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Prepared Statement
Mr. DOBIN:
Thank you. Chairman Collins, Members of the U.S. Senate Permanent Subcommittee on Investigations, I wish to thank the Subcommittee for this opportunity to discuss with you the sweepstakes industry and the proposed legislation to control deceptive mailings.
I am currently president of Lone Star Promotions, Inc., which is engaged in marketing coupon books using sweepstakes promotions. I first entered the direct marketing sweepstakes business in 1992. While I made some mistakes when I first entered the business, since 1994 I have operated my business with close attention to all legal requirements.
I am gratified that the proposed legislation does not seek to outlaw the sweepstakes business. Sweepstakes are enjoyed by many Americans, and I fervently believe that they should be conducted fairly and in conformance with all laws.
As I said, I first entered the direct mail sweepstakes business in 1992. Prior to that I was a partner in a successful automobile leasing business. I became friendly with one of my customers, Jeffrey Novis, who suggested that I go into the sweepstakes business with him. Another of my customers was already in the business and had offered to assist Mr. Novis and myself. We formed Wellsworth Smythe Jewelers, WSJ. In the beginning, we had a third partner, whom Mr. Novis and I subsequently bought out.
We initially planned to sell jewelry by direct mail, as well; however, when our initial efforts were unsuccessful, we decided to focus on the sweepstakes business. We were aided at the time by the decision of another individual to leave the business. We were able to move into his business premises and hire his staff of experienced employees. He remained as a consultant and taught me how to write copy for WSJ’s promotional mailings. Our efforts were rewarded with a successful business.
However, as I said, I made a serious mistake for which I have pled guilty. Our mailings offered expedited processing and handling for an additional fee. While I collected that fee from many customers, I regrettably did not assure that these orders, in fact, were expedited. The postal inspectors searched my business on August 10, 1994, and seized not only our business accounts but my own bank accounts and those of my partner, Mr. Novis.
The postal inspectors’ investigation was a shock. We were accused of engaging in various fraudulent activities and misleading representations. These allegations were largely unfounded, but I could not deny that those people who paid for expedited handling did not receive it. So after much reflection and discussion with my family, I decided that I would agree to plead guilty to one count of conspiracy before any charges were filed against me.
At the same time, I hired new counsel, including an attorney who recently became a Federal district court judge. I told my attorneys that since I wanted to stay in the sweepstakes business, I wanted to make sure that we scrupulously followed all the legal requirements. Since the search, I have personally written all of the promotions which we use in our business. I have done my best to assure that they are not misleading. We continue to offer expedited handling, but now I make sure that customers who pay for this service receive it. We have a no-questions-asked refund policy for anyone dissatisfied with either our product or our promotions. We ensure that people who do not want to receive our promotions are removed from our mailing list permanently.
Currently, I am the president and sole shareholder of Lone Star Promotions, Inc. I formed Lone Star in February 1996. After the postal inspectors searched our business in 1994, Mr. Novis and I formed a new corporation called TriStar Promotions, Inc., which we continued to operate together until 1996. I was the vice president of both TriStar and Wellsworth Smythe.
Lone Star is located in the village of Merrick, New York. We employ 12 people and mail approximately 5 million pieces of mail each year using sweepstakes promotions to sell coupon books. Lone Star’s sweepstakes offer prizes in the amounts of $12,000, $10,000, and $5,000. Currently our odds are 1 in 3 million. In other words, for each 3 million mailings, we award one prize. In 1998, Lone Star awarded three prizes. We did not reach the 3 million mark for the $5,000 drawing. Our 1998 winners were:
All of our promotional mailings clearly indicate to the consumer in several places that no purchase is required. I write the copy for Lone Star promotions. I have each new promotion carefully reviewed by Lone Star’s attorneys in an effort to ensure that the promotions I mail are not misleading in any way.
In addition, our official rules state the odds of winning in bold type on a separate line. I have tried to make the rules clear and changes over the years to improve the rules in this regard. I also make clear reference to the rules in my promotional copy.
While Lone Star uses a different company name for each of its promotional mailings, we make no effort to hide the fact that Lone Star is the sponsor of these promotions. The name ‘‘Lone Star Promotions, Inc.’’ and an address and telephone number at which we can be reached appear at the end of the Official Rules which are part of every mailing. Lone Star duly registers each of its trade names it uses as a ‘‘DBA’’ and reports those names to its banks and the U.S. Postal Service.
