Senator COLLINS. How much experience did you have using the Internet prior to your dealings with Fortuna Alliance?

Mr. WISE. I think prior to that I had had Internet service for about a year, but not a whole lot of experience using the Internet. Senator COLLINS. Had you had experience with investing via the Internet prior to your dealings with Fortuna?

Mr. WISE. No, I had never invested on the Internet. And I never will, also.

Senator COLLINS. Did it cause you-were you more concerned, did you have a higher level of wariness that you were dealing through the Internet rather than in person with a financial advisor, for example?

Mr. WISE. Not really, because an individual had told me about it and plus they had one Web site of their own and probably numerous other Web sites that were out there by some of your individual investors, which sort of added a legitimacy to what was going on.

Senator COLLINS. You have mentioned that there were these other Web sites.

Mr. WISE. Right.

Senator COLLINS. It is my understanding that Fortuna Alliance instructed its investors to create their own Web sites. Is that correct?

Mr. WISE. That is my understanding.

Senator COLLINS. And that was a means of soliciting new members to try to sustain the pyramid a little bit longer. Is that correct?

Mr. WISE. Yes. At the time, I pulled up all the individual Web sites, just did a search word "Fortuna," and I think there were probably three or four complete pages that would come up. When a search engine would pull up Fortuna, you would see page after page of just nothing but Fortuna, Fortuna, Fortuna. And you would go to another page, and you would see more lines of Fortuna. So there were numerous Web sites out there.

Senator COLLINS. Did the existence of all these other related Web sites confer to you a certain legitimacy of the enterprise? Did it reassure you that it must be legitimate or otherwise why would there be all these Web sites?

Mr. WISE. Yes, that did, plus they also had a 90-day money-back guarantee, which I guess at that time added some legitimacy. But in hindsight, money-back guarantees really don't mean anything. Senator COLLINS. That certainly seems to have been the case. You discovered that you were a victim of fraud really by chance. Is that correct?

Mr. WISE. That is right. I don't think if I had searched-had been on the Internet with the search engine "fraud, I don't even know if I would have ever known about it.

Senator COLLINS. What did the FTC statement say that you chanced upon when you were browsing on the Internet?

Mr. WISE. I can't recall the exact-what the FTC said. I just know once I hit that search engine, there was a big alert that came up, and it gave a lot of details of what the Federal Trade Commission did as far as what they had. They had raided their complex.

They had been shut down, could not do business anymore, and they were in the process of legal action against Fortuna.

Senator COLLINS. So the FTC site specifically identified Fortuna Alliance as a fraudulent enterprise that it was taking action against?

Mr. WISE. That is right.

Senator COLLINS. And had it not been for your stumbling across the FTC's fraud Web site, do you think you would have discovered that you were a victim of fraud as quickly?

Mr. WISE. No.

Senator COLLINS. You stated that you received a letter from Fortuna Alliance indicating that they had been cleared of all charges and urging you not to request a refund. And it is my understanding that this letter was written after action was taken against the company by the FTC.

Did you report that additional letter that you received to the FTC?

Mr. WISE. I did not. In hindsight, I probably should have, but the reason I didn't, because I know that the FTC at that time was aggressively pursuing Fortuna and had already one legal action against them.

Senator COLLINS. As a consumer, did you find it troubling that Fortuna Alliance could make such claims and so quickly could emerge with a new identity as Fortuna Alliance II?

Mr. WISE. Yes. I would have had more concern if they would have set up business in the realm of the United States. But when they set up Fortuna Alliance II, they did that outside of the country, which really makes

Senator COLLINS. So this was an offshore enterprise?

Mr. WISE. Right, which really makes it difficult to do anything with anybody that does something like that.

Senator COLLINS. Again, I see a parallel with the hearings we held on securities scams where a rogue broker will go from one firm to another, set up a new base of operations, and it becomes difficult to track and catch these individuals.

Did you try to use the information resources of the Internet to do some background research on Fortuna Alliance prior to or at the time of your investment?

Mr. WISE. No. I will have to plead ignorance to that.

