Nailing Net grifters

Nailing Net grifters
By Courtney Macavinta
Staff Writer, CNET NEWS.COM

WASHINGTON, D.C.--If you fail to read the fine print when handing over cash on the Net, don't look to Christine Varney for sympathy.

As one of the five Federal Trade commissioners, Varney's job is to advance commerce by protecting consumers from swindlers, both on and off the Net. Armed with federal force, Varney tracks down scammers who surreptitiously bilk consumers out of money. But, she warns, if consumers aren't shrewd themselves, they can easily be taken for a ride.

Varney's sink-or-swim attitude is really a campaign for common sense. Robust commerce, she says, is only possible if consumers are educated, while their rights are protected, which means the FTC will continue to go after deliberate rip-off artists and shut them down. This is especially true, she says, in the new frontier of electronic commerce, a market place that she--and her buddies in the White House--believes has glorious potential.

The FTC, unlike many state and federal regulators, has figured out how to enforce existing laws on the Net. Varney attributes this to the FTC's many tips from consumers and state's attorney generals, in addition to the endless surfing done by herself and others. If Varney does a search for "get rich" or "cheap travel," the creators of the sites she finds better be legit.

These efforts have resulted in shakedowns on Internet schemes such as pyramid clubs, in which consumers are promised a "profit" for joining. In one such scam, consumers shelled out anywhere from $6 million to $11 million over the Net, the exact amount isn't yet known. The agency intervened and is getting a large portion of the money back.

The huge one-block building that houses the FTC is a sign of its governmental power. There is a stricter security check here than at either the Supreme Court or Congress. Despite the "official business" feel, the numerous American flags, and federal seals on the walls, the atmosphere in Varney's private office is much more casual.

Before the interview, she takes a call from her 10-year-old son John who is asking her permission to play at a friend's house. After giving him the OK she smiles, but doesn't apologize for bringing her personal life to work. As she sits down on the couch next to one of the two signed pictures of President Clinton in her office, she looks like she has a secret to tell. The 9-to-5 gig at the FTC, she quickly reveals, is much easier than her days at the White House.

Born in Washington, D.C., Varney hasn't strayed far from birthplace or her Democratic party lines. Prior to her appointment to the FTC by Clinton in 1994, she was the president's Cabinet Secretary. There, she worked seven days a week, sometimes 19 hours a day. When there was a natural disaster, she was the person who coordinated a governmentwide response. After three years of nonstop crisis management, the administration reassigned her to the FTC where she now puts her more than ten years of law experience to work.

Her connection to the administration remains strong. Like her friend, Ira Magaziner, she says the government should resist temptation to create laws affecting e-commerce and allow the market to grow. She also thinks the Net and information technology are instrumental in the future of global commerce.

In her role at the FTC, Varney is arguably the most vocal commissioner when it comes to the Internet. And although the Net has become a sexy topic for the federal government, Varney is no showboater. Recently, she was the only commissioner to vote against penalizing an adult-entertainment Web site that allegedly rerouted surfers' Internet connections, in order to bill them for hefty long distance calls. The FTC gained national media attention for its legal step to shut down the site. Varney was the unpopular dissenting voice, arguing that although the business was shady, it had put up a disclaimer. She says it is unjustifiable to use federal resources to help thousands of angry Net surfers get their money back if they weren't actually defrauded.

For all her straight talk, however, Varney is down-home and nurturing. She confidently assures people in her many public appearances that the Net is not anymore dangerous for consumers than other media; if the FTC finds fraud online, it will prosecute. The agency is also stepping up its investigation of unfair advertising practices toward kids on the Net and pushing for increased protection for consumers' online privacy. Credit card and identity fraud, as well as selling unknowing consumers' personal information will hurt the free market. Like Magaziner, she's learned to speak in the born-again free trade parlance of Clinton's New Democrat.

The day after the administration's first Internet law, the Communications Decency Act, went before the Supreme Court, Varney talked with NEWS.COM about the FTC's role in the future of online commerce.

NEWS.COM: Is the Internet more dangerous than other media when it comes to consumer fraud?
Varney: No, because there are always stupid people that will always get taken advantage of. Whether they get taken advantage of over the telephone or over the Internet, they're going to get taken advantage of.

