Markets Wired

The Federal Trade Commission has charged seven defendants with illegally processing credit card payments on behalf of a massive Internet scam that allegedly bilked millions of dollars from consumers by repeatedly charging them for “trial” memberships they never ordered. Three of the defendants have agreed to settle the FTC’s charges.

According to a complaint filed by the FTC, the defendants arranged for a deceptive operation known as I Works to obtain and maintain merchant accounts that allowed it to process more than $26 million in illegal credit and debit card payments through the Visa and MasterCard payment networks.

In December 2010, the FTC charged I Works with scamming consumers out of more than $275 million via deceptive “trial” memberships for bogus government-grant and money-making schemes. A federal court subsequently froze I Works’ assets and placed them under the control of a court-supervised receiver. The I Works litigation is ongoing.

Today’s case alleges that the defendants – CardFlex Inc. (formerly operated as CardFlex Financial Services LLC), Blaze Processing LLC, Mach 1 Merchanting LLC, Andrew M. Phillips, John S. Blaugrund, Shane Fisher and Jeremy Livingston – illegally provided the 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. In spite of this, the defendants provided I Works with unfettered access to payment networks and failed to engage in their contractually required underwriting process when they opened accounts for I Works, according to the FTC’s complaint.

In fact, the FTC charged, the defendants helped I Works evade the credit card networks’ fraud monitoring programs to help keep I Works’ merchant accounts open. The defendants opened at least 293 accounts in the names of 30 separate shell corporations on I Works’ behalf, and implemented a system that enabled I Works to divide its sales transactions between these accounts in order to avoid reaching the thresholds necessary for its accounts to be monitored by the credit card networks.

According to the FTC’s complaint, CardFlex, as an Independent Sales Organization (ISO), was paid for referring merchants to banks and their payment processors and it received payments based on the volume of transactions processed as well as for processing reversals of charges to credit cards or debits to bank accounts, known as chargebacks. Blaze Processing and Mach 1 Merchanting were sales agents that managed the relationship between CardFlex and I Works.

Blaze Processing, Mach 1 Merchanting, and Shane Fisher have agreed to settle the FTC’s charges. The suit against CardFlex, Andrew Phillips, John Blaugrund, and Jeremy Livingston is ongoing.

The stipulated final order against Shane Fisher, Blaze Processing, and Mach 1 prohibits them from acting as a payment processor, ISO, or sales agent for any third parties. The order also contains a nearly $1 million monetary judgment against the defendants. The FTC will collect $328,607.78, and the remainder of the judgment will be suspended due to an inability to pay.

The Commission vote authorizing the staff to file the complaint was 4-0-1, with Commissioner McSweeny not participating. The Commission vote approving the stipulated final order was 4-0-1, also with Commissioner Terrell McSweeny not participating.

The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 2,000 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC’s website provides free information on a variety of consumer topics. Like the FTC on Facebook, follow us on Twitter, and subscribe to press releases for the latest FTC news and resources.