Lone Star currently receives responses at post office boxes in three local post offices: Baldwin, Levittown, and Massapequa. They are all right in the same area. We do this to reduce the burden of our mail volume on the individual post offices. Each box is signed for by me as president of Lone Star Promotions, Inc.
I am aware that this Subcommittee is concerned that sweepstakes companies target certain groups such as senior citizens. I am personally responsible for obtaining our mailing lists, and I can tell you unequivocally that Lone Star does not target any age group; rather, we focus our efforts on people who have previously participated in sweepstakes and skills games.
We obtain our mailing lists from list brokers. List brokers purchase lists from sweepstakes companies and others to sell them to other companies. My only specifications to the list broker is that the list should be people who play sweepstakes and skills games. I do not specify any age group and do not believe that the list brokers with whom I deal do so for the lists they sell me.
We generally purchase several lists, which we sent to a company which compiles a single mailing list for us which we refer to as the ‘‘computer house.’’ The computer house compiles our mailing list by eliminating any duplicates, as well as the addresses of anyone who has asked that we not send promotions to them or live in States to which we do not mail. This company also selects the winning number for each group of promotions. The computer house provides the pre-selected number to our attorney but not to Lone Star until that group of promotions is complete.
We then send the list to another company, which we refer to as the mailing house. The mailing house personalizes and mails our promotions to those on the list. We generally send two to three mailings to these people. We refer to these initial mailings as ‘‘front end’’ mailings.
When we receive the responses, we sort them into three categories: Those who made purchases, those who did not make purchases, and others.
The names of those people who purchased our coupon booklet are further separated into the group that requested and paid for expedited handling and those who did not. These purchases in both groups are processed and the coupon books are sent out with the appropriate handling. We enclose with the coupon booklets a form letter thanking the customer for the purchase, requesting their comments, and advising them that they have been entered in the sweepstakes and will be notified if they have the matching pre-selected winning number.
Any response that contains any additional correspondence, notations on the processing form, or anything in addition to the form and payment is placed in the ‘‘other’’ category and processed individually by our customer service department.
Complaints and requests for refunds are addressed immediately. On occasion, we receive orders which make reference to increasing the entrant’s chances of winning. In those cases, we return the order and payment to the customer with a letter reminding that customer that no purchase is necessary. Of course, we offer to sell the coupon book if that person still wishes to purchase it.
The names of all the people who return our promotion whether or not they purchase anything are sent to the computer house to compare to the pre-selected number. Since historically only 12 percent of those receiving the promotions return them, the pre-selected number is generally not returned. In such cases, as provided by our official rules, the prize is awarded by a random drawing of all the entries received during the promotion period.
We generally send additional promotions to individuals who make purchases. These promotions, which we refer to as ‘‘back ends,’’ also clearly state that no purchase is necessary. Of course, additional entries do increase the entrant’s chances of winning. Generally, we send four to five ‘‘back end’’ mailings to each purchaser. If a person purchases again, we send that person another four to five ‘‘back ends.’’
It is important to note that rules clearly state that purchases and expedited processing do not increase the chances of winning. Lone Star sends out the back-end mailings using its own staff. The back-end mailings are not personalized. When Lone Star completes a cycle of mailings, which usually takes 4 to 6 weeks, we sell the list. Lone Star does not conduct any market analysis on its lists.
Lone Star sells the list to Heatherwood Associates, Inc., which in turn sells it to a list broker. Heatherwood is wholly owned and operated by my wife. Heatherwood pays Lone Star $5,000 per month for its lists and the use of Lone Star’s employees. In addition, I have another company which leases the premises Lone Star uses from its owner and subleases it to Lone Star. Other than these companies, my wife and I and our children do not own any other businesses.
Lone Star also sells the original return forms through a list broker who sells such information to other sweepstakes promoters or telemarketers. After the computer house has processed the return forms and removed all the relevant information, it returns these forms directly to Lone Star. Lone Star removes information regarding the promotion and then offers the forms for sale.
