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The following is a consumer alert reported by my colleague Ray Stern, following up on features he wrote last year concerning the local co. LifeLock.

LifeLock, the ethics-challenged, Tempe-based company featured in two investigative New Times articles last year, has been slammed with a federal lawsuit that aims to deliver the business equivalent of a mortal blow.

The lawsuit was filed February 13 in the United States District Court, Central District of California, by one of the Big Three credit bureaus, Experian, which alleges it’s losing millions of dollars a year because of LifeLock’s “illegal and fraudulent activities.” You can read the entirety of the complaint, here

Experian not only wants to stop LifeLock from providing its primary service – it wants massive payback and punitive damages, including the “disgorgement of profits earned by LifeLock as a result of its illegal practices.”

As New Times reporter Ray Stern revealed in his May 31, 2007 article, What Happened in Vegas, LifeLock was founded by Robert J. Maynard Jr., a local entrepreneur who had been banned for life from the credit-repair industry after the Federal Trade Commission shut down another of his businesses in the mid-1990s. The article also exposed as a lie Maynard’s oft-repeated tale about spending a week in jail because he was a victim of identity theft, and quoted his own father accusing Maynard Jr. of identity theft. Maynard Jr. resigned in the wake of the article, but reportedly still retains a 10 percent stake in the company.

Despite the negative media attention following New Times’ expose, not to mention a follow-up article that blasted anti-identity-theft services as a waste of money ("Money for Nothing," July 19, 2007), the company continued to gain thousands of customers. LifeLock claims more than 500,000 customers now, though such a figure must be taken lightly considering a LifeLock spokesman’s admission that the company has falsely inflated customer numbers in the past.

One reason for LifeLock’s success is the millions it spends on heavy advertising, with much of that funded by private investors. CEO Todd Davis is widely known for giving out his Social Security Number in advertisements, though that tactic has also resulted in Davis becoming the victim of identity theft. Last month, the company reported it received $25.5 million in fresh funding from Goldman Sachs Group Inc. and other investors.

At the heart of the lawsuit are the “fraud alerts” LifeLock places on its customers’ credit bureau accounts, which are like electronic red flags. They require a lender to call the consumer directly if someone applies for credit in the consumer’s name. In other words, if you wanted to a buy computer on credit, Circuit City would have to call you first and confirm you really wanted to take out a loan. Without your credit bureau account being red-flagged, it’s possible someone other than you could take out a loan in your name -- a frequent type of identity theft.

A 2003 amendment to federal law gave consumers the right to place fraud alerts good for 90 days on their credit accounts. But the law states that only the consumer or an “individual” acting on behalf of the consumer can place the fraud alert – even then, the consumer must believe he or she is about to become a victim of identity theft. People can easily place a fraud alert on their own account, for free, by calling Experian at 1-888-397-3742.

LifeLock charges people more than $100 a year to place the fraud alerts four times a year, leaving the person’s account in a perpetual state of alert. And that ain’t right, Experian charges.

Experian claims it incurs a huge expense operating the toll-free line being used to process fraud alerts for thousands of LifeLock customers. And the credit bureau alleges LifeLock “launders” the fraud alerts by hiding who is making the calls to the toll-free number.

When Experian discovered thousands of fraud alerts were being placed by LifeLock through a Canadian telephone number, it blocked that number from being received – but LifeLock switched to a Pennsylsvania phone number to make the calls. When Experian blocked that number, too, “LifeLock then resorted to larger banks of telephone numbers in an attempt to further disguise its activities,” the lawsuit states.

Experian also makes other allegations, such as that LifeLock habitually uses false advertising to claim its service is legitimate. The company seeks an injunction to stop LifeLock from making fraud alerts on behalf of individals, and it wants LifeLock to pay back the money it has made from offering the service.

“It’s damaging for us and to the industry as a whole,” says Peg Smith, one of Experian’s senior VPs.

No word yet from LifeLock, whose local spinmeister, Jason Rose, hadn’t yet heard of the suit as of Wednesday.

****UPDATE****

LifeLock flack Jason Rose finally got back to us with the following statement:

"LifeLock does not comment on pending litigation.We have engaged counsel and intend to vigorously defend the case. In the meantime, we remain focused on our mission of providing valuable services to help protect consumers from identity theft. National consumer reporting agencies like Experian have an important role to play to protect consumers too. Instead of taking actions to hinder or challenge us, we want Experian to join us in pursuing this mission of helping consumers prevent identity theft."