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.