FTC Says Debt Processors Swiped $26 Million

LAS VEGAS (CN) - Three credit and debit card-processing companies and the four men who run them helped bilk consumers of more than $26 million through fraudulent charges and unauthorized fees, the FTC claims in court.

The FTC sued Cardflex, of California, and Idaho-based Blaze Processing, and Mach I Merchanting. Also sued are Cardflex president Andrew M. Phillips, Cardflex officer/director John Blaugrund, and Shane Fisher and Jeremy Livingston, managers and principals of Blaze Processing and Mach I Merchanting.

The FTC sued "on behalf of consumers against defendants for their actions in causing more than $26 million in unauthorized charges to consumers' credit and debit card accounts. Defendants caused these unauthorized charges by arranging for a group of interrelated merchants, known as iWorks, to obtain and maintain merchant accounts that enabled iWorks to process unlawful credit and debit card payments through the Visa and MasterCard payment networks. Defendants caused these charges to consumers' credit card accounts by actively employing, and advising or enabling the fraudulent merchants to employ, numerous tactics that were designed to evade fraud monitoring programs implemented by Visa and MasterCard. Defendants' tactics included: (1) opening any merchant account with minimal underwriting as long as the account was personally guaranteed by iWorks' President; (2) opening at least 293 merchant accounts in 30 separate corporate names for processing iWorks transactions; (3) implementing a system by which iWorks was able to distribute sales transactions and chargebacks among their numerous merchant accounts in order to avoid detection by the credit card networks (a tactic known as 'load balancing'); and (4) ignoring excessive rates of transactions returned by consumers ('chargebacks') on iWorks' merchant accounts.

CardFlex is an independent sales organization that charges a fee to help merchants process credit card transactions, the FTC says. CardFlex acts as a "gateway that handled some of the technical aspects of the actual payment processing."

Blaze Processing and Mach 1 Merchanting are sales agents that arrange connections between merchants such as iWorks and processing companies such as CardFlex.

"iWorks operated several related scams in which it lured consumers through websites that purported to offer free or risk-free information about products or services such as government grants to pay personal expenses and Internet-based money-making opportunities," the lawsuit states. "iWorks' websites were replete with misrepresentations about the availability of grants for personal expenses and the likely profitability of the money-making opportunities."

The complaint continues: "The iWorks websites lured consumers into an expensive bait-and-switch. After viewing misrepresentations on iWorks' websites, consumers were led to believe they would be charged only a small fee for shipping and handling, such as $1.99 or $2.99, to receive information about obtaining government grants or making substantial amounts of money. Instead of providing a free product or service for the nominal shipping and handling fee, iWorks enrolled consumers in multiple expensive online plans and charged recurring fees or other additional fees until consumers affirmatively cancelled enrollment in the plan."

The FTC says cardholders paid dearly when "iWorks enrolled consumers in online Negative Option Plans for both the advertised product as well as for additional products and services" and "charged consumers' credit cards hefty one-time fees of as much as $189 and then recurring monthly fees of as much as $59.95 for the core product as well as recurring monthly fees for the additional products and services costing as much as $39.97."

The high rates of returned transactions are evidence that "defendants knew or should have known that the merchants were deceptively offering consumers free or risk-free information about products or services, such as government grants, in order to deceptively enroll consumers in costly membership programs and repeatedly charge consumers' credit cards without their authorization," the FTC says.

"Evidence of the merchants' scam included the numerous consumer disputes challenging unauthorized charges; chronically excessive chargebacks; publicly available merchant websites with facially deceptive statements; and notices that several merchant accounts warranted placement in Visa and MasterCard chargeback monitoring and reduction programs."

The FTC seeks an injunction, rescission of contract, disgorgement of ill-gotten gains, restitution and damages for violations of the FTC Act.

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