[Senate Hearing 110-]
[From the U.S. Government Publishing Office]


 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2009 

                              ----------                              


                        WEDNESDAY, MAY 14, 2008

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 3:35 p.m., in room SD-192, Dirksen 
Senate Office Building, Hon. Richard J. Durbin (chairman) 
presiding.
    Present: Senators Durbin and Brownback.

                        FEDERAL TRADE COMMISSION

STATEMENT OF HON. WILLIAM E. KOVACIC, CHAIRMAN
ACCOMPANIED BY HON. JON LEIBOWITZ, COMMISSIONER

             OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

    Senator Durbin. Good afternoon. I'm pleased to welcome you 
to this hearing today before the Financial Services and General 
Government Appropriations Subcommittee.
    I apologize for the late start. We had a rollcall vote on 
the floor, and Senator Reid was called to a funeral service in 
Arlington for a fallen soldier from Nevada, and I had to fill 
in for a few minutes there. I thank Senator Brownback as well 
for his patience in waiting for my arrival.
    Today's hearing focuses on the President's fiscal year 2009 
budget request for the Federal Trade Commission (FTC). 
Testifying before us this afternoon is Chairman William Kovacic 
and Commissioner Jon Leibowitz.
    I welcome my colleagues to the dais and those who will 
appear in short order.
    The FTC, Federal Trade Commission, has two important and 
related missions: to protect consumers and to preserve 
competition in the marketplace. These missions really hit home 
when it comes to American consumers as they face skyrocketing 
prices at gasoline pumps, struggle with home mortgages they may 
not be able to pay back, and worry about identity theft and 
privacy in our increasingly intrusive world. The FTC pursues 
both of its consumer protection and competition missions by 
identifying illegal practices, stopping them through law 
enforcement, and preventing them through consumer and business 
education. It also adds to the public knowledge and dialogue by 
conducting research, advocating for consumers, and representing 
American consumer interests.
    I am pleased to see the FTC has a strong record on these 
missions. The agency has received numerous awards for its 
consumer education programs. Its implementation of the Do Not 
Call program has enjoyed success in curbing most unwanted 
telemarketing calls. There are still some of them getting 
through we will have to talk about. And last year, the FTC 
received a clean audit opinion for the 11th straight year in a 
row. Congratulations. With these and other accomplishments, I 
think the FTC has much to be proud of.
    The President's budget requests $256.2 million for fiscal 
year 2009, increased $12.3 million, or about 5 percent, over 
current year funding. This request will provide additional 
funding for consumer protection, including three additional 
FTE's dedicated to financial services. I am glad you are 
looking in this area. We are all too familiar with the fraud 
and deception in the mortgage industry, so this is certainly a 
good idea.
    This request also would provide additional funding for the 
FTC's Competition Bureau, including eight additional FTEs. Your 
role as consumer watchdog for anticompetitive behavior is 
especially crucial in today's market for gasoline, diesel fuel, 
and jet fuel.
    As you know, based on a letter I recently sent to you, I am 
very concerned about the spike in fuel prices. Drivers across 
America are paying higher and higher prices at the pump. Air 
travelers and consumers are also feeling the heat. Projections 
suggest the situation could get worse. Yet, somehow these 
record-breaking prices are coming at a time when the oil 
industry is reporting record-breaking profits.
    This chart points out something that an executive from an 
airline told me just a couple weeks ago when we talked about 
the increasing cost of jet fuel and what it was doing to the 
airline industry across America. He had made a phone call to a 
chief executive officer (CEO) of the same airline who had his 
job about 15 to 20 years ago, and this former CEO said, I do 
not understand how you can even operate with the so-called 
crack spreads today, crack spread being the difference between 
the crude oil and the refined product.
    That differential used to be in the $1 to $5 range. Now it 
is in the $40 range. And so as you see the price of a barrel of 
oil going up--I do not know what it is today. I think yesterday 
it was $127--you have to know that ultimately the consumer will 
pay even more because the spread between crude oil and refined 
product just continues to grow exponentially, making it 
increasingly difficult to be competitive for all users of 
refined oil products. That would include families, businesses, 
farmers, truckers, airlines, transit agencies, and all of the 
above.
    I am happy that you will be here to testify about this and 
other issues, perhaps commenting on the letter that I sent 
requesting an inquiry. And before turning it over to you for 
presentation, I would like to invite my colleague, Senator 
Brownback, to speak.

                   STATEMENT OF SENATOR SAM BROWNBACK

    Senator Brownback. Thank you, Mr. Chairman, for holding the 
hearing. I look forward to the presentation that is going to be 
coming up from our colleagues and to our question and answer 
session. I think this is an important hearing on some very 
substantive issues.
    I have worked with the FTC over many years on a number of 
topics, and I have found the Commission very good to work with. 
I appreciate their mission. I think it is crucial and a 
delicately balanced one of protecting consumers from fraud and 
predatory scams, while at the same time not interfering with 
legitimate business activities. Protecting consumers from 
identity theft and credit fraud, enforcing the Do Not Call 
Registry, and prohibiting the marketing of media violence to 
children, the Commission has a valuable role in our Government.
    To carry out its mission, the FTC must look carefully at 
the facts to guide its efforts. It cannot rely on anecdotes or 
speculation. It is a difficult function. It requires objective 
inquiry, analysis, and deliberation. It is not a function that 
can be exercised properly by a rush to judgment that is based 
on a theory or popular opinion.
    Mr. Chairman, all of us are very concerned and troubled by 
the exorbitant prices that consumers are paying at the pump. In 
my State and across the country, farmers, truck drivers, and 
all working families are facing painfully high prices to put 
gas in their cars and trucks and to put food on their tables. I 
would say, Mr. Chairman, if oil companies have acted in an 
anticompetitive fashion that has harmed consumers, then throw 
the book at them. I have no qualms about doing that whatsoever, 
and it should be done and it should be the function of the 
Government to do it.
    Now, let us make sure that they are not colluding and 
engaging in anticompetitive activities. We must do that. But 
let us base those claims on facts and not anecdotes and let us 
find answers and not excuses. And we must pursue real solutions 
rather than political gain.
    In the same way that we admonish our colleagues not to 
scapegoat ethanol for rising food prices here in the United 
States and abroad, we need to examine carefully the data and 
facts surrounding higher gasoline prices. As you and I know, 
Mr. Chairman, if it were not for the increased use of ethanol 
and the blending of gasoline, prices at the pump would be some 
29 cents to 40 cents higher per gallon. That may explain in 
part why crude oil prices have risen faster and further than 
prices at the pump, and we have a chart that I wanted to show 
on this.
    Since January of this year, crude prices are up 21 percent, 
while gasoline prices are up 19 percent. Since January 2007, 
the difference is even more pronounced. Crude prices are up 106 
percent while gasoline prices are up 94 percent.
    The latest data from the Energy Information Administration 
(EIA) in March 2008 shows that 71.8 percent of the price of a 
gallon of gasoline is attributable to the raw crude oil input. 
In March 2007, crude oil accounted for only 52.3 percent of the 
cost of a gallon of gasoline. In March 2000, crude oil 
accounted for 44.6 percent of a gallon of gasoline. And that is 
on the charts.
    Crude oil costs are the unmistakable driving force behind 
the rise in gasoline prices, and for that we need to look in 
part at our own body here. We have made choices to refuse to 
allow drilling off the continental shelf and in Arctic National 
Wildlife Refuge (ANWR). We have chosen to allow antidevelopment 
and, I believe, antigrowth activists to block any attempt to 
expand our Nation's refining capacity. We need to revisit those 
decisions just as much as we need to examine the behavior of 
private enterprises.
    It is unfortunate the Government is not called to task for 
its own role in distorting markets and placing increased costs 
on consumers. Decisions that our Government has made regarding 
energy policy have contributed to the higher prices that 
consumers are now paying. And even though the percentage of 
retail gasoline prices and taxes represent a decline from 32.1 
percent in January 2000 to 12.3 percent in March 2008, the 
actual amount of the tax has not. In January 2000, taxes 
accounted for 41.4 cents per gallon. In March 2008, they 
accounted for 39.9 cents per gallon.
    I urge the FTC to use its resources to examine diligently 
and thoroughly all aspects of this issue. In the past, FTC has 
determined, except in a few isolated cases, that market forces 
were responsible for large changes in gasoline prices, not 
anticompetitive actions by the industry. But if you find those 
anticompetitive actions, we want to know about it and we want 
them pursued. Let us not think that we need to change the rules 
or alter the objectivity of scientific analysis and facts just 
to get the answer we want.
    I want to thank you, Mr. Chairman, for holding this 
hearing. I look forward to the testimony of the witnesses and a 
chance to question them.
    Senator Durbin. Thank you, Senator Brownback.
    As you can tell, we have a slightly different view of the 
world, and luckily the Federal Trade Commission is here to be 
the ultimate arbiter.
    We want to thank Chairman Kovacic, who will be allowed to 
make an opening statement, followed by Commissioner Leibowitz. 
Mr. Chairman.

                SUMMARY STATEMENT OF WILLIAM E. KOVACIC

    Mr. Kovacic. Thank you, Chairman Durbin and Ranking Member 
Brownback. You could not have put the arbitration position in 
better hands.
    We are delighted to have the opportunity to speak to the 
budget request and to give you a sense of how we would use the 
funds that have been sought. To divide the labor today, I would 
like to talk a bit about the competition mission, and my 
colleague, Commissioner Leibowitz, will address the consumer 
protection mission.
    I want to talk about several areas that are examples of the 
respects in which I think this true modern success story in 
public administration provides an excellent return to consumers 
for the resources you have entrusted us with. Our basic 
philosophy in competition policy, I think, truly matches the 
intuition that motivates both of your comments about what we 
should be doing. We try to use our resources in areas that are 
of the greatest concern to consumers, and we have tried to 
address them by using the varied tools you put at our disposal. 
You not only made us, nearly a century ago, a law enforcement 
agency, but you entrusted us with research capabilities to get 
underneath the surface, to understand more fundamentally what 
is going on in our industries, and to not simply use the 
prosecution of lawsuits, but the formulation of rules, consumer 
education, and publicity as tools for formulating adjustments 
that we can control ourselves, but advising you as well about 
what policies should do.
    Let me single out several areas of principal concern to us, 
the areas, among others, in which we will devote our efforts in 
the competition area with the proposed budget of $256 million.
    First and foremost, energy. I share your view that there is 
no single field of endeavor for us that is more important to 
the American public, and we expect to approach it, among other 
areas, in two ways.
    As you know, earlier this month we issued an advance notice 
of proposed rulemaking to explore approaches for applying the 
market manipulation authority that this body gave us in 
December. We anticipate that the rulemaking process will be 
concluded in this calendar year, and there is nothing that my 
colleagues and I will devote more effort to see addressed as 
expeditiously and effectively within our agency.
    At the same time, we are deeply concerned with structural 
changes in this sector that can affect the price at which 
petroleum products, natural gas, other energy products are 
delivered to consumers. Within the past 12 months, we 
challenged a natural gas distribution merger in Pittsburgh, 
which ultimately resulted in the abandonment of the 
transaction. We brought a case against a combination of two 
refiners in the southwestern United States involving Western 
refining and Giant industries. In this we were unsuccessful in 
obtaining a preliminary injunction. But both matters are 
indicative of our willingness in all areas to scrutinize very 
carefully structural adjustments or proposed changes in the 
industry that would affect competition in this sector.
    The second area that is certainly close behind is health 
care. Two priorities I want to flag for you. The first is our 
continuing commitment to monitor and to challenge 
anticompetitive pay-for-delay settlements. Our prosecution of 
the Cephalon case is the latest in our efforts to ensure that 
the arrangements that Congress set in place with the Hatch-
Waxman Act and the promise of lower prices through the 
provision of generic drugs to consumers are not lost. And even 
though we have suffered setbacks in a couple of these matters 
in the courts of appeals, we will continue to press as 
effectively as we can for successful judicial resolution of 
these matters. Cephalon is part of our commitment in that area.
    We are here also examining structural changes in the 
sector. Only recently we filed a challenge to a merger in 
northern Virginia that involves hospital providers, INOVA and 
the Prince William County Health Care System, again an 
indication of our commitment to monitor structural changes in 
this and other important sectors that would affect the price 
that consumers pay for healthcare.
    In the real estate area, we have brought cases involving 
what we feel are inappropriate arrangements involving multiple 
listing services.
    In the area of standards setting, we were unsuccessful in 
our Rambus case, but within the past couple of years, our 
successful challenge to an effort by Unocal to distort the 
process by which the State of California sets standards for 
gasoline to be sold in that State, resulted in a settlement 
that has yielded, we believe, benefits of at least $500 million 
a year to consumers.
    And the last item I want to mention is the very generous 
allotment that this subcommittee and the Congress as a whole 
gave us to pursue international matters. We have extended our 
efforts to work more effectively with our counterparts abroad 
to provide technical assistance to new competition systems, 
China, India, among others, and to pursue effective 
international cooperation under the framework of the SAFE WEB 
legislation that Congress also enacted in 2006.

