Allegations focus on defendants’ efforts to maintain accounts on behalf of dummy companies and to avoid fraud detection systems
The Federal Trade Commission filed an amended complaint in federal district court in a case alleging a multi-national scheme to defraud consumers via deceptive “free trial” offers and negative-option continuity plans. The amended complaint names a Latvian financial institution and its CEO as additional defendants, alleging they participated in the scheme by processing $40 million in consumer payments.
The amended complaint alleges that the newly added defendants engaged in credit card laundering by approving and maintaining merchant accounts in the name of shell companies with straw owners, and that they manipulated chargeback levels in those merchant accounts to evade credit card chargeback monitoring programs.
According to the FTC’s 2018 complaint, Apex Capital Group, LLC, two individual defendants, and related entities marketed supposed “free trial” offers for personal care products and dietary supplements online, but then billed consumers the full price and enrolled them in negative-option continuity plans without their consent.
To further the scheme, the defendants used dozens of shell companies and straw men in the United States and the United Kingdom to obtain the merchant accounts needed to accept consumers’ credit and debit card payments. Processing charges through other companies’ merchant accounts is known as “credit card laundering,” an illegal practice that some unscrupulous merchants use to bypass credit card associations’ monitoring programs and avoid law enforcement.
The alleged scheme, run by defendants Phillip Peikos and David Barnett, conducted its online subscription scam since early 2014, and marketed and sold a variety of products to consumers before the court issued an order halting it at the Commission’s request.
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. 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.
The Commission vote authorizing the staff to file the amended complaint was 5-0. The amended complaint was filed in the U.S. District Court for the Central District of California on May 30, 2019.
NOTE: The Commission files a complaint when it has “reason to believe” that the law is being violated and it appears to the Commission that a proceeding is in the public interest. The case will be decided by the court.
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CONTACT FOR CONSUMERS:
Consumer Response Center
CONTACT FOR NEWS MEDIA:
Mitchell J. Katz
Office of Public Affairs
Laura A. Zuckerwise
FTC’s Northeast Region