Morning Session

MR. SHOUP: Good morning and welcome to the Preventing Fraudulent Advertising Conference. I'm Hal Shoup. I'm Executive Vice President of the American Association of Advertising Agencies, hereinafter referred to as "the Four A's," and I am the Director of the Washington office of that association.

It is a pleasure to be here this morning and to be part of a group that's addressing such an important issue. The Four A's has over 600 advertising agencies located in cities and towns across the country; and, in the aggregate, we place about 75 percent of all advertising -- national advertising, that is -- and a fairly substantial amount of local and regional advertising as well.

Now, I know that most of the advertising that we're going to be talking about this morning will be advertising that's not in that 75 percent, but something that's in the other 25 percent. Nonetheless, we are very much interested in the subject.

The prevention of fraudulent advertising, as I said, is of great interest to us. Fraudulent advertising is bad for business. It is certainly bad for the advertising business and advertising agencies, and that is because it is very bad for the consumer. So it's important, I think, for all of us to be here to learn more about advertising fraud and, more importantly, how it can be prevented. And, from our standpoint, it's an honor and a privilege to be able to support those agencies of the government that are deeply involved in the prevention of fraudulent advertising.

Now, over the years, advertising has had numerous critics, and one of them wrote, -- and I quote -- "Advertisements are now so numerous that they are very negligently perused, and it has therefore become necessary to gain attention by magnificence of promises and by eloquences sometimes sublime and sometimes ridiculous." That quote, perhaps, could have been uttered recently; but, as it turns out, it was uttered by Samuel Johnson back in 1758. So, the problem that we address is not a new one. My view is that it perhaps is not as serious as it once was, but that's what we're here to find out.

Certainly, preventing fraudulent advertising requires constant vigilance, certainly by the regulatory agencies and other entities of the government, but also by advertisers, advertising agencies, consumer groups, and, of course, trade associations like the one I represent.

I hope that by the end of this conference today everyone will go away with the understanding that combating this problem, particularly in light of the emerging technologies that are available to us, that this problem, really, its solution is, in fact, a shared responsibility.

It is a great pleasure for me to introduce somebody who has been on the watch, if you will, for fraudulent advertising for a good part of her career; someone who has, at least in my view, been extremely vigilant in this job; someone who has been touch, but I think evenhanded and certainly fair.

Federal Trade Commissioner Mary Azcuenaga was sworn in for her first term in 1984 by President Reagan and was reappointed by President Bush for a second term in 1991. Before her appointment as commissioner, she held several positions at the Federal Trade Commission and has gained experience in every aspect of the Commission's work. Won't you join me, please, in welcoming to our podium Commissioner Mary Azcuenaga.

COMMISSIONER AZCUENAGA: Thank you, Hal, and good morning. I am delighted to have the opportunity to welcome you to this important conference on media advertising and the clearance process. Media screening of advertising before it runs is one of the best examples of how industry self-regulation efforts can offer tremendous benefits to consumers. Unlike government efforts, which ordinarily occur after a deceptive ad runs, media screening stops deceptive and sometimes fraudulent advertising claims before they cause consumer injury.

In addition to protecting consumers, this self-regulatory effort helps businesses by helping to protect the credibility of honest advertisers, making government regulation less necessary. It offers the added benefit of protecting the media from nonpayment.

All of these shared benefits are reflected in the title of the conference today, "Preventing Fraudulent Advertising: A Shared Responsibility," and in the joint government/industry sponsorship of today's program.

This conference has three goals. First, we want to get the message out about the good job many members of the media have done in this area. In fact, looking around the room, I see some people here with a lot of expertise and a lot of experience who have done good work.

For many media, the ad clearance process has been one of the great success stories of self-regulation. We want to hear from members of the panels and the audience about how different media approach this responsibility, what works, what hasn't worked, and what can be done to improve current screening efforts. And, third, we want to discuss what government and private consumer protection organizations can do to assist this process. We also want to discuss what consumer protection agencies can do to assist the media in the process of reviewing advertising for deception.

Media screening is always an important subject, but it has never been more important than today. The rapid expansion of traditional media and the dynamic growth of entirely new media have placed, and will continue to place, increasing pressure on existing media clearance systems and pose significant challenges to maintaining the current level of consumer protection.

Today is an opportunity to learn about the operation of the current system, to educate ourselves about the problems the media have in screening advertising to prevent deception and fraud, and to think about how the existing system can work even better.

Now, it's my pleasure to introduce Amanda Pedersen. Amanda, who joined the FDA in 1990, is that agency's Chief Mediator and Ombudsman. She is an independent representative who reports directly to and acts on behalf of the Commissioner in investigation and resolving issues or problems that affect products under the FDA's jurisdiction. So, I'm now going to turn the podium over to Amanda so she also can welcome you to this conference. Thank you.

MS. PEDERSEN: Thank you very much, Commissioner Azcuenaga. It really is a pleasure to be here this morning, both with so many former colleagues, but also representing the Food and Drug Administration in what we regard as this really important conference on preventing fraudulent advertising.

I think the FDA is especially pleased to participate not only with other sister federal agencies, if you will, but also with our colleagues from the states, and, importantly, from the private sector.

As you all probably know, FDA is the nation's oldest consumer protection agency, and its regulatory mandate includes a very wide variety of things. It includes food; drugs, both prescription and over the counter; biologics; medical devices; and radiation-emitting devices, which is an area that not everyone recognizes that we regulate.

Health fraud, which can occur in virtually all these areas, is a very significant economic problem involving millions, perhaps even billions, of dollars. But, more importantly, it can also cause harm to consumers in two very important ways: one, direct adverse health effects from products which are dangerous; and, two, even if the products aren't dangerous, by causing consumers to forgo alternative effective treatments.

Thus, curbing advertisements for these fraudulent health products can have very significant benefits to consumers. Therefore, we really welcome the contribution that we recognize the media is already making to this effort. And, we want to do all that we can to prevent this kind of fraudulent advertising.

As you will hear in greater detail, FDA has an agency-wide health fraud task force, and each of our 21 district offices has a designated health fraud coordinator.

The FDA is organized around the products I just outlined. There are five centers: Foods, which includes cosmetics; drugs; the center for devices; biologics; and, finally, veterinary medicine.

Each of these centers has staff and offices that are designated to address these issues; and these staff and offices are available to assist other federal law enforcement agencies, as well as the media, in efforts to combat fraudulent health claims.

In closing, let me express FDA's appreciation to the FTC and to the Four A's who have done the lion's share of the work in putting this really important conference together. The FDA welcomes this opportunity to be here today to explore the ways that we can work together to be more effective; and, specifically, we are interested in your thoughts and your observations on what we can do to help you. I concur with Commissioner Azcuenaga: it is a shared responsibility for all of us.

MR. SHOUP: Thank you, Amanda. I'd like to convene the first panel of the day by introducing our first moderator, Chris White. Chris, as many of you know, is the Acting Director of the Bureau of Consumer Protection at the Federal Trade Commission.

In his position, Chris directs the law enforcement and educational efforts associated with carrying out the FTC's consumer protection policy. You're going to be in good hands, if you will, with Chris White. Please welcome him to our podium. Thank you.

MR. WHITE: Thank you very much. Let me just ask the members of my panel to join me here, and I'll introduce them. I'll take the moderator's prerogative to tell a story or two and show you a couple of slides, and then we can get right into the issues.

There are a number of reasons why media screening serves the interest of the media. Screening can be advantageous to the media's readers. For every aggravated consumer that you hear from, there are many more who may be unhappy but that we'll never hear from. We also know that being careful about who you do business with has a direct bottom-line effect.

The scam artists -- and that's really what we're talking about here, the scam artists who rip off consumers without hesitation -- often show a distinct lack of regard for paying their bills to the media.

Finally, elevating the level of credibility of what consumers receive is advantageous to the public. Fraudulent advertising threatens to undermine the credibility of all advertising; it's in the interest of every participant in the process to root out fraudulent ads.

The most important reason, from my standpoint, is simply the fact that private media screening efforts to root out fraudulent advertising are a commercial complement to the Federal Trade Commission and other government enforcement efforts. I've had the privilege of working with consumer protection officials in new market economies in Eastern Europe and in the former Soviet Union, and it's become clear that private sector efforts are an essential part of what it takes to ensure that advertising serves the interests of consumers. What happens in the private sector is extremely important to the government.

Our first panel will present the government perspective: what we are doing; how a partnership with the private sector can work; and, what government agencies can do to assist in the private advertising screening function. We have an excellent panel.

First, let me introduce Doug Blanke. He's the director of consumer policy for the Minnesota Attorney General's Office. He also serves as the vice president of NACAA, the National Association of Consumer Agency Administrators.

On Doug's left is John Brugger. John is the program manager for congressional and public affairs for the Postal Inspection Service. He is responsible for the agency's national fraud protection program. He has a wealth of experience on the prosecutorial side, and I can also tell you, John, that without the cooperation of the Service, much of what the Trade Commission is able to do in stamping out telemarketing fraud would be extremely difficult.

The next participant is Minnie Baylor-Henry, the acting director of FDA's Division of Drug Marketing, Advertising and Communication. Minnie has also served as FDA's National Health Fraud Coordinator and is both a lawyer and a health professional.

Finally, we welcome Nancy Smith. Nancy is Director of Consumer Affairs for the Securities and Exchange Commission. She has a terrific vantage point to bring to bear on these issues and a wealth of legislative experience dealing with consumer protection issues. She is the former director of the New Mexico Securities Division and she's no stranger to the work of the North American Securities Administrators's Association. Nancy has been fighting consumer fraud from a number of different angles and a number of different levels of government.

That enables me to give a little plug for my favorite notion -- that we are all in this together. It will take the concerted effort of all of the agencies that you see represented here this morning and many others to deal with the problem of fraud and to ensure that consumers get protected.

The FTC has in the past worked very closely with the major networks. We think that they are doing an extraordinary job in the screening of advertising. We have a number of individuals in the audience who perform that function and have for some years. We know, however, that not every part of the media can screen ads as the networks do. I'm confident that, regardless of the level of resources and time and opportunity that the media have to bring to bear on this task, there are many practical solutions that we can talk about today to improve the credibility and improve the quality of advertising that gets out to consumers.

Common sense can take us a long way in this process, and I want to illustrate that with one quick story. One of the staffers in our advertising practices division once received a call from a local newspaper complaining about a possible scam artist. That person had advertised an investment opportunity guaranteeing investors $25,000 a month in profits. By the time the fraud was discovered, consumers had been cheated, the scam artist was nowhere to be found, and the newspaper was left with thousands of dollars of unpaid ad space. Said the rueful sales manager, "Maybe I should have been tipped off when I saw him drive up in a '67 Dodge Dart." Clearly, common sense can really help.

I also want to quickly show a couple of slides of advertisements because the ads illustrate some useful points. The first ad on the screen is an ad for something called Cho-lo Tea, and it contains a number of altogether too familiar claims. This was a "cholesterol-lowering" product advertised in full-page ads in 46 newspapers, primarily in California. Claims such as: new tea from China reduces cholesterol; as effective as medically prescribed drugs in lowering cholesterol; aids in the digestion of fatty foods; go ahead and eat your favorite foods; don't cut out your favorite foods. This ad make me think, where can I get some of this tea? It does sound very good.

Those of you who are familiar with the FTC are probably thinking, here we go again into a donnybrook with the FTC about whether the studies they are relying on are methodologically-sound. But here there weren't two double-blind, well-controlled clinical trials. There wasn't one. There were no trials at all, and I guess lawyers could still fight about that. In fact, here there was no product at all. So that made the case simpler. This ad was simply a mail drop. The people who ran the ads collected the money and attempted to run.

Due to some excellent investigative work by the Los Angeles City Attorney, the L.A. Police Department, and the California Health Department, they were actually able to catch the perpetrators of this ad. They were prosecuted and received housing from the State of California for some months and the opportunity to assist the State of California clean up its highways for another three months. But the fact is that some 46 newspapers had taken the ad and run it, and they were stiffed to the tune of a quarter of a million dollars when the companies took the proceeds and tried to leave.

This case involves an issue we want to talk about later in the program: facially-implausible claims. Such extreme claims can and should alert nonexperts to ask questions. We all are hoping for the time when there is a product that does deliver fast and easy treatment of high cholesterol, but it's unlikely that the first time we'll hear about such a treatment is when someone walks into the sales office to place an ad.

Let me quickly discuss another print ad. This is for a company called United Consumer Marketing. It involved a diet pill advertised across the country. "Metatrol," the ad says, "has been tested in over a hundred clinics around the world. Scientists are totally astounded how it makes people lose weight without changing their eating habits. The tablet's main ingredient has been approved by the FDA and is considered 100-percent safe and effective, a major breakthrough." You know, the usual diet-pill claims.

Again, we'd all like to lose weight, but promises to shed pounds without diet changes and exercise, unfortunately, are implausible at present. I'd like to highlight that this ad had another important clue: a claim that the FDA had approved the product.

The question is, can you call FDA and find out whether, in fact, the FDA has approved the pill and what that should stand for? As it turns out, the active ingredient in Metatrol was PPA. PPA is a common ingredient of many over-the-counter weight loss products, not a miracle or breakthrough. The bottom line is, this company agreed to an injunction that prohibited false and unsubstantiated claims. The principals of the company were barred from ever again participating in the weight loss business and provided some redress to consumers.

The last advertisement illustrates one point I'd like to make about the FTC. You can see the headline, "Lose 30 Pounds in 30 Days." The FTC staff often get calls from media clearance folk asking whether a certain company or a product is under investigation. At the FTC, we are under very strong confidentiality restrictions. Those of you who are familiar with the FTC know we can't tell you if we have an investigation under way. We can tell you, and are anxious to tell you, about actions that we've taken that are public, but until that time, we simply can't disclose even the existence of an investigation.

Here, a media clearance person called the FTC and, while we couldn't say whether or not we were investigating this particular company, we were able to quickly search our records and find that we had a public case against, in essence, the same product. This is a product that you stick in your ear and -- no, I'm not kidding. This is a product that you stick in your ear or you clip onto your ear, and, of course, it harnesses the ancient secrets of accupressure to help you lose weight; but we were able to find a previous case that was public that involved precisely the same claims, and provide that information.

