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FTC Sues Spyware Suspects

By David McGuire
washingtonpost.com Staff Writer
Tuesday, October 12, 2004; 6:15 PM

Federal authorities have asked a federal judge to shut down an operation that they said installed intrusive "spyware" on people's computers and then sold anti-spyware software to those same victims, a top consumer protection official said today.

The complaint, filed by the Federal Trade Commission last week with the U.S. District Court in New Hampshire, accuses the defendants of fraud and asks a judge to shutter the organization and force the people behind it to pay back to their victims. It is the first federal lawsuit filed against the purveyors of spyware, a rapidly growing nuisance on the Internet.

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"The defendants were selling software to fix the problem they just caused. I've decided this is my definition of online chutzpah," Lydia Parnes, acting director of the FTC's Bureau of Consumer Protection, said at a press conference Tuesday.

Parnes said the case was filed against two companies, Seismic Entertainment Productions and Smartbot.net, as well as Sanford Wallace, who in the late 1990's was known as the infamous "spam king."

Spyware stealthily installs itself on people's computers, often when they download other free software online. The more benign types of spyware, sometimes called "adware," generate flurries of pop-up ads on people's computer monitors. More malicious types record everything users type into their computers, including passwords and other sensitive data.

Lawmakers and regulators have stepped up their anti-spyware efforts during the past year. The FTC held a meeting in April on the problem and the House of Representatives earlier this month passed two bills that would expose distributors of spyware to multimillion dollar civil penalties and send them to jail for up to five years.

Parnes said the FTC is already has complaints against other spyware scammers in the works. "Note to the purveyors of spyware: this may be our first case, but it won't be our last," she said.

The companies used several tricks to direct victims to their Web sites, which were designed to automatically install spyware on visitors' computers, the FTC complaint said. The sites exploited a feature of Microsoft's Internet Explorer to install the software so that victims never knew that it was being downloaded.

Once installed, the spyware often would open the computer's CD-ROM tray and display a message on the monitor that read: "FINAL WARNING if your cd-rom drive is open you desperately need to rid your system of spyware pop-ups IMMEDIATELY." Consumers who responded to the message were prompted to buy programs called Spy Wiper or Spy Deleter for about $30 each.

FTC spokeswoman Claudia Bourne Farrell said that the FTC does not know how many copies were sold. The commission plans to ask that the eventual dollar amount be handed back to victims or to the U.S. government.

Philadelphia-based attorney Ralph Jacobs, who is representing the defendants in the case, said that many of the practices targeted by the FTC are legal. "Automatic uploading of software and altering default home pages are in widespread use by many companies on the Internet," Jacobs said. "SmartBot's goal is to find lawful ways to use these techniques for advertising and marketing."

Parnes said the scheme violates federal fraud laws. The measures pending in Congress, meanwhile, target common spyware practices such as resetting people's homepages and installing software without their consent.

Wallace, who pioneered the use of spam as a moneymaking tool under the name Cyber-Promotions Inc., before publicly apologizing for it in April 1998, was not immediately available for comment.

Sen. Conrad Burns (R-Mont.), sponsor of one anti-spyware bill, applauded the FTC for filing the case. "Today's action from the FTC regarding spyware is music to my ears," said Burns. "Each time we knock one player down it sends a signal to others out there and makes them think twice."

Ari Schwartz, associate director of the Center for Democracy and Technology in Washington, D.C., said the FTC and other law enforcers could play a big role in slowing the growth of spyware.

"Spyware is still a young industry and it takes a lot of investment to build these really awful programs. People who are just getting into the industry may be deterred by the fact that the FTC is taking action," Schwartz said.

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