credit card numbers, a perpetrator pretended to be AOL's Member Services Department and had a fake letter from AOL's chairman. Do you know how the con artists were getting your subscribers' addresses? And how do you guard against that?

Ms. GAU. The example you just mentioned was one of the examples that types of examples I illustrated in my presentation. The scam artists harvest names, again, for these types of scams, collecting names from people in chat rooms, member profiles, message boards, whatever the case might be, and then, in fact, target the individual.

Senator GLENN. Let me address this to both of you. Should there be a requirement in law or by regulation that requires ISP's to screen commercial sites more carefully, to set some criteria and make them screen for those criteria?

Ms. GAU. At AOL we do, indeed, engage in screening processes with the commercial sites that are allowed to be set up within the AOL environment. As far as the Internet is concerned, when users go out onto the Internet, they, in fact, are entering areas where AOL does not have control over those sites.

Senator GLENN. Ms. Grant, do you think there should be requirements, certain criteria set by government, that they would have to adhere to in screening commercial sites more carefully?

Ms. GRANT. We have long advocated that newspapers and other forms of media that have advertising do a better job of voluntary screening. I am not sure how feasible it would be to actually screen everything on the Net except perhaps things that are just within a certain proprietary service, like AÓL. But I think that if a better job of self-screening isn't done, maybe that is something we should look into in the future.

Senator GLENN. Should the ISP's be required to report customer complaints to the FTC?

Ms. GRANT. I think with the consumer's permission they should. When consumers report fraud to us, we tell them that, with their permission, we will report this information to law enforcement agencies.

Senator GLENN. Ms. Gau.

Ms. GAU. I would absolutely agree that we would need the member's consent to forward the message on. But we do, indeed, refer any illegal activity to law enforcement, so I think that the combination of both of those would be a good step.

Senator GLENN. Well, there were already two pieces of legislation introduced that deal with unsolicited commercial E-mail, and given the proliferation of this activity and the technical and consumer problems it creates, there is likely to be even more legislation proposed unless the problem is controlled.

You people are more familiar with this than I am, certainly, and I presume the Chairman, also. But what do we need to do? What do you suggest at this point? Ms. Gau.

Ms. GAU. Unfortunately, spam is constantly changing in terms of the techniques that they use to attack Internet service providers. They are using ever-changing techniques, whether it is changing the source addresses from which the spam is coming or forging headers to disguise where the message is actually coming from, that make it extremely complicated not only to create effective

blocking software that would, in fact, prevent any spam from getting through, but also poses problems for some of the legislation currently being proposed as the dynamics are continually changing and they will continue to change, and next week we probably will have one more problem to deal with.

Senator GLENN. Could ISP's levy extra fees on those who want to send unsolicited commercial E-mail? Would that control it?

Ms. GAU. We are not in favor of unsolicited commercial E-mail, so that is not something that we are looking at right now.

Senator GLENN. Well, just to sort of summarize here—and I know I am probably over my time, Madam Chairman-let me just say that the issues are how much we are going to regulate to protect those interests, who will regulate, and are we moving fast enough. Two big concerns are consumer protection and individual privacy. And I don't know whether we ought to require opt-in systems so businesses can't collect personal information unless the consumer first gives his or her permission. Maybe we are coming to that one of these days. I don't know. And children, we haven't dealt with that one at all, didn't even question on that. Kids have far more computer knowledge than I have, I can guarantee you that, and they are into these things all the time. And what happens if someone says go get daddy's credit card and do whatever? How do we deal with children? That is another big one here.

I don't know how long the FTC wants to wait on self-regulation by the industry before we step in with other regulations, but that is what is coming if the industry doesn't do it itself.

Thank you.

Senator COLLINS. Thank you, Senator Glenn. I want to commend you for your probing questions on this very important issue.

I just want to second your comments about the need for the ISP's to set a very high ethical standard. If they are going to be the ones that are helping to educate consumers about fraud, certainly their own activities have to be above reproach, and I think that is an excellent point.

Senator GLENN. I have to leave early. I am going back to get those thousand roses for Annie. [Laughter.]

Senator COLLINS. Could I have a few?

