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Early card fraud rains new payouts for victims

Millions recovered from offshore accounts held by an owner of online porn sites

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 Early card fraud rains new payouts for victims RapidEye/iStock /Getty Images Plus/Getty Images

 

 Early card fraud rains new payouts for victims RapidEye/iStock /Getty Images Plus/Getty Images

 

Ken Taves yearbook photo

Kenneth Taves in his yearbook photo at Lodi (California) High School

Long before Facebook, Snapchat or Google entered our lives, a former high school student body president pulled off one of the largest online credit card fraud schemes of the 20th century, stealing $45.7 million from 900,000 cardholders without ever hacking an account. 

The story has it all: nuns billed for porn sites, millions stashed in the Caribbean and South Pacific, years of pursuit – and finally some payback for the fraudster’s victims all these years later.

But we’re getting ahead of ourselves. 

How Kenneth Taves got hold of so many credit card numbers so easily served as a wake-up call for card issuers, banks and the Federal Trade Commission. Ultimately, the case became a prize trophy of a get-tough FTC consumer protection initiative called Project Scofflaw

Taves was a high flier even back at Lodi (California) High School. He hired an airplane to trail a banner with his name on it over the campus – winning a runoff for student body president in 1969. And before the airplane banner to sway votes, Taves used his father’s Rolls-Royce in his campaign to lead the student body. 

Some people paid $19.95 to look at their (porn) pictures, but that was a very small percentage of it. But when we started getting Catholic nuns complaining about being charged for pornography?

— Robb Evans
Chairman, Robb Evans & Associates

Flash forward to 1998, when Taves legally purchased 3.7 million credit card numbers for $5,000 from Charter Pacific Bank in Agoura Hills, California, ostensibly to protect his new online businesses from card fraud. 

Instead, Taves used the list to fraudulently bill (or “cram”) roughly 900,000 of those cards with $19.95 access fees to he and his wife's 14 adult websites. The FTC estimates that Taves made 90 percent of $49 million in sales through these fraudulent charges without ever hacking an account or even knowing the names of their victims. 

“Some people paid $19.95 to look at their [porn] pictures, but that was a very small percentage of it,” says Robb Evans, a former bank executive who helped the FTC crack the Taves case. “But when we started getting Catholic nuns complaining about being charged for pornography?” 

Well, that just didn’t make sense, Evans says with a laugh now. 

From oil refinery swindler to internet porn pioneer
Taves’ history of bad behavior dates back to 1985 and includes wire fraud, passing counterfeit checks and swindling oil refineries out of $16.9 million. In 1988, he was charged with murder, but he pleaded guilty to the lesser charge of accessory to the killing of a business associate who owed him money. In each case, Taves received a slap on the wrist in lieu of an orange onesie. 

His timing as an Internet porn pioneer was fortuitous, but his timing as a credit card “crammer” ultimately proved his undoing. 

In the mid-1990s, the FTC, historically hamstrung by its solely civil authority, embarked on Project Scofflaw. The initiative was designed to help the FTC combat fraud and deter recidivism by sharing its findings, via a criminal-liaison unit, with the Department of Justice, which then would pursue criminal prosecution of the FTC’s more egregious cases. 

One such case involved the Taves-owned J.K. Publications, which hit the FTC’s radar due to the growing number of consumer complaints about porn site memberships mysteriously popping up on consumer credit card statements. Upon investigation, the FTC found that thousands of the victims didn’t even own a computer. 

In January 1999, at the behest of the FTC, a U.S. District Court judge in Los Angeles issued a temporary restraining order, seized Taves and his wife's assets and placed their firm in temporary receivership.

Evans was there at the big raid on Taves’ operations. “There was a boiler room setup in Malibu, and when we stepped in the doors and people realized there was something going on because we had police with us,” Evans says. “You could see the people diving out the windows and running out the back door to get away before even stopping to find out what we wanted.”

The Taveses were ordered to pay $37.5 million in restitution in the civil action. 

Analysis of offshore activity

Following the money trail
Here’s where the happy ending begins. 

After the FTC lowered the boom, the DOJ brought criminal charges against Ken Taves, to which he pleaded guilty in 2001, earning him an 11-year prison sentence in 2004. He was forced to sell his Malibu home to pay restitution. 

During the discovery process, the feds unearthed $23.5 million in assets that the Taveses had squirreled away in offshore accounts in the Cayman Islands and the South Pacific isle of Vanuatu. 

