Marketers Use Trickery to Evade No-Call Lists

Older Americans around the country are getting duped by a seemingly innocuous tactic that can expose them to hard-sell pitches from the insurance industry.

The technique is centered on a marketing tool called the lead card, and it became popular after the federal government created its Do Not Call Registry in 2003 to shield consumers from unwanted solicitors. Sent through the mail, the lead card invites the recipient to mail off an enclosed reply for free information about, say, estate planning.

But the cards fail to warn that by sending off replies, recipients are giving up their right to avoid telephone solicitations from the sender -- even if their phone numbers are on the Do Not Call list.

"It's a huge loophole," says Pam Dixon, executive director of the World Privacy Forum, a San Diego nonprofit researcher of privacy issues including commercial use of personal information.

The technique is prompting legal action from states across the country. Because the loophole itself violates no law in most states, prosecutors are focusing their cases on other lead-card deceptions. The cards often falsely imply an affiliation with the federal government or with advocacy groups such as AARP, for instance. Many of the cards also fail to mention that replies will be turned over to insurance salespeople.

When Naomi and Horace Williams got a postcard warning that estates of older Americans could be wiped out by taxes unless they moved quickly, they believed it came from AARP, the Washington-based lobbying group for older Americans, since it said that "AARP found" probate taxes were hurting seniors.

So the Williamses filled out a reply card that promised more information and mailed it to a post-office box in Washington, D.C. Soon after came a phone call from a man saying he wanted to drop by their North Carolina home to deliver the information they'd requested. It never occurred to the Williamses -- who had registered on the Federal Trade Commission's Do Not Call Registry -- that the caller was a marketer. They assumed he was affiliated with AARP, they say.

As it turned out, the actual sender of the card had been America's Recommended Mailers Inc., a company housed in a Lewisville, Texas, strip mall that provides leads to insurance agents nationwide.

Soon after they mailed the reply, a living-trust marketer, and then an insurance agent, showed up at the couple's Morganton, N.C., home, Mr. Williams said in an affidavit filed in state Superior Court in Raleigh. Mr. Williams, an 83-year-old retired factory worker, says the agent talked him into transferring much of the couple's $179,000 nest egg into annuities that barred them from tapping the bulk of their money, unless they paid high penalties, until Mr. Williams was nearly 90. The commission on such products is typically 9.5%.

The marketer and the insurance agent worked for American Family Prepaid Legal Corp., an Irvine, Calif., living-trust provider, and its related insurance marketing company, which filed an affidavit generally denying wrongdoing as well as an affidavit from the living-trust salesman denying the Williamses' claim.

The agent received his lead from the postcard reply, according to North Carolina court filings. Meanwhile, the Texas attorney general is suing America's Recommended Mailers for alleged misrepresentations in its pitches. The company disputes the allegation, saying it merely quoted AARP. Nonetheless, it says it is revising its cards. After hiring a lawyer and complaining, the Williamses obtained the return of their nest egg.

Since the FTC created the Do Not Call Registry four years ago, Americans have registered 145 million phone numbers on the list, theoretically shielding themselves from phone solicitations.

But that measure gave new purpose to a growing breed of marketers known as lead generators. "Overnight," says a Web site run by Kaleidico LLC, a Flat Rock, Mich., company that sells software to the lead industry, the Do Not Call Registry made obsolete traditional methods of "prospecting for business" such as "auto-dialing." As a result, Kaleidico says, the new postcard niche has emerged -- a "marketing medium" that is geared toward prompting consumers to "raise their hand to be called."

Some cards gush about sweepstakes prizes, and returns may be used by marketers in any number of industries. But state regulators say the most ubiquitous type of card is delivered to seniors on behalf of insurers. Often plastered with American flags, such cards may cite "changes in your Medicare benefits" or mention "new legislation" passed by Congress that will "affect you and your heirs" -- along with references to research by federal agencies or AARP on how to handle such changes.

The research is offered free to those who send back contact information. Then the companies, some owned by large insurers, sell the names and contact information they compile to insurance agents and other salespeople.

The postcards often don't identify the mailers, using return addresses with oblique names such as "Central Processing Center." And they often ask for the respondent's signature, considered by some insurers as further consent to be contacted. "You have that hand-signed card with their phone number on it, and you sell tons," says Gary Brown, a salesman in Minneapolis until April for American Family, which buys leads from America's Recommended Mailers.

The Do Not Call law allows companies to bypass the registry and call people on the list if they have "provided express agreement in writing" to receive calls. But Eileen Harrington, deputy director of the FTC's Bureau of Consumer Protection, says the commission's view is that "you cannot use ruses" to get consumers to provide that agreement. Such mailers could be considered deceptive and violate the law, she says. Although the FTC has not yet gone after lead-card companies, she says the agency has some "nonpublic matters pending."

Attorneys general in Illinois, Pennsylvania and Texas have taken legal actions against a total of seven lead generators, charging them with falsely suggesting endorsements by the government or AARP. Regulators in about 20 states have opened fraud investigations into lead generators, according to a court filing by the Texas attorney general's office in one of the cases.

State regulators say insurers are using the cards to peddle investments unsuitable for seniors, including so-called living trusts that may provide no benefit and annuities that come with steep surrender charges and lengthy payout deferrals.

A case in point is Jeanne Blom, an 81-year-old widow in Minneapolis. A retired office-building cleaner, Mrs. Blom years ago transferred the deed of her house, worth $135,000, to her son, placed his name on her checking account and made him the owner of her 1990 Buick LeSabre. The rest of her assets were valued at far less than $20,000, which under Minnesota law would allow her son to collect them without probate, according to Charles Roach, her attorney. In any case, the probate fee in her county is only $250.

