September 07, 2000 01:00pm
FTC Orders Porn Sites to Pay Up
Source: CNET News.com
by: Cecily Barnes
The Federal Trade Commission today announced a $37.5 million judgment against the operators of at least six Internet pornography sites who billed customers for services they didn't purchase.
The ruling is the second case in recent weeks involving fraudulent billing at online pornography sites. Consumer watchdogs say the increasing frequency of such scams should put credit card holders on alert to vigilantly guard credit information and scan monthly bills.
In addition to the $37.5 million judgment, U.S. District Court Judge Audrey B. Collins barred Kenneth and Teresa Taves and Dennis Rappaport of Malibu, Calif., from owning or managing any business that handles consumers' credit cards. According to a ruling on Aug. 30, the trio had operated a group of Web sites including AsianHQ, Erosisland.com and Restricted.com.
"The court concludes as a matter of law that defendants engaged in the unfair practice of operating a fraudulent scheme by which they debited and charged card numbers without the cardholders' authorization," according to a summary judgment document.
"This case is out-and-out fraud," said Douglas Wolfe, a trial attorney with the FTC. "The Internet here was simply a ruse to tell people, 'Here, this is what you were charged for.' As our bureau director is fond of saying, 'This is old wine in a new bottle.'"
The Web site operators could not immediately be reached for comment.
The FTC filed suit against the defendants in January 1999 in a case titled FTC vs. J.K. Publications, and a judge temporarily shut down the business on Jan. 6. The judge then appointed a receiver who managed the business instead of the original owners.
In reviewing the company's business and server traffic, the receiver from Robb Evans & Associates discovered that the company's sales figures did not match the traffic on their server.
"Their own server records indicated that the traffic on their Web site was about $4 million worth, when they charged $49 million for total charges in 1998," Wolfe said.
According to the FTC, the defendants purchased a list of 3 million credit card numbers from Charter Pacific Bank of Agoura Hills, Calif., and illegally logged charges to many accounts.
Consumers began receiving charges on their credit card statements under names that were different from the Web site. For example, instead of a charge from "www.restricted.com" a consumer would get a charge from "Netfill," "N-Bill," "MJD Service Corp." and "Webtel."
According to the court document, 40 percent to 50 percent of the people who called the number on their statement to complain about the charges did not even own a computer, nor had they released credit card information.
"The only reasonable inference the court can draw from the corporate defendants' access to the Charter Pacific Positive Database and the timing of the defendants' fraudulent billing practices is that the defendants stole and processed Visas and MasterCard numbers from the database," the court document stated.
The receiver also discovered that millions of dollars were transferred oversees to the Cayman Islands and Vanuatu.
The case against J.K. Publications is not the first time adult content Web site operators have been accused of wrongfully charging people's credit cards. The FTC filed a lawsuit last month against the operators of Playgirl.com and Highsociety.com for allegedly charging consumers for visiting free portions of the Web site.
David Horowitz, a consumer advocate for Lowermybills.com, said he is pleased by the FTC's victory but believes the problem is much greater. Internet credit card fraud, he said, is rampant.
"This story is just the tip of the iceberg," Horowitz said. "The oversight on the Internet is so lax. No one really knows what's going on out there. People will get an $8 or $9 bill and won't necessarily pay attention to it."
Horowitz applauds the FTC but also wants a more formal oversight group to monitor the Internet. Until then, he suggests consumers follow a simple guideline to minimize their exposure to fraud: Make sure a Web site lists an address and working telephone number before turning over credit card information.
"A lot of these sites don't have anything more than an email address and P.O. Box," Horowitz said.
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