                           PREPARED STATEMENT

    Last, I want to mention that we are undertaking a basic 
self-assessment. We are looking ahead to our centennial in 
2014, and we are going to be asking ourselves, with respect to 
all areas of our operations, are we the agency that Congress 
intended us to be, what steps can we take to get there? This 
will fold well into other areas in which Congress has directed 
us: to examine ourselves, to identify our possibilities for 
greatness, and to allow no power persuasion to deter us from 
that mission.
    Thank you.
    Senator Durbin. Thank you, Mr. Chairman.
    [The statement follows:]
             Prepared Statement of Hon. William E. Kovacic
                              introduction
    Chairman Durbin, Ranking Member Brownback, and members of the 
subcommittee, thank you for inviting us to testify today in support of 
the Federal Trade Commission's (FTCs) fiscal year 2009 appropriation 
request and to discuss some of the work we will be doing next year. The 
Commission looks forward to working with you to further the interests 
of American consumers.
    The FTC, though small, is the one Federal agency with both consumer 
protection and competition jurisdiction across broad sectors of the 
economy. It enforces, among a broad range of other laws, Section 5 of 
the Federal Trade Commission Act, which prohibits business practices 
that are harmful to consumers because they are anticompetitive, 
deceptive, or unfair.
    The Report attached to this testimony, ``The FTC in 2008: A Force 
for Consumers and Competition'' provides a detailed overview of the 
scope of our work. The FTC has pursued a vigorous and effective law 
enforcement program in a dynamic marketplace that is increasingly 
global and characterized by changing technologies. Through the efforts 
of a dedicated staff, the FTC continues to handle a growing workload. 
This testimony summarizes the FTC's budget request for fiscal year 
2009, and describes some of its major activities. To meet the 
challenges of our Consumer Protection and Maintaining Competition goals 
in fiscal year 2009, the FTC requests $256,200,000 and 1,102 FTE. The 
fiscal year 2009 request represents an increase of $12,336,000 and 18 
FTE over the fiscal year 2008 enacted levels.
    Looking further into the future our success will require continued 
efforts to improve the institutional mechanism through which we execute 
our responsibilities. In the coming months we will undertake a program 
to identify the way ahead. Our focus will extend beyond the next few 
years, and we will ask what the Agency should look like when our 
centennial arrives in 2014, and beyond. This self-assessment will 
include a combination of internal deliberations and external 
consultations in the United States and overseas with the community of 
Government and non-Government bodies that have an interest in 
competition and consumer protection policy.
                      consumer protection mission
    In the consumer protection area, the Commission is active in a 
variety of efforts to protect the public from unfair, deceptive, and 
fraudulent practices in the marketplace, including law enforcement 
targeting telemarketing fraud, deceptive marketing of health care 
products, consumer fraud against Hispanics, and business opportunity 
and work-at-home schemes. The Commission also has an active program of 
consumer and business education and outreach. This testimony highlights 
seven key priorities for the FTC in fiscal year 2009: financial 
practices; technology (spyware, spam, and behavioral advertising); Do 
Not Call; privacy and data security; green claims; food marketing to 
children; and entertainment industry marketing to children.
Financial Practices
    The Commission will continue its important work to protect 
consumers of financial services, focusing on every stage of the 
consumer credit life cycle, from the advertising and marketing of 
financial products to debt collection and debt relief. The Commission 
is particularly concerned at this time about the rise in mortgage 
foreclosures and delinquencies in the subprime market and its impact on 
communities.
    In the past decade, the Agency has brought 22 actions focused on 
the mortgage lending industry, with particular attention to the 
subprime market, alleging that lenders and servicers have engaged in 
unfair and deceptive advertising and mortgage servicing practices. 
Through these cases, the FTC has recovered more than $320 million for 
consumer redress. In addition, these cases serve as notice to the 
industry generally not to engage in the practices identified as unfair 
or deceptive. Most of these mortgage cases are complex and take 
considerable resources to investigate and prosecute, often requiring 
considerable litigation, in order to obtain adequate redress for 
consumers and other remedies. The Commission continues its important 
work in this area.
    The Agency is currently investigating the ads of a dozen companies 
for improperly promoting mortgage products, such as ads that announce 
low ``teaser'' rates without explaining that those rates apply for a 
short period of time and can increase substantially after the loan's 
introductory period. Commission staff has reviewed hundreds of mortgage 
advertisements and sent warning letters to 200 mortgage lenders because 
their ads did not appear to comply with laws the Commission enforces. 
Staff is examining these companies' more recent advertisements and, 
where they are noncompliant, the Commission will follow up by bringing 
cases.
    With the rapid increase in mortgage delinquencies and foreclosures, 
the FTC has also intensified its efforts to protect consumers from 
mortgage foreclosure rescue scams. Most of these cases involve 
allegations of scammers who falsely promise that they can save 
consumers' homes from foreclosure.\1\ Since February of this year, the 
Commission has announced four cases targeting such foreclosure rescue 
scams.\2\ Commission staff also continues to conduct outreach and to 
share enforcement resources with State and local authorities through 
seven regional task forces in cities with high foreclosure rates.
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    \1\ In testimony on February 13, 2008 before the Senate Special 
Committee on Aging on foreclosure rescue fraud, the Commission set 
forth a more complete description of the FTC's efforts to address such 
fraud. The FTC's testimony is available at http://www.ftc.gov/os/
testimony/P064814foreclosure.pdf.
    \2\ FTC v. Safe Harbour Foundation, No. 08 C 1185 (N.D. Ill. filed 
Feb. 25, 2008), available at http://www.ftc.gov/os/caselist/0823028/
index.shtm; FTC v. Mortgage Foreclosure Solutions, Inc., No. 8:08 CV-
00388 (M.D. Fla. filed Feb. 26, 2008) available at http://www.ftc.gov/
os/caselist/0823021/index.shtm; FTC v. National Hometeam Solutions, 
Inc., No. 4:08-CV-00067 (E.D. Tex. filed Feb. 26, 2008), available at 
http://www.ftc.gov/os/caselist/0823076/index.shtm. FTC v. Foreclosure 
Solutions, LLC, No. 1-08-CV-01075 (N.D. Ohio filed Apr. 28, 2008), 
available at http://www.ftc.gov/os/caselist/0723131/index.shtm. Last 
month, The Bear Stearns Companies, Inc. (``Bear Stearns'') disclosed 
that FTC staff has notified its mortgage servicing subsidiary, EMC 
Mortgage Corporation (``EMC''), that the staff believes EMC and its 
parent Bear Stearns have violated a number of Federal consumer 
protection statutes in connection with its servicing activities. Bear 
Stearns further disclosed that FTC staff offered an opportunity to 
resolve the matter through consent negotiations before seeking approval 
from the Commission to proceed with the filing of a complaint. 
According to the disclosure, EMC expects to engage in such discussions 
with Commission staff. Form 10-K, Bear Stearns Mortgage Funding Trust 
2007-AR4 (CIK No. 1393708), at Item 1117 of Reg AB, Legal Proceedings 
(filed Mar. 31, 2008), available at www.sec.gov/Archives/edgar/data/
1393708/000105640408001164/0001056404-08-001164.txt. The FTC cannot 
comment further on this ongoing law enforcement investigation.
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    The Commission's actions to protect consumers of financial services 
extend beyond mortgage lending to a wide range of non-mortgage 
financial services. Earlier this year, the Commission announced that 
three payday lenders agreed to settle FTC charges that their 
advertising violated the Truth in Lending Act by failing to provide 
interest information required by Federal law. This information helps 
consumers compare the costs of these payday loans to other payday loans 
and to alternative forms of short-term credit.\3\ The settlements have 
been accepted for public comment.
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    \3\ CashPro, File No. 072-3203 (Feb. 2008); American Cash Market, 
Inc., File No. 072-3210 (Feb. 2008); Anderson Payday Loans, File No. 
072-3212 (Feb. 2008) (all available at http://www.ftc.gov/opa/2008/02/
amercash.shtm).
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    In this economy, consumers with high levels of debt are 
particularly vulnerable to debt collection abuses, as well as debt 
negotiation and debt consolidation scams. Last November, the Commission 
announced its largest civil penalty in a debt collection case $1.375 
million.\4\ In addition, the Commission has prosecuted more than 60 
companies engaged in deceptive debt negotiation, debt consolidation, 
and credit repair practices. The Commission plans to continue its 
important work in this area in fiscal year 2009.
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    \4\ United States v. LTD Financial Services, Inc., Civ. No. H-07-
3741 (S.D. Tex. filed Nov. 5, 2007), available at http://www.ftc.gov/
os/caselist/0523012/index.shtm.
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Technology (Spyware, Spam, and Behavioral Advertising)
    The Commission has been at the forefront of protecting consumers 
from such technological threats as spam and spyware. The Agency has 
brought more than 100 spam and spyware cases. Earlier this year, the 
Agency announced its largest civil penalty in a spam case $2.9 million 
against a company allegedly using deceptive email to offer ``free'' 
gifts that were not, in fact, free.\5\
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    \5\ United States v. Valueclick, No. CV08-01711 MMM (rzx) (C.D. 
Cal. filed Mar. 13, 2008), available at http://www.ftc.gov/os/caselist/
0723111/index.shtm.
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    In addition, the Agency identifies and studies potential consumer 
protection issues raised by new technologies. For example, last week, 
the Commission hosted a town-hall meeting on mobile marketing, which 
examined such topics as consumers' ability to control mobile 
applications; the challenges presented by small screen disclosures; 
practices targeting children and teens; evolving security threats and 
solutions; and next-generation products and services.
    The Commission also continues to examine behavioral advertising, 
the practice of collecting information about consumers' online habits 
in order to deliver targeted advertising.\6\ Following a workshop on 
behavioral advertising last fall, the Commission staff released a set 
of proposed principles to guide the development of self-regulation in 
this area and sought comment on these principles.\7\ The deadline for 
comments was April 11; the Agency received numerous detailed and 
thorough comments, which it is currently reviewing.
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    \6\ See http://www.ftc.gov/bcp/workshops/ehavioral/index.shtml.
    \7\ See Press Release, FTC Staff Proposes Online Behavioral 
Advertising Privacy Principles (Dec. 20, 2007), available at http://
www.ftc.gov/opa/2007/12/principles.shtm.
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Do Not Call
    The Commission continues aggressively to implement and enforce the 
National Do Not Call Registry. The Commission is grateful that Congress 
made participation in the Do Not Call Registry permanent so that 
consumers will continue to enjoy its benefits without having to re-
register. In November 2007, the Commission announced six new 
settlements and one new Federal court action against companies that 
violated the Do Not Call provisions of the Telemarketing Sales Rule. 
The six settlements resulted in $7.7 million in civil penalties for Do 
Not Call violations.\8\
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    \8\ See Press Release, FTC Announces Law Enforcement Crackdown On 
Do Not Call Violators, Nov. 7, 2007, available at http://www.ftc.gov/
opa/2007/11/dncpress.shtm.
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Privacy and Data Security
    Privacy and data security continue to be high priorities for the 
Commission. In the past 6 months, the Commission announced six new data 
security cases,\9\ bringing the total number of FTC data security cases 
to 20. Most recently, the Commission announced cases against TJX and 
Reed Elsevier, the parent company of Lexis Nexis, alleging that the 
companies engaged in unfair practices by failing to employ reasonable 
and appropriate security measures to safeguard sensitive data. The 
settlements have been accepted for comment, and would require the 
companies to implement comprehensive data security programs and third-
party assessments biennially for 20 years.\10\
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    \9\ United States v. American United Mortgage Company, No. 07C 7064 
(N.D. Ill. filed Dec. 17, 2007), available at http://www.ftc.gov/opa/
2007/12/aumort.shtm; Life is good, Inc., Docket C-4216 (Apr. 2008), 
available at http://www.ftc.gov/os/caselist/0723046/index.shtm; In the 
Matter of Goal Financial, LLC., Docket No. C-4216 (Mar. 2008), 
available at http://www.ftc.gov/os/caselist/0723013/index.shtm 
(settlement accepted for public comment); United States v. Valueclick, 
No. CV08-01711 MMM (rzx) (C.D. Cal. filed Mar. 13, 2008), available at 
http://www.ftc.gov/os/caselist/0723111/index.shtm; The TJX Companies, 
File No. 072-3055 (Mar. 2008), available at http://www.ftc.gov/os/
caselist/0723055/index.shtm (settlement accepted for public comment); 
Reed Elsevier, Inc. and Seisint, Inc., File No. 052-3094 (Mar. 2008), 
available at http://www.ftc.gov/os/caselist/0523094/index.shtm 
(settlement accepted for public comment).
    \10\ The TJX Companies, File No. 072-3055 (Mar. 2008), available at 
http://www.ftc.gov/os/caselist/0723055/index.shtm; In the Matter of 
Reed Elsevier, Inc. and Seisint, Inc., File No. 052-3094 (Mar. 2008), 
available at http://www.ftc.gov/os/caselist/0523094/index.shtm.
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    The FTC has also been active on data security education. It has 
distributed more than 3 million copies of its consumer education 
publication ``Take Charge: Fighting Back Against ID Theft.'' The FTC 
also published a guide for businesses on data security, Protecting 
Personal Information: A Guide for Business, and launched an 
interactive, online video tutorial designed to educate businesses using 
real-life scenarios. The Agency has also begun to hold regional 
workshops for businesses on how to plan and manage data security. The 
first workshop took place April 15 in Chicago.
Green Marketing
    In response to a virtual explosion of green marketing over the past 
year, the Commission has accelerated its review of its environmental 
marketing guidelines, also known as the Green Guides.\11\ In November 
2007, the FTC published a Federal Register Notice seeking public 
comment on the Guides. Given the importance of green marketing and the 
proliferation of new claims, the Commission also announced that it 
would hold a series of workshops in aid of the Guide review. The 
Commission hosted the first of these events on January 8, 2008, 
addressing the marketing of carbon offsets and renewable energy 
certificates. The second workshop, on green packaging, took place on 
April 30, 2008, and a third workshop, on green claims related to 
textiles and building materials, is planned for this July. The 
Commission will use the information it receives at these workshops to 
inform its review of the Green Guides, conduct enforcement actions, and 
educate consumers.
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    \11\ See Press Release, FTC Reviews Environmental Marketing Guides, 
Announces Public Meetings (Nov. 26, 2007), available at http://
www.ftc.gov/opa/2007/11/enviro.shtm.
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Food Marketing to Children
    The Commission continues its efforts to combat childhood obesity. 
In early August, the Commission issued compulsory process orders to 44 
food and beverage companies and quick-service restaurants, asking for 
information on their expenditures and activities targeted toward 
children and adolescents. All of the targeted companies have submitted 
their responses, and staff is analyzing the submissions. Staff will 
prepare a report, submit it to Congress, and release it publicly this 
summer. The report will be an important tool for tracking the 
marketplace's response to childhood obesity and identifying where more 
action is needed.
Entertainment Marketing to Children
    The Commission continues to monitor the marketing of violent 
entertainment to children and encourage industry self-regulation in 
this area. Since 2000, the FTC has issued six reports on the marketing 
of movies, music, and video games containing content that may not be 
appropriate for children.\12\ The Commission's reports generally 
document improvement by all three industries in providing rating or 
labeling information in advertising. The Commission has also conducted 
five ``undercover shops,'' in which underage teenagers try to purchase 
media rated or labeled as containing inappropriate content. These 
undercover shops have demonstrated steady improvement in retail 
enforcement of the age ratings.
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    \12\ Moreover, in 2006, the Commission initiated and settled an 
action against Take-Two Interactive Software, Inc. and Rockstar Games, 
Inc., the creators and distributors of the popular Grand Theft Auto: 
San Andreas video game, because they advertised the Entertainment 
Software Rating Board (``ESRB'') rating for the game but failed to 
disclose that the game discs contained potentially viewable sexually 
explicit content that was unrated by the ESRB. Take-Two Interactive 
Software, Inc., No. C-4162 (July 21, 2006), available at http://
www.ftc.gov/os/caselist/0523158/0523158.shtm.
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    Last week, the Commission released the results of its fifth 
undercover shop. These results show improvement, particularly by the 
video game industry, which denied sales of Mature-rated games to our 
underage shoppers 80 percent of the time. This is a dramatic 
improvement from where the industry started 8 years ago, when nearly 9 
out of 10 underage shoppers were able to buy these games. There are, 
however, still areas for improvement. For example, roughly half of our 
undercover shoppers were able to purchase R-rated or unrated DVDs and 
explicit content music. The Commission will continue to monitor self-
regulatory efforts in this area.
                          competition mission
    The Commission has an active enforcement agenda to promote and 
protect competition, focusing on areas that are highly important to 
consumers, such as health care, energy, real estate, and high 
technology and standard setting. The Commission scrutinizes mergers in 
many industries, filing actions to enjoin those that are likely to be 
anticompetitive and ordering divestitures where appropriate to preserve 
competition while allowing the beneficial aspects of the merger to 
proceed. The Commission also polices anticompetitive conduct, with a 
particular focus on competitor collaboration and exclusionary conduct. 
Additionally, the Commission promotes sound competition policy through 
myriad research and reports, studies, hearings, workshops, advocacy 
filings, and amicus briefs. The Commission is also very active on the 
international front, developing strong working relationships with 
foreign antitrust agencies, cooperating on cross-border cases, 
promoting convergence on competition policies, and offering technical 
assistance to countries with relatively new competition laws.
    This portion of the testimony highlights several important recent 
developments in the Commission's competition agenda.
Health Care (Pay-For-Delay Settlements and Hospital Mergers)
    In the health care area, the Commission is continuing its efforts 
to prevent brand name drug companies from paying generic competitors to 
stay out of the market, thereby depriving consumers and other payers of 
significant savings. In February 2008, the Commission filed a case 
charging that Cephalon, a pharmaceutical manufacturer, engaged in 
illegal conduct to prevent competition for its branded drug, 
Provigil,\13\ by paying four competing firms to refrain from selling 
generic versions of the drug until 2012.\14\ The Commission's complaint 
alleges that Cephalon's conduct constituted an abuse of monopoly power 
that is unlawful under Section 5 of the FTC Act. The Commission also 
has several other exclusion payment (``pay-for-delay settlement'') 
investigations ongoing.
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    \13\ Provigil is used to treat excessive sleepiness in patients 
with sleep apnea, narcolepsy, and shift-work sleep disorder.
    \14\ FTC v. Cephalon, Inc., No. 1:08-cv-00244 (D.DC. filed Feb. 13, 
2008), available at http://www.ftc.gov/os/caselist/0610182/
080213complaint.pdf.
---------------------------------------------------------------------------
    These deals are a growing problem due to two court decisions taking 
a lenient view of the practice. Between 2000 and 2004, there were no 
patent settlements in which the generic received compensation and 
agreed to stay off the market, but after the two court decisions in 
2005, there were 3 such agreements in fiscal year 2005 and 14 in fiscal 
year 2006. The Commission strongly supports legislation to address 
competitive problems with pay-for-delay settlements. We note that bills 
have been introduced in both chambers, and thank you, Mr. Chairman, for 
your sponsorship of the bipartisan Senate bill.\15\
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    \15\ Preserve Access to Affordable Generics Act, S. 316, 110th 
Cong. (2007) (as reported by S. Comm. on the Judiciary).
---------------------------------------------------------------------------
    Last week the Commission voted to challenge the Inova Health 
System's proposed acquisition of the Prince William Health System. The 
proposed merger would combine Inova, the largest hospital system in 
Northern Virginia, with the Prince William Hospital in Prince William 
County, Virginia. The Commission alleges that the merger would 
eliminate the existing, significant price and non-price competition 
between these hospitals, particularly in the fast-growing western 
suburbs of Northern Virginia, leading to higher health care costs for 
the employers and residents of Northern Virginia.
Energy
    The Commission shares the concerns of lawmakers, businesses, and 
American consumers about rapidly increasing prices for crude oil, 
gasoline,\16\ diesel fuel, jet fuel, and natural gas, and currently 
engages in a wide range of activities to prevent improper industry 
conduct causing such price rises. Under new authority to promulgate 
regulations provided in Section 811 of the Energy Independence and 
Security Act of 2007 (EISA), this month the Commission issued an 
Advance Notice of Proposed Rulemaking (ANPR) regarding manipulation of 
wholesale crude oil, gasoline, or petroleum distillate markets. The 
ANPR, available on the Commission's website and in the Federal 
Register, solicits public comments on determining whether and in what 
ways the Commission should develop a rule defining and prohibiting 
market manipulation in the petroleum industry.\17\ The 30-day public 
comment period runs through June 6, 2008, and the Commission 
anticipates concluding the rulemaking process this year. In addition, 
Section 812 of that act prohibits knowingly reporting false data to a 
Federal agency under a mandatory reporting requirement, with the 
intention of affecting the Agency's data compilations for statistical 
or analytical purposes. The section provides for Commission enforcement 
with substantial penalties.
---------------------------------------------------------------------------
    \16\ The Commission actively and continuously monitors retail and 
wholesale prices of gasoline and diesel fuel, looking for ``unusual'' 
price movements and then examining whether any such movements might 
result from anticompetitive conduct that violates Section 5 of the FTC 
Act. FTC economists have developed a statistical model for identifying 
such movements. The Agency's economists regularly scrutinize price 
movements in 20 wholesale regions and approximately 360 retail areas 
across the country.
    \17\ FTC Seeks Public Comment on Rulemaking to Prohibit Market 
Manipulation in the Petroleum Industry, Press Release, May 1, 2008, 
available at: http://www.ftc.gov/opa/2008/05/anpr.shtm, 73 Fed. Reg. 
25614 (May 7, 2008).
---------------------------------------------------------------------------
    To protect and promote competition in the energy industry, the 
Commission reviews mergers and investigates pricing and other 
conduct.\18\ Over the past several years, the Commission has challenged 
many mergers in this industry, obtaining significant divestitures to 
preserve competition.\19\
---------------------------------------------------------------------------
    \18\ In 2005, the Commission settled an enforcement action charging 
that Unocal deceived the California Air Resources Board (``CARB'') in 
connection with regulatory proceedings to develop the reformulated 
gasoline standards that CARB adopted. We believe the settlement 
continues to result in an estimated $500 million of consumer savings at 
the pump each year. See the discussion in Section III.D below.
    \19\ These include Mobil/Exxon, British Petroleum/Amoco, Chevron/
Texaco, and Phillips Petroleum/Conoco.
---------------------------------------------------------------------------
    In the past year, we have acted to block acquisitions in the 
natural gas and petroleum industries that we believed could raise 
prices to consumers. In January 2008, Equitable Resources abandoned its 
proposed acquisition of the Peoples Natural Gas Company, a subsidiary 
of Dominion Resources, after the Third Circuit took the unusual step of 
granting the Commission's motion for an injunction pending appeal, and 
vacated the District Court's ruling dismissing the Commission's 
complaint.\20\ The Commission alleged that parties were each others' 
sole competitors in the distribution of natural gas to non-residential 
customers in the Pittsburgh area and the transaction would have 
resulted in a monopoly for many customers. Moreover, in May 2007, the 
Commission brought an enforcement action in the oil and gasoline 
industry when it issued an administrative complaint and initiated a 
Federal court action to block Western Refining, Inc.'s $1.4 billion 
proposed acquisition of rival energy company Giant Industries, Inc. The 
Commission brought the action in an effort to preserve competition in 
the supply of bulk light petroleum products, including motor gasoline, 
diesel fuels, and jet fuels, in northern New Mexico. After a week-long 
trial, the Federal district court denied the Commission's motion for a 
preliminary injunction.\21\ The Commission is continuing to examine and 
address a wide range of issues in the energy markets.\22\
---------------------------------------------------------------------------
    \20\ See FTC v. Equitable Resources, Inc., No. 07-2499 (3rd Cir. 
2008), available at http://www.ftc.gov/os/caselist/0610140/
080204ftcmovacateequitabledecision.pdf.
    \21\ The Commission subsequently dismissed its administrative 
complaint, concluding that further prosecution would not be in the 
public interest.
    \22\ For example, in November 2007, the Commission issued its third 
annual report on the state of ethanol production in the U.S. The report 
noted that, as of September 2007, 13 firms had entered into the 
production of ethanol during the preceding year, bringing the total 
number of U.S. producers to 103. As new firms have entered, the market, 
which is unconcentrated by any measure of capacity or production, has 
become even more unconcentrated. 2007 Federal Trade Commission Report 
of Ethanol Market Concentration (Nov. 2007) available at http://
www.ftc.gov/reports/ethanol/2007ethanol.pdf.
    Additionally, the Commission is preparing its first report for the 
Committees on Appropriations summarizing the Commission's activities 
relating to ongoing reviews of mergers, acquisitions, and other 
transactions in the oil and natural gas industries, the investigation 
of pricing behavior or any potential anticompetitive actions in those 
industries, and the resources that the Commission has devoted to such 
reviews and investigations during the 6-month period.
---------------------------------------------------------------------------
Real Estate
    In another area critical to consumers, the Commission continues to 
challenge realtor board rules that restrain competition and hinder 
consumer choice in markets throughout the country. The Commission's 
cases allege that associations of competing real estate agents have 
adopted rules that limit competition from non-traditional and discount 
brokers by restricting these brokers from, in part, placing listings on 
MLS Internet sites, thus harming consumers who may prefer to list with 
less expensive or non-traditional brokers. Six of our cases were 
resolved by consent order requiring each realtor board to discontinue 
enforcing the policies that, the Commission alleged, kept 
nontraditional brokers from competing. A seventh investigation led to 
an administrative complaint against a realtor group, which after a full 
administrative trial and dismissal of the complaint against the 
realtors by the ALJ is on appeal before the Commission. Oral arguments 
were held in April, and a Commission opinion is expected in the next 
months. The Commission also settled an action raising similar concerns 
with a Milwaukee-based realtor group in the past year.\23\
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    \23\ Press Release, FTC Charges Milwaukee MLS with Illegally 
Restraining Competition (Dec. 12, 2007), available at http://
www.ftc.gov/opa/2007/12/mls.shtm.
---------------------------------------------------------------------------
High Technology and Standard Setting
    The Commission continues to remain vigilant against mergers and 
conduct that would distort competition in the high technology industry. 
One such enforcement case that the Commission has brought is the case 
against Rambus. In June 2002, the Commission charged Rambus with 
unlawfully monopolizing four computer memory technologies that were 
incorporated into industry standards for dynamic random access memory 
chips, widely used in personal computers, servers, printers, and 
cameras. In July 2006, the Commission found that Rambus had illegally 
acquired monopoly power through exclusionary acts, and issued an order 
limiting the royalty rates Rambus may collect under its licensing 
agreements.\24\ On April 22, 2008, the D.C. Circuit Court of Appeals 
set aside the Commission's Order and remanded the case for further 
proceedings before the Commission. The Commission is reviewing the 
Court of Appeals opinion and will decide in the next few weeks whether 
to appeal the decision to the full D.C. Circuit or the Supreme Court.
---------------------------------------------------------------------------
    \24\ Press Release, FTC Issues Final Opinion and Order in Rambus 
Matter (Feb. 5, 2007), available at http://www.ftc.gov/opa/2007/02/
070502rambus.htm.
---------------------------------------------------------------------------
    The Commission has previously addressed the substantial consumer 
harm, including higher prices, that can result from the alleged abuse 
of standard-setting processes. In 2003, the Commission successfully 
challenged Unocal's alleged illegal acquisition of monopoly power in 
the technology market for producing Phase 2 ``summer-time'' gasoline a 
formulation of low- emissions gasoline mandated for sale and use in 
California for up to 8 months of the year by misrepresenting that 
certain information was non-proprietary and in the public domain, while 
at the same time pursuing patents that would enable it to charge 
substantial royalties if the information was incorporated into 
California Air Resources Board (``CARB'') standards. The complaint 
alleged that Unocal induced CARB to adopt standards for this gasoline 
that substantially overlapped with Unocal's patent rights. The 
Commission's success is estimated to have saved California consumers 
over $500 million per year at the pump.
Other
    The Commission's efforts to maintain competition are not limited to 
high profile industries. In January 2008, the U.S. Court of Appeals for 
the Fifth Circuit upheld a Commission order requiring Chicago Bridge & 
Iron Co., N.V. and its United States subsidiary (CB&I) to divest assets 
acquired from Pitt-Des Moines, Inc. used in the business of designing, 
engineering, and building field-erected cryogenic storage tanks.\25\ 
The Commission had ruled in 2005 that CB&I's acquisition of these 
assets in 2001, would likely result in a substantial lessening of 
competition or tend to create a monopoly in four markets for industrial 
storage tanks in the United States. The court endorsed the Commission's 
findings that the merged firms controlled over 70 percent of the 
market, and that new entry was unlikely given the high entry barriers 
and based on the incumbents' reputation and control of skilled crews.
---------------------------------------------------------------------------
    \25\ FTC v. Chicago Bridge & Iron Co., No. 05-60192 (5th Cir. 2008) 
available at http://www.ftc.gov/os/adjpro/d9300/
080125opinion.pdf.http://www.ftc.gov/opa/2008/01/cbi.shtm
---------------------------------------------------------------------------
    The Commission continues to appeal its case against Whole Foods 
Market, Inc.'s acquisition of its chief rival, Wild Oats Markets, Inc., 
on the grounds that the district court failed to apply the proper legal 
standard that governs preliminary injunction applications by the 
Commission in Section 7 cases. The Court of Appeals for the District of 
Columbia Circuit heard oral arguments on this case on April 23, 2008.
                 needed resources for fiscal year 2009
    To meet the challenges of its Consumer Protection and Maintaining 
Competition goals in fiscal year 2009, the FTC requests $256,200,000 
and 1,102 FTE. The fiscal year 2009 request represents an increase of 
$12,336,000 and 18 FTE over the fiscal year 2008 enacted levels.
    The Commission seeks these additional resources to continue to 
build on its record of accomplishments in enhancing consumer protection 
and protecting competition in the United States and, increasingly, 
abroad. The increase of $12,336,000 that the Commission is seeking in 
fiscal year 2009 includes:
  --$7,989,000 in mandatory cost increases associated with contract 
        expenses (CPI adjustment) and personnel (salaries and with-in-
        grade increases);
  --$2,847,000 for 18 additional FTE;
    --10 FTE for Consumer Protection to protect consumers from unfair 
            and deceptive practices in the financial services 
            marketplace; protect consumers' privacy; improve compliance 
            with FTC orders; pursue foreign-located evidence of fraud 
            perpetrated against U.S. consumers; advocate the adoption 
            of foreign data privacy laws and procedures that are 
            compatible with American law; and provide support for the 
            effective operation of this program; and
    --8 FTE for Maintaining Competition to meet the increased workload 
            required to challenge anticompetitive mergers and assure 
            that the marketplace is free from anticompetitive business 
            practices in the health care, pharmaceutical, energy, and 
            technology sectors; promote convergence in competition 
            policy of foreign enforcement practices; and provide 
            support for the effective operation of this program;
  --$1,500,000 for non-FTE program needs;
    --$1,100,000 for Consumer Protection;
      -- $500,000 for ``Green'' marketing research, education campaign, 
            and enforcement;
      -- $250,000 for high-tech tools to stop fraudsters;
      -- $250,000 for marketing and advertising of food to children;
      -- $100,000 for privacy and identity theft and deceptive and 
            unfair practices in mobile marketing; and
      -- $400,000 for Maintaining Competition to meet the challenges of 
            an increased enforcement agenda and associated litigation 
            and outreach efforts.
    The majority of the funding for the FTC's fiscal year 2009 budget 
request will be derived from offsetting collections; HSR filing fees 
and Do Not Call fees will provide the Agency with an estimated 
$189,800,000 in fiscal year 2009. The FTC anticipates that the 
remaining funding needed for the Agency's operations will be through a 
direct appropriation of $66,400,000 from the General Fund in the U.S. 
Treasury. The FTC appreciates the strong support it has received from 
Congress to serve its critical mission of protecting the American 
consumer and ensuring competition in the marketplace. With the 
increased funding made available to the FTC in the fiscal year 2008 
appropriation for high priority activities including subprime lending, 
identity theft, the U.S. SAFE WEB Act, market manipulation of 
petroleum, maintaining competition, and training and technical 
assistance for developing nations, the FTC will be able to address 
critical consumer problems at present and anticipate, adapt, and 
mitigate the challenges of the future.
                               conclusion
    We appreciate the opportunity to appear before you today to discuss 
the Commission's work and our fiscal year 2009 budget request, and look 
forward to continuing to work together.

