Comment Before the Federal Communications Commission In the Matter of Paging Licensing Rules

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Before the
FEDERAL COMMUNICATIONS COMMISSION
In the Matter of Revision of Part 22 and Part 90 of the Commission's
Rules to
Facilitate Future Development of Paging Systems and
Implementation of Section 309(j) of the Communications Act --
Competitive Bidding
[WT Docket No. 96-18; PP Docket No. 93-253]
Comment of the
FEDERAL TRADE COMMISSION
March 18, 1996*
* By direction of the Commission. Inquiries regarding this Comment should be directed to Bureau of Consumer
Protection staff attorneys Heather Hippsley, (202) 326-3285, or Eric J. Bash, (202) 326-2892.
INTRODUCTION AND SUMMARY
On February 9, 1996, the Federal Communications Commission ("FCC") published a Notice of Proposed Rule
Making ("NPRM") soliciting comments on proposed revisions to its paging licensing rules. Generally, the NPRM
proposes that the FCC use competitive bidding on a geographic basis to license paging channels. The FCC states
that its proposed rules are intended to promote growth and competition in the paging industry by assigning channels
to those applicants who will expedite service to the public.(1)
The Federal Trade Commission ("Commission" or "FTC") supports the FCC's efforts and believes that the proposed
paging licensing procedures will help combat the plague of fraud that has been associated with the licensing of
paging and other wireless technologies in the past.(2) The Commission has extensive experience investigating and
litigating cases involving telecommunications investment fraud, including some very recent cases involving paging
licenses. By virtue of this experience, the Commission has learned a great deal about the mechanisms through which
scam artists have used FCC licensing procedures to perpetrate fraud on consumers. This comment is intended to
assist the FCC by addressing several of the proposed rule changes with a view toward reducing the incidence of
licensing fraud.(3) The Commission, from this standpoint, supports the FCC's proposal for geographic licensing
through competitive bidding, and offers ideas for improving the application and auction procedures to deter consumer
fraud associated with the FCC's issuance of paging licenses.
1. BACKGROUND: TELEMARKETING FRAUD USING FCC LICENSES
Fraudulent investment schemes that are centered on acquiring FCC licenses for wireless technologies have been the
most prevalent telemarketing investment scams of the 1990s, costing consumers hundreds of millions of dollars.(4)
Over a quarter of the total dollar losses reported by consumers to the NAAG/FTC Telemarketing Complaint System
database between March and October 1995 involved FCC license-related fraud.(5)

Over the past decade, the Commission has filed twenty-one law enforcement actions against telemarketers engaged
in FCC license-related investment fraud. These have involved myriad wireless technologies, such as cellular
telephones,(6) wireless cable,(7) specialized mobile radio ("SMR"),(8) and interactive video and data services
("IVDS").(9) The Securities and Exchange Commission ("SEC") has also filed approximately twenty law enforcement
actions against telemarketers engaged in FCC license-related fraud.(10) The combined sales of the companies
targeted in the approximately forty actions filed by the FTC and the SEC approach $400,000,000. Six of the FTC's
most recent actions, filed in January 1996 as part of "Project Roadblock," a law enforcement effort of the FTC and
twenty-one states targeting hi-tech frauds, involved telemarketers who sold application preparation and acquisition
services primarily for paging licenses.(11) The FCC assisted this effort by providing the FTC with consumer
complaints and expertise on paging licensing and other FCC procedures.
Telecommunications investment frauds associated with FCC licenses are of two basic types: "license application
mills" and "build-out" schemes. License application mills sell application preparation services for acquisition of FCC
wireless licenses, and typically charge a fee of several thousand dollars per license. Promoters of build-out schemes
usually sell interests in limited liability companies or general partnerships which supposedly will acquire FCC wireless
licenses and build and operate telecommunications systems that use these licenses. These promoters also charge a
fee of several thousand dollars per interest.
Both schemes are carried out through telemarketing sales calls placed to inexperienced, unsophisticated consumers
located throughout the United States. Scam artists often identify consumer targets by purchasing FCC databases of
wireless licensees, which include consumers who acquired licenses through earlier scams.(12)
The typical application mill sales "pitch" is that FCC wireless licenses are investment products worth many times the
telemarketer's fee of thousands of dollars, because customers will be able to lease or sell their licenses to tele-
communications systems operators without themselves having to build and operate a system that would use the
license. The typical build-out scheme "pitch" is that an investment interest in the telecommunications business
operated by the limited liability or general partnership will be worth many times the telemarketer's fee, due to the sure
success of the business. Although details of the schemes and technology may vary, the end result is the same:
consumers are deceived about the profitability and risk of FCC license acquisitions and lose most, if not all, of their
investments.
