It didn't seem kosher to start with, but few would have guessed that a website called BadCustomer.com actually was the Internet version of a menacing bully, enforcing what federal regulators contend was a mammoth scam that ensnared millions of credit card holders -- and kept them trapped.
Federal agents say it worked, brilliantly and maliciously, for four years.
The cyberbullying billing scam siphoned at least $275 million from the accounts of about 5 million credit card holders and bank customers between 2006 and late 2010, according to the Federal Trade Commission, which has won a federal court order that pulled the plug on the website and the far-reaching enterprise it supported.
Involved in the alleged rip-off: 10 individuals, 10 corporations and 51 shell companies, all interrelated, all apparently determined to hoodwink credit card customers, banks and credit processors.
Jeremy D. Johnson, described by the FTC as the "ringleader" and "mastermind" of the operation, was arrested June 11 at the Phoenix airport en route to Costa Rica. He has been charged with one count of mail fraud in relation to the alleged scam. Prosecutors said other charges were possible.
The FTC said the web of deceit spun by Johnson was built around a company called I Works Inc., based in St. George, Utah, with a satellite office in Santa Monica, Calif. The scam, according to the FTC's complaint, was designed to lure consumers into "trial" memberships for information about bogus government grants and other fictitious products. The company would then repeatedly charge the consumers' credit card accounts for monthly fees the customers never signed up for, and, later, threaten to report complainers to the scheme's secretly owned BadCustomer.com website -- an action that could inhibit their ability to make legitimate purchases with their credit cards.
"No consumer should be sucker-punched into making payments for products they don't know about and don't want," said FTC Chairman Jon Leibowitz.
Some of the more than 5 million people who fell into the trap were able to extricate themselves by navigating through I Works' shrouded cancellation process, but at least 500,000 consumers contacted their credit card companies and demanded temporary credits called "charge-backs," according to federal regulators.
"A lot of consumers were defrauded," said Collot Guerard, the FTC's lead attorney on the case.
Massive charge-backs trigger investigation Those charge-backs helped draw attention to BadCustomer.com and eventually to the entire alleged scheme.
The intriguingly named BadCustomer.com ostensibly was established to protect merchants from consumers who abused the charge-back process by seeking credits for products that they had in their possession yet claimed not to have received.
"Consumers have the Better Business Bureau to help them look at and get reports on companies," Brien Heideman, who said he was BadCustomer.com's co-founder and vice president, told CreditCards.com in a 2010 interview.
In May 2010, Heideman claimed that 13.5 million people already were on the blacklist. (Just two months earlier, he said that 6 million people were on it.) Merchants could check the list and refrain from accepting orders from people whose names appeared there. Anyone who landed on the list could get themselves removed by paying $99 to BadCustomer.com, Heideman said. Heideman has not been named in the FTC's case and did not respond to requests for comment left by CreditCards.com at a telephone number associated with BadCustomer.com.
Wide-open blacklist The problem: The operation did not distinguish between people who might have been abusing the charge-back system and those who had requested legitimate credits.
For instance, if you opened up your credit card bill and found a bogus charge for $199.95 from the Acme Ripoff Co. and challenged that charge through your credit card company, boom! You might land on the BadCustomer.com blacklist and be prevented from making other credit card purchases