Using data bought from banks and other financial institutions to target customers, MemberWorks Inc. of Stamford, Conn., in recent years has built one of the nation's fastest-growing telemarketing enterprises.

MemberWorks offers what company officials call "innovative membership service programs." For an annual fee -- charged to a credit card or withdrawn from a checking account -- consumers can buy discounted travel packages, clothing, health and dental care and other services.

But authorities across the nation are questioning how MemberWorks and other such telemarketing firms obtain and use what is generally considered confidential financial information -- including Social Security numbers and bank account records. A lawsuit filed yesterday by Minnesota's attorney general is the first step in what officials say is a five-state effort to dissect the ties between telemarketers and financial services companies.

"What is amazing to us is legitimate financial institutions are lending their credibility to telemarketing companies," said Jack Norris, an assistant attorney general in Florida, who is involved in the group examining the industry. Officials from California, Washington and Illinois also are involved.

The Minnesota suit, filed by Attorney General Mike Hatch, alleges that MemberWorks violated state laws governing consumer fraud, false advertising and deceptive practices.

Court papers charge that telemarketers working on MemberWorks' behalf misled customers into accepting offers before they understood what was being sold. The lawsuit also alleges that telemarketers are not forthcoming about confidential information the company has and how it is used.

Comptroller of the Currency John D. Hawke Jr., who heads the agency that regulates national banks, recently said that the sharing between banks and companies such as MemberWorks are "at least seamy, if not downright unfair." He said certain uses of financial information by telemarketers raises "a number of serious legal concerns" as well as privacy questions.

MemberWorks officials say their sales techniques are fair and their programs enable banks, mortgage lenders and other partners to offer quality consumer services at low cost.

These practices received relatively little attention until last month, when Hatch alleged in a lawsuit that U.S. Bancorp engaged in consumer fraud and deceptive advertising by sharing data with MemberWorks.

While denying wrongdoing, in a settlement U.S. Bancorp agreed to cut its ties to MemberWorks and allow customers to block such information-sharing.

Documents obtained from MemberWorks during the U.S. Bancorp investigation and turned over to regulators show that the telemarketers' past or current business partners include American Express, Capital One, Citibank, Sears and many others.

As part of the five-state examination, authorities intend to review cases such as that of Dorothy Christensen, a recently deceased Minnesota woman. According to her son, Christensen, then 90, discovered that MemberWorks charged her Visa card almost $200 for discounts on fashion, fitness services and computer products, including video games.

Christensen no longer shopped for clothes by herself and did not own a personal computer, her son said. Confused, she wrote to U.S. Bancorp, her bank for 50 years, to ask who gave out her card number.

"I do not understand how these companies could have obtained my Visa account number," Christensen wrote. "Did US BANCORP have any part in providing my Visa account information . . .?"

As it happened, the bank had sold MemberWorks Christensen's name, telephone number and credit card records, documents show. In exchange, the bank earned royalties from each MemberWorks sale to her.

In May, a bank official wrote Christensen apologizing for "the inconvenience you have experienced while disputing these unrecognized charges." But the official said the "only way to ensure this situation will not recur is to contact the merchant."

Wayne Gattinella, MemberWorks' senior vice president for marketing, said a review of Christensen's taped conversations with telemarketers in 1997 and 1998 showed "she was conversant, she understood." Gattinella said she received a refund after she called and canceled.

New questions about these telemarketing practices underscore the gap between consumer and regulator understanding and the frenetic change in the financial services world.

Facing pressure to maximize profits -- and dazzled by database marketing's potential -- many top banks, mortgage lenders and credit card companies have increasingly shared or sold customer information.

The practice spurred intense debate earlier this year on Capitol Hill, as the House of Representatives considered legislation that would enable banks, securities firms and insurance companies to merge and more easily trade customer information. A House subcommittee is set to hold hearings next week.

Consumer and privacy advocates argued that the flow of account and transaction data erodes individual privacy and may expose consumers to marketing abuses.

"This is a mechanism through which consumer right to privacy is being ignored," said Maryalice Hurst, a marketing consultant and former chairman of the Direct Marketing Association's ethics committee.

Some companies are rethinking their use of telemarketers. Chase officials recently imposed a moratorium on the use of third-party telemarketers that sell "nonfinancial products and services."

"As a result, we are reconsidering the entire issue of whether we engage third parties to solicit our customers," officials said in a statement this week.

Gail Wasserman, spokeswoman for American Express, said her company shared only customer names, telephone numbers and scrambled account numbers with MemberWorks when it twice used the company in recent years to market travel and health programs. "We decided it didn't have enough value for our customers," she said.

Documents from the U.S. Bancorp case show that MemberWorks pays from 15 percent to 70 percent of its sales revenue in royalties to financial institutions that sell their data. MemberWorks typically enhances the information with other data -- such as magazine subscriptions and car ownership -- bought from information brokers.

People with high discretionary income and a penchant for travel, for instance, might receive MemberWorks' pitch for Travel Arrangements -- a plan offering "substantial savings and convenience" on travel services. Fashion or health enthusiasts might get a pitch for Essentials, offering "fitness, fashion and beauty services."

The company routinely offers free use of its programs for 30 days, according to its telemarketing scripts. Once agreeing to a trial, the customer must call and cancel the service or be charged automatically.

Telemarketers typically do not disclose that they possess the customer's account information.

Gattinella denied that MemberWorks misused information or deceived customers. He said callers enrolled in programs understand the offers and freely give consent.

"When we offer a program to a customer, they are agreeing to purchase it," he said. "The customer understands and agrees."

Hatch said he believes that many people do not realize that agreeing to a free trial is construed as a purchase agreement.

Gattinella said the company uses limited information about customers to make a sale and does not use credit information restricted by federal law, he said.

MemberWorks' customer list grew from 3 million to 5 million in a year and revenue more than doubled from $57 million in 1996 to $120 million in 1998.

"We've got very satisfied customers," Gattinella said.