerships with private industry, asked Silicon Valley 
executives for assistance in working with us, and we have 
developed road shows and seminars to present to small business 
and their lawyers.
    The Commission also educates businesses through projects 
that it calls surf days. During a typical surf day, the 
Commission and its law enforcement partners surf together for a 
few hours, searching the Internet for a specific type of 
problem, and after compiling a list of potentially deceptive 
sites, the Commission sends the operators at those sites a 
message. The message discusses the problem targeted by the surf 
day and outlines the law in that particular area.
    Looking ahead, the Commission expects that old-fashioned 
types of fraud will continue to plague the Internet. At the 
same time, the Commission expects that new high-tech schemes 
will present new challenges. Combatting Internet fraud will be 
a daunting task, but we will continue to attack it with law 
enforcement and education, always looking for ways to turn new 
technology to our advantage and ways to boost consumer 
confidence in this emerging marketplace.
    Finally, we must consider the question of how many 
resources we have to deal with this problem, and the chart 
demonstrates something along that line. As you will see, the 
tall block on the screen is total consumer protection resources 
each year during the last 3 years. They haven't changed much at 
all, but our resources committed to challenging fraudulent 
behavior on the Internet have gone from 4 percent to 11 percent 
to 16 percent. Something like 53 people at the Federal Trade 
Commission are now working in this area.
    I think we are doing as much as ought to be done. On the 
other hand, in order to come up with these resources, we really 
did have to reduce resources in other areas of our consumer 
protection mission. And I have no doubt that this is not the 
end of the growth of Internet fraud or of our response to it.
    Thank you, and I would be glad to answer your questions.
    Senator Collins. Thank you very much, Mr. Chairman.
    One of the complaints that the Subcommittee has heard from 
consumers is there is a perception that there is, as I put it, 
no sheriff in cyberspace. Consumers feel that if their fraud 
involves only a few hundred dollars that nobody is going to pay 
attention to it, that Federal agencies or law enforcement 
officials are only interested in the big-dollar frauds.
    What would be your response to that concern? Can consumers 
come to you if they have lost, say, under $500? Which may be a 
great deal to that particular consumer.
    Mr. Pitofsky. Of course. Absolutely. Let me start by saying 
that I think the perception that the Internet is a wild west 
frontier and there is no law and there is no regulation, that 
is one of the things that needs to be combatted, because we 
want consumers to have confidence in the Internet in order to 
see that constructive and useful marketplace grow.
    Now, it is true if we see something like Fortuna, where we 
are talking about millions and millions of dollars of fraud, we 
are going to be quicker off the mark than we would be for 
smaller-scale frauds. But we have brought actions where 
relatively modest amounts of money have been defrauded away 
from consumers.
    Jodie, do you want to add to that?
    Ms. Bernstein. In fact, the first five cases, I think, that 
the Commission brought early on were against small companies 
with small amounts of losses per consumer. But in total, it 
added up to a lot of money. That means that there was a lot of 
loss involved.
    We did that in part to establish the Commission's 
jurisdiction to attack fraud and deception in this particular 
marketplace and because we wanted, as the Chairman said, to 
establish that there will be protection for consumers in this 
new medium.
    Senator Collins. I would like to talk a little bit more 
about the Fortuna Alliance case. What is the present status of 
the FTC's actions against Fortuna Alliance?
    Mr. Pitofsky. We challenged their behavior, and later 
settled the case. We are trying to get restitution for 
defrauded consumers. Restitution did not occur promptly, and 
with the help of the Department of Justice, we have pursued 
these people to Antigua. That is where they are located now. 
And we were able to get the court to enforce an order which 
would require very substantial restitution to consumers.
    I understand that tomorrow is the date when they are 
committed to pay back to consumers 60 percent of the monies 
that they have committed to pay back, which I think is in the 
range of about $6 million. But I must tell you, until that 
money is in the hands of consumers, I am not prepared to 
declare victory here.
    This is a very difficult enforcement process. They have 
made it difficult for us. But we are pursuing it, and we will 
continue to pursue it and get the money back if we can.
    Senator Collins. It is very troubling to me that this 
company could pop up with the same name with just ``II'' after 
it and move its operations offshore. Does the company's ability 
to move offshore make it more difficult for the FTC to pursue 
this kind of fraudulent activity?
