In Battle Against Fraud in Free Phone Service, the Poor Might Pay the Price

“If it weren’t for my free phone, there were a few times I wouldn’t have made it to the hospital,” said Ms. James, who is unemployed because of chronic health problems and has no other telephone or Internet connection in her home. She is among the 15.3 million people in the United States who receive the Lifeline telephone service because they meet income guidelines or are enrolled in programs like Medicaid or food stamps.

But the fundamental feature of the program on which Ms. James relies — 250 minutes of free wireless service a month — is at the center of a legal battle linked to a new tactic to reduce fraud in the program. The outcome could have far-reaching consequences for the telecommunications industry and for millions of impoverished Americans.

Alarmed by accounts of households that have more than one subsidized phone — a breach of federal guidelines — and other allegations of fraud, the Georgia Public Service Commission voted this year to make this state the first to require phone companies to collect a fee of at least $5 a month from Lifeline users.

As an alternative, in an effort to force the service providers to better police phone usage, the commission also said that the companies could, for the same compensation they already receive from the government, offer participants 500 minutes a month. But the companies denounced that option.

Georgia regulators made their move about three years after the Government Accountability Office reported that officials from 21 states “indicated that they were somewhat or very concerned about consumer fraud in the Lifeline program.”

Georgia’s mandate, which had been scheduled to take effect in January before a judge in Atlanta granted an injunction last week, prompted outrage from some advocates for the poor, and a legal challenge from a trade group that represents cellphone companies. The group argued that Georgia was circumventing federal law to set rates.

But the author of the regulation has argued that the fee’s benefits outweigh the risks, and that it would do much to reduce Georgia’s share of fraud in the Lifeline program, which began in 1985 and was expanded to include wireless coverage two decades later.

“There’s always going to be collateral damage when you’re having a war, and we’re having a war with fraud and abuse,” Commissioner H. Doug Everett told WABE Radio in October.

Stan Wise, one of two public service commissioners who voted against the new regulation, conceded that the Lifeline program has been rife with misconduct, but warned that the fee would be ineffective and damaging.

“What it really does is harm those in the most need and the ones that the program was designed to help,” Mr. Wise said. “If you have three Lifelines and it’s important to you to have the three phones, what’s $15 to you if you’re promoting fraud?”

The program’s troubles have received widespread attention. Aware of the criticisms, the Federal Communications Commission, which cited the potential for “a significant burden on some classes of Lifeline consumers” when it turned back a plan in 2012 to impose monthly fees across the country, has started a campaign to clean up the program, including the introduction of new national databases tracking eligibility and participation.

But if Georgia’s new policy can survive in court, it could be replicated elsewhere by anxious state regulators.

“These sorts of cases are relatively unusual,” said James B. Speta, a professor at Northwestern University who specializes in telecommunications law. “So in a second state or a third state, they will certainly look at what happened in Georgia.”

As the legal battle plays out, Georgia residents who have Lifeline phones are beginning to contemplate what they will do if the fee is put in effect.

Ms. James, who has a monthly budget of about $350, said she was likely to have to choose between her phone and one of the six prescription medications she takes every day.

“I’ve got medicines I’ve got to buy with $5,” said Ms. James, 47, who lives just northwest of Atlanta and said she has medical debts well into six figures after numerous hospitalizations and health issues that include chronic bronchitis and gastrointestinal ailments.

Others who have the Lifeline phones, including Brenda Florence, said they would immediately return them.

“They’re supposed to be free,” said Ms. Florence, 60, who pays for a home landline and cell service but also participates in Lifeline because she receives Medicaid benefits. “I’m going to put it in the box and mail it back.”

In Georgia, where nearly 721,000 people use Lifeline, the debate has also exposed a fissure among those who work to aid people in poverty.

At the Christian Aid Mission Partnership, which provides food and clothing to the region’s poor and sometimes hosts phone providers offering their wares, officials said they endorsed the state’s new effort to stem fraud.

“I think there should be some skin in the game,” said Linda Oviatt, the organization’s outreach director. But she added that she generally supported the Lifeline program because it was “a godsend” for many of her clients.

Other advocates for the poor, though, have been sharply critical of Georgia’s plan.

“The proposed fee simply serves as a penalty on the poor,” the Rainbow PUSH Coalition wrote in an October letter to commissioners. “It is, in essence, a tax being arbitrarily applied to those who can least afford it and an incursion by the P.S.C. on the free market business practices of private companies.”