So there can be advantages to contacting consumer protection agencies, even ones that are as chary about disclosing nonpublic information as the FTC. Now, I'll ask Doug Blanke to give us the perspective from the National Association of Attorneys General.

MR. BLANKE: Thank you, Chris. I'm very happy to be here today, not only on behalf of the Minnesota Attorney General's Office, but also, as Chris said, the National Association of Attorneys General.

As some of you know from personal experience, state attorneys general are very interested in these issues, and they are a high priority in most states in the country. Every state has a law against false and deceptive advertising. In Minnesota, we're fond of reminding people that ours was the first, but they're all really quite similar. They are similar to the Federal Trade Commission Act, in that they are expansive in their sweep and elastic in their language. They really cover almost any type of deceptive practice or claim that one can imagine in advertising.

Generally, under most of the state laws, it is possible, at least in theory, for the medium that disseminates the advertising to be liable for those deceptive claims as well, if the medium has knowledge that they are deceptive or reasonably should have knowledge that they are deceptive. So, if nothing else, that certainly gives a very immediate and practical reason why anyone who is involved in media screening would be interested in taking that job very seriously. The states, too, have an equal interest, both in seeing that the ads are honest and in encouraging you to approach that screening process seriously.

The title of today's conference is particularly appropriate. Responsibility for these issues is definitely shared. As Chris said, we are all in this together. And that's true not simply because this is a legal requirement. Our common interest in screening ads, or reviewing them carefully, really goes beyond legal compliance.

Self-regulation certainly is in everyone's self-interest, for the very practical reason that no one is interested in finding themselves in a tangle with one of the federal agencies here or with one of the attorneys general. The media are interested in serving the interests of their advertisers and keeping them out of trouble.

We, as public officials, are similarly interested -- especially these days as our budgets are strained and stretched a little bit tighter every year -- we are very interested in finding ways to work with others to reduce the number of cases that end up coming in our doors.

When we remind people that Minnesota had the first false advertising statute, we also remind them that it didn't originate with someone who worked at the attorney general's office or at the legislature. It originated with business people in Minneapolis who were very concerned in the early days of this century that, with kind of a Wild West atmosphere in the marketplace, it was becoming very difficult for them to make honest claims, because all claims were losing credibility and were being discounted by, in those days, readers.

And so they came to the legislature and asked for some kind of a standard to weed out the kinds of claims that you have seen in the slides here this morning. And those interests are no less important today than they were at the turn of the century.

Despite all the problems that have occurred, (especially in some areas) I think it's still true that if we went to most members of the public, when they see an advertisement on television, or read it in the paper, or hear it on the radio, if they have some question about it, there is at least some level of tendency to react by saying, "Well, it must be true, or they wouldn't be able to say it."

That's really saying that the public assumes that there are people like those on the panel and in agencies around the country whose job it is to make sure that if it wasn't true, they wouldn't be saying it. And that, too, is the role that those of you who are involved in media screening are performing, making sure that if it isn't true, they won't be able to say it.

We recognize that there is a wide degree of variation in the way that's performed and that the level of screening varies widely -- from the systematic and elaborate process at the networks to the more hit-and-miss process that we see in some other institutions. I know that in our office we see wide variations -- sometimes between two different newspapers in the same community, for example.

At the other end of the spectrum, we see the screening process that really consists of one step: waiting for the advertiser's check to clear.

What I want to do in the rest of my time this morning is just mention a couple more examples of some of the areas where it seems to us that there is much more that can be done. And I think that's true as a general proposition, but there are judgment calls to be made at every turn and there are also some areas where the judgments are fairly easy.

Chris already showed you one slide of the weight loss claims -- "lose 30 pounds in 30 minutes while you're pigging out." It never ceases to amaze us the types of claims that will be made. Some of them are old fashioned, some of them are new; but the lengths to which they will go are amazing, especially in this area, because people are so anxious to believe.

The head of our Better Business Bureau in Minnesota has another slide that he uses as a counterpart to the types that Chris displayed. This one came from the turn of the century, when social expectations were different, and it's kind of a weight-gain scam from the days when people didn't want to look thin. The ad promised consumers they could gain 30 pounds in 30 days guaranteed. And even back at turn of the century the same kinds of claims were being made, but they've now been kind of turned on their head.

But when we see ads like these, "sit on the couch and eat potato chips and lose weight." or "lose weight while you sleep" -- it's very difficult to believe that those could not have been screened out, or that whoever placed the ad was not aware that the claims probably could not be substantiated.

Another area where we've seen a lot of this -- especially with rising gasoline prices -- is that of energy-saving claims. We saw it a few years ago during the Gulf War, when Iraq had invaded Kuwait. And full-page ads were taken out in over a hundred papers around the country for something called the Petro Miser, which was guaranteed to increase your fuel mileage by about 28 percent based on miracle breakthroughs at government laboratories and discoveries by Japanese conglomerates.

And if you, for fifty dollars, would order one of these Petro Misers, which was a magnet about the size of a large french fry, and attach it to your fuel line, you would get 28 percent improved performance. These were really just recycled claims that had been around during the energy crunch of the seventies. The ads, in fact, looked very similar to some that had been run in the seventies, but over a hundred newspapers ran those ads, apparently with no questions asked.

Another area, one of the very few that the attorneys general are no longer involved in, is that of airline advertising. Some years ago, before we were bumped out of that area, we had large ads running in our papers in Minnesota for something called Hawaiian Pacific Airlines. If you're from Minnesota or have been there, you know that vacation travel is an area ripe with opportunities in Minnesota winters. We had an airline called Hawaiian Pacific Airlines that began advertising round trips to Hawaii for about $250. The ads went into a description of the way their 747's were configured, and what the meals would be like, and so on, and began taking money for these trips.

In fact, the ad said something about "it has everything you want in an airline." What they didn't have was an airplane or a pilot or certification to fly. They began running these ads, and we -- this was probably my least pleasant experience with media screening -- we filed suit against the company. We alleged that they didn't have the certification to fly or a pilot or a plane, and one of our papers continued to run the ads.

And when we made these allegations to the papers --and pointed out that they had only to check with the FAA to find out if this, in fact, was a lawful airline -- their response to us was, well, come back after you've got your preliminary injunction, and then we'll pull the ads.

Fortunately, in my experience, that has not been typical of media screening, but it certainly was an area where I think there are opportunities for more screening than is going on today. As some of you in the audience know, airline advertising is now the exclusive province of the federal government and not the states, but the problems continue.

Minnesota is the home to Northwest Airlines, which recently, finally, was caught for the banners that they've been running for years saying that they are "the number-one, on-time airline out of the top seven." The reason they were saying that is that the federal government tracks ten airlines, and the eighth largest was, in fact, the number-one, on-time airline; so they jiggered the numbers, counting only the seven largest, and then it became the number-one, on-time airline. I suppose they were also the number-one, on-time airline north of Des Moines, Iowa, depending on how you were defining it. But airline advertising is an area, again, that's begging for better screening.

Another one that I want to mention is price advertising for sales -- a perennial problem, and one that plagues Better Business Bureaus and attorneys general. I'll just give one example of that, one we saw recently, a company we sued that was running a going-out-of-business sale, an oriental rug company -- need I say more? They had placed ads to run a countdown until their closing, ten days, nine days, and so on.

They ran it daily, complete with "selling out to the bare walls!...everything must go!...this is it!... Sunday at midnight, definitely closed.' At the same time that the ten-day countdown was running, they had already placed the ads to run the next week, in which they would change their name at the same location and run another ten-day count down. And the newspaper had accepted those ads from the same people to continue that going-out-of-business sale.

The last area I'll mention is auto leases. The Truth in Lending Act, and Regulation M under it, spell out some very specific disclosures that are required for the advertisement of a lease, and they require those disclosures to be clear and conspicuous. And if anyone has seen an ad that indeed makes a clear disclosure of the auto lease terms, I'd be interested in getting a copy of that ad.

Let me move, finally, to several reasons why I think that media screening is going to become even more important in the future than it is today. First of all, in both the public sector and in the private sector, we're all experiencing strains on our resources. Certainly, consumer agencies are facing, if not cutbacks, then at least increased demands on limited resources; and that is driving us throughout our society to look increasingly for creative partnerships to help us approach our business.

The states are doing that by working with one another and forming multi-state task forces to look at advertising. We're doing it by working with the federal agencies and, we're doing it increasingly by working with folks in the private sector. As that tendency continues, I think it's inevitable that we're going to look increasingly to working with advertising self-regulation and media screening to do an increasing portion of the job.

Secondly, as our revenues are cut, I think it's predictable that we in the law enforcement agencies are going to look increasingly for ways to approach false advertising by concentrating on those organizations that are the intermediaries that control the flow of information.

The Federal Trade Commission has been doing this already for a number of years, as they have looked to organizations like credit card issuers, the bank that's funding the advertising or the fraudulent practice, the phone company that's placing the 900 number, the production house that's producing the infomercials that are false. I think that trend will continue as well, and I think it suggests that there will be increasing scrutiny of the role that the media themselves are performing as they place these ads.

And, finally -- and I think perhaps most importantly -- I want to suggest that the information revolution is likely to increase the role of media screening. As we go through the transition to an electronic marketplace, more and more commerce and advertising will take place on line (whatever "on line" is going to mean in a few years as we see computing merge with entertainment, merge with information providing). As that process takes place, I think the role of media screening has to increase from what it is today.

Let me just ask, how many of you here are from organizations that are already providing information on line or electronically? And how many, if you're not doing it now, are in the process of moving toward that? It looks like probably three quarters or more of the people in the audience. Undoubtedly, within a few years it will be close to a hundred percent.

The fundamental reason why, as a society, we have set rules against fraudulent advertising have to do with the need for public confidence in the transactions that they enter into in the marketplace. That was true at the turn of the century when it came to newspapers, and it's true today when it comes to electronic commerce.

The Wild West atmosphere prevails. It's an electronic frontier. We hear people say that really it's a lawless kind of atmosphere, and there's debate about whether we ought to bring in somebody to enforce the law.

But I would suggest that the Wild West atmosphere is already retarding the ability to do commerce electronically and that many of the people who have access to online services are reluctant to buy things through them, in part because they are unsure about how the money is going to change hands and in part because they know that there is no reason for confidence in the information that they receive.

It's not even possible to know who's giving you the information today with any confidence. I think that fact alone is going to drive us toward the necessity for improved media screening because we in the public sector are going to have a limited ability to perform the role that we can play more easily when it comes to a newspaper or a local media institution.

When that information comes over the Internet, perhaps from a relay that might be in Finland, perhaps originating from an information provider who might be in Bulgaria, there is really little likelihood that we in the States, or even at the federal level, are going to be able to effectively police all of that, and the consumers who are going to want to engage in that commerce are going to rely on some kind of intermediating institution.

I think, in all likelihood, that's going to be in part the media that's carrying that, whether it's the newspaper online or the Dow Jones service or the new Microsoft online service that will be coming along. But I think, more than anything else, that suggests that media screening is going to play an increasingly important role in the years ahead. And, with that, I'm going to turn it over to our next panelist.

MR. BRUGGER: Good morning, ladies and gentlemen. My name is John Brugger and I'm a postal inspector. I want to echo a sympathetic rejoinder to what Doug has said about regulation. With all the government-bashing and regulation-bashing that's been going on the last few months, those of us in Washington have taken to wearing hard hats most of the time. But I think, truthfully, if we can find a way to minimize the regulations to achieve the desired result, there's a place for them. There's definitely a place for the laws and the regulations that we enforce to shore up and maintain public confidence in the kinds of institutions we have and the kinds of media that you folks represent.

The Postal Inspection Service is the oldest federal law enforcement agency and the mail fraud statute is the oldest consumer protection statute. Just to make a point, the mail fraud statute is a criminal statute, of course, and it has criminal sanctions. We apply it to fraudulent advertising and it's applied to misleading advertising. I've heard different phrasing this morning talking about false or deceptive, misleading, and fraudulent advertising. That covers a pretty wide spectrum of material out there that isn't quite straightforward.

The criminal side concerns itself with fraudulent advertising, and our burden is to prove their fraudulent intent. That's a difficult standard to meet. Misleading and deceptive advertising might be something different. It might be grist for our civil and administrative actions; just as the FTC enforces civil laws, so does the Postal Inspection Service.

We have a full range of different enforcement actions we can bring to bear on the administrative side to stop the flow of mail, stop the flow of money back to the operator. We can even invoke the mail fraud statute in electronic transactions, if the mails are used some place in the transaction. It's not required that a fraudulent representation travel through the mail. It's not required that the crooked operator actually mail anything. It can be a third party. It can be the victim. It can be anybody whose use of the mails was caused by the fraudulent operator. So it's a tremendously flexible statute.

On top of that, just one more point of fact. If the operator is in Toronto, Canada and victimizing people in the United States and the rest of the world, we can bring charges any place the mails are used to deliver a letter in the United States -- certainly not in Canada, but in any district where mailings are received or mailed back to Canada, we can bring charges.

The original invitation was to discuss how we can help you folks do your job; I have no idea, frankly, what your level of proof is. How do you satisfy yourselves of the truth or falsity of any of the material you look at? What must you do to satisfy yourselves? What steps do you take to uncover information and document the truth or falsity of the information you're looking at?

We have a publication, called Misleading Advertisements, and I think it's an excellent place to begin. It talks about typical garden-variety frauds -- money-making schemes; health-related items we looked at this morning; cures for cancer, arthritis, and AIDS, credit repair schemes; false representations about different types of products and services; travel fraud. And then in the back, there is no less than a full two pages of ad clearance tips.

There is one item that needs to be updated. Under the recent mail fraud amendment that was passed last September, the mail fraud statute also covers the use of private couriers in the furtherance of a scheme to defraud. We'll get that changed the next printing.

The next question was, How can inspectors help? Postal inspectors all over the country are investigating mail fraud. We had one typical case recently -- Gray International out of New York. They were circulating insertion orders all over the country, and, cleverly, they adopted the name of a legitimate advertising agency, Gray Advertising in New York. Their address was almost a layover -- it was the same numbers but a different street or the same street but different numbers.

The newspaper clearance person up in Yakima, Washington, spotted their ad and called it to our attention. He wanted to ask our inspector, "what about this stuff? How does it sound to you?" The inspector replied that we had seen this for years -- they're offering to sell information that's available from the government free of charge. They want to charge the customer five dollars, $4.95, and it's nonsense. If it looks like a duck and quacks like a duck, what else are you going to call it?