In 2006, a Grand Cayman court convicted a 71-year-old American named Raymond Creed on four counts of laundering more than $9 million for Ken Taves between 1998-1999. Taves’ retired father Mel was likewise prosecuted for money laundering in the Caymans. 

Suffice it to say, years of foreign litigation ensued as the DOJ went after something the FTC rarely encounters: enough dough to redress the losses to 900,000 victims. 

To haul Taves’ sheltered millions back onshore, the FTC recommended to the U.S. District Court that the California-based Evans be engaged. The selection was a no-brainer, given that the former international bank CEO’s hand-picked team of bankers and forensic accountants played a pivotal role as U.S. trustee in dismantling the Bank of Credit and Commerce International (BCCI), then the center of the worst international money laundering scandal in history. (Enron would top BCCI in 2001).

“We’re basically a banking team, not a lawyer team like many receiverships,” Evans explains. “We can do things in a receivership, which is a civil matter, that law enforcement – the district attorney or the DOJ – can’t do, because they are dealing with criminal matters, and in our cases we are usually dealing with civil matters which can move much more rapidly. There is a whole different standard of proof.” 

Robb Evans & Associates painstakingly followed the money and quickly noted this case would involve serious air miles. 

“Taves laid a very careful chain to try to hide it that ran through California and Nevada to the Cayman Islands and from there scattered all over the world. I don’t think he thought for a moment that we could ever trace it all down,” Evans says. 

Money flows back to fraud victims
The FTC announced July 26, 2016, that it was mailing out its third flight of redress payments. It is sending out $9.7 million in $30 checks to 321,982 cardholders who had been charged access fees to Taves’ porn sites without their permission. In 2009, 400,000 cardholders received a total of $12 million, and in 2010, 145,000 cardholders received $4 million in redress checks, all $30 each. 

In some cases, we get a very, very small percentage of the money back, so this seems like a very positive result for consumers.

— Mitchell Katz
FTC spokesman

FTC spokesman Mitchell Katz says the lengthy redress period, while rare, benefits the defrauded cardholders. After all, the $25.7 million returned so far, while short of the $37.5 million court-ordered restitution, is already more than the FTC initially thought they’d see from Taves’ assets. 

“In some cases, we get a very, very small percentage of the money back, so this seems like a very positive result for consumers,” he says. 

Additional payments aren’t out of the question. 

“It is possible, as the court-appointed receiver is still in litigation over some funds remaining frozen in the courts of Vanuatu,” the FTC team says. “It is unusual for multiple redress mailings related to one case to be so far apart.” 

Katz says the Taves case demonstrates that the government’s new approach to scofflaws has teeth. 

“What it shows is that the FTC is not going to give up when a lot of money is lost, a judge orders it paid and it simply is inaccessible for the FTC to get at that time,” he says. “We’re going to keep going after it until we get it.” 

Evans takes pride not only in redressing cardholder losses, but also working on cases that helped close an ethical loophole in banking. 

“This was a case where the depository banks either did not pay attention to their clients’ conduct, did not know their customers or chose to ignore their business practices and suffered greatly as a result. Two banks were put out of business, at least in part, because of their involvement in this case,” Evans recalls.

“Today the know your customer regulatory standards are very high. Then, they were not as high.”

Court documents indicate a chain of banks in the United States and internationally that held or moved the funds. Two, Charter Pacific Bank in California and EuroBank in the Cayman Islands were closed by regulators shortly after their role in the matter was made public.

Things changed after BCCI and other scandals led Congress to pass the Public Interest Disclosure Act of 1998

Evans was there at the big raid on Taves’ operations. “There was a boiler room setup in Malibu, and when we stepped in the doors and people realized there was something going on because we had police with us,” Evans says. “You could see the people diving out the windows and running out the back door to get away before even stopping to find out what we wanted.”  

Epilogue: Taves, banks and the moral of the story
According to the Federal Bureau of Prisons, Kenneth Howard Taves, now 64, was released from federal custody in April 2008. 

Charter Pacific Bank no longer sells its credit card account numbers or anything else for that matter. It was acquired by First Banks of America in 2001. 

And Evans? What drove his team to pursue Taves’ millions across the globe – and to take on similar cases today? “It’s a matter of principle,” he says. “People who have money stolen should get it back.” 

See related: Account takeover fraud rising, 10 warning signs of fraud and what to do about them

Published: August 9, 2016

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Updated: 01-22-2017

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