Porn in the USA

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

Robb Evans, the court-appointed receiver in the Taves case, has found millions of dollars in Taves' bank accounts in the Cayman Islands, Switzerland and Vanuatu, a small island nation in the South Pacific. Most of the money will likely end up in government coffers. Because it will probably be impossible to find all the victims, any portion of the $37.5 million judgment left over after cardholders are paid will go to the U.S. Treasury, Judge Collins ruled. Carr says HPS is owed about $1.5 million. A hearing on its claim is scheduled in California on Dec. 4.


Internet pornographers would not be able to scam anyone without the help of companies such as HPS, which continued to process credit-card transactions despite growing signs of trouble. HPS knew about excessive chargebacks at Charter Pacific before it opened accounts for Xpics and Taves. HPS kept accounts open despite high chargeback rates. HPS, overwhelmed itself with letters demanding refunds, knew the pornographers couldn't handle refund requests. And HPS opened new accounts for pornographers whose existing Heartland accounts were drawing attention from Visa and Mastercard as a result of excessive chargebacks.

Why did HPS continue doing business with pornographers despite so many signs of trouble? "It's a very good question," Carr admits. "They are masters. They are very, very smart people who spend their every waking moment trying to figure out how to beat the system."

Heartland's culpability in scamming consumers is "very much an open issue," says Evans, who blasts Charter Pacific and Heartland for doing business with Taves. "I would suggest it was never prudent for them to do so, because neither of these banks had any appropriate due diligence in opening these accounts," he says. "If I were in the shoes of either of those two banks, there would be two things I would be worried about. One would be me -- my charge to the court is to make the victims whole, and we are not finished with that process yet. The other would be a class-action (lawsuit). That would be a bad thing, because the money that would be recovered would go substantially to lawyers, not to victims."

Cohen, the FTC lawyer who sued Carmona and Shuster, chuckles a bit when asked whether Heartland bears any responsibility in the Xpics case. "I think that any credit-card processor who is getting a high level of chargebacks and doesn't take appropriate action is culpable," he says. Like Wolfe in the Taves case, Cohen says the FTC didn't investigate Heartland because the agency has no jurisdiction over banks.

The federal Office of Thrift Supervision, which does have jurisdiction, placed Heartland Bank under special monitoring in January, but it isn't clear whether the bank's dealings with Internet pornographers played any role. OTS concluded Heartland had engaged in unsafe banking practices, but the audit that led to the special monitoring isn't a public record. Besides calling on the bank to increase its capital, the supervisory agreement between the bank and OTS states that the Heartland must come up with a plan to monitor the activities of its subsidiaries. Carr says OTS supervision has nothing to do with HPS. The bank says the federal action resulted from a downturn in Fannie Mae and Freddie Mac stock and the failure of a subsidiary that tried collecting credit-card debt that had been written off as uncollectible by other banks.

Heartland Bank senior vice president David Minton insists HPS was operating on its own when it came to Internet porn, particularly in the Taves case. Minton says the bank wasn't aware that porn was an important part of HPS's growth. "It was never in the bank's mind a focus of the business," he says. The bank learned about the Taves fiasco only after the FTC launched an investigation, Minton says. "Our reaction was not very favorable, to say the least," Minton says. "We had a procedure in place, effectively, for merchants of a particular size to be approved by Heartland Bank before they proceeded. That procedure did not occur in this particular situation. The bank immediately said there should be absolutely no Internet-pornography business. I really do want to distance the bank from Heartland Payment Systems. I don't think we were a primary actor in this case. We were a conduit, to a certain extent." How much the bank's owners and outside directors knew of the extent of HPS's involvement in the porn business is unclear. The McDonnell brothers, who say they've had no say in the bank's operation, are currently locked in a court fight against Love and Schiffer for control of the bank.

Carr says Heartland Bank knew full well what HPS was doing. Senior bank officers had to approve every account involving more than $5 million a year in annual transactions, he says, and HPS got approval for Taves. In the Xpics case, one of the exhibits introduced at trial was a merchant-account agreement signed by Wuest, the CEO of Heartland Bank.

Although Heartland appears to have escaped serious punishment for its dalliance in the porn business, the FDIC -- which doesn't have jurisdiction over savings and loans like Heartland -- cracked down hard on Charter Pacific, which enabled Ken Taves' scam by selling him credit-card numbers and processing his transactions. In a cease-and-desist order issued in May, the FDIC ordered Charter Pacific to divest itself of its bank-card division by Sept. 30. In the meantime, the feds barred Charter Pacific from selling credit-card information for any purpose and ordered the bank to terminate the account of any merchant deemed high-risk by Visa or Mastercard. The FDIC also forced Charter Pacific to immediately terminate the account of any merchants with excessive chargebacks and deny new accounts to applicants who had previous accounts terminated by the bank.

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