U.S. GOVERNMENT PRINTING OFFICE

64–206 CC WASHINGTON : 2000

S. HRG. 106–516

SWINDLING SMALL BUSINESSES: TONER-PHONER

SCHEMES AND OTHER OFFICE SUPPLY SCAMS

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

MARCH 28, 2000

(

Printed for the Committee on Small Business

For sale by the Superintendent of Documents, Congressional Office

U.S. Government Printing Office, Washington, DC 20402

COMMITTEE ON SMALL BUSINESS

ONE HUNDRED SIXTH CONGRESS

CHRISTOPHER S. BOND, Missouri, Chairman

CONRAD BURNS, Montana

PAUL COVERDELL, Georgia

ROBERT F. BENNETT, Utah

OLYMPIA J. SNOWE, Maine

MICHAEL ENZI, Wyoming

PETER G. FITZGERALD, Illinois

MIKE CRAPO, Idaho

GEORGE V. VOINOVICH, Ohio

SPENCER ABRAHAM, Michigan

JOHN F. KERRY, Massachusetts

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

PAUL D. WELLSTONE, Minnesota

MAX CLELAND, Georgia

MARY LANDRIEU, Louisiana

JOHN EDWARDS, North Carolina

EMILIA DISANTO, Staff Director

PAUL COOKSEY, Chief Counsel

PATRICIA R. FORBES, Democratic Staff Director and Chief Counsel

(II)

CONTENTS

OPENING STATEMENTS

Page

Bond, The Honorable Christopher S., Chairman, Senate Committee on Small

Business, and a United States Senator from Missouri ..................................... 1

WITNESS TESTIMONY

Bailey, Joan, Administrative Assistant, Brownstone Real Estate Company,

Hershey, Pennsylvania ........................................................................................ 5

Easton-Saunders, Linda, Database/LAN Administrator, Prospect Associates,

Silver Spring, Maryland ...................................................................................... 14

Everding, George, Communications Coordinator, Feed My People, St. Louis,

Missouri ................................................................................................................ 22

Grosfeld, Peter, Miami, Florida .............................................................................. 24

Duffy, William R., President and Chief Executive Officer, Imaging Supplies

Coalition for International Intellectual Property Protection Inc., Lexington,

Kentucky ............................................................................................................... 30

Burke, Tricia, Vice President, Office Equipment Company, Inc., Louisville,

Kentucky, on behalf of Independent Office Products & Furniture Dealers

Association, Alexandria, Virginia ....................................................................... 39

Bernstein, Jodie, Director, Bureau of Consumer Protection, Federal Trade

Commission, Washington, D.C. ........................................................................... 51

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Bailey, Joan

Testimony .......................................................................................................... 5

Prepared statement and attachment .............................................................. 8

Bernstein, Jodie

Testimony .......................................................................................................... 51

Prepared statement and attachments ............................................................ 54

Bond, The Honorable Christopher S.

Opening statement ........................................................................................... 1

Attachment to statement ................................................................................. 4

Burke, Tricia

Testimony .......................................................................................................... 39

Prepared statement and attachment .............................................................. 42

Coverdell, The Honorable Paul

Prepared statement .......................................................................................... 83

Duffy, William R.

Testimony .......................................................................................................... 30

Prepared statement .......................................................................................... 34

Easton-Saunders, Linda

Testimony .......................................................................................................... 14

Prepared statement and attachment .............................................................. 17

Everding, George

Testimony .......................................................................................................... 22

Grosfeld, Peter

Testimony .......................................................................................................... 24

Prepared statement .......................................................................................... 27

Kerry, The Honorable John F.

Prepared statement .......................................................................................... 84

Page

IV

COMMENTS FOR THE RECORD

United States Postal Inspection Service, Washington, D.C., statement and

attachment ............................................................................................................ 86

Xerox Corporation, Rochester, New York, statement ........................................... 118

(1)

SWINDLING SMALL BUSINESSES:

TONER-PHONER SCHEMES AND OTHER

OFFICE SUPPLY SCAMS

TUESDAY, MARCH 28, 2000

UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS,

Washington, D.C.

The Committee met, pursuant to notice, at 9:43 a.m., in room

SD–562, Russell Senate Office Building, the Honorable Christopher

S. Bond (Chairman of the Committee) presiding.

Present: Senator Bond.

OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S.

BOND, CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS, AND A UNITED STATES SENATOR FROM MISSOURI

Chairman BOND. Good morning. The hearing will come to order.

Unfortunately, my colleague and Ranking Member, Senator Kerry,

has a Commerce Committee hearing in which he is deeply involved,

so he will not be able to join us.

Last fall this Committee commenced a series of hearings on deceptive or unfair trade practices that are particularly harmful to

the small business community. Our first hearing focused on slotting fees, a method that large companies use to preclude competition from small businesses getting onto supermarket shelves. The

Committee then followed up with a hearing on unscrupulous web

site creators cramming unauthorized charges onto the telephone

bills of unsuspecting small businesses.

Today’s hearing is the third in this series. This morning we will

address another scam targeting small businesses; the fraudulent

telemarketing of office suppliers, particularly copier and printer

toner. While the fraudulent telemarketing of toner cartridges may

at first glance seem to be ‘‘no big deal,’’ I am here to tell you that

it is actually an extraordinarily widespread problem, and to be this

high on our agenda it has to be. The Committee has received estimates that this type of fraud victimizes businesses up to $250 million per year.

The toner cartridge in my hand is the tool scam artists use to

ensnare small businesses. This is what is being sold, and these cartridges are usually of very inferior quality and are sold at very inflated prices.

The FTC has several ongoing investigations of companies that

deceptively cold-call businesses to sell toner cartridges. According

to the FTC, the offers are rife with fraudulent statements and misVerDate 11-MAY-2000 09:17 Aug 29, 2000 Jkt 064206 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 E:\HEARINGS\64206 pfrm03 PsN: 64206
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representations. The bottom line on these types of scams is that

small businesses and non-profit entities are shipped low-quality office supplies that they did not order at grossly inflated prices,

sometimes up to 20 times conventional prices.

Our witnesses today will testify about the many different methods these scam artists use to persuade small businesses to accept

shipments of vastly overpriced toners. In many cases, the telemarketers will expressly or implicitly represent that they are associated with the business’ regular supplier of photocopier toner or

the photocopier manufacturer. The telemarketers may also represent that they are calling to confirm an order placed by an employee’s predecessor when no order had been previously placed.

In addition, the companies may call a business to receive the

name of an employee and then ship unordered merchandise and an

invoice containing that particular employee’s name. It is not uncommon for telemarketers to send a free gift to employees with

whom they have spoken so that the employees feel obligated to pay

the invoice they receive.

One of the most common practices is for telemarketers falsely to

claim that prices have or are about to increase, but as a courtesy—

what a courtesy—an order has been reserved for the business at

the ‘‘regular’’ price. It would be more appropriate to state that the

prices are highly ‘‘irregular.’’ As some of our witnesses will testify

today, the prices of the toner cartridges sold by telemarketers are

substantially higher than prices for similar products available from

reputable suppliers.

Once the telemarketer has scammed a business into agreeing to

accept the delivery of the toner, it may use several other methods

to coerce businesses into paying. Typically, invoices are sent a week

following the unordered merchandise as the inflated price is not as

obvious after the merchandise has been stocked and there is a reasonable chance that it has already been used.

Moreover, the fraudulent telemarketers usually spend significant

time and energy on collection efforts including, drafting invoices

containing unenforceable contract terms to coerce businesses into

paying; stamping ‘‘Past Due’’ on first-time invoices; resorting to

bogus or real collection agencies; threatening legal action; negotiating lower prices; or claiming that if the items are to be returned,

the company will be charged a ‘‘restocking fee.’’

Finally, if the telemarketer finds a business that is willing to pay

for the overpriced toner, a telemarketer will ‘‘reload’’ and send

unordered merchandise and invoices as long as the business continues to pay.

While the FTC and certain States’ attorneys general have been

active in prosecuting businesses engaged in deceptive office supply

sales, they have limited resources. To be successful in putting these

scam artists out of business it is imperative that the Federal Government act as an information clearinghouse. We must ensure that

small businesses and small not-for-profits are aware of the scams,

and inform them how they can protect themselves. That is why we

are holding the hearing today.

