O.C. Firm Poised to Settle Fraud Cases, Move On

With its sweepstakes division crippled by federal and state fraud investigations, Direct American Marketers Inc. said it will shut down the operation to settle a federal investigation and a Florida lawsuit.

Details of the agreements with the Federal Trade Commission and Florida are expected to be released as early as Monday, said Anthony C. Brown, DAMI’s chairman and chief executive.

The FTC refused to comment. An assistant Florida attorney general confirmed that a settlement has been reached with the state.

In an interview, Brown said the Irvine telemarketer has agreed to pay the federal government $500,000, close its prize promotions division and halt the related use of pay-per-call 900 services to avoid a formal lawsuit.

In addition, he said, the company will pay $150,000 and halt sweepstakes activities in Florida to settle a deceptive advertising and illegal lottery lawsuit filed by the Florida attorney general.

DAMI, as it calls itself, has been the target of investigations by the FTC and several states for allegedly misleading consumers with direct-mail advertising that promises sweepstakes prizes and urges them to use expensive 900 numbers to claim their prizes, which often amount to only $1.

In Florida, Assistant Atty. Gen. Will Haselden said that a settlement of the state’s lawsuit only needs the signatures of the parties. He added only that the company is agreeing to a permanent injunction and paying “some money.” He said he expects the settlement to be made public this week.

The federal investigation, though, was the company’s biggest concern, Brown said.

“To fight the FTC all the way in court was a $3-million legal bill,” he said in explaining the company’s willingness to settle. “Also, strategically, we have wanted since 1993 to be less dependent on sweepstakes.”

DAMI is settling the two cases without admitting any wrongdoing, Brown said.

But the company isn’t in the clear elsewhere.

In Missouri, DAMI went to trial this year on a civil fraud lawsuit filed by the state’s attorney general. The judge in the trial hasn’t ruled yet.

The company also is trying to clear its name in a criminal investigation by the Oklahoma attorney general’s office into similar activities.

“The Oklahoma investigation is ongoing, but at this point, we don’t view it to be serious,” said Brown, who owns 25% of the privately held company. “Hopefully, it will become a nonissue.”

He said he is committed to fighting the Missouri lawsuit.

DAMI is among a plethora of telemarketers flooding U.S. homes with mailings and telephone calls soliciting business. The FTC is focusing on the burgeoning activities, targeting schemes that prey on the elderly.

Experts say that Americans now lose more than $40 billion a year to direct-mail enticements because they neglect to read the fine print, want something for nothing or simply don’t know their rights.

Many elderly citizens spend hundreds of dollars they can’t afford to lose on dozens of telemarketing pitches that offer impossible odds at winning big money, authorities have said.

The 11-year-old DAMI was one of the faster-growing telemarketers nationwide with more than $100 million in annual revenue.

It sent tens of thousands of direct-mail fliers--often authentic-looking checks, marked “Not Valid” in small type, from such fictitious companies as the Audit Control Bureau. The fliers intimated that consumers had won cash or prizes and urged them to dial a pay-per-call number to claim it.

Victims have complained that the pseudo-checks typically look like income tax refunds and lead consumers to believe that more money could be on the way with a simple 900 telephone call.

Brown has insisted that he provides refunds for anyone who complains, and he cited a list of winners who have picked up $50 to $42,000. Everyone, he has said, wins at least $1.

After two civil actions by the California attorney general’s office, the company agreed to be more forthright about the odds and the pay-per-call number, which has cost consumers $30 to as much as $400 on calls.

In those previous settlements, DAMI agreed to include in its advertising both the huge odds--nearly 5 million to 1--of winning the grand prize and the fact that consumers also could simply mail in a postcard to claim their prize.

In March, Brown testified in the Missouri trial that DAMI received about two-thirds of the $4.5 million that citizens of that state spent on calls to 900 numbers in DAMI fliers. But expenses, he said, left the company with only about $400,000.

In the interview, Brown said that DAMI will halt its sweepstake prize promotions at the end of the month and will focus on its less notorious business: entertainment-based televised services, such as the company’s “It’s a Date” matching service hosted by television personality Chuck Woolery.

“Sweeps are a very volatile business,” Brown said. “Sweeps are also regulator unfriendly, especially the kind that Direct American ran, where services weren’t as apparent as those offered by Publishers Clearinghouse.”

DAMI also markets three psychic and astrological programs--Circle of Vision, Psychic Stargate and Psychic Revelations clubs--in 30- to 60-second television advertisements. Brown said the three clubs have close to 700,000 dues-paying members.

Recently, the company acquired exclusive rights to the National Pet Club, which sells pet products and services at a discount.

The idea, he said, is to buy or create clubs the company believes will attract followers willing to pay nearly $10 a month for such things as information, newsletters and access to others with similar views.

“Some pay-per-call numbers will be a part of the tele-services, but it will be a small component,” Brown said. “We use a lot of 800 numbers, which are free calls.”

With the sweepstakes operation, he said, the company employed about 125 people and took in $100 million to $150 million a year. Without that operation, he said, the company will drop to about $75 million in annual revenue and have 50 to 75 employees. Many workers already have left, he said.

“The complete focus of the company is to transition away from sweeps and reposition more into entertainment services,” he said. “Many of us executives have come from similar backgrounds with clubs. We’re more than encouraged about this business, we’re highly optimistic.”