So the paper ran the story and featured the postal inspector's quote. And the thing about it, we were able to invoke one of our civil orders to stop the flow of mail back to this address on the theory that they're using an assumed address, it was a mail drop and we saved consumers their five dollars.

Now, the same reporter was asking the FBI and the New York AG's office if there was anything they could tell him about this case, and neither would confirm that they were doing anything about it. We will confirm that.

Postal Service inspectors have access to a fraud complaint data base, and I know the FTC has a data base, too. Ours has about 500,000 complaints in it on various companies and individuals all over the country. They're not as detailed, in terms of the types of transactions or the essential details of the transactions as are those of the FTC, but they are still a good barometer of whether a company is on the up-and-up, and we can often be helpful with that kind of information.

We know about mail drops and post office boxes and who's behind them. That kind of information may be available to you directly from the postal office as much as or through an inspector in your city. I would suggest that you get to know the postal inspectors that work mail fraud investigations wherever you're from and explain to them what you're trying to do and that you occasionally have ads that come to you that don't pass the smell test. You'd like to run them past these guys and see if there's anything they can help you with or tell you about them, anything they can suggest.

Another thing we've tried is to run advertisements ourselves that look like these things we describe in Publication 237. For example, we're telling people we've got a work-at-home opportunity for them or a postal job opportunity or a travel opportunity, some sort of a glittering, highfalutin sort of a promise that there is a pot of gold at the end of the rainbow. And we get those people to call us. The beauty of this, of course, is that you're hitting the people who are attracted to these advertisements. The only people who are going to respond are those who take these things at face value. They'll call us, ask for information, and that's when we load them up with the educational material and try to hit them as hard as we can with a strong crime-prevention message.

It makes a great story in your consumer editor's column if it's done right, and I think we could work something out. I'd be happy to work with you on that, put you in touch with somebody who can help you. My name, again, is John Brugger, and my number here in Washington is 202-268-5283. I think I'm out of time, but thanks for your attention, and I look forward to some questions.

MS. BAYLOR-HENRY: Good morning. I'm very pleased to be here on behalf of the Food and Drug Administration. I want to talk about what the FDA is doing in terms of health fraud. As Amanda Pedersen indicated earlier, the FDA has an established health fraud program that has been in existence for many years.

The question that you should ask is how FDA can help you if you need information about health fraud. If you get a copy of an ad that says that the product "cures cancer, cures AIDS," or it instructs the user to rub a bowl or a crystal, and you have a questions about the validity of the claims, call FDA. Most importantly, if you see a claim that says that the product is "FDA approved," I would encourage you to call us and ask about it.

I'd like to start with the FDA's definition of health fraud because I think that forms a good foundation for explaining what we're doing in this area. FDA defines health fraud as "the deceptive promotion, advertisement, distribution or sale of articles intended for human or animal use that are represented as being effective to diagnose, prevent, cure, treat, or mitigate disease or other conditions or provide a beneficial effect on health but which have not been scientifically proven safe and effective for such purposes. Such practices may be deliberate or done without adequate knowledge or understanding of the article." The key is whether or not it's been recognized to be safe and effective.

I guess all of you remember pinhole glasses. They were the glasses that had the little holes in the lens and they were supposed to increase your energy level and your cognitive abilities. If you have a question about these glasses, I encourage you to call the FDA Center for Devices and Radiological Health. If you have a question about any of the homeopathy products, or if you have a question about any oral diet product, call the FDA's Center for Drug Evaluation and Research. Likewise, if you have questions about any blood-related products, anything that makes claims relating to blood, there is a health fraud person within the Center for Biologics at FDA who can answer your questions.

If you have a question about thigh cream, for example, who would you call for information? This has certainly generated a lot of media attention. One of the questions is whether this is a drug or a cosmetic. Since cosmetics are regulated in the Center for Food Safety and Nutrition -- CFSN -- your should pose your question to that group.

One of the bigger concerns is how to determine if something is classified as a drug or a cosmetic. FDA has a mechanism in place to also handle this. The health fraud unit has an extensive data base, and they have the resources to tell you if FDA has any information on a particular product. I encourage you to use that resource. The Health Fraud Coordinator can also tell you which Center within FDA can best handle your question.

The FDA has been working very closely with the FTC, other federal agencies, and with the states through the National Association of Attorneys General. We encourage you to call us and we hope that by providing you with our information resources, and particularly the directory, it won't be so difficult to get information on health fraud.

MS. SMITH: Hello and good morning. My name is Nancy Smith, and I'm the Director of the Office of Consumer Affairs at the Securities and Exchange Commission.

I hate to burst some bubbles up here, but state securities laws were the first consumer protection laws in the country, and they started in Kansas. And some of you may know them as "Blue Sky laws" because what they were going after were the promoters and the speculators that were selling nothing more than, let's say, blue sky to potential investors. So that's where it all started.

We have worked very closely with the postal inspectors. Since so much has been said about the importance of screening and prevention, I won't repeat some of the comments that the others have made but would certainly support them.

Let me take you back to a more personal perspective. I left Washington about four years ago and became the Director of Securities in Santa Fe, New Mexico. It was very different from working in Washington. You actually had victims of fraud come before you, and some of them cried in front of you. It was a very sobering experience, and they would tell you their tales of woe -- that they were reading some advertisement in the paper and it said they could make money. They were struggling and they didn't know what they were going to do with their retirement years. They were really worried, and they called up that ad in the paper. And they thought it was legitimate because, after all, it was in the newspaper, and they wouldn't put stuff like that in the newspaper.

And you had to tell them that there's no way we were going to get that back for them. You go after crooks, and when you find them, they haven't invested the money at all -- you know, it's not sitting in a money market account somewhere. They usually went to Las Vegas and spent it gambling. I mean, it's gone. They bought cars, paid the rent, whatever. The money is gone.

As a regulator and as somebody who's enforcing the law, you just become terribly frustrated. So what you start doing is reading the paper every day and looking through all the classified ads. And somebody once said to me, "Well, Nancy, isn't that terrific because then you can find the criminal? They're actually advertising themselves. Wouldn't you rather have them do that than not advertise?" And I thought, no, that really doesn't make a lot of sense.

What we did was every morning we'd get up, and we'd read the papers. And then we started thinking -- what can we do about this? How can we get the papers to stop running these ads, and how can we educate the people who are taking in the ads and approving them and train them about what they should be looking for?

As part of that effort, I worked quite closely with a number of my state colleagues. I think one of the things that we could do today is really talk about what were the best practices we saw around the country, and how do we publicize those best practices that your colleagues in other states are doing?

One of the speakers here said in the same city you have two papers that have a very different approach. I think part of our job is to highlight the best practices, and people might go ahead and start instituting them in other places. Let me give you an example here. In Washington State, for instance, the state securities people convinced their papers to actually call them when they got an ad on a business opportunity. The paper would call and ask, "Is this person who's offering this business opportunity licensed and is the property registered?

There are two fundamental issues that you confront when you have a security: is the person licensed to do business in the state, and is the product registered to be sold in the state? That information is a phone call away. In many states they can tell you right over the phone if that person is licensed.

When it comes to the salesperson, there is a national computer data base -- the Central Registration Depository -- that will tell you if the person is registered. It doesn't take much time. You just call with the name of the person and ask if he or she is licensed to sell. You will have an immediate answer and will know if the person has a disciplinary record.

With that call -- and before anything has been published -- you can alert the state securities office or the SEC that there's a possibility of an ongoing fraud.

We had a case in New Mexico with the wireless cable scams that I'm sure you've all heard about. Those persons engaged in the scam were using an overnight delivery service to pick up the checks before people had time to think twice about the investment. They also thought they were getting around some of the mail fraud statutes.

In any case, when the overnight delivery service went to pick up the checks, they told the investors, "You probably don't want to do this. You don't want to send this check in."

One of the worst practices I've seen was with a newspaper -- and it shall remain nameless, for obvious reasons. What they did was they put in their classified ads, right before the investment opportunity section, a little box that said, "We will not give out information to any governmental agency at all about you if you advertise with us."

How many of you think that's a best practice? In Utah, for instance, they've been very successful in the papers where they will actually put in a public service-type box in the classified that tells people that they should check. If you're not willing to check it yourself, as the advertiser, you can tell the potential investor what their rights are in a little box. And in Utah, they've been doing that. They've been giving the name of the state's securities division and telling people to call up and make sure that these people are licensed and the product is registered.

One of the things we'd love to do at the SEC would be to work with you to really promote these best practices around the country and to work together with my former state colleagues in giving wide distribution to these different ways to confront the fraud problem.

I urge you to work with the SEC. If any of you out there would like to work with us on this issue, you can reach me at 202-942-7040. And I also encourage you to call me if you see an ad which you think is fraudulent. They run in some of the best papers in the country. The Wall Street Journal recently ran some of these ads that turned out to be fraudulent, too. The credibility of the legitimate ads are brought into question when you have people think that can't trust what's in the paper.

We're also doing quite a bit with online fraud. The SEC has a unit that monitors advertisements in cyberspace and will start looking at some of these companies. It's a critical problem and it's growing by leaps and bounds. Thank you.

MR. SHOUP: Thanks to all of you, and particularly thanks for providing a little time in the schedule for questions. I'd be happy to open it up, if there are questions for any of us that you would like to ask.

MS. GRANT: The central data base that you referred to -- who maintains it and how do you contact it?

MS. SMITH: The data base is maintained by the NASD, the National Association of Securities Dealers, and also by the North American Securities Administrators Association, NASAA. The toll-free number is 1-800-289-9999. The number is set up for consumers to call, but I'm sure that they would be delighted to take calls from publishers or classified ad folks.

MR. SHOUP: Other questions? (QUESTION) Let me repeat that, if I may. The question is: how much can people find out about who are the holders of post office boxes?

MR. BRUGGER: If a business is being conducted through the box, you should be able to call that post office, that station, and obtain the name of the company that's doing business through the box as it's registered on the box application, and the address, the phone number, and, under some circumstances which escape me at the moment, the name of the person who opens the box. If it's not under any given name but under an individual name, that name may be available to you.

MR. SHOUP: Let me just restate that so we're sure we have it for posterity. The question is, Are similar procedures available to find out the holders of boxes in some of the private situations like mailboxes, etc? To what extent are the private box services regulated?

MR. BRUGGER: Commercial mail receiving agencies are regulated. A person using a commercial mail-receiving agency must fill out a form that's on file at the post office, but that information is not available to the public. There is another way to identify commercial mail-receiving agencies. The Postal Service makes available a delivery point sequence mailing list which lists every address in the United States and identifies those that are known as commercial mail-receiving agencies. Those lists are available through brokers independent of the postal service, and I don't have any idea what they cost.

MR. SHOUP: Does anyone on the panel want to talk about what the specific policies are of your agency with respect to disclosing matters that are under investigation?

MS. BAYLOR-HENRY: At FDA, if there is an ongoing investigation, and if there is information that is already in the public sector, and oftentimes this information is already in the public sector, that information would be available to you. Confidential information obtained pursuant to an investigation, would not be revealed.

MS. SMITH: The Securities and Exchange Commission cannot make an investigation public unless the Commission votes to make it a public investigation. But once there is any type of proceeding and administrative action taken, it becomes public by virtue of that. I do know that some of the states have less restrictive policies on disclosing whether or not there is an investigation.

And I would certainly urge you to call the local state authorities. In New Mexico, I could disclose information about our investigations, and felt that if we were pretty well along and that we knew that we had a big problem, that there was a great deal of virtue in getting that word out to people to prevent further victims.

MR. BLANKE: As Nancy suggested, I think there's a fair degree of variation among the states. Minnesota has a rule that generally we are unable to disclose the existence of an investigation. There are some exceptions to that, but I think that is probably typical of state attorneys general.

MR. WHITE: Even where we can't tell you whether we have a specific advertisement under investigation, we often can provide information about the type of product or claim. This won't be possible if the issues are new, but that doesn't happen very often.

Each of these agencies, within their area, is likely to be able to provide some very useful information for evaluating an ad claim that you have before you.

MR. BLANKE: It's important to distinguish, too, between investigations and complaints that we receive from the public because the treatment of complaints might be different than the treatment of investigations. About half of the states are able to disclose the existence of complaints.

So even if they couldn't tell you that they were conducting a formal investigation, they might be able to share with you that there are 50 complaints and that essentially they say the following things, you know there was nothing sent when people sent in their order.

MR. WHITE: I can talk to you about the specific standards that the FTC applies, but screens can eliminate many problems just by asking basic questions about ad claims that are implausible on their face. As to tests and studies, that's a particular interest of the Federal Trade Commission.

The level of substantiation that the FTC requires for an ad claim depends on the type of claim. First, we focus on objective claims. Then the claim must be one that a consumer would not him or herself be able to evaluate. Then you get into the question of what levels of substantiation ought to be there.

Suppose a newspaper is running a high volume of advertising. Is there a way in which the newspaper can help consumers evaluate the claims being made? There are a lot of models that can be followed. There may very well be very precise warnings or tips for consumers that would enable them to evaluate the claims. Notices, warnings, or recommendations for caution may be helpful. Each of the agencies on this panel has produced a wide variety of consumer education materials. The FTC has more than 140 consumer publications that provide useful information and questions to ask.

MR. BRUGGER: I don't know that you have any legal duty to educate consumers. That's not my place to say, but I think we all share in the responsibility. That's the whole point of this get-together, to warn people about the crooked advertisements so that the legitimate ones have more credibility.

MS. SMITH: I was just going to reiterate that it's not a legal duty, but certainly I would think it is a good business practice, and I think people appreciate seeing something like that. You're taking the time and the space to give them that information.

Maybe what we can do at the SEC to help you out is to give you more guidelines, more specific information about what you can do to screen, and where people can turn to for information.

MS. BAYLOR-HENRY: At FDA, we have a consumer affairs office that takes a lot of calls from consumers dealing with health fraud issues. Also, nationally, we have public affairs specialists that work in all of the FDA field offices, and they go out and give talks to consumer groups about health fraud.

MR. WHITE: One last comment. Warnings and Disclaimers are not a substitute for the screening process that we're talking about today. The best answer is to apply some judgment to the ads that you receive and determine whether they are nonfraudulent and therefore ought to be run. Both providing consumer information and screening out fraudulent claims are certainly steps we encourage the media to take.