Back on Lot 54, Ms. James, whose kitchen on a recent day was cluttered with boxed and canned foods, said she thought the debate should focus less on complex legal arguments. She merely wants to keep her aging flip phone.

“It’s so hard on someone who is on a fixed, fixed income,” she said. “It was just an honor to get something that is going to help me.”

A Vulnerable Age: Fraud Against Seniors Often Is Routed Through Banks

Bruno Koch, 83, told the telemarketer on the line that, yes, of course he would like to update his health insurance card. Then Mr. Koch, of Newport News, Va., slipped up: he divulged his bank account information.

What happened next is all too familiar. Money was withdrawn from Mr. Koch’s account for something that he now says he never authorized. The new health insurance card never arrived.

What is less familiar — and what federal authorities say occurs with alarming frequency — is that a reputable bank played a crucial role in parting Mr. Koch from his money. The bank was the 140-year-old Zions Bank of Salt Lake City. Despite spotting suspicious activity, Zions served as a gateway between dubious Internet merchants and their marks — and made money for itself in the process, according to newly unsealed court documents reviewed by The New York Times.

The Times reviewed hundreds of filings in connection with civil lawsuits brought by federal authorities and a consumer law firm against Zions and another regional bank that has drawn even more scrutiny, First Bank of Delaware. Last November, First Delaware reached a $15 million settlement with the Justice Department after the bank was accused of allowing merchants to illegally debit accounts more than two million times and siphon more than $100 million.

The documents, as well as interviews with state and federal officials, paint a troubling picture. They outline how banks profit handsomely by collecting fees while ignoring warnings of potential fraud and, in some instances, enabling dubious merchants to prey on consumers.

Anyone, young or old, can be targeted by unscrupulous marketers. But for several reasons — financial worries, age, loneliness — older people are particularly vulnerable to what is known as mass market fraud, deceptive pitches that arrive by telephone, mail and the Internet.

The problems at Zions and First Delaware, where the banks became financial conduits and quiet enablers for questionable businesses, extend well beyond those two institutions, federal authorities say. Indeed, banks across the country, from some of the largest to smaller regional players, help facilitate billions of dollars of fraud each year, according to interviews with consumer lawyers and state and federal prosecutors.

Officials at the Justice Department say they are taking aim at banks’ role in giving predatory lenders and fraudulent merchants access to the United States financial system. The department is considering civil and criminal actions against a number of banks for allowing tainted money to flow through branches, for failing to safeguard against suspicious merchants, and for originating transactions on behalf of businesses that they know make unauthorized withdrawals from customer accounts, according to people with direct knowledge of the matter.

“You can’t close your eyes anymore to the fraud that you are allowing to happen,” said Michael Blume, the director of the consumer protection branch at the Justice Department. “Banks are in business to make a profit. Unfortunately, this is a moneymaking operation at consumers’ expense.”

Zions did not interact directly with the company that called Mr. Koch, National Health Net Online. What the bank did was establish a banking relationship with an intermediary, Modern Payments, that handled payments for National Health. Mr. Koch’s account at a small Virginia bank was debited by National Health, which in turn paid Modern Payments for processing the transaction. Modern Payments gave its bank, Zions, a cut of its fee.

In all, Zions in effect let roughly $39 million be withdrawn from hundreds of thousands of accounts from 2007 to 2009. Much of that money was ultimately transferred to bank accounts in Canada, India and the Caribbean, according to a Times review of court records. Many of the Internet merchants’ customers were older people and others on shaky financial footing. But that, too, worked in banks’ favor: the withdrawals set off a cascade of insufficient fund fees — more than $20 million in all, court records show.

DealBook: Man Claiming Facebook Ownership Arrested on Fraud Charges

John Anderson/Wellsville Daily ReporterPaul Ceglia, who claimed he owned half of Facebook, at home in 2010.

In 2010, a New York entrepreneur made an explosive legal claim: An agreement that he had with Facebook’s founder, Mark Zuckerberg, entitled him to a major stake in the social-networking giant.

Mr. Zuckerberg staunchly denied the allegation, and his lawyers insisted that the entrepreneur, Paul Ceglia, was a scam artist.

On Friday, federal authorities sided with Mr. Zuckerberg, arresting Mr. Ceglia and charging him with a multibillion dollar scheme to defraud Facebook.

Prosecutors say that Mr. Ceglia, 39, of Wellsville, N.Y., filed a sham federal lawsuit claiming to have been promised a 50 percent share of Facebook in 2003, and then doctored, fabricated and destroyed evidence to support his allegations.

