Verizon lawsuit alleging premium SMS fraud serves as cautionary tale

By Dan Butcher

March 11, 2011

Class-action suit alleges data misuse

If the Verizon Wireless lawsuit against bad actors misusing premium SMS teaches marketers anything, it is play by the Mobile Marketing Association’s best-practice guidelines or pay the price.

Verizon Wireless filed a lawsuit in federal district court in Phoenix outlining an ongoing scheme that used Premium SMS campaigns to defraud the carrier and its customers, and asked the Court for an injunction to put an immediate stop to the activities. The Texas Attorney General also filed a similar suit against the same defendants on Monday, and Verizon assisted and supported the prosecutors in their investigation.

“This case should not directly affect legitimate mobile marketers who structure lawful campaigns, follow the wireless carriers’ approval processes and conduct their campaigns in the manner they represented to the carriers,” said Gonzalo Mon, partner at Kelley Drye & Warren LLP, Washington.

“Unfortunately, though, schemes like those operated by the defendants have the potential to taint mobile marketing in the eyes of consumers, who may be less likely to participate in mobile campaigns,” he said.

“And these schemes could also cause regulators to pass more restrictive laws.”

Who will prevail?

Verizon’s case
Customers who believe they have been affected by this scheme and think they are due a refund can visit http://www.premiumsmsrefunds.com to learn how to submit a claim.

The Web site provides full names of all the premium SMS campaigns and associated short codes Verizon Wireless has been able to trace back to the defendants in the lawsuit.

The campaign names would appear in the Data Charges section of detailed wireless bills. Customers can use MyVerizon online to get detailed bills going back one year.

Verizon Wireless recently became aware of the possible fraud and immediately launched an investigation.

Among the things the company discovered and that are explained in detail in the lawsuit filing include the fact that the defendants defrauded Verizon Wireless by misappropriating approved short codes for unapproved “shadow” campaigns that did not comply with the carrier's consumer protection and disclosure policies.

The lawsuit further alleges that the defendants were blocking certain IP addresses from accessing the Web sites associated with these shadow campaigns or were redirecting visitors to shell Web sites, preventing Verizon Wireless and its auditors from finding the shadow campaign Web sites in the normal course of monitoring premium SMS campaigns for compliance.

The suit names Jason Hope and Wayne P. DeStefano and companies they own, including Cylon, Jawa and EyeLevel Holdings among others, and asks for an immediate injunction to stop these companies from further defrauding Verizon Wireless and its customers as well as monetary relief.

Since 2004, Verizon Wireless has brought more than 20 lawsuits against wireless spammers, telemarketers and pretexters.

Verizon Wireless has won permanent injunctions against individuals and companies that have engaged in illegal activity.

“Verizon Wireless's complaint shows that they aggressively audit short codes and will sue a company in federal court even without consumer complaints as backup,” said Michael Hazzard, partner at Arent Fox LLP, Washington.

“On its face, Verizon's lawsuit is based on the conclusions of its in-house audit team, which is now apparently trying to generate consumer complaints through a Verizon Web site premiumsmsrefunds.com,” he said. “I have seen this type of ready, fire, aim approach do a lot of damage to good companies doing very good work.

“I don't know Cylon or the individuals named in the complaint, or their practices, and I hope that no consumers were harmed by the conduct alleged by Verizon.”

Specific allegations
Like other wireless carriers, Verizon offers its subscribers the opportunity to purchase premium content—such as ringtones, wallpaper and news alerts—from third-party content providers.

This content is often advertised on the content providers’ Web sites and delivered to subscribers through text messages.

To ensure its subscribers are aware of and authorize the charges associated with the content, Verizon requires that content providers follow the MMA’s Best Practice Guidelines.

Among other things, content providers are required to disclose the prices of their offers in specific places and in specific font sizes.

Before allowing delivery of premium content to subscribers, Verizon conducts an extensive review of a content provider’s proposed marketing campaign, including any Web pages.

Verizon also monitors campaigns after approval.

