1. Background and the OII

In April 2008, the Commission's Consumer Protection and Safety Division (CPSD) received an informal complaint from G-Five, LLC (G-Five), a billing aggregator, which reported that Respondents Contractors Strategies Group, Inc. (CSGI), A&M Communications (A&M), TNT Financial Services (TNT), and Limo Services, Inc. (Limo Services) had generated abnormally high volumes of toll-free number calling from their Customer-Owned Pay Telephone (COPT) lines.¹ The complaint alleged that, in 2007-2008, these Respondents may have fraudulently generated Dial-Around Compensation (DAC) from their twenty-four payphone lines.²

A payphone service provider (PSP) generates DAC of $0.494 for every successful call to a toll-free number, regardless of duration. Payment is collected from carriers, typically through a billing aggregator that processes and remits the payments to the owners of the COPTs. G-Five, the billing aggregator for CSGI, A&M, TNT, and Limo Services, decided to retain the undisbursed DAC in an escrow account until given instructions by the Commission as to its disposition.

CPSD investigated the questionable call activity, starting with an analysis of the 2007 call detail records for the twenty-four COPT lines registered to the four Respondents. Over 99% of the calls were to toll-free numbers, mostly unsuccessful or lasting less than 60 seconds. G-Five's owner, an experienced billing aggregator, noted that it was extremely unusual that none of the calls were to 1-800-CALLATT or 1-800-COLLECT, and that most of the toll-free numbers were called only once. Based on his experience, he concluded that these facts together indicated Automatic Dialing-Announcing Devices (ADAD) use.

Alterber Tekulsky Freeman (Freeman), owner of CSGI and a partner in A&M, admitted he connected ADADs to his companies' payphone lines, purportedly to advance a telemarketing business using a "loophole" within telephone regulation to gain DAC, find clients, and cover the cost of his equipment.³ Furthermore, Freeman said he helped the other Respondents obtain COPTs, installed the ADADs to their payphone lines, provided technical support as a liaison between the software and hardware equipment manufacturer, and loaded toll-free numbers provided by other Respondents into the switch.⁴ Freeman also recorded the alleged marketing messages played on the ADADs of these Respondents.⁵ The purported message was, "Hello. If you would like to reach thousands of potential customers each day or week just like this, please call Al Freeman for further information at 480-678-4444."⁶

The Respondents all confirmed that they intentionally connected ADADs to their payphone lines to dial toll-free numbers, did not comply with § 2871 et seq., and knew that DAC would be generated. All Respondents denied knowing that the attachment of ADADs to COPTs for long hours of dialing toll-free numbers with a pre-recorded message was illegal. Instead, they asserted they had no reason to know the activities were illegal and lacked any intent to deceive anyone.⁷

Following notice of a dispute with two carriers over the DAC, and G-Five's notice it would withhold payment of DAC pending a Commission investigation of the call activity, Freeman said he contacted the Federal Communications Commission (FCC) to determine whether the activity was a violation of the laws governing DAC.⁸ After learning that their use of the ADADs had been illegal, Freeman and the other Respondents disposed of their COPTs, ADADs, and related records.⁹

CPSD further investigated Respondents' activities with payphone lines in previous years and found that Freeman had also operated COPTs with ADADs between 2002 and 2005 through two other wholly-owned businesses, Calnev Communications (Calnev) and 1^st Capital Source Funding & Financial Services, Inc. (1^st Capital). Freeman said most of the generated DAC went to another individual, John Barrett, who "duped" him about the legality of the ADAD activities.¹⁰ On the other hand, Freeman admitted that he attached the ADADs to the lines and recorded the "marketing" messages for the ADADs. CPSD provided documentary evidence that during 2002 - 2005, $47,712.99 in DAC revenue was paid to Calnev and 1^st Capital by the predecessor company¹¹ to Freeman's current aggregator, G-Five.¹² Freeman cannot confirm how much DAC was distributed to Calnev and 1^st Capital, but has offered no contradictory evidence nor shown evidence that he transferred DAC funds to Barrett.

The results of CPSD's initial investigation are contained in a report (Staff Report) provided to the Commission and made part of the record of this proceeding.¹³ CPSD provided documentary evidence from G-Five that, as a result of unlawful use of ADADs, 546,167 calls made in 2007 from the twenty-four payphone lines registered solely or jointly to CSGI, Intella II, A&M, TNT, & Limo Services were made to toll-free numbers.¹⁴ Respondents did not contradict the call records, which did not cover the entire period in which the ADADs were in operation.