“Ceglia’s alleged conduct not only constitutes a massive fraud attempt, but also an attempted corruption of our legal system through the manufacture of false evidence,” said Preet Bharara, the United States attorney in Manhattan. “Dressing up a fraud as a lawsuit does not immunize you from prosecution.”

Gonzalo Fuentes/ReutersMark Zuckerberg, the chief executive of Facebook.

Mr. Ceglia is expected to make an appearance in federal court in Buffalo on Friday afternoon. His lawyer, Dean Boland, did not immediately return a telephone call seeking comment.

The improbable claims made by Mr. Ceglia received outsized attention in part because it came at around the same time as the release of “The Social Network,” the Academy Award-winning film that told the tale of Mr. Zuckerberg’s legal battle with his Harvard schoolmates, the Winklevoss twins, over the origins of Facebook. Mr. Zuckerberg paid the Winklevosses at least $65 million to settle their case.

Since the lawsuit was first filed, Facebook’s lawyers have raised questions about Mr. Ceglia’s credibility. In 1997, he pleaded guilty to possessing hallucinogenic mushrooms. And in 2010, the New York State attorney general criminally charged him with defrauding customers in a now-defunct wood pellet manufacturing business that he had run with his wife.

Questions are now also being raised about the lawyers that represented Mr. Ceglia in his lawsuit.

In his original complaint, filed in 2010, Mr. Ceglia was represented by Paul Argentieri, a sole practitioner in upstate New York. An amended lawsuit was filed in April 2011 by Robert W. Brownlie of DLA Piper, the world’s largest law firm, and Dennis C. Vacco, a former New York attorney general now in private practice at Lippes Mathias Wexler Friedman in Buffalo.

In 2011, Mr. Brownlie of DLA Piper declined a request by The New York Times to produce the original documents backing his client’s legal claims. “That will come out during the course of litigation,” Mr. Brownlie said. “Anyone who claims this case is fraudulent and brought by a scam artist will come to regret those claims.”

Yet court records indicate that another law firm, Kasowitz Benson Friedman & Torres, had been hired by Mr. Ceglia before DLA Piper and Lippes Mathias becoming involved. Kasowitz Benson withdrew from the case and put DLA Piper and Lippes Mathias on notice that it had determined that the purported contract was a fraud.

Mr. Brownlie and Mr. Vacco later withdrew from the case. They did not return calls and e-mails seeking comment.

Mr. Ceglia’s alleged plot dates back to 2003, when Mr. Zuckerberg was a student at Harvard University. Mr. Ceglia had placed an advertisement on Craigslist looking for a programmer for an Internet business he was trying to get off the ground. Mr. Zuckerberg responded to the ad, and Mr. Ceglia agreed to pay him $1,000 for his work.

Months later, in his college dorm room, Mr. Zuckerberg started a business called Facebook.

Mr. Zuckerberg did not hear from Mr. Ceglia again until 2010, when he was served with a complaint that claimed Mr. Ceglia was entitled to a substantial ownership stake in Facebook.

According to the lawsuit, Mr. Zuckerberg had promised him a substantial interest in either “The Face Book” or “The Page Book.” Attached to the legal papers was a contract that contained language giving Mr. Ceglia an interest in Mr. Zuckerberg’s start-up. The filing also included e-mail exchanges between Mr. Ceglia and Mr. Zuckerberg that purported to show their collaboration on ideas for the social network business.

Federal prosecutors say that Mr. Ceglia’s claims were entirely false. Government investigators searched Mr. Ceglia’s hard drive and discovered the original contract, which had no reference to Facebook. And Harvard’s e-mail servers had no record of the supposed e-mails.

Facebook’s lawyers at Gibson, Dunn & Crutcher commended the Justice Department for filing criminal charges and, in statement, indicated that it would pursue possible claims against the lawyers that represented Mr. Ceglia.

“Ceglia used the federal court system to perpetuate his fraud and will now be held accountable for his criminal scheme,” said Orin Snyder, a partner at Gibson Dunn. “Facebook also intends to hold accountable all of those who assisted Ceglia in this outrageous fraud.”

Arrest on Fraud Charge in Facebook Case

NEW YORK (AP) — A businessman who claimed in a lawsuit that Facebook founder Mark Zuckerberg had promised him half ownership in the then-fledgling company when he was still at Harvard was arrested Friday on fraud charges.

