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Monday, February 27, 2012

U.S. v. Saferstein, 10-4092 (3d Cir, 2012)

From 1997 until 2004, Saferstein was President, Chief Executive Officer, and majority owner of GoInternet, a telemarketing company based in Philadelphia. Beginning in 1997, GoInternet's telemarketers cold-called businesses around the country in an attempt to sell them an internet services package, including a web page, dial-up web access, and an email account. GoInternet began charging each business that agreed to receive a “welcome packet” $29.95 per month for these services, a fee which was added to its telephone bill. By the end of 2003, more than 350,000 businesses were “customers” of GoInternet, yielding annual gross revenue in excess of $49 million.

GoInternet's implementation of this business model had several fraudulent aspects. First, the telemarketers frequently failed to disclose the full terms of the agreement, including the fact that consenting to receive a welcome packet would result in the $29.95 monthly charge unless the business called GoInternet within fifteen days to cancel services. Second, the welcome packet looked like unsolicited junk mail, so that it was often discarded unopened. Even if a customer did open and read the welcome packet, disclosures related to billing were hidden, so that most customers remained unaware that they were required to cancel services in order to avoid being charged. Third, because the charges appeared only within telephone bills, many customers did not notice the GoInternet charges. Fourth, GoInternet lacked the personnel to handle incoming calls from customers, making it extremely difficult for customers who attempted to cancel to do so successfully.

In addition to these fraudulent practices, the web pages provided to GoInternet customers were not accurate or useful to potential customers. The websites were generic, filled with mistakes, and often appeared at web addresses that were impossible to locate using major search engines.

The Government has estimated the losses to customers associated with the scheme to be approximately $74 million.

Saferstein and GoInternet were sued by the FTC and, by agreement, were ordered to inform their "customers" that they were being billed.  Saferstein apparently prepared mailings but, before they were sent, had them destroyed.  When the FTC demanded he be held in contempt, Saferstein convinced a co-executive to present perjurious testimony that GoInternet's services were used by a significant fraction of its customers.

Ultimately, Saferstein was charged with failing to report more than $1.8M in personal income, and failing to pay more than $2.8M in payroll taxes.  He was also charged with sixteen counts of mail and wire fraud, conspiracy to commit perjury; four counts of submitting false tax returns, and six counts of failure to pay over payroll taxes. He pleaded guilty to mail fraud, wire fraud, and submitting false tax returns, and waived his rights to appeal.

Prior to sentencing, the trial judge indicated on the record that Saferstein would be permitted to raise constitutional issues on appeal.  The plain language of the plea agreement, however, unambiguously indicated that Saferstein would only be permitted to raise "constitutional claims that the relevant case law holds cannot be waived.”  Saferstein appealed, raising a constitutional claim that has not heretofore been deemed to be one that cannot be waived, and relied on the trial judge's explanation of his plea agreement to void the provision that would have barred his appeal.

The Third Circuit noted that plea agreements are considered under contract law.  However, the Court noted, the plea colloquy has no analogue in contract law.  Given that, and the Court's recognition that plea agreements must be construed to protect the defendant as the weaker bargaining party, it held that a statement made by the sentencing court during the colloquy can create ambiguity where none exists in the plain text of the plea agreement.  This ambiguity is to be resolved in favor of the defendant and, as such, Saferstein was permitted to raise his issue.

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