Category Archives: Affiliate Law

FTC files Suit Against ISO, Merchant Processor – FTC v. Electronic Payment Solutions of America, Inc., et al.

The FTC recently filed suit against Electronic Payment Solutions of America, Inc., et al., seeking to hold Independent Sales Organizations and their sales reps liable under the FTC Act (and other statutes). The case is significant because the FTC takes a stance against ‘Independent Business Organizations’ involvement in affiliate marketing operations, stating that: “[t]he practice of processing credit card transactions through another company’s merchant accounts is called “credit card laundering” or “factoring” in the credit card industry. It is strictly forbidden by the credit card companies and is illegal under the TSR.”[1]

The liability at issue in this case is largely based upon the alleged fraudulent scheme in a prior case, FTC v. Money Now Funding, LLC et al. The initial Complaint in that case alleges that from 2011 to 2013, the principals of Money Now Funding, LLC (“MNF”) operated a deceptive telemarketing scam, charging thousands of consumers more than $7 million for worthless business opportunities and related upsells.[2] In 2013, the FTC sued MNF for telemarketing worthless business opportunities to consumers and falsely promising that consumers would earn thousands of dollars in income.[3] In 2015, the court entered summary judgment and default judgments against certain MNF defendants, finding that MNF was a multi-million dollar scheme to defraud consumers.[4]

The MNF case is significant because the defendants in the present case of FTC v. Electronic Payment Solutions of America, Inc., et al. are alleged to have processed victim credit card charges through merchant accounts established in the names of MNF’s fictitious companies, rather than through a single merchant account in the name of MNF.[5] Specifically, in 2012 and 2013, Electronic Payment Solutions, LLC served as the ISO for the entities involved in the MNF scam.[6] MNF transactions were also alleged by the FTC to have been laundered through at least two merchant accounts set up in the name of companies created by defendants in the Electronic Payment Solutions of America, Inc., et al. case.[7]

The present case involves two groups of defendants: the “KMAWigdore Defendants” and the “EPS Defendants” (the two groups collectively the, “Defendants”). The KMA-Wigdore Defendants are three individuals who acted as Independent Sales Organization (“ISO”) sales agents to other Defendants, and four entities associated with these individuals. The EPS Defendants are the ISO, their two principals, and risk manager.

The FTC’s pleadings state that EPS Defendants marketed ISO and payment processing services to prospective merchants.[8] They also: (1) did the underwriting for MNF and (2) using the services of two payment processors, processed more than $5,895,035 in MNF transactions through these and other merchant accounts. [9] Furthermore, the Complaint alleges that EPS Defendants used ISO “sales agents” to market the processing services to merchants.[10] Three of these sales agents, Defendants Jay Wigdore, Michael Abdelmesseh, and Nikolas Mihilli, directly participated in the MNF credit card laundering scheme.[11] Defendant Wigdore submitted the merchant applications for the MNF fictitious companies to the EPS Defendants.[12] Once the EPS Defendants processed MNF’s transactions through the fictitious company accounts, the MNF sales revenues were transferred to companies controlled by the ISO sales agents and others.[13]

Most significant from this case is the conduct the FTC took issue with. The FTC is alleging the Defendants failed to sufficiently screen incoming merchants that were applying for merchant accounts with Merrick, the acquirer.[14] As an ISO for Merrick, the FTC claims that the EPS Defendants were contractually required to comply with Merrick’s underwriting rules for screening merchants, which included strict guidelines designed to verify the identity of the merchant and the legitimacy of the merchant’s business, and to screen out merchants potentially engaged in fraud.[15] The FTC is also alleging that the EPS Defendants had a duty to adequately monitor its merchants’ transactions, update merchant information in the merchant database, and ensure that its merchants complied with the card networks’ rules and various fraud monitoring programs.[16]