In this case, Verizon is alleging that the defendants conspired to defraud it and deceptively market their content to subscribers.

“As with previous lawsuits in this area, the key lesson here is that marketers need to clearly and conspicuously disclose the material terms of their offers, including the prices associated with those offers,” Kelley Drye & Warren's Mr. Mon said.

“Fortunately, the MMA’s Best Practice Guidelines offer some very helpful tips for how to do this,” he said. “Marketers would be well-advised to following the guidelines closely when planning their offers.

“Failure to do that could lead to rejection from the carries or—worse—lawsuits and attorney general investigations.”

Among other things, Verizon is arguing that the defendants:

  -  Activated dozens of separate short code campaigns with Verizon using false names and addresses to create the false impression that the campaigns were unrelated to each other.  

  -  Used deceptive and noncompliant marketing practices, including unapproved web pages that differ from the ones the defendants represented they would use when they sought Verizon’s approval. 

  -  Failed to clearly disclose the price of the content they sold. 

  -  Failed to comply with various provisions of the MMA’s Best Practice Guidelines, including by failing to obtain double opt-in consent from subscribers.  

  -  Deployed sophisticated methods to prevent Verizon and its auditors from discovering their deceptive and noncompliant marketing practices.

Verizon alleges that the defendants’ conduct violates various civil and criminal laws. The company is seeking unspecified damages and has asked the court for an injunction to put an end to the scheme.

These suits and actions seem to be arising with greater frequency.

“Carriers and app publishers are waking up to the reality they own some level of responsibility for the safety of their customers,” said Adam Snukal, senior associate at Reed Smith LLC, New York. “Google came to this realization last week, and Verizon Wireless is doing the same as evidenced by this suit.

“While no one can fault Verizon Wireless for taking responsibility of the security and welfare of its customers, the question which beg asking is—will customers come to rely and depend upon their carriers and publishers to play a more active gatekeeping role?” he said.

“If so, a carrier must be certain the commitments it makes under a customer contract is consistent with the actions it takes in the marketplace.”

Final Take
Dan Butcher, associate editor, Mobile Marketer

Comments on "Verizon lawsuit alleging premium SMS fraud serves as cautionary tale"

1. Paul Dent says:

   May 5, 2012 at 12:30am

   I fully agree that the cellular industry seems complicit in this. T-mopbile, after first agreeng to put a block on such charges, today told me I had to change to a more expensive monthly plan to do this. B.S.!!
   Now we have been used to roaming charges and even charges from foreign telecomms administrations for many years, when we travel, but what is new is that the carriers are allowing any Tom Dick and Harry who gets hold of your telephone number to place a charge on your phone bill claiming you subscribed to their "service" (Horoscopes, dietary advice or whatever) for $9.99 a month! They are treating your phone number like a credit card number, without having the security and verification mechanisms that VISA has.
   The answer is simple: Pass a law that only permits telecomms companies to pass on a charge from another FCC licensed and regulated telecomms company, or an equivalent approved foreign counterpart, and the latter only with the subscriber's pre-agreement on a case by case basis.

2. David Ashforth says:

   March 11, 2011 at 8:25pm

   Finally! A sign that premium SMS is under threat of existence. Surely no-one wants to pay $2 or even $5 for a text message service, whatever value it claims to give. With internet enabled phones becoming the norm - what service could a premium SMS give the end user...
   
   And as for the fraudsters who take advantage of users text message ability - I hope they send you to jail. But probably the more likely outcome will be a slapped wrist or less. These people make legitimate sms marketers lives much harder.

3. Adam V says:

   March 11, 2011 at 10:40am

   I guess the part of Verizon makes a profit of about $6.00 of every charge that the consumre initiates, I work for a Cell provider SMA messages are processed thru an agregator who taked a chunk of the $ out then Verizon takes about $ 6.00 out and leaves the SMS entity about $ 2.00 Verizon complains they facilitate this by allowing 3rd party billing and they have the nerve to charge their customers to block 3rd party billing it seems they are fully involved in the deceptive enterprise making extra profit at no cost.