We do not need to change existing law to provide the authority

to Federal law enforcement agencies to prosecute fraudulent telemarketers. The FTC already has the authority to seek civil penVerDate 11-MAY-2000 09:17 Aug 29, 2000 Jkt 064206 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 E:\HEARINGS\64206 pfrm03 PsN: 64206
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alties. The Department of Justice has the authority to prosecute

criminally bad actors. The FBI and the Postal Inspection Service

also have the authority to investigate the fraudulent sale of office

supplies.

The FTC has been particularly active in bringing enforcement actions in this type of fraud, and their efforts are ones we commend.

Nevertheless, it appears that even companies that are successfully

prosecuted often simply change their business name and continue

the same fraudulent activities. The Committee is interested in

hearing about what the FTC and other agencies are doing to decrease recidivism, and what Congress can do to assist in their efforts. My personal view is that that might begin to border on the

criminal responsibility side.

Additionally, the Committee has learned that many States’ attorneys general may not have appropriate statutory authority to seek

civil penalties. While most States have ‘‘Little FTC Acts,’’ which

prohibit deceptive business practices, some of these acts may not

apply to sales of business to business. Accordingly, we intend to

work with States through their legislatures, Governors, and attorneys general to suggest to them that this business-to-business scam

merits their attention as well.

The FTC has been extremely helpful in providing the Committee

with background information on this problem and their enforcement actions. I am especially grateful for the extraordinary effort

of FTC Chairman Robert Pitofsky, and FTC staff members Elaine

Kolish, James Reilly Dolan, Elena Paoli, and Matthew Downs.

[An attachment to the statement of Senator Bond follows:]

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Chairman BOND. We are fortunate to have four panels this

morning. Our first panel consists of representatives of two small

businesses, and a non-profit organization that were targeted by

fraudulent telemarketers. Our second panel is an ex-employee of a

telemarketing company who will give us a look inside as to how

these operations work. The third panel consists of a representative

of the ISC, and a reputable small office supply firm. Finally, a

fourth panel, a representative of the FTC who will give us the results of its recent enforcement actions and a new grass roots education initiative. We look forward to hearing from and working

with each of our witnesses.

Accordingly, to begin the hearing I would like to call as the first

panel Ms. Joan Bailey, administrative assistant, Brownstone Real

Estate Company, Hershey, Pennsylvania; Mrs. Linda Easton-Saunders, data base and LAN administrator, Prospect Associates, Silver

Spring, Maryland; and Mr. George Everding, communications coordinator, Feed My People, St. Louis, Missouri.

As you come forward I am going to submit for the record a statement from Senator Coverdell.

[The prepared statement of Senator Coverdell is in the APPEN- DIX:]

Chairman BOND. I also submit for the record a statement from

the Xerox Corporation in Rochester, New York; and a statement

from the Postal Inspection Service in Washington, D.C.

[The statements are in the COMMENTS FOR THE RECORD:]

Chairman BOND. Good morning and welcome. Ms. Bailey, would

you care to begin?

STATEMENT OF JOAN BAILEY, ADMINISTRATIVE ASSISTANT,

BROWNSTONE REAL ESTATE COMPANY, HERSHEY,

PENNSYLVANIA

Ms. BAILEY. Thank you. First off, I want to introduce our firm.

I am with Brownstone Real Estate Company, an independent real

estate brokerage firm in Hershey, Pennsylvania. We have been in

business since 1971. I joined the firm in 1995 and have acted as

the administrative assistant since 1998. My responsibility include

ordering and monitoring inventory of office forms, supplies, and

items for computers, fax machines, and our copiers.

At this time I would like to explain my recent experience with

a distribution company that solicited us for business. On July 7,

1999 I received a phone call. As per standard practice I identified

myself and asked the caller how I could be of assistance. A female

responded, ‘‘Hi, Joan, I am calling about your Lanier copier. What

is the serial number on your copier?’’

My initial response was, ‘‘Why do you need that?’’

I was told there was a pending price increase on toner and the

caller wanted to get me under the old pricing of $549. I asked how

much of a price increase and was quoted a ridiculously high

amount like $800—a very drastic difference.

I told the caller I would have to verify this offer with our accountant and asked her to please hold. I explained this offer, as I

understood it, to our accountant—toner prices were about to increase for our Lanier copier, but if we acted immediately we could

still get the old pricing. The accountant and I compared the offer

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with our most recent purchase of similar toner which we purchased

on May 18, 1999. At that time we had paid $695 for one case of

four toner bottles. So this was a natural assumption on my part

that this was a case. We were not in dire need of toner at the time,

but given the price, both my accountant and I felt that it would be

beneficial to make this purchase at this time.

When I returned to the person who was on hold, who I believed

to be a Lanier representative, I informed her we would take advantage of the offer. I, of course, gave her my name and complete mailing address.

I did not give another thought to this purchase until the next

day, July 8, when a gentleman called identifying himself as ‘‘Bill.’’

He told me he was calling to verify my toner purchase, which I did

confirm. Again, I did not think anything of this out of the ordinary

because Bill is the name of our copier repairman with Lanier. Coincidence? I do not know. I do remember thinking it a bit odd that

Bill was calling in reference to a toner order, but maybe Bill made

a job change. I do not know.

A week later, about July 19, I received another call from Lanier—this one from our representative, Brooks Bracken, who I had

spoken with many times. She wanted to know if we needed anything in the way of supplies, particularly toner. I asked, ‘‘How

many times is Lanier going to call wanting to know if we need

toner? How many copies do you think we make in a week?’’

She informed me this was her first call she had made in this current quarter, and furthermore, she was the only one to contact me

for an order. My first red flag went up.

She immediately wanted to know who had called and how they

represented themselves. I repeated the chain of events ending with

how I purchased the toner. This was when I first heard the term

‘‘Paper Pirates.’’ I was furious, embarrassed to think I was swindled by this fast-talking rep, but our only consolation at this time

was the fact that we had not yet received it and we were not out

of any money. Now my true Lanier representative faxed me completed details educating me on what I had just fallen victim to.

With her help and per enclosed instructions I began to prepare for

when this toner finally arrived.

That was on or about July 20, 1999. I was shocked to find the

box contained only one bottle of toner, not the case of four I had

expected. The enclosed packing slip was not from Lanier, but rather Global Distribution Center located in Marina Del Rey, California.

Chairman BOND. This is what you received?

Ms. BAILEY. Right. An invoice was not included. I have since

learned that is part of the scam—hoping that you would open the

package, use it, and then, of course, feel obligated to pay. Thanks

to Lanier that was not going to happen. I made a copy of the toner

label and the packing slip; packed the toner back up and waited

for the invoice to arrive.

On or about August 2, 1999, 13 days later, the invoice arrived

separately. I was appalled at the charge of $549 for this single bottle of toner. In addition there were $60.40 in shipping charges that

were never disclosed in our original conversation. August 5, per

Lanier’s instructions, I sent a brief but direct letter to Global DisVerDate 11-MAY-2000 09:17 Aug 29, 2000 Jkt 064206 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 E:\HEARINGS\64206 pfrm03 PsN: 64206
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tribution Center. Basically stating, ‘‘You misrepresented the sale.’’

Get your things within 30 days or we are going to get rid of it. ‘‘We

do not want it.’’ But I did forget in my haste to send it certified.

On that same day I sent a copy of this letter, all the pertinent

information: packing slip, invoice, and toner label, to the names

and organizations on the list I received from Lanier which was part

of this. So to get rid of this I just made a file, ‘‘Information’’ and

filed it.

August 9 we received an invoice for $609.40. I told the accountant, forget it, we are not paying it. Disregard it. August 12 our accountant received a call from Kelly Glen of Global Distribution

Center regarding payment of this toner. Our accountant informed

her we sent her a letter and we had no intention of paying it. Ms.

Glen claimed Global had not received it. We asked for the fax number and said we would gladly fax that letter over, at which time

she informed me according to terms and conditions we had 15 days.

We were past that 15 days. We told her basically, end of discussion. The toner is here. You come get it. We are not paying for it,

and we are not paying anything else.

When she received this fax Kelly Glen responded with a letter

dated August 12 very different to the events that occurred, basically outlining they were up front, they always identify themselves,

they made it clear how many it was. Not the case. August 16, a

United Parcel service tag was issued and the toner was finally

picked up. On that same day however we did receive another invoice for $609.40 and we figured it just crossed in the mail. August

26, we received a final invoice stamped past due. We responded on

August 27, by remailing everything we had sent, a copy of our letter, Kelly Glen’s letter, and again stating we are not paying this.

We are done.