It is arguably easier to perpetrate fraud on the Net because when you go into, for example, a discussion group, it's not clear always who's offering an opinion and who's offering hype based on a pecuniary interest. But we have those problems in other contexts also.

Certainly the Home Shopping Network is a great example of people offering what appear to be opinions, but in fact they may have ownership interests in the products they're selling. So it may be harder for consumers to determine in the Internet who is giving an opinion based on an experience and who is telling you something because they're trying to sell you something.

But I think that if you're trying to sell something on the Net you have an obligation to disclose that you're trying to sell it or that you have a pecuniary interest in it and it may be deception if you don't. So we may go after you if you don't disclose that you have a pecuniary interest.

NEXT: Cyber sheriffs and Net scams

Cyber sheriffs and Net scams

What's your motto regarding Net policy?
My main policy idea is don't fix it if it's not broken. Keep the government out of it until we really understand where the market will fail without government intervention.

We have two missions here at the FTC: One is consumer protection and the other is antitrust.

In the antitrust arena we're really not yet at the point where we understand what the new strategic business alliances mean for competition in the United States. So, for example, we once thought that browsers were what we call a "separate and distinct market" from operating systems. And so if two companies that had browsers wanted to merge, we might have had a problem with that. Now we're beginning to see that browsers are migrating and possibly becoming part of operating systems or operating systems are becoming part of browsers. It's a constantly evolving environment that we really are trying to understand on a daily basis.

On the consumer protection side we see a lot going on in the Internet that you see in terrestrial space. We have telephone fraud: well, you have Internet fraud. We have truth in advertising requirements that have to be met when you advertise on television: Well, the same requirements will probably have to be met in the Internet. So we're seeing a lot of the same issues.

We're trying to figure out how all the traditional deception and fraud and truth in advertising issues apply on the Internet. We're spending a lot of time on that. I think we're coming to conclude that deception is deception. When we find it on the Net, we prosecute it. Fraud is fraud. When we find that on the Net, we prosecute it.

But one of the marvelous things about the Net is that you have the opportunity to do a lot of education. People can talk to each other on the Net in ways that were not possible before. So when someone gets ripped off by a company on the Net, they can immediately let it be known that they got ripped off. And that's sometimes the best deterrent.

The FTC is one agency on Capitol Hill that has found a way to enforce laws on the Net. What's the FTC's secret?
What we've been doing is we have the statute which created the FTC, called the Federal Trade Commission Act. And it directs the FTC to prosecute fraud and deception and unfairness in commerce. So we have this huge authority to bring actions against anyone that we think is perpetrating fraud, deception, or an unfair act or practice in commerce. That clearly extends to the Internet, so we really have not had a problem bringing cases against people who are running pyramids on the Net or travel scams or misleading advertising on the Web. We're able to bring all those cases in court and win.

How does your investigative team operate? Are you looking for fraud on the Net or do people just report it?
We do both. Everybody here in the FTC is on the Net and has access to the Net. We use it for our own research, but occasionally I'll just type in something like "get rich" or "cheap travel" and see what comes up. But all of our investigators here do that. So we find things on the Net and then we get consumer complaints. We get complaints from state attorneys general and we follow them up.

Does the FTC have jurisdiction over, for example, Web sites that sell or advertise alcohol?
One thing is that we probably don't have jurisdiction over the question of whether or not alcohol can be advertised to adults on the Internet. That is something that is not in our jurisdiction. I'm not sure it's in anybody's jurisdiction. I'm not sure that even that's been defined yet. Simply having a presence on the Web may be advertising.

But what we do have jurisdiction over is deceptive acts or unfair acts. Now one of the questions that we're always pondering and wrestling with is advertising directed at children, whether it's tobacco advertising or alcohol advertising. Whether it's on the Internet or in other places, it is illegal to sell cigarettes or alcohol to minors. So we're always watching advertising that may or may not be directed to children because there is an element of deception there or an element of unfairness there potentially. And that is something that we will be watching on the Net. We haven't reached any conclusions about those issues on the Internet yet.

Do you think law enforcement will have be done at the federal level when it comes to the Net?
Or global. I think that's an open question. I can tell you though that if your Web page is accessible in Minnesota, the Minnesota attorney general believes he has jurisdiction. So you'd better not be violating his laws. The Tennessee attorney general believes the same thing. So it's a question yet to be resolved. Indeed whether the Internet has its own culture and its own citizens and its own standards and whether there should be some sort of virtual magistrate to settle those disputes are all questions that we're still looking forward to finding out the answers.