2. AWARDING PAGING LICENSES THROUGH COMPETITIVE BIDDING LIKELY WILL
REDUCE FRAUD ASSOCIATED WITH APPLICATION MILLS
Our past experience shows that fraudulent application mill schemes thrive where licenses are readily available, in
part because they are not in demand by legitimate telecommunications companies. In such situations, telemarketers,
as part of their pitch, can virtually guarantee that consumers will receive licenses. The consumer, having obtained a
license as promised, is not likely to complain for quite some time, given the telemarketer's assurance that the license
is a valuable passive investment. Thus, telemarketers can profit handsomely while avoiding early and easy detection.
In the Commission's "Project Roadblock" cases, the telemarketer defendants operated application mills for paging
licenses. These licenses included mostly non-exclusive 929 MHz and exclusive 931 MHz channels, as well as some
exclusive 454 MHz channels.(13) The telemarketers sold their services for roughly $1,500 to $12,000 per application,
and, in five of these cases alone, took in well over $13,000,000.
The FCC's paging license databases suggest the magnitude of telemarketers' abuses as well. As of February 1996,
the FCC's database of licensees for the five 929 MHz non-exclusive frequencies identifies over 3,600 individual
consumers -- instead of paging or other businesses -- as licensees.(14) As of March 5, 1996, the FCC's database of
pending applications for 931 MHz licenses lists over 2,700 individual consumers as applicants.(15) Many of these
pending applications and licenses listed under individual consumer names were likely applied for and/or obtained
through application mills.(16) In short, the application mills have caused the FCC to process and grant license

applications for thousands of consumers who almost certainly have neither the intention nor the financial wherewithal
to provide telecommunications service,(17) rather than for bona fide businesses that need and use paging channels.
The database of pending applications for 931 MHz licenses alone suggests the pernicious effect these frauds have
had on the integrity of the FCC's current licensing processes. The database identifies fully 72% of the total number of
pending applicants as individual consumers.(18) These consumers, mere grist for the application mills, may, in large
part, account for the FCC's application backlogs in the 931 MHz bands, occasioned by competing applications for the
same service areas.(19)
The FCC's geographic licensing and competitive bidding proposal likely will inhibit paging application mill fraud. The
proposed change to geographic licensing makes considerably fewer paging licenses available, reducing the ready
supply of licenses on which the fraudulent telemarketers thrive. An application mill is unlikely to be able to
"guarantee" licenses to its customers, eliminating a major selling point of the investment opportunity. Moreover,
competitive pressures under the new rules make obtaining these licenses more costly for fraudulent telemarketers.
For example, the FCC's proposal to require bidders to post upfront payments ( 104-105) and the winning bidders to
post a 20% down payment ( 106), will impose costs that fraudulent telemarketers may not wish to assume. In
addition, competitive bidding will help prevent telemarketers from deriving huge profits based on the mark-up
between the FCC's modest application fees and the telemarketers' required consumer "investment fees."
The likely deterrent effect of competitive bidding on application mill fraud (along with an interim freeze on new
applications) is evidenced by the Commission's past experience with FCC licensing fraud.(20) As the application mills
have moved from one wireless technology to the next, they have generally moved away from technologies licensed
by competitive bidding, and toward those licensed on a first-come, first-served basis.(21)
Non-Exclusive Licenses
The FCC expressly seeks comment on whether to convert "shared" paging channels to exclusive use, to issue a
limited number of licenses per shared channel, or to retain the "status quo."(22) The Commission offers no comment
on these alternatives from the standpoint of general telecommunications policy. However, based on its extensive law
enforcement in the area of telecommunications investment fraud, the Commission believes that either the alternative
to eliminate shared licenses altogether, or to limit the number of licenses per shared channel, would have a major
impact on reducing certain frauds. In reviewing the FCC's database of 929 MHz shared licenseholders, 92% are
individual consumers, many of whom would appear to be customers of application mills.(23) Fraudulent telemarketers
easily abuse the current process that licenses shared channels without limitation.