I just have one final question for Ms. Grant. Ms. Grant, we had hearings last year on fraud in the securities industry, and we are starting to see the Internet used as a medium for that kind of fraud. And I know that you have a long history, the league, in this

area.

I propose to the industry as well as the Chairman of the Securities and Exchange Commission that there be adopted what I call a zero tolerance policy so that if a licensed individual in the industry commits a serious breach of ethical standards or a fraud, that that individual be banned from the industry forever, because what we have seen is rogue brokers going from firm to firm.

Do you think that such an action would be helpful in trying to curb the use of the Internet for securities fraud?

Ms. GRANT. I think it probably would. I think that more action has to be done to keep repeat offenders from victimizing consumers both in the physical world and in cyberspace.

Senator COLLINS. I want to thank you both very much for your testimony today and your cooperation with our investigation. We very much appreciate your being here.

Ms. GRANT. Thank you.

Ms. GAU. Thank you.

Senator COLLINS. Our next witness is Barry Wise, a certified public accountant and a certified fraud examiner, from Matthews, North Carolina.

Mr. Wise unfortunately was a victim of a pyramid scheme conducted over the Internet. I very much appreciate his willingness to share his experience with us. It shows that even an individual with financial training can become a victim of cyberspace fraud. So we very much appreciate your being here.

As I explained earlier, pursuant to Rule VI, all the witnesses who testify before us are required to be sworn in, so I would ask that you stand and raise your right hand. Do you swear that the testimony you will give to the Subcommittee will be the truth, the whole truth, and nothing but the truth, so help you, God?

Mr. WISE. Yes.

Senator COLLINS. Thank you.

We look forward to hearing your testimony today. Because of time constraints, including an upcoming vote, I would ask that you limit your testimony to 10 minutes, and we will put your prepared statement as part of the hearing record.

Please proceed.

TESTIMONY OF BARRY D. WISE,1 CERTIFIED PUBLIC ACCOUNTANT, VICTIM OF FORTUNA ALLIANCE INTERNET PYRAMID SCHEME, MATTHEWS, NORTH CAROLINA

Mr. WISE. Actually, I have already learned a lot from what I have heard.

Madam Chairman and Members of the Subcommittee, my name is Barry Wise, and it is my pleasure to be here today to share my experiences with you of being defrauded by a company known as Fortuna Alliance.2 I am currently employed by the Duke Energy Corporation as a senior internal auditor. I am also a certified public accountant and recently became a certified fraud examiner. Obviously I wish I had become a certified fraud examiner when I was considering my investment with Fortuna Alliance.

I am also a husband and a father of two young children. The intention of my investment with Fortuna was meant to benefit my children's future, not the financial heartache that resulted instead. I would also like to express my appreciation to the Federal Trade Commission at this time for the help that they have given with this

case.

In April of 1996, I was told by a colleague that a company known as Fortuna Alliance was advertising on the Internet. The company was supposedly offering a good investment opportunity with a high rate of return. My associate informed me that he knew of a person who had already received some return on the investment, so it must be legitimate. I later discovered that this person had some

1 The prepared statement of Mr. Wise appears in the Appendix on page 75.

2 See Exhibit No. 2 for background material on Fortuna Alliance which appears in the Appendix on page 267.

type of relationship with the founder of Fortuna Alliance and the return on investment probably was nothing more than bait money to create an air of legitimacy to the scheme.

I visited the Fortuna Alliance Web site as well as numerous other individual sites that had been created by its members. These members were people who had already invested with Fortuna and were actively recruiting new investors which would be directly to their benefit. The Fortuna Alliance site explained that each membership would pay out a maximum of $5,000 per month when a matrix of approximately 300 was filled with names of new investors. The matrix was supposedly based on their "unique mathematical formula: The Fibonacci Sequence." The Web site informed that Fortuna was about to begin a massive advertising campaign. to solicit new members; therefore, I would not have to recruit anyone or do anything to get a return on my investment. I would not have to work at filling up the matrix because Fortuna Alliance's advertising campaign would accomplish that for me. However, the recruitment of new investors was encouraged because that would fill up the matrix faster, which in turn would initiate a flow of money to Fortuna Alliance members.