Thus, the FTC claims that, rather than verify its merchants’ identities, the EPS Defendants opened merchant accounts in the names of numerous fictitious companies for the same underlying merchant, and thereby falsely represented the true identity of the fictitious companies.[17] Additionally, the Commission asserts that the Defendants: (a) ignored obvious warning signs of fraud, including the likely presence of credit card laundering; (b) concealed from Merrick (the acquirer) and the card networks the true identity and nature of the MNF Fictitious Companies; and (c) made every effort to continue processing for the MNF Fictitious Companies, and other merchants related to the KMA-Wigdore Defendants, even after Merrick noticed signs of fraud and instructed EPS to stop.[18]

The FTC’s allegations in this case against merchant processing entities, and definition of “credit card laundering”, highlight the FTC’s level of scrutiny that ISOs and acquirers face moving forward. Regardless of how the case concludes, it shows a decreasing level of tolerance by the FTC for those that play even more passive/secondary/indirect roles in the traditional affiliate marketing operational structure.

 

 

[1] FTC v. Electronic Payment Solutions of America, Inc. Complaint ¶ 6.

[2] See e.g., Final Judgment and Order for Permanent Injunction and Equitable Monetary Judgment as to Defendant Leary Darling.

[3] See FTC v. Money Now Funding, LLC, et al., CV 13-01583-PHX-ROS (D. Ariz. 2013) Complaint

[4] See e.g., Final Judgment and Order for Permanent Injunction and Equitable Monetary Judgment as to Defendant Leary Darling.

[5] FTC v. Electronic Payment Solutions of America, Inc. Complaint ¶ 5.

[6] Id. at ¶ 12.

[7] Id. at ¶ 5.

[8] Id. at ¶ 10.

[9] Id. at ¶ 18.

[10] Id. at ¶ 12.

[11] Id.

[12] Id.

[13] Id. at ¶ 13.

[14] Id. at ¶ 82.

[15] Id.

[16] Id. at ¶ 83.

[17] Id.

[18] Id. at ¶ 84.

FTC Charges Online Marketers and Merchant Account Entities

negative option marketingThe FTC fired warning shots that could affect affiliate marketers, publishers, and merchant account signers. The FTC filed suit against RevGuard, LLC and 60 other defendants. What’s the charge? Negative option marketing (FTC Act, 15 U.S.C. § 45(a), and ROSCA, 15 U.S.C. § 1843).

Negative Option Marketing At Center of RevGuard FTC Lawsuit

The lawsuit asserts that RevGuard, et al. deceptively billed people who bought a tooth-whitening product.[1] A negative option plan generally refers to transactions in which a seller interprets the customer’s failure to take an affirmative action — typically cancelling an offer — as consent to be charged for goods or services on a recurring basis.

In the FTC v. RevGuard case, the FTC alleges that the defendants’ checkout pages were structured so that once a customer made a purchase, they were instantly redirected to another page that displayed a large yellow “complete checkout” button. The commission further alleges that when customers clicked to “complete checkout” they were enrolled in a second negative option plan for additional products. According to the FTC, the offending checkout page looked like an order confirmation.

Who Does This Decision Affect?

Though the FTC commonly cracks down on negative option schemes, this case has significant implications for merchant transaction companies. Specifically, the FTC’s co-defendants list included: (1) service providers that perform the fraud’s “back office” functions; (2) intermediate holding companies that obscure financial transactions; and (3) merchant entities that obtain merchant accounts, web domains, and credit-card settlement bank accounts.[2] In essence, this case raises concerns for entities that did nothing more than open merchant accounts.

Furthermore, and far more troubling, is that the asset freeze applied to the aforementioned three groups of co-defendants, not just the affiliate marketers who actually profited from the scheme.[3] In particular, the Ex Parte Temporary Restraining Order issued by the Court declared that the asset freeze applied to “. . . [d]efendants and their officers, agents, employees, and attorneys, and all other persons in active concert or participation with any of them, who receive actual notice of this Order, whether acting directly or indirectly . . . .”[4]

This case should serve as a lesson for entities involved in similar arrangements. While the FTC v. RevGuard, LLC case is just getting started (it has not even been posted to the FTC website as of the date of this post), it promises to shake up the industry and force affiliate marketers to get creative with structuring future payment processing arrangements.