In the Commission's recent "Project Roadblock" cases, five of the seven telemarketers hawked 929 MHz shared
licenses for several thousand dollars per license. Telemarketers guaranteed paging licenses for such major markets
as New York, and were able to deliver on their promises in the form of a 929 MHz shared channel. Because
telemarketers delivered, they were able to "reload" many unwitting customers for more money to purchase additional
major market "shared" licenses. In short, the "shared" licensing process provided an opportunity for scam artists to
make money with little risk of immediate detection. Consumers, on the other hand, are left with little more than a
piece of paper as they come to the realization that their shared licenses cannot be leased or sold as promised, and
are virtually worthless for investment purposes.(24) Given the application mills' misuse of the current licensing
process for "shared" channels, the Commission strongly endorses changing the status quo to at least limit "shared"
channel licensing.
3. THE COMPETITIVE BIDDING RULES CAN BE IMPROVED TO DETECT AND DETER
UNQUALIFIED APPLICANTS WHO MAY BE VICTIMS OF FRAUD
While the FCC's proposed competitive bidding process likely will deter application mill fraud, it may not eliminate
other types of fraud centered on FCC licenses, such as build-out schemes. The Commission has filed law
enforcement actions against two telemarketers for alleged deception in connection with IVDS licenses, which were

recently awarded through competitive bidding.(25) In both of these cases, telemarketers sold consumers interests in
partnerships that supposedly would operate a telecommunications systems using IVDS licenses acquired through
auction. In one of the cases, the partnership itself was the bidder, but the telemarketer pocketed the majority of the
money it raised, and rendered the partnership financially incapable of building and operating a telecommunications
system that would generate the kind of financial returns promised.(26) In the other case, through a series of
transactions, the auction winner (an affiliate of the telemarketer) ultimately will transfer the IVDS license to a
partnership of consumer investors, but for over fifteen times the amount of the winning bid.(27)
The Commission supports the FCC's goal to structure competitive bidding rules "to ensure that bidders and licensees
are qualified and will be able to construct systems quickly and offer service to the public." ( 95) While the Commission
offers no view on the proposed rules from the standpoint of telecommunications policy, the Commission believes that
certain proposed bidding procedures will help deter fraud. These measures include the proposed rules that require a
bidder to disclose its business classification ( 100), to post upfront payments ( 104-05), and to post a down payment
in short order ( 106). The Commission believes that the proposed transfer disclosure rules that would carefully
scrutinize a transfer of a license by an auction winner who had not yet begun commercial service ( 112) also would
help deter fraud.(28) These disclosures to the FCC would inhibit fraudulent telemarketers from obtaining a license at
auction, and then "flipping" it to coalitions of unqualified and unsuspecting consumers for a multiple of its auction
value.
The Commission believes, however, that the proposed bidding procedures can be strengthened further "to ensure
that auction winners have the necessary financial capabilities to complete payment for the license and to pay for the
costs of constructing a system" ( 106), and thereby prevent fraudulent abuse of the auction process. For example, the
NPRM seeks comment on whether the FCC should require further ownership disclosures. ( 100) The Commission
suggests that applicants should be required to disclose to the FCC, prior to auction, the identities of the real parties in
interest (e.g., partners or shareholders) and financial information about the proposed licensees (e.g., the limited
liability company or general partnership). In addition, the Commission suggests that applicants should certify, prior to
auction, that the licensee will comply with any FCC transfer restrictions and performance requirements. ( 111-113)
Such pre-auction application requirements would assist the FCC in rooting out unqualified applicants and the
Commission in exposing fraudulent actors.
The Commission further suggests that the application and competitive bidding procedures require that bidding agents
and application preparers disclose material information about paging license regulations to the licensee and real
parties in interest, e.g., partners or shareholders. Such requirements would enhance the FCC's efforts to ensure that
only qualified applicants obtain paging licenses. A fundamental problem in FCC license related fraud cases has been
that potential consumer licensees do not have complete relevant information about the FCC licenses when they make
an investment decision. Consumers have stated that if they had known more about the FCC regulations governing
paging licenses, they would have realized that the licenses were not a proper "investment" vehicle and would not
have been taken in by fraudulent marketing schemes.(29) The Commission therefore suggests the inclusion of a
requirement that application preparers or bidding agents disclose material information, such as auction rules including
payment schedules, transfer restrictions, and performance requirements, to their customers or clients -- the potential
licensee.