    Mr. Pitofsky. Absolutely, and we have often seen this 
business of people who are caught in one place moving to 
another jurisdiction, changing their names, and going right 
back into business. We have seen that a lot in telemarketing. 
This is not all that unusual.
    What is unusual is going across a national border because 
the Internet respects no borders, and when you get to these 
foreign jurisdictions, sometimes they have no comparable 
consumer protection law or it is very difficult to enforce your 
judgment in a foreign country. It just makes our job all the 
more difficult, and yet we know that that is what is going to 
happen more and more as time goes on.
    Senator Collins. Isn't the company essentially violating at 
least the spirit if not the letter of the agreement that it 
reached with the FTC?
    Mr. Pitofsky. We have moved for contempt against the 
company on grounds that they are violating the previous order.
    Senator Collins. In a case like this, does the FTC, Mr. 
Chairman, consider a referral to the Justice Department for a 
criminal prosecution? I know you can't comment on a specific 
action, but----
    Mr. Pitofsky. I can't. The general policy is we are 
increasingly thinking about these kinds of fraud, telemarketing 
and Internet, as deserving criminal enforcement. Some of these 
frauds are extremely raw. People are taken advantage of. They 
are injured very badly. And some of these people engaged in the 
fraud deserve to be treated criminally.
    Ms. Bernstein. Madam Chairman, in this case, we can also 
disclose because it is public that a Federal grand jury in 
Seattle has issued subpoenas to individuals associated with 
Fortuna, and the FBI is also conducting interviews.
    Senator Collins. Ms. Bernstein, I notice that the victim we 
had who was testifying today talked about some of the customers 
of Fortuna Alliance actually being angry at the FTC for closing 
down what clearly was a fraudulent pyramid scheme. Were these 
customers who got in at the ground level and thus made some 
money before the whole pyramid collapsed? Or could you tell us 
a little bit about that? I thought that was just fascinating. I 
would think they would be grateful to you.
    Ms. Bernstein. Well, not only were they complaining about 
our conduct, I believe they complained to various Members of 
Congress that the FTC was interfering with their ability to be 
winners in this scheme.
    I think the voices that were heard were people who really 
believed if we, the FTC, had held off for a little while 
longer, they would be among the early winners, and they weren't 
too concerned, I think, about the downstream potential victims. 
We believe that is what happened in that situation, and it 
often does in pyramid schemes.
    Senator Collins. I noticed that you provided to the 
Subcommittee some terrific consumer brochures and sort of 
warning tips. But I have to say this is the first that I have 
seen these materials, which I think are excellent.
    What do you do, Mr. Chairman or Ms. Bernstein, to make sure 
that consumers get hold of these kinds of very useful warning 
publications? What is your plan for distributing them?
    Ms. Bernstein. The first thing that we have done, obviously 
we have tried to move away from what used to be called 
government brochures that were not very readable and not very 
intriguing to people. We have tried to use new techniques.
    Second, we formed partnerships with legitimate companies 
who were anxious to assist us with our consumer education. 
Various companies have taken on the task of distributing 
materials very broadly. We have over 100 companies as part of 
our consumer education partnership that we established some 
time ago.
    And, third, and perhaps I should have said this first, we 
are on the Web with these materials. Our home page allows you 
to know what is available, how to get it, and you can print it 
out directly from the Web page.
    So we are trying to use, as best we can, every technique 
that these fraud operators are using to get to consumers. We 
hope the teaser pages, particularly, are very specific, and 
like our previous witness said, it was one of those pages and 
one of our alerts that caused him to be suspicious of his 
investment in Fortuna.
    So we are using every technique that we know of and that 
experts in dissemination and communication have helped us with.
    Senator Collins. I was wondering whether it would be 
worthwhile trying to get some of the service providers, the 
Internet service providers, to include some of your 
publications when they sign up a new customer. For example, the 
``Don't get scammed'' publication, the little bookmark, would 
be very easy to stuff in as a mailer, it seems to me.
    Have you pursued that sort of idea?
    Ms. Bernstein. We have, and they have been very 
cooperative, the service providers we have worked with, AOL and 
the others, to be of assistance on that. And some have actually 
included some of our consumer education material in the billing 
notices. I hope it doesn't turn people off from the message 
when they have to pay the bill, but it is a very good device. 
