Feds make bust in $45M Net scam
May 11, 1999
by Kim S. Nash and Ann Harrison
(IDG) -- In what may be the biggest Internet credit-card billing scam to date, federal agents last week arrested a Malibu, Calif., man who allegedly engineered $45 million in bogus charges on hundreds of thousands of transactions.
Credit-card fraud is a big problem for online merchants. An official at Visa International Inc., for example, recently said half of Visa's transactions from online sales are disputed or full-fledged frauds.
Kenneth H. Taves and four others were named in complaints filed by the Federal Trade Commission in January that accused the group of "unfairly or deceptively billing consumers for charges they didn't know about or authorize on their credit and debit
Yet Taves was arrested by police last week on contempt charges for failing to repatriate overseas accounts and to reveal complete information about his financial affairs, including a $6.2 million bank account in the Cayman Islands.
"What we have asked for is restitution and disgorgement, which means giving up ill-gotten gains," an FTC spokeswoman said.
The FTC alleged that since early last year, Taves; his wife, Teresa Callei Taves; and their business partners billed hundreds of thousands of credit-card holders for services they didn't request, such as subscriptions to adult Internet sites. The group allegedly set up several fake companies and shunted the money to numerous offshore bank accounts, the FTC said.
Taves couldn't be reached for comment after his arrest. But FTC attorney Douglas Wolfe said Taves' lawyers argued that their client provided legitimate billing and access services for adult Internet sites.
Although Taves ran 15 of his own adult sites, his customer base and billing contracts with other sites would have generated only about $4 million -- not the estimated $45 million he is accused of taking in, Wolfe said.
Go-between bill processors like Taves aren't unusual in adult entertainment, said Jane Duvall, whose Seattle-based site (www.janesguide.com) rates adult sites and monitors fraud complaints.
But Taves' numerous companies used some "pretty suspect" business practices, Duvall said. For example, users were routinely charged for an extra three months after canceling accounts, she said.
Donn Parker, a retired security analyst and author of the book Fighting Computer Crime, noted that e-commerce fraudsters often rely on automated programs to generate card numbers to bill with false charges.
When the Taves case goes to trial Sept. 28, more information will come out about how he and his group worked -- a potential education for would-be scammers, Parker said.
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