$422,000 to stream a movie? The continued “success” of phone cramming (original) (raw)

The feds crack down—yet again—on those mystery phone bill charges.

If you were watching Mulholland Drive on your phone, it probably wasn't through Streaming Flix. Credit: Aurich Lawson

From July 2009 until December 2010, a Minneapolis-based company called Streaming Flix allegedly hit on a hugely profitable business model—slapping steep monthly fees for its online movie service on the phone bills of 253,269 customers. In total, $9.7 million was billed in that year and a half. How many movies did Americans watch after spending all that cash? 23.

That's no typo—and it means an average of $422,000 was spent each time someone streamed a film. It also suggests that 99.99 percent of the people paying monthly fees for the service weren't using it.

Perhaps that's why the very first Google hit for "Streaming Flix" points to a question from one Barbara G. She wants to know what the company is and why "I am being billed for it with my AT&T bill but did not sign up for it?" The situation grew so bad that the FBI opened a probe of Streaming Flix and its related companies. In December 2010, the Bureau asked the public to send in complaints about the company.

Not a good sign.

According to the Federal Trade Commission, which has recently taken a strongly litigious view of the matter, Streaming Flix was a massive "cramming" operation. The company used deceptive tactics to bill people for services through their local phone bills. There, charges would often go unnoticed for months. This practice, called Local Exchange Carrier (LEC) billing, is legal and can have legitimate uses—but it's widely known as a vector for cramming schemes.

This one appears to be particularly brazen. According to the feds, a long-time LEC biller named Cindy Landeen was behind Streaming Flix. The company went so far as to bill "internal business lines at AT&T," "customers who lacked Internet access," and "at least 16 deceased consumers."

Complaints rolled down like a mighty flood as outraged customers discovered the charges and demanded their money back. (A whopping 46 percent of all customers billed obtained at least one credit, a shocking stat in a world where credit card companies will cut off merchants with "chargeback rates" above one percent). Verizon refused to accept billings from Streaming Flix in July 2010 as the complaints mounted; AT&T also refused to take new billings from the company.

But the FTC said that the middleman between Streaming Flix and the phone companies, a "billing aggregator" called Billing Services Group (BSG), kept going. BSG placed new Streaming Flix charges with other phone companies who hadn't yet cut off the money spigot. According to the feds, BSG didn't stop working with Streaming Flix until the FBI actually raided Cindy Landeen's offices in Minneapolis back in late 2010.

Streaming Flix wasn't the only company Landeen ran. She also oversaw MyIproducts, 800 Vmailbox, and Digital Vmail—all services that used LEC billing to offer voicemail service that almost no "subscriber" actually used. (Between July 2009 and March 2010, tens of thousands of people were billed but only 209 ever used their mailbox). The total amount billed for these services in less than a year: $30 million.

Landeen also ran "identity theft protection services" ($4 million billed), "directory assistance services" ($8.4 million billed), and even "a job skills training service" (a mere $277,000 billed). Clearly, serious money was at stake.

The Landeen case is under FBI jurisdiction, but the FTC recently filed a civil action against BSG, the billing aggregator, on the grounds that it must have (or at least should have) known exactly what was going on and failed to stop it. The FTC wants $52 million back from the company.

How cramming works

Back in 2008, I got crammed with four "mystery charges" on my phone bill for services I had never heard of, much less ordered. The company billing me was ESBI, now a unit of BSG (the FTC went after ESBI over cramming issues back in 2001). Curious about whether these "billing aggregators" knew that they were billing for unbelievably dodgy services, I called up ESBI to dispute some of the $48.21 in monthly charges that had appeared on my phone bill. I was asked for my phone number, then for my address.

"Why do you need that?" I asked.

"To verify your account."

"But you slapped a $14.95 charge onto my phone bill without verifying my account. Isn't it odd that you care about security now?"

"Sir, I have to enter it in the computer."

After much back and forth, all three firms allowed me to proceed without providing a complete address, and all three firms then provided the address of whoever had allegedly signed up for their "services." This address, which turned out to be the same for all four of the charges on my AT&T bill, was not mine. Despite this, each company allowed me to proceed and to dispute the charges.

"Why did you ask me to verify my address when you don't actually require it to match what's on the account anyway?" I asked. "What kind of verification is that? What possible purpose does that accomplish?"

I received no good answer. Each operator was polite, even cheerful. Each agreed to refund my charges immediately, and each offered the exact same explanation of why I was billed in the first place. "Someone must have made a mistake when typing their phone number into some form online, and they entered yours instead," I was told.

I asked each operator if I understood this correctly: the company they worked for was billing people based on nothing more than phone numbers typed into online forms? The company conducted no sort of verification at all on these accounts? That is, if I went online right now and entered their (the operators') phone numbers into these same online forms, they would be billed? And they had no problem with that sort of setup?