You are absolutely right. It is a very good device for having a 
consumer see it at the time they are thinking about the 
service.
    Senator Collins. Both Senator Glenn and I in our opening 
statements talked about the importance of striking the right 
balance here, because the Internet really is a tremendous means 
for small businesses in particular, which don't have the money 
for large advertising budgets, to reach consumers. Yet, on the 
other hand, that same ease of transactions and speed and low 
cost are an invitation to the fraudulent person as well.
    I am interested--and I will start with you, Mr. Chairman--
in what specifically you would recommend that Congress do as 
far as new legislation in this area. Is there new legislation 
that is needed to make it easier for you to police the Internet 
or to discourage this kind of fraud? Are our current penalties 
tough enough? What would your recommendations be to us?
    Mr. Pitofsky. Well, let me start by saying how much I agree 
with what you say. There are legitimate people who are 
marketing on the Internet, and this new marketplace creates a 
great opportunity for easy entry, for good service, for 
information and so forth.
    I think that in the long run it may very well be that 
Congress is going to have to act in this area, as it did with 
respect to telemarketing fraud so very effectively.
    On the other hand, I think maybe we are just a little bit 
premature at this point in looking to legislation, for several 
reasons. One is this whole Internet marketing phenomenon is 
only a few years old. We are just beginning to learn about how 
it works, what the frauds are, who is vulnerable and so forth.
    I think it is a good idea, before we move too quickly into 
legislation or rulemaking by an agency like this, to get a 
better fix on where the problems are. Also, some of these 
problems are unique to the Internet, like the password thefts 
that we talked about before.
    We held several sets of hearings bringing consumer groups, 
industry groups, and academics together to talk about what the 
problems are on the Internet, and we received some pretty clear 
promises from the industry that, through technology or self-
regulation, they thought they were capable of cleaning up a lot 
of the problems on the Internet.
    We are going to surf the Net very broadly next month. That 
was a commitment we made to Congress some time ago, and we will 
be filing a report to Congress before the end of June of this 
year in which we evaluate self-regulation, in which we look 
carefully at what has been done and what hasn't been done, and 
we may be making legislative recommendations.
    I heard Senator Glenn say earlier that if self-regulation 
doesn't happen, Congress should and likely will act, and I 
think that is exactly right. In that event, Congress should 
act. It is up to the industry at this point. They have made a 
lot of promises. Some people have come through in excellent 
fashion in proposed self-regulation programs, but we have got a 
long way to go. And we will be ready to report to the Congress 
by the end of June of this year.
    Senator Collins. One of our witnesses earlier today, Susan 
Grant of the National Consumers League, made a specific 
recommendation with regard to the FTC's telemarketing sales 
rule, and she proposed that it be expanded to cover promotions 
via the Internet and online services so that Federal and State 
prosecutors can go into Federal court to take action on 
interstate violations.
    Do you agree with that recommendation? What is your 
reaction to that specific proposal?
    Mr. Pitofsky. Two reactions. One is, again, I think we are 
a little ahead of where we ought to be. The telemarketing sales 
rule, first of all, wouldn't fit exactly for some of the 
Internet problems that we see. On the other hand, my second 
reaction is the best thing about the telemarketing sales rule 
is the way Congress adopted the rule--or adopted a law, 
authorized us to promulgate a rule, and then allowed not only 
the Federal Government but State officials to go into Federal 
court to enforce that rule. That has led to an extraordinary 
level of cooperation, and I think some success in challenging 
telemarketing fraud.
    So I think if there is to be legislation, it ought to be 
along that model. As to what the exact provisions ought to be 
in dealing with Internet fraud, I think we ought to allow a 
little more time to pass to see how self-regulation works and 
have a little more experience with what the frauds are.
    Senator Collins. Thank you.
    Senator Glenn.
    Senator Glenn. Thank you, Madam Chairman. Sorry I was a 
little late getting back. I got tied up over there on the 
floor.
    Do you think the ISP's should be required to screen 
commercial sites more carefully? I presume you believe that 
that is a starting point, at least.
    Mr. Pitofsky. I do, and we have urged them to do so.
    Senator Glenn. Should they be required to report customer 
complaints to FTC?