Basically we thought that was the end, and as far as that company, it was. But it was not the end of the calls from the tonerphoners. To this day I receive many calls. Again they do not identify themselves or they will just give a first name, but do not give

a company name. They use similar lines, we want to call about

your copier, do you have that number? And all we have to basically

say is, ‘‘Don’t you have it? You would if you were my representative.’’ What I have learned is, it is very easy to really get rid of

them. You ask what their name is, they hang up. ‘‘Who are you

with?’’ They hang up.

So I feel lucky that Lanier educated us, and that we were not

taken by this. There are similar incidents that have happened, not

just toner-phoner. In conclusion, I would like to express my need

for the continued investigation, not only of the toner-phoner and office supply scams but all who are constantly trying to swindle

small businesses. This heightened distrust of business relationships

has a severe impact on the workplace environment. Basically, can

we not trust anyone?

Thank you.

[The prepared statement and attachment of Ms. Bailey follow:]

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Chairman BOND. Thank you very much, Ms. Bailey. Thank you

for going through the steps with us and outlining how your real

supplier was very helpful. We congratulate you on standing up to

them.

Ms. Linda Easton-Saunders.

STATEMENT OF LINDA EASTON-SAUNDERS, DATABASE/LAN

ADMINISTRATOR, PROSPECT ASSOCIATES, SILVER SPRING,

MARYLAND

Ms. EASTON-SAUNDERS. Good morning. I am Linda EastonSaunders and I have been employed with Prospect Associates for

the past 5 years. I am the data base/LAN administrator in the Information Technology department. As part of my job I cost and purchase computer and printer hardware, software, and supplies for

the company.

On approximately October 3, 1997, I received a telephone call

from a female from WorldTech Computers selling toner cartridges.

I recall that the female was very rude after I told her that we did

not buy toner from phone calls. She said, ‘‘What kind of manager

are you? Don’t you want to save your company money?’’ I again

told her that we were not interested.

A day or so later I was paged while I was in a meeting to answer

a phone call from a man from the same company. I told him that

I was in a meeting and that we only buy authentic HP toner, not

remanufactured. A man identifying himself as Sam Million, office

manager, called back later. I told him that we only buy HP and

that I did not appreciate his salespeople and their attitudes. He

said that he did not train their people that way and would talk to

them.

He then said they were working with HP on a pilot program with

a new type of toner which would produce more copies since it had

300 grams instead of 100 grams. Also the drum was longer lasting

and he was willing to invite us to try it saying, ‘‘How can we sell

it if you do not try it?’’ He said that if we did not like it after trying

it we could send it back and owe nothing. He also offered to send

a promotional gift, a clock radio, along with the toner, that I could

keep whether we kept the toner or not. I then said, go ahead, just

to get rid of him.

Not being sure that this was an HP promotion I went on the

Internet to the HP site to see if I could find out anything about this

new pilot program. Finding nothing on this, I called HP to ask

them about it and was told that this was not an HP program.

HP put me in contact with Thomas G. Byrne, an investigator

with M. Morgan Cherry & Associates, who told me to accept the

toner cartridge and call him when it arrived. I received the

Laserjet 5Si MX toner cartridge on October 16, 1997, via UPS and

called Mr. Byrne. I recall meeting Mr. Byrne and talking to him

about my experience and at some point giving him the toner, but

I do not have the dates when this occurred documented.

I was sent a fax on October 20, which gave me the e-mail address and fax information for Toni Berria, HP’s supplies operations

person. On October 21, I sent an e-mail to Toni advising her that

I had received the invoice from WorldTech for $297.50. This price

was double the price that I normally pay for the same toner. I menVerDate 11-MAY-2000 09:17 Aug 29, 2000 Jkt 064206 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 E:\HEARINGS\64206 pfrm03 PsN: 64206
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tioned in the e-mail that there were a couple of sentences on the

back of the invoice that I could raise an objection with. One of

them is the SOLE AGREEMENT which is on the terms and conditions up here on the exhibit.

I also told Ms. Berria that WorldTech had represented the toner

as being HP toner and not remanufactured toner and on the front

of the invoice it said, ‘‘LASERJET means high remanufactured

quality.’’ I felt that this was something that I could object to as I

did not agree that the invoice supersedes anything told to me over

the phone.

On October 27, I called and talked to Paul Derek who claimed

to be the general manager of WorldTech. I informed him that I was

not happy and wanted to talk to Sam Million, office manager, to

tell him that he had misrepresented their product. Mr. Derek informed me that he was Mr. Million’s boss. I let him know that Mr.

Million had told me their product was HP toner and it was not remanufactured, as I had informed Mr. Million that we only buy HP

toner and do not purchase remanufactured toner.

I also informed him that Mr. Million had stated that WorldTech

was selling these toners under a pilot program approved by HP.

Mr. Derek appeared to be upset stating that Mr. Million cannot do

this as it is illegal. He went on to state that he was going to reprimand Mr. Million today and Mr. Million would be suspended.

I asked Mr. Derek to explain further about the toner. He said

that the parts are remanufactured, the drum has been recoated

and is stronger than HP’s, which makes it last longer. They put

300 grams of microfine toner, approved by HP, in their cartridges

instead of the 150 grams which is put in HP’s cartridges. Comparing apples to apples, HP toner will render 11,000 to 12,000 copies while their toner will render around 30,000.

He stated that they have been in business for over 20 years and

HP approves their product. He even told me to check with HP. He

asked that I try the product and offered to lower the price to $240

including shipping and handling. He also stated that if I liked the

product he would keep the $240 for future orders.

On October 30, 1997, M. Morgan Cherry & Associates sent Prospect a check for $240 to cover the cost of the toner cartridge that

was received. Prospect in turn cut a check to WorldTech Computers

to pay for the toner.

On November 18, 1997, I received a call from WorldTech. The

man on the other end said he was my toner representative. He

mentioned receiving our check and something about closing out the

account, which confused me. He then said that WorldTech was

going to send me five cartridges because they have a minimum

order and that the one we received was only a trial. This statement

angered me and I said, ‘‘NO, we do not want any more cartridges.’’

He restated that they have a minimum order. In my anger, I was

extremely rude and said some bad words and said that I did not

care about his minimum order. I do not want any more cartridges.

Take us off of your list. Do not call me any more. He was taken

aback and then hung up.

I did not hear from WorldTech again until about a year ago. The

person said she was from WorldTech and she wanted to know what

type of printer we had. The name rang a bell and I immediately

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said that I had dealings with them before and that I did not want

to buy any toner from them. The person hung up.

I receive many phone calls from people trying to sell toner cartridges. Most of them use similar tactics as WorldTech’s. Some are

quite creative and change how they approach their caller. Some

will talk as if they are a long-standing supplier, when in fact you

have never heard of them. Many will start out saying they had a

gift they want to send and ask which one you would prefer, like

the computer cleaning supply vendor that said she had a sports cap

and which team did I want on it. When I told her I have never

done business with her company before and did not plan to, all of

a sudden the niceness went away. She was no longer my long lost

buddy, and hung up.

I have learned to tell these people that we have a contract with

a vendor already and do not wish to purchase any from them. Unfortunately, not all small businesses are aware of the scams out

there and get caught by these companies. They are cunning and

continually changing their tactics to catch the consumer unaware.

These companies have been doing this for over 30 years that I

can recall going back to when I was an office manager at a small

plastics plant back in Michigan. I do not know what you can do to

stop these people but I hope you will continue to look into this

problem and come up with a solution.

Once again, thank you for the opportunity to testify before your

committee today.

[The prepared statement and attachment of Ms. Easton-Saunders follow:]

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Chairman BOND. Thank you very much for providing us that

story, Ms. Easton-Saunders, and thank you for being strong with

those people. Unfortunately, a few bad words apparently is not

enough to discourage them.

Now let us turn to Mr. Everding. Welcome.

STATEMENT OF GEORGE EVERDING, COMMUNICATIONS

COORDINATOR, FEED MY PEOPLE, ST. LOUIS, MISSOURI

Mr. EVERDING. Thank you, Mr. Chairman, for allowing me to testify at this hearing. My name is George Everding and I live in St.

Louis, Missouri. I retired from the U.S. Navy after having served

over 32 years of active duty as an officer and enlisted man.

For almost 15 years I have been a volunteer at Feed My People,

a charity organization located in St. Louis County. Feed My People

is dedicated to feeding the poor and hungry, and to helping them

become independent, self-supporting citizens. In addition to food,

clothing and help with utility bills, we provide budget and job

search counseling and a variety of other services. Our board of directors is made up of representatives from over 25 churches of various denominations.