4. CONCLUSION
The Commission would welcome the opportunity to have its staff meet with appropriate FCC personnel to discuss the
issues raised in this comment.(30)
1. NPRM, at 1.
2. The Acting Chief of the FCC's Wireless Telecommunications Bureau has stated that stopping "these investment
scams will be a top priority for the Wireless Telecommunications Bureau." Michele Farquhar, Remarks at Press
Conference (Jan. 30, 1996).

3. This comment does not purport to address the merits of the current or proposed rules from a legitimate paging
industry standpoint (e.g., appropriate service area size, treatment of incumbents, coverage requirements, etc.), but
rather addresses only the implications of the NPRM with respect to allowing or deterring consumer fraud.
4. See infra at 3.
5. The National Association of Attorneys General ("NAAG")/FTC Telemarketing Complaint System ("TCS") is a
nationwide electronic consumer complaint system maintained by the FTC in Washington, D.C. Close to 100 law
enforcement agencies use this database.
6. FTC v. American Nat'l Cellular Corp., No. 85-7375-WJR (PX) (C.D. Cal.); FTC v. The Cellular Corp., No. C-85-
8231-WHO (N.D. Cal.); FTC v. Continental Communications Corp., No. 88-6876-CIV-ZLOCH (S.D. Fla.).
7. FTC v. Applied Telemedia Eng'g & Mgmt. Inc., No. 91-0635-CIV-UNGARO-BENAGES (S.D. Fla.); FTC v.
American Microtel, No. CV-S-92-178-LDG(RJJ) (D. Nev.); FTC v. Metro Communications Group, No. 920011-B(CM)
(S.D. Cal.); FTC v. Spectrum Resources Group Ltd. & Mass Media I Ltd., No. CV-S-93-00662-HDM (RLH) (D. Nev.).
8. FTC v. Digital Communications Inc., No. 93-6648-JGD (C.D. Cal.); FTC v. Metropolitan Communications Corp.,
No. 94-Civ-0142 (JFK) (S.D.N.Y.); FTC v. Network Communications Ltd., No. 96-CIV-0567 (SHS) (S.D.N.Y.).
9. FTC v. Chase McNulty Group Inc., No. 95-524-CIV-T-25E (M.D. Fla.); FTC v. Digital Interactive Assocs. Inc., No.
95-Z-754 (D. Colo.).
10. See SEC, Litigation Release entitled "Telecommunications Technology Securities Fraud" (Jan. 25, 1996). State
regulators have also been active in bringing law enforcement actions to deter these frauds.
11. FTC v. Alliance Communication Inc., No. 96-CIV-0568 (DC) (S.D.N.Y.) (hereafter, "Alliance"); FTC v. Bell
Connections Inc., No. 96-0455 KMW (SHx) (C.D. Cal.) (hereafter, "Bell"); FTC v. Micom Corp., No. 96-CIV-0472 (SS)
(S.D.N.Y.) (hereafter, "Micom"); FTC v. North East Telecommunications Ltd., No. 96-6081-CIV-Gonzalez (S.D. Fla.)
(hereafter, "North East"); FTC v. On Line Communications Inc., No. CV-S-96-00055-LDG (RLH) (hereafter, "On
Line"); FTC v. USA Channel Systems Inc., No. 96-0454 HLH (CTx) (C.D. Cal.) (hereafter, "USA").
In addition to cellular telephone, wireless cable, SMR, IVDS, and paging cases, the FTC has also filed cases against
"brokers" that purport to secure leases or sales of FCC licenses for consumer licensees, FTC v. Falcon Crest
Communications Inc., No. CV 95-4881 (ADS) (E.D.N.Y.), and has filed cases against "recovery rooms" that purport to
recover monies lost by consumers to application mills or build-out schemes. FTC v. Meridian Capital Mgmt., No. CV-
S-96-63-PMP-(RLH) (D. Nev.); FTC v. United Consumer Servs. Inc., No. 1:94-CV-3164-CAM (N.D. Ga.).
12. For example, in Bell, one of the individual defendants testified during his deposition that the corporate defendant
acquired its customer "lead" list by purchasing the names of applicants or licensees for other FCC licenses from one
of the FCC's contractors. See Deposition of Donald Dayer (Jan. 31, 1996). In addition, in Micom, a salesperson has
stated in a sworn declaration that "every lead furnished to me was taken from the FCC data base...." See Declaration
of David Bozic (filed Mar. 1, 1996). See also infra at 6-7 (discussion of FCC databases).
