Wednesday, January 27, 2010

NY Attorney General Alleges Online Fraud

The Wall Street Journal

New York Attorney General Andrew M. Cuomo said Wednesday his office is investigating 22 online businesses for allegedly linking consumers with discount promotions that end up charging them illegal fees.

Online sites of retailers including Staples Inc. (SPLS), Barnes & Noble Inc. (BKS), Avon Products Inc. (AVP), GameStop Corp. (GME), Inc. (FLWS) and Orbitz Worldwide Inc. (OWW) "deceptively link" customers to fee-based membership programs, Cuomo said in a call with reporters.

The programs are run by third-party companies that charge unauthorized fees under the guise of discount offers and also receive consumers' credit card numbers, Cuomo said. His office also named the mortgage business of GMAC Financial Services as a participant by offering discounts on mortgage payments.

"Well-known companies are tricking customers into accepting offers from third-party vendors, which then siphon money from consumers' accounts," Cuomo said. "We need them to stop because this is consumer fraud" that extends nationwide.

The charges by the New York Attorney General are believed to be the first by a U.S. state and come as retailers have been adding all sorts of services and promotions to their Internet sites to try and attract business as the recession has caused massive spending pullbacks. Retailers run their Internet programs themselves or work with third-party companies for either parts or all of their Web efforts.

The subpoenas sent by Cuomo's office seek information about retailers' practices of sharing consumers' account information with membership program companies, their knowledge of any deceptive solicitations and what kind of compensation they may be receiving from the membership companies.

All told, Cuomo said his office has sent subpoenas to 22 merchants that have deals with the three major companies that offer these discount programs: Webloyalty, Affinion/Trilegiant and Vertrue.

Eileen Gibson, 66, of Bay Ridge, Brooklyn, said she ordered a book for her son's birthday from Barnes & Noble and after completing her order, a Web page with Barnes & Noble's name appeared and asked if she wanted to receive a $20 "award," which she accepted.

Gibson said she subsequently found out that she was going to be enrolled in a discount membership club and charged $12 a month. She said Barnes & Noble and the membership club weren't responsive to her calls to cancel the arrangement so she contacted the Better Business Bureau.

In a statement, Barnes & Noble said it "does not and has not shared customer debit or credit card information" with the outside companies. "We seek to protect our customers from these types of practices," Barnes & Noble said.

All three of the online discount program companies said they already require customers to provide their full credit card numbers to enroll and that they are cooperating with Cuomo's office.

Calls to other companies named by Cuomo weren't returned.

The subpoenas started going out several months ago, said Richard Bamberger, a spokesman for Cuomo. The Attorney General's office has heard back from most of the companies, Bamberger said, but declined to provide their names.

Cuomo said when consumers shop online from familiar retailers, they are often presented with a discount or cash-back incentive offer as they complete their purchases. By clicking on the discount or incentive banner, they are unknowingly directed to a membership program seller's Web page that is separate from the online retailer's site and recurring charges begin to appear on consumers' credit or debit card bills from unfamiliar companies, Cuomo said. Because the charges are often small they can go unnoticed for some time.

The three membership program sellers being investigated bring in revenue of more than $1 billion per year, much of which is amassed through fraud, Cuomo said.

Many consumers have reported that the companies offering membership programs make it difficult for them to cancel memberships and obtain full refunds of the unauthorized charges.

Cuomo said his office reached an agreement with online movie ticket retailer Fandango to permanently end the practice of sharing customers' credit and debit card information with discount program sellers.