You were the only dissenting vote on the FTC taking action to stop an operation known as the "Moldova sex site scheme," which allegedly bilked consumers out of hundred of thousands of dollars. Why did you vote "no"?
Well I had mixed feelings about the Moldova case. I think with the Moldova case you have to keep in mind a couple of things. The technology that was used was reprehensible. It is a program that they tell you when you visit the site: "In order to view these sexy girls, you must download our viewer." Well in fact what you're doing is downloading their computer program that turns down the volume on your computer, disconnects you from your local service provider, reconnects you to a long distance provider, and dials you into Canada or Moldova or whatever. And you stay connected even after you leave their site. That is very dangerous, insidious technology, absolutely designed to be deceptive. And that's what they were doing.

Now, what they were also doing in this instance is they were telling you, they were disclosing that what was going to happen was you would be disconnected, you'd be redialed, long distance rates would apply, check with the operator for rates to Moldova, and in order to exit the connection, you had to turn your computer off. So they did tell you that.

I felt that because they were disclaiming what they were doing, because there was no deception about where you were--these were hardcore sex sites--you didn't happen onto them, you weren't being deceived that you were going to a cartoon site or a children's site or anything else.

There's a lot of disagreement about the disclaimer, whether it went up mid-December or late December of last year. We know that as of January 10 there were complete disclaimers.

My view is that people knew exactly what they were doing. I just felt that what was going on was you had a lot of consumers who visited these sites, who got their phone bills--$600 or $700 phone bills--and said "Oh my goodness, what's this about? I'm not going to pay this" and called AT&T and said "I'm refusing to pay." And AT&T came to the FTC.

When consumers are being deceived and they're being harmed it is absolutely legitimate for us to step in. The fact that these were very clear in what kind of sites they were and the fact that they did tell you--as reprehensible as it is--what they were going to do, I didn't think it was an appropriate use of government resources. If you go back and press AT&T, ask them if there was fraud involved, they will tell you no because they're still holding the people responsible for the bills. So it's not all that clear-cut.

NEXT: Privacy, security, commerce

Privacy, security, commerce

What role should the FTC play in electronic commerce?
Well I think that the FTC has a very important role to protect and promote the right of consumers to have accurate information. So when you're doing business online, the same rules will apply in terms of your obligation to tell the truth, to be able to substantiate any claims that you make, and to generally not engage in misleading advertising. So I think that we have a very important role in making sure that electronic commerce can become robust and thrive.

I also think that electronic commerce won't take off unless people are assured both of the security of their transactions and the privacy of their transactions. Now the security side is really being worked on by banks and the Secured Electronic Transaction folks, Visa and Mastercard, and Digicash and CyberCash. So I think that there's a lot of people working on that side.

I think that we have and will continue to work on the privacy side to make sure that people understand what information is being collected about them when they're online and what they can do to limit or prevent the collection of information about them online if they want to do that.

You were on the forefront of investigating online privacy issues at the FTC. What are the problems, and what should be done?
When I first came to the FTC at the end of '94 I planned a two- or three-day hearing for early '95 to really poll all segments of people that I knew that were interested in issues in the information age, to come and spend two or three days and help me and the other commissioners figure out what should the FTC be doing. There was a lot of diversity, a lot different opinion. Some people were screaming and yelling about encryption, others about content, all kinds of stuff. But what really struck me and what so clearly emerged was privacy--that it was a huge issue. The ability to collect, aggregate, and reuse data about people without their knowledge or consent was enormous, unthinkable two or three years ago. And nobody was doing anything about it.

It was probably one of the three single-biggest consumer protection issues on the Internet. And I thought and continue to think we have jurisdiction to do something about it.

What I think the government's role is right now on privacy is convening all the market participants and all the consumers and all the privacy advocates to figure out where are the market-based solutions (as opposed to regulatory solutions) that protect and promote privacy and where are the shortcomings--where might we need to regulate. Perhaps [it will be] when it comes to children, perhaps when it comes to the collection of data from people that aren't engaged in a transaction. There are probably going to be some holes and the government is going to have to step in, but I think in the first instance we wanted to find what the market can take care of by itself.