    Mr. Pitofsky. I don't know about--well, require. They do 
now. We received many of our complaints from the service 
providers. I think they are well advised to do that. But I 
think for the most part they are doing that.
    Senator Glenn. There are two pieces of legislation that 
have been introduced that deal with unsolicited commercial E-
mail. I have not looked in detail at those. Have you looked at 
those? And do you favor either one of them, or do you have some 
suggestions how we could either use those as a basis for 
legislation or should we be putting in separate legislation or 
let well enough alone right now?
    Mr. Pitofsky. Well, I think spam, unsolicited E-mail, is a 
real problem, in part because we--there are probably certain 
kinds of spam that are injurious, and yet we can't reach it 
under our statute.
    We can challenge the kind of unsolicited E-mail that 
contains some deceptive count to it: False return address, 
false claims within the four corners of the presentation. But 
if it is just straight spam, I am not at all sure that we can 
get at it. And unless self-regulation--again, we have had all 
these promises that self-regulation and technological fixes 
would do the job. Unless it does, I think Congress would and 
will become involved. But I haven't looked at these two bills.
    Senator Glenn. Is this akin to junk mail that we get in our 
mailbox every day? And we haven't learned how to regulate that. 
We do have laws for truth in advertising that cover that. Now, 
should those same laws be extended here, or do they already 
apply?
    Mr. Pitofsky. Oh, they already apply, and we would enforce 
that law. But, yes, it is junk mail raised to a higher power. 
We are talking about a million people who may get this kind of 
unsolicited E-mail at a very cheap cost to the sender.
    Senator Glenn. Could the ISP's levy extra fees on those who 
want to send unsolicited E-mail?
    Mr. Pitofsky. I think they could. I heard the testimony 
earlier that they have no intention of doing do. I don't know 
exactly where that stands as far as what their policies are.
    Senator Glenn. What do you need to more effectively fight 
Internet fraud? Do you need more people? Do you need more 
resources? You need what?
    Mr. Pitofsky. Well, I am glad you asked me that question, 
Senator.
    Senator Glenn. We did not have that arranged in advance, I 
would add. [Laughter.]
    Mr. Pitofsky. There is a chart that I mentioned earlier in 
my testimony. The red block is our appropriation across the 
board for consumer protection. The green block shows that we 
are now spending four times as much of our resources, 16 
percent of our total consumer protection resources, on Internet 
monitoring and regulation, and we know that that block is going 
to continue to grow.
    I think we can cover our responsibility right now, but the 
way things are going, two things are happening. One is we are 
robbing Peter to pay Paul. We are taking resources away from 
other valuable activities in order to cover the Internet. And, 
second, that block is going to grow, and I think if we are to 
address Internet problems, we are going to need more people and 
more money.
    Senator Glenn. You heard us earlier--I know you were in the 
room--when we talked about America Online and some of the other 
companies that were hauled up and after due course made a 
settlement of some kind with the FTC. They were three of the 
largest and supposedly most reputable ISP's.
    Do you have any estimate of how much the consumers lost 
because of improper practices of either of those three or in 
general across the board?
    Mr. Pitofsky. I don't. And, incidentally, that case is not 
yet final, so let me--I would be limited in what I can say 
about it. But let me make two points about that.
    One is that we jumped into that matter very early in the 
game. I don't think that behavior was going on too long before 
we learned about it from a very wide variety of consumer 
complaints. And, second, my recollection is that the companies, 
as soon as we started our investigation, abandoned the 
practices. They didn't wait for us to complete our enforcement 
action.
    And so we settled with an order that required them to 
discontinue the four practices that you mentioned earlier this 
morning and also commit some money for consumer education. But 
as to getting money back for consumers, I don't have an 
estimate as to how much money was involved there.
    Senator Glenn. Have we made any effort--the Fortuna case is 
one that just sort of pops out at me, Mr. Wise--Barry Wise is 
still in the room and let me just say for the record here, 
Barry, I admire your coming forward, and I hope that your 
company gives you full credit when you get back home for being 
honest enough to come up here and I think they are to be 
commended for letting you come up here and testify on these 
matters today, because it is too easy to get a scam and say I 
am ashamed of what I did in this and just clam up. And you have 
got guts enough to come up and testify before a Senate 
Committee and say where you got scammed and admit it and 
hopefully prevent this from hurting other people. And your 
company was willing to let you come up and make that kind of 
testimony, and I think both the company and you are to be given 
a lot of credit for being willing to do that. If we had more 
people willing to come forward instead of just covering up 
things like this, why, it would be a big help toward getting 
some eventual solution to this. So I want to compliment you for 
coming up this morning.
