Porn in the USA

Internet smut peddlers reaped millions from unsuspecting credit-card holders. Their partner in slime was right here in the heartland.

Although HPS's relationship with Xpics lasted less than three months, it continued processing cards for several other X-rated Internet businesses. And troubles continued. HPS has at least two lawsuits pending against Internet pornographers in St. Louis County Circuit Court. The allegations are much the same as the one the bank made against Xpics: HPS was left owing money as a result of excessive chargebacks. Like Xpics, the pornographers blame HPS for problems.

Eagle Access, a Delaware corporation for which HPS maintained three accounts opened between April 15 and June 8, 1998, says Heartland wasn't prepared to handle the volume of transactions and refund requests. Clear Access and its successor company Internet Provider (both owned by the same Florida couple) make the same claim, adding that HPS shifted transactions from Clear Access to Internet Provider because of excessive chargebacks.

All told, Carr says, HPS maintained about 20 accounts for adult Internet merchants. All of them went sideways, he says, and HPS no longer accepts adult Internet clients. But HPS admits porn helped make it an industry leader. Under questioning by Xpics attorney Jacobson in the recently concluded St. Louis County civil lawsuit, HPS senior vice president Joan Herman testified that porn companies were HPS's biggest clients in 1998 and that the company got into the adult Internet business because it thought it could make a lot of money fast. She also said Carr once told her that porn was the secret to HPS's growth. Carr testified that porn paid for the infrastructure that made Heartland what it is today. "I don't mind the truth being told," Carr says. "It can be colored, which is obviously what Xpics did to try to prejudice the jury. It gave us the money to hire a big staff. We had to have a big staff to process all the chargebacks. We made gross income. You take all of our expenses out of it and all that, we actually lost money in 1998. We certainly learned a lot."

Founded in 1997, Heartland Payment Systems is now the largest privately held credit-card-processing company in the nation.
Founded in 1997, Heartland Payment Systems is now the largest privately held credit-card-processing company in the nation.

Heartland and HPS had no better teacher than Kenneth Taves.


Three years ago, Ken Taves had big dreams and a rocky history with the law. Today his dreams are dashed, but legal troubles remain. He's in prison in California, held for contempt of court until he tells where the money is. The feds say Taves engineered the largest credit-card scam in U.S. history. And most of the money went through Heartland Payment Systems.

No ordinary swindler, Taves pleaded guilty to a charge of being an accessory to murder in 1980. The victim -- who, Taves thought, had cheated him in a business deal -- was in the federal witness-protection program. Taves potentially faced a murder charge in the alleged murder-for-hire scheme, but the main witness against him died in a car accident, forcing prosecutors to accept a lesser plea. Taves was also a suspect in a 1988 murder investigation, according to the FTC, but was never charged.

Taves supported himself through a variety of businesses, but forays into such ventures as a printer-toner-supply distributorship didn't prove profitable. And so in 1997 -- the same year he pleaded guilty to federal check-counterfeiting charges -- Taves went into the Internet-porn business.

Taves ran Netfill, a California-based company that operated several porn sites. Like Xpics, Netfill contracted with Charter Pacific Bank to process its credit-card transactions. Taves, who had a bad credit history, used his wife, Teresa, to secure a merchant account and processing agreement with Charter Pacific. The Taves were soon rich and enjoying life in a Malibu mansion worth more than $2 million. They each got $1.7 million a year in salary. Their son, who was 15, was also on the payroll. The teenager was paid $48,000 a year, even though he had no job title or job description -- Teresa Taves recalls seeing him cleaning up the office once in a while.

Like Xpics, Netfill's chargeback rate was astronomical, given industry standards. In January 1998, Netfill had a 5.54 percent Visa chargeback rate. The rate exceeded 6 percent the next month. In March -- the third month of excessive chargebacks -- Visa notified Taves and Charter Pacific that Netfill needed to submit a written plan to reduce chargebacks within 15 days. Visa also warned Netfill that the high chargeback rate could result in the suspension of privileges to accept Visa cards.

Taves never did submit a chargeback-reduction plan. Instead, just a few weeks away from the four-month threshold that triggered fines, he went to HPS and opened accounts under the names N-Bill and Webtel, again using his wife's name because of his bad credit history. But Taves was in charge of the day-to-day operations, and HPS knew it. As Carr said on the witness stand in the Xpics case, "I've been to Ken Taves' office a few times." They certainly had plenty to talk about.

In November 1997, Taves bought 3.6 million credit-card numbers from Charter Pacific. The database, however, didn't include the names of cardholders, their addresses or the expiration dates of credit cards, information that is typically required by merchants and banks to prevent fraud.

Once Taves had the card numbers, he began charging accounts, even though cardholders hadn't ordered anything or visited pinkbeaver.com, muffpie.com or any other Web site he ran. Because Taves didn't have the software required to access credit-card systems, he contracted with a Los Angeles company called Automated Transaction Services, which essentially acted as a go-between for Taves and HPS. Once a month, Taves would e-mail batches of credit-card numbers to ATS, which would verify that accounts were open and had sufficient credit available, according to the FTC and David Goldfarb, ATS owner. Money from those accounts would then be deposited into Taves' account at Heartland, which received chargeback demands and was ultimately responsible for making good on any refund demands.

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