I am the communications coordinater at Feed My People. Among

my duties is the maintenance and support of computers, copiers,

and other office equipment. Feed My People has over 300 volunteers and only five paid employees, so we have different volunteers

at the reception desk each day. Sometime in 1997 our volunteer receptionist received a call from a representative of Ikon Supply

Service. He asked our receptionist what kind of office copier we

were using. She looked at our copier and told him the make and

model number which was printed on the side of the machine.

When he asked who did the ordering of office supplies she transferred the call to me. He started the conversation by saying that

there would soon be a price increase in the cost of the Xerox dry

toner cartridges we used in our copier. Since he seemed to be familiar with our equipment I assumed that he was from Ikon Office Solutions, a supplier with an office in our local area.

The caller offered a special price of $329 if four toner cartridges

were ordered. His implication was that the $329 was for the box

of four toners. This would have resulted in a price of about $80 per

cartridge, a price somewhat less than we had been paying. Since

we were in need of toner at that time I consented to order four cartridges.

Shortly after this I went into the hospital for emergency repair

of an aortic aneurysm. When I returned a month or so later Shirley

Beeson, Feed My People treasurer, said she had been receiving several collection calls from Ikon Supply Service in California demanding payment for toner cartridges. She had no record of having received an invoice or a bill from them so I asked Ikon to fax a copy

of the invoice. We received an invoice for two dry ink cartridges at

$329 each. None of our volunteers could remember having received

a package from Ikon but I found two cartridges in our storeroom

so I told Shirley to pay the bill. First mistake.

In March or April 1998 Shirley began to receive calls from a

Steve Nelson asking for payment for four cartridges supposedly

shipped in December 1997. This time I asked for a UPS receipt as

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well as a copy of the invoice. We received invoice number 98775 for

four cartridges at $329 each for a total of $1,316, and a UPS receipt. The UPS receipt indicated that a package had been delivered

on December 10, 1997, but did not indicate the weight or size of

the package. And it was a copy of a copy and illegible in some

places. I now believe that that UPS receipt was for the two cartridges we had received earlier. But at the time we considered the

UPS receipt proof that we had received the package and no way

of proving that we had not received the cartridges, so we mailed

them a check. Second mistake.

Several months later Shirley started to receive calls from an Ikon

representative claiming that we had ordered 12 cartridges and asking for payment of $987 for three cartridges he claimed were

shipped. He became rude and threatening, probably thinking that

he could frighten her into sending another check.

I then addressed a letter to the CEO of Ikon Supply Service stating all the things that I have just mentioned here and ended it by

writing: ‘‘We are a charitable organization operating on a very limited budget and supported solely on donations by individuals and

small companies. We cannot understand why you would want to

take advantage of someone like us. By copy of this letter we are

asking the Los Angeles County District Attorney’s Office to investigate this situation for us and to determine why we were billed

$1,964 for six cartridges worth at the most $360. A copy of this letter is being sent to the Better Business Bureau and the Conoga

Park Chamber of Commerce.’’

The Los Angeles County District Attorney referred my letter to

the Postal Inspection Service. On September 10, 1999, I received a

phone call from Mr. C.F. Dudley, a postal inspector. In response to

his questions I repeated most of what I have already said here. He

said they were taking action against Ikon. Apparently they had

swindled others.

I have since learned from a news article dated March 16, 2000,

that William H. Chatham, the owner of Ikon Supply Service, was

sentenced to 300 hours of community service and ordered to pay

$7,500 in fines and $20,428 in restitution to the Naperville, Illinois

office of Hartford and Feed My People, thanks to the investigative

service. Now we have not seen any of this money. The two checks

we sent to Ikon were endorsed by William H. Chatham. If Mr.

Chatham is looking for a place to perform his community service,

Feed My People is, as always, looking for volunteers to help us

meet our goals. I have got several jobs I can think of for him.

Chairman BOND. I was going to suggest that that would be a

great place. We could use him on some of the heavy lifting.

Mr. EVERDING. We certainly could use him.

Thank you, Mr. Chairman, for permitting me to testify before

this Committee.

Chairman BOND. Thank you very much, Mr. Everding. It is disgusting when we see people preying on not-for-profits that are operating to do very, very important work using volunteers. This is,

unfortunately, an occurrence when we talk about scams affecting

small business. In the cramming hearing we had representatives

from churches talking about how they had been abused by these

unscrupulous operators. Thank you so much for telling your story

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and we hope that your example will serve as a warning to not-forprofits, charities, churches and others that they too can be victimized by these frauds.

Mr. EVERDING. Yes, sir. We passed that information around to all

of our fellow charities around the St. Louis area.

Chairman BOND. We appreciate that and I hope that your story

and your experience will be taken to heart by others.

This is a busy day with other hearings. If you have further

thoughts, as you hear from the other witnesses who are here, we

would ask that you submit your questions or your further comments in writing within a week. Thank you very much for taking

the time to come and tell your story, and we very much appreciate

your being here.

Now we will call Mr. Peter Grosfeld of Miami, Florida. Thank

you, Mr. Grosfeld, and welcome.

STATEMENT OF PETER GROSFELD, MIAMI, FLORIDA

Mr. GROSFELD. Thank you. Good morning, Mr. Chairman. Thank

you for allowing me to testify at your hearing, ‘‘Swindling Small

Businesses: Toner-Phoner Schemes and Office Supply Scams.’’

I began working for ABC telemarketing in June 1997. I was

hired to be their telemarketing manager and was placed in charge

of their main phone room. My job was training all the new hires

and making sure that the FTC-approved phone presentation was

the only one being used. Before I was hired, the FTC had shut this

company down. Prior to being allowed to resume business they had

to place a performance bond and the FTC had to approve their

phone presentation. I was hired to make sure that the telemarketers were complying with this new phone presentation.

This company’s main product was copier toner. They sold toner

to schools, religious institutions, daycare centers, banks, and basically any type of small business. Any business could fall victim to

their sales practices. The size of the business was not important.

Having enough leads for the telemarketers to call on a daily basis

was.

The phone presentation being used by the employees that were

hired before the FTC sanctions implied that the call was being

made by the customer’s normal supplier. For example, ‘‘Hi, this is

Peter and I am just calling to double-check the model number of

the photocopier.’’ The key words here are, double-check. They imply

that we know the model number of the photocopier and thus we

are your normal supplier.

Once this model number was given, the telemarketer was trained

to name the machine. For example, the person would come back

and say model number 2020. The telemarketer would say, ‘‘That is

your Xerox machine; that checks.’’ Again leading the person to believe that the caller was their normal supplier. The rest of the

phone script would continue that it was time again for their yearly

sale and that we would be shipping your order a little bit ahead

of when you would normally get it so that you would be able to

take advantage of it. As a handshake they would ask the person

to spell their last name.

The mistaken shipment pitch was also being used by former employees that returned after the sanctions and it started the same

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way. After the model number was established the telemarketer

would tell a story about another company close by that had the

same machine, and that they were sent toner before it was realized

that they had switched machines. Since this company was just

down the road, would it be possible if we sent their toner over to

them a little bit ahead of when they would normally call to order

it?

As a new person in the phone room learned the approved phone

presentation they would be moved closer to the older employees

where they would learn the different variations of the pitch. The

only printed copy of the phone script was the approved one. Every

once in a while I would find a handwritten copy of a non-approved

phone presentation but everyone was told to keep those out of the

building. They had learned from their previous FTC raid what not

to have in the phone room.

Since this phone call’s real objective was to trick a person into

placing an order, the price was never discussed. The telemarketers

were never trained in the prices of the toner they were selling. Not

only was the price of the toner not discussed; the amount of toner

being shipped was never discussed either. Technically, a sale had

not been made. The price and quantity of toner had not been established. The following day is when the sale was made. The day after

the original call was placed, a confirmation sales call was made.

This call was taped and most of the information about the sale was

disclosed.

For example, ‘‘Hi, my name is Peter and I am calling from the

ABC company on a recorded line about the toner that you ordered

yesterday with Sally. I am calling back today to go over the shipping and billing information so that we can get this toner over to

you. The order called for eight, but we are only shipping four boxes

of toner at 250 a box for a total of 10 54 98. Your address is 1410

West Main Street, on and on.’’

If the person objected, the tape was stopped. If the objection was

overcome, the tape would be resumed. If not, the tape would be

rewound for the next call.

