Antitrust Law Daily Wrap Up, CONSUMER PROTECTION NEWS: Payment processors settle FTC charges over I Works scheme, (Mar 27, 2015)

By Linda O’Brien, J.D., LL.M.

CardFlex Inc., an Independent Sales Organization (ISO), and its principals Andrew Phillips and John Blaugrund have settled FTC charges that they illegally processed more than $26 million in unauthorized consumer charges on behalf of a company called I Works, the agency announced today (FTC v. CardFlex, Inc., File no. 122-3003).

In July 2014, the FTC filed a complaint in the federal district court for the District of Nevada, alleging that the defendants arranged for a deceptive operation known as I Works to obtain and maintain merchant accounts that allowed it to process illegal credit and debit card payments through the Visa and MasterCard payment networks. The FTC has charged I Works with scamming consumers out of more than $275 million via deceptive “trial” memberships for bogus government-grant and money-making schemes.

The complaint charged that the defendants – CardFlex, Blaze Processing LLC, Mach 1 Merchanting LLC, Phillips, Blaugrund, Shane Fisher and Jeremy Livingston – illegally provided access to payment networks that I Works needed to carry out its deceptive scheme.

In its complaint, the FTC alleged that the defendants knew I Works had been placed on industry lists of high-risk merchants numerous times due to high chargeback rates. Still, the defendants provided I Works with full access to payment networks and did not engage in required underwriting processes when they opened I Works accounts.

The FTC further alleged the defendants helped I Works evade the credit card networks’ fraud monitoring programs to help keep the company’s merchant accounts open. The CardFlex defendants opened nearly 300 accounts in the names of shell corporations on I Works’ behalf, and implemented a system that enabled I Works to divide its sales transactions between 30 separate accounts to avoid reaching the level that they would be monitored by the credit card networks.

The stipulated order settling the charges ensures that the defendants will no longer process payments for merchants engaged in deceptive conduct. Specifically, the order prohibits CardFlex, Phillips, and Blaugrund from acting as a payment processor, ISO, or sales agent on behalf of several categories of merchants and assisting and facilitating clients’ attempts to evade credit card risk-monitoring programs.

In addition, the defendants must screen prospective clients that meet certain criteria, monitor the sales activity of current clients to detect indications of deceptive conduct, and terminate contracts with those engaged in deceptive conduct.

The order also imposes a $3.3 million monetary judgment against CardFlex and Phillips that will be partially suspended based on their current financial condition. Phillips will pay $150,000 and turn over personal assets, including nearly $1.2 million worth of jewelry that the FTC will sell at auction. However, the full judgment will become due, if it is later discovered that the defendants misrepresented their financial condition to the Commission.

At the same time the FTC filed the complaint in the case, the agency announced the settlement with Blaze Processing, Mach 1 Merchanting, and Shane Fisher. The stipulated final order regarding the three defendants prohibits each from acting as a payment processor, ISO, or sales agent for any third parties. The order also contains a $328,607.78 judgment against Fisher, and more than $650,000 in judgments against Blaze Processing and Mach 1. The FTC has collected the judgment against Fisher, while the judgments against Blaze Processing and Mach 1 have been suspended due to an inability to pay.

In January 2015, defendant Jeremy Livingston also agreed to settle the FTC charges against him in this matter. The order against Livingston prohibits him from acting as a payment processor, ISO, or sales agent for third parties. It contains a monetary judgment of $328,467.23, which has been suspended due to his inability to pay. However, the full judgment will become due, if it is later discovered that Livingston misrepresented his financial condition to the Commission.

“CardFlex helped scammers drain people’s credit and debit accounts without their permission,” said Jessica Rich, Director of the FTC’s Bureau of Consumer Protection. “This case shows that facilitating fraud is a bad strategy for payment processors.”

Companies: CardFlex, Inc.

News: ConsumerProtection FederalTradeCommissionNews