Not one bit. In fact, each assured me that they did not get many calls about this issue, a claim that even the most cursory Web searching is extremely dubious. In the new BSG case, the government said that services like Streaming Flix routinely violated BSG's own extremely liberal "15 percent" complaint threshold—sometimes by huge margins.

In my case, someone had entered my phone number into a "prize draw" website which signed up everyone who entered for multiple monthly services. Such practices continue. When the FTC looked into Landeen's businesses, it found that the bills being generated were based on Internet "offer" pages that "appeared to be part of the sign-up process for an unrelated, free service or event, such as voting in a picture contest or obtaining a free e-mail account."

As consumers clicked through the Web pages related to these free events or services, the offer pages for the crammed services appeared several pages into the click-through and appeared to be part of the unrelated sign-up. Indeed, the offer pages were pre-populated with information (such as name, address, and phone number) that consumers had initially entered to obtain the free e-mail account or to vote, and contained a prominent heading such as “You’re Almost Ready to Cast Your Vote!” or “Your E-mail Account is Almost Ready!” Though the offer pages “disclosed” the service, its cost, and that it would be billed to the user’s telephone number, these disclosures appeared in a lengthy block of tiny text sandwiched between the large-print headline and the pre-populated data fields.

This enraged many of those billed. FTC investigators unearthed a few phone calls from disgruntled "customers." One, calling from a law firm, was told that someone named "David Jones" had signed the firm up for voicemail services. "Nice gig you guys got," replied the caller. "I got seven employees, and we don't have any Davids or any Joneses."

Another woman complained that she had been billed for Streaming Flix even though she didn't own a computer and even though the Streaming Flix "order" was in her ex-husband's name. "But this is not right, how somebody can put something on my phone bill that I don't even have and I have to pay it," she pleaded. "The phone is in my name, and I did not okay this."

As one rep admitted when an angry customer called about charges in her son's name, "Well, he may have been on one of our advertising affiliate sites and thought he was signing up for something else."

Such schemes enrage and aggravate at every level, from individual consumers to the federal government to state attorneys general. Speaking at a 2011 FTC panel on cramming, Illinois Assistant Attorney General Beth Blackston recounted her horror stories for the audience.

"One vendor in 15 months billed 3,650 Illinois consumers approximately $800,000," she said. "And this is one of my favorites, in one case 9,842 Illinois consumers were billed for credit repair services. And when we drilled down a little bit on the phone numbers that were billed, we found—this is for credit repair services—Steak ‘n Shake, our county coroner’s office, a Super 8 lodge, and our local public library’s story line, which is just a recording."

A question of responsibility

So why is the FTC going after the billing aggregator, the company that collects the millions of monthly charges from many different LEC billers and sends them on to the phone companies? Because BSG and its numerous subsidiaries are subject to a court-ordered Permanent Injunction going back to 1999.

Between 2006 and 2010, says the FTC, BSG violated that Injunction by "putting more than $70 million in bogus charges on consumers' phone bills for 'enhanced services'... In the face of stark evidence of ongoing fraud, BSG continued to bill month after month for these services, even approving new billing for the same crammer. In fact, BSG continued to bill and collect for these services after major telephone companies refused to do so."

BSG insists it's an innocent bystander—blame the actual crammer, not the middleman. "The bottom line is that the FTC is trying to blame BSG for the acts of another party," said the company in a statement sent to Ars.

BSG has fought hard to stop crammers since our incorporation 23 years ago. We have a strict protocol in place to thwart cramming, including a 100-point review process that all businesses must go through before we allow them to bill any customers, monthly performance evaluations, and a thorough review of all customer inquiries. Our process includes pre-screening vendors, authenticating charges, and testing to confirm the authenticity of charges. We believe in the effectiveness of our due diligence processes, which have reduced reports of cramming to extraordinarily low levels.

Firms accused of involvement in cramming often complain that they are the victims. For instance, back in 2008, the owners of Inc21.com, an accused crammer, filed a federal lawsuit against the Philippines-based call centers they used. Inc21.com claimed that workers there had deceived the company and falsified the "third-party verification" process used to root out fraud. (The suit did not save Inc21's backers from civil action by the FTC nor from a federal criminal case brought by the government earlier this year).

BSG performed its own "scrub" of the AT&T numbers billed by 800 Vmailbox and Digital Vmail—and found that 5,430 of the 8,413 phone numbers being billed didn't match the name and address provided by the voicemail company.

As the middleman, BSG makes similar claims about being duped, but the new FTC complaint tries to show that the company had ample reason to know it was aiding a fraudulent enterprise. (These claims are detailed, extremely detailed, in a 45-page appendix to the original FTC complaint). For instance, the FTC says that BSG saw the "astronomical refund rates" requested by Landeen's "consumers," including a 60 percent refund rate on the voicemail products alone. BSG was also notified that major carriers like Verizon and AT&T were cutting off various Landeen products at different times due to the complaint rates that the telcos themselves were seeing.

