By: Linda L. Goodman
On or about November 14, 2018, in response to the Federal Trade Commission’s motion, a U.S. District Court in California issued an order temporarily halting an alleged Internet marketing scam. The Commission alleged that the defendants marketed “free trial” offers for personal care products and dietary supplements online but charged consumers the full price of the products and enrolled them in negative option continuity plans without their consent.
In addition, Apex Capital Group, LLC and the individual defendants also set up shell companies in the United States and the United Kingdom, which they then used as fronts to open merchant accounts. Those merchant accounts allegedly were used to process millions of dollars in consumer payments for the defendants’ products, allowing the defendants to avoid detection by the credit card networks and law enforcement agencies for several years.
According to the FTC’s complaint, the operation, run by individual defendants, Phillip Peikos and David Barnett, has conducted its negative option “scam” since early 2014, marketing and selling more than 50 different products to consumers.
The defendants offered “free trials” of personal care products and dietary supplements that they claim will promote weight loss, hair growth, clear skin, muscle development, sexual performance, and cognitive abilities. The products were sold on websites with both U.S. and U.K. using domain names, such as trybiogenic.com, tryneuroxr.com, virilitydirect.com, and bestcelex.co.uk.
The FTC alleges that the defendants represent that consumers only have to pay a $4.95 shipping and handling fee for a 30-day supply, but actually charge consumers the full price for the products—approximately $90. In addition, they also enrolled consumers in undisclosed negative option continuity plans and continued to charge them about $90 per month for a month’s supply of the product. In addition, they did force upsells and again did not disclose the negative option program.
The material terms of these offers were not presented prior to registering the payment information or the disclosure was in small, hard-to-read type, or on separate webpages accessible only via hyperlinks wherein the consumer would have to scroll to find the disclosure.
Finally, the FTC alleges that many consumers who tried to cancel the unwanted plans found it difficult to do so, and the defendants continued to charge some consumers even after cancelling their order and the plans.
The FTC’s complaint further alleges that to further this scheme, the defendants used dozens of shell companies and straw owners—sometimes referred to as nominees or signors—to obtain the merchant accounts needed to accept consumers’ credit and debit card payments.
Thus, processing charges through other companies’ merchant accounts is known as “credit card laundering,” which is an illegal practice that some unscrupulous merchants use to by-pass credit card associations’ monitoring practices and avoid detection by law enforcement. Defendants formed at least 32 limited liability companies in Wyoming between August 2013 and May 2016. These companies allegedly had no employees, did not conduct business, and were formed solely to obtain merchant accounts used to accept consumers’ credit and debit card payments. To secure these merchant accounts, the defendants used California residents who were friends and relatives as signors on merchant account applications submitted to banks and other financial institutions. Notably, none of these individuals had ownership or signing ability over the accounts they obtained. In addition, the Defendants falsified the applications by claiming ownership of the company in more than one individual and submitting forged checks and information to the processor to obtain the merchant account.
The defendants also formed at least 37 limited companies in the United Kingdom, including the corporate defendants and now individual defendants named in the complaint. The FTC alleges that in many instances, the individuals named as directors of the U.K. companies actually are the same California residents used as signors on merchant account applications submitted in the U.S. The defendants used these U.K. companies to open additional merchant accounts at a Latvian bank as part of the scheme, according to the Commission.
Based on this conduct, the FTC’s complaint alleges that the defendants violated Section 5 of the FTC Act, as well as the Restore Online Shoppers’ Confidence Act (“ROSCA”) and the Electronic Fund Transfer Act (“EFTA”). The complaint also alleges that the defendants engaged in unfair practices, in violation of the FTC Act, through their credit card laundering activities and unauthorized charges.
THE AMENDED COMPLAINT.
The amended complaint adds two defendants to the case, SIA Transact Pro, a Latvian financial institution and payment processor, and its CEO, Mark Moskvins. The FTC alleges that the Transact Pro defendants opened at least 50 merchant accounts in the names of U.K.-registered shell companies for the benefit of the Apex Capital Group defendants who ran the scheme. The FTC also alleges the Transact Pro defendants manipulated credit card chargeback levels to circumvent card network rules and transaction monitoring programs designed to prevent fraud. In essence, they ran charges through their own accounts to adjust the percentage or charge backs. Both practices are alleged to unfairly injure consumers in violation of the FTC Act.
The amended complaint describes two methods the defendants allegedly used to artificially lower the level and rate of chargebacks in their merchant accounts: load balancing and microtransaction processing. Load balancing involves opening numerous merchant accounts for the purpose of spreading sales volume across multiple accounts. This artificially reduces chargeback levels in each account.
Microtransaction processing, in this case, involved using prepaid gift cards to make thousands of individual transactions in small dollar amounts. Because these transactions would not lead to chargebacks, they artificially diluted the ratio of chargebacks to total sales in the defendants’ merchant accounts.
Finally, there were aggravating circumstances as well. For example, the defendants made it hard if not impossible to cancel the negative option. The defendants did not ensure that even if the consumer was able to cancel, further charges did not occur – they did.
Overall, the complaint reads as a how not to sell products on the internet.
For more information and to view the full complaint, go to the FTC’s website here: https://www.ftc.gov/system/files/documents/cases/apex_complaint_filed.pdf
______________________________________________________________________
This article was originally posted on Cliclaw.com as part of my ongoing efforts to share valuable legal insights. I regularly contribute guest blogs to leading websites in the field of internet compliance. In these posts, I cover a range of topics to help businesses stay compliant in the ever-evolving digital world. You can read my latest guest contributions on Cliclaw.com.
This article is a publication of The Goodman Law Firm and is intended to provide information on recent legal developments. This article does not create an attorney-client relationship, nor should it be construed as legal advice or an opinion on specific situations. This may constitute “Attorney Advertising” under the Rules of Professional Conduct and under the law of other jurisdictions.
Linda L. Goodman is the founder of The Goodman Law Firm, concentrating its practice in internet business and law. Her firm’s clients include Advertisers, Affiliates, Affiliate Networks, and ISP’s.
© 2018 TGLF, A.P.C.