Another part of the Fortuna Alliance business was a co-op through which products and services would be sold in the matrix. I understood that a commission would be paid to me for any purchases made in the co-op by people in my matrix. It should be noted I never received any literature from Fortuna that explained what goods were for sale and how to purchase them. Fortuna stated there was a money-back guarantee of my entire initial investment if after 90 days I was not completely satisfied for any reason. The offer really made me feel that I had nothing to lose with this potentially lucrative investment.

In late April of 1996, after carefully studying the Fortuna Alliance Web site and several of the individual member sites, I decided to make an investment. I purchased 15 elite membership at $250 each and two premier memberships which cost $600 each. My total investment was $4,950 which I hoped would result in a monthly income check from Fortuna Alliance. Fortuna insisted that I pay this investment by money order or certified check only. When I received a very elaborate package of investment information from Fortuna for each of my memberships, I read this information carefully and continued to understand I did not have to actually do anything to receive a return on my investment.

Shortly after purchasing these memberships, I tried to call Fortuna Alliance several times in order to verify my investment was properly recorded in their computer system. My telephone calls were always answered by an automated voice system that never connected me to an actual person.

In late May 1996, I was roving the Internet while working on a project with the search word "fraud." During this search, I came across a notice by the Federal Trade Commission that Fortuna Alliance had been shut down for operating an illegal pyramid scheme and making false claims. I immediately sent a letter to Fortuna Alliance requesting a refund of my money. They never refunded any of the $4,950 initial investment. I also filed a claim with the Federal Trade Commission.

Upon discovering that I had been the victim of a fraud via the Internet, I started to do some investigation on my own. I determined that in order to be a legitimate multi-level marketing company, commission needs to be paid on actual goods and services sold. Fortuna Alliance was supposedly going to pay commissions only based on one-time fees paid to purchase a membership-in other words, money was just being funneled to people at the top of the pyramid. During my research, I noted several other companies on the Internet which appeared to be operating illegal pyramid-type schemes.

In the spring of 1997, I received a letter from Gilardi & Company in San Rafael, California. Gilardi & Company had been appointed by the Federal Trade Commission to be the claims administrator for Fortuna Alliance. The correspondence I received from Gilardi & Company indicated that my account consisted of only three elite memberships, when I had actually purchased 15 elite membership and two premier memberships. Evidently, Fortuna Alliance's records of my purchases did not properly account for my entire investment. I subsequently filed a claim of $4,950 with proper documentation to Gilardi & Company. In a telephone conversation with representatives of Gilardi & Company, I determined that my claim of $4,950 was accepted and verified by them as accurate.

Shortly after my dealings with Gilardi & Company, I received a letter from Fortuna Alliance which stated they had been cleared of all charges and were continuing to do business as Fortuna Alliance II. They also encouraged me not to request a refund and continue to invest with Fortuna Alliance II. I disregarded this letter and its message as being completely bogus.

It is my understanding that the Federal Trade Commission has collected enough funds from Fortuna Alliance thus far to cover 60 percent of investors' claims. On January 6, 1998, the court issued a compliance order that would allow over 8,600 Fortuna Alliance members to begin receiving partial refunds which would cover approximately 60 percent of their individual claim amounts.

I appreciate this opportunity to share my story. This concludes my statement. I would be pleased to answer any questions.

Senator COLLINS. Thank you very much, Mr. Wise.

Let me start by just clarifying some of the facts in this case. This essentially was a pyramid scheme is that correct? Where there was an effort to recruit a lot of investors and eventually it was going to collapse?

Mr. WISE. That is right.

Senator COLLINS. Did you ever recover the nearly $5,000 that you invested?

Mr. WISE. No, but it is my understanding per a conversation with Gilardi & Company that on February 11, 60 percent of that money will be mailed to me. And it should be on its way shortly. Senator COLLINS. So you hope to recover about 60 percent of your initial investment due to the action taken by the FTC?

Mr. WISE. At least at this time. I am not sure what the outcome is going to be between them and the Federal Trade Commission as far as recouping the other 40 percent. But I do know that the Federal Trade Commission is aggressively pursuing that remaining 40 percent.