New York examines Web marketing 'scam'

State officials follow up on federal probe of "misleading" marketing practices by Orbitz, Barnes & Noble, and other online retailers.

New York Attorney General Andrew Cuomo has launched an investigation into the marketing practices of 22 online retailers, including Staples, 1-800-Flowers.com, and Orbitz.

Cuomo's office said Wednesday it issued subpoenas to the merchants and requested information about the retailers' relationships with three marketing companies, Webloyalty, Affinion, and Vertrue. These firms have allegedly misled consumers for years into joining membership programs and paying monthly fees.

Webloyalty and the other companies are so-called post-transaction marketers that have compiled a long history of consumer complaints and class-action lawsuits. Typically, the three firms present pop-up ads to online shoppers when they're finalizing a transaction. Some consumers have said the ads appear to be a discount coupon from the retailer.

Federal regulators and New York state officials are trying to halt what they say are scam marketing practices by some e-tailers and marketing firms. Greg Sandoval/CNET

The ads offer discounts or cash-back coupons if the shopper will only provide an e-mail address or user name. Buried in the fine print however, are the full terms, which state that by providing an e-mail address, the customer is agreeing to sign up for a membership program and authorizing their credit card to be charged sometimes as much as $20 a month. How can these marketers charge credit cards without the owners giving them their card information? Simple, they buy the information from well-respected merchants, such as Continental Airlines, Priceline and Buy.com.

Cuomo arrives a little late to what many regard as the biggest scandal ever to hit online shopping. The U.S. Senate Commerce committee launched its investigation last May . Initially, the retailers suggested that their customers were at fault for not reading the ads more carefully. They changed their approach after investigators working for the committee unearthed hundreds of documents that show the marketers know that the overwhelming number of their programs' members don't know they are signed up. Many don't learn about it until discovering the charges on their credit card statements.

The materials produced by the Commerce committee also shows that the marketers know that without the ability to obtain credit card information from merchants, the revenue they make plummets.

Some people go months and even years before realizing that they're being charged. The government's investigation has also uncovered evidence that some of the Web merchants involved are aware their customers are duped into joining. It's safe to say many consumers believe the only way that their credit cards can be charged is if they key in their card information. That's the way it has always worked in the past.

"This online scheme has impacted the finances and tried the patience of tens of millions of consumers nationwide," Cuomo said in a statement. "Well-known companies are tricking customers into accepting offers from third-party vendors, which then siphon money from consumers' accounts."

With the U.S. government and the state of New York bearing down, many of the Web retailers have been severing ties with the marketers, whose leaders have been doing their own backpedaling. All three now say they will require consumers to key in their credit card number before signing them up to a membership.

But that doesn't go far enough, as the marketers have already begun exploiting new loopholes says, Prentiss Cox, a former assistant attorney general for the state of Minnesota and a leading expert in online marketing scams.

Cox said the marketers can still get a credit card's expiration date and the card's three-digit credit security code from retailers. The marketers have also changed up their ads to include wording that obscures the fact that by entering their card number, the consumer is agreeing to be charged monthly.

"Here's the fundamental problem with this industry," Cox said. "They have a product where if you tried to sell it legitimately, nobody would buy it. They have to use these tactics because they wouldn't have a business otherwise."

Cox congratulated the Senate Committee and Cuomo for investigating and pushing the marketers to the "fallback position" of requiring consumers to provide their credit card numbers, which he predicts will sharply reduce their revenue. But he predicted that Webloyalty, Affinion, and Vertrue will go on paying retailers for whatever credit card information they can get until merchants are prohibited from sharing any of their customers' financial data.

"There's no commercially useful reason for one company to be selling a consumer's account information," Cox said. "If you're selling a product then the consumer should have ultimate control over their account information...If you really want to put an end to the problem, we need carefully and well-written laws or regulations."

 

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