    Senator Durbin. Commissioner Leibowitz.

                SUMMARY STATEMENT OF HON. JON LEIBOWITZ

    Mr. Leibowitz. Thank you, Mr. Chairman, Ranking Member 
Brownback. Let me begin by speaking briefly about the 
Commission generally before I turn to the FTC's consumer 
protection efforts.
    From my perspective, the Commission's biggest challenge is 
that we are a small agency--we have fewer than 1,100 full-time 
equivalents (FTEs)--but we are tasked with a big mission: 
protecting competition and consumers across broad swaths of the 
economy. The constant challenge for us is not only to 
effectively leverage our limited resources--I think we do that 
quite well--but also to ensure that the quality of our work is 
not strained by the quantity of demands placed upon us.
    In the past few years, Congress has enacted new laws, 
several very important ones, that the FTC is charged with 
enforcing: CAN-SPAM, the Fair and Accurate Credit Transactions 
Act (FACT), the Children's Online Privacy Protection Act 
(COPPA), to name just a few.
    Put simply, implementing and enforcing these laws takes 
resources. For that reason, we deeply appreciate your efforts 
to ensure that we have the budget we need. Speaking for myself, 
I am enormously grateful for the $3 million your subcommittee 
authorized last year above the administration's request. That 
enabled us to hire additional employees to bolster our 
enforcement efforts, especially in the areas of financial fraud 
and anticompetitive behavior by pharmaceutical companies, which 
Chairman Kovacic talked about.
    Mr. Chairman, the rest of my remarks will focus on some of 
our consumer protection priorities. I am going to try to do six 
priorities in 3 minutes.
    First, financial services. Chairman Durbin, you mentioned 
mortgages, and we currently have multiple investigations 
underway in the subprime market, including two that the targets 
themselves have made public: investigations of Bear Stearns, 
for servicing subprime mortgage loans; and of CompuCredit, a 
leading provider of subprime credit cards. We also are 
investigating mortgage brokers whose advertising, for example, 
touted preposterously low interest rates without disclosing 
that they would increase substantially after a short 
introductory period. In the past decade, we have brought 22 
actions against the mortgage lending industry and obtained more 
than $320 million in consumer redress.
    Indeed, if you combine all the consumer redress, 
disgorgement, and fines we collect with our Hart-Scott-Rodino 
and Do Not Call fees, the agency brings back more money to 
American consumers than it costs.
    Second, Do Not Call. The great American philosopher, Dave 
Barry, has called the Do Not Call Registry the most popular 
Government program since the Elvis stamp. It has helped 
preserve the sanctity of the American dinner hour, and we are 
grateful that Congress made Do Not Call permanent last year. 
There are nearly 160 million phone numbers registered on Do Not 
Call and----
    Mr. Kovacic. How many?
    Mr. Leibowitz. 160 million registered, and to date we have 
brought 36 cases against violators.
    Third, technology. The Commission has initiated more than 
100 spam and spyware actions, and has helped to substantially 
reduce the nuisance adware problems that have caused literally 
billions of unwanted pop-up ads on Americans' computers.
    We have also held hearings on emerging technologies and 
practices such as behavioral marketing; that is, the monitoring 
of consumers' online behavior to deliver targeted advertising. 
Commission staff recently issued a set of proposed behavioral 
advertising principles for public comment designed to push 
self-regulation in the right direction.
    Fourth, privacy and data security. Safeguarding consumers' 
sensitive personal information remains a priority for us. To 
date, the FTC has brought 20 enforcement actions challenging 
data breaches and inadequate data security practices.
    Fifth, so-called green claims. In the past year or two, 
there has been an explosion of environmental advertising claims 
like ``sustainable'', ``renewable'', and ``carbon neutral''. In 
response, we are holding a series of workshops and updating our 
environmental marketing guidelines, better known as the Green 
Guides.
    Sixth and finally, an issue I know both of you are 
interested in, marketing to children. The Commission continues 
its efforts to combat childhood obesity and foster appropriate 
food marketing to kids. Last August, the Commission subpoenaed 
44 food and beverage companies seeking information on their 
activities targeted to children. Staff is preparing a report 
based on what we have learned, and we expect to release it this 
summer.
    The Commission also continues to monitor entertainment 
industry marketing practices. Since 2000, the FTC has issued 
six reports on the marketing of movies, music, and video games 
containing violent content. And last week we released the 
results of our fifth undercover shopping survey in which 
underage teenagers tried to buy media labeled as containing 
inappropriate content. These reports and surveys generally show 
industry improvement, although further progress would be 
helpful, especially in the growing marketing of unrated DVDs. 
Our efforts are designed to encourage further self-regulation 
in this area. We believe they have been helpful.
    With that, I will exercise some self-regulation of my own 
and stop talking. And I am happy to answer questions.
    Senator Durbin. Thank you, and I think we will have a few.

                        TRENDS IN THE OIL MARKET

    Chairman Kovacic, I wrote you a letter on April 23 urging 
the FTC to investigate trends in the oil market. We have seen a 
sudden widening of the difference between crude oil and certain 
refined petroleum product prices, the so-called crack spread. 
This crack spread for middle distillate fuels like diesel, home 
heating oil, and jet fuel has spiked recently, leading to two 
trends I wrote you about.
    First, while gasoline has typically been more expensive 
than diesel fuel, we have recently seen that trend dramatically 
reversed. The national average for retail gas, $3.72; the 
average for diesel fuel, $4.33 a gallon, a difference of 61 
cents.
    Second, we are seeing a spike in jet fuel costs having a 
major impact on struggling airlines. Yesterday CNN quoted the 
CEO of a consumer airline ticket web site as expecting ``at 
least two more price increases before the end of May.''
    These trends are not linked to changes in crude oil prices 
or taxes. The crude feedstock for diesel and gasoline is 
identical, about $3 a gallon, and Federal gas and diesel taxes 
have not changed for almost 15 years.
    I would like to just make a comment. First, I do not think 
these charts are inconsistent. What Senator Brownback has shown 
us is that as crude oil prices have gone up, so too has the 
cost of the refined product, in this case I believe gasoline. I 
do not quarrel with that.
    But this one tells you that the difference between the two 
is much wider than it once was, and that difference is the 
refining add-on cost to the basic crude product. And within 
that add-on cost for refining, the so-called crack spread, 
turns out to be a world of profit for the oil companies now 
registering and reporting not only record oil company profits, 
but record profits for American businesses. No one has ever 
been quite this successful in our capital system.
    So the question I have is this. Has the FTC been monitoring 
these trends? Do you plan to initiate a comprehensive 
investigation or inquiry? And what is driving this?
    Mr. Kovacic. Thank you, indeed, for your letter, Chairman 
Durbin.
    For about the past 3 or 4 years, we have had a program in 
place to monitor on a retail and wholesale basis price changes 
concerning gasoline and diesel. The program has not covered jet 
fuel as well. But we have been examining anomalies as they 
appear in the pricing and distribution of these products. With 
your letter in hand, we are expanding our examination of these 
issues and we are taking a look very closely at both trends in 
diesel and jet fuel.
    I do not have specific results to report to you at the 
moment, although I do make the offer to meet with you and with 
my staff as we do learn more from the results of this 
examination, and I make myself, along with my staff, available 
to discuss this with you.
    What we are seeing in part is that this is an international 
pattern. That is, from our quick examination to date, these are 
trends that characterize practice in global markets, Singapore, 
Europe.
    We are also noticing that one notable feature has been a 
dramatic increase in demand for diesel in recent years. That 
is, in Europe, in Asia, in a number of areas where we have been 
able to examine very closely and compare with our own 
experience, there has been a significant increase in the demand 
for diesel. We see that as one factor that has probably made 
the two lines cross that you were referring to before.
    Another relationship we are looking at quite carefully is 
that in the stratum of the refining process, the barrel that is 
being produced--there is a very close interaction between 
production capacity and the production of both jet fuel and 
diesel, kerosene and diesel together. We are looking very 
carefully at how adjustments in production process and capacity 
allocation decisions have affected that.
    But let me emphasize that your inquiry and others that we 
have received from your colleagues in this body and across the 
Capitol--we are looking at this very carefully. I make myself 
at your disposal to report to you on what we see as the 
consequence of this deeper look at both diesel and jet fuel.
    Senator Durbin. Thank you. I am glad that the FTC is going 
to initiate this inquiry, and I am sure it will expand even 
beyond the questions that I have asked. I hope that it will 
include questions about refinery capacity and unused capacity. 
I find it hard to imagine why we are still dealing with about 
85 percent use of refinery capacity in a country where the 
prices are so high.
    Second, I hope you will at least explore the question as to 
whether and, if so, how much the United States is exporting in 
terms of refined product or even crude product for that matter. 
There have been calls for us to drill in the Arctic National 
Wildlife Refuge and other places offshore that are 
controversial from an environmental viewpoint, and I certainly 
hope that before we would even consider such a thing, that we 
would look at other alternatives that would spare these areas 
from creating any kind of environmental hardship.
    Let me turn it over to my colleague and I will return with 
some more questions.
    Senator Brownback. Thank you, Mr. Chairman.
    Examining the data, I think we are using similar charts. It 
looks like the crack spread has flipped between 2007 to 2008. I 
have somebody who understands and analyzes this more, but if 
you look at what has happened on the spot oil price, this chart 
goes from 2001 to 2008. Yours goes from 2002 to 2007. There has 
been substantial movement. But I would just point out over a 
longer period of time, these two track together and you are 
going to see an increase in gasoline prices.
    If there has been market manipulation, I want us to 
absolutely go after people with hammer and tong on it so that 
we can get at the bottom of this.
    I understand the FTC has recently announced an advance 
notice of proposed rulemaking on market manipulation of oil and 
gas prices. How do you see this rule helping the American 
consumer? What are you targeting? And I know you cannot talk on 
some of the specifics of this from our previous discussion, but 
can you give us any thought of what the American consumer can 
see out of the FTC as a result of this?
    Mr. Kovacic. What I am going to do, Senator, is to give you 
a snapshot of what was in that notice as an indication of what 
we will be looking at and, as you mentioned, to be enormously 
cautious in offering any specific views about what we might do 
to avoid a possibility of prejudgment.
    We intend to examine very carefully a variety of scenarios 
that are laid out in the advance notice. Among the scenarios 
for which we have sought comment involves the possibility that 
there has been fraud with respect to the reporting of 
information to public authorities, or fraud or 
misrepresentation with respect to the reporting of information 
to private bodies that collect and report information on 
pricing and transactions.
    We intend to look very carefully at a collection of 
scenarios that are closely related to those that our other 
Federal agencies, the Federal Communication Commission (FCC), 
Federal Energy Regulatory Commission (FERC), and Commodity 
Futures Trading Commission (CFTC) have examined in the course 
of applying manipulation authority. Have there been deliberate 
efforts in specific instances to exploit shortage conditions as 
an opportunity to raise prices? Have there been traditional 
forms of manipulation that would fit within a conventional 
antitrust or competition context, that is, including the 
possibility of collusion, improper behavior to exclude other 
firms?
    As laid out in the notice, this range of possibilities, 
some of them familiar to the concepts that you were alluding to 
before, Senator, involving outright collusion, traditional 
antitrust actionable behavior, but not antitrust behavior in 
many instances examined by our fellow Federal agencies in 
different settings. Those are the scenarios in the notice that 
we have asked others to comment upon, and we do welcome the 
comments before the comment period closes in early June.
    Mr. Leibowitz. Yes. And let me just echo what the Chairman 
has said. We put out, I think, a 38-page advance notice of 
proposed rulemaking. I think that is the right approach to take 
because, after all, we have a lot of experience with antitrust, 
but we do not have a lot of experience with manipulation beyond 
the antitrust laws.
    And in the ANPR--and again, I do not want to talk in too 
much detail because we do not want to be accused of prejudging; 
we do not want to be asked to be recused--we show other 
examples, examples that we want commented on, like very public 
announcements or pre-announcements of refinery shutdowns, or 
moving product away from an area where there is a shortage to 
drive up prices. And so those are the things we want comments 
on, and we are committed to, I think, completing--we certainly 
anticipate completing the rulemaking process by the end of the 
year.
    Senator Brownback. Good. I think that is good and I think 
it is going to be very useful to be able to see that kind of 
information. As you may know from last week's hearing, we had 
the CFTC here, and we were talking about market manipulation by 
large hedge funds, index funds on commodity prices overall. And 
I think there is more to be looked at there.

                       FOOD MARKETING TO CHILDREN

    On another area, Senator Harkin and I have been working 
closely together over the last year examining the effects of 
food marketing to kids. I am very interested in the 
comprehensive analysis the FTC has undertaken on the types and 
amounts of food marketing directed at children. It is my 
understanding the report is due to be released this summer. You 
have worked on these topics. I have worked with you on these 
topics before, as you mentioned, Mr. Leibowitz, and on target 
marketing of violent entertainment to children.
    What kind of information should we expect to see in this 
report that you are going to be putting out on target marketing 
of food to children?
    Mr. Kovacic. Jon?
    Mr. Leibowitz. Well, we hope to complete our report this 
summer. We did a workshop on this issue. We sent out a number 
of subpoenas to the major fast food restaurants and food 
companies.
    Maybe we can come in and brief your staff about this. But 
we are trying to figure out exactly how the targeting is being 
done and what effect it may have on children. And as you know, 
because I know you are involved in the FCC task force, 
childhood obesity has gone up dramatically in the last 
generation. What used to be called adult-onset diabetes cannot 
be called that anymore because so many children have it. We 
think part of that may be due to the foods that they are 
eating, and so we are taking a look at this marketing and we 
hope to have something useful to say in the report in the next 
couple of months. But we will come in and talk to you about it 
beforehand.
    Mr. Kovacic. I think, Senator, what you certainly can 
expect to see is what probably will be the best empirical view 
that a public agency has had to date about some of the 
phenomena that are being addressed. We are undertaking a very 
careful effort to gather data company by company to give you 
and the larger public a clear view of the advertising trends at 
issue. This study will be based, again related to a point that 
both of you made before, as much as possible, on a carefully 
developed empirical foundation and not simply on hunches.
    Senator Brownback. Thank you.

                     SPECULATION IN THE OIL MARKET

    Senator Durbin. Chairman Kovacic, last week the Wall Street 
Journal's Market Watch quoted an industry analyst as estimating 
that about $25 to $30 of price per barrel of crude oil may be 
attributed solely to speculation. Have you looked into how the 
futures market is influencing the price of gasoline or other 
energy products? And if so, what steps do you think should be 
taken to protect consumers from any excessive speculation?
    Mr. Kovacic. To this point, we have not examined that in a 
detailed way, Mr. Chairman. What we have seen from our work in 
the past, looking at the links between futures trading activity 
and current prices, is that efforts on the part of individual 
investors to anticipate future developments and make 
investments unmistakably play some role in setting current 
prices. What we are not certain of is how much. That is, is it, 
in the case of the individual quoted in the article, $25 or $30 
a barrel? Is it $5 or $10 a barrel? Is it $1 a barrel? That is 
something we do not know.
    I would anticipate pursuing two avenues on this issue. One 
is in the course of the rulemaking process; one possible avenue 
identified in the advance notice is to devote closer attention 
as part of the authority. That is, one possible application of 
our authority might be to examine these issues in much closer 
detail.
    A second one that I detect in your questioning of Walt 
Lukken from the CFTC and to some extent with Chris Cox is a 
concern that whatever we do, we make the best possible use of 
knowledge that already resides in other public authorities that 
have been examining this. So in addition to our consultation 
with them as part of the rulemaking process, we are separately 
going to work as carefully as possible with the CFTC, with the 
SEC, and indeed, with FERC, though they do not deal with 
petroleum prices as such, to see the extent to which we can 
explore these issues together and to make sure that as our own 
research program is formulated and, as an enforcement program 
is developed, that we take the fullest possible advantage of 
what they have learned. I have met with Chairman Lukken on this 
point. I have met with Chairman Kelleher, and I anticipate 
meeting with Chairman Cox as well to ensure that whatever we do 
builds on the foundation they have already constructed.
    Senator Durbin. It is no secret that Chicago, which I 
represent, is very interested in the futures markets.
    Mr. Kovacic. There are futures markets in Chicago, yes.
    Senator Durbin. So I am trying my best to look at this in 
an honest fashion, and when I ask the industry, they say do not 
forget we are one player, and there are other markets that 
people can choose to use outside of the United States. And if 
we take action in the hopes of having impact on speculation, it 
may just drive the futures activities to other countries. I 
assume that will be taken into consideration?
    Mr. Kovacic. Indeed. As a consequence of the augmentation 
of resources that you provided us last year for international 
matters, we have a much better platform today than we did 2 
years ago to work with our foreign counterparts. I suspect it 
would surprise neither of you that the issue of energy prices, 
both with respect to current prices and futures markets, is an 
acute matter of concern to our counterparts at the Office of 
Fair Trading in London, to our counterparts in the 
Bundeskartellamt in Bonn, to our counterparts at the ACCC in 
Canberra, and to Canada's Competition Bureau in Ottawa. There 
is no issue, I would suspect, that is more important or 
compelling to all of us.
    And we do have increasingly effective means to cooperate 
with each other. So the international dimension of this problem 
will be a crucial element of what we do. Again, by way of 
thanking you for looking over the horizon to think of the kinds 
of resources that provide a better basis for us for doing that 
work and taking that into account, we are in a much better 
position to do that now than we were previously.
    Mr. Leibowitz. Yes. And if I can just add, I agree with 
everything that the Chairman just said, and we are also going 
to be reaching out in the rulemaking process to buyers, to 
customers, and to consumer groups because we really need to 
learn about this area as we go forward with our manipulation 
authority.