The amount of toner that was ordered was important to get on

tape because it enabled the shipping of future toner. This second

call was made as soon as the first payment was received. ‘‘Hi, this

is Peter from ABC telemarketing and just letting you know that

the second half of your order is on the way to you. You remember,

last month’s toner was for eight boxes but we only shipped you

four. We just shipped the remaining four boxes of toner and they

are on the way out to you; we will call you next month when your

regular order goes out.’’

From then on a call was made every single month notifying that

this month’s regular order just went out and we would call next

month when the regular order was to be shipped. This would continue until someone questioned the price or noticed that they

should not be paying for toner.

After working for this company for approximately 2 months I

started catching on to what was happening. As the new employees

left my direct control they would start learning variations of the

phone pitch. This enabled them to have more orders, thus earn

larger bonuses. I brought this to the attention of the owner and he

26

assured me that he would look into it and fix the matter. I kept

bringing it up at all meeting for about 3 weeks. I was then taken

out of the main phone room and placed into the confirmation sales

room.

It was during my time in the confirmation phone room that I

learned the true nature of the business that I was working for. The

50-plus telemarketers in the main phone room were really only

looking for people who either were new at their job or just plain

did not care. The first call was set up for the confirmation call. The

confirmation call was geared only to get the person on tape so that

their company could be sent a bill for about $1,000. Then just wait

and see who paid, keep on sending toner and charge outrageous

amounts of money until someone noticed.

In conclusion, I would like to express the need for much stiffer

penalties for any company or their owners that are caught and convicted of telemarketing fraud.

Thank you for the opportunity to testify before this Committee.

[The prepared statement of Mr. Grosfeld follows:]

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Chairman BOND. Mr. Grosfeld, ABC telemarketing obviously is a

supposed company name. Was this a single person—who was the

real brains behind this operation?

Mr. GROSFELD. I was told not to answer any specific questions

at this hearing, Mr. Chairman.

Chairman BOND. All right. Do you know how much he collected

in checks.

Mr. GROSFELD. Yes, I do. I can tell you that every Monday morning there would be a little party at about 10 o’clock when the

checks totaled over $250,000. And that was every single Monday

morning.

Chairman BOND. Just thinking generally without getting into the

specifics here, what kind of enforcement actions would be effective

to take the man behind ABC telemarketing and people of his ilk

out of the field permanently? Do we need criminal sanctions?

Mr. GROSFELD. I do believe that they do border on criminal practices. But I believe the money is what they are after, so one of the

main things that has to be done is taking their money away. Most

of the fines that I am reading about or hearing are basically slaps

on the wrist, and it is the cost of their doing business.

Chairman BOND. Three hundred hours of community service is

not much of a deterrent unless they show up at Feed My People.

I want to be there to watch that community service. But I think

that that might be a problem.

Do you have any information regarding whether your former employer is continuing to engage in similar activities?

Mr. GROSFELD. As of right now, no, I do not.

Chairman BOND. Thank you very much, Mr. Grosfeld. As I said

earlier, we will have additional questions for the record. We very

much appreciate your coming to be with us and giving us an inside

look at how these scams operate.

Mr. GROSFELD. Thank you, Mr. Chairman.

Chairman BOND. Thank you, sir.

Now I would like to call Mr. William R. Duffy, president and

chief executive officer, Imaging Supplies Coalition for International

Intellectual Property Protection Inc. of Lexington, Kentucky, and

Ms. Tricia Burke, vice president of Office Equipment Company,

Inc., Louisville, Kentucky on behalf of Independent Office Products

and Furniture Dealers Association of Alexandria, Virginia.

This has got to be a major headache for your business. Let me

now call on Mr. Duffy to begin the presentation.

STATEMENT OF WILLIAM R. DUFFY, PRESIDENT AND CHIEF

EXECUTIVE OFFICER, IMAGING SUPPLIES COALITION FOR

INTERNATIONAL INTELLECTUAL PROPERTY PROTECTION

INC., LEXINGTON, KENTUCKY

Mr. DUFFY. Thank you, Mr. Chairman. I am delighted to have

the opportunity to speak to you today regarding the toner phoner

schemes that are swindling small businesses and costing manufacturers an estimated $125 million annually at manufacturer’s cost

and also causing significant damage to their brand reputation and

loyalty.

The Imaging Supplies Coalition is a non-profit trade association

made up of original equipment manufacturers of consumable supVerDate 11-MAY-2000 09:17 Aug 29, 2000 Jkt 064206 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 E:\HEARINGS\64206 pfrm03 PsN: 64206
31

plies such as toner, toner cartridges, ink cartridges, and ribbons,

and also the equipment in the printer, copier and fax industry. The

members of the coalition are Brother International, Canon, Epson,

Konica Business Technologies, Katun, Lexmark, OKI, and the

Xerox Corporation.

The mission of the coalition is to protect our members’ customers

from misrepresented products and services by seeking worldwide

protection of intellectual property and related assets of the imaging

supplies industry’s distributors, suppliers, and manufacturers. This

is accomplished by training and education in counterfeit product

identification, methods of product security, techniques for avoiding

telemarketing fraud—the focus of today’s hearing—and by promoting laws and their enforcement.

Since you have already heard this morning about these scams I

will focus my testimony on the scope of the problem that has been

plaguing our industry for approximately 20 years. I will also discuss the trends we see and what the ISC members and other

OEM’s have done and actions we plan to take to curtail the fraudulent telemarketing of copier and printer toners and cartridges.

A 1999 survey of original equipment manufacturers in the indus- try estimated that intellectual property violations exceed $1 billion

at retail per year on a worldwide basis. Telemarketing fraud was

reported as the second largest problem; second only to product

counterfeiting.

The revenue impact is almost double what was reported in our

1997 survey. Twenty percent of the respondents reported a significant increase in telemarketing fraud, 30 percent a moderate increase, and 30 percent said that it had remained the same. The

survey also revealed that 90 percent of the companies’ complaints

regarding telemarketing fraud came from their end user customers,

while 10 percent came from authorized dealers and companies’ own

employees.

Xerox alone receives over 5,000 complaints a year. Of the complaints received, 39 percent report being victimized while 61 percent reported attempted solicitations. This ratio of attempts versus

swindles has improved since our 1997 survey which I would like to

think is a direct result of our various education programs and the

anti-telemarketing fraud programs by the FTC and others.

Revenue impact and lost profits are only part of the problems

manufacturers must contend with as a result of this illegal activity.

Perhaps even larger than the financial loss is the damage done to

the company’s brand and customer loyalty. OEM’s spend virtually

hundreds of millions of dollars in product development and manufacturing to ensure that their customers receive the highest quality

printed output from their printers, copies, and fax machines. In

cases where the telemarketing fraudsters do deliver the product it

is often of lower quality resulting in poor output and can also cause

damage to the machines.

This results in technical support hotline calls, service calls, and

dissatisfied customers. Customers look to the manufacturer to solve

these problems and the OEM’s do address them at considerable expense since they want to ensure customer satisfaction and continued brand loyalty which certainly affects future hardware and supplies purchases.

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Additional problems are created for the legitimate hardware and

supplies resellers. Many of them are small, independent businesses

who invest in sales and service training, product inventories, and

sales, service, and marketing expense. They must compete with

these scam artists, and like the manufacturers, lose revenue, profits, and must service the customers once the fraud is discovered.

State, local, and Federal Governments lose when legitimate jobs

are lost and taxes are not paid. Basically everyone loses but the

scam artist.

Recognizing all of these problems and wanting to ensure customer satisfaction, the OEM’s have undertaken various programs

to educate their employees, resellers, service providers, and end

users. The Imaging Supplies Coalition has developed and implemented a telemarketing incident reporting process for the OEM’s

who did not already have one in place. This closed-loop process ensures that complaints are captured, reported, and most importantly, that the customer is satisfied. Since our inception in 1994,

we have published numerous articles on the subject in various industry trade publications which are targeted at the manufacturers

and resellers in the industry. We have also published a number of

end user articles.

As part of our efforts to educate our resellers, we speak at industry seminars sponsored by various industry trade associations such

as BTA, the Business Technology Association, what was formerly

BPIA, now known as the Independent Office Products and Furniture Dealers Association, as well as conferences sponsored by

various resellers.

We publish a quarterly newsletter. We have established a web

site. It describes how to spot a scam, the FTC Telemarketing Sales

Rule, and links to the FTC web site and various consumer protection agencies, as well as the OEM’s. We even provide a list of all

50 States’ attorneys general offices and fraud contacts so that consumers can report these scams. All of this information, including

our 1999 survey, is published and can be downloaded by our customers.

