Porn in the USA

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

The FTC, which won a $37.5 million judgment against Taves in September, says 90 percent of $49.4 million in charges generated by his companies in less than a year were bogus -- an estimated 40 to 50 percent of cardholders who were charged didn't even own computers. Most of the money -- $38.7 million -- went through HPS, which continued doing business with Taves despite months of excessive chargebacks.

Visa was monitoring Taves' accounts at Heartland within two months after they were opened. In June, the credit-card company warned HPS that chargeback problems could result in fines. HPS argued that chargebacks weren't excessive, and Taves' accounts remained open while the chargebacks piled up. In August alone, HPS received 21,431 chargebacks for N-Bill, for which it charged Taves $321,465 in fees at the rate of $15 per chargeback. Visa chargebacks soared to nearly 10 percent of transactions in September. If chargebacks weren't brought under control within a month, Visa would fine the bank.

Heartland closed the N-Bill account on Oct. 1, just before fines kicked in. About the same time, however, the bank opened another account for Webtel, according to the FTC. Taves used a surrogate to sign the paperwork, but there was ample evidence he was in charge of both Webtel and N-Bill. On the Webtel account application, Taves listed pureskin.com as one of the company's Web sites. Pureskin.com was also an N-Bill Web site. FTC attorney Douglas Wolfe, who handled the case against Taves, says e-mails between HPS and ATS indicate the bank knew that Taves was in charge.

"Basically, all of the correspondence and electronic mail that went back and forth between Heartland and the defendants, a lot of it was exchanged with Mr. Taves directly," Wolfe says. "I think that there was certainly some correspondence from Mr. Goldfarb to Mr. Carr that indicated they were asking for a way to lessen Ken Taves' chargebacks. And this was in the middle of October 1998, and clearly, as of that point, every account except for the Webtel account was closed. You can draw your own conclusions from that. We at the FTC did not really follow up on that area directly, simply because we have no jurisdiction over banks."

Carr admits Heartland erred in opening new accounts for Taves. He says the bank learned too late just how many chargebacks Taves was racking up. "It was a mistake," he says. "We just didn't know. We shouldn't have done it. What can I say?"

Heartland didn't stop processing credit cards for Taves until Dec. 7, 1998. The end came after three card-issuing banks, concerned about fraud, contacted Mastercard after Webtel processed $4.7 million in transactions through HPS in the space of four days. Mastercard subsequently called HPS and convinced Carr to close the account, which put Taves out of business. The call from Mastercard was the first time HPS had any inkling that Taves wasn't on the up-and-up, Carr says. Mastercard eventually fined Heartland more than $500,000. By January, the FTC had launched an investigation.

All told, bank records show Charter Pacific and Heartland together refunded $7.3 million, or about 14 percent of transactions from Taves' companies. The FTC and Visa say that rate doesn't accurately reflect the number of bogus charges. Processing a chargeback typically costs a card-issuing bank at least $20, so if the disputed charge is less than the cost of the paperwork, the bank will sometimes issue a refund and eat the questioned charge without submitting a chargeback. Like Xpics, Taves charged $19.95 for monthly memberships, beating the $20 threshold by just a nickel. The FTC also says some cardholders discovered the charges too late to request refunds, others never noticed porn charges and some cardholders who thought they were getting a month of free service probably suffered in silence. "People may have gotten scammed by these companies, but they're somewhat embarrassed to admit it due to the nature of the entertainment that's being provided," says FTC lawyer Stephen Cohen, who handled the Xpics case.

The bottom line is, no one knows how many victims are out there. "The number of consumers that we know at least caught these and received chargebacks and credits was the vast minority compared to the number who appear to have gotten stung here," says Wolfe, who estimates that 700,000 cardholders got taken in the Taves case.

In January 1999, the FTC obtained a restraining order against Taves preventing him from getting back into the Internet-porn business. Meanwhile, a federal judge appointed a receiver to track down his assets and look for victims. The judge also ordered Taves to disclose his assets to the FTC. In February, federal prosecutors in Los Angeles charged Taves with making false statements to the FTC and criminal contempt for hiding $23.5 million in a Cayman Islands bank account. In addition to hiding bank accounts, the FTC says, Taves sold his Malibu home for more than $2 million and tried transferring the proceeds to a third party in an attempt to hide the money. Taves is now in prison on the pending charges.

Taves never disputed the FTC's contention that he'd broken the law. "In this case, the corporate defendants essentially concede that they engaged in unfair business practices in violation of the FTC Act," U.S. District Judge Audrey Collins said in a ruling in April of this year.

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