                              DO NOT CALL

    Senator Durbin. Commissioner Leibowitz, you mentioned the 
Do Not Call Registry that Dave Barry had just kind things to 
say in reference to. And it is my understanding that there are 
now some 145 million active telephone number registrations in 
our country, maybe even higher.
    Mr. Leibowitz. It is up to 160 million now. It grows every 
day.
    Senator Durbin. I also understand the FTC has received over 
1.2 million consumer complaints alleging violations of the 
registry. How are you responding? What remedies or relief do 
you have available when you find violations?
    Mr. Leibowitz. Well, that is a really good question. We do 
collect complaints and that is how we prioritize, in a large 
way, the law enforcement actions that we take. We have actually 
brought 36 cases against violators thus far. I think last year, 
we recovered $7.7 million in fines.
    We are fortunate that when we have violations of Do Not 
Call, we are able to fine malefactors. For most violations of 
the FTC Act, however, we do not have fining authority. That is 
an issue that is being discussed in the context of the 
reauthorization that is going through the Commerce Committee.
    But we take Do Not Call very, very seriously. We think it 
is a wonderful program and an unequivocally successful one, and 
we spend a lot of resources to make sure that we go after 
people who are in violation of it.
    Senator Durbin. Thank you.
    Senator Brownback.

            MARKETING ADULT-RATED ENTERTAINMENT TO CHILDREN

    Senator Brownback. Gentlemen, I want to look at the FTC 
study that previously done on target marketing of adult-rated 
entertainment material for children. I appreciate you handing 
me your FTC press release about undercover shoppers finding it 
more difficult to buy ``M'' rated games.
    You may recall some of the ground-breaking studies and work 
that were done as the Commerce Committee was pushing on this 
issue. Mr. Leibowitz, you were working with Herb Kohl. I have 
worked on it with Senator Lieberman. John McCain was chairing 
the Commerce Committee when we moved into this area.
    Are you looking still at the target marketing of the adult 
material? This is on the ability to purchase, but not the 
target marketing of this.
    I want to suggest that what you studied in the target 
marketing of entertainment to underage consumers may be the way 
you want to study the comparable target marketing of material 
in the food consumption area. Are you updating the target 
marketing survey on the entertainment material?
    Mr. Leibowitz. Yes. We will be doing another report. We 
have done six in the last 8 years, I believe, and so we will be 
doing another entertainment industry marketing report probably 
sometime toward the end of this year or next year.
    And we do look at targeted marketing. In the context of our 
food marketing to children report, we will be looking at, for 
example, Internet advertising to kids and the propriety of it 
and the types of advertising we are seeing. I think in our last 
report on entertainment industry marketing, we saw that ratings 
were not as well associated with Internet advertising as they 
were with, for example, print advertising.
    Senator Brownback. I think this is a key area for us. You 
have correctly identified that we are all seeing this huge 
onslaught on obesity, particularly in children. We are looking 
at a possibility of a generation that may not live as long as 
their parents did and this would be a first for this country, a 
lot of the problem is just based upon a lack of healthy eating 
habits.
    We are seeing target marketing taking place here, which we 
saw in the entertainment industry. You guys doing that survey 
and putting the information out was something that was very 
helpful to the Congress, and I think it would be very helpful 
to the country to expose the problem of target marketing of 
food to children, if it is what is taking place here. This is 
why it is so hard for mom or dad to go for the Healthy Choice 
when they are taking the kids to the grocery store or to the 
fast food restaurant. And the kids say no, as they pull back 
the other way. We can try to help the parents in that 
situation. I think it would be very beneficial.
    Might I make a suggestion to both of you? I have recently 
met with the head of the National Institute of Mental Health. 
The understanding of how the mind works is getting much better. 
Now, we are a long ways from understanding the most complex 
physical entity in the entire cosmos. It is the human mind. And 
then there is a subset of that, the child's mind, even maybe 
more difficult to understand.
    Mr. Leibowitz. And I have two young children, so I know 
exactly what you are talking about.
    Senator Brownback. And it is not fully developed until--I 
think they are saying now--the age of 23 on average.
    But I found it very interesting what we do know. By meeting 
with them, I might suggest that you bring out some of the 
experts from the National Institute of Mental Health or you 
yourself go there and have them tell you what do we know and 
what do we not know because I think you will find it 
interesting to your own perspective about regulating 
advertising or looking at advertising. To ask the question of 
what is really happenning within this mind, and what do we know 
and what do we not know, what are we unlikely to know. I think 
it would be advantageous.
    One quick final comment. I hope when you do the gasoline 
study, which I think can be very helpful, you will look at 
overall supply and demand situations globally and the effects 
of transportation because in any sort of global commodity 
business is effected by supply and demand. The big differential 
is transportation cost of that commodity. While we may have 
disputes about domestic production of oil, it does have a 
significant impact and a more pronounced impact domestically. 
And I hope you would look into this.
    I do not want anything left off the table on this as we 
look at this very key area and an area of deep concern to us 
and to the country. I think you guys can provide some overall 
data to use in this tough time of increasing energy costs.
    Mr. Kovacic. Senator, your comment about the consultation 
with the authorities at the National Institute of Mental Health 
fits very well into an approach that we have taken to heart on 
consultations with others. Indeed, one line of research that we 
have been spending more time on is the larger question about 
how people absorb information, what do they understand, adults 
and children, from the downpour of information that swamps each 
of us every day. When they see a mandated disclosure, what do 
they take away from it? We had a very good workshop on what is 
called behavioral economics, which really goes to this question 
in many ways, of how people understand images or messages that 
are being brought to them. So that fits very well--your thought 
about how to approach that--with other things we are doing, and 
I will certainly bring that back to my colleagues.
    On the point about energy, I think it is our responsibility 
within the sphere of work we do to be as active and effective 
as we possibly can. And we cannot possibly shed responsibility 
by saying the problem lies elsewhere. In the full scope of 
authority we have, our principal duty is to use that authority 
as effectively as we possibly can.
    I think another part of our responsibility that you have 
touched on--and I think it is really implicit in larger 
discussion we have had--is our obligation to participate in 
larger discussions about what energy policy should be, larger 
discussions about how we live from what we see in our consumer 
protection and competition side, how we consume, how our lives 
are structured in a way that drives demand in certain 
directions, how people can make adjustments from existing 
lifestyles in ways that could affect consumption patterns, and 
indeed, on the supply side, what challenges we face in ensuring 
that there are adequate supplies.
    And I think beyond the narrow niche of competition and 
consumer protection, as important as those are to both of us, 
we would like to be part of that larger discussion about 
looking ahead as a country, what bigger challenges we must face 
in order to resolve these and related problems. We would 
eagerly enjoy being part of that discussion as well.
    Senator Brownback. Thank you, Mr. Chairman.

                         CREDIT CARD PRACTICES

    Senator Durbin. So you identified one of your concerns with 
financial services as subprime lenders and the like. I would 
like to ask you whether you have initiated any kind of 
inquiries or investigation into credit card practices.
    Mr. Leibowitz. Credit card practices are tricky for us 
because they are mostly done through banks, and we do not have 
jurisdiction over banks. It is one of the carve-outs, like 
common carriers and insurers, that we do not have jurisdiction 
over.
    We do have a major investigation going on of a large 
subprime credit card non-bank company, CompuCredit, and I can 
make that public because they have made it public in, I think, 
their Securities and Exchange Commission (SEC) filings. So yes. 
The answer is yes. We are looking at this.
    Senator Durbin. I would think that the credit card aspect 
of this might come up in the identity theft investigations.
    Mr. Leibowitz. Of course, it does.

                             IDENTITY THEFT

    Senator Durbin. And that is your number one complaint. I 
think one out of three consumer complaints relate to identity 
theft.
    Mr. Leibowitz. That is right.
    Senator Durbin. Having been personally victimized a few 
years ago and my wife just recently--thank goodness, it was not 
any great damage to us. Tell me what you are finding. Are there 
things that we should be considering in terms of new 
legislation or new policies that might protect the privacy of 
American consumers?
    Mr. Leibowitz. Well, identity theft is a very major problem 
in America. Roughly 10 million people, according to our 
surveys, are victims of some sort of identity theft every year.
    We are mostly an information clearinghouse on identity 
theft because, after all, a lot of identity theft is criminal. 
But we do a lot of education on this, and we have some identity 
theft brochures, and I believe 3 million people have copies of 
them.
    Do I think that there is a need for more legislation? I 
would like to think about that and get back to you.
    But I certainly think it is an area--and I think our staff 
certainly thinks it is an area--that we need to keep in the 
forefront because it affects so many Americans. And so we spend 
a lot of time on the education side, on the compiling of 
statistics side, and we are going to stay on top of it.
    Mr. Kovacic. I want to underscore Commissioner Leibowitz's 
observation about the importance of your support for our 
efforts to do education. This is an area where we think that 
with greater precaution-taking, many Americans can avoid 
circumstances in which they are going to be vulnerable. We 
should begin the process of education at the earliest possible 
stages of our education system. That is, imagine building into 
grade school education equivalence of the precepts that I think 
many of us--well, of a certain age at least--tended to learn as 
school children. Do not take a ride home with a stranger. If 
someone approaches you that you do not know, you do not follow 
them around. Basic precepts that might be identified for an 
electronic age today. If it is someone you do not know that is 
reaching out to you, far more often than not, nothing good is 
going to come from that. To tell adults about how to be 
discreet in the way in which they disclose information about 
themselves. If you receive a telephone solicitation--we will 
assume it is a legitimate one seemingly--or if you receive 
solicitations over the Internet and you know that you do not 
have a bank account with the State National Bank and they are 
asking you to verify account information, that is certain to be 
a fraud.
    So your continuing support for efforts both for us and for 
related public institutions to carry on that education function 
would be helpful, along with your support for our continuing 
efforts to work more extensively with other public 
institutions.
    As my colleague mentioned, the serious wrongdoers I think 
will only be deterred in this area when we take their freedom 
away. That means prison sentences. That means criminal 
prosecution. And your encouragement and continuing assistance 
in our efforts to prepare matters for prosecution by the 
Department of Justice, by State prosecutors, by Assistant U.S. 
attorneys would be most valuable in this respect.
    Mr. Leibowitz. And I absolutely agree with that.

                            GREEN MARKETING

    Senator Durbin. If I could just have one last question, I 
think there is one area we have not touched on in the consumer 
side, and that is the so-called green marketing that you 
mentioned in your summary.
    The FTC has been working to review environmental marketing 
guidelines, also known as Green Guides. What is the most common 
type of problem that you are finding when it comes to green 
advertising?
    Mr. Leibowitz. Well, what we are beginning to see with the 
proliferation of green advertising--of course, if it is 
accurate, that is very good. It is good for the environment, 
and it is good for consumers to have that option. What we are 
beginning to see--and we started this with a workshop process--
is that some of the advertisements are sometimes exaggerated, 
and if an advertisement is deceptive, then we are going to do 
an investigation and perhaps bring a prosecution. We are just 
starting to look at this issue. We think most of the 
advertisements we are seeing are good and they are well-
intended, but we are going to police this area. That is what we 
are supposed to be doing.
    Mr. Kovacic. If I can mention, Mr. Chairman, our recent 
workshop on packaging and green claims related to packaging I 
think underscored an issue that lies ahead which is in popular 
discourse in advertising you see common use of terms like 
``sustainable,'' ``green,'' ``green-friendly.'' I suppose in 
some way we have a general hunch about what these things mean, 
but there could be a source of confusion for consumers as a 
whole. What is a sustainable product?
    Senator Brownback. Or what does ecoshaped mean? A very 
handsome shape, too.
    Mr. Kovacic. That is right.
    And one of the things we saw in our workshop was--I think 
our workshop will help be a catalyst for further efforts by a 
variety of private and not-for-profit associations to provide 
better definitions for these things, to help establish 
standards and focal points for providing meaningful 
definitions. That, in turn, is going to assist us in framing 
the revision of our guidelines themselves. And as my colleague 
mentioned, we are keenly attuned to instances in which someone 
says, give me $50, I will plant a tree in the rainforest, to 
focus more and more attentively on whether that tree gets 
planted.
    Senator Durbin. Thank you.
    Senator Brownback.
    Senator Brownback. I have no further questions.
    Senator Durbin. Thank you. It has been a great hearing. You 
have a fascinating agency which has received high marks for its 
performance for America's taxpayers and our economy, and you 
should be proud to be part of it. And we are glad to have you 
as part of our appropriation. I thank you for your preparation 
for this hearing and your comments.