We run an annual conference and in the past we have had representatives from the Federal Trade Commission and the manufacturers speak. We had Steve St. Claire from Iowa, a member of Attorney General Tom Miller’s staff, discuss how his State has successfully dealt with fraudulent telemarketing including toner

phoners. We have heard cases where telemarketing fraud boilerrooms post ‘‘Do not call Iowa’’ on the wall. This shows that measures can be effective and it is our goal to have all 50 States on the

do not call list. In 1999, we had both a keynote speech and telemarketing fraud seminar conducted by investigative reporter and

the author of ‘‘Scam School,’’ Chuck Whitlock.

Last year, the Imaging Supplies Coalition was awarded an

Association Advance America Award from the American Society of

Association Executives for our telemarketing fraud process and

education. In our short history, we have done a great deal to help

combat these scams.

The manufacturers are committed to continue to battle these

crimes that so adversely impact their companies and their customers. You will hear later about Project BOSS, Banish Office SupVerDate 11-MAY-2000 09:17 Aug 29, 2000 Jkt 064206 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 E:\HEARINGS\64206 pfrm03 PsN: 64206
33

ply Scams, from the Federal Trade Commission. The members are

committed to supporting that by distributing the materials from

the FTC, linking to the web sites, and getting the word out to their

customers.

In summary, we have been battling these crimes for many years

and we are making progress. The manufacturers have and will continue to spend considerable resources, both time and money, in the

fight to stop this illegal activity. We believe by working together

and utilizing all available Government resources we can have success in stopping these crimes and protecting our customers.

I thank you for your time today and welcome any assistance you

can provide us in our fight against telemarketing fraud.

[The prepared statement of Mr. Duffy follows:]

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Chairman BOND. Thank you very much, Mr. Duffy.

Now, Ms. Burke.

STATEMENT OF TRICIA BURKE, VICE PRESIDENT, OFFICE

EQUIPMENT COMPANY, INC., LOUISVILLE, KENTUCKY, ON

BEHALF OF INDEPENDENT OFFICE PRODUCTS & FURNITURE DEALERS ASSOCIATION, ALEXANDRIA, VIRGINIA

Ms. BURKE. Mr. Chairman, thank you for allowing me to testify

today before you at today’s hearing on this very important issue affecting small businesses like mine. I am here testifying as a small

businesswoman and on behalf of the Independent Office Products

and Furniture Dealers Association. Before I tell you about our association and what we are doing to combat this problem, let me first

tell you about my business.

I am Tricia Burke, vice president of OEC, Office Equipment

Company, in Louisville, Kentucky. We are family-owned and -operated and we were founded in 1907 by A.E. Meffert. My grandfather

bought the company in 1934. Office Equipment Company has been

in our family for three generations. OEC is a small family-owned

company with 35 employees that sells office products and furniture,

toner being one of our key products. OEC does about $8 million a

year in sales and we lose roughly $25,000 a year in business due

to telemarketing scams.

Now that I have told you a little bit about myself and our company, let me focus the rest of my comments on how telemarketing

scams are affecting my business and what we and the association

are doing to combat this problem in our industry. Each year the office products industry loses $225 million to telemarketing scams. This is a staggering figure for companies like

mine to comprehend. Not only are these scams having a detrimental impact on my industry, it is estimated that each year consumers lose roughly $40 billion to telemarketing scams.

OEC receives about 60 complaints a year having to do with this

issue. You might not think this is a significant number of complaints for a business to receive each year, but for one issue a small

business like ours, OEC, this is a significant amount. My goal as

vice president of OEC is to make sure that our company is competitive in today’s marketplace while ensuring quality service to our

customers. I am not able to focus on this goal when I am spending

valuable time each day trying to figure out how we can fix the

problem brought on by unscrupulous telemarketers.

When I am focusing on how to handle ramifications on our business brought on by these types of scams that means there is less

time for me to focus on our business and the customers we serve.

This is a tremendous burden for small businesses like mine. We

need to focus our attention and energy on our business, making

sure they are profitable, that we are serving the customer, and not

combating abuse by those trying to scam customers.

Let me tell you a personal story of how telemarketing scams

have affected my business and my relationship with my customers.

Back in March 1995 a gentleman by the name of ‘‘Terry Sullivan’’

was making phone calls to office products dealers throughout the

States of Indiana and Kentucky letting them know that he was

running a contract operator service for Ameritech pay phones and

40

he was setting up a local office in the area. Mr. Sullivan was extremely knowledgeable of the office products industry. He told dealers that when his company orders from dealers his company has

a policy that they pay their bills off statement at the end of the

month and that a check would be cut within 5 days. We liked that.

Mr. Sullivan proceeded to tell the dealer that he was in the market to buy transcribers and recorders. He bought four of each. An

office products dealer in Indiana proceeded to deliver the merchandise to Mr. Sullivan’s company. When the dealer went to collect at

the end of the month, Mr. Sullivan was nowhere to be found. In

fact, the bill was never paid, the phone was disconnected, and

when the dealer went to the address given by Mr. Sullivan to see

what was going on, all that was found was an empty office with

empty transcriber and recorder boxes. That means he did get his

merchandise.

This was not an isolated incident, but happened to a number of

small businesses in the Indiana and Kentucky areas. I hate to say

it, but OEC was one of those small businesses that fell victim to

Mr. Sullivan’s illegal telemarketing scam. Our company received a

call from ‘‘Terry Sullivan’’ back in 1995 where he proceeded to tell

our customer service representative a similar story. However, instead of ordering transcribers and recorders from OEC, he ordered

a Panasonic microcassette recorder worth $300. When we followed

up in our credit check process we discovered that the information

Mr. Sullivan provided was false.

As vice president of OEC, I do everything I can to make sure our

employees are trained to catch these type of scams. But the sad reality is, until an individual actually experiences it firsthand or is

knowledgeable about these type of scams, you do not know what

signs to look for. Looking back I wish we would have done some

things differently, as I can imagine everyone who has been

scammed does. But unless something is done to seriously crack

down on telemarketing scams, small businesses are going to continue to be a target. Today is the first step, but small business

owners like myself need to be provided with the tools that will help

us recognize the signs of these scams before we are bilked out of

thousands of dollars.

Now let me give you another example of how these scams not

only hurt my business, but more importantly, my relationship with

a customer. In the spring of 1998, a gentleman began calling companies in the Louisville area telling them that he was in the copier

business and could provide them quality service at an inexpensive

price. The gentleman proceeded to ask the companies he called for

the model number of their copiers so that he could send them

toner.

When asked what company he was calling from, the gentleman

informed the dealer he was calling from none other than OEC, Office Equipment Company. Shortly thereafter, we received a call

from an OEC customer who had been contacted by this gentleman.

The customer asked me if we called earlier trying to sell them copier products, and if so, why did OEC need their copier model numbers? I assured this customer, who has been doing business with

us for years, that we were not making these calls and that we only

sell them the products they order. We informed our OEC employees

41

about this situation and let them know that someone was out there

misrepresenting us. We wanted them to be aware of the incident

and to keep us informed of any additional complaints.

As a company, we may only receive 60 complaints a year from

customers dealing with scams, but OEC receives dozens of calls a

week from those trying to scam our company out of money or products. These scams range from selling us advertising in publications

we have never publicized in or even heard of, to selling us light

bulbs, janitorial products, copier toner and supplies. The caller will

ask to talk to the person in charge of a particular department, the

general office, maintenance, marketing, copy room, then proceed to

use a hard sell approach. Those involved in these criminal activities hurt companies like mine who are legitimate resellers of office

products and ‘‘play by the rules.’’

Our association, the Independent Office Products and Furniture

Dealers Association is working hard to combat it. We have come up

with a brochure that we make available to our customers to be able

to send out to their customers informing them of the situation.

Chairman BOND. If you do not mind, we would like to have copies of that for the members of the Committee and for the record.

Ms. BURKE. Sure. We have hundreds for you.

Chairman BOND. I do not need hundreds, but thank you.

[Laughter.]

Ms. BURKE. This has been a wonderful opportunity for me to

come before you and tell you how telemarketing scams are affecting

my business. I would like, before I leave, just to offer a couple suggestions.

Telemarketing scams are a problem in this country not just for

businesses like mine but for businesses large and small. According

to the FBI there are 14,000 illegal telephone sales operations

bilking consumers in the United States every day. It is sometimes

hard to distinguish between reputable telemarketers and criminals

who are using the phone for fraudulent purposes. But if you know

what to look for you can identify the ‘‘red flags of fraud.’’ This is

why the best thing that the Government can do for businesswomen

and men in this country is to provide them with educational tools

and resources that will help them avoid being taken advantage of

by telemarketing scams.

