Report Says Phone Fraud Is Rampant Due in Part to Lack of Enforcement

Fraudulent telephone marketers, based largely in Southern California and Florida, cheat Americans out of billions of dollars each year and generally are not prosecuted because law enforcement agencies lack the manpower to go after them, according to a new congressional report.

A subcommittee of the House Committee on Government Operations begins two days of hearings today on “boiler-room” telemarketing schemes that bilk consumers by offering to sell coins, travel packages, oil and gas leases and other goods or services that are grossly overpriced or nonexistent.

“Telemarketing fraud is rampant,” said the report by the staff of the commerce, consumer and monetary affairs subcommittee, and “it appears that law enforcement efforts are perceived only as a cost of doing business.”

The most frequent victims are the elderly, the report said.

While Southern California and Florida account for most of the schemes, the report said, there is increasing activity in Nevada, Arizona and Texas. Los Angeles County and Orange County alone are home to 200 to 300 telephone boiler rooms, according to the congressional investigators.

However, “literally hundreds of these schemes are not being addressed in Southern California because of resource limitations,” the subcommittee report quoted an FBI document as saying.

Among witnesses scheduled to testify today is an Orange County man convicted of telemarketing fraud in a coin scheme that may have grossed $100 million. The witness, who will testify under the alias John Allbright, will have his face screened and voice altered because he is cooperating with federal authorities, according to the subcommittee staff.

Allbright’s scheme involved the sale of two relatively common ancient Greek and Roman coins. The coins, estimated to be 2,000 years old, were worth $6 to $12 each. Allbright’s telephone salesmen sold them for $400 to $600 apiece, in some cases “indicating that Jesus might have touched these coins,” the congressional report said.

Also scheduled to testify is another convicted boiler-room operator, who most recently was involved in the sale of phony oil and gas leases that netted $5 million from more than 500 victims.

State law enforcement agencies often hesitate to aggressively investigate boiler rooms because the cost of such investigations is high and because many victims live out of state, the subcommittee staff said.

Federal agencies, including the FBI, the Postal Inspection Service and the Federal Trade Commission, have only limited statutory authority to investigate fraudulent telemarketers. Because their resources are overextended, they tend to assign a low priority to telemarketing fraud inquiries, the report said. It noted that the Los Angeles FBI division has only one squad working part time on such cases.

“The U.S. Attorney’s office in the Central District of California (which includes Los Angeles and Orange counties) . . . has a backlog of 50 to 60 major telemarketing cases . . . and is absolutely overwhelmed with 16,000 referrals for bank and (savings and loan) fraud and embezzlement,” the congressional staff found.

California Rep. C. Christopher Cox (R-Newport Beach), a member of the subcommittee, said he believes that the problem is largely one of finding enough resources to allow state agencies, such as the California Department of Corporations, to aggressively pursue telemarketing investigations.

“With the vast sums of money involved here, one needn’t be too creative to see how we can turn that money to good use in the enforcement area,” Cox said.

He said government officials need to find the legal means to seize assets of fraudulent boiler-room operators, then use the money for law enforcement--in the same way that seized profits of drug dealers are handed over to local police.

“There needs to be a good asset-seizure remedy.” Cox said. “I don’t think that exists right now.”

Cox said he believes that the Department of Corporations has most of the statutory authority it needs to go after telemarketing frauds, because California courts have broadly interpreted the securities laws under which the department operates.

“To the extent new legislation is needed,” Cox said, “it is probably needed at the state level.”