13. See Complaints filed in Alliance (selling services for mostly 929 MHz licenses); Bell (mostly 454, 929 & 931 MHz
licenses); Micom (800, 929 & 931 MHz licenses); North East (mostly 929 MHz licenses); On Line (929 MHz licenses);
USA (931 MHz licenses).
14. In arriving at this figure, licensees listed under a personal name, rather than a business name, such as a
corporation, partnership, or hospital, were considered to be "individual consumers."

15. "Pending applicants" includes applications for new channels only and excludes modification applications by
incumbents to expand on existing channels.
16. The Commission is aware that some "individual consumer" licensees may have acquired licenses for legitimate
purposes, and are not the victims of scams. However, a recent search of the FCC databases revealed the names of
literally hundreds of consumers who invested with the "Project Roadblock" defendants, often purchasing two or more
licenses. This is not surprising given that these defendants have used the databases as "lead sheets." See supra
note 12. These facts lead the Commission to conclude that many, if not most, of the "individual consumers" listed are
indeed scam victims.
17. See, e.g., Micom, Exhibits in Support of TRO (Jan. 24, 1996).
18. There are 3,856 pending applications for 931 MHz licenses; 2,784 of these are individual consumers.
19. See, e.g., in Bell, Micom, North East, On Line, and USA, Declaration of David Furth, Attachment 1 (declaration
signed Jan. 19, 1996) (including Petition of MetroCall Inc. to deny application of application mill customer for paging
channel).
20. Clearly, the interim freeze against accepting new applications also has a strong deterrent effect on application mill
fraud. For example, during the FCC freeze against accepting new SMR applications, a Micom salesperson told an
undercover FTC investigator that she could not invest in SMR licenses because of the freeze, and encouraged her to
invest in paging licenses. After the FCC lifted the freeze, Micom sold SMR services again.
21. Indeed, some of the "Project Roadblock" defendants who offered paging licenses were previously connected with
SMR application mills. See, e.g., in Micom, Exhibits in Support of TRO (Jan. 24, 1996); in USA, Memorandum of
Points & Authorities in Support of TRO (Jan. 24, 1996).
22. See NPRM, at 31, 32. The NPRM expressly excludes 929 MHz shared channels from the analysis for 152/158,
462 and 465 MHz channels. The NPRM does not expressly include the 929 MHz shared channels in its proposal to
implement geographic licensing for 931 and 929 MHz paging channels. ( 24, 25) The text of this comment treats 929
MHz shared channels as if they were included in the NPRM discussion of lower band private carrier paging shared
channels.
23. There are 4,003 licenseholders listed in the database for all five 929 MHz shared channels; 3,687 are individual
consumers. The Commission is aware that some individual consumers may not have purchased through application
mills. See supra note 16.
24. These consumers are also victimized by license "brokers" who claim to procure for consumer-licensees leases or
purchases for their licenses from system operators. See, e.g., FTC v. Falcon Crest Communications Inc., CV 95-4881
(ADS) (E.D.N.Y.).
25. See Chase McNulty Group, supra note 9; Digital Interactive Assocs., supra note 9.
26. Chase McNulty Group, supra note 9.
27. Digital Interactive Assocs. Inc., supra note 9.
28. Restrictions on the purchase and subsequent resale of licenses, while deterring licensing fraud, can be costly if
they impede the efficient reallocation of scarce resources to their highest-valued use. Transfer disclosure rules are
preferable to transfer prohibitions, particularly in an industry in which the best use of assets may change as
technologies develop. See, e.g., Comment of the Staff of the Bureau of Economics and the San Francisco Regional

Office of the Federal Trade Commission In The Matter of Competition, Rate Deregulation and the MM Docket No. 89-
600 Commission's Policies Relating to the Provision of Cable Television Service, April 20, 1990.
29. See, e.g., Letter to FTC from Patricia Rand (Feb. 24, 1996) ("I do wish the FCC had issued a warning when these
licenses were released ... that these licenses were no good to the little guy and not to be taken in by marketing
schemes.... [The FCC "consumer alert" circulated after she made her investment] was issued much too late."); Letter
to FTC from Kenneth F. Trofatter (Feb. 13, 1996).
30. The Commission would like to assist the Wireless Telecommunications Bureau in protecting "the integrity of the
Commission's [FCC's] processes," and ensuring that "auctions provide a fast, fair, and efficient way to [award]
licenses ... to those who value them most." Michele Farquhar, Remarks at Press Conference (Jan. 30, 1996).