Sources

[1] FTC v. RevGuard, LLC et. al. Complaint at 21.

[2] FTC v. RevGuard, LLC et al. Emergency Motion for a Temporary Restraining Order at 12.

[3] FTC v. RevGuard, LLC et al. Ex Parte Temporary Restraining Order Granting Asset Freeze, Appointment of a Temporary Receiver, and other Equitable Relied, and Order to Show Cause Why a Preliminary Injunction Should Not Issue § 5.

[4] Id. at § V(A).

Gordon Law Moves Court to File Counterclaim against FTC

FTC lawyer

DOTAuthority.com and Affiliates File A Counterclaim Against the Federal Trade Commission (“FTC”) for Defamation and Tortious Interference

March 21, 2017 – Fort Lauderdale, FL – Gordon Law Group has moved the court on behalf of clients DOTAuthority, Inc. et al.(“Plaintiffs”) for leave to file a counterclaim against the Federal Trade Commission (“FTC”) alleging defamation and tortious interference (CIVIL ACTION NUMBER: 0:16-cv-62186-WJZ) in the United States District Court for the Southern District of Florida.

Business to FTC: Derogatory Alerts Caused Undue Harm

On March 20, 2017, the Plaintiffs filed an action for declaratory and injunctive relief against the FTC to correct press releases, blog posts, a scam alert listing, and public comments by the FTC and its designated representatives. The materials at issue allegedly injured the Plaintiffs’ reputations and revenue streams. The Counterclaim also asserts a cause of action for the FTC’s alleged tortious interference with Plaintiffs’ business relationships.

Business to FTC: We Used Proper Disclaimers

The newly filed countersuit arises from the FTC’s September 2016 lawsuit accusing DOTAuthority.com and its affiliates of deceptive business practices. Specifically, commissioners argued that DOTAuthority.com purposefully tried to mislead consumers into believing it was a government entity (CIVIL ACTION NUMBER: 0:16-cv-62186-WJZ). The Plaintiffs’ court filing states thatDOTAuthority.com’s marketing materials, websites, and shopping carts featured pre-existing, adequate good faith disclaimers explaining that the company is a third party and “not the Department of Transportation.”

On September 15, 2016, the FTC obtained an ex parte temporary restraining order without DOTAuthority.com’s knowledge. The agency froze the personal and business assets of DOTAuthority.com and its owner James Lamb. The court also appointed a receiver to wrest control of the company away from Lamb during the proceeding’s pendency.

Overruling the FTC’s objections, on September 28, 2016, the Federal court took witness testimony from Lamb and heard arguments. In defense of Lamb and his business, the Gordon Law Group argued that:

Gordon Law Group Convinces Court To Unfreeze Client’s Millions

Gordon Law Group prevailed at the September 29, 2016 hearing. The court immediately unfroze $4 million in assets and terminated the receivership.

Ultimately, the FTC issued a significantly modified preliminary injunction, which the Plaintiffs accepted. In fact, the revised order was nearly identical to the original restrictions voluntarily offered to the FTC.

Did The FTC Commit An Act of Defamation?

Specifically, DOTAuthority.com’s March 20, 2017 counterclaim against the FTC alleges that several of the agency’s pre-trial publications falsely characterized the Plaintiffs as “scammers” and “crooks” and exaggerated their culpability by using inflammatory language in the absence of a final judgment.

The countersuit explicitly alleges that the FTC’s publications intentionally mischaracterize the substance of the September 29, 2016 court order, causing proximate and irreparable injury to the Defendants’ reputations and revenues.

According to one of the members of DOTAuthority.com’s legal team, Attorney Andrew Gordon:

“The FTC’s publications at issue in the Counterclaim collectively mischaracterize the substance of the preliminary injunction order. The language caused proximate and irreparable injury to the Defendants’ reputations and revenues.”

Attorneys Andrew Gordon, Aaron Wiener, and Bradley Gross represented DOTAuthority.com. Attorneys Karen S. Hobbs, Danielle Estrada, Connell McNulty and Collot Guerard represented the FTC. The case is expected to go to trial in October 2017.