Senator COLLINS. Given your experience-and, again, I would emphasize that you are much more sophisticated than a lot of people who are doing investments via the Internet. You are a CPA. I know how prestigious a designation that is. And yet you got trapped.

I guess I have two final questions for you. One, why do you think you did get taken in? And, second, what advice would you have for other consumers so that they can avoid the kind of fraudulent investment that you made?

Mr. WISE. I was mainly taken in with the 90-day money-back guarantee, which, like I said earlier, I now know means absolutely nothing. They were obviously offering a good return on the investment. Probably greed comes into play, which in turn clouds your thinking ability to a certain extent.

As far as the normal investor or anybody on the street, as long as they know that to be legitimate, especially in a multi-level marketing scheme like this, commissions need to be paid solely on goods or services that are sold. If they knew that, that would probably eliminate at least some of the people that would get involved in an illegal pyramid scheme.

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

Senator Glenn.

Senator GLENN. Thank you very much, Madam Chairman.

I was interested in some of the material that Fortuna Alliance sent out where even an educated person like yourself, an auditor, who is familiar with accounts and how these things work, you could be drawn into something like this. And the company has all the things down there, "no recruiting necessary, no investment, no"-a whole bunch of things, just on and on and on here. And then its latest publication talks about how the FTC came in with armed people and so on, and the company says down here it has made some changes "to protect it from interference by governmental agencies of any country," and so on.

The gist of this is these people are so brazen, they have now set up Fortuna Alliance II.

Mr. WISE. That is right.

Senator GLENN. It is offshore, I guess. Where is it based now? Mr. WISE. I have no idea. I have sort of disconnected myself from them. (Laughter.]

Senator GLENN. You are not a new investor

Mr. WISE. I would like to add one other thing that I thought was, to me, almost amusing at the time that the Federal Trade Commission went in and raided Fortuna. Based on my knowledge, there was a good percentage of Fortuna Alliance memberships that were so became so, I guess, sucked in with Fortuna that they were actually, I guess, mad at the Federal Trade Commission for shutting down Fortuna and were sending, I guess, letters and complaining about the Federal Trade Commission as being a tyrannous-type organization, which in hindsight that was far from the fact in this particular case.

Senator GLENN. Well, they say here that Fortuna Alliance offices in the United States were "raided by armed members of a U.S. regulatory enforcement agency known as the Federal Trade Commission." I didn't know the Federal Trade Commission went around packing guns, but maybe they do now. [Laughter.]

Maybe we will get some testimony on that a little bit later. Fortuna Alliance was forced into receivership by order of a Federal judge and so on. But they have opened up again offshore. That is the point I am making.

Mr. WISE. Right.

Senator GLENN. They have opened up again. They are still going, and I guess they are back on the Internet and didn't even change their name except they now make it Fortuna Alliance II. And, “The new Fortuna Alliance II will be similar to the original Fortuna Alliance in most ways. It was very good as it was, and the primary reasons to change any part of it are, one, to protect it from interference by governmental agencies of any country; and, two, to take advantage of all the founder, Augie Delgado"-that sounds great

46-902 98-2

"and executive team learned from this most devastating experience at the hands of a brutal U.S. regulatory agency, the Federal Trade Commission," and so on.

And the one that I like, too, is they have-this is in their quotes, "a unique mathematical formula: The Fibonacci Sequence." At least the first syllable is right, the "fib" part, anyway.

Mr. WISE. That is right.

Senator GLENN. We know that. So, anyway, these things, you squash them here and they pop up somewhere offshore, I guess.

We are on five lights up there, and I know we have got to vote, Madam Chairman, but this is very interesting, and I hope it gets enough publicity that people are not subscribing to things like this. Senator COLLINS. Mr. Wise, I do want to thank you very much for sharing your experience. It certainly is a cautionary tale for all of us, and we appreciate your willingness to come forward. Thank you very much.

Mr. WISE. All right. Thank you.

Senator COLLINS. We are now in the middle of a vote, and I expect a second vote back to back. So I regret to inform our next witness, with great apologies, that we are going to need to take a 15minute recess. But we will resume in 15 minutes.

Thank you.