I am aware that this Subcommittee is concerned that sending multiple mailings with different copy for the same sweepstakes contest implies that each promotion involves a different sweepstakes. However, in our case, we respectfully do not believe this is true. We use trade or DBA names to sort our promotions and track results. Each of our promotions lists Lone Star as the corporate sponsor. Our rules clearly state that Lone Star may use different copy and different promotional names in the same contest. Since I do my best to make the rules clear and make reference to them in the promotional copy, I believe that I should be able to rely on the entrants’ reading them.
Similarly, I am aware that this Subcommittee is concerned that subsequent mailings may entice customers to make excessive and unneeded purchases. I expect that Lone Star’s back-end mailings will lead to additional sales and the statistics show that a greater percentage of recipients purchase on the back end. However, I do not agree that in the case of Lone Star’s customers these purchases are either excessive or unneeded.
Senator COLLINS:
Mr. Dobin, your 10 minutes have expired, but if you are close to the end, why don’t you take an additional minute or two to conclude your comments?
Mr. DOBIN:
Thank you.
Lone Star receives letters from its customers complimenting our product and asking where they could purchase additional coupon books. We also have a policy to give full refunds without question to anyone who asks. I don’t know how anyone can complain that Lone Star unfairly enticed them to purchase something they didn’t want when we clearly explain what we are selling and readily refund their money if they are dissatisfied.
From my own experience and observations of the sweepstakes business, I believe that the most significant problems in the industry are: Promotional mailings which mislead the recipient into believing he or she has already won; use of facsimile checks; appearance that the government is involved in the sweepstakes; and nonfulfillment. I would like to address each one of these quickly.
Some mailings suggest that the recipient has already won and need only return the form to collect the prize. For example, one promotion which I have seen tells the recipient that all they have to do to collect the prize is return the form and that guarantees that person’s status as a winner.
Lone Star’s promotional mailings clearly advise the recipient that to win he or she must both have and return the matching pre-selected winning number.
Some mailings also seem to promise that the recipients have won a large prize when, in fact, the prize is minimal, such as $1, and may require that if the winner does not make a purchase, he cannot use the claim form provided but must claim it in a different way, such as by sending a 3-by-5 card to a different address. Needless to say, Lone Star does not engage in this practice or use such statements in its promotional mailings.
Some sweepstakes companies send out documents which look like real negotiable checks. I believe that this is also done to mislead recipients into believing that they have already won. When they discover that the check cannot be cashed, they may conclude that all they have to do is mail in the response form and they will receive the real check which they can cash.
Lone Star does not use facsimile checks.
As many other businesses in all industries, Lone Star uses terms like ‘‘American’’ and ‘‘United States’’ in its promotional mailings. However, some sweepstakes companies go too far through the use of language or official symbols and use promotional mailings which suggest that it is being sent by or with the approval of the U.S. Government. This is wrong and misleading.
I know from my own experience that sweepstakes companies did not send me the product which was offered in their promotional mailing. I know this because either I or an employee filled out a form and paid for the item but never received it. Sweepstakes are a useful tool for selling products and a company using them should fulfill all orders. It is incumbent upon the companies in the sweepstakes business to fulfill all orders, provide refunds, and pay winners. In my opinion, this is something to which the Subcommittee should give close attention.
There is another way in which sweepstakes recipients and sweepstakes companies may be victimized when criminals obtain a promotional mailing and/or a response and convince the recipient that they must pay a payment to obtain the prize. This happened to Lone Star and some of its customers last year. We learned about it when a recipient contacted us and complained that she had paid the fee for a prize but never received it. When I spoke to her myself, I learned that she had received a telephone call from someone pretending to be associated with Lone Star who had told her that she had won the prize. Later she received another call telling her that before the prize money could be given to her, she had to send a check to pay for the taxes. She did but she never received the prize check. She didn’t receive it from Lone Star because she had not won. We immediately advised the postal inspectors who initiated an investigation. Subsequently, we received similar complaints which we also referred to the inspectors. I suspect that the people committing these crimes obtained copies of their responses sent in by the recipients perhaps from the leads Lone Star sold through list brokers. To avoid this problem, Lone Star initiated a process of removing information relating to the sweepstakes, such as the claim number, from the lead before it is sold. Prior to receiving these complaints, it had never occurred to us that this information could be used in this way.
This completes my prepared remarks, and I am now available to
answer any questions that you may have. Thank you very much.
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