What about BSG's "strict protocol" and "100-point review process"? According to the FTC, the company did evaluate Landeen's businesses. At one point, BSG performed its own "scrub" of the list of AT&T numbers billed by 800 Vmailbox and Digital Vmail—and found that 5,430 of the 8,413 phone numbers being billed didn't match the name and address provided by the voicemail company. But after the scrub, the FTC says BSG opened no broader investigation into this staggering rate of error. BSG did not proactively offer refunds, and did not notify law enforcement. In fact, it "doubled down on its relationships with the crammers, approving two new Landeen services for billing in the fall of 2010." BSG even agreed to bill for Landeen's services, says the FTC, after Landeen's company admitted that only 20 percent of those billed were even expected to use them.

Some of the information in the complaint was apparently not known by BSG at the time, only coming out as part of the FTC's investigation. For instance, video provider Rovi Corporation revealed to the FTC that only 23 videos had been watched through Streaming Flix; BSG does not appear to have had that information and so could not have acted on it. But the complaint claims that, even in this case, BSG did know that Streaming Flix had racked up 65,025 complaints (25 percent of all customers billed) and also knew that AT&T and Verizon eventually banned the service from billing through their phone networks.

While BSG argues that the FTC doesn't know what it's doing ("The FTC plainly misunderstands BSG’s business," it said in a statement), the FTC has a long history of bringing civil cramming cases, including against the billing aggregators. It went after BSG back in 1999 (when the company had a different name) and after ESBI in 2001, among other cases, so the strategy is hardly novel. Still, BSG says it is being unfairly singled out despite its best efforts at containing fraud.

Billing aggregators don't get much sympathy from law enforcement, though. As the State of Illinois' Beth Blackston put it, "The carriers and the [billing] aggregators tried a fix several years ago with the best practices, and those best practices, coupled with numerous law enforcement actions, did seem to reduce the problem for a few years, but now, as I mention, we’ve seen a resurgence in phone-billed products and consumer complaints alleging cramming. And we just don’t see any real products or services that anyone is using."

"It seems that everybody on the billing side could do a better job of knowing their customers and how they are marketing based on some of the responses that we get," she added.

Time for the banhammer?

Convincing people to turn over payment details on the Web is tough; tucking fees onto people's existing bills with nothing more than an online "yes" click sounds much more attractive to many marketers looking to make a quick buck. While the FTC and FBI may whack some of the biggest players in the game, interest in this kind of billing will remain so long as carriers allow it. To their credit, the phone companies appear to have made LEC billing somewhat more difficult. In addition, many like AT&T allow customers to turn it off altogether, though anyone planning to do so should get a clear description of how this may affect legitimate services they may use.

Why do carriers offer LEC billing at all, given the massive problems? A 2011 investigation from the Senate Commerce Committee found that the phone companies are keenly aware of the revenue they make from the practice.

Evidence reviewed by Committee staff shows that telephone company employees understood that third-party billing was a valuable source of revenue for their companies. While allowing third-party vendors to access their telephone bills exposed their customers to cramming, it was also profitable business line for the companies.

In November 2008, for example, a Verizon employee forwarded a cramming complaint to a colleague and stated, "[h]ere is an example where B&C [billings & collections] is causing problems here—why do we let this ESBI—and there have been many complaints on this provider, do business with us?" He asked, "[w]hy can‘t we just shut this off and let these carriers go elsewhere—i.e. use a credit card for their services and get out of this business?" As the colleague forwarded the e-mail to the Verizon employee who handled complaints he noted, "I did not respond…since…I'm confident he already understands that B&C is a revenue generating product with excellent margins (ROI) [return on investment] for Verizon...

A Director for AT&T Billing & Collection replied, "I know however we are pushed to bring in revenue and we can't if we deny new customers. The only thing we can do is try to get as much protection as possible and go from there."

Some consumer advocates want to put a stake through the heart of LEC billing, ending the vampiric practice of billing unrelated products to a phone bill altogether.

"In my opinion, there’s very little legitimate business being conducted that uses third-party billing on landline phone bills," said John Breyault of the National Consumers League at the FTC cramming symposium in 2011. "Third-party billing on landline phone bills is in many ways a relic of the days before consumers began to widely adopt credit and debit cards... The blanket outlawing of third-party billing through the landline phone bills seems to us like the most prudent option."

But some of those looking for easy ways to make a buck online would like to see the practice extended to other monthly bills.

"Basically, it is extremely difficult to get approved to bill your customers this way," wrote one user on the Money Maker Discussion website. "With LEC Billing, you are able to bill the customer (end-user) directly on their monthly phone bill. Now, my main question is whether anyone knows of a similar billing concept that I can implement. Is there a way to charge an end-user's other utility bills? (cable, gas, electric, etc.)"

Now there's a scary thought.

Listing image: Aurich Lawson

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