Mrs. Blom, who is registered on the Do Not Call list, received a postcard offering free information on estate planning, and she sent it back. Soon, an American Family saleswoman named Deborah Kimball called and set up an appointment to discuss a legal plan. When Mrs. Blom explained the steps she'd already taken, Ms. Kimball insisted that "I needed more than that," recalls Mrs. Blom.

American Family "sounded like they knew what they were talking about," says Mrs. Blom. So she purchased a living trust -- designed to save her the costs of probate -- for $2,295, about a third of her cash savings.

Mrs. Blom's case was one of many that prompted Minnesota Attorney General Lori Swanson to file suit against American Family in March, accusing it of selling living trusts and annuities that are unsuitable for older adults with modest savings. Attorneys general in North Carolina and Pennsylvania have filed similar suits against American Family, which has 10 offices around the country.

American Family denied the attorney general's allegations but in July agreed to shut down in Minnesota. Mrs. Blom, who lives on a Social Security payment of $900 a month, has been unable to get her money back. Her lawyer, Charles Roach, says that American Family's headquarters, after initially telling him it would look into Mrs. Blom's request for a refund, hasn't been returning his calls.

Ms. Kimball didn't return several phone calls seeking comment. Jeffrey Norman, the chief executive of American Family, declined to discuss a specific case but said, "We've had thousands and thousands of clients and hardly any problems."

Four of the country's largest lead generators are clustered around Fort Worth, Texas, and Attorney General Greg Abbott has sued them all in an Austin state court, accusing them of false and misleading practices.

In another lead-generator case, the Illinois attorney general, Lisa Madigan, has sued Senior Benefit Services Inc. and American Investors Life Insurance Co., two Kansas-based units of London-based Aviva PLC, one of the world's largest insurers. The suit, brought in state court in Springfield, alleges that Senior Benefit mailed postcards offering free advice that resulted in sales pitches for American Investors products. The complaint says that 393 Illinois residents over age 65 who returned lead cards bought 512 annuities worth $29 million between 2002 and 2005, resulting in commissions of $1.5 million to $2.9 million. The annuities were largely unsuitable for older investors, the claim alleges, because they barred access to the money put into the annuities for years without stiff penalties.

An Aviva spokeswoman says that the company disputes the Illinois allegations.

Mary Menges, a 70-year-old retired nurse in Collinsville, Ill., had signed onto the federal Do Not Call list. But in 2004 she replied to a Senior Benefit postcard that offered estate-planning information because she believed the card came from the government, Mrs. Menges said in an interview. Senior Benefit postcards filed as exhibits in the case don't say they came from an insurance marketer. In fine print -- about half the size of the regular print on the postcards -- is a disclaimer: "Not affiliated with any government agencies."

After returning the card, Mrs. Menges got a phone call from a Senior Benefit telemarketer, followed by a visitor who told her he was paid by the "program" that sent the card, and presented a business card with the title "senior estate advisor."

"I didn't know this was an insurance agent at all," she says.

During their meeting, she recalls, he "asked me what I had in stocks and bonds" and convinced her to move her $170,000 IRA, invested in mutual funds, to an American Investors deferred annuity. She says she only realized later that she was limited to withdrawing 10% a year. Any withdrawals beyond that sum were subject to a penalty as high as 17% in some cases, the state complaint says. After Mrs. Menges, with her son's help, made several phone calls to the insurer, wrote a letter of complaint and was declined in writing twice, she complained to the state.

Informal mediation through the state failed, so the attorney general's office started an investigation. Shortly after that, the company returned her money.

Michael Vaughan, an attorney representing the Aviva units, says the company has seen "no evidence" that Mrs. Menges's claims represent a "broad-based issue."

AARP has also been upset with lead generators. In April 2006 it won a permanent injunction in U.S. District Court in Jacksonville, Fla., prohibiting a company owned by ChoicePoint Inc., a big Alpharetta, Ga., seller of personal data, from referring to AARP on its lead cards and from using a Washington, D.C., return address unless it had an office there. In a settlement, ChoicePoint also agreed to destroy lead cards violating the injunction and paid an undisclosed sum to AARP.

ChoicePoint internal emails used as evidence in the case showed it was mailing more than a million lead cards a year and charged insurers as much as $35,000 per order for the mass mailings, including one in 2003 alerting older adults to a "new" AARP study on probate taxes. The study was then actually 14 years old, was done before a change in federal probate laws and, according to AARP, no longer represented its views. In internal emails, ChoicePoint employees attributed the cards' success in generating responses to their "fear factor" and described response rates that "tumbled" when AARP's name was temporarily removed from mailings.

ChoicePoint's spokesman says the "business practice" described in the settlement began before ChoicePoint bought its lead-generator unit in 2003, and that ChoicePoint stopped using AARP references after last year's settlement.

AARP has a similar complaint pending against America's Recommended Mailers and American Family Prepaid in U.S. District Court in Durham, N.C. AARP alleges that America's Recommended Mailers uses cards that appear to come from AARP to generate leads sold to American Family and others. America's Recommended Mailers has denied the claim. American Family said in a court filing that it bought lead cards on "good faith" belief that the cards didn't violate laws.

North Carolina court filings against American Family say "deceptive" mailers enabled the company's agents to visit 2,000 North Carolina residents over age 65 in their homes in 2004 and 2005. The state says they bought $4.2 million in living trusts and millions of dollars in equity-indexed annuities that were unnecessary and unsuitable.

Write to Jennifer Levitz at jennifer.levitz@wsj.com and Kelly Greene at kelly.greene@wsj.com