Talk Isn't So Cheap on a Phone Card

Legal battles among prepaid providers are bringing the shady side of the business to light

For many immigrants, prepaid phone cards are the main connection to home cities and villages across Latin America and the world. But it practically goes without saying, according to users, that the cards don't deliver what they promise.

"The number of minutes the card tells you that you have, you get half of that," says Alma Hernandez, 22, a native Mexican who works at a taco stand in the Plaza Fiesta, an Atlanta mall popular with Latinos. "It's what everybody thinks."

Now fresh allegations of fraudulent marketing of phone cards are coming from an unlikely source: some of the biggest companies selling the cards. Confirming suspicions long held among users, these corporations are accusing each other in federal court litigation in Newark, N.J., of systematically shortchanging vulnerable customers.

Prepaid phone cards have proliferated in recent years to become a $4 billion industry whose customers are mostly poor immigrants, older people, and other low-income consumers unable to afford conventional phone service or lacking the documentation needed to sign up. Major retailers such as Wal-Mart Stores Inc. (WMT ) and Walgreens (WAG ) sell prepaid cards under their own brands, but these are generally thought to provide the service they advertise and aren't involved in the current controversy.

The main accuser in the industry court fight is Newark-based IDT Corp. (IDT ), the largest player in the business, with total sales last year of $2.2 billion. In March its IDT Telecom unit filed suit against nine rivals, alleging that they market inexpensive cards that offer as many as 100 minutes apiece but deliver only about 60% of what they promise. IDT Telecom estimates that fraud by its competitors costs consumers more than $1 million a day and cuts into IDT's sales. "What makes this insidious scheme especially abhorrent is that it preys on a repeated basis on vulnerable segments of the immigrant population, including the Hispanic community," the IDT complaint alleges. "These guys belong in jail," the company's founder and chairman, Howard S. Jonas, adds in an interview.

THREE COMPANIES HAVE settled with IDT: Epana Networks, Dollar Phone, and Locus Telecommunications denied any liability and made no payments, but they agreed to cease any misleading marketing they may have employed.

The other six IDT competitors named in the suit are fighting back. In an open letter to the industry dated Mar. 19, CVT Prepaid Solutions Inc., based in Great Neck, N.Y., said: "IDT's lawsuit is nothing but an underhanded ploy to regain lost market share by intimidation." CVT points out that in January, IDT settled a separate class action in federal court in Newark brought on behalf of hundreds of phone card customers who accused IDT of the same sort of deceptive marketing that the company is blaming on its rivals. In a settlement of the consumer class action, IDT denied wrongdoing but agreed to pay up to $20 million in refunds and improve disclosures on its own cards. CVT argues that IDT's suit merely attempts to spread the pain. "They want everyone else to die, and they want to dominate the industry," says CVT Co-Chairman Richard R. Roscitt. IDT's Jonas counters that he's acting out of "moral outrage."

Caught in the middle are the customers, who use the phone cards by dialing an access number and then entering the unique ID number provided on each card. Many are illegal immigrants who lack documentation required to sign up for phone service from AT&T (T ), Verizon (VZ ), or other major providers. "If you don't have a Social [Security number], you can't get a phone," says Marta Sierra, a middle-aged store clerk in Atlanta who has used phone cards for eight years since emigrating from Colombia.


Legal or not, many new immigrants lack sufficient credit history to qualify for discount international service. AT&T's full-price service costs as much as $1.32 a minute for calls to major Mexican cities. In contrast, a $5 card called Oye!, marketed by IDT subsidiary Entrix Telecom Inc., has offered "unlimited" minutes to similar Mexican locations. IDT says the card allows for at lesast one conversation of any duration. But some users have assumed they would receive an open-ended number of minutes over multiple calls and say they were surprised when the card cut off after one conversation.

The IDT suit has brought to light suggestions that phone card providers routinely manipulate the minutes consumers can use. In an internal e-mail presented by an IDT attorney during a May 9 hearing, two executives from Los Angeles-based Total Call International Inc. purportedly discuss cards offering 72 minutes to Guatemala that in fact provide only 45. "Do you think you can make it deliver 50 minutes to Guatemala for a week to 10 days, and then change it back to 45?" an executive identified in court documents only as Mr. Ali asks a colleague. An attorney for Total Call didn't return calls seeking comment.

Phone card companies also impose an array of "fees" on card users that reduce the value of cards by trimming 10, 20, or more minutes. Often called connection, service, or maintenance fees, these provisions sometimes are disclosed in ambiguous fine print on the back of cards, but other times aren't disclosed at all, according to a 2005 study by Julia Marlowe, associate professor emeritus of housing and consumer economics at the University of Georgia. IDT's $3 Crazy Crazy Crazy card, for example, charges a connection fee at the end of the call for every five minutes of use. The card also lists a 25% service fee, although it's not clear from the language on the card how the 25% applies. IDT says the fees are fair and vary by destination. A customer can avoid them by using all of a card's minutes for one conversation, the company says.

Regulation of phone cards has been light. Only 11 states, including California, Connecticut, Florida, and Illinois, have laws on calling cards. Other states rely on generic consumer protection regulations, but those are rarely applied to cards. The Federal Communications Commission has jurisdiction but hasn't used it much. The staff of the Federal Trade Commission is watching the calling card industry, suggesting stiffer enforcement could come soon. "We have been speaking to Hispanics across the country, and allegations about deceptive practices in the prepaid calling card industry keep coming up," says Lisa Hone, the FTC's assistant director of marketing practices.

Marta Trias is resigned to the fraud. The manager of 11 kiosks selling jewelry and clothing at Atlanta's Plaza Fiesta, Trias, 52, emigrated from Uruguay four and a half years ago. She spends $150 a month on cards to call her mother every day in Montevideo, Uruguay's capital. She currently uses IDT's Crazy Crazy Crazy card. On July 4, the voice prompt on her brand-new $3 card said she had 55 minutes for calls. But she expects she won't get that much because of fees that she admits she doesn't understand. "They're taking advantage of the situation of immigrants," she says in Spanish. "If you don't get your minutes, who are you going to complain to?"

By Brian Grow

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