In addition, CPSD provided undisputed evidence that between 2002 and 2005, Freeman leased 204 payphone lines from AT&T¹⁵ through Calnev and 1^st Capital. CPSD provided documentary evidence from G-Five¹⁶ that these businesses collected DAC revenue generated by the lines from more than 550,000 calls in similar call patterns to those operated by Respondents in 2007.¹⁷ Other than Freeman's statements that he did not keep most of the DAC, he offered no evidence to contradict the call or payment records.

CPSD recommended that the Commission impose unspecified penalties on each Respondent, order full restitution of any DAC money received, and order the DAC held in escrow to be either returned to owners of the toll-free numbers or, if not administratively feasible, then to distribute 50% of the funds to the State of California General Fund and 50% to an unspecified consumer education fund. Furthermore, CPSD recommended that Respondents be ordered to cease and desist all payphone operations and be prohibited from any future payphone-related activity. All Respondents have ceased payphone operations.

In addition, CPSD commented on the failure of AT&T's internal controls to detect the suspicious calls that all originated in its service area and were routed through AT&T's switch. AT&T staff did not clearly explain why the patterns were not detected and CPSD asked the Commission to order AT&T to review its internal control structures to ensure they are able to detect and prevent fraud in this area.

Based on the evidence in the Staff Report, on February 4, 2010, the Commission issued an Order Instituting Investigation into the Operations of CSGI, Intella II, A&M, TNT, Limo Services, Calnev, 1st Capital, and their owners (OII).¹⁸ The Commission made a preliminary finding that the Respondents generated illegal revenue totaling over $156,000 through the unlawful connection of ADADs to their COPTs.

The OII set forth the claimed DAC revenue and call volume by Respondent, as follows:

TABLE A: DAC Revenue and Volume by Respondent¹⁹

Respondent(s)	Number of COPT lines	DAC Revenue ESCROW	DAC Revenue DISBURSED	Call Volume	Dates of Operation
1. CSGI 2. CSGI/Intella II 3. CSGI/Limo Services	2 lines 8 lines 2 lines	$ 67,815.83	$ 5,322.29	385,326	April - December 2007
CALNEV	200 lines		$ 47,274.51	553,847	2002 - 2005
1st Capital Source Funding	4 lines		$ 438.48		2002 - 2004
A&M Communications	7 lines	$ 24,829.92	$ 211.93	118,417	July - December 2007
TNT Financial Services	1 line	$ 4,545.79	$ 115.60	24,467	July - December 2007
Limo Services	4 lines	$ 6,002.10		18,057	July - December 2007
Total		$ 103,193.64	$ 53,362.81	1,100,114

The Commission determined that all of the Respondents attached ADADs to their payphone lines in order to continuously dial toll-free numbers for the purpose of collecting DAC.²⁰ The Commission found insufficient evidence in the record to support Freeman's claim that in 2007-2008, he was executing a business plan to promote a new telemarketing business in conjunction with the other Respondents. Instead, the Commission found "no legitimate purpose" for the call activity.²¹

Respondents were ordered to appear and show cause why the Commission should not impose penalties and other remedies for their unlawful use of ADADs, which CPSD characterized as a "fraudulent scheme" masterminded by Freeman.²²

¹ Order Instituting Investigation into the Operations of Contractors Strategies Group, Inc., Intella II, Inc., A&M Communications, TNT Financial Services, Limo Services, Inc., Calnev Communications, Inc., 1st Capital Source Funding & Financial Services, Inc., and their owners (OII) at 2-3.

² Id. at 3.

³ Id. at 4.

⁴ Id. at 5.

⁵ Ibid.

⁶ Staff Report at 21.

⁷ Ibid.

⁸ Staff Report, Appendix K (Attachment Letter to Freeman's response to Data Request 1.0).

⁹ Ibid.

¹⁰ Staff Report at 6.

¹¹ Private Payphones Provider Network (OII at 3).

¹² OII at 6.

¹³ Exh. CPSD-2.

¹⁴ Exh. CPSD-2 at 13 (fn. 38).

¹⁵ Formerly SBC Communications, Inc. which merged with AT&T in 2005.

¹⁶ G-Five provided computerized summary business records that its owner declared he acquired from Private Payphone Owners Network (PPON) when G-Five acquired that company in 2007.

¹⁷ Staff Report at 16, Appendix F (CPSD obtained call detail from AT&T for 24 of the 204 COPT lines which generated 87% of the total DAC revenue for Calnev and 1^st Capital).

¹⁸ Staff Report is attached to the OII.

¹⁹ Id. at 7.

²⁰ OII at 15-16.

²¹ Id. at 15.

²² Staff Report at 7-8.