    But what happened with Fortuna that Mr. Wise testified 
about was the company got whacked, and so they just go 
offshore, and they have got the same thing going again and 
didn't even change the name, now Fortuna Alliance II, and even 
the parentheses, ``TM,'' which I guess means trademark, which 
is the ultimate insult, I guess. I presume that is what it 
means. I don't know.
    But how are we going to get into this? Because we have got 
people on the Internet now from all over the world, you can 
have people operating out of any little country that has no 
regulation whatsoever. They could be set up in some place that 
doesn't even have much business law or whatever. And yet they 
are just as much a scam on the international Net as anybody 
else.
    How are you going to address that? Are there any plans to 
hold some international organization or conference that 
addresses this and tries to get agreements with other nations? 
It is a very tough problem you are up against here. How are you 
going to deal with the international aspects?
    Mr. Pitofsky. It is one of the most serious problems, and 
it is going to grow as time goes on.
    I think long term--I am going to ask Ms. Bernstein to 
address this because she has negotiated with some of these 
foreign countries. But I think long term we are going to need 
bilateral agreements with countries like Canada and the E.U., 
Australia, Mexico, and so forth. The kind of agreements that we 
have begun to develop in the antitrust field, we are going to 
have to expand that to consumer protection so that we can get 
some help.
    The problem isn't identifying the crooks. The problem is 
when you have identified them and you know what they have done, 
bringing an enforcement action that can be enforced in a 
foreign country is where the difficulty is.
    Now, Jodie, do you want to add to that?
    Ms. Bernstein. Yes. At least in connection with our 
relationships with Canada, we have had a good deal of success 
in establishing bilateral relationships already, sharing data 
with them, pursuing joint actions and so forth. We really have 
a very good working arrangement with them because the first 
sign of movement was initially into Canada or Canadians coming 
here in order to escape either country's laws. And that sets a 
good model for us, at least initially, because we are part of a 
joint law enforcement initiative, in addition to which a 
committee, an international committee, has been set up--I think 
it was a couple years ago, maybe a year and a half--called the 
International Marketing Supervisory Network, in which we were 
trying to work as other international organizations have, to 
extend that international--extend the law enforcement Network 
to other countries as well so that we can quickly alert each 
other and work together to try to pursue this.
    It certainly is a long way from being in completion, but at 
least we have an organization that we have been participating 
in with other countries at the same time.
    Senator Glenn. Fortuna, though, is a good example. I 
understand they are operating now out of Antigua. Is that 
correct?
    Ms. Bernstein. Right.
    Senator Glenn. Well, that would just show they could be in 
Antigua, they could be in Burma, they could be on an island, in 
Diego Garcia. They could be anywhere in the world, almost.
    Ms. Bernstein. Well, we did have some success in working 
through the Justice Department in Antigua, and the courts down 
there, after we, through the Justice Department, had local 
counsel retained, which is required by law down there, to be 
able to pursue them there. The courts down there have been 
quite--very supportive of reaching them in Antigua.
    Senator Glenn. Just as a last statement, Madam Chairman, I 
am not quite as optimistic about this self-regulation as you 
indicated you might have hopes for. It hasn't worked with 
banks, SEC, auto dealers, doctors, lawyers, you name it. We 
have laws all over the place. In fact, our whole body of 
regulatory law in this country is based on the fact that people 
are not operating under the golden rule, not operating under 
fairness, and so we have to have some sort of regulation.
    This is such a tough one to get your arms around that I 
don't know where you go with it. But I will pledge you my 
support for what time I have left in the Senate here the rest 
of this year. Mr. Pitofsky, I don't know whether it is possible 
to do this or whether you people at the FTC are over there like 
the little Dutch kid with the finger in the dike. You are just 
waiting for the dam to burst in some way over there and that we 
are at that stage of this whole thing right now. I think you do 
need more resources than you are probably going to get to deal 
with a problem of this magnitude. But it is a tough one, and I 
hope we can be working with you on this and that you will keep 
us advised on what you think is necessary so that we can give 
you the maximum support possible.