Mr. Chairman, thank you for this opportunity and we would be

happy to work with you on a solution to this problem, and we will

answer any questions you might have.

[The prepared statement and attachment of Ms. Burke follow:]

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Chairman BOND. Thank you very much, Ms. Burke. Let me ask

very briefly first, Mr. Duffy, can you give us any idea of why the

frequency of this type of fraud seems to have increased so significantly? From your standpoint do you see any reason why this

should be so much more prevalent now?

Mr. DUFFY. I think there are really a couple of basic reasons.

First of all, there is dynamic growth in the industry. The industry

is roughly a $25 billion industry in the United States growing at

$28 billion in the next couple of years. There are some 52 million

machines that use imaging supplies installed in millions of establishments in the United States. The compound growth rate over the

last decade has been about 10 percent year to year. So the industry

is growing.

I think that the penalties are low. They are not a deterrent to

these telemarketing fraudsters. And frankly, I think we see the impact has doubled in our survey because, I think, we see better reporting of it. We see better reporting from our various constituencies.

Chairman BOND. So it has been there but we are just now beginning to see the extent of it?

Mr. DUFFY. Right. I believe it is just the tip of the iceberg.

Chairman BOND. That is scary. You have indicated some of the

steps your members are taking. Are these fraudulent operators getting products from the original equipment manufacturers, from

your people, or are they just dealing in the aftermarket? Do your

individual members have a means of cutting off supplies to these

fraudulent operators?

Mr. DUFFY. Typically, they do not buy from the manufacturer.

There, of course, is a very legitimate aftermarket business in office

supplies that many reputable companies represent. Typically, these

people would buy the product offshore. In many cases it also involves trademark violations, certainly tradedress violations. You

can see that on some of the examples up here today using the HP

trademarks on the invoices, for example, and on the material itself.

So there are some suppliers outside the United States that these

people would buy the raw product from. Typically they repackage

it, put their own labels on it, and as I mentioned there are other

intellectual property crimes involved in it also.

Chairman BOND. There are not, in your view, sufficient penalties

to discourage those frauds?

Mr. DUFFY. I think as the previous witness said, it is a cost of

doing business. It is a slap on the wrist. In my view, the only penalty that will work is some criminal action and jail time.

Chairman BOND. Thank you. Ms. Burke, you said that you needed to get some additional tools to help prevent this kind of unfair

competition which is not only a scam and a fraud on your customers, either potential or actual customers, but obviously a great

loss to them. Are there any other tools that you would suggest?

What kinds of things specifically do you need besides the information that you put out in your bulletins and other sources?

Ms. BURKE. I think the best opportunity to address this issue is,

to educate consumers as much as we can. I know brochures are one

way, but to keep talking about it; the whole idea of top-of-mind

awareness. I know with our company when there are buyers of

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product, it is very important that people have effective procurement methods—that there really are designated people at a company who are the one and only who can make those purchases.

Usually those folks, after week two of being in that position are extremely assertive at saying, ‘‘No’’ on the phone, and they know that

those things are not legitimate.

But where there is danger is when people go on vacations and

things like that and there is the temporary assistant person who

is just doing it this week. I would encourage companies to have a

game plan. We all have game plans when it comes to fire drills. Let

us have a game plan when it comes to procurement so that there

are designated buyers. When you do orientation of employees, people are made aware of this issue and that is enforced within a company.

So I think the more education—I realize there is discussion here

too regarding additional laws and things like that. I want to say

that there are legitimate telemarketers out there, and in the office

products industry there are very legitimate people who are calling

and sell by phone. But to deal with the scam artist, it is very important to just say, ‘‘No;’’ to come up with methods.

Chairman BOND. Is your association working with local, State,

and Federal law enforcement agencies? Do you have a game plan

for getting these people turned over to the law enforcement community?

Ms. BURKE. I know we are involved with coming up with more

educational processes. But to be honest, I do not know that—

awareness has been our key goal, but working with the different

law enforcement agencies, I do not know at this point if we are.

Chairman BOND. Thank you very much, Ms. Burke. Mr. Duffy,

again we will have questions from the rest of the Committee. We

thank you very much for your time and being here today.

Now I would like to call the fourth panel, Ms. Jodie Bernstein,

the director of the Bureau of Consumer Protection in the Federal

Trade Commission. Again, welcome, Ms. Bernstein. Glad to have

you back with us to discuss another fun and interesting area of

fraud.

STATEMENT OF JODIE BERNSTEIN, DIRECTOR, BUREAU OF

CONSUMER PROTECTION, FEDERAL TRADE COMMISSION,

WASHINGTON, D.C.

Ms. BERNSTEIN. Thank you, Mr. Chairman. It is a great pleasure

for us to appear at your hearings, which are especially valuable to

us because they help to call attention to the particular issues that

we have to face today. Nothing is better than making people aware

of these scams so they can prevent them. Again, I will summarize

the Commission’s full statement, if I may.

Chairman BOND. Your full statement will be made part of the

record and we hope to have that avilable for the media and others,

and I appreciate your making some summary comments.

Ms. BERNSTEIN. Thank you. I wanted to point out also, of course,

that the Commission wants to thank you, Mr. Chairman, and the

Committee again for holding these hearings.

The FTC has had a long tradition of protecting consumers and

businesses against fraud, including office supply fraud, and we apVerDate 11-MAY-2000 09:17 Aug 29, 2000 Jkt 064206 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 E:\HEARINGS\64206 pfrm03 PsN: 64206
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preciate the chance to discuss them with you and the Committee.

In just the last 4 years the Commission conducted three law enforcement sweeps targeting office supply fraud, Operation Copycat,

Operation Clean Sweep, and Operation Misprint. During these

sweeps the Commission filed 19 Federal court actions against more

than 45 companies and individuals. States and other Federal agencies participated in the sweeps by filing 17 additional cases of their

own.

Office supply fraud cases have a common pattern that starts, as

you know and have heard from other witnesses, with the scammers

placing an unsolicited telemarketing call to a small business or notfor-profit organization and they pitch, most always, copy machine

or printer toner, hence the designation ‘‘toner-phoner fraud.’’ Generally the callers make the recipients feel as if they are dealing

with their regular supplier.

Sometimes the telemarketers try to get the name of the employee, or the brand or serial number of the copier the office uses

under the guise that they are verifying existing records. At other

times the caller merely asks the employee if the business wants to

get a free gift or a sample. The bottom line is that through these

false pretenses, the caller seemingly gets somebody’s consent to

ship office supplies or makes it appear as if the consent or the authorization has been given.

Shortly after that, the business or the organization receives its

supplies, sometimes, usually a smaller quantity and a lower quality

than expected, and separately from the supplies, always an inflated

bill. These bills usually contain information like an employee’s

name or the brand of copier machine that makes the bills really

look legit.

These sales practices are illegal and violate Federal laws like the

Telemarketing Sales Act. The Telemarketing Sales Rule prohibits

misrepresentations and requires up-front disclosure of the purpose

of the call and the material conditions of the offer. We prosecute

defendants to stop these practices, impose bans and bonding requirements on specific types of telemarketing, and obtain redress

to give money back to the victims of the fraud. That is always our

principal goal, to get redress and get the money back to the businesses that have been victims.

As a result of settlements in several sweep cases and other FTC

law enforcement actions, the Commission soon will be giving more

than $4 million in redress to small businesses and not-for-profit organizations that lost money to these scams. The Commission is

pleased to announce that it obtained the largest-ever civil penalty

under the Telemarketing Sales Rule, $500,000, as part of a recent

settlement in an Operation Misprint office supply case.

Unfortunately, office supply scammers, as you have also heard,

continue to prey on small business and others despite our and other’s enforcement and education efforts. One reason is that the pool

of potential victims seems to grow larger every year. That is why

the Commission is announcing what we call Project BOSS. That

stands for Banish Office Supply Scams. It is a new grass roots education campaign that seeks to stop fraud before it starts.

Because of the tremendous growth in the number of new small

businesses each year—and we are delighted with that figure—eduVerDate 11-MAY-2000 09:17 Aug 29, 2000 Jkt 064206 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 E:\HEARINGS\64206 pfrm03 PsN: 64206
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cating new employees and volunteers to be aware of and on the

lookout for office supply fraud must be an ongoing effort. Project

BOSS builds on the past FTC education campaigns with expanded

industry and business association partnerships and new materials

for small business to use to banish office supply scams.