                     ADDITIONAL COMMITTEE QUESTIONS

    We may send some written questions your way, and I hope you 
will have a chance to respond to them in a careful and 
expedient way. The hearing record is going to remain open for 
about 1 week until Wednesday, May 21, for other subcommittee 
members if they would care to submit questions as well.
    [The following questions were not asked at the hearing, but 
were submitted to the Commission for response subsequent to the 
hearing:]
            Questions Submitted by Senator Richard J. Durbin
                            merger activity
    Question. During economic downturns like we're experiencing today, 
analysts have reported that merger activity tends to increase.
    Has the FTC observed that trend in the past, and if so, does the 
fiscal year 2009 budget include an increase to accommodate the increase 
in anticipated workload?
    Answer. The FTC's data show that the number of merger filings with 
the FTC and the Department of Justice tends to grow with increased 
merger and acquisition activity during strong economic times. The FTC 
has not observed that merger notifications tend to increase during 
economic downturns. Notwithstanding the current economic downturn, 
however, the FTC budget request for fiscal year 2009 includes an 
increase in resources devoted to reviewing mergers--resources that will 
be used to address the growing complexity of the transactions that the 
agency reviews and the increased need for sophisticated economic 
analysis of those transactions.
                            fraud complaints
    Question. The number of fraud complaints reported to the FTC grew 
by almost 30 percent in 2007.
    What was the cause of the increase, and how will the fiscal year 
2009 request address this problem?
    Answer. This increase is due, in large part, to better data 
collection and specifically due to a substantial increase in complaints 
shared by the Better Business Bureaus (``BBBs''). We received 169,887 
complaints from the BBBs in 2007, compared to 20,265 complaints in 
2006.
    The FTC maintains a broad range of consumer complaint data in 
Consumer Sentinel, which is a secure online database of millions of 
complaints that we make available to more than 1,700 law enforcement 
agencies. Numerous consumers complain directly to the FTC. At the same 
time, for many years, the agency has undertaken significant efforts to 
obtain complaints from other law enforcers combating fraud, such as the 
FBI, U.S. Postal Inspection Service, National Association of Attorneys 
General, and Australian Competition and Consumer Commission, as well as 
non-governmental entities, such as the BBBs. Pooling consumer complaint 
data from multiple sources enhances their utility for law enforcement, 
that is, bringing cases, and related purposes. For this reason, each 
year we strive to encourage new entities to share data with us and to 
increase the amount of data shared by existing contributors.
    During fiscal year 2009, we will continue our efforts to increase 
complaint data sharing from our partners and, through outreach, 
encourage consumers to complain directly to the FTC. Our fiscal year 
2009 budget request provides funds to support these important efforts.
                            subprime lending
    Question. The FTC's fiscal year 2009 budget request includes an 
increase for protecting consumers from unfair and deceptive practices 
in the financial services marketplace.
    What tools does the FTC have to investigate predatory lending 
practices? What specific steps has the FTC taken in the past year?
    Answer. The FTC has effective tools for investigating lending 
practices that might violate any of the laws it enforces, which include 
the Truth in Lending Act (``TILA''),\1\ the Home Ownership and Equity 
Protection Act (``HOEPA''),\2\ and the Equal Credit Opportunity Act.\3\ 
The Commission also enforces Section 5 of the Federal Trade Commission 
Act (``FTC Act''), which more generally prohibits unfair or deceptive 
acts or practices in the marketplace.\4\ The FTC has jurisdiction over 
nonbank financial companies, including nonbank mortgage companies, 
mortgage brokers, and finance companies.
---------------------------------------------------------------------------
    \1\ 15 U.S.C. Sec. Sec. 1601-1666j (requiring disclosures and 
establishing other requirements in connection with consumer credit 
transactions).
    \2\ 15 U.S.C. Sec. 1639 (providing additional protections for 
consumers who enter into certain high-cost refinance mortgage loans). 
HOEPA is a part of TILA.
    \3\ 15 U.S.C. Sec. Sec. 1691-1691f (prohibiting creditor practices 
that discriminate on the basis of race, religion, national origin, sex, 
marital status, age, receipt of public assistance, and the exercise of 
certain legal rights).
    \4\ 15 U.S.C. Sec. 45(a).
---------------------------------------------------------------------------
    The full range of investigative tools available to the Commission 
in its other consumer protection investigations are available in its 
lending investigations. Most significantly, the FTC has the authority 
under Section 20 of the Federal Trade Commission Act to issue civil 
investigative demands to compel the recipient to provide documents, 
testimony, and other information to be used in determining whether the 
law has been violated and whether to commence a law enforcement action.
    The Commission has been very active in investigating mortgage 
lending practices in the past year.\5\ Among other things, in June 
2007, the agency staff conducted a nationwide review of ads, including 
some in Spanish, featuring claims for very low rates or monthly payment 
amounts without adequate disclosure of other important loan terms. The 
FTC staff reviewed the ads to determine whether they may be deceptive 
in violation of Section 5 of the FTC Act or may violate TILA.\6\ The 
Commission staff then commenced investigations of or sent warning 
letters to advertisers whose ads raised concerns. This included warning 
letters that FTC staff sent in September 2007 to more than 200 mortgage 
brokers and lenders, and media outlets that carry their advertisements 
for home mortgages, informing them that their ads may be unlawful. The 
agency staff recently reviewed the current advertising of those who 
received warning letters. We will take law enforcement action where 
appropriate if this review or other monitoring of mortgage advertising 
claims reveals that an advertiser has violated the law.
---------------------------------------------------------------------------
    \5\ The Commission's April 29, 2008 testimony before the 
Subcommittee On Interstate Commerce, Trade, and Tourism of the 
Committee On Commerce, Science, and Transportation, United States 
Senate provides a comprehensive description of the FTC's law 
enforcement, policy, and consumer education work in the subprime 
mortgage market in recent years. The testimony is available at http://
www.ftc.gov/os/testimony/P064814subprimelending.pdf.
    \6\ See Press Release, FTC Warns Mortgage Advertisers and Media 
That Ads May Be Deceptive (Sept. 11, 2007), available at www.ftc.gov/
opa/2007/09/mortsurf.shtm.
---------------------------------------------------------------------------
    In addition, the FTC plays an important role in preventing unlawful 
mortgage discrimination.\7\ At this time, the Commission is conducting 
several non-public investigations of mortgage originators for possible 
violations of fair lending laws.
---------------------------------------------------------------------------
    \7\ The Commission's July 25, 2007 testimony before the 
Subcommittee on Oversight and Investigations of the House Committee on 
Financial Services detailed the Commission's fair lending program. The 
testimony is available at www.ftc.gov/os/testimony/P064806hdma.pdf.
---------------------------------------------------------------------------
    The Commission has also been active in investigating unfair or 
deceptive practices by mortgage servicers. Recently, The Bear Stearns 
Companies, Inc. (``Bear Stearns'') disclosed that FTC staff has 
notified its mortgage servicing subsidiary, EMC Mortgage Corporation 
(``EMC''), that the staff believes EMC and its parent Bear Stearns have 
violated a number of federal consumer protection statutes in connection 
with its servicing activities. Bear Stearns further disclosed that FTC 
staff offered an opportunity to resolve the matter through consent 
negotiations before seeking approval from the Commission to proceed 
with the filing of a complaint. According to the disclosure, EMC 
expects to engage in such discussions with Commission staff.\8\ The FTC 
cannot comment further on this ongoing law enforcement investigation.
---------------------------------------------------------------------------
    \8\ Form 10-K, Bear Stearns Mortgage Funding Trust 2007-AR4 (CIK 
No. 1393708), at Item 1117 of Reg AB, Legal Proceedings (filed Mar. 31, 
2008), available at www.sec.gov/Archives/edgar/data/1393708/
000105640408001164/0001056404-08-001164.txt.
---------------------------------------------------------------------------
    Previously, in 2003, the Commission, along with HUD, announced a 
settlement of allegations that Fairbanks Capital Corp. (now called 
Select Portfolio Servicing, Inc.) failed to post consumers' payments 
upon receipt, charged unauthorized fees, used dishonest or abusive 
tactics to collect debts, and reported to credit bureaus consumer 
payment information that it knew to be inaccurate.\9\ In late 2007, 
based on a compliance review of the company, the Commission negotiated 
modifications to the 2003 consent order. The modified consent order 
provides substantial benefits to consumers beyond those in the original 
order, including additional refunds of fees paid in certain 
circumstances.\10\
---------------------------------------------------------------------------
    \9\ United States v. Fairbanks Capital Corp., No. 03-12219 (D. 
Mass. 2003). The settlement agreement included a $40 million redress 
fund for consumers as well as strong injunctive provisions and specific 
safeguards to prevent the company from foreclosing on consumers without 
cause.
    \10\ United States v. Fairbanks Capital Corp., No. 03-12219 (D. 
Mass. Sept. 4, 2007) (Modified Stipulated Final Judgment and Order).
---------------------------------------------------------------------------
    The Commission continues to investigate mortgage servicing 
practices for compliance with the law.
    In an effort to enhance interagency coordination, the FTC, the 
Federal Reserve Board (``FRB''), the Office of Thrift Supervision, and 
two associations of state regulators have combined forces to undertake 
an innovative law enforcement project. The agencies are jointly 
conducting consumer protection compliance reviews and investigations of 
certain nonbank subsidiaries of bank holding companies with significant 
subprime mortgage operations.\11\
---------------------------------------------------------------------------
    \11\ See Press Release, FTC, Federal and State Agencies Announce 
Pilot Project to Improve Supervision of Subprime Mortgage Lenders (July 
17, 2007), available at www.ftc.gov/opa/2007/07/subprime.shtm.
---------------------------------------------------------------------------
    Finally, the Commission works to protect consumers of subprime 
unsecured loans. In June 2008, for example, the Commission filed a 
lawsuit charging subprime credit card company CompuCredit Corporation 
(``CompuCredit'') and its affiliate with deception in marketing credit 
cards.\12\
---------------------------------------------------------------------------
    \12\ FTC v. CompuCredit Corp., No. 1:08cv1976-BBM-RGV (N.D. Ga. 
2008). The FTC's complaint alleges, among other things, that 
CompuCredit marketed to consumers with subprime credit ratings a Visa 
credit card purportedly providing $300 in credit, using solicitations 
that touted in bold headlines that certain up-front fees that did not 
apply. Rather than provide consumers with $300 of available credit, 
CompuCredit allegedly immediately charged consumers as much as $185 in 
fees that it did not disclose adequately in light of the 
representations made. These fees left consumers with as little as $115 
in available credit. The FTC alleges that CompuCredit deceived 
consumers in violation of Section 5 of the FTC Act by misrepresenting 
the amount of credit available.
    With respect to another Visa credit card CompuCredit offered, the 
FTC alleges CompuCredit marketed to consumers with slightly higher 
credit scores its Visa credit card purporting to offer ``up to $3,250'' 
in available credit and touted that the card could be used for any 
purpose. The FTC alleges, however, that CompuCredit misrepresented the 
amount of available credit because it withheld 50 percent of that 
credit for 90 days. CompuCredit allegedly also failed to disclose, or 
failed to disclose adequately, that for the first 90 days, the company 
would monitor consumers' purchases, and might reduce their credit limit 
based on an undisclosed ``behavioral'' scoring model. The Commission 
alleges that CompuCredit's misrepresentation as to the amount of 
available credit and its failure to disclose adequately that the types 
of purchases consumers made could reduce their credit limit were 
deceptive acts and practices in violation of Section 5 of the FTC Act. 
The FTC's litigation with CompuCredit is ongoing.
---------------------------------------------------------------------------
    Question. Are there steps that the FTC would have liked to have 
taken that it could not because of limits or restrictions in the FTC's 
authorities?
    Answer. The Commission generally believes that the scope of its 
legal authority has not prevented the agency from taking steps to 
address the acts and practices of those within its jurisdiction related 
to subprime mortgage lending, although the Commission currently lacks 
authority to seek civil penalties for HOEPA violations. The FTC, 
however, notes that the FRB recently finalized rules under HOEPA and 
TILA that will prohibit specific mortgage lending and related practices 
the FRB determined were unfair and deceptive under the HOEPA.\13\ Both 
the federal banking agencies and the FTC can enforce the new rules as 
to the entities they regulate. We note, though, that the federal 
banking agencies have the authority to obtain civil penalties against 
entities they regulate who violate the new rules, while the FTC does 
not.\14\ Enacting legislation allowing the FTC to obtain civil 
penalties against entities within the FTC's jurisdiction who violate 
the new rules would allow the FTC to enforce the rules more effectively 
and better protect consumers in the subprime mortgage market, and it 
would level the playing field such that all entities subject to HOEPA 
could be subject to civil penalties. We particularly appreciate the 
inclusion of provisions in the Committee's fiscal year 2009 
appropriations bill that would authorize the FTC to obtain civil 
penalties for violations of rules under HOEPA.
---------------------------------------------------------------------------
    \13\ The rules add four protections for a newly defined category of 
``higher-priced'' mortgage loans: (1) they prohibit a lender from 
making a loan without regard to borrowers' ability to repay the loan; 
(2) they require creditors to verify the income and assets they rely 
upon to determine repayment ability; (3) they restrict prepayment 
penalties; and (4) they require creditors to establish tax and 
insurance escrow accounts for all first-lien mortgage loans. The rules 
also prohibit creditors and mortgage brokers from coercing a real 
estate appraiser to misstate a home's value. And the rules prohibit 
mortgage servicers from engaging in certain practices, such as 
pyramiding late fees. The rules also impose specific advertising 
standards, banning seven deceptive or misleading advertising practices, 
including representing that a rate or payment is ``fixed'' when it can 
change.
    \14\ Under the Federal Deposit Insurance Act, 12 U.S.C. Section 
1818(i)(2), federal banking agencies can obtain civil penalties from 
the entities they regulate who violate the laws they enforce, including 
TILA and its implementing regulations. The FTC has no comparable 
authority to obtain civil penalties from the nonbank entities it 
regulates for violations of TILA and its implementing regulations.
---------------------------------------------------------------------------
    Question. FTC testimony states that the agency has sent warning 
letters to 200 mortgage lenders about misleading mortgage 
advertisements--for example, promoting low ``teaser rates'' without 
explanation of long-term rates. Are these warning letters a strong 
enough punishment? Why hasn't the FTC taken enforcement action against 
these lenders?
    Answer. As explained above, the FTC is following up on these 
warning letters with law enforcement, where appropriate. Currently, the 
Commission is investigating a number of mortgage originators for 
potential deceptive advertising.
    Question. To what extent is the FTC coordinating with other 
agencies (such as the FBI, the SEC, and HUD) in pursuing predatory 
lending?
    Answer. The Commission coordinates regularly on financial practices 
matters with federal banking agencies, the Department of Justice, and 
HUD. For more than a decade, the FTC has been a member of the 
Interagency Task Force on Fair Lending, a joint undertaking with DOJ, 
HUD, and the federal banking regulatory agencies. Task Force members 
meet often to share information on lending discrimination, predatory 
lending enforcement, and policy issues. The Commission also has had 
several conversations with SEC representatives about the subprime 
mortgage market, although our law enforcement activities focus on 
different practices in the mortgage industry.
    Further, FTC staff are coordinating with other governmental 
entities to combat foreclosure rescue fraud. Commission staff are 
participating in task forces concerning foreclosure rescue fraud in 
seven geographic areas. Task force members in each local area share 
information about trends in consumer complaints and work to identify 
solutions. For example, the FTC's Southeast Regional Office is working 
with a state attorney general's office to identify, investigate, and 
prosecute cases. These efforts include close coordination on cases 
under investigation. In some cases, the two agencies have divided 
responsibility for law enforcement actions; in other cases, the two 
agencies are working cooperatively on particular targets. The FTC's 
East Central Regional Office is partnering with a local task force to 
implement various consumer education and outreach strategies to help 
consumers. The Southern California Foreclosure Fraud Task Force, in 
which the FTC's Western Region participates, has facilitated the 
coordination of prosecutions by civil and criminal authorities at 
various levels.
                           u.s. safe web act
    Question. The U.S. SAFE WEB Act, enacted in December 2006, expanded 
the FTC's authorities to coordinate with foreign law enforcement 
against spam and other unfair and deceptive practices involving foreign 
commerce. The FTC's fiscal year 2009 budget request includes additional 
funding for staff to pursue foreign-located fraud.
    How many FTE are currently dedicated to implementing the U.S. SAFE 
WEB Act, and how would additional staff enhance that effort?
    Answer. Because the statute provides a wide range of authorities to 
the agency, a number of staff members in a number of offices throughout 
the agency are involved in implementing it. FTC's Office of 
International Affairs (``OIA''), which helped develop the Act and works 
to advance international enforcement cooperation, leads the 
implementation, including chairing an agency-wide steering group of 9 
people and several additional ad hoc members for particular issues. At 
least six attorneys in OIA devote substantial time to implementing the 
Act, including the Act's provisions on information sharing, 
investigative assistance, international agreements, cooperation on 
foreign judgment enforcement and asset recovery, enforcement networks 
and projects, and foreign staff exchange programs (i.e., the FTC's new 
``International Fellows'' program). In addition, a number of other 
staff members within OIA as well as in the Bureau of Consumer 
Protection, the Office of the General Counsel, the Executive Director's 
Office, and others are involved in implementing and making use of the 
SAFE WEB authority.
    We would use additional staff to enhance our efforts on foreign 
judgment enforcement and asset recovery for American consumers, 
information sharing and investigative assistance, and our International 
Fellows program. We are addressing increasing numbers of requests for 
information sharing and investigative assistance regarding cross-border 
matters that may aid FTC enforcement actions or may halt frauds 
targeting U.S. consumers among others. In addition, we are expanding 
our International Fellows program to provide opportunities for foreign 
officials to learn first-hand how the FTC operates and for FTC staff 
similarly to learn about agencies abroad, thereby improving the ability 
of the agencies to coordinate and cooperate on law enforcement matters. 
We are also working to take advantage of our enhanced ability through 
SAFE WEB to enforce judgments against foreign defendants. With more 
staff, we can manage additional use of these and other SAFE WEB tools 
to protect American consumers from cross-border fraud.
    Question. What are the biggest obstacles to enforce against foreign 
fraud? How is the FTC addressing these obstacles?
    Answer. The biggest obstacle to enforcing against foreign fraud is 
the ability of unscrupulous businesses operating in one jurisdiction to 
evade enforcement by using the Internet and long distance telephone 
technology to victimize consumers globally and hide behind national 
borders and laws. In particular, these actors often exploit the 
inability of many foreign law enforcement agencies to identify schemes 
and targets and share information about them in a timely and effective 
manner because of antiquated laws and regulations.
    As described above, the FTC is using the tools of the SAFE WEB Act 
to address these obstacles. The key to combating cross-border fraud is 
developing better and quicker enforcement cooperation with foreign law 
enforcement agencies, including information sharing and investigative 
cooperation. While the FTC has always acted aggressively to combat 
cross-border fraud, since the Act went into effect at the end of 2006 
and implementing regulations in the spring of 2007 the FTC has been 
able to obtain heightened success by using the tools of the SAFE WEB 
Act. For example, the FTC's enforcement action against Spear Systems, 
Inc., alleging international illegal spamming, was significantly 
enhanced by the agency's use of its information sharing powers under 
SAFE WEB. Information sharing authorized under SAFE WEB assisted 
Canadian law enforcement agencies with regard to several cases 
targeting telemarketing schemes that allegedly defrauded U.S. 
consumers, as part of the FTC's 2008 Telemarketing Sweep--``Operation 
Tele-PHONEY.'' The U.S. SAFE WEB Act has been pivotal in allowing the 
FTC to take the lead globally in combating cross-border fraud and in 
encouraging our foreign law enforcement partners to revise their laws 
in light of the global nature of mass-marketing fraud.
                               gas prices
    Question. The FTC's 2006 study on nationwide gas prices \15\ 
concluded that rising prices could be explained entirely by market 
forces, not illegal anticompetitive behavior or other activity designed 
to increase prices relative to costs or to reduce output.
---------------------------------------------------------------------------
    \15\ Federal Trade Commission Report On Spring/Summer 2006 
Nationwide Gasoline Price Increases (August 2007) (available at http://
www.ftc.gov/reports/gasprices06/P040101Gas06increase.pdf); Dissenting 
Statement of Commissioner Jon Leibowitz Regarding the Federal Trade 
Commission and Department of Justice Antitrust Division Report on 
Spring/Summer 2006 Nationwide Gasoline Price Increases (available at 
http://www.ftc.gov/reports/gasprices06/P010401Gas06dissent.pdf).
---------------------------------------------------------------------------
    Commissioner Leibowitz filed a dissent to the 2006 report, writing: 
``. . . the question you ask determines the answer you get: whatever 
theoretical justifications exist don't exclude the real world threat 
that there was profiteering at the expense of consumers.''
    Is the FTC asking the wrong questions when it comes to 
investigating these high gas prices? And if so, what is the right 
question to ask so that we can get to the heart of what Commissioner 
Leibowitz calls ``profiteering at the expense of consumers?''
    Answer. For the most part the Agency is asking the right questions, 
especially today. But I was hoping that the 2006 gas price 
investigation and the resulting report would cover potential misconduct 
by oil companies. Instead, staff constructed a theoretical model of 
legitimate behavior and attempted to determine whether that model could 
explain gas prices (we could not have uncovered anticompetitive conduct 
by oil companies because we were not looking for it). To be fair, and 
as I noted in my 2007 statement, when we began the investigation for 
the 2006 Report, staff had just finished a major report relating the 
gas price run-up in the wake of hurricanes Katrina and Rita.\16\ In 
that investigation, staff found no antitrust violations but did find 
what in my view was inappropriate profit-taking by the oil companies in 
the wake of a disaster, including price-gouging as that term was 
defined by Congress.
---------------------------------------------------------------------------
    \16\ See Dissenting Statement at 1; see also Federal Trade 
Commission Report on the FTC's Investigation of Gasoline Price 
Manipulation and Post-Katrina Price Increases (May 2006) (available at 
http://www.ftc.gov/reports/
060518PublicGasolinePricesInvestigationReportFinal.pdf).
---------------------------------------------------------------------------
    Going forward, the Commission, in its ongoing rulemaking 
proceeding, is considering assessing conduct under a standard set out 
in the Energy Independence Security Act of 2007. To the extent that the 
profiteering was a result of manipulation of gas prices by individual 
oil companies, it is possible that a result of the rulemaking 
proceeding may make it easier to prevent that in the future.\17\
---------------------------------------------------------------------------
    \17\ Information on the Commission's rulemaking proceeding is 
available at http://www.ftc.gov/ftc/oilgas/index.html.
---------------------------------------------------------------------------
    The report on the 2006 nationwide price increases was not based on 
theoretical justifications. Rather it was an analysis and description 
of the factual evidence of the economic developments actually 
experienced that could account for the price spikes: facts concerning 
upward price pressure stemming from seasonal effects on both the demand 
for and the supply of gasoline, increases in prices for crude oil and 
ethanol, reductions in refining capacity due to the transition to 
ethanol, and other identified market factors. This fact-based analysis 
led to the conclusion that such developments adequately explained the 
2006 price increases and that the price phenomena did not indicate 
anticompetitive conduct.
    With respect to the right question to address ``profiteering at the 
expense of consumers,'' this has to depend on what is meant by 
``profiteering.'' To the extent it is intended to refer to the sheer 
size of profits, decisions on how to address this, such as through 
fiscal policy or price controls, are very fundamental policy 
determinations that are properly reserved for Congress. The Commission, 
however, must--and does--continue zealously to seek out and prevent any 
violations of the antitrust laws, including those that illegally raise 
prices and profits. Furthermore, Congress has given the Commission 
authority with respect to manipulative or deceptive devices or 
contrivances regarding this industry, and, as Commissioner Leibowitz 
notes above, the Commission is currently engaged in a rulemaking 
proceeding under this authority.
    Question. Commissioner Leibowitz cited that among other things, the 
investigation found ``disturbing conduct by . . . petroleum 
companies.''
    What disturbing conduct did the FTC observe? What action did the 
FTC take, and does the agency continue to see this kind of behavior?
    Answer. As described above, the Katrina Report found that there was 
price gouging (under the Congressional definition) by some oil 
companies in the wake of the disaster. And it is disturbing that oil 
companies made record profits even as many consumers suffered from high 
energy prices in the affected area. The conduct found was not a 
violation of the antitrust laws however. Going forward, the Commission, 
in its ongoing rulemaking proceeding is considering assessing conduct 
under a standard set out in the Energy Independence Security Act of 
2007 and it may ultimately be that we look at certain oil company 
behavior using a broader definition of misconduct.
    Neither the major investigation reported in the Katrina report nor 
the careful analysis the following year of the 2006 price spikes showed 
evidence of behavior inconsistent with competitive responses to market 
conditions. In particular, with respect to the Katrina aftermath, the 
agency's extensive investigation found that the market, including price 
increases for a period of time, functioned appropriately to enable 
increased supply to flow into the affected areas and to reduce prices 
to consumers swiftly. With respect to the ``price gouging'' identified 
in the Commission's post-Katrina report, in fifteen instances prices 
met the statutory definition of ``price gouging'' laid down for the 
study, but all except one were explainable by identifiable market 
factors other than those incorporated into that definition. As noted, 
the agency continues to scrutinize the industry carefully to identify 
possible anticompetitive activity, and to investigate and take 
enforcement action whenever warranted. In addition, as noted, the 
agency is conducting a rulemaking proceeding under its new authority to 
prohibit manipulative or deceptive devices or contrivances and our 
expectation is that this proceeding will be completed this year.
                     resources for price monitoring
    Question. The President ordered the 2006 study of nationwide gas 
prices in April of 2006, yet the FTC report was published in August 
2007--a full 16 months later.
    If the FTC is conducting real-time monitoring of gas prices for 
anticompetitive behavior, why did it take 16 months to come to a 
conclusion on this study? How can the FTC stop oil companies in their 
tracks if investigations take this long?
    Answer. The inquiry into the 2006 price increases--conducted 
jointly with the Department of Justice and with assistance from the 
Department of Energy's Energy Information Administration--focused on 
the gasoline price increases experienced nationwide in the spring and 
summer of that year. The inquiry identified six broad market factors 
that appeared to contribute to the national average price increases 
during the spring and summer of 2006: seasonal effects, increases in 
crude oil prices, increases in ethanol prices, capacity reductions due 
to the transition to ethanol, reductions in refiners' ability to 
produce gasoline, and increases in demand. It required careful 
financial and economic analysis of price and cost data spanning an 
extended period of time, supplemented by interviews with refiner 
personnel and a review of key company documents, to identify the 
relative contribution of each factor to the price increases and 
conclude that those market factors provided an adequate explanation for 
the price increases without giving rise to an inference of 
anticompetitive behavior.
    In this instance, the FTC Gasoline and Diesel Price Monitoring 
Project was of limited value in explaining the nationwide, average 
increases, because the project's model is designed to focus on a 
different phenomenon--i.e., whether an observed difference between two 
retail or wholesale areas' local gasoline or diesel prices departs from 
the difference that one would expect based on historical statistical 
relationships.
    As you know, the FTC is primarily a law enforcement agency rather 
than a supervisory or regulatory agency. As a law enforcement agency, 
the FTC is empowered to take legal action to challenge suspect behavior 
under the federal laws it enforces. In such proceedings, the FTC must 
meet burdens of proof as determined by the relevant statutes and as 
interpreted by the federal courts. For practices that do violate a 
federal law, the FTC has available a wide variety of remedies to halt 
the practices and reverse their harmful results. I also note that the 
task involved in this investigation is not necessarily the same as that 
of a law enforcement investigation, which may stem, for example, from a 
merger filing, information on specific company acts, or a more 
localized or straightforward pricing anomaly rather than a nationwide 
price movement.
    Question. Does the FTC have sufficient resources to analyze the oil 
and gas markets quickly enough to promptly act and stop anticompetitive 
behavior?
    Answer. The FTC believes that its fiscal year 2009 funding request 
would provide sufficient resources to meet the agency's Consumer 
Protection and Maintaining Competition goals, including those involving 
oil and gas markets. I note, however, that the budgets that serve as 
the basis of the appropriations requests are prepared many months 
before requests are submitted to Congress, and they cannot always 
predict changes to the agency's work that are dictated by emerging 
events or Congressional directives or requests. A recent example of 
this is the new statutory authority Congress gave the FTC to prescribe 
anti-manipulation rules in the energy sector. The Commission will 
continue, as it has in the past, to redistribute existing resources to 
meet these new demands, while assessing the need for additional 
resources.
                             price gouging
    Question. What is the FTC's opinion on federal anti-price gouging 
legislation? On the state level, has the agency observed a deterrent 
effect? Would federal price gouging laws enhance state laws?
    Answer. The Commission has testified on several occasions that 
federal price gouging legislation likely would harm consumers by 
reducing the incentives and increasing the risks for refiners to move 
additional supply into affected areas and take other steps to respond 
to market forces after natural disasters.\18\ After Hurricanes Katrina 
and Rita in 2005, gasoline prices briefly spiked higher in many parts 
of the country. Consumers understandably are upset when they face 
dramatic price increases within very short periods of time, especially 
during a disaster. But price gouging laws--particularly inasmuch as 
they could well deter firms from taking beneficial steps to respond to 
post-disaster shortages--likely will do consumers more harm than good. 
Law enforcement actions premised on a notion of restricting price 
increases essentially are a form of price control, which could produce 
longer lines at the pump and prolong the gasoline crisis. Although no 
consumer likes price increases, such an increase in fact can help to 
make the gasoline shortage less intense and shorter-lived than it 
otherwise would have been.
---------------------------------------------------------------------------
    \18\ Commissioner Leibowitz notes that, as he has stated in his 
concurrence to the Commission's report ``Investigation of Gasoline 
Price Manipulation and Post-Katrina Gasoline Price Increases,'' twenty-
nine states and the District of Columbia have price gouging laws that 
provide for either civil or criminal penalties and, in some situations, 
both. Six of these states and the District of Columbia expressly are 
permitted by their statutes to cap price increases during an emergency. 
Most of these price gouging statutes require an emergency declaration 
and, to the Commissioner's mind, seem entirely unthreatening to the 
operation of the free market--and, indeed they may serve a salutary 
purpose of discouraging outliers from profiteering in the aftermath of 
a disaster.
---------------------------------------------------------------------------
    Prices play a critical role in our economy: they signal producers 
to increase or decrease supply, and they also signal consumers to 
increase or decrease demand. In a period of shortage--particularly with 
a product, like gasoline, that can be sold in many markets around the 
world--higher prices create incentives for suppliers to send more 
product into the market, while also creating incentives for consumers 
to use less of the product. For instance, sharp increases in the price 
of gasoline can help curtail the panic buying and ``topping off'' 
practices that cause retailers to run out of gasoline. In addition, 
higher gasoline prices in the United States in the wake of the 2005 
hurricanes resulted in the shipment of substantial additional supplies 
of foreign gasoline to the United States.\19\ If price gouging laws 
distort these natural market signals, markets may not function well and 
consumers would be worse off.
---------------------------------------------------------------------------
    \19\ Total gasoline imports into the United States for September 
and the first three weeks of October 2005 (after the August hurricanes) 
were approximately 34 percent higher than imports over the same seven-
week period in 2004. See U.S. Dep't of Energy, Energy Information 
Admin., U.S. Weekly Gasoline Imports (Oct. 26, 2005), available at 
http://www.eia.doe.gov/oil_gas/petroleum/info_glance/gasoline.html.
---------------------------------------------------------------------------
    To be sure, there may be situations in which sellers go beyond the 
necessary market-induced price increase. A seller might misjudge the 
market and attempt to charge prices substantially higher than 
conditions warrant or than its competitors are charging. News stories 
of gasoline retailers panicking and setting prices of $6.00 per gallon 
after Katrina are evidence of such misjudgments. But the market--not 
price gouging laws--is the most effective cure for these. Temporary 
prices that are wildly out of line with competitors' prices do not last 
when consumers quickly discover that other stations are charging lower 
prices. A single seller in a market structured like gasoline retailing 
cannot unilaterally raise prices for long above the level justified by 
supply and demand factors. The few retailers who raised prices to the 
$6.00 level reduced them just as quickly when it became apparent that 
they had misjudged the market.
    A price gouging law likely would be difficult to enforce fairly. 
The difficulty for gas station managers, as well as for enforcers, 
often is knowing when the managers have raised prices ``too much,'' as 
opposed to responding to reduced supply conditions. It can be very 
difficult to determine the extent to which any more moderate price 
increases are necessary. Examination of extant state price gouging laws 
and of the federal gasoline price gouging legislation that has been 
introduced indicates that the offense of ``price gouging'' is difficult 
to define. For example, some bills define ``gouging'' as consisting of 
a 10 or 15 percent increase in average prices, while most leave the 
decision to the courts by defining gouging in nebulous terms such as 
``gross disparity'' or ``unconscionably excessive.'' Some, but not all, 
make allowances for the extra costs that may be involved in providing 
product in a disaster area. Few, if any, proposed federal bills or 
state laws take account of market incentives for sellers to divert 
supply from their usual customers in order to supply the disaster area, 
or incentives for consumers to reduce their purchases as much as 
possible, minimizing the shortage. Ultimately, the inability to agree 
on what should be prohibited indicates the risks in developing and 
enforcing a federal statute that could be counterproductive to 
consumers' best interest. Moreover, much legislation provides 
substantial criminal penalties for those found guilty of ``price 
gouging''--a feature of the legislation that is likely to persuade 
significant numbers of merchants to close down operations rather than 
run the risk of going to prison for raising prices enough to cover 
ongoing costs and maintain adequate supplies.
    For all of these reasons, a majority of the Commission has 
concluded that federal price gouging legislation would harm consumers 
overall.
    The Commission has not studied state price gouging laws in depth to 
determine if they actually have any deterrent effect.\20\ Because of 
the potential overall harm to consumers of price gouging laws, I cannot 
say that a federal law would be likely to enhance the states' ability 
to protect consumers.
---------------------------------------------------------------------------
    \20\ The Commission's report following Hurricanes Katrina and Rita 
noted that the prices of nearly all the retailers subjected to state 
enforcement actions were consistent with market trends or other market-
based factors.
---------------------------------------------------------------------------
                      strategic petroleum reserve
    Question. A provision suspending the acquisition of petroleum for 
the Strategic Petroleum Reserve passed the Senate recently. Based on 
the FTC's historical models, would the suspension have significant 
effect on prices a the pump?
    Answer. As noted above, the FTC's Gasoline and Diesel Price 
Monitoring Project--with its focus on historical differences in local 
gasoline or diesel prices in retail or wholesale areas--is not designed 
to predict how changes in crude oil availability might affect crude oil 
prices or gasoline or diesel prices. Accordingly, the Monitoring 
Project model cannot provide any insight into the possible effects on 
prices at the pump of a suspension of additions to the Strategic 
Petroleum Reserve.
                                 ______
                                 