    It is never pleasant to have to come up and appear at a 
hearing and answer a lot of questions. I know that. But we are 
really all working together on this thing, and we have one part 
of the puzzle here. If we can put it together to help you, that 
is what we want to do.
    Thank you.
    Senator Collins. Thank you, Senator.
    Mr. Pitofsky. May I just----
    Senator Collins. Yes.
    Mr. Pitofsky. I don't want to be misunderstood here. I 
completely agree with you that self-regulation is going to be 
difficult here. We have heard many promises. We have had some 
constructive evidence of moving forward, but not a great deal.
    My own view is that if self-regulation doesn't work after 
all those promises, that is all the more reason for Congress to 
step in aggressively in this area.
    Ms. Bernstein. The Chairman has also made clear that any 
self-regulatory mechanism that they propound will have to have 
a strong enforcement mechanism so that we can monitor it and 
the public can monitor what the effects of self-regulation are.
    Senator Collins. Mr. Chairman, in one of my previous 
incarnations, I was a commissioner in State government in 
charge of the department that had a broad consumer protection 
mandate and included securities regulation. As I am listening 
to the testimony today, it strikes me that there are a lot of 
cross-jurisdictional issues right within our own country, and I 
am interested in whether or not there is good cooperation with 
State and local law enforcement officials, but also whether you 
have considered some sort of interagency task force. The SEC 
obviously has a role in the area of securities fraud being 
perpetrated over the Internet.
    What is the status of cooperative efforts such as those?
    Mr. Pitofsky. On the Federal-State front, I would say the 
cooperation is better than anything we have seen before. It is 
outstanding. We work constantly together. Congress, as I said, 
made a very good call here by allowing States and the Federal 
Government to enforce laws in this marketing fraud area.
    Now, we are all short of resources, but we certainly 
maximize our resources and leverage our resources, I should add 
that the FBI, the Department of Justice, the SEC and others are 
active in this area.
    At the Federal level, you are absolutely right. There are 
some overlaps here. There is some gray area. There are some 
cross-lines. In specific areas, there are groups that are 
working together. For example, we hardly have mentioned privacy 
considerations today, and yet they are going to influence 
profoundly the willingness of consumers to buy products on the 
Internet.
    We have a good working group going with respect to privacy. 
I think we have a ways to go, and I think more coordination at 
the Federal level will occur as time goes on.
    Senator Collins. Finally, I want to turn to one aspect that 
we haven't discussed today, and that is, we have talked a lot 
about the cyber crooks, if you will, the people who are 
deliberately, intentionally defrauding individuals. But I 
suspect there is also a category of online fraud that occurs 
that is undertaken by people who are just ignorant of the law 
or who are very unsophisticated, think that they have come up 
with a scheme that is legitimate, when, in fact, it is 
downright illegal.
    When you do your surveillances and visits to Web sites, how 
much is that a problem, of an unsophisticated person putting 
together a scheme that is, in fact, illegal and yet the person 
is unaware of that?
    Mr. Pitofsky. They don't have a large law firm and a 
general counsel to advise them. That is exactly right. We see a 
lot of it. And I think what we are trying to do is to get back 
to some of these people and let them know that they are on thin 
ice, they are in an area where they may be approaching or have 
stepped over the line with respect to fraud.
    I am going to ask Ms. Bernstein, again, because she is 
responsible for developing a program of advising the small 
business community about this. I will ask her to develop the 
point.
    Ms. Bernstein. Thank you. We have actually conducted what 
we call surf days, eight surf days on different fraud topics 
over the last couple of years, and the purpose of it, Madam 
Chairman, really was to do exactly what you have referred to, 
because we know there are a lot of small entrepreneurs and 
others who aren't--some of them, we think, have never heard of 
the FTC, leave alone that there is a law against deception or 
false advertising.
    So what we do is join together with States and other law 
enforcement folks, look at the surf in a block of time, say, 
for example, the first one we did was on pyramid sites, gather 
them up, and then those that we believe have violated the law, 
we send warning letters to saying: You may not be aware that 
your practice here violates Federal law, etc., and we are going 
to give you a chance to basically clean up your act. And then 
we go back and surf after 30 days.
