The Federal Trade Commission, Washington, won a $37.5 million verdict yesterday against an adult Web site operation it accused of running an illegal billing scam in which it charged the credit cards of consumers who had not visited the X-rated Web sites.
In January 1999, the FTC sued Dennis Rappaport, Kenneth Taves and Teresa Taves of Malibu, CA, and their businesses — J.K. Publications Inc., MJD Service Corp., Herbal Care Inc. and Discreet Bill Inc. The suit charged that the defendants billed consumers without authorization for alleged visits to adult Web sites. The businesses were shut down by a court order days later.
The FTC alleged that the defendants repeatedly charged consumers' credit and debit cards for X-rated Internet visits they had not made and for services they had not ordered. Thousands of those billed for visiting the Web sites did not own computers.
The agency told the court that the defendants bought lists from Charter Pacific Bank, Agoura Hills, CA, that contained the account numbers for more than 3 million Visa and MasterCard credit cards. Rather than use the lists to confirm that potential customers had valid cards, the defendants debited the cards for Web site services the cardholders had never used.
The FTC argued that more than 90 percent of the defendants' $49 million a year in sales were unauthorized charges. The court agreed.
The FTC showed that the defendants used at least five merchant accounts and four fictitious business names to process the transactions. The timing of each new merchant account application coincided with the impending threat of being placed on Visa USA's active monitoring list for excessive charge backs, which are card charges disputed by consumers.
“A shocking 40 [percent] to 50 percent of the calls received by the defendants were from people who said they did not have a computer and had not given their card numbers to anyone,” said U.S. District Court Judge Audrey B. Collins.
The court concluded that the defendants processed bogus charges totaling more than $43 million. The $37.5 million judgment represents the illegal charges minus the amounts that consumers already received through charge backs and credits.
In addition to the $37.5 million in damages, the court judgment bans lead defendant Kenneth Taves from owning or controlling any business that handles consumer credit or debit card accounts, as well as from holding a managerial or consulting position or serving as an officer at such a business.
The FTC has identified more than $20 million in defendants' assets. It is not clear whether the $37.5 million award will be available for consumer redress.