With the help of our industry, business association, and Government partners, the Commission hopes to distribute educational materials to thousands of small businesses through mailings and web

site links. We recently forged a new partnership with the National

Association of Secretaries of State through which participating Secretaries of State will distribute BOSS materials to prospective new

businesses at the time that they register in the State to do business. Hopefully, they will become aware of the problem by reaching

them before they become victims.

In addition, the Commission has created a page for small businesses on our web site that provides information about various office supply frauds and how to avoid them. The Small Business Administration, the Better Business Bureaus, Independent Office

Products and Furniture Dealers Association, the National Federation of Independent Business, the Yellow Pages Publisher Association, the U.S. Chamber of Commerce, and others have created or

will create links on their web site to ours.

We also have a new animated and attention-grabbing public

service banner ad for web sites that companies and organizations

may use on their sites to link to the FTC web site, and a new tip

sheet designed to look like a page from an employee manual that

employers may post or give to new employees as part of training

on office procedures. The Imaging Supplies Coalition, Business

Technology Association, the International Sanitary Supply Association, and the Office Products Wholesalers Association all have

agreed to distribute these and other educational materials to their

members, reaching more than 4,000 manufacturers, distributors,

and wholesalers of office products.

In addition, the Commission will distribute a new Powerpoint

and speech package that many people will be able to use to spread

the message, which we hope will be effective. Our partners have

helped us form this information chain, and hopefully as the chain

grows and is implemented it will reach those who might fall victim

to the fraud.

The Commission is going to continue to attack office supply fraud

in the courts as well. Through campaigns like Project BOSS, the

Commission will continue to spread the message and take innovative measures in this effort to avoid fraud in the first place.

Mr. Chairman, thank you again for giving the FTC the opportunity to testify on our efforts, and hopefully together we can bring

more awareness to the American people about this very damaging

practice. Thank you and I will be glad, of course, to answer your

questions.

[The prepared statement and attachments of Ms. Bernstein follow:]

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Chairman BOND. Thank you very much, Ms. Bernstein. As I

think we have mentioned to you before, a little over 30 years ago

I was chief counsel of the consumer protection office in the Missouri Attorney General’s Office, and you know some things never

change. The technology is new, the scams are new, but the same

old fraud are used. When you mentioned the sending out of the free

gift, that was a red flag 30 years ago; it still works. An operating

rule that I advised our citizens at the time was, if an offer sounds

too good to be true, it is. Is that still operative today?

Ms. BERNSTEIN. It certainly is, Mr. Chairman. Unfortunately,

these folks seem to be with us forever, and they do use new technologies and new techniques. So I guess the challenge to all of us

is to try to use those techniques and new ways of catching them

and preventing them in the first place. But certainly, if it sounds

too good to be true, it is.

Chairman BOND. I thank you for your great information efforts,

and we are going to work with you and with the associations and

with the witnesses we have had here today. But let us go to the

law enforcement side of it.

During the time we were investigating the problem the Committee uncovered two instances of individuals who were subject to

enforcement actions by the FTC and the Postal Inspection Service

for deceptively selling toner cartridges apparently engaging in the

same activity several years later, merely using different company

names. How large a problem is this recidivism? I get the sense that

these people just take a fine or a requirement for community service as a cost of doing business and gear up and keep going. What

is your assessment of the repeat offender situation?

Ms. BERNSTEIN. We believe that it is a problem, and a couple of

years ago we really began to focus on it, on the recidivism, because

we were seeing the same thing that you identified, Mr. Chairman.

So we made a concerted effort to target some, slightly at least, different approaches to begin to deal with the recidivist particularly.

First of all, we did bring 50 sweeps initially, and then we went

back and looked at those to see if we could identify people who

were engaged in the same activities.

So we started first of all looking for stronger provisions in our

orders. We are imposing bans and bonds, and that has not always

been the case, significantly strengthening the Commission’s orders.

Then we began an operation we call Operation Scofflaw, which

was really to bring attention and prioritizing our review, and monitoring and following up, on Federal court orders. In the past our

orders had been administrative orders. Now for the first time the

Commission has shifted to the Federal courts and we made a determined or dedicated effort to following those up.

The increased penalties that we seek there are, of course, different than administrative cases. That is, we can seek civil and

criminal contempt. And we have. So we have not had a huge number of people that have been subject to criminal contempt, but we

have had some, and some jail sentences have been imposed on recidivists. So we are going to continue that effort. We are trying to

work with the Justice Department and others to make that a more

effective effort.

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Chairman BOND. That was going to be my second question, but

you have answered it. It seems to me that when you go through

the mill the first time, you can enter an order and they pay a fine.

Having the additional order, having the court order I guess is essential to bringing a much higher penalty action against a subsequent involvement because once they go through the motions, having that extra noose around their neck would seem to me to be very

effective. About how many of those actions have you taken? Are

these usually brought against just the top individual in the company, or do you catch a number of people typically?

Ms. BERNSTEIN. Certainly we go after the top one. As you know,

as a former prosecutor, of course, we have to have direct evidence

of employees that might have been involved in it. We have brought

cases against at least eight recidivists, criminal contempt actions.

And to the extent that we can develop evidence—and of course, it

is easier to get civil contempt than criminal, but we are really focusing on criminal contempt now. We will try to get as many of the

others who were involved in the operation as we can. Principally,

we have gone after the main operator.

Chairman BOND. Mr. Grosfeld testified earlier that his exemployer was obtaining lists of businesses to call from commercial

list providers. Again, Ms. Burke mentioned the fact that there are

many legitimate telemarketers so you do not want to crack down

on them. But are there any circumstances in which FTC has

brought action against list providers who were working in concert

with the toner-phoner fraud perpetrators?

Ms. BERNSTEIN. It is a tough one to say but it does kind of summarize what the whole thing is about. Yes, we have tried to focus

on list providers, and as you know, the standard for going after a

list provider who is a third party would be ‘‘assisting and facilitating,’’ the legal standard, and to the extent that they knew that

they were facilitating and assisting in the basic fraud—we have

done that.

We have actually pursued one list enterpriser by itself and actually brought a lawsuit under the Telemarketing Sales Act for those

violations. That resulted in a considerable recovery. To the extent

that we can include in our orders prohibitions on obtaining lead

lists where we have found them to be abused in the past, we are

also doing that. Then we can monitor that as we go forward.

I meant to mention one other thing which I think may be effective in connection with recidivists, Mr. Chairman. That is, we are

imposing in our orders requirements that the convicted or the defendant notify us of a change in employment and tell us where they

are working if it is a new job or new opportunity so that we can

monitor those activities. That should be helpful too in terms of following up on those people who seem to go from one enterprise to

another.

Chairman BOND. I will discuss with you later some ideas on how

to follow up with them. I know that that is an interesting challenge.

Let me ask one final question. Are there steps that we in Congress can take to help you minimize this deceptive activity, and

particularly the repeat activities that seem to be hitting so many

small businesses and not-for-profits?

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Ms. BERNSTEIN. One thing that I have just briefly been thinking about is the extent of our penalties are $11,000 per violation. Now

as you know, Mr. Chairman, that is an old statutory provision, and

perhaps it has not kept pace.

Chairman BOND. Mr. Grosfeld said $250,000 a week. You could

clear a nice amount of money and still pay $11,000 a day if you

are raking in $250,000 a week. That is not bad.

Ms. BERNSTEIN. That is right. And I mention it because I really

think it has not kept pace with what Congress has imposed in

other similar kinds of violations of various statutes. I thought perhaps in the future that might be increased substantially. It would

help us a good deal, although as I said before, redress is where we

get the big bucks, if we can locate the money.

I suppose finally, the FTC is still pretty small for dealing with

this extensive fraudulent operation. I know you have been supportive of us in the past in terms of helping us out with our resource needs.

Chairman BOND. It all comes back to appropriations.

Ms. BERNSTEIN. Usually.

Chairman BOND. Ms. Bernstein, my sincere thanks to you and to

all our witnesses today. As I said, the record will be kept open for

a week for any comments from the witnesses, or those who are

here either in the audience or watching us by means of TV coverage. We will be asking Committee Members to review the record

and submit any questions. We would ask that you reply to those

as promptly as possible.

And with our best wishes to everybody who is working to focus

attention on this fraud, to help identify it and drive it out of business, our sincere thanks. The hearing is adjourned.

[Whereupon, at 11:08 a.m., the Committee was adjourned.]

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