    On the very first one, we found when we went back that 18 
percent of the sites had improved or had taken them away 
entirely in 30 days. Others in business opportunities, almost 
25 percent either disappeared or had cleaned up what they were 
proposing and so forth.
    We have done eight of them, one on credit repair, get-rich-
quick schemes, and the last one we did was what we called our 
false spam harvest. We sent out 1,000 letters to fraudulent, 
unsolicited E-mail communicators with the same purpose in mind. 
We just did that last week. Interestingly enough, they didn't 
give us their E-mail address, so we had to send it by ``snail'' 
mail. But we will be following through on that, and that was a 
very aggressive kind of program that we have put in place to 
try to get that, to clean up that part of a new type of 
business.
    Senator Collins. Senator Glenn, do you have any further 
questions?
    Senator Glenn. I just have a couple to wrap up, Madam 
Chairman, if I could.
    In your testimony I believe you testified that you have 
brought about 25 civil cases, I think.
    Mr. Pitofsky. That is right.
    Senator Glenn. Let me just run through this. You had 25 
civil cases. Were those all done within the FTC itself, or did 
you refer those to Justice?
    Mr. Pitofsky. Oh, no. These are FTC cases, although in most 
instances we went to court. We didn't enforce it within the 
administrative process.
    Senator Glenn. OK. But you have your own counsel and your 
own staff of people there to do this on civil cases.
    Mr. Pitofsky. We do.
    Senator Glenn. I presume that on criminal cases you have to 
go through Justice; is that correct?
    Mr. Pitofsky. We refer those to the Justice Department.
    Senator Glenn. And have you done any of that? Have you 
referred criminal cases to Justice?
    Mr. Pitofsky. Well, this Fortuna case----
    Senator Glenn. That was a criminal case.
    Mr. Pitofsky. Yes. I don't think we have had any other 
criminal cases with respect, narrowly, to Internet fraud thus 
far.
    Senator Glenn. Do we have any extradition agreements with 
other countries that cover this?
    Mr. Pitofsky. I think we do not, but I would have to check 
on that and find out.
    Senator Glenn. Do you know?
    Ms. Bernstein. I don't know, Senator.
    Senator Glenn. And my follow-up to that was going to be has 
it ever been exercised. If so, how many have we extradited?
    That may be an area where we could help out some on this. 
Since the con artists are moving, shuffling off to other 
countries when they have a problem in this country, that may be 
an important area that we could help on as far as getting 
extradition agreements and things like that. So if you could 
furnish that for the record, we would appreciate it.
    Thank you, Madam Chairman. I think it has been a good 
hearing this morning.
    Senator Collins. Thank you very much, Senator Glenn.
    Each of the witnesses that we have heard from today have 
emphasized a common theme, and that is that we need to do more 
to educate consumers so that they can distinguish more easily 
between fraudulent offers on the Internet from legitimate 
offers. We don't want to stifle legitimate commerce, and yet we 
do want to take steps to protect the consumer who may be out 
there with very little guidance on what is a fraudulent scheme.
    We also need to make certain that consumer complaints in 
this area are vigorously pursued and that agencies like the FTC 
have the tools needed to do the job. In that regard, I would 
invite you, Mr. Pitofsky, and your staff to continue to work 
with the Subcommittee on legislative or regulatory reforms when 
the appropriate time comes and to share with us the report that 
you mentioned that will be available in June.
    I also want to echo Senator Glenn's commendation of Mr. 
Wise for coming forward today. It is never easy to come forward 
and concede that you were ripped off, but it was his testimony 
that allows us to understand that even a sophisticated consumer 
can be taken advantage of. And he has done, indeed, a great 
public service.
    Finally, I want to thank Susan Grant and America Online and 
other witnesses today for sharing their information as well. We 
hope to build on these hearings to further the consumer 
education efforts we are all involved in and also to identify 
legislative reforms that may be needed.
    I finally want to thank my staff for their hard work on 
this hearing. Rena Johnson, Tim Shea, and Kirk Walder all 
worked very hard, as did the rest of the staff and the minority 
staff as well. We will be continuing hearings into this area, 
and we look forward to continuing to work with you.
    Senator Collins. The Subcommittee is now adjourned.
    [Whereupon, at 12:27 p.m., the Subcommittee was adjourned.]



                            A P P E N D I X

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