Dan Perrault, enticed by the promise of a free laptop computer, in February paid $300 for a dozen different products, including phone service from Vonage Holdings Corp. and monthly shipments of wine.
"I'm still using Vonage, and the wine isn't bad," says the 38-year-old Wisconsin physician. Trouble is, he has yet to receive the $1,100 computer. Mr. Perrault has repeatedly faxed his receipts to the promoter, Consumer Promotion Center, and complained to the Better Business Bureau. "At this point I've pretty much given up."
Consumer Promotion Center is part of ValueClick Inc., an online-advertising company with a highflying stock but some practices that are coming into a regulatory spotlight.
Companies that corral customer "leads" for clients through the use of aggressive tactics are being scrutinized by the Federal Trade Commission, the agency charged with enforcing truth-in-advertising laws. The FTC won't comment, but several people with knowledge of the situation say the agency is investigating following complaints from consumers and has been in contact with lead-generation companies, email marketers and advertisers.
If the FTC forces a change, a business that represents a third of ValueClick's revenue and has been a source of financial strength recently could be squeezed, according to Jordan Rohan, an analyst at RBC Capital Markets. Late last month, he predicted government scrutiny of the so-called incentivized lead-generation industry and recommended ValueClick investors sell their shares.
At the same time, ValueClick's shares have been pushed up by an M&A frenzy in its industry. Big Internet companies are snapping up online-advertising businesses in a wave of takeovers, including Microsoft Corp.'s deal last week to buy aQuantive Inc. for $6 billion. The prospects of further deals has caused the price of ValueClick stock to rocket, even after it confirmed Friday that it is the subject of an FTC probe.
"Specifically, the FTC is investigating certain ValueClick Web sites which promise consumers a free gift of substantial value, and the manner in which the company drives traffic to such Web sites, in particular through e-mail," the company said in a regulatory filing. ValueClick said that prior to receiving the May 16 letter, it wasn't aware of any pending or planned FTC investigation related to the company's lead-generation activities.
"The company continues to believe that it is compliant with all current state and federal regulations pertaining to its lead generation activities, and intends to fully cooperate with the FTC in connection with this inquiry," ValueClick said.
ValueClick fell as low as $26.06 in the week following the company's May 1 quarterly earnings report and a conference call where questions about its lead-generation business overshadowed better-than-expected results.
But the stock is now at a 52-week high after speculation that it could be an acquisition target, despite warnings from some analysts that the FTC cloud could reduce its takeover appeal. The stock surged 7.6% Friday, then logged another 14% gain on Monday and climbed 2% yesterday to close at $35 in 4 p.m. Nasdaq Stock Market trading.
ValueClick's business could be hurt if government scrutiny of the industry forces changes or scares away advertising clients and publishers who distribute its ads. ValueClick is paid by clients only for customer leads it produces. Moreover, ValueClick shareholders could be harmed if questions turn off potential acquirers.
In addition to the Microsoft-aQuantive deal, Google Inc. grabbed DoubleClick Inc., and WPP Group PLC announced plans to acquire 24/7 Real Media Inc. ValueClick, which has technology for showing online ads and offers services to both advertisers and Web publishers, has been considered a potential takeover target.
The FTC appears to be concerned primarily with disclosures that promoters provide on Web sites and in emails to consumers.
"If you make a representation that something is free, but a person has to spend hundreds of dollars" to get it and that requirement hasn't been disclosed adequately, "that's standard, or basic, advertising law that that claim may be deceptive," said Lois Greisman, associate director of the FTC's division of marketing practices.
ValueClick has said its disclosures comply with all federal and state guidelines and industry best practices. Representatives who responded to complaints to the Better Business Bureau have argued consumers were told upfront that they had to respond to a certain number of offers -- and, in some cases, refer a friend who also responds to offers -- to collect their free prizes, which can run the gamut from diamond-encrusted pink cellphones to trips to Las Vegas.
Gary Almond, vice president of the Los Angeles Better Business Bureau, contends that terms of Consumer Promotion Center's offers aren't properly disclosed. "This is not free. It's conditional, and the conditions aren't fully disclosed," he says. "I think it's misleading."
Consumers who were wooed by ValueClick promotions, through emails and online ads, were required to visit multiple Web pages where they chose among sets of offers and steadily wracked up bills. In the final step, Mr. Perrault said, his only alternative to joining Vonage and the wine club was to apply for a car loan -- suggesting a car purchase was necessary. He said he was also asked to fill out multiple surveys that asked for detailed information about his interests, income and family.
"These tactics... prey on users who are confused or naive or just a little too trusting," says Ben Edelman, a lawyer and expert on the online-advertising business.
Last year, ValueClick settled a trademark lawsuit filed by Wal-Mart Stores Inc. over ads promising free $500 Wal-Mart shopping cards. Though the settlement terms weren't disclosed, court records show ValueClick agreed to cease using Wal-Mart's name in its advertising. Wal-Mart declined to comment.
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