[Recess.]

Senator COLLINS. The Subcommittee will be back in session. I apologize for the delay. We were on Senate time, which I have yet to get used to, and the vote was held for a couple of Senators, so I apologize for the delay.

Our final witness this morning is the Hon. Robert Pitofsky, the chairman of the Federal Trade Commission. The chairman's testimony will provide the Subcommittee with an overview of the roots of Internet fraud from the Federal perspective, as well as a discussion of the FTC's civil enforcement action and consumer education efforts.

I would note that the FTC's enforcement led to the dismantling of the pyramid scheme about which the previous witness just testified. It is my understanding that the chairman may wish to have an individual accompany him, and I would at this time introduce Jodie Bernstein, the Director of Consumer Protection, and anyone else that you would like to have, Mr. Pitofsky, we would welcome their participation.

As I have explained, pursuant to the rules of the Subcommittee, all witnesses who testify are required to be sworn, so I would ask that you stand and raise your right hands.

Do you swear that the testimony you are about to give to the Subcommittee will be the truth, the whole truth, and nothing but the truth, so help you, God?

Mr. PITOFSKY. I do.

Ms. BERNSTEIN. I do.

Senator COLLINS. Thank you.

Again, Mr. Pitofsky, my apologies for the unavoidable delays. I know you have a busy schedule, and I appreciate your willingness to participate in these important hearings. And I would ask that you proceed with your statement.

TESTIMONY OF HON. ROBERT PITOFSKY,1 CHAIRMAN, FEDERAL TRADE COMMISSION, ACCOMPANIED BY JODIE BERNSTEIN, DIRECTOR, BUREAU OF CONSUMER PROTECTION

Mr. PITOFSKY. Thank you, Madam Chairman. I am delighted to be here, and I want to compliment the Subcommittee for holding hearings on this important and, I think, sometimes somewhat neglected subject, and that is, marketing fraud on the Internet and in this country generally.

With your permission, I would like to submit my full testimony for the record and just summarize it this morning.

Senator COLLINS. It will be included in the record in its entirety. Thank you.

Mr. PITOFSKY. And may I introduce Jodie Bernstein, who is director of our Bureau of Consumer Protection, and who is in charge of enforcement in this area, and also very active on the consumer education front.

As you know, the FTC is the primary agency at the Federal level authorized to challenge fraud and deception. We do so under Section 5 of the Federal Trade Commission Act, which outlaws unfair and deceptive acts and practices in commerce. Section 5 gives the Commission the authority not only to combat fraudulent activity by issuing administrative cease and desist orders, but also by going directly into Federal court to seek injunctive relief and consumer redress.

We have noted several times already this morning that the Internet is growing by leaps and bounds.2 Fifty-eight million potential consumers are already online, and we expect Internet commerce to grow exponentially over the next few years. Online advertising is expected to grow to $4.35 billion by the year 2000, and as Senator Glenn's reference to the Internet Shopper pointed out, online commerce is growing. We think it might be as much as $220 billion by the year 2001.

In this expanding marketplace, consumers often will receive new goods and services faster and at lower prices. They will receive more information to make informed decisions. In general, I think of the Internet as a pro-competitive, pro-consumer opportunity.

We also know, however, that the growth of the Internet will generate an increase in fraud and deception. To combat these problems, we will combine traditional law enforcement with new types of consumer and business education.

The Commission has already brought over 25 Federal actions against deceptive and fraudulent activity on the Internet. That has just occurred in the last year and a half or so. Most of these cases have involved old wine in new bottles, traditional types of scams that have migrated to cyberspace. For example, we have seen credit repair scams and business opportunity schemes, that look very much like the traditional programs that we have seen in telemarketing and elsewhere.

It has also given new life to a kind of fraud that we thought we had virtually wiped out 10 or 15 years ago, and that is the pyramid

1The prepared statement of Mr. Pitofsky and additional copy submitted for the record appears in the Appendix on page 78.

2 See Exhibit No. 3, slide presentation of the Honorable Robert Pitofsky, Chairman, Federal Trade Commission which appears in the Appendix on page 300.