"THE LEGAL AND PRACTICAL ENVIRONMENT FOR LEGAL SCREENING"

MS. FAIR: My name Lesley Fair. I'm an attorney in the Division of Advertising Practices of the Federal Trade Commission. At the FTC's Division of Ad Practices, our primary responsibility is enforcing Section 5 of the Federal Trade Commission Act. Section 5 of the Act was actually drafted well after the State of Minnesota's act, well after state blue sky laws, and well after the FDA, making us the most modern, cutting-edge, and up-to-date law enforcement agency.

I can't top Hal Shoup's Samuel Johnson, but I was flipping through some rather arcane material a couple days ago and found, in a volume of the official reporter of FTC cases, a couple of instances of print ads that are the very thing that make up a lot of what you do in your work screening ads and an awful lot of what we look at. So here are just three garden-variety examples.

One was a gourmet coffee case advertising that the coffee was mocha beans and java beans. It called itself M&J Coffee, when, in fact, it was made from a very inferior grade of coffee remnants and mulch and things along those lines. The second was a case for a spark plug that falsely claimed that it was certified for safety by the National Bureau of Standards, when, in fact, the National Bureau of Standards did not have any sort of safety certification program. The third was a medical device called the Vitalizer that when worn on the body emitted certain auras and promoted good health.

The final case that I saw in this group was an investment opportunity for some new, cutting-edge mechanical technology. I will give away the source of these cases when I tell you that the cutting-edge technology was an investment opportunity for automobiles.

These cases all appeared in FTC, Volume One, 1915, yet look to be the very same cases that we investigate today. So, I think the one thread that continued from this morning and will continue this afternoon is, yes, there are many difficult gray-area questions, and, yes, we're going to all have to deal with those gray areas, but one of the tools in our hand right now is to look at the relatively easier calls and to see how we can work together.

The topic of this panel will be the legal and practical environment for media screening. We will focus on the legal right that the media has to say "no." Every now and then I hear about an otherwise savvy media professional who claims not to be aware that the media is well within its rights to simply refuse to run an ad. Our first two panelists will discuss the media's legal right to say no, the legal right also to say yes or maybe, and the practical ramifications of each of those decisions.

Ren‚ Milam is the Director of Legal Affairs for the Newspaper Association of America, based in Reston, Virginia. She is a member of the ABA's National Conference of Lawyers and Representatives of the Media and the Forum Committee on Communications Law.

Following her will be attorney Lawrence Murphy, who is a partner in the New York law firm, Murphy & Burke. He currently serves as general counsel of Advertising for the Media Credit Executives Association, whose 250 members represent almost all major newspapers as well as magazine and broadcast properties. Larry was formerly the director of credit operations for the New York Times.

Our final panelist is Professor Herb Rotfeld. Herb is a member of the faculty at Auburn University in the marketing department. He has also been on the faculty at Penn State, Bowling Green, and Boston College. Professor Rotfeld has written extensively on the subject of advertising, with a particular emphasis on media screening.

Each panelist will take a short period of time, and I look forward to hearing your questions after they've finished. May I present Ren‚ Milam?

MS. MILAM: Good morning. On behalf of the Newspaper Association of America, I'm very pleased to be here. I'm going to start off by giving a quick overview of some of the instances where courts have upheld the right of the media to reject advertising, followed by just a very brief discussion of some of the special circumstances that courts have carved out restricting the ability of the media to reject advertising, followed by some of the practical consequences flowing from the exercise of the right to reject.

As most of us know, courts have consistently held that the media is not obligated to run advertising or to publish any advertising that it does not wish to publish or to run. As a matter of fact, a publisher may reject an ad for almost any reason that it chooses to do so, absent what's called "special circumstances," which I'll talk about in a few moments.

The media's right to reject is grounded in the First Amendment guarantee of a free press. The reasoning being that in order to have the right to publish, the publisher should also have the right not to publish, if it so chooses. The media's right to reject is a fairly broad right, in that it can extend even to what may be characterized as a kind of capricious rejection, for example, where, in one instance, a newspaper actually lost an ad and, therefore the ad did not run, and was sued for not publishing the ad.

The Court upheld the right of the newspaper not to run the ad, and, in fact, refused to impose a duty on the publisher not to lose the ad, finding that to impose a duty not to lose the ad would really be of no avail because the publisher could always take the ad and then make an affirmative decision not to publish the ad without having lost it.

Publishers have rejected advertising for a number of reasons, ranging from a concern that by running the ad, they may lose the accounts of larger advertisers, if a particular ad is very critical of a particular advertiser, to a concern that the ad does not comply with the internal policies of the publisher. For example, publishers rejected advertising that they feel may be harmful or offensive to their readers or to the community within which they publish.

In one instance, a publication rejected an ad of a competitor that engaged a bait-and-switch operation. This is a fairly old case involving The Homefinders vs. Providence Journal, and in that instance, the court upheld the publisher's right to reject a competitor's ad because in that particular instance it found that the ad would hurt the publication.

The advertiser, in that instance, was advertising real estate that also happened to compete with the classified section of the paper. It turned out the ad advertised properties and displayed a phone number. Once the individual called the number, they were then told to pay a $20 fee to get more information about the property. Obviously, there was no property to be had, and so the court found that the rejection was justified, even though this was a competitive situation.

Let's move to some of the special circumstances that courts have carved out in restricting a publisher's ability to reject advertising. One circumstance would involve breach of contract where an ad taker or the publisher has actually accepted payment for the ad, maybe approved layout of the ad and engaged in any other kinds of similar representations with the advertiser, indicating that the insertion may be placed in a timely fashion, the courts have found that a contract has been formed at that point, and the publisher may not then later come back and decide not to run the ad. There have been a few decisions on that score.

Courts, though, have not found a contract to be formed where, for example -- and this is an actual case that occurred -- where a mail room clerk signs the return receipt that was submitted with an ad. In one particular instance, an ad was submitted by a construction company to a Midwestern paper, and it was accompanied by a certified letter.

The mail room clerk signed the return receipt, and the construction company lost thousands of dollars as a result of the ad not running -- this was a legal notice ad -- and attempted to recover lost profits. Essentially, they were out of luck because there was no contract deemed to have been formed.

The second special circumstance involves antitrust. Courts have denied publishers the right to reject advertising where the rejection is motivated by an intent to restrain competition. A publisher may decide to blanketly refuse the ads of all competitors, or to refuse the ads of individuals who may use competing publications or competing media.

In one instance, there was a Supreme Court decision, a fairly old case involving a newspaper that occupied a monopoly position within that particular market. They had a formal policy of rejecting the advertising of companies that bought time on a competing radio station. The Court balanced the right to reject against the congressional policy against the creation of monopolies and found that the policy against monopolies under the Sherman Act greatly outweighed the publisher's First Amendment right to reject.

There are some practical consequences flowing from the right to reject. If an ad is rejected, some of the cases that I just referred to indicate that an advertiser is likely to sue, or at least threaten to sue, the publisher. And, as we've seen, there is a fairly broad right to reject, and courts have been very reluctant to force publishers or the media to accept advertising that has been rejected, absent those special circumstances that I mentioned.

A second consequence, kind of on the flip side, would be where a publisher, exercising his or her right, actually decides to accept the ad, and it turns out that the particular product or service that's advertised may result in some harm to the public.

In that instance, there may be some potential liability for suit. Courts, though, have generally been reluctant to force publishers to investigate the underlying soundness or worth of the products or services that they advertise. So if there is a problem with the product or service that's advertised, the publisher is generally not going to be liable in tort, what's called "tort liability," for injuries resulting from the use of those products or services that are advertised, basically because there is no duty on the part of the publisher to investigate that ad.

There is one instance, a few years back in the late-eighties where the courts -- various federal courts -- deviated from that broad rule against publisher liability. And I'm speaking of the Soldier of Fortune cases, which many of you may be familiar with.

Just to kind of briefly recap, Soldier of Fortune is a magazine that focuses primarily on military activities and mercenary affairs. It ran a series of gun-for-hire ads back in the late-eighties. There were two court decisions that came out of those Soldier of Fortune cases.

One was decided by the U.S. Court of Appeals for the Fifth Circuit coming out of Texas that looked at a particular ad that ran. Gun for hire: "Ex-Marine, '67 to '69 Nam vet, ex-DI" -- 'ex-DI,' the court, in its findings, determined meant 'ex-drill instructor' -- "weapons specialist, jungle warfare pilot, ME" -- another code word for 'multiple engines' planes -- "high-risk assignments" -- another code word referring either to work as a bodyguard or a security specialist -- "U.S. or overseas." And then a phone number for response.

The court, in that case, found that this particular ad was very ambiguous, and because it was ambiguous, it sent kind of mixed messages. It could be legitimate; it may not be legitimate. We don't know. But the publisher, inevitably, did not have a duty to investigate the underlying intent of that ad and therefore was not liable in negligence when what actually happened was the person who placed the ad ended up killing someone.

The last Soldier of Fortune case that was decided involved another kind of murder for hire, a gun for hire. The ad in this case read: "Gun for hire, 37-year-old professional mercenary desires jobs. Vietnam veteran, discreet and very private. Bodyguard, courier, and other skills. All jobs considered."

Unlike the previous case, the Eleventh Circuit court found this ad to be very clear and very specific -- basically an offer for murder. And because the ad, on its face, clearly posed an identifiable risk to the general public, the publisher, although still not having a duty to investigate, clearly should have been aware that this was going to cause substantial harm, and was negligent in publishing the ad.

So, those are some aberrant cases that have come down that have made some of us in the media a little nervous, but, again, these cases appear to be an aberration. Generally, mainstream media do not carry gun-for-hire ads. They don't focus on military activities, and we've seen that these are more the exception to the rule.

I would like to conclude by just briefly emphasizing that publishers are very concerned about their readers and community within which they publish, and as a result of that sensitivity, they have implemented a variety of policies internal to their own organizations, to screen out advertising that they feel may be harmful or offensive to the public that reads their publications.

We found as an association that, by and large, these voluntary policies have worked very well. Thank you.

MR. MURPHY: Good morning. I was privileged to be at the first joint conference with the regulatory agencies and the newspaper media back in 1988. I think in the ten years that I was director of credit for the New York Times and the seven years I've been practicing law, no problem has been more difficult to deal with than fraud.

I would like to show some of the concerns that the media does have. We've heard a lot from regulatory agencies, and we've seen some ads that got in the paper that looked outrageous. But if you know anything about the Wall Street Journal, it is tremendously embarrassing to them to have an ad in the paper that's fraudulent. They will do anything to screen those ads out of the paper.

I think we really have to determine what fraud is according to whose ox is gored. When I was first credit manager at the Times, we had an investor opportunity man who created 30 different corporations with the same address. Under state law, he was able to do it. He ran ads under all different names, all different phone numbers. It was almost impossible to catch him.

We created a file to gather all the ads. It was a six figure count. Most of them were five- and six-line ads. We took it to the district attorney. We said we have reason to believe that there's fraud going on here because nobody creates 30 corporations and puts these ads in the paper. We'd like you to investigate it.

They took six months to investigate it, and came back and said they found no fraud. So we said it just is impossible in the stated facts that we have here. We have not been paid for any of these advertisements. Just the circumstances alone would indicate that there's some fraud here. The response was, we're not your collection agency. That is the fraud that media fights all the time. Some companies have 25 to 30 percent of their bad debt attributable to fraud. So when we have a conference like this, you'll see any number of credit people come down here because they are very concerned about fraud.

Now, there's the consumer fraud we talked a little bit about this morning -- the diet ads, the phony products, the phony health claims. The phenomena that I've seen is that media screening is not done in many places. And what's happened is it's devolved into the credit area. That's why you see so many credit people involved in trying to detect fraud.

Many companies feel the wording of these ads is ambiguous enough that they do not

want to challenge, they do not want to hold the ad out, and they don't want to accuse anybody of fraud. They would rather have the credit department check the bona fides of the person placing the ad.

When they find out that the advertiser can't pay for the ad, they hold the ad out on those grounds. This works fairly successfully. It escapes the whole dilemma of that first question you get from the sales department, the person placing the ad or the agency placing the ad -- why are you holding it out?

It is very rare that you would say I believe there's deceptive advertising here or there's fraudulent advertising here, especially fraudulent advertising, because immediately the person placing the ad will get his lawyer on the phone to threaten you with a lawsuit for defamation.

So the media, by and large, are reluctant to hold advertising out because they believe it is deceptive advertising or fraudulent advertising. What they will try and do is negotiate with bonafide companies that have gone over the line and made some unsubstantiated claims. But the out-and-out fraud who scams the consumer and does not pay for ads is the biggest problem that we face.

Part of the problem you have in detecting fraud is that it is so easy to commit. I was happy to hear this morning from some of the representatives of the regulatory agencies that there will be hotlines which you can call to find out if somebody placing the ad for a particular product has been reported somewhere else or if there's some knowledge of this. I think every media organization should exchange the information on people that we believe are fraudulent.

The thing I would like to see, if this is to be a shared, cooperative venture, is that regulatory agencies ask the media who are placing these ads, or the agencies who are placing the ads, what kind of help they would need. I can give you a couple of examples right offhand. Anybody that's had to deal with the phone company finds it amazing that anybody can easily get 10 and 12 phone numbers in a private residence: disconnect one and start another one up.

The media is not going to go out and substantiate claims; it's not going to undertake investigations; it's not going to make a determination; it's not going to tell its readers that they stand by its products.

There was a magazine case involving Good Housekeeping that used to endorse its products. By endorsing a product, it assumed a duty it didn't have, and when injury happened -- if you assume a duty you don't have, if you perform it negligently, you're liable as if you had the duty in the first place. So the media is not eager to go out there and endorse all of its advertising or screen for fraud. It's just like the Wall Street Journal case; somebody's going to get through.

There is a lot that can be done in concert, I think, between the media and the regulatory agencies and the advertising agencies and anybody interested in preventing consumer fraud. Thank you.

MR. ROTFELD: I'm Herb Rotfeld, and as you can tell from my affiliation, I'm the sole academic on the program. And, in keeping with the running comment of the day, I will point out that if you pick up a textbook on advertising, any of the college textbooks around, they make one consistent comment. They refer to media standards for acceptable advertising as the original form of advertising regulation.