Paul Ceglia, 39, was arrested at his Wellsville, N.Y., home on charges of mail and wire fraud after an investigation by the U.S. Postal Inspection Service. He was scheduled to appear in federal court in Buffalo later in the day.

Authorities said Ceglia doctored, fabricated and destroyed evidence to support the claims in a lawsuit he filed in Buffalo federal court in 2010.

In the lawsuit, Ceglia claimed that he and Zuckerberg in 2003 signed a software development contract that included a provision entitling Ceglia to half ownership of Facebook in exchange for $1,000 in startup money for the budding company.

Investigators said in a release that Ceglia had replaced the first page of the real contract he signed with Zuckerberg with another page that was "doctored to make it appear as though Zuckerberg had agreed to provide Ceglia with an interest in Facebook."

A criminal complaint in the case said a search of Ceglia's computer hard drives uncovered the real April 28, 2003 contract, which Ceglia had emailed to an attorney in March 2004, years before his lawsuit against Facebook and Zuckerberg. Additional evidence included proof that spacing, columns and margins in the fake contract differs from the real contract and copies of actual emails in Harvard's backup tapes, the complaint said. Authorities said Zuckerberg and another of Facebook's founders have said the idea for Facebook did not arise until months after the contract with Ceglia.

Manhattan U.S. Attorney Preet Bharara said Ceglia was seeking a "quick payday based on a blatant forgery."

Bharara said Ceglia's "alleged conduct not only constitutes a massive fraud attempt, but also an attempted corruption of our legal system through the manufacture of false evidence. That is always intolerable. Dressing up a fraud as a lawsuit does not immunize you from prosecution."

In a statement, attorney Orin Snyder praised the prosecution on behalf of Zuckerberg and the Menlo Park, Calif.-based Facebook. "Ceglia used the federal court system to perpetuate his fraud and will now be held accountable for his criminal scheme," the statement says.

If convicted, Ceglia could face up to 40 years in prison. It was not immediately clear who will represent Ceglia in court. A lawyer who has represented him in his lawsuit did not immediately return a message for comment.

Full Tilt Poker Chief Surrenders to U.S. on Gambling Fraud

Raymond Bitar,40, had been working at Full Tilt's Dublin, Ireland, headquarters, and until Monday had not returned to the United States since charges against him were first announced in April 2011.

Federal prosecutors in Manhattan have charged 11 people at the three biggest online poker companies: Absolute Poker, Full Tilt Poker and PokerStars. The U.S. government also seized their Internet domain names.

At a hearing late on Monday in Manhattan federal court, Bitar pleaded not guilty to nine criminal counts, including illegal gambling, money laundering and wire fraud charges.

Online gambling has been illegal in the United States since 2006, the year Bitar moved Full Tilt's operations to Ireland. Some U.S. lawmakers have talked recently about legalizing Internet gambling and regulating it.

Since unveiling the case, prosecutors have expanded both their civil and criminal charges against Full Tilt. They say it operates as a Ponzi scheme and paid its directors more than $440 million while defrauding players, even after the charges were filed.

Prosecutors say Full Tilt, founded in 2004, has taken in about $1 billion from players in the United States. They estimate that Full Tilt still owes $350 million to customers in the United States.

Full Tilt and Bitar have denied the Ponzi scheme accusations.

U.S. Magistrate Judge Debra Freeman at Monday's court hearing denied a prosecutor's request to refuse bail for Bitar, and set his release on a $2.5 million bond. He will, however, remain jailed until all the bail conditions are met.

Prosecutor Arlo Devlin-Brown said Bitar's decision to stay in Ireland rather than face U.S. charges showed he was at risk of flight. Devlin-Brown said that Bitar had remained in Ireland to operate Full Tilt's fraud against its players.

"He was running it, I submit, because the company was at this point little more than a Ponzi scheme and he had to be there to prevent it from unraveling," said prosecutor Arlo Devlin-Brown.

Bitar, a U.S. citizen from near Los Angeles, California, said in a statement that he had stayed in Ireland to work on "possible solutions to get the players repaid."

Tiltware, a California-based company, owns all the Full Tilt Poker entities.

Absolute Poker co-owner Brent Beckley pleaded guilty in December to conspiring to break U.S. laws against gambling on the Internet. He also pleaded guilty to a charge of conspiracy to commit bank fraud and wire fraud. His sentencing is scheduled for July 23.

The case is USA v. Tzvetkoff et al, U.S. District Court for the Southern District of New York No. 10-cr-00336

(Reporting By Basil Katz; Editing by Eric Walsh)