              Questions Submitted by Senator Sam Brownback
                            gasoline prices
    Question. On May 23, 2007, the FTC testified before the Joint 
Economic Committee that ``mergers of private oil companies have not 
significantly affected worldwide concentration in crude oil. This fact 
is important, because crude oil prices historically have been the chief 
determinant of gasoline prices.'' Given the fact that the share of 
gasoline prices attributable to crude oil costs haves risen to 71.8 
percent from around 50 percent a year ago, would you say that crude oil 
costs are likely an even stronger determinant today?
    Answer. The average spot price of crude oil, as reported by the 
Energy Information Administration, nearly doubled between May 2007 and 
May 2008, from a monthly average of $67 per barrel to approximately 
$125 per barrel. Crude oil prices rose even more after May 2008, 
varying daily between about $130 and $145 per barrel during June and 
the first three weeks of July. This increase in crude oil prices has by 
far outstripped changes in any other element relevant to the production 
of gasoline. Crude oil prices are a stronger determinant of gasoline 
prices today because any given percentage change in crude oil prices 
from current levels will have a greater impact on pump prices than in 
previous years, when crude oil prices were dramatically lower.
                                ethanol
    Question. Has the FTC looked at concentration in the ethanol 
market? Is concentration increasing or decreasing?
    Answer. The FTC has closely scrutinized and reported on production 
and concentration in the United States ethanol market since late 2005. 
In November 2007, the Commission issued its third annual report on the 
U.S. industry. The series of FTC reports shows that concentration in 
the industry has been decreasing. The 2007 report noted that, as of 
September 2007, 13 firms had entered into the production of ethanol 
during the preceding year, bringing the total number of U.S. producers 
to 103.\21\ As new firms have entered, the market, which is 
unconcentrated by any measure of capacity or production, has become 
even more unconcentrated.
---------------------------------------------------------------------------
    \21\ Federal Trade Commission, 2007 Report on Ethanol Market 
Concentration (Nov. 2007), available at http://www.ftc.gov/reports/
ethanol/2007ethanol.pdf.
---------------------------------------------------------------------------
                           telecommunications
    Question. The proposed Reauthorization bill S. 2831, which is 
currently before the Senate Commerce Committee, proposes a waiver of 
the telecommunications common carrier exemption. This exemption bars 
the agency from reaching certain conduct of telecommunications 
companies. The Commission has testified in favor of the repeal of the 
exemption. However in seeking this new authority, the FTC has never 
cited an instance where the FCC failed to fulfill its responsibilities. 
The Telecommunications Consumers Division within the FCC's Enforcement 
Bureau investigates the practices of companies engaged in various 
telecommunications-related activities. So, the FCC already is 
exercising its statutory authority in the precise areas in which the 
FTC seeks jurisdiction. If this exemption were to be lifted what would 
be the benefit? What could the FTC accomplish or reach that is not 
currently dealt with? Because, to permit two different agencies to 
impose regulations covering the same type of conduct could very easily 
become unduly burdensome on companies, while not providing a 
corresponding benefit to or protection for consumers.
    Answer. The FTC's request that Congress repeal the FTC Act 
exemption for common carriers as applied to providing telecommunication 
services is not a commentary on or reflection of concern about the work 
done by the FTC's sister agency, the Federal Communications Commission. 
Indeed, over the years, the FTC has worked closely with the FCC on 
numerous issues of joint interest. Currently, the two agencies 
coordinate enforcement of their overlapping Do Not Call rules, and the 
FCC is a member of the federal-state law enforcement task force on 
prepaid calling cards that the FTC established last year.
    The two agencies, however, have very different missions and law 
enforcement tools. The FTC is the nation's consumer protection 
authority and, as such, has extensive experience investigating and 
bringing federal court and administrative actions against companies 
engaged in deceptive and unfair practices. As a result, the FTC has 
substantial litigation experience and a robust body of case law to rely 
on in seeking to stop deceptive or unfair acts and practices that harm 
consumers, and to get money back for injured consumers.
    The common carrier exemption dates from a period when 
telecommunications were provided by highly-regulated monopolies. The 
exemption as applied to telecommunications services is now outdated, 
and the FTC has repeatedly found its consumer protection work impeded 
by the exemption in ways that are detrimental to consumers. Most 
recently, the common carrier exemption has been an issue in two FTC 
cases against the distributors of prepaid calling cards. In those 
cases, the FTC has alleged that the distributors engaged in deceptive 
marketing practices by misrepresenting the number of calling minutes 
provided by their cards and failing to disclose or to adequately 
disclose fees and charges associated with their cards. FTC v. Clifton 
Telecard Alliance One LLC, No. 2:08-cv-01480-PGS-ES (D.N.J.) (filed 
March 25, 2008); and FTC v. Alternatel, Inc., No. 08-21433-CIV-Jordan/
McAliley (S.D. Fla.) (filed May 19, 2008).\22\ In both cases, the FTC 
sought and received temporary restraining orders prohibiting defendants 
from, inter alia, misrepresenting the number of calling minutes 
provided by the cards they distribute, and failing to disclose fees and 
charges that reduce the value of their calling cards. Because of the 
common carrier exemption, the FTC has not pursued the carriers that 
provide the telecommunications services for the cards at issue. As a 
result, in both cases the defendants have moved to dismiss the FTC's 
case on the grounds that the underlying telecommunications carriers are 
necessary parties that cannot be joined by the FTC, because of the 
common carrier exemption. Although the FTC has opposed defendants' 
motions, and is confident that it will win on the merits, the exemption 
has created a litigation issue for the FTC. More fundamentally, the 
exemption directly impedes the FTC's ability to hold carriers 
accountable for their role in allegedly deceptive and unfair practices 
in the calling card industry.
---------------------------------------------------------------------------
    \22\ In the Clifton case the Commission has also alleged that 
defendants failed to disclose or to adequately disclose that the value 
of their cards may be reduced even when a call does not connect.
---------------------------------------------------------------------------
    The prepaid calling card industry is not an isolated example of an 
area in which the common carrier exemption hampers the FTC's ability to 
protect consumers from deceptive and unfair acts or practices. As 
information, entertainment, and payment systems converge, common 
carriers are providing an increasing number of new services. Now, 
consumers can purchase their voice services bundled with Internet 
access services and video services. Moreover, landline and cellular 
carriers bill consumers for unlimited numbers of services provided by 
third parties. The FTC has brought dozens of cases against companies 
that the FTC alleges have crammed unauthorized charges onto consumers' 
phone bills.\23\ The common carrier exemption, however, has given rise 
to issues that complicate litigation in some of these cases,\24\ and 
has impeded the Commission's ability to consider whether and to what 
extent phone companies should be held responsible for placing those 
charges on their customers' phone bills.
---------------------------------------------------------------------------
    \23\ See, e.g., FTC v. Verity International Ltd., 335 F. Supp. 2d 
479 (S.D.N.Y. 2004), aff'd in part, rev'd in part, 443 F.3d 48 (2d Cir. 
2006), cert. denied, 127 S. Ct. 1868 (2007); FTC v. Nationwide 
Connections, Inc., No. 06-80180-CIV-Ryskamp/Vitunack (S.D. Fla. 2006); 
FTC v. Websource Media, LLC., No. H-06-1980 (S.D. Tex. 2006); FTC v. 
Epixtar Corp., No. 03-CV-8511 (DAB) (S.D.N.Y. 2003); FTC v. Sheinkin, 
No. 2-00-363618 (D.S.C., 2000); FTC v. Mercury Marketing of Delaware, 
Inc., No. 00-CV-3281 (E.D. Pa. 2000); FTC v. Int'l Telemedia Assocs., 
Inc., No. 1-98-CV-1925 (N.D. Ga. 1998); FTC v. Audiotex Connection, 
Inc., No. C-97 0726 (DRH) (E.D.N.Y. 1997).
    \24\ For example, in FTC v. Verity International Ltd., the 
Commission alleged that the defendants orchestrated a scheme whereby 
consumers seeking online entertainment were disconnected from their 
regular ISPs and reconnected to a Madagascar phone number. The 
consumers were then charged between $3.99 and $7.78 per minute for the 
duration of each connection. AT&T and Sprint--which were not parties to 
the FTC enforcement action--had carried the calls connecting the 
consumers' computers to the defendants' servers. The defendants 
therefore argued that the entertainment service in question was 
provided on a common carrier basis and thus outside the FTC's 
jurisdiction. One defendant also claimed to be a common carrier itself 
and hence beyond FTC jurisdiction. Although both the District Court and 
the Court of Appeals rejected those arguments, the FTC had to expend 
substantial time and resources litigating the question of jurisdiction.
---------------------------------------------------------------------------
                           mortgage marketing
    Question. Could you elaborate for the record on some of the most 
egregious examples of unfair and deceptive advertising that the FTC has 
reviewed in connection with mortgage brokerage activities? What are the 
underlying themes--is it rates that adjust after a month, unclear 
disclosures of what the terms are, failure to disclose that the quoted 
terms didn't include escrow information clearly, or represented a type 
of bait and switch approach? Just give us a flavor of some of the most 
significant aspects of this type of marketing.
    Answer. The Commission has been actively investigating mortgage 
lending practices for many years.\25\ In June 2007, the agency staff 
conducted a nationwide review of mortgage ads, including some in 
Spanish, featuring claims for very low rates or monthly payment amounts 
without adequate disclosure of other important loan terms. The FTC 
staff reviewed the ads to determine whether they may be deceptive in 
violation of Section 5 of the FTC Act or may violate the Truth in 
Lending Act (``TILA'').\26\ The Commission staff then commenced 
investigations of or sent warning letters to advertisers whose ads 
raised concerns. This included warning letters that FTC staff sent to 
more than 200 mortgage brokers and lenders, and media outlets that 
carry their advertisements for home mortgages, informing them that 
their ads may be unlawful. The agency staff recently reviewed the 
current advertising of those who received warning letters. We will take 
law enforcement action where appropriate if this review or other 
monitoring of mortgage advertising claims reveals that an advertiser 
has violated the law.
---------------------------------------------------------------------------
    \25\ The Commission's April 29, 2008 testimony before the 
Subcommittee On Interstate Commerce, Trade, and Tourism of the 
Committee On Commerce, Science, and Transportation, United States 
Senate provides a comprehensive description of the FTC's law 
enforcement, policy, and consumer education work in the subprime 
mortgage market in recent years. The testimony is available at http://
www.ftc.gov/os/testimony/P064814subprimelending.pdf.
    \26\ See Press Release, FTC Warns Mortgage Advertisers and Media 
That Ads May Be Deceptive (Sept. 11, 2007), available at www.ftc.gov/
opa/2007/09/mortsurf.shtm.
---------------------------------------------------------------------------
    Through our deceptive mortgage advertising sweep and other 
monitoring of mortgage ads, the FTC has reviewed many mortgage ads for 
problematic claims. The ads frequently tout the most favorable terms of 
a mortgage without revealing critical facts consumers need to make 
well-informed decisions. We have encountered numerous ads offering low 
rates or monthly payments without disclosing adequately significant 
limitations or conditions. For example, an ad may tout that a mortgage 
is available with only ``1 percent Payments,'' yet fail to disclose 
that 1 percent is not an interest rate or that this payment rate only 
applies during a brief introductory period. We have also encountered 
ads offering loans with ``fixed'' low rates or monthly payments which 
in fact are loans with adjustable rates or payments. For instance, an 
ad may state in large bold print, ``30-Year Fixed, 1.99 percent.'' Only 
at the bottom or reverse side, in tiny print, will it reveal that it is 
only fixed for the first year, and that after that will increase every 
year by as much as 7 percent.
                              debt relief
    Question. Can you outline examples of some of the most egregious 
cases of consumer fraud that you've witnessed in the Debt Relief/Debt 
Counseling arena? Obviously, people are hurting and looking for hope 
when they go to these services. What characteristics delineate the 
legitimate players in the market from those simply looking to prey upon 
desperate people?
    Answer. The Commission has prosecuted about a dozen companies that 
it alleged falsely promised lifelines to consumers overwhelmed with 
credit card debt.\27\ Some examples of egregious alleged conduct 
include the following cases:
---------------------------------------------------------------------------
    \27\ FTC v. Debt-Set, No. 07-558 (D. Colo. 2007); FTC v. Select 
Personnel Mgmt., Inc., No. 07-0529 (N.D. Ill. 2007); FTC v. Dennis 
Connelly, No. 06-701 (C.D. Cal. 2006); FTC v. Express Consolidation, 
No. 06-61851 (S.D. Fla. 2006); US v. Credit Found. of Am., No. 06-3654 
(C.D. Cal. 2006); FTC v. Debt Solutions, Inc., No. 06-0298 (W.D. Wash. 
2006); FTC v. Debt Mgmt. Found. Servs., Inc., No. 04-1674 (M.D. Fla. 
2004); FTC v. Integrated Credit Solutions, Inc., No. 06-00806 (M.D. 
Fla. 2006); FTC v. National Consumer Council, Inc., No. 04-0474 (C.D. 
Cal. 2004); FTC v. Better Budget Fin. Servs., Inc., No. 04-12326 (D. 
Mass. 2004); FTC v. Innovative Sys. Tech., Inc., d/b/a Briggs & Baker, 
No. 04-0728 (C.D. Cal. 2004); FTC v. Jubilee Fin. Servs., Inc., No. 02-
6468 (C.D. Cal. 2002).
---------------------------------------------------------------------------
    In its largest case in this area, the FTC sued AmeriDebt, Inc., a 
purported credit counseling organization.\28\ The Commission alleged 
that AmeriDebt deceived consumers with claims that it was a non-profit 
organization that provided bona fide debt counseling services. In fact, 
the FTC alleged, AmeriDebt funneled profits to affiliated for-profit 
entities and individuals. The Commission also alleged that AmeriDebt 
deceived customers by claiming that it did not charge an up-front fee 
when, in fact, AmeriDebt kept its clients' first payments as a fee, 
rather than disbursing the money to their creditors as promised. The 
FTC's settlement with AmeriDebt, which filed for bankruptcy during the 
litigation, bans the company from the industry. Subsequently, on the 
eve of trial, AmeriDebt's founder agreed to a $35 million 
settlement.\29\
---------------------------------------------------------------------------
    \28\ FTC v. AmeriDebt, Inc., No. 03-3317 (D. Md. 2003).
    \29\ See FTC v. AmeriDebt, Inc., No. 03-3317 (D. Md. Jan. 9, 2006) 
(Stipulated Final Judgment and Permanent Injunction as to DebtWorks, 
Inc. and Andris Pukke). Subsequently, the court-appointed receiver 
determined that primary defendant Andris Pukke had hidden assets from 
the FTC, and the court entered a judgment requiring him to turn over 
tens of millions of dollars' worth of additional assets. Because he 
resisted turning over his assets even after the court found him in 
contempt of court, the Court ordered his incarceration pending full 
cooperation, lasting almost a month.
---------------------------------------------------------------------------
    In another case, the Commission sued a Canadian telemarketer, 
alleging that it preyed on American consumers by falsely promising 
that, for an upfront fee of $700, it would provide interest rate 
reduction services for consumers with high-interest credit cards.\30\ 
Although the telemarketer claimed affiliation with consumers' credit 
card companies, the extent of its services consisted of a single call 
to the creditor asking for an interest rate reduction, which was 
routinely denied. The Commission also alleged that the defendant did 
not honor its refund guarantee to consumers who did not experience the 
promised substantial savings.
---------------------------------------------------------------------------
    \30\ FTC v. Select Personnel Mgmt., Inc., No. 07-0529 (N.D. Ill. 
2007) (litigation ongoing).
---------------------------------------------------------------------------
    The Commission also has brought actions against for-profit debt 
settlement companies, alleging that defendants falsely promised to 
reduce substantially credit card debt.\31\ In those cases, defendants 
allegedly deceived consumers into paying hundreds or thousands of 
dollars in upfront fees by misrepresenting that they would obtain lump 
sum settlements of consumers' credit card debt. In fact, the Commission 
alleged that defendants kept the upfront fees and had little if any 
success in obtaining the promised settlements.
---------------------------------------------------------------------------
    \31\ E.g., FTC v. Debt-Set, No. 07-558 (D. Colo. 2007).
---------------------------------------------------------------------------
    There are a number of features for consumers to look for when 
assessing the legitimacy of debt relief services being offered. The 
legitimate non-profit credit counseling agencies commonly provide free 
budget analysis for consumers seeking a manageable debt repayment plan. 
They do not charge substantial fees for services. After reviewing a 
consumer's financial condition, the these legitimate agencies explain 
the possible options for the consumer. If consumers have sufficient 
income, the agencies can negotiate a debt consolidation plan (known as 
a ``debt management plan'') directly with the creditors on behalf of 
the consumer. The consumer then pays the agency one monthly amount 
which the agency then disburses to the creditors. The Commission's 
education and outreach program in this area includes a number of 
publications to help consumers who are seeking debt relief 
services.\32\
---------------------------------------------------------------------------
    \32\ Consumer education materials on debt relief and credit 
counseling issues are directly accessible from the FTC's webpage, 
Credit and Loans: In Debt?, available at www.ftc.gov/bcp/menus/
consumer/credit/debt.shtm. In Spanish, the materials are available from 
the FTC's webpage, Credito y Prestamos: oEndeudado?, available at 
www.ftc.gov/bcp/menus/consumer/credit/debt_es.shtm.
---------------------------------------------------------------------------
                          real estate markets
    Question. Can you discuss for the record any inquiries the FTC has 
made into ``infomercial'' type marketing of ``get rich easy'' real 
estate investment schemes? Have you looked at the role those programs 
may have played in encouraging irresponsible speculation in the real 
estate market, including flipping activities that went bad? Or the 
degree to which those programs included suggestions that participants 
engage in occupancy fraud that led to a high degree of early payment 
defaults?
    Answer. The Commission's testimony emphasized recent law 
enforcement and outreach efforts to tackle deceptive and unfair 
practices involving mortgage lending and servicing, and to halt 
mortgage foreclosure rescue scams, which impact the real estate market. 
As a general matter, we know that scam artists seize upon ``hot'' 
areas, such as real estate investment, to promote fraudulent business 
opportunities as ``get rich quick'' schemes. Such scammers promote 
their false promises of wealth through any medium, including 
infomercials.
    The Commission has aggressively targeted the broad range of 
business opportunity frauds. In December 2006, the agency spearheaded 
``Project FAL$E HOPE$,'' which was a coordinated civil and criminal 
crackdown by federal and state law enforcers targeting more than 100 
bogus business opportunities.\33\ As part of that sweep, the FTC 
announced partial settlements in the Commission's pending case against 
a group of defendants that the FTC alleged telemarketed a product that 
purportedly instructed consumers on how to make easy money buying and 
selling privately held mortgages. In 2007, the Court issued summary 
judgment in the case by against the remaining defendants ordering them 
to pay $17 million in consumer redress.\34\ The agency is generally 
aware that some real estate investment schemes have been promoted 
through infomercials, but it is not aware of any clear connection 
between such investment schemes and irresponsible speculation or 
occupancy fraud in the marketplace.
---------------------------------------------------------------------------
    \33\ http://www.ftc.gov/opa/2006/12/falsehopes.shtm.
    \34\ http://www.ftc.gov/opa/2007/05/stefanchik.shtm.
---------------------------------------------------------------------------
    The FTC will continue to challenge false ``get rich quick'' claims 
that promote bogus investment opportunities, including those involving 
real estate, and will continue to combat deceptive and unfair practices 
that impact the real estate market.