The image that we hold in the academic community, and I should say that the public holds as well, is that what the most visible media organizations do is what everyone does. By this, I mean we hear about Good Housekeeping and its seal of approval, we read about ABC, CBS, NBC, and their screening of television commercials, and we get an impression that these media practices are advertising regulation. It is often referred to as a major bulwark of consumer protection.

Former Chairman of the Federal Trade Commission, Jim Miller, once said on the McNeil-Lehrer Report, well, the FTC doesn't have to do as much because the media screen ads, and because they're screening ads, we don't have to do as much regulation ourselves.

Now, I mentioned that some of this is an academic belief. James Miller is an economist -- an academic -- and academic people, what do they know? They don't hold real jobs. But I started doing my research, and I find that people in the media also have their beliefs.

I've been surveying media organizations over the last ten years. I've had surveys of television stations, radio stations, magazines, follow up correspondence, depth interviews. I've run up nice phone bills, much to my department head's dismay, talking with people about this subject, and I find there's great variation in what the various organizations do. And the reasons that you do these things, there's also variation. Now, most rate cards state a right to reject advertising, even if the organization says, "I don't remember rejecting anything in the last ten years," the rate card will say, "we reserve to reject any ads or commercials for any reason." But I find great variation in what these reasons might be. As I talk to the different media organizations, I find one common belief. And that is, everyone believes that what they do is universal, and they are all proud of it.

The media manager has a basic problem. You want the money -- this is your income; you reject an ad, you're turning down income -- but you also need an audience. You don't want the ad to send the audience away. I think many people also perceive a time or work problem. I periodically find people who, with limited financial constraints, limited manpower -- they have a small radio station, a medium-sized television station -- always check things out. It doesn't take much time; it's something they want to do.

So, some screening of ads in terms of content can be done. It depends on whether or not the decision-maker wants to do it. Some people also realize that any decision to reject an ad causes a problem for the advertiser.

The advertiser can change the content to make the ad acceptable if it won't mess up their message strategy, or they can try and go elsewhere if they feel it won't mess up their media strategy. This is their basic concern, and, with this in mind, media standards for acceptable advertising can have more influence than many managers think.

I find, in many situations, these standards actually influence what the advertisers like to do. We're all aware of one example -- that the networks and many TV stations across the country have said for years that no live models can be shown in underwear. So we would see all sorts of attempts by Playtex and other firms to show the model holding up the bra in her hand and pointing out the benefits. We saw some models wearing the underwear outside their clothes, which I guess is a little bit strange, and we'd see the invisible woman working around with her underwear showing.

We see this more currently in the treatment of condom advertising. Many television stations, I'm finding, are increasingly deciding to accept condom ads, but this is what the restriction is saying: you can talk about condoms for disease prevention, not birth control. I guess they feel that this is more acceptable. I'm a little puzzled by it because, as far as I understand, it's used the same way for both.

It became clearest to me when I was talking to someone from the AARP shortly after Modern Maturity became the number-one circulation magazine in the country. I'm talking to this woman, and my first comment was, now that you're the number one magazine in circulation, I assume you're rejecting more ads -- my logic being that now that they're number one, more garbage is coming in through the door. Her answer was, no. Now that we're number one, we're rejecting less.

This seemed very counter-intuitive until we discussed it a bit, and I discovered two things were happening. Once they're rejected, more and more advertisers are coming back with corrected ads, and, now that they're the number one circulation magazine, more advertisers want to know what their requirements are in advance. And this is, I think, the most common concern for media standards for acceptable advertising, one of fit and style. Many magazines will say our single most common reason for rejecting an ad is the ad does not fit the style of the magazine. Television stations, radio stations will say to me, we are concerned that the ad is not offensive and fits with our overall content.

This often means fit in terms of style, production values, and quality of presentation. But fit also can mean content. My best example of this is one magazine that was well known for its investigative journalism and consumer-protection reporting. Its media kit for advertisers said on the front page, "Readers trust," and the name of the magazine.

I came across an ad that I had data on that was clearly false; I mean, there was no question in my mind. I wrote a very nice letter to the publisher, and said, here's a false ad; I understand you might not have picked this up on your own, but here's the data; it is false.

The publisher wrote back that they believe in the First Amendment and don't reject any ad based on its content. I discussed the issue with my students a little bit -- passed the letter around -- and we all pretty much agreed that they should tell their readers that they accept everything. They've had this image of trust.

So I wrote the publisher, and I told her what my students said, and her reply was that since I had shown her letter to other people without her permission, she was not going to pursue the matter further. That ended that.

I also find with newspapers sometimes the advertising people don't like to talk to the journalists, and vice versa, even if the journalists might know what is false. A blatant example occurred when I was talking with a reporter in a major city. She wrote an in-depth series on some bait-and-switch ads from a retailer in the area. On the fourth or fifth day, the last day of her series, there are the ads in the newspaper.

I called and she said, "Well, I really don't want to tell the advertising people what they should do in their ad pages because they'll feel they can tell me what I should do in the news pages." That struck me as a little strange.

I increasingly find that it's easy to come up with excuses for not screening ads. There is the excuse that someone else does it. A station in Macon, Georgia says to me, "You have to understand, Professor Rotfeld, before it comes to us, the commercials have been running in the big cities on the cable networks, and if there was a problem, it would have come up by now."

A gentleman with a network affiliate in a top-ten city, and said to me, "You've got to understand, before it gets to us, it's been in the small towns, it's been on the cable networks, and the broadcast networks might have screened it." In other words, someone else does it. I'm not sure who this someone else is, but we're able to point fingers.

You can work with advertisers. I'm sure those of you who are sales staff with local media organizations work with local advertisers all the time. A national advertiser, too, can say, "I didn't realize that this might have been deceptive." Advertisers might not see what's going on.

At another level, I don't think any organization wishes to publish a news story that they know might be deceptive, misleading, or false. They are not going to publish what they feel is a misleading or deceptive portrayal of women, a demeaning of deceptive portrayal of black people, an undesirable portrayal of the elderly. A question about content in terms of something being false is just an extension of the same concept.

This can make the readers happy. Their trust of the media organization extends to the ads that are in there, and this is the important point. Some managers, I find, are very strong and consumer oriented. They have a very strong emphasis on and desire to protect their readers, listeners, or viewers from harm. But, I do not see any relationship between the managers who have this concern and the size of their organization. Some big organizations say we'll take everything. Some very small organizations are very skeptical of everything they receive.

The fact is, no matter what the media organization, many readers, viewers, listeners expect the organization to be doing some type of screening of ads. And, I presume, after today's session, more of you might be willing to do it. Thank you.

MS. FAIR: Thank you very much, Ren‚, Larry, and Herb. Questions? (QUESTION) Let me, for the record, just repeat the question: If there is a situation where a consumer is ripped off, what steps, if any, should the media take in attempting to correct the problem?

MR. ROTFELD: For one, don't take the ads anymore. And, notify that advertiser that you won't take the ads until something is done to correct the problem. And, as I said, to my knowledge, many newspapers and most radio stations report to me that if they discover this type of problem, they immediately take steps to correct it.

MR. MURPHY: Most newspapers and magazines get complaints about items that haven't been delivered. We notify the advertiser, tell them about the complaint, ask them for details, and ask them to correct it. If it doesn't get cleared up, then we either stop running the ads or look for some other way of taking action.

MS. FAIR: I would echo that, and some papers may even call various government enforcement agencies to inform them that there is a problem with that particular advertiser.

MR. MURPHY: You also have this scenario: when you run mail order advertising, you assume that the person is going to have the product and deliver it. So you say to the advertiser that you want the product delivered within 30 days; or the advertiser says to allow four-to-six weeks for delivery.

If there is a genuine fraud, the advertiser has plenty of time to get the money and disappear. We had a case in California for a major media organization that wound up as mail fraud because nothing was delivered. The time frame can be difficult. How do you assure that this company does have the product and that they're going to deliver?

MS. FAIR: One thing that I can add. As staff of the Federal Trade Commission, we often are the ones answering consumer telephone calls. I don't say that my experience is a scientific survey, but it amazes me that consumers can call and not remember the name of the company, may not remember the name of the product, but they remember what television station it was on, what television show they were watching when the ad was on, or what newspaper or magazine it was in. So, obviously, it bears, in consumers' minds, on the credibility of the media itself.

Other questions? Yes. The question was: retail versus classified ads and whether the precedents that Ren‚ and Larry had talked about apply differently in those cases.

MS. MILAM: Even though there is no legal obligation, papers implement a number of policies to try to protect their readers and the consumer, such as putting disclaimers on ads where they don't have to. For example, if an ad is an advertorial -- a hybrid between an editorial and an advertisement -- many papers will not accept that particular submission unless the advertiser will allow them to put that disclaimer on the ad.

Some newspapers will not accept certain ads for services, unless it contains the name, street address, and phone number of the advertiser. And if it doesn't contain that, they will view the ad with suspicion and ask questions. We can't do it for every ad, but it will weed out some of the major ads that look suspicious.

MS. FAIR: The issue of format that Ren‚ has raised, I think, is an important one. Obviously, in the infomercial area, for example, one of the major concerns over the past few years, in addition to certain product claims, was the format itself. And the FTC does have some guidelines with regard to the advertorials that Ren‚ has seen. We're seeing many, many more of these than have come in the past, and I think this will continue to be a developing area.

MR. MURPHY: There are publications in many media organizations that will not allow P.O. boxes. That's the easy, clean way to do it.

MS. FAIR: The question is about statistics about newspapers that screen classification ads. Herb, I know you have studied this for years.

MR. ROTFELD: Well, the newspapers, in general, are more strict about their treatment of advertising than other types of media organizations. The classifieds are the difficult area because they raise cost-benefit issues. The margin here on what they're getting per ad is very, very small, so they might have broad directives on what acceptable types of products, statements, and information they want.

I believe the concern of the media organization is directly related to the size of the ad. In other words, the bigger the ad, the more concerned they might be. In part, it's a pragmatic concern tied to their interest for the readers because the bigger the ad, the more they are seen to be tied to the advertiser.

Some television stations will ask infomercial producers to provide an example of the product, or sometimes to post a performance bond in advance, whereas they might not hold somebody buying a 30-second spot to the same standard. With classifieds, we're getting down to the really small stuff.

MR. MURPHY: The larger newspapers run something like 50,000 classified ads on a weekend. It's almost impossible to screen those. What they'll do is screen certain categories like business opportunities, investment wanted, investment to lend, car ads, or other ads where they have a pattern of complaints from readers that they have been injured.

MS. FAIR: (QUESTION) The question is about breach of contracts. In a situation where prepayment was accepted for an ad, the layout was done, and then the publication chose to reject the ad -- and they were held liable -- would that hold true as well if the payment was taken, the advertiser was told that the ad was going to be reviewed, and then the ad was rejected? Would the publication still be liable?

MS. MILAM: I don't think so in that instance. Once you make a representation that there's still another layer of review, you've not really said that you're going to accept the ad. And this particular case that I'm referring to was very blatant. They accepted payment, promised that the insertion would be run in a timely fashion, approved the layout -- all the steps that one would take to accept an ad, and there was no mention of any kind of review process.

QUESTION: If there is a mention of a review process, is it best to take payments and wait until the review process is completed?

MS. MILAN: I'm not sure that's going to be a determining factor. It's kind of viewed in the entire context of the transaction.

MR. MURPHY: I would think that any time you take payment or prepayment, it's always subject to your final decision whether to run the ad. I just think that was a bad case of the breach of contract unless there was some element that I don't know of. I don't think there's an obligation, just because you took prepayment, to run the ad. The contract is complete when you run the ad. You can always refund the money and say we didn't have space or time, or, we found some reason that we didn't want to run the ad, such as we had a complaint from a government agency that this was fraud.

MS. MILAM: The key in that case was that there was no mention of a right to review or right to reject; and so, again, it's always important to always mention that right to reject, even though you accept payment -- that's really the key -- so there's no expectation that it's going to run.

MS. FAIR: I'd like to thank our three panelists. Thank you very much.

MEDIA SELF-REGULATION: WHAT WORKS

MR. PEELER: This morning we've had a great opportunity to hear about deceptive and misleading advertising from the government's perspective. We heard why we need media screening, and we got to hear just recently on the last panel a description of the legal environment and the rights of the media to screen ads. Now we're very fortunate to have a distinguished panel which will to talk to us about how it's actually done. We will hear the views of people who actually do media screening for a living.

Our first panelist is Harvey Dzodin. He is Vice President of Commercial Standards for Cap Cities ABC Television. Harvey joined ABC in 1982.

Next, we have James Van Meter, Vice President of the Media Credit Association, the credit reporting division of the Magazine Publishers of America, a trade association for consumer magazines which currently has membership of more than 200 publishing companies representing 800 magazine titles.

Our third panelist today is Buzz Buzogany, President of the Broadcast Cable Financial Management Association -- a non- profit professional society primarily composed of chief financial officers and business managers for television, radio and cable.

And finally, we have Debra Goldstein, Director of the National Advertising Division of the Better Business Bureau, the industry's self-regulatory arm.

MR. DZODIN: Good morning. It's always a pleasure to be so tantalizingly close to Washington, that city that Walter Mondale once described as 67 square miles surrounded by reality.

I thought we'd raise the literary level of the meeting because I want to read you a poem that we actually got from a viewer. We get a lot of things from viewers. And this is a great man, kind of a Benvenuto Cellini of our age, because he said in his letter that he was an educator in the fields of science, teaching, teacher training, school administration, staff relations, principles of education, instructional psychology, and experimental techniques. He's also a photographer, a specialist in audiovisual teaching materials, a pioneer in educational television, a writer, a magician, a poet, and an attorney at law. He wrote -- and this is probably very apt after the Eggland's Best case --

"The cod fish lays 10,000 eggs ,

the homely hen lays one.

The cod fish never cackles

to tell what she has done.

And so we scorn the cod fish,

while the humble hen we prize.

Which only goes to show you

that it pays to advertise."

My job today is to tell you that advertising self-regulation can work and can be profitable. It's not only pro-social; it's pro-business. And I only have to look at today's Washington Post on page F-2 to see that my company reported a 34 percent gain in first-quarter earnings and that our net income rose to $157.8 million from $116.1 million last year.

