Three men will be sentenced next month for their part in a nationwide magazine subscription fraud scheme.
Dennis James Ward, Michael O’Malley McKee and Thomas Albert Cavanaugh IV each pleaded guilty Nov. 12 to one criminal count of conspiracy to commit mail fraud in U.S. District Court in Phoenix.
The trio sold subscription renewals worth $236,748, remitting $51,089 to publishers to pay the renewal subscription rate.
To advance this “scheme and artifice to defraud,” Ward and McKee submitted bogus sample mailing pieces to list managers to obtain lists, and Cavanaugh stole hundreds of thousands of names from a major subscription fulfillment firm, according to postal inspectors and court documents. The lists were used to solicit renewal subscriptions from current magazine subscribers, the papers said.
“It’s a small victory,” said Alan Zamchick, list director for Hachette Filipacchi Media U.S. Inc. “It’s nice to see, but my feeling is that there are other fish out there and hopefully they will be found.”
Ward and McKee have agreed to pay criminal fines of $185,685 each. Cavanaugh was fined $30,686. Sentencing is scheduled for Feb. 3 in Phoenix. The maximum penalty carries a fine of up to $250,000 and/or five years’ imprisonment.
Karen Snell, an attorney for McKee, said the case turned on the manner in which the lists were obtained and that McKee had been authorized to sell magazine subscription renewals as a subcontractor.
“Publishers won’t sell the lists to magazine subscription services,” Snell said. “They obtained them through other means and that’s the crux of this case.”
She added that magazines were delivered to consumers who renewed subscriptions.
But industry sources counter that publishers do sometimes rent names to subscription agents.
According to court papers, the defendants used a variety of means for obtaining the names of active magazine subscribers. For example, Ward and McKee used two bulk mailing facilities, Valley Printing & Mailing and Peninsula Mailing Service, through which they rented lists from managers, the court papers state.
The requests for lists were accompanied by sample mailing pieces using the fictitious names Sport Apparel Ltd. and Leisure Services, the court documents continue.
Four list companies received the bogus pieces between 1997 and 2000, according to the court papers. The firms — and the lists they rented — were as follows:
American List Counsel Inc., Princeton, NJ: 10,000 Inc. magazine subscribers, 30,000 Forbes subscribers.
The Specialists Ltd. (now Client-Logic Specialists Marketing Services), Weehawken, NJ: 40,000 Playboy subscribers.
List Services Corp., Bethel, CT: 30,000 Family Circle subscribers (in two separate requests) and 10,000 Fitness subscribers.
CompuName Inc. (now Lake Group Media Inc.), Rye, NY: 20,000 ESPN magazine subscribers.
Ward and McKee withheld the fact that they intended to use the lists to solicit renewals from current magazine subscribers, the papers allege. This disclosure was “necessary in order for the list management companies and publishers to make an informed decision and not be misled with respect to the rental of the subscriber lists,” the documents state.
American List Counsel participated in the investigation after being contacted by the U.S. Postal Inspection Service (USPIS). It provided the inspectors with sample mail pieces, orders from Valley Printing & Mailing, copies of canceled checks with bank account numbers, and signed list rental agreements.
Lori Magill-Cook, ALC’s senior vice president for data management, said the firm become suspicious of orders it was receiving from Valley Printing & Mailing in 1997 after the return addresses on the majority of mail pieces were traced to a mailbox drop and calls to verify the phone numbers listed were picked up by an answering machine.
“At that point we cut them off,” she said.
Magill-Cook applauded the USPIS’ investigation and subsequent indictment of the defendants.
“It’s a good thing because this is a huge issue for our consumer publishing clients as well as the consumer publishing industry at large,” she said.
Ryan Lake, CEO of Lake Group Media Inc., concurred.
“We’re glad they got caught and that there’s some teeth to the judgment,” he said.
But submitting false mailing pieces wasn’t the only method of obtaining names.
Cavanaugh, an employee of Communications Data Services (CDS) in Des Moines, IA, stole the names of 476,720 current magazine subscribers from CDS’ database to sell to Ward for $30,686, the court documents allege.
Dennis Luther, CDS vice president for marketing, acknowledged that Cavanaugh had worked for the firm but declined to comment on his length of service.
In September 2000, Cavanaugh was identified by the USPIS as being involved in the case and was immediately terminated, Luther said.
Luther added that CDS had actively participated in the investigation with both the postal inspection service and the Magazine Publishers of America (MPA).
CDS provides order fulfillment services for more than 400 accounts, including national magazines and direct marketing firms. In addition, the company maintains data on more than 142 million active customer files for its magazine fulfillment clients, according to information posted on its Web site.
Meanwhile, the USPIS sent a letter dated Nov. 29, 2002 to publishers whose subscribers were approached by the conspirators to alert them to the indictment, said Robert Maes, a postal inspector in Phoenix.
“We applaud the fact that the postal inspection service is taking action on this and we hope it will continue in its efforts,” said MPA spokeswoman Ronni Faust. “It’s too bad that there are some people who are doing these things and overshadowing the good that most of the industry is doing in terms of subscriptions.”
The magazine publishing industry has been troubled for years by individuals operating companies under dozens of names that solicit subscriptions or renewals without authorization.
Some publishers have challenged subscription agents.
In June, Time Inc. filed a lawsuit against a magazine subscription agent, alleging trademark infringement and improper solicitation. That suit named Publishers Service Exchange and its owner Dennis Simpson as defendants. Several publishers have issued alerts to subscribers to be wary of subscription renewal communications from PSE.
Ward operated several companies, among them Delta Readers, Publishers Agency, Marketing Service, Publishers Service, Subscription Service, Magazine Processing Center, Subscription Processing, and Publication Center, in four states: Arizona, California, Colorado and Florida.
McKee owned and operated subscription businesses called Periodical Distribution Systems, Publishers Discount Service, and Nationwide Marketing Inc., all of them in California.