                         CONCLUSION OF HEARINGS

    Senator Durbin. If there are no further questions, the 
subcommittee stands recessed.
    [Whereupon, at 4:30 p.m., Wednesday, May 14, the hearings 
were concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]


             Material Submitted Subsequent to the Hearings

    [The following agencies were unable to testify and have 
submitted statements for inclusion in the record.]

                     OFFICE OF PERSONNEL MANAGEMENT

    Prepared Statement of the Honorable Linda M. Springer, Director
    Mr. Chairman and members of the subcommittee: I appreciate the 
opportunity to submit for the record a statement addressing the 
appropriations request for the Office of Personnel Management (OPM) for 
fiscal year 2009.
    As you know, OPM provides a variety of products and services to the 
nearly 1.8 million employees in the Federal Government. Some of our 
products and services include managing health insurance for 
approximately 8 million current and former Federal employees and their 
families, administering retirement services for over 2 million retirees 
from all branches of Government, completing 90 percent of background 
investigations for industry and Federal agencies, and administering 
career development programs. As the OPM Director, I am committed to 
successfully delivering on our responsibilities on a timely basis. In 
short, I believe the American citizens and the Federal civilian 
workforce expect us to get things done, and our fiscal year 2009 budget 
request will allow us to do just that.
    We are requesting $20 billion to carry out our mission in fiscal 
year 2009. Of this total, $19.8 billion is requested for mandatory 
programs and $228.9 million for discretionary activities. The 
discretionary request reflects $211 million for Salaries and Expenses--
including transfers from the Trust Fund Accounts of $118.1 million--and 
$18 million for the Office of the Inspector General. The total 
discretionary request reflects a net decrease of $15.4 million compared 
to the fiscal year 2008 enacted level. I also want to note that OPM 
operates a revolving fund for the administration and operations of a 
number of programs including our Federal investigative services and 
Government-wide training efforts.
           retirement claims processing and benefits programs
    OPM's request includes funding to improve the services it delivers 
to Federal employees, annuitants, and their families through the 
retirement and insurance programs.
    On February 25, 2008, OPM began the rollout of the first ever 
Federal electronic retirement system. The budget requests an additional 
$15.2 million in No-Year Trust funds for continuation of this project. 
These funds will allow OPM to continue the conversion of millions of 
paper retirement records to electronic data and contract for the 
information technology needed for the system so that retirees can 
receive full payments once they separate from service eliminating 
interim payments at reduced amounts. At full rollout, employees will be 
able to model their retirement and initiate the process.
            federal employees health benefits program (fehb)
    As the administrator of the FEHBP, OPM will continue to negotiate 
and contract with private insurance companies that offer a broad range 
of health insurance benefits, including high-deductible health plans 
with Health Savings Accounts and consumer-driven health plan options. 
As such, OPM will spend $26 million in fiscal year 2009 to ensure the 
viability of the Program's 283 health care plans covering over 8 
million people. As usual, OPM will continue to carry out tough 
negotiations with health carriers to contain premium hikes. Over the 
years these negotiations have resulted in employee premiums that are 
substantially lower than those of the private sector while maintaining 
benefit levels, and continuing to provide, improve, and expand tools so 
customers can make informed health insurance decisions. In fact, the 
FEHBP increase for 2008 was 2.1 percent, compared to an average 8.7 
percent increase for the private sector and a 6.3 percent increase for 
the California Public Employees' Retirement System during that same 
year.
                       human resources management
    In fiscal year 2009, OPM will pursue policy initiatives that 
continue to reform human resources management in Federal agencies. We 
will work with the Department of Defense to ensure the reforms underway 
link pay to performance in a fair and consistent manner. At the same 
time, OPM will work with other agencies engaged in implementing 
Alternative Personnel Systems to assess the lessons learned from 
various modernization efforts. Mr. Chairman, in the last half-century, 
the Federal workforce has changed significantly, and the old personnel 
system has not kept pace. We are, therefore, striving to modernize the 
systems designed to recruit and retain federal employees.
    The fiscal year 2009 budget will allow OPM to maintain the 
competitiveness of Federal employee compensation and benefits by 
exploring ways to refine market adjustments to Federal pay, and 
providing Federal employees with opportunities, benefits, and service 
delivery that compare favorably with other employers. For instance, OPM 
will continue to develop new workforce recruitment strategies and 
tools, and further improve the hiring process by developing a life-
cycle reform model for agencies to adopt to streamline the current 
recruitment process. And last but not least, OPM will spend $200,000 to 
continue to support the Nation's returning Veterans by providing 
assistance in finding job opportunities with the Federal Government.
            implementing human capital standards for success
    OPM will use requested funds to engage Federal agencies in 
implementing the Human Capital Assessment and Accountability Framework, 
and other best practices in human capital management, in keeping with 
the Merit System Principles, veterans' preference, and other standards. 
At the beginning of fiscal year 2008, 17 of the 26 agencies reporting 
under the President's Management Agenda Scorecard have met these 
standards, up from 11 in 2006, eight in 2005, and zero in 2003. As a 
result, more than 99 percent of the Federal civilian workforce is 
employed by agencies that have made significant progress toward meeting 
these standards.
    Through its Compliance Program, OPM will continue to evaluate, 
review, and ensure agencies comply with Merit System Principles and 
veterans' preference, and to ensure whistleblower protection and other 
rights and privileges are honored and protected. OPM will strengthen 
this program through a human capital accountability system that holds 
agencies accountable for adhering to these principles, laws, and rules, 
as well as the human capital best practices referenced above.
                    human resources line of business
    In 2009, OPM will continue to be a leader in the President's 
Management Initiative for Expanded Electronic Government and has 
included $7,202,000 in its request for this purpose. The requested 
resources will support the Human Resources Line of Business (HR LOB) 
and Enterprise Human Resources Integration (EHRI). HR LOB will continue 
to identify and document common functional, technical, and data 
requirements consistent with Federal human resources policies and will 
work toward the establishment of Federal and private sector Shared 
Service Centers to meet these requirements. During 2009, the EHRI 
project will continue to modernize how the Federal Government 
maintains, stores, protects, and transmits information on human 
resources transactions.
                      security-related activities
    The fiscal year 2009 request includes funding for a number of 
important security-related activities. OPM will implement Homeland 
Security Presidential Directive 12 (HSPD-12), Policy for a Common 
Identification Standard for Federal Employees and Contractors, which 
was signed by the President on August 27, 2004. This mandates the 
circulation of a Federal standard for a secure and reliable form of 
identification for Federal employees and contractors. HSPD-12 
requirements will enhance OPM's strategic goal of improving security 
and emergency planning actions throughout the agency.
                             revolving fund
    OPM also provides a variety of ongoing services that are financed 
by other agencies through our revolving fund. These services include 
providing one-stop access to high-quality e-Training products and 
services; offering professional development and continuous learning for 
Federal managers and executives; providing employment information and 
assessment services; automating other agencies' staffing systems; 
providing examining services when requested by an agency; providing 
technical assistance and consulting services on all facets of Human 
Resources management; testing potential military personnel for the 
Department of Defense where it is cost-effective for OPM to do so; 
managing the selection, coordination, and development of Presidential 
Management Fellows; and conducting investigations for employees to 
determine whether they are suitable for employment, as well as more in-
depth investigations for employees whose positions require security 
clearances. For those ongoing revolving fund responsibilities, the 
fiscal year 2009 budget includes an estimated $1 billion in obligations 
and 3,131 FTE to be financed through payments for OPM's services by 
other agencies.
                       mandatory payment accounts
    The OPM budget request also includes mandatory appropriations to 
fund the Government contributions to the health benefits and life 
insurance programs for Federal annuitants.
    For the approximately 1.9 million annuitants participating in the 
Federal Employees Health Benefits Program, we estimate that about $9.6 
billion will be needed to pay the Government's share of the cost of 
coverage. That represents an increase of $769 million over fiscal year 
2008. We estimate that, for the 500,000 annuitants under age 65 who 
elect post-employment life insurance coverage, an appropriation of $46 
million will be required.
    Also, as mandated by the financing system established in 1969 by 
Public Law 91-93, liabilities resulting from changes (principally pay 
raises) since that year that affect retirement benefits must be 
amortized over a 30-year period. For that purpose, we are requesting a 
``such sums as may be necessary'' payment to the Civil Service 
Retirement and Disability Fund in the amount of $10.2 billion. This 
represents an increase of $100 million to cover the service cost of the 
Civil Service Retirement System, which is not funded by and for active 
employees.
    Thank you again for the opportunity to provide for the record a 
discussion of OPM's budget request for fiscal year 2009. I would be 
pleased to provide any additional information the subcommittee may 
need.
                                 ______
                                 
  Prepared Statement of the Honorable Patrick E. McFarland, Inspector 
                                General
    Mr. Chairman and members of the subcommittee: Thank you for 
providing me this opportunity to discuss the President's fiscal year 
2009 request for appropriations for the Office of the Inspector General 
at the Office of Personnel Management (OPM). The total request for the 
Office of the Inspector General is $18,000,000, which is $600,000 below 
the amount enacted for fiscal year 2008. Of our requested amount, 
$1,538,000 is from the salaries and expenses/general fund and 
$16,462,000 is from the trust funds. These resources are requested to 
perform our core functions which include:
  --Conducting audits, investigations, and evaluations of agency 
        programs and operations, including primarily carriers 
        participating in the Federal Employees Health Benefits Program 
        (FEHBP), the associated information systems, and internal 
        agency operations and financial systems; and
  --Issuing administrative sanctions, including debarments and 
        suspensions to health care providers who pose a financial risk 
        to the FEHBP itself or a health care risk to persons who 
        receive health insurance coverage through the FEHBP.
    The Office of the Inspector General recognizes that oversight of 
the retirement, health benefits, and life insurance trust funds 
administered by OPM is, and will remain, its most significant 
challenge. These trust funds are among the largest held by the United 
States Government. Their assets totaled $789.3 billion in fiscal year 
2007, their receipts were $97.1 billion, and their annual outlays were 
$153.7 billion. The amounts of their balances are material to the 
integrity of the Government's financial position. I continue to 
allocate the vast majority of the Office of the Inspector General's 
efforts and resources to trust fund oversight, and we remain fully 
committed to trust fund activities.
    OPM makes outlays from the retirement trust funds in the form of 
payments to millions of Federal annuity recipients. The health 
insurance trust fund provides payments to approximately 270 health 
insurance plans nationwide. In turn, the health insurance carriers pay 
millions of claims for services filed by their enrollees and health 
care providers. We have shown through our audits and investigations 
that such health insurance payments may be at risk through improper, 
inaccurate or fraudulent claims.
    We are obligated to Federal employees and annuitants to protect the 
integrity of their earned benefits. Our audit and criminal 
investigative work reduces losses due to fraud and improper payments 
and recovers misspent funds whenever possible. We have a special 
obligation to the Federal agencies and the American taxpayers, who 
provide the majority of the funding. We also seek to deter future 
occurrences of fraud and abuse within OPM programs, as well as serve to 
protect the health and welfare of beneficiaries of OPM programs and 
services.
    Audits and criminal investigations of the OPM-administered trust 
fund programs have resulted in significant financial recoveries to the 
trust funds and commitments by program management to recover additional 
amounts. From fiscal year 2005 to the present, our office has 
cumulative judicial recoveries and audit recommendations to recover 
funds exceeding $440 million.
    Beginning in 2005, the Office of the Inspector General established 
a nationwide field structure. As of 2008, the office has eighteen 
investigative and two audit field offices in addition to its 
headquarters in Washington, DC. We have determined that the most 
effective deployment of investigative staff is to locate them in areas 
of the country where FEHBP and retirement benefits are more 
concentrated. Experience has shown that criminal investigators located 
in these areas often work in cooperation with other law enforcement 
entities similarly located, resulting in additional criminal leads and 
better protection of OPM programs. In many instances, criminal 
investigators located outside of Washington, DC work exclusively on 
cases referred to them by local authorities. During fiscal year 2007, 
investigative work resulted in 46 arrests, 66 indictments, and 50 
convictions.
    During fiscal year 2009, we will continue to conduct audits of 
pharmacy benefit managers (PBMs), firms contracted by FEHBP carriers to 
administer their prescription drug programs. The premiums paid for 
prescription drug coverage have risen exponentially over the last ten 
years and allegations against PBMs have also increased. It is estimated 
that approximately $9.2 billion was paid during 2007 in prescription 
drug premiums to experience-rated and health maintenance organization 
(HMO) carriers. This represents approximately 28 percent of experience-
rated and HMO carrier premiums paid for health benefits coverage for 
Federal employees and annuitants. In fiscal year 2007, we settled a 
large civil health care fraud claims case against an FEHBP PBM, 
resulting in $97 million returned to the OPM trust fund. We remain 
steadfast in our efforts to audit and investigate pharmacy benefits and 
pharmaceutical fraud within the FEHBP.
    Also during fiscal year 2009, we will further our development of a 
data warehouse of health benefits claims. The data warehouse offers the 
best opportunity for global detection of erroneous health benefit 
payment transactions by medical providers, insurance carriers and 
subscribers by accumulating all benefit claims for all fee-for-service 
insurance carriers in a single data repository. This effort will 
enhance our current claims reviews by enabling the auditors and 
investigators to target certain types of potential claim payment errors 
on a program-wide rather than on a plan-by-plan basis. This will 
provide a significant improvement in our audit efficiency and 
effectiveness by offering us the opportunity to address significant 
issues of broad concern on a coordinated basis and to recover 
overcharges to the program when appropriate.
    Currently in the data warehouse, we have data for the top three 
experience-rated carriers (Blue Cross Blue Shield, Mail Handlers 
Benefit Plan, and Government Employees Health Association), 
representing 86 percent of experience-rated plans claims payments. We 
are also receiving data from HMO plans with over 500 subscribers. This 
includes 85 plans, representing 87 percent of the HMO plans claims 
payments. The data is being accumulated and used for basic analysis to 
support premium rate calculations. Starting in fiscal year 2009, we 
plan to introduce more advanced claims analyses which recognize 
potential high risk areas for community-rated carriers.
    Our administrative sanctions program has continued to improve its 
effectiveness in protecting the FEHBP and its enrollees against 
untrustworthy health care providers. This program enforces the FEHBP 
sanctions statute, which authorizes suspension or debarment of 
providers on the basis of 18 different categories of violations. The 
most frequently-encountered violations represent criminal convictions 
or loss of professional licensure. The highest priority sanctions cases 
involve providers who are the subject of investigation by our Office of 
Investigations. We select cases for action on the basis of the 
seriousness of the provider's violations and the risks that the 
provider poses to the FEHBP and to the health and safety of its 
subscribers. We currently have over 30,396 active debarments and 
suspensions in effect. We recently completed the conversion and 
digitizing of our debarment and suspension paper files and records to 
an electronic, searchable database.
    Thank you for this opportunity to present our office's resource 
request for fiscal year 2009.
                                 ______
                                 