And to further compound the evidence, last year my company, Capital Cities ABC, reported record earnings. We believe that self-regulation is certainly a recent, modern-day example of what Adam Smith wrote about when he talked about the invisible hand of private individuals and enterprises pursuing their own selfish interests but, at the same time, also promoting the commonweal.

And so, at Capital Cities ABC, we engage in a very strenuous level of advertising review. Because ads on ABC are so very expensive, -- and next year, they'll be about 12 percent more expensive -- most of the fraudulent advertisers who might be able to afford post office boxes still aren't able to afford advertising on ABC. But some have slipped through the cracks and have found enough money.

I know some people told horror stories before. My horror story was my first year on the job. It was the last day of the year, when things were only semi-operating, and one of our salesman came to me and said, "We have this great advertiser. This advertiser has been in the New York Times and the Wall Street Journal, and they want to get on Good Morning, America' on Monday. Of course, we're closed because it's a holiday. So would you please approve this advertising?"

This advertiser -- you might remember the two principals that died under unfortunate circumstances -- was called the International Gold Bullion Exchange. And this International Gold Bullion Exchange, in their advertising, showed a picture of a vault full of gold bricks -- which turned out to be a vault full of gold-painted wood blocks.

And this was before I got smart and learned to call the Better Business Bureau, learned to call regulatory agencies when we saw a new advertiser, especially in the financial area. Then I got those calls from the individuals, from people who you might think would not be taken -- people who you would expect to be more sophisticated but were looking to get rich quick, people who had invested their life savings. So that was very much of a sobering experience for me and for my colleagues.

At ABC, we review about 50,000 commercial submissions a year -- and I do mean review. We ultimately approve 25,000 commercials. We have a staff of ten editors who have two very good skills -- analytic abilities and good negotiating skills. They work to try to promote truthful advertising that's not false, misleading, or deceptive.

We do it because it's the law. We do it because we want to be good corporate citizens. But, as I indicated, we also do it because we believe that it has bottom-line consequences. We believe that the power of advertising, its persuasiveness, is directly related to its credibility. And we believe that people can and do see that the quality of advertising on ABC does differ from the kind of advertising that's in other places. And we believe that if we can maintain a high level of credibility, advertisers will want to come to us so we can deliver audiences to them.

In our shop, editors are divided by subject matter expertise so we can try to treat all advertisers, big and small, in a similar fashion. Also, we don't require absolutely certainty because the FTC -- although you may think that they are unreasonable -- in some instances, only requires a reasonable basis for claims.

We also have something that I think works very well, and that is a challenge procedure. Our editors can't be at every shoot, they can't run every test, and we do very little of that. But we can rely on market forces because we can rely on competitors to tell us when one of their competitors may not be telling the truth or may have made too much of a claim for the amount of substantiation that they have.

In my view, the best person on my staff, in terms of function, is my research editor. My research editor looks at the claims that come in and actually can do a very good job of figuring out where there are problems and where there are methodological flaws.

We think self-regulation works for everybody: It's a win-win situation. It works for us because it keeps government off our back -- whether it's the FTC, the FCC, or other agencies. It works for us because we don't get stiffed by unscrupulous advertisers. It works for consumers because we're able to promote truthful information to help them make important economic decisions.

It works for advertisers because people know, whether they are the largest advertiser in the marketplace or the smallest, that we're going to hold them to the same standard. And it works for the public, too, because I don't think the FTC has enough resources yet to review all the ads that we review, and I also think that it works because those resources can be devoted to those special cases that require government attention.

One thing I'm concerned about, because my company spends a lot of money to employ me and my colleagues, is the fact that there is an unlevel playing field out there, and it makes it difficult for a bottom-line operation to continue to operate in an unlevel-playing-field environment.

Thank goodness that our company, from the top down -- and I think you need top-down commitment -- very much believes in serving the public interest, which is our broadcasting charter, and believes in truthful advertising. But we do see people that don't even apply a smell test to advertising. And this is going to get more difficult.

We've already heard this morning about going down the information superhighway, and the FTC had a conference on that not too long ago. Basically, that electronic superhighway today is really a dirt road; but soon it will be a road, and it will be a superhighway in not too many years.

It's a little scary to contemplate because people do have to spend a lot of money on ABC or on television to produce and buy an ad. But consider, when you lower the economic threshold to close to zero in cyberspace, and consider that you make it a borderless world, the MMM Fund that defrauded Russians of billions of rubles, millions of dollars, maybe that's thousands of dollars now, I'm not sure, that they could have as easily advertised here, and it can happen here.

So I'm very concerned, and I think one thing we have to keep in perspective is that all our worlds are changing. This is a wonderful opportunity to look and see what's going on in the past and the present and the future, so that we can all be acting in the mode of Adam Smith and working with that invisible hand. Thank you very much.

MR. VAN METER: Good morning, everyone. My name is Jim Van Meter, and it's a pleasure to be with you today on behalf of the Media Credit Association.

For obvious reasons, fraudulent advertising is taken very seriously in the magazine industry. Within the magazine credit community, my members take it personally when a fraudulent ad gets into their magazine. I've been asked today to talk about what magazines do to screen potential fraudulent advertisements. I would like to beginning by telling you about a landmark case that singlehandedly gave rise to a lot of procedures the magazine industry follows today.

This is a case study on how the magazine industry and the United States postal authorities work closely together to put a fraudulent advertiser behind bars. This is a story about the infamous Russell Levitt, who plagued the magazine industry for more than ten years. Whenever Mr. Levitt's name was mentioned at an MCA function, a moan would roll through the room like a wave. During the course of Mr. Levitt's career, the magazine credit community tried to deal with him through the civil courts, but to no avail. There are numerous unsatisfied claims against Mr. Levitt that he simply ignored. And this is sad because we had no idea how many of our readers he defrauded.

Postal Inspector William Keesler, who handled the entire two-year investigation, solved the puzzle why Mr. Levitt was so good at picking our pockets. We found out that Mr. Levitt not only worked for several advertising agencies, but he actually worked for a magazine once. Mr. Levitt could turn a rate card into a blueprint on how to pick our pockets.

He would begin by blanketing the industry with insertion orders. Timing was everything. He would send his insertion orders out on the very day that a magazine would be closing their issues, to take advantage of the organized chaos that takes place between editorial, production, and the sales department.

A major part of his strategy was his cover letter. On impressive stationery, he would personally address his cover letter to either the publisher or to someone in the sales department, and he would slyly imply, that there had been a prior conversation. And if his insertion order, which was always printed on Four A's contract paper, could circumvent the credit department, he had a very good chance of getting his ad into that magazine.

He tried to make sure everything was in order. If Mr. Levitt could circumvent the credit department, he knew that he had between five to seven more weeks after publication date to wreak havoc before the credit department would start calling him. And then he would just simply disappear.

By then, we had no idea how many of our members responded to his scam. But it was Levitt's final act or scam that really outraged everybody. Using a fictitious agency name of Madison Advertising, Mr. Levitt once again blanketed the industry with fake insertion orders, but this time he was asking for full-page ads promoting a nonexisting fundraising group called Drug Free America. He was now asking for donations. And, at the same time, he was sending out insertion orders for a small ad for an antistress kit.

However, Mr. Levitt's biggest mistake was trying to send one of his antidrug ads to Newsweek magazine. The address of Madison Advertising was only a few blocks away from Newsweek's office. Our colleague, Norma D'Avanzo, who is the credit manager at Newsweek -- and also one of our industry best -- decided to take a walk at lunch. Norma found out that Madison Advertising was nothing more than a mail drop, so she called the Ad Council up, and they said they knew nothing about Madison Advertising nor of a drug campaign called Antidrugs for America. Norma then called her colleagues at the Washington Post and found out that the address for the antidrug campaign in Washington, D.C. was also a mail drop. Norma called me up and said, "He's back, and you'll never guess what he's up to this time!"

So, on that very same day, I sent out a bulletin to all my members across the country. Within a few days, my phones lit up like Christmas trees. While all this was going on, I found myself crying to one of our Washington attorneys, Jim Creagan, about Levitt's new scam. I told Jim we knew where Levitt lived, we knew what he was up to, but we just couldn't stop this guy.

Jim started telling me about a few of his friends on a softball team. These fellows are United States postal inspectors, Jim said, and they have absolutely no sense of humor about anybody using the mails to defraud or pull off a scam.

We presented the Postal Inspection Service with ten years' worth of files on Mr. Levitt and detailed information on his current scam. On July 19, 1991, Mr. Levitt was indicted on 29 counts of mail fraud. On June 3, 1992, Mr. Levitt pleaded guilty in the United States Federal Court in Manhattan for mail fraud in connection with advertising he placed in numerous publications to which more than 1,000 consumers responded.

On November 4, 1992, in exchange for his plea of guilty, Mr. Levitt agreed to make full restitution to all known victims who responded to his ads. The judge said there is no way to protect the public from behavior like Mr. Levitt's without sending someone like him to jail. Mr. Levitt was sentenced to three months in prison that day.

Since the Levitt case, MCA has hosted several workshops and has focused on fraud prevention. So many things have drastically changed in the magazine credit community as a result of the Levitt case. Over the last few weeks, I spoke with many of my members about what they do to screen ads. I was most impressed with Parade magazine's system. Parade is very careful about what ads run in their publication. Parade appears in 351 Sunday newspapers in every state in the country, which translates into more than 85 million readers.

Parade has a committee of department heads that evaluates every ad seeking to run in the magazine. First, an advertising agency has to submit its ad three months in advance of publication date. Everything about that ad is checked out. Does the product do what it claims it can do? If the ad copy is at all misleading, Parade tells them to change it or it won't run. If everything checks out, the committee then turns that agency over to the credit department for a financial check.

I also spoke to John Berdemill, the director of credit at Conde-Nast publications and MCA's chairman. Conde-Nast Publications, which has 14 magazines, has a well-defined routine that has to be followed. A credit check is performed on all new advertisers. All unsolicited advertising is screened. Any agency that uses a post office box or an 800 number is automatically screened. The biggest obstacle Conde-Nast has against fraudulent advertising is the company's prepayment policy on their classified and display ads.

Rodale Press told me that they rely on a lot of common sense. The first question Rodale asks is, does the ad fit into the editorial content of their magazine? Unsolicited or overnight packages that come in after closing are automatically red flagged. Also, any advertiser that is at all hesitant about providing credit information is automatically red flagged. And, Rodale also pays a lot of attention to media references. They call everybody up, trade associations and so on, and they check that agency out.

The fraudulent advertising problem has gotten much smaller. As you've seen, this is result, in large part, because of the lessons we've learned from the Levitt case. However, I'm not going to stand here and imply that magazines no longer have a problem with fraudulent advertisers. Each year MCA conducts a survey on magazine industry credit practices, which, on the average, more than 80 percent of our members, representing more than 800 consumer and trade magazines, participate in, which is an awesome sampling of what's going on in our industry. For example, 17 percent of our members polled said they were victims at least once of a fraudulent ad in 1993. With the exception of one large magazine, every magazine that was hit was a small, regional publication.

Everyone examines everything so much closer because they want to make sure we get paid. We don't have the profit margins now to just blow off advertising. Over the last several years, the MPA has done a fantastic job of telling our industry leaders about fraudulent advertising, about promoting the service of the magazine community and the MCA.

In closing, I think it would be important to note that more than 85 percent of my members now say they come in contact with other media people, and MCA is going to do everything we can to promote that. But, however, what do you think would happen if all the federal enforcement agencies and all the media trade groups had each other's phone numbers on their Rolodex? Thank you.

MR. BUZOGANY: Good morning. My name is Buzz Buzogany. I'm with the Broadcast Cable Credit Association, and we primarily deal with the credit impact of advertising, not with the fraudulent aspect, so there was a quandary in my mind as to why I was actually here. The answer appears to be that I was drawn in because I happen to have station experience, from the perspective of network television, radio, and cable. And I'm going to relate a little bit of that experience and talk about the food chain in broadcasting.

Harvey Dzodin talked about the job that Cap Cities-ABC does, and I'm sure that it is a terrific job, and they are truly at the upper edge of the food chain. As you go down and down and down in the food chain, you'll discover that the practices employed by most of the television stations and/or cable stations and/or radio stations differ according to financial wherewithal, the size of the station, and the intent of the management.

Management has to serve notice on who's doing what and how well they do it. About 20 years ago, I was out in San Francisco at KTVU, a successful station in the Oakland-San Francisco market. They had a screening department with two people, one from film and one from sales. The film person was there simply because everything was still being done on film in those days, and so they would actually have to roll the film; and the person from sales would come along to make sure that it actually was 30 seconds in length and that, in fact, it didn't seem to do anything too crazy. And so that made advertising okay and they moved it right along through the system, and as long as people paid, everybody was happy.

Later, I went on to KTLA in Los Angeles and they were higher in the food chain -- not just because the market was bigger, but because they were successful within the marketplace. KTLA had a standards and practices committee which, in fact, helped screen commercials, and they also had a legal department, an existing on-staff legal department that could react to any of the questions that were raised.

What are we doing differently today from these 20-year-old experiences? In most television stations throughout the United States, not a hell of a lot is different. There may be different people who are screening. There certainly are people who are much more aware, but the answer is that, in fact, most television stations do not do things a lot differently today.

Again, it comes back to one of the old, original bugaboos, which is time. How much time and how much money are you willing to spend to make sure that the advertisements you air are in fact, correct, just, and not deceptive, and so forth. Unfortunately, most of the time there is not an enormous amount of time or money devoted to this arena.

How can we make it the way it should be? Well, I think there has to be the kind of environment in which there are enough organizations coming together under one roof to say, here's how we do it; here's how it should be done; here's how we might fix it.

From the standpoint of the Broadcast Cable Financial Management, which is the parent organization of the BCCA, screening ads is extremely important. We do, in fact, represent the chief financial officers from radio and television stations and cable systems throughout the United States. So this is an area that we could at least help in starting to influence how we prevent fraudulent advertising from reaching the air.

I think that there are two priorities that come into play here. The first is, you have a time consideration that's always been a constraint; it will continue to be. The second is that you have an economic restraint -- I am familiar with a cable system that has sold 100 spots for $500. When you get into that kind of environment in which your margins are extremely limited and in which your production staff and backup is so extremely limited, literally, the only motivation is profit.

I appreciate the opportunity to chat briefly in front of you to tell you how things aren't quite as bright as they might be; but I also appreciate the opportunity to learn more about the subject matter from all of you. Thank you.

