Judge Throws the Book at Magazine Peddler

Direct Sales International to Pay $7 Million

September 11, 2006

Subscription Woes • Big Sky Periodicals • Big Sky Responds • Diversified Marketing • Magazine Source --- News • Direct Sales International to Pay $7 Million • Negative Option Marketing: When No Means Yes

A federal judge has ordered a magazine subscription seller, Direct Sales International (DSI), to pay a civil penalty of more than $5.4 million and give up more than $1.6 million of ill-gotten gains for violating a 1996 Federal Trade Commission consent order and the FTC's Telemarketing Sales Rule (TSR).

It is the largest civil penalty the Federal Trade Commission has ever obtained for a violation of a consent order in a consumer protection matter.

"The FTC expects full compliance with its orders, period," said Lydia Parnes, Director of the FTC's Bureau of Consumer Protection. "This case demonstrates that the Commission will prosecute those who flout its orders and deceive consumers."

Based on an FTC complaint filed by the U.S. Department of Justice, the court entered a judgment against Richard L. Prochnow of Atlanta. The court had found that Prochnow violated the consent order through his ownership and control of DSI, which either directly or through its dealers:

(1) failed to disclose or misled consumers regarding the cost of magazine packages and individual magazines; and

(2) made weekly cost representations even though consumers could not make weekly payments for the magazine packages.

The court also held Prochnow liable for DSI's failure to tell consumers that their credit cards would be billed for membership in a buying club unless they called within thirty days to cancel, and its failure to provide consumers with information that would enable them to cancel, in violation of the TSR.

The court further found Prochnow liable for false statements to consumers that publishers were paid in advance for magazines, which the Court found to be a violation of the TSR.

The court ordered that, with a few narrow exceptions, Prochnow may not own, control, manage, advise, or assist others engaged in a telemarketing business for five years.

This ban does not apply to his ownership in Amerinet, a company that processes payments to telemarketers, and Hotdogger, an infomercial company, provided he does not exercise any control over the companies and places his interest in them in the custody and control of an independent third party approved by the court.

In holding Prochnow personally liable for the violations, the court found that he had the authority to control the practices of DSI's employees and those of the dealers selling magazine subscriptions pursuant to contracts with DSI.

The violations of the consent order and the TSR occurred between April 1997 and January 2000, when Prochnow sold DSI. The consent order, which prohibited Prochnow from using deceptive practices to sell magazine subscriptions, had settled FTC charges against Prochnow, then doing business as DSI, and several other corporate and individual parties.

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