                        SELECTIVE SERVICE SYSTEM

   Prepared Statement of the Honorable William A. Chatfield, Director
                                forward
    Chairman Durbin and members of this subcommittee, I am honored as 
Selective Service Director to present the President's fiscal year 2009 
appropriations request of $22,000,000 for the agency. The Congress and 
administrations under both parties have acknowledged the wisdom of 
maintaining Selective Service as a hedge against unforeseen threats and 
as a low-cost insurance policy against underestimating any threat our 
Armed Forces might face in a still-dangerous world.
    This agency is as determined as ever to make the necessary 
adjustments to budget realities and the requirements of combating 
terrorism, defending the homeland, and maintaining other priorities 
listed in the President's January 28, 2008, State of the Union Address. 
Personnel reductions at Selective Service have resulted from planned 
attrition and will not involve a reduction-in-force. Meanwhile, the 
agency continues its phased reductions in operational readiness while 
preserving as much customer service as possible. For example, we are 
reducing the number of part-time Reserve Component officers from a 
total of 250 to 200 by the end of fiscal year 2008 and to 150 by the 
end of 2009. Automated registrations are making it possible to 
accomplish our missions without the need for as much face-to-face 
contact at the local level. These innovations have required painful 
choices, but satisfying our goals will assure a Selective Service that 
is beyond reproach, while meeting the needs of its primary customer, 
the Department of Defense. I welcome the challenge and appreciate the 
opportunity to share my vision for Selective Service with you today.
                            what we do today
    Selective Service is in business to perform two unique functions. 
Should the Congress and the President authorize a return to military 
conscription, the agency can conduct a draft that is efficient, fair, 
and accepted by the public. It is also ready to administer a program of 
alternative community service for men who are classified as 
conscientiously opposed to military service.
    Additionally, each and every day Selective Service continues its 
close partnership with the Department of Defense by providing direct 
support to Armed Forces recruiting. Specifically, Selective Service 
provides names of registrants to the Secretary of Defense for 
recruiting purposes, in accordance with the Military Selective Service 
Act. Information about Armed Forces opportunities for Active Duty, 
National Guard, and Reserves, along with a business reply card, is 
enclosed routinely with our registration acknowledgment that Selective 
Service sends to each new registrant. For fiscal year 2007, these 
contacts totaled nearly 2.2 million young men. Consequently, the 
Defense Department benefits by ``piggy-backing'' on our routine 
mailings which generate actual recruiting leads. And it reimburses us 
for the additional costs in accordance with the Economy Act.
    Beyond its compliance with the Military Selective Service Act and 
providing these tangible services, the agency also promotes an 
intangible national benefit. For present and future generations of 
America's young men, Selective Service is a very critical link between 
society-at-large and today's volunteer military. It is a reminder that, 
as Americans, every young man is personally responsible to ``provide 
for the common defence'' in the time-honored tradition of preceding 
generations.
                           areas of emphasis
    Air Shows.--I look forward once again in 2008 and continuing in 
2009 what I regard as this agency's most creative innovation in meeting 
its traditional mission in a climate of budget austerity. I refer to 
our success in harnessing the venue, excitement, and patriotism of air 
shows.
    My vision has been to present the agency in huge, open community 
venues across the Nation, highlighting authentic American heroes and 
promoting public service and patriotic themes appealing to multiple 
generations. The value of this effort presented itself after my 
assessment of the agency's capabilities, priorities, and missions. Air 
shows are the second most attended spectator events in America, 
attracting a high concentration of registration-age men. I remain 
convinced that funding this initiative results in a substantial 
increase in registration compliance and represents a positive impact on 
the influencers of young men. We are conducting this effort by 
absorbing the $118,000 expense out of our fiscal year 2008 budget and 
will do so again in fiscal year 2009. No new money is involved.
    Registration Compliance.--As exciting as the air show initiative 
has been, it will not be the only effort to satisfy our statutory 
missions. Our operational readiness to perform our traditional missions 
has been reduced because of world risk assessments. Selective Service 
has always believed only when all eligible young men are in the 
manpower pool and accounted for as equally vulnerable would any future 
draft be considered completely fair and equitable by the public.
    Our latest full year of data collection (CY 2007) indicates 91 
percent of legally eligible men (ages 18 to 25) are registered; this is 
a 2 percentage point drop from the previous year. The compliance rate 
for men who are draft eligible (ages 20 to 25) is 95 percent, a 1 
percentage point decrease from CY 2006. Keeping the rates high is very 
important because a declining compliance rate contributes to a lack of 
public confidence in our ability to administer a fair and equitable 
draft.
    Naturally, this agency is as determined as ever to make 
congressional priorities truly our own. We appreciate the 
subcommittee's support for ensuring that our work continues. To the 
extent that our traditional mission survives, I will use every resource 
to continue to maintain high registration compliance. For example, the 
agency will:
    Carry on routine updating of the interactive Selective Service 
pages on the World Wide Web (www.sss.gov) where online registration, 
registration verification, the ability to file changes of information, 
and a wealth of other agency information are available to anyone with 
access to the Internet. For fiscal year 2007, 83 percent of 
registrations reached Selective Service through electronic means, the 
same percentage as 2006. Electronic registrations are encouraged 
because they are quicker, more cost-effective than processing paper 
registrations, and provide better customer service. We are also placing 
links to our site with other Federal, State, and local agencies, 
schools, and assorted organizations to enhance public education and 
facilitate customer responsiveness.
    Profit from an increasing number of States that link obtaining a 
driver's license or State identification card to the Selective Service 
registration requirement. These State and territorial laws currently 
provide Selective Service with an average of 71,000 registrations per 
month. As of this month, 36 States, 3 territories, and the District of 
Columbia have enacted laws. These jurisdictions represent 70.1 percent 
of the national 18-year-old male registrant population. We continue to 
offer technical expertise to the other States where such legislation is 
pending. Data electronic exchanges are the most cost-effective, timely, 
and user-friendly registrations available. Selective Service is 
committed to aid the remaining 14 States in implementing this easy 
method to protect their young men's eligibility for State and Federal 
benefits and programs. This program has been a valuable tool to reach 
all eligible registrants and is more customer-friendly.
    Remain sensitive to the fact that not every household in your 
district has a computer, so technological innovations will not 
compensate for all resource restraints. The only way for young men in 
those households to register is the old-fashioned, pre-Internet way. 
That means going to the nearest post office. And that is why we must 
devote sufficient resources to printing forms and keeping post offices 
well stocked.
    Alternative Service Program.--Half of the agency's mission during 
any return to conscription is to provide for a supervised term of 
alternative civilian service for all men it classifies as conscientious 
objectors. A key component of this program, therefore, is reaching out 
to employers capable of providing work of ``national importance'' by 
becoming members of the Alternative Service Employer Network, or ASEN. 
We continue to reach out to historic peace church constituencies, non-
profit organizations, and Government entities. These have, in past 
wars, provided the bulk of the assignments we will need to provide our 
alternative service workers with employment that benefits the national 
health, safety, and welfare.
    We have had negotiations with Christian Aid Ministries, Mennonite 
Voluntary Services, and others who hope to join the ASEN. We also 
continue to have our State Directors visit the projects run by these 
organizations to determine their suitability to become ASEN members. In 
addition to visiting model project sites, our State Directors have 
begun to reach out to our historic conscientious objector 
constituencies across America. These contacts and outreach efforts were 
previously confined to our headquarters staff. In addition to making it 
easier and less expensive for the public to stay in touch with us, this 
field effort facilitates the building of the relationships we will need 
to successfully meet our goals for this program during any return to 
conscription.
    Finally, we continue to work toward obtaining employer agreements 
with the Public Health Service and the Corporation for Community and 
National Service. These two Federal entities will, we hope, play a key 
role in providing suitable employment to conscientious objectors in any 
future conscription.
    Information Technology Modernization.--The agency's Reclassify, 
Compliance, and Verification project is intended to allow Selective 
Service System to leave the Department of Defense's Military Entrance 
Processing Command mainframe and move to a Microsoft Windows system. 
However, it is behind schedule. Selective Service hopes to complete the 
analysis, scope, and requirements definition during fiscal year 2008, 
and we plan to design, code, and test in fiscal year 2009. 
Notwithstanding resources expended so far, if our revised schedule is 
not met, then the entire project will be shelved pending future 
resources and commitment.
                  national in scope, local in service
    While rumors of a future draft will continue to circulate among the 
public, private groups, the media, and academia, Selective Service 
remains focused on missions mandated by Congress. It manages its 
volunteer board members; prepares to administer a program of 
alternative community-based service for men classified as conscientious 
objectors; and, to the extent possible, updates its conscription plans 
and registration procedures. All these efforts are aimed at being ready 
to conduct a fair and equitable classification procedure to determine 
who should serve when not all can serve during an emergency. To ensure 
fairness and equity, each Selective Service board is a gathering of 
civic-minded men and women reflecting the racial, cultural and ethnic 
diversity of the young men in your districts. Through these volunteers, 
a unique bond has been formed at the grass roots with young American 
men, society-at-large, and the U.S. Armed Forces. Through the Selective 
Service structure, local American communities play a positive role in 
providing for the common defense.
                                closing
    Mr. Chairman, Selective Service stands prepared to perform its 
time-tested responsibilities when directed. The fiscal year 2009 
appropriation request of $22,000,000 will be invested prudently in one 
of the Nation's important security assets in an increasingly dangerous 
and ambiguous world. Maintaining this adequate funding level would: (1) 
provide a compact, cost-efficient civilian structure capable of 
expansion in a crisis; (2) provide manpower to the U.S. Armed Forces as 
required; and (3) do it fairly, equitably, and within the necessary 
timeframes. These outcomes will advance our statutory mandate and 
restore the high registration compliance rates so painstakingly 
achieved over the last decade. Selective Service remains an active 
partner in the national preparedness community, ever watchful for 
opportunities to improve.
    Thank you, Mr. Chairman. I would be pleased to answer your 
questions.
                                 ______
                                 

  COURT SERVICES AND OFFENDER SUPERVISION AGENCY FOR THE DISTRICT OF 
                                COLUMBIA

          Prepared Statement of Paul A. Quander, Jr., Director
    The Court Services and Offender Supervision Agency (CSOSA) 
supervises approximately 15,000 men and women offenders on probation, 
parole, or supervised release in the District of Columbia at any given 
time. CSOSA includes the D.C. Pretrial Services Agency, which 
supervises another 5,000 defendants at any given time to ensure that 
they comply with court-imposed release conditions and appear for 
scheduled court dates. These agencies make a vital contribution to 
public safety in Washington, D.C.
    This statement is provided in support of CSOSA's fiscal year 2009 
budget request of $202,490,000 including 1,297 permanent positions and 
1,293 full time equivalents (FTE). Of this amount, $54,838,000 is 
requested for the Pretrial Services Agency (PSA) and $147,652,000 is 
requested for the Community Supervision Program (CSP). The fiscal year 
2009 request for CSOSA represents a $12,147,000, or 6 percent, increase 
over fiscal year 2008 enacted levels.
                               background
    Since CSOSA was created under the National Capital Revitalization 
and Self-Government Improvement Act of 1997, we have implemented 
significant program enhancements, particularly in post-release 
supervision. Probation and parole caseloads have been lowered 
dramatically--in many cases by 50 percent--to meet or exceed the 
recommended national standard of 50 cases per Community Supervision 
Officer (CSO). Since fiscal year 1999, monthly surveillance drug 
testing has increased 360 percent; last year, over 8,300 offenders were 
tested each month. CSOSA operates six field offices to locate CSOs in 
the neighborhoods were offenders live and work, and over 8,000 joint 
field visits by CSOs and the Metropolitan Police Department occurred in 
those neighborhoods last year. Since fiscal year 2004, CSOSA has placed 
over 2,000 high-risk offenders on Global Positioning System (GPS) 
monitoring to reinforce compliance and track their location; the 
Metropolitan Police Department routinely uses GPS data in crime 
investigation.
    CSOSA has also received resources for contract substance abuse 
treatment to supplement the District's public treatment system. Last 
year, we made over 2,400 offender and over 1,600 pretrial defendant 
placements in our continuum of services, which includes detox, 
residential, transitional housing, and outpatient services. We also 
continue to implement the Reentry and Sanctions Center, a residential 
program that provides intensive assessment and treatment readiness 
services for high-risk offenders and defendants. Since the facility's 
opening in 2006, we have placed 1,188 individuals in the program; 88 
percent have completed it successfully.
    CSOSA recognizes that successful supervision involves both managing 
risk through close supervision and addressing need through the 
provision of treatment and support services. We have implemented many 
enhancements to ensure effective risk management. We work closely with 
a variety of Government, non-profit, and faith-based partners to 
increase offenders' access to existing services and build additional 
capacity in the core need areas of housing, education/training, and 
health care. Through the Criminal Justice Coordinating Council's 
Reentry Steering Committee, we provide leadership of efforts to address 
the needs of supervised offenders, particularly those returning to the 
District from incarceration.
    One of our most significant accomplishments of the past year has 
been the implementation of a new performance management system 
(SMARTStat) that tracks a core set of supervision practices down to the 
individual case level. Through this system, we can determine the extent 
to which cases are being managed effectively. This information is 
available to supervisors and branch chiefs, who are encouraged to use 
it as part of their case audits and team meetings. The information 
forms the basis of regular reviews with the entire CSP executive staff, 
during which action items are assigned and outcomes regularly tracked 
so that problems can be solved quickly.
                        2009 budget initiatives
    CSOSA's fiscal year 2009 budget contains two initiatives, one for 
CSP, which provides information technology resources for post-release 
supervision, and one for PSA, which provides resources for supervision 
of D.C. Misdemeanor and Traffic Court (drunk driving) cases.
CSP Information Technology Enhancement Initiative
    CSP requests $2,583,000 and ten (10) positions to continue building 
its information technology infrastructure, including enhancements to 
the Supervision Management Automated Records Tracking (SMART) case 
management system.
    Improving the quality, management, and utility of information has 
been a CSP priority since CSOSA's founding. CSP inherited outdated, 
cumbersome legacy systems from its predecessor agencies. In 1997, most 
probation and parole officers relied on paper case files and lacked 
access to personal computers. Developing an automated case management 
system and training staff to use it were essential to successful 
implementation of the agency's program strategy. CSP launched the 
initial version of SMART in 2002, following a remarkably efficient 
requirements gathering and application development process.
    SMART is now in its third release. From its initial core 
supervision tracking functions, the system has expanded to encompass 
modules that capture treatment placement and expenditures, the 
development of Alleged Violation Reports, vocational and education 
assessment, and other critical program functions. We are also 
developing an Enterprise Data Warehouse (EDW) as a repository for 
historical data that can be used for research and performance 
measurement. The EDW is the source of CSP's new performance management 
system, SMARTStat, which provides management and staff with complete 
visibility into offender supervision practices and effectiveness. CSP 
also developed and maintains the District's Sex Offender Registry 
(SOR).
    CSP's Office of Information Technology (OIT) develops and maintains 
the CSP infrastructure, including acquisition, support, maintenance, 
and life-cycle replacement of architecture/design/systems enhancements, 
the EDW, IT security services, disaster recovery, and operational 
services, such as customer support (Help Desk), network management, 
change and configuration management, e-mail, and system administration 
services.
    The requested resources will continue the significant progress made 
by CSP OIT to increase the timeliness and accuracy of data used by 
agency staff and our partners to make day-to-day law enforcement 
decisions affecting public safety in the District. These resources will 
be used to continue SMART and SOR enhancements, transition to a next-
generation Service Oriented Architecture platform, continue building 
the EDW and performance management platform, and continue improving our 
capacity to integrate data with our partner agencies.
    The resources will be allocated as follows:
    Infrastructure Enhancements
    --$300,000 in contract funding to support EDW software, development 
            and maintenance;
    --Five (5) New Positions: Two Systems Engineers (GS-13); One 
            infrastructure Architect/Project Manager (GS-14); One 
            Customer Support Specialist (GS-8); One EDW Database 
            Administrator (GS-13).
    SMART Enhancements
    --$1,000,000 in contract funding to support SMART, SOR and Data 
            Sharing development and maintenance;
    --Five (5) New Positions: One Systems Integration Architect (GS-
            14); One Systems Integration Analyst (GS-13); One 
            Configuration Manager (GS-13); One Business Intelligence 
            Analyst (GS-13); and One Technical Writer (GS-13).
    CSP OIT currently lacks sufficient staff to sustain operations and 
to plan and implement migration to an ``agile'' service-based 
infrastructure. Current CSP funding does not provide sufficient ongoing 
resources to maintain the current IT infrastructure and continue the 
SMART development process. To date, CSP has been able to support the 
significant SMART and IT infrastructure accomplishments through delayed 
operational costs at two new field units. One of those field units 
(Rhode Island Avenue) became operational in fiscal year 2006, and the 
other is planned for implementation in fiscal year 2009. Without the 
requested fiscal year 2009 resources, planned SMART, partnership/data 
sharing and infrastructure improvements will be significantly reduced, 
affecting the effectiveness and efficiency of CSP and our law 
enforcement partners.
    Lack of additional resources will effectively derail investments 
made in our information technology (IT) infrastructure over the past 2 
years, most of which were implemented to comply with Federal IT 
mandates for security, disaster recovery and performance management. It 
is vital that CSOSA have the IT capability to effectively perform its 
law enforcement and public safety functions for the Nation's capital. 
Compared to its Federal counterparts, CSOSA is still very new and very 
small. We are still in need of funding for critical IT infrastructure 
and developmental initiatives to implement the full scope of the local 
public safety functions that CSOSA was created to assume.
PSA Misdemeanor and Traffic Court Supervision Initiative
    In our other new budget initiative, PSA requests $3,340,000 and 23 
positions for defendant supervision, substance abuse and mental health 
assessments, and drug testing services for D.C. Misdemeanor and Traffic 
Court (drunk driving) cases.
    In 2006, the Office of the Attorney General's (OAG) Criminal 
Section papered over 12,400 D.C. misdemeanor and traffic cases. Based 
on estimates from the OAG's Public Safety Division and the D.C. 
Superior Court, over 3,600 of these cases (29 percent) involved 
defendants in need of mental health and/or substance abuse treatment 
services. To better address the problems and community safety issues 
within this population, beginning in fiscal year 2009, the D.C. 
Superior Court and OAG will lead a court-centered, problem-solving 
initiative geared to the unique problems and service requirements of 
mentally ill and substance abusing arrestees. This initiative will 
identify mental health and substance abuse issues in this population 
and link defendants to community-based services; ensure the least 
restrictive diversion and community supervision options needed to 
address public safety and treatment concerns; ensure comprehensive and 
individualized treatment and supervision placements; provide a 
comprehensive team-oriented approach to addressing health and social 
issues geared to a defendant's criminal behavior; and provide 
supervision of participants, including court notice for infractions of 
supervision conditions.
    The initiative already has the support of many local criminal 
justice and community partners. Defendants will be referred to the 
District of Columbia's Addiction Prevention and Recovery Administration 
(APRA) and the Department of Mental Health (DMH) for needed treatment 
services. DMH also will establish a crisis care center within the D.C. 
Superior Court to temporarily assist defendants with severe mental 
health issues. The city's Department of Employment Services (DOES) will 
offer job referral and training geared to the special needs of this 
population.
    The missing elements of the program design are strong defendant 
supervision and drug testing, as well as assessments for and linkages 
to needed treatment and social services in the community. Therefore, 
the D.C. Superior Court and the OAG have requested that PSA provide 
supervision, substance abuse and mental health assessments, linkage to 
treatment, and drug testing services. Supervision would include 
conditions such as weekly drug testing, in-person contact as needed 
with a case manager, and referrals to treatment and social service 
agencies. Besides helping the OAG, the Court, and other collaborative 
partners meet an important strategic goal, this assistance would help 
PSA meet its statutory obligation under D.C. Code Sec. 23-1303(h) to 
provide supervision to all defendants released with conditions and to 
address within this population what potentially may be unacceptable 
safety risk to the Washington metropolitan community.
    To ensure proper management of treatment and other conditions, as 
well as prompt administrative and judicial responses to infractions, 
PSA recommends a maximum case manager-to-defendant ratio of 1:75.
    The proposed request would fund the following supervision, drug 
testing, and treatment assessment personnel costs: 12 Pretrial Service 
Officers; 1 supervisory Pretrial Service Officer; 3 Community Treatment 
Specialists; 2 Chemists; 1 Laboratory Technician; 3 Drug Testing 
Technicians; 1 Program Assistant; and $120,000 for drug testing 
supplies (chemical reagents).
    PSA data supports enhanced supervision for defendants charged with 
serious traffic offenses as well as misdemeanants with serious mental 
health and substance abuse needs. Drug-involved defendants are three 
times as likely to be rearrested and more than twice as likely to fail 
to appear as non-users. Introducing pretrial supervision to the high 
risk defendants in D.C. Misdemeanor and Traffic Court who have mental 
health and substance abuse challenges will assist the Court in 
enhancing public safety and assuring that these defendants keep their 
court dates.
    This initiative will also enhance PSA's collaborations with the 
D.C. Superior Court, OAG, and other criminal justice and community 
partners. The proposed initiative is a combined effort to screen, 
assess, and supervise potentially high-risk defendants who now receive 
little or no supervision and support. No other partner in this 
initiative can provide the assessment, supervision, and drug testing of 
this population; these services are needed to ensure court appearance 
and protect the public.
Adjustments to Base
    CSOSA also requests $6,224,000 in adjustments to base to fund 
employee cost of living pay raises and general price increases. Of this 
amount, $4,620,000 is for CSP, and $1,604,000 is for PSA.
                               conclusion
    CSOSA's budget initiatives reflect the developmental challenges the 
agency continues to face. While CSP has implemented a wide range of 
program enhancements, such progress necessitates ongoing maintenance 
and expansion of IT infrastructure to ensure that our ability to manage 
cases efficiently, analyze data, and measure performance keeps pace 
with our operations. PSA continues to face the need to collaborate with 
and support its partners--most particularly, Superior Court--by 
participating in initiatives that will enhance defendant compliance and 
protect the public.
    Unless CSOSA responds to these challenges, we are at risk of losing 
the ground we have gained. These initiatives will enable us to continue 
building and supporting a model supervision system that achieves the 
benefits CSOSA was established to bring to the District of Columbia: 
increased public safety, reduced recidivism, and enhanced systemwide 
collaboration.
    We appreciate the support we have received to date, and we look 
forward to working with the Committee on this request.
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