Dear Legal Line,

I’ve been reading a lot from you about prepaid scams and fraud in recent editions. Has anyone ever gotten pinched for scamming those of us in the prepaid business, or do they always get away? Most of these guys stay off the radar in order to avoid these kinds of problems. I have been in prepaid for seven years now and have yet to hear about a case that someone has really gotten nailed as a crime for what they did.

Ordinary Telecom Joe

Dear Joe,

I can’t blame you for having a Doubting Thomas attitude after 7 years in prepaid, however, I believe that state prosecutors and the courts are catching on to the “old tricks” of the prepaid industry. Case-in-point, a little matter that just got denied across the board on appeal in the State of California — People v. Tudor, (cite at 2003 WL 1889695 (Cal. App. 6th Dist.) for you legal eagles). It is an appeal of a criminal conviction from a Santa Clara Superior Court (Case # B9841872) for conspiracy to commit grand theft and 11 counts of grand theft on the theory that the defendant intended to obtain telephone service without paying for it and intended to sell debit cards without providing underlying service. Does this sound familiar in the industry?

The facts of the case were pretty clear: defendant (along with other defendants) formed a limited liability company “Global Software Group, LLC” to sell prepaid telephone debit cards. Although they were really a prepaid calling card provider, they obtained initial carrier services under the guise that they were purely a software company. This way they avoided carrier deposits and other requisites/costs that most providers bear. They also misrepresented that they would have only modest usage levels because they were a “software” company and that locked in favorable rates. Thereafter, they sold thousands of debit cards with rates well below carrier costs to the public — like twenty cents per minute below carrier cost. The Global cards sold to the consumers initially worked, but not surprisingly, stopped working when the carriers cut off service for nonpayment by Global. The total loss from the conspiracy was found to be more than $1 million USD.

Prior to the trial, two of the other defendants in the case plead guilty to the conspiracy charge and several counts of grand theft. At trial, the state presented its case along with testimony against Tudor from these two former co-defendants. The state’s case also included expert testimony against the defendant from a witness, a former partner of Tudor, who was qualified as an expert because he had been a member of a committee that set standards for the prepaid telephone card industry between 1995-96, had worked in the telecom industry since 1993, and was familiar with the telephone card industry. In the end, the jury returned a guilty verdict against Tudor on conspiracy and the 11 counts of grand theft. As entitled, Tudor appealed based on two grounds (1) that the prosecution engaged in several acts of misconduct, and (2) that the trial court abused its discretion by allowing the expert testimony.

This past April 17th 2003, the 6th District Court of Appeals rendered its ruling which denied the contention that there was misconduct by the prosecution, and that the judgment of the trial court regarding expert testimony was correct. In both appeals, the court found that the defendant’s claims just didn’t pass legal muster. While Tudor still may be appealed further, the District Court of Appeals cited a solid legal foundation in its rationale. Overall, this is a good sign for the potential prosecution of similar prepaid calling card criminal cases. It means that not only did the prosecutors in Santa Clara County understand the issues related to prepaid, fraud and theft, they also knew where experts could be utilized in such cases. It is also encouraging to see the Court of Appeals reinforcing convictions such as these. In general, convictions upheld at the appellate level are good measures of how cases may be prosecuted or defended in the future. If you are really interested Joe, I suggest that you keep an occasional eye on criminal case appeals in the 11th Federal Circuit, the 1st Circuit, the 7th Circuit, and the 9th Circuit through www.findlaw.com. It is a free service and has a decent search engine for cases. I suggest these specific jurisdictions because they may be important to prepaid criminal cases due to some recent verdicts and appeals — or so a little birdie told me. So, keep an eye out for them.

Good Luck and Success in the Industry.

•• Ed Maldonado is a principal of Maldonado & Glenn, a telecom legal firm. He can be reached at info@4counsel.net. Send all of your Legal Line questions to legalline@prepaidpress.com.