The defendants are charged with conspiracy to commit mail and
wire fraud, conspiracy to commit credit card fraud, and conspiracy
to commit money laundering. The indictment also seeks forfeiture of
up to $230 million in assets, and specifically seeks forfeiture of
the defendants' multimillion dollar luxury homes in New York and
California.
Among the defendants is Richard Martino, whom New York
prosecutors say is a "soldier" with the Gambino crime family of La
Cosa Nostra. Another is Bruce Chew, CEO of Crescent Publishing
Group, the company that publishes Playgirl, High Society and other
adult magazines.
According to the indictment, the web sites featured content from
Crescent's magazines and the magazines featured adverts for the web
site. The web developer is among the defendants, but Crescent
appears to have escaped charges by co-operating in the
investigation.
The heart of the scam involved advertised "free tours" of the
web sites. Users were tricked into providing credit or debit card
information, purportedly as proof of age, and were promised that
the card would "NOT BE BILLED!" In fact, the cards were billed,
typically $59.99 per month after the initial web site visit,
without the users' knowledge or consent.
The defendants allegedly employed various means to prevent users
from leaving the web sites, including disabling the back button on
the users' browsers, and failing to include an "exit" or "home"
button within the free introductory portion of the tour. In
addition, they hid price information by burying vague language in
the middle of sexually explicit text which was superimposed over
sexually explicit images on the web sites.
Virtually from the inception of the scheme, Crescent received an
extremely high number of "chargebacks" from disgruntled web site
users who complained about unauthorised charges to their credit
cards. A chargeback occurs when a consumer disputes a charge and
receives a credit on his or her bill, which in this case was
debited from Crescent.
During 1999, Crescent's chargeback rate was more than 10%, the
third highest rate among millions of companies participating in the
Visa programme within the US.
Facing escalating fees imposed by Visa for excessive chargebacks
and the prospect of termination from the Visa programme, the
defendants created a series of shell companies with new bank
accounts - all secretly controlled by Crescent - on a continuous,
rolling basis, in violation of Visa's operating regulations, and
abandoned their old accounts as chargeback rates mounted.
In a further effort to reduce chargebacks and conceal their
scheme, the defendants apparently attempted to settle individual
customer complaints internally at Crescent rather than at the
banks. In these instances, refunds were given only when expressly
demanded by the user, and otherwise the consumer's web site
membership was simply cancelled.
In April 2000, as the high rate of chargebacks continued, Visa
terminated the rights of Crescent, CEO Bruce Chew, and its chief
financial officer, to participate in the Visa program in the US. In
response, the defendants apparently took their credit card
processing operations offshore. In September 2000, Visa barred them
from the global Visa programme. Despite this, Chew and Crescent
apparently attempted to continue operating the web sites through
nominees.
In August 2000, the Federal Trade Commission and the New York
State Attorney General jointly filed a civil complaint against
Crescent, certain affiliated companies, Chew and Crescent's chief
financial officer. In March 2001, the court issued a preliminary
injunction against those defendants. In September 2001, the civil
defendants agreed to pay $30 million in penalties, and to entry of
a permanent injunction in settlement of that lawsuit, without
admitting liability.
If convicted, the individual defendants face up to 5 years in
prison on the wire fraud conspiracy charge, 15 years in prison on
the credit card fraud conspiracy charge, and 20 years in prison on
the money laundering conspiracy charge.
They also face fines of up to $500,000 on the money laundering
conspiracy charge and $250,000 on each of the other charges, or up
to twice their gains, the loss to the public, or the amount of
funds laundered, which is put at $230 million. The corporate
defendants face fines up to $500,000 or twice their gains, the loss
to the public, or the amount of the funds laundered.