MS. GOLDSTEIN: Good morning. It has been said -- actually, it was said by Lee Peeler a couple of months ago -- that the National Advertising Division is one of the country's best-kept secrets. Maybe today, with all of the media representatives here, we can get a start on changing all that, as we offer some guidance on what you can do to help the industry succeed in its attempt to sustain high levels of truth and accuracy in advertising.

First, a little bit about who we are and how we operate. The NAD was established in 1971 by the advertising trade associations, the Four A's, the AAF, the ANA, and the Council of Better Business Bureaus.

It was established in response to some heavy government involvement in ad regulation that was going on at the time in the late-sixties and early seventies that, in turn, was spurred on by the newly active consumerist movements.

That was the time when Pfizer and Rapid Shave and other demonstration cases were being litigated in the courts by the FTC. This is not to say that those were unwarranted cases or that the demonstrations involved were somewhat outrageous, but dealing with this litigation was very costly, both in terms of time and money.

It was also a time when the FTC was proposing many broad-ranging trade regulation rules that were an attempt to regulate claims made in food advertising, over-the-counter drug advertising, and to ban altogether advertising to children.

So, in the face of all this action, the industry got together and felt that we needed to create a system to start this whole process of self-monitoring and self-regulation.

The mission of the NAD is to sustain high standards of truth in national advertising, and its purpose is twofold: one is to promote ethical business practices, ethical advertising practices and a level playing field so as to benefit both consumers and industry; and it's also to keep our friends at the FTC from working too hard -- minimizing undue government interference into advertising practices.

So how do we do this? By a system of voluntary self-regulation, a kind of hybrid form of very user-friendly, alternate-dispute resolution, which creates a forum for competitors or consumers to directly challenge or make inquiry about claims in advertising. And we also do it by a certain amount of monitoring on our own of advertising.

We know that we can't just sit back and wait for competitors or consumers to challenge advertising. To be credible, we need a certain amount of active monitoring on our own part to maintain a level playing field.

The NAD has a staff of six attorneys, including myself, with various complementary backgrounds, ranging from the sciences to advertising trade regulation, intellectual property, litigation, arbitration, and I even have a freelance music critic.

We are the initial stage of the investigation. When an inquiry comes in or we decide to initiate our own inquiry, we determine the issues, collect and evaluate sometimes voluminous amounts of data, and reach a decision on whether there was a reasonable basis to make a claim.

There is an appellate process, through the National Advertising Review Board, which is a sitting panel of 80 industry members from both advertisers, advertising agencies, and the public, five of whom are pulled at any one time to hear an appeal. Most of our cases are not concerned with what I think we all generally describe as fraudulent advertising.

Most are challenges by competitors or consumers on issues reasonable people could differ about -- for example, was there a reasonable basis? Did the claim overstate the testing that was involved? And it entails, as I said, detailed review of both technology and communications data, which I understand, realistically, many of you are not going to be prepared to undertake.

However, about 30 percent of what we do is monitoring, and while some of our monitoring is in this gray area, some of the more egregious cases of monitoring that we handle can offer some principles of what to look for in order to help prevent the fraudulent ads from appearing in or on your media.

What are the most problematic areas? Since we review national advertising, we really don't see a lot of the business opportunity employment fraud and investment fraud cases, which tend to be more in the classified and local ads. But what we do see as most troublesome are claims in the health and safety area and performance claims that consumers really can't judge themselves.

Examples are the weight loss programs and products, nutritional supplements, food claims, skin treatments, cosmetic claims in the health and safety area and advertising for things like air filters, air purifiers, alarm systems, even a learning system which recently came across our desk, where the consumers can't judge for themselves whether it's really working by looking at the ad or looking at the product.

So what do we look for in our monitoring? It's really no different than what a consumer or a competitor would look for. Several areas raise red flags. One is strong, arguably exaggerated performance claims for a new product.

When you see the words like "revolutionary," "amazing discovery," a "wonder pill," a "never-again-suffer" from a long litany of ailments; that something is effortless; strong, specific weight loss within a week; or specific categories of performance -- they'll quadruple your reading speed, your children will learn 300 to 500 percent faster than their peers -- these should raise red flags and make you think.

It often amazes me that some of the advertisers or manufacturers of these products find it necessary to sound like snake oil salesmen. It totally undercuts their credibility. Many of the, say, nutritional supplements that we've seen that are a combination of herbs and vitamins can provide some help to some people for some kinds of situations and would probably do very well in the marketplace if they made their claims more believable to fit with what they can do.

When you look at an ad, is it clear what's being offered? We've seen several weight loss programs where we couldn't tell from the nature of the claims, is it a pill, is it some kind of mechanical device that you're wrapping around your legs or your waist, or is it really what, in reality, it turned out to be, a book of recipes and exercises?

Along the same lines of exaggerated claims, are exaggerated savings: Sixty-five-percent-off window blinds. Two air fares for one cent more than a single fare. Are the regular prices that are being offered bona fide? Have there been any sales at that price, or can the advertiser give you any other price formulating information to show that the regular price that it's discounted from is really a bona fide price. Are all the details explained and disclosed? Do you know exactly what coach fare you have to buy in order to get the special deal?

Another big area of concern are striking visuals or before-and-after demonstrations. Those should be an immediate flag for you to ask some questions. On the one hand, is the visual that's shown actual? I mean, did that really happen? But one step beyond that, even if it was true in one case, in an ad of this sort, the visual demonstration has to be typical of what consumers can expect. Is this a typical result that can be independently supported?

Several of the diet products that we've had problems with show people before and after with amazing differences. An acne medication product showing a woman with a terribly scarred cystic condition going to a practically cover-girl look. Even if it happened once, is it typical? Is that really what consumers can expect?

The same issue occurs if you see an ad -- and some of these were shown before -- where most of the ad is consumer testimonials, you know, with initials or even with the names. Are they real; and, again, are they typical?

An advertiser's testimonial from a consumer has to be typical of what consumers can expect, and it has to be independently supported. If you call and you ask, the fact that they may have 200 satisfied customer letters in their file is almost irrelevant. They have to be able to have controlled scientific evidence that the performance, the claim, the weight loss claim, the nutritional supplement claim is supportable.

Again, look for recurring patterns, both in terms of format and in claims. We had two very recent examples, both in the weight loss category. I guess last year, the end of '93, we had a case against Lipotrim, which is one of these wonderful, miracle pills -- you can eat anything you want and you'll still lose weight -- and we got it discontinued, and they promised they wouldn't run the ad.

About eight or nine months later, we were looking through the magazines, and we see a magazine ad that says, "I lost 52 pounds with the most amazing diet discovery available today," with a picture and then lots of testimonial claims.

About a year later or so, we came across another one. It's a different visual in the middle, but the same idea, a different name attributed to the exact-same headline. The body copy, layout, cross heads, even the coupon, are practically identical, but now it's called Instatrim instead of Lipotrim.

We didn't even waste time with that, and we immediately sent it down to Lee Peeler at the FTC. So be aware of that. You're familiar with what you're seeing. If it recurs again, but with a different name, that's an immediate trigger that it should be questioned.

And I guess that's the point. Ask questions. Large or small, reputable companies know that they must support their claims, and they should answer your questions. That's not to say they won't complain and won't make you feel guilty (" how dare you're asking me this question") but they will know they have to respond to you. If they just come back and say, "Well, I have six file cabinets full of information and good consumer letters, you can come look," that's an immediate sign that maybe you should look a little harder.

Often, just asking questions will deter the most questionable advertising. Not infrequently, the response to our initial primary question was a letter back saying that they're discontinuing the advertising until they can run more testing, for whatever reason the ad's being discontinued. That was the case with a Korean cure-all skin cream and what appeared to be some kind of impregnable nail polish nail-enhancer product that we came across.

In addition to asking questions directly to advertisers, if you can find them, as we said today, use the numbers that you're being given for government hotlines. Call the local Better Business Bureau at the company's headquarters. The local BBBs are putting together national databases. They have a lot of information on the reliability of companies or if there have been repeated questions about those companies.

As an example also, the ad that Chris White showed this morning, the first one -- the tea that didn't exist. I don't know if anyone noticed, but right above the coupon was the little Better Business Bureau seal. It said "Member of the BBB." Well, members of the BBB know they can't do that, that we don't endorse or authorize companies, and they're not allowed to use that seal in advertising. (They can put a little plaque up in their store.) So if you see any of those symbols in ads, call the Better Business Bureau.

You're gatekeepers and you have an obligation, as well as a self-interest, to exercise some responsibility. No one expects you to replace the FTC or the NAD, but I think that we all can agree that there's a certain level of common-sense review that we can all take.

And I wouldn't think that YM or Teen magazine would want to be known as hawking highly questionable weight loss programs to impressionable teenage girls, but we are continually seeing these ads in magazines such as that. And I think there's an easy way to have some kind of screening device for that.

If you'll just be alert consumers yourself and ask some questions, you'll go a long way to helping us and the whole industry maintain the integrity of bona fide, reputable advertisers, as well as helping the consumers that we also want to serve. Thank you.

MR. PEELER: Thanks to the panel for those excellent presentations. And now we have some time for questions from the audience. Yes.

Q: When you complete your investigation and you find that the advertisement is fraudulent, what regulatory authority do you have to stop the advertisement?

MS. GOLDSTEIN: We cannot assess any penalties and we don't have any regular enforcement authority other than peer pressure and voluntary cooperation. As I said, most of our cases are not the fraudulent kind. We may see a clarification here or there or some kind of change, and most companies are very happy and willing to modify or discontinue claims if needed.

As far as some of these that I've mentioned, we've gotten agreement from companies not to run the ads anymore. If we find them again or if we can reach them or if they refuse to cooperate with us, we do pass them on to government authorities to handle. We can't guarantee that at that point something will happen, but we do pass them on.

Q: When those cases do get passed on, or a company refuses to voluntarily submit to a self-regulatory process, does the Federal Trade Commission or another regulatory agency give any kind of special look or priority handling, since regulation is so important to the success of self-regulation?

MR. PEELER: Yes. We have addressed the relationship between the FTC and self-regulation in the formal document called the Advertising Substantiation Policy Statement. As that document indicates, the Commission has, since the seventies, been a strong supporter of the self-regulatory process; it is something that we believe in. When we get referrals from the self-regulatory process, we review them under the same case-selection standards that we have for all advertising. But, clearly, the fact that someone has gone through the self-regulatory proceeding and is engaged in the same practice, is one factor we would consider about the need to enter an order against a company to prevent it from engaging in these practices in the future.

Similarly, with respect to media screening generally, we have expressed concern about advertisers who go to one media and have their advertising screened, and are told "no," and then go to another medium that doesn't screen their advertising -- or doesn't screen it as carefully -- and then run the advertising. Again, that is an indication that the company knew there was something wrong with the advertising but went ahead with it anyway. Again, it's another factor we would consider in deciding whether to bring a case.

It's not a definitive factor, but it's certainly something we look at. We put a very high priority on the question of cooperation with the NAD and the media screening process.

The last point I'd like to make is that it really is remarkable, when you look at the history of the NAD, how many large, national advertisers have made changes in their ads on a voluntary basis to respond to the findings of that body. There really is a shared value in the credibility of advertising for national advertisers that the NAD has been able to harness very well.

Q: How can we -- or a typical consumer -- contact NAD? Is there a phone number and address? And also you mentioned calling local Better Business Bureaus, which is a good idea, but often those numbers, the public numbers -- the Better Business Bureau where I live, that phone number is usually off the hook. And, let me say here, because I know that there is a directory that I can get -- I've got a copy of it -- that lists the unlisted numbers. Is that possible to get?

MS. GOLDSTEIN: I don't believe so. But the local Better Business Bureaus is an exceptional resource, and they are working very hard to upgrade their communications systems. There is a brochure in the conference materials on the NAD which does have our address and phone number. So, by all means, we are not open only to just large advertisers, but we take inquiries and complaints from individual consumers, and we're happy to provide as much information as we can.

Q: What can be done by the private sector to help the Better Business Bureaus with the resource crunch they have when they get a large number of calls asking for information about complaints.

MS. GOLDSTEIN: The Council of Better Business Bureaus is working very hard to come into the second half of the 20th Century. The Council is working to create a data base linking all the individual local Better Business Bureaus, which all are independent, autonomous groups. Jim will talk about it more at lunch, but that is a major goal that is being worked so that we can share that information much more quickly.

And I guess the private sector can help by becoming more aware of who we are and promote us, and we get more national members, which then allows us to be able to fund more activities.

MR. PEELER: Time for one or two more questions.

(QUESTION) Professor Rotfeld's comment is that in his surveys the willingness to do media screening appears to be more a function of commitment by the management rather than time and money. I'll let Buzz Buzogany respond to that.

MR. BUZOGANY: I think you're absolutely right. It is certainly a commitment by the management, no matter what the size of the organization. I'm just suggesting to you that, depending upon the size of the organization, the likelihood of commitment increases as the size increases. That's my personal opinion.

MR. PEELER: The comment from the audience was there's some ads out there that meet many of the criteria that Debra outlined in her speech, but which have run for a long time. And the question was: how does an ad clearance person for the media deal with those ads?

MS. GOLDSTEIN: A lot of it is a judgment call. But if an ad claims that you will lose weight in all parts of your body, or that you can direct where you want to lose weight, or that it will stay off and you can eat whatever you want and there's no concrete, scientific evidence to back this up, and it turns out that the product is a book of exercises, you know, no one's going to die from it, but, on the other hand, it's fraudulent.

MR. PEELER: Let me ask Buzz Buzogany. Is there anything we can do, following up on Professor Rotfeld's suggestion, to raise the profile of advertising screening in the non-network electronic media?

MR. BUZOGANY: Probably the greatest influence that can be exerted is on organizations that touch upon most of the general managers in the country, and that's an organization like the National Association of Broadcasters. Their influence is widely felt. They had 80,000 people at their last conference, which was just held a few weeks back, and they really reflect the width and breadth of the entire industry. Another organization, the National Cable Television Association, which influences cable.

MR. PEELER: Harvey Dzodin, were there circumstances that were present when the networks decided to undertake their commitment to ad screening that aren't present now?