What do you think about Net privacy legislation?
Well I think that we need to legislate or regulate very carefully in this arena so that you don't get consequences that you didn't anticipate. I think that in the first instance, particularly on the Internet, the technology changes so fast that government regulation is likely to slow down the marketplace for privacy.

So I think we need to be very careful and very thoughtful about where consumers can get control over what information is collected about them and used about them when they're in a transaction as opposed to those businesses that are engaged in purchasing information about people or getting information from public record sources and collecting it and what they do with it.

So we really need to separate the two because when you deal with a merchant, right now, today, you can go to amazon.com and buy a book and they tell you what information they collect about you and they tell you what they do with it and they tell you, "Click here if you don't want us to do this." That's great--you've got the choice. So long as they tell you that, presumably the market place will work. And if privacy is important to you, you'll shop at the place that doesn't sell the information.

With Net commerce do we need to "think globally, act globally"?
I think one of the things that government can do is work with other national governments to remove barriers to trade. And that is kind of the "thinking globally." There are inconsistent consumer protection regimes in Europe, Asia, South America, and the U.S. We really need to start talking to each other about harmonizing those privacy regimes.

Do consumers needed to be thought of as international consumers, especially on the Net?
We'll try and make sure that to the extent that there are people engaged in electronic commerce in the U.S., that they are playing fair, that they are not engaging in deceptive practices, that they are truthful in their advertising and if the other countries of the world will make that assurance--that they will police anybody who is operating in their territory to make sure that they're being honest and truthful in commerce--that will go a long way.

For example, in most Scandinavian countries it is illegal to advertise alcohol, period. So if you have a Web site, say Cuervo Gold, that's an open question. In our country we have very strong First Amendment protections and we tend to say "Of course you can have a Web site. You're a U.S. company." So we've got to sit down with the Scandinavian authorities and figure out what constitutes advertising and how we balance that with our own First Amendment rights.

What's coming up for you in the next year
I think we're really going to have to look very hard at the children's issues on the Internet, a collection of data from children without parental consent, advertising direct to their children on the Net. I think we'll probably see an explosion in that this year. You see more of it on the Internet and you're going to see more people clamoring for the FTC to get involved in those issues.

NEXT: The maverick child, mom, and executive

Protecting children

One of the first and most controversial actions the administration took regarding the Net was signing the Communications Decency Act. What do think about the CDA saga?
It's definitely not over. I think it will be very interesting to see what the Supreme Court has to say. Obviously I'm a member of the Clinton administration and a Clinton appointee and the president signed the law. The Supreme Court will decide whether or not it was legal or an overly broad constitutional question.

Going back more generally, I think there's a huge amount of misunderstanding about what's on the Net, how you get there, and what laws apply. Before we rush out and create new laws that are going to have unforeseen consequences, we ought to try and apply the laws that exist.

Congress passed a law that was aimed at a problem that they perceived. It was part of a much bigger package as you point out that Clinton did sign. The Court will decide whether or not it's constitutional. And I have every faith that the Court will make the right decision.

Do you think people should be able to collect information about kids without their parents' permissions?
Kids are being targeted on the Net the same way kids are targeted in television advertising. Kids have a significant amount of influence over how parents spend certain dollars. So the biggest places targeting kids on the Net are cereal manufacturers, Disney, and Warner Brothers: All people who have a vested interest in getting kids to get their parents to buy their products.

I, as a matter of fact, don't have any reason to believe that those companies are doing anything but responsible interaction with kids online, but there are some less-responsible companies out there.

We work very closely with both Disney and Warner Brothers on what we think the parameters are or could be or should be and we like to hear from them because they're in the industry and they like to hear from us because we're the regulators and the law enforcement people on this. So we actually do have a pretty good relationship with them.

The nice thing about [Disney becoming an] ISP is that it's a pay service. So that provides a nice opportunity for a company to say "Here are the kinds of things that we're going to do. Here's what we'd like your permission for. Here's what you may or may not want to block or sign up for."

Do you think that the Net would work better if there were sections for kids only, or adults only?
I think the more you label, the more you give people notice, the more you empower parents to make choices for their family. And that to me is far preferable to the government making choices for families--anybody's government. I'd rather decide where my kids can go than have a government--whether it's an extreme-right government or an extreme-left government--deciding where my kids can go.