Technology Law Column

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Published in the Chicago Daily Law Bulletin, November 13, 1997 at page 5.

Authorities Target Many Webs of Fraud.

Copyright 1997 by David Loundy

While the Internet brings us nearly instantaneous global communication, it also allows nearly instantaneous global access to fraudulent schemes. However, the U.S. Federal Trade Commission, foreign equivalents, and state Attorneys General around the U.S. have been stepping up efforts to locate and stop fraudulent and illegal activities from being promoted on-line. Some plaintiffs have even brought claims under state unfair competition and similar-type laws, in addition to long-standing on-line trademark law-- which has consumer protection as an underlying motivation.

The FTC has organized a series of "Surf Days" which involve lining up participants to surf the Internet to locate potentially illegal advertisements and businesses that meet the theme of the day.

For instance, in early November, the FTC along with state, Canadian, and Mexican officials, conducted "North American Health Claim Surf Day." The day's activities consisted of searching the Internet for web sites and news group postings where claims were made about the efficacy of various products at curing certain diseases. FTC staff sent the targeted message originators e-mail messages warning that the claims made could constitute a violation of the law if the claims cannot be substantiated. These sites are then later checked to see if the potential problem claims have been removed, or whether additional actions may be necessary. The FTC initially questioned some 400 Internet sites.

Health Claim Surf Day follows several other Surf Days used to identify fraudulent schemes. Other Surf Days have investigated coupon fraud, pyramid schemes, credit repair rackets, and business opportunity schemes.

FTC authority for the Surf Days and subsequent enforcement activities comes from the Federal Trade Commission Act, 15 U.S.C. 41 et seq., as well as from parts of several dozen other statutes the FTC is responsible for enforcing. The FTC is charged primarily with investigating entities which engage in unfair competition and deceptive acts in interstate commerce (15 U.S.C. Section 45), and disseminate in interstate commerce false advertising material (15 U.S.C. Section 52). Many states have local statutes modeled after the Federal Trade Commission Act.

Actions resulting from some of these Surf Days, as well as complaints about specific incidents, are starting to pay off for the FTC. In addition to shutting down several alleged pyramid schemes, such as the Fortuna Alliance, the Mentor Network, the Global Assistance Network for Charities, and Credit Development International, the FTC has recently hampered successfully several other fraudulent schemes.

Settlements have been reached (and for some defendants, entered as judgments) regarding what gets my vote for this year's most creative example of "computer crime." Advertisements were circulated on the Internet for free access to "adult images." All the potential porn-perusers needed to do was download the free image viewing software.

Unbeknownst to the image-seekers, the software disconnected the users' modems from their Internet Service Providers, turned off the modems' speakers, and re-dialed a Moldovan telephone number. The users could then view the "free" images-- all while paying international phone rates of more than $2 per minute. Furthermore, the phone would stay connected until users turned off their computers.

The FTC alleged that, not only did the acts mentioned obviously constitute a violation of Section 45(a) of the FTC Act which prohibits unfair practices, but that the defendants' actions were also fraudulent because the Moldovan phone number really connected users to a server in Canada, rather than in Moldova, even though rates to the Eastern European country were charged.

Another on-line incident which received some international press attention produced merely an FTC opinion letter-- in part because the incident involves an Australian company (now being investigated by the Australian authorities). At issue is the web site at where people can choose domain names and register them, for a charge of $250 for an initial two-year registration. The hitch is, the InterNIC, the official domain name registry run by Network Solutions, Inc. under contract to the National Science Foundation, is located at, and charges only $100 for a two-year domain name registrations.

The "dot-com" address belongs to Internic Software in Australia. Over 2,000 people confused the two entities and registered domain names with the Australian company. In a letter to the business manager of Network Solutions, the FTC stated that the actions of the Australian company are likely in violation of the FTC Act, especially because the Australian company, which subsequently passed the potentially fraudulent registrations through to the real InterNIC, has not actually paid for all of the domains it has registered, and is thus further misleading its customers.

In a similar "misrepresentation of domain name" case, the U.S. District Court for Northern District of Illinois touched briefly on the issue of whether the defendant's registration of the plaintiff's company name as a domain name violated the Illinois Deceptive Trade Practices Act, 815 ILCS 510/2, and the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/2. However, because the defendant had merely registered the domain name and not actually used it, the court held that the statutes had not been violated. See Juno Online Service, L.P. v. Juno Lighting, Inc., N. 97 C 791, Sept. 29, 1997 available at

Another lawsuit, which is more interesting from a fraud perspective, involves a state Attorney General cracking down on Internet fraud. People v. Lipsitz, New York Supreme Court, IA Part 8, June, 1997 (available on the Internet at involves a New York prosecution for repeated or persistent fraudulent or illegal acts, deceptive acts and practices, false advertising, and the use of unregistered assumed business names.

Lipsitz concerns a magazine subscription sales scheme operated under a variety of (unregistered) business names. However, only a small number of customers were lucky enough to have actually been issued subscriptions to the magazines they had ordered and for which they had paid. Complaints were not handled by the promised "courteous staff," nor did complaints produce the promised refunds. In some cases, complaints produced acts of retaliation-- such as attempts to "mailbomb" discussion groups with ads to the point where the volume of mail exceeded the recipient's computer's ability to handle the volume of mail. Furthermore, the advertisements for the magazine service were sent from forged e-mail accounts, and contained testimonials from fictitious people. Any e-mail that could be traced, was traced back to the defendants.

The court in Lipsitz held that jurisdiction was clearly not an issue, even though conduct over the Internet was at issue, because the defendants were New York residents. The court also held that it did not matter that some of the complaints had come from out of state, because the acts at issue all originated from New York and violated New York law. The court distinguished the case at issue from the recent American Library Association v. Pataki case (available at which held that a New York law violated the U.S. Constitution's Commerce Clause because of the State law's extraterritorial reach. The Lipsitz court found that at issue in this case was not an attempt to reach conduct occurring outside of the state, but rather an attempt to regulate a local business in a local court.

To place a realistic context on these matters and leave behind the rarefied air of cyberspace, the issues raised here would be the same if each involved consumer individually sued in Staten Island Small Claims Part. Each defrauded customer's complaint would state, "I was robbed of my subscription money," "failure to deliver as promised," or "breach of contract." . . . There is no compelling reason to find that local legal officials must take a "hands off" approach just because a crook or a con artist is technologically sophisticated enough to sell on the Internet.

As to violations of the law, the Lipsitz court had no problem in finding the defendants liable. The defendant's actions constituted a clear case of consumer fraud carried out under unlicensed business names in violation of several New York statutes. The court continued, however, to point out that the Internet brings nothing new to the world of consumer fraud and fraud prevention, and that "the Attorney General has also demonstrated that a consumer fraud action by a State's Attorney General against a local offending business is an excellent weapon in the soon-to-be-expected war on Internet fraud."

So the next time you receive e-mail explaining how you can "MAKE MONEY FAST!!!" instead of just deleting it, you might want to forward it on to the local Attorney General.

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