MR. DZODIN: Well, sometimes we were jaw-boned by the FTC, for instance, on taking comparative ads. We didn't take direct comparative advertising, and when Bob Pitofsky came to us in the seventies and said this would be a good idea, and we thought it would be a good idea not to be in trouble with the FTC, and when he came back to us and said, "You're not going far enough; you're not allowing truthful disparagement," we thought that was a good idea, too -- to stay out of trouble with the FTC.

I think that we all act in our own self-interest, whether it's getting money or keeping the government off our backs. And I think what works best is a deterrent effect of selective but highly-publicized regulation that hits people in the pocketbook. I think that the FTC has started to do that again because you brought this case against the Home Shopping Network.

I think everybody here has to wake up and take notice that we're all on notice that if we carry advertising that's problematic, it may be our skins as well.

MR. PEELER: Thanks, Harvey Dzodin and the rest of our panelists.

LUNCHEON SPEAKER:

JAMES L. BAST, PRESIDENT AND CEO,

COUNCIL OF BETTER BUSINESS BUREAUS, INC.

Good afternoon! It's a pleasure to be with you today. I thank the sponsors of this conference -- the Federal Trade Commission, the Food and Drug Administration, the National Association of Attorneys General and the American Association of Advertising Agencies -- for this opportunity to share some of our views on advertising voluntary self-regulation.

The theme of today's conference "Preventing Fraudulent Advertising: A Shared Responsibility" delivers an appropriate message. Federal and state government, the business community, regulators, advertisers, news media, trade associations, Better Business Bureaus and consumers groups -- each can play an important role in helping to prevent fraudulent advertising and we all benefit when advertising claims are truthful, accurate and meet our Code of Advertising.

As I've stated, my remarks today will focus on advertising voluntary self-regulation. I appreciate this chance to describe a process that I believe holds truly high value for businesses, consumers and regulators. The Better Business Bureau system is uniquely positioned upstream in advertising, where ethics play an important role before media prescreening, in catching poor advertising practices as they occur in the field, and in resolving disputes about advertising substantiation afterwards.

The Council of Better Business Bureaus is the umbrella organization for the nation's Better Business Bureaus, known as BBBs. We're a not-for-profit business-member organization. The BBB system exists because our members believe most marketplace problems can be corrected through voluntary self-regulatory programs, and because they want to assist consumers in obtaining necessary information for resolving problems. Honest advertising and selling practices mean customer satisfaction, and that's better business.

Probably not too many of you know that the BBB system was founded more than 80 years ago for the specific purpose of increasing confidence in advertising. We've since expanded our advertising review expertise from the local level to the regional and national levels. We have found, during these eight decades, that most advertising is truthful and accurate. Advertising has a powerful influence on our daily purchasing decisions and on the quality of life in our country; it has value for our society. And, what helps keep most advertising "good" is honest people, people who believe it's crucial that consumers trust the information relayed through commercial messages.

Now, what can be done about those few unethical businesses and scam artists who insist on using fraudulent advertising to gain an unfair short-term advantage over reputable businesses? Some regulation will probably always be needed to deal with scammers and schemers. However, we believe that the majority of advertisers are responsible and ethical. They will voluntarily comply with self-regulation measures because they know it's in their best interests to do so, for a number of reasons: self-regulation provides consumers with a forum to address concerns about potentially misleading advertising claims; it's preferable to government regulation, which can be costly and burdensome; it provides a low-cost alternative to litigation; it's quick and informal; it enables advertisers to settle their disputes fairly and effectively, and it helps to ensure a level playing field for reputable advertisers.

So what's the problem, you might ask? If self-regulation is working that well, why the need for conferences such as this one? We must do a better job of promoting the advertising industry's success in policing itself. As Lee Peeler of the FTC's Bureau of Consumer Protection so aptly put it recently, "the work of our self-regulatory process is probably one of the best kept secrets in the country."

As described so well by Debra Goldstein at this morning's panel, the National Advertising Division of the Council of Better Business Bureaus, otherwise known as NAD, is the first tier of the advertising industry's national self-regulation forum. But it is positioned after all the media pre-screening has taken place. NAD was founded by the advertising industry in 1971 as a positive response to consumer activists who were pushing for increased government regulation. The advertising community -- represented by the ANA, the AAF and the Four A's -- made a commitment then to police itself. Advertisers promised to cooperate with NAD's investigations of advertising claims and to abide by its findings. To ensure the credibility and impartiality of this self-regulatory process, NAD is managed under the purview and funding of my organization, the Council of Better Business Bureaus.

NAD's role is to investigate complaints about truth and accuracy in national commercial advertising. NAD resolved 87 challenges to national advertising in 1994; it's resolved nearly 3,200 complaints since it's founding. When investigating a claim, NAD determines the issues, collects and evaluates data, and decides whether the advertiser has a reasonable basis to substantiate the claim, in accordance with the highest ethical advertising practices. If the claim is found to be unsubstantiated, NAD attempts to reach voluntary agreements with advertisers to modify or discontinue the claim. NAD's advertising review process is fair, equitable and swift.

Adhering to a strict timetable, NAD provides a written decision within 60 business days, which is then published in an NAD Case Report. This is the only visible portion of the NAD process, and it meets the commitment to operate in the open.

Recently there have been some recurring questions regarding self-initiation of cases at the NAD, commonly referred to as "monitoring." When the NAD was first established, its primary practice to accomplish its mission was to monitor. Once NAD's reputation became known, consumers, BBBs, and competitors began bringing complaints to its attention. While this alternative dispute resolution function from outside initiators today accounts for the large majority of NAD cases (almost 66% in 1994), monitoring is still an important part of NAD's mandate. It just wouldn't be self-regulation without the affirmative action of some monitoring. NAD's governing body has confirmed the importance of NAD being able to initiate, on its own, complaints about the truth and accuracy of advertising claims. And quite often the advertisers' claims are substantiated, so the advertiser and the industry benefits from the positive publicity in the subsequent NAD Case Report.

As I've stated, most advertisers do indeed voluntarily comply with NAD's recommendations and most challengers do accept NAD's resolutions. However, if either the challenger or the advertiser is not satisfied with NAD's recommendations, they can appeal to the National Advertising Review Board, or NARB. Composed of advertising professionals, the NARB functions as a peer review group. A panel of five NARB members convenes to consider disposition of each appeal, and determines whether to uphold or overturn NAD's decision. And, like the NAD, the NARB is funded entirely by the Council of Better Business Bureaus.

It's important to note that the advertiser has the right to an automatic appeal of any NAD decision to the NARB. The challenger, however, must first gain the approval of the NARB chairman in order to have an appeals panel hear the case. There have been 85 panels in the 23 years that the NARB has functioned. Participants have always agreed voluntarily, with only a handful of recent exceptions, to be bound by the panel's decision. Now, the volume of cases appealed to NARB has increased in the last couple of years. It's unclear why this is happening; it could be that with a faster NAD process, certain advertisers are using NARB to play a game of "delay."

There's another component to this self-regulatory mechanism -- the Children's Advertising Review Unit of the Council of Better Business Bureaus, otherwise known as CARU. CARU was established in 1974 by industry in response to public concerns about fairness of advertising to children. CARU reviews advertising directed at children, 12 years and younger. When advertising is found to be misleading or inconsistent with CARU's Self-Regulatory Guidelines for Children's Advertising, CARU seeks change through the voluntary cooperation of advertisers. In cases of competitor challengers, or if no prompt resolution is reached, CARU follows the same formal case procedures as does NAD, with the same provision for appeal to NARB.

Recognizing that the special nature and needs of this youthful audience require particular care and diligence on our part and that of advertisers, CARU performs a high level of monitoring. In a typical year, CARU monitors more than 15,000 television commercials, often with the assistance of local BBBs, and reviews advertising in print and other media.

CARU also offers "pre-clearance" of proposed advertising as a service to advertisers and their agencies. Although this review cannot guarantee that the finished advertisement will be in compliance with CARU's Guidelines, it can spot potential conflicts and eliminate the need for costly revisions later.

Just a couple of CARU's recent accomplishments include helping keep out government regulation of 900-number usage by children, and quieting down some extremely offensive Nintendo ads. The funds supporting CARU come from designated giving by manufacturers and others concerned with advertising directed at our youngest consumers.

So, at the national level, we have NAD and CARU, working in association with NARB, to sustain truth and accuracy in national advertising. Overseeing this process and setting policy is the National Advertising Review Council, otherwise known as NARC. NARC membership consists of the president and voluntary board chair (or designee) from each of its founding four members: the AAF, the four A's, the ANA and the CBBB.

Working together, NARC leaders have forged strong cooperation on a number of issues. We're currently looking at some survey recommendations for an even better NAD/NARB process, and how to address future needs of interactive communications. NARB has been requested to consider again whether labeling should be under NAD's domain (it currently is not), and the Consultive Panel on Claims Jurisdiction should report back to NARC in the near future. As you probably know, NARC has no definitive policy regarding the use or disclosure of Consultive Panel reports. But I assure you, all of this is being undertaken with the strongest commitment to voluntary self-regulation and increasing visibility for this mechanism.

Today, advertisers, consumers and regulators alike rely on national voluntary self-regulation to maintain the highest standards of honesty in advertising. With more than 3200 cases handled over the past 24 years, there is hardly an advertiser you have not heard of -- Procter & Gamble, Gillette, Wal-Mart, Texaco, Kellogg's, Maytag, on down -- whose advertising has not at some time been reviewed by the NAD/NARB -- and (when warranted) changed. In fact, only 14 out of the entire 3200 cases, have been turned over to regulators because participants would not take part voluntarily - quite a favorable 99.5% batting average for a process with absolutely no sanctions nor authority.

We now have 138 Better Business Bureaus serving every major metropolitan area in the United States. They are supported by 230,000 businesses that have met BBB standards for membership and agree to support the BBB principles of ethical business practices and voluntary self-regulation. These BBB members provide most of the funding to support Bureau programs, staff and activities.

Indeed our strength in ad review begins locally. At the grass-roots level, our Bureaus work diligently to uphold high standards in local advertising -- not always an easy task. Local advertising is where the most extravagant promises and egregious claims are made, and where substantiation is rarely adequate. This is where we are well-positioned in the heat of daily advertising. Many Bureau CEOs appear frequently on local radio and television shows to warn consumers about unethical business practices, including fraudulent advertising. They call questionable advertisers immediately on the morning when questionable ads appear, they issue press releases and publish their ad review findings. In fact, a number of Bureaus have established database links with local newspapers, enabling the papers to check BBB reliability reports in real-time, before accepting advertisements.

Good as they are, these local ad review efforts are still not enough. They can, should, and are being expanded and strengthened. We're now involved in re-invigorating the local self-regulatory process through joint programs with the AAF and local Ad Clubs, using most of the same NAD/NARB process. Establishing active local advertising review programs will serve to raise the bar of excellence for advertising and selling practices by local businesses, and assist BBBs in alerting consumers to fraudulent and misleading advertising claims.

Regional BBB ad review is conducted through a network composed of ad review coordinators from each of our five regions. Known as the National Advertising Review Network, or NARN, these representatives arrange comparative shopping throughout their geographic areas and pool the information to identify advertisers that are making false and inaccurate claims beyond a single Bureau territory.

An excellent example of what regional ad review can accomplish is the Wal-Mart case, which was decided by the NARB last summer and received publicity nationwide. Wal-Mart's advertising was challenged by several competitors and by local BBBs working through their regional network. The challengers contended that Wal-Mart's slogan "Always The Low Price, Always" misled consumers to think they were getting the lowest price available. NARB agreed. In the spirit of self-regulation, Wal-Mart agreed to eliminate use of the word "the" and has since changed its corporate slogan to "Always Low Prices Always", at a cost of hundreds of thousands of dollars. Who won this case? The consumer always wins. And that's good for the advertising industry and it's good for the business community.

I'd like to close with a few comments about the current environment. Politically, deregulators are in the majority now in Congress and they're setting the agenda. Pundits are predicting that the new climate in Washington and many states will veer towards less government regulation and considerable government down-sizing. How does that impact on self-regulation? Rather than suggesting less need for BBB services, I see this as a marvelous opportunity to promote and increase visibility for advertising voluntary self-regulation.

With a government that may be shrinking in size and power, legislators, regulators, businesses and consumers need to have confidence that our system of self-regulation is working effectively. When phones are no longer answered at closed state and local consumer protection offices, consumers need to know that they can turn to our advertising self-regulation forums for assistance in the vacuum being created. Advertisers need to be made aware that they can turn to NAD/NARB to resolve disputes voluntarily and ensure a level playing field. And government, particularly the many freshman legislators who rode the Republican tidal wave last fall, need to be made aware that our system is working on behalf of an ethical marketplace. We plan to make sure that they do. With NARC we are working on new visibility methods.

Coupled with the changing face of government is another challenge...the current ethical environment. There are some who claim that American business -- like many other institutions in our nation -- is now in an ethics "recession". The Better Business Bureaus believe that ethical business positively impacts the bottom line, as Harvey Dzodin said this morning. Ethics in business is a competitive asset, and will be even more so in the years ahead. We reinforce this creed through our work on behalf of an ethical marketplace and through our reputation for integrity and credibility. This is why we are positioned upstream of the advertising process, before an unethical corporate culture attempts to appear in fraudulent advertising.

And a final challenge given our current environment is the technology revolution. All of us here today need to deal with the challenges represented by new forms of advertising which are appearing in new media -- cable TV, CD-Rom's, on-line services, infomercials, children's video games. How do we police these new frontiers? How do we protect the millions of consumers who are the target of these new promotions? Advertising claims can come and go more quickly now; they're more pervasive and more broad-reaching. The FTC's recent workshop on the Global Information Infrastructure and other cyber-marketing efforts are helpful. CBBB in NAD and CARU and NARC are committed to ensuring the self-regulatory forum is on the leading edge. NAD will be digitized, CARU is on-line, CBBB has its WEB home page on the Internet. This revolution cries out for ethical standards, for effective self-regulation.

I'll close by stressing the Council of Better Business Bureaus and the entire BBB system is here to serve, through our partnership in NARC, through our voluntary self-regulation programs and through our cooperation with others represented here today. Advertising is certainly necessary, and it is predominantly truthful and accurate. For non-conforming, unethical advertising, there is a superb self-regulatory process. Let's go out and spread the good word!

THIS CONCLUDES THE PROCEEDINGS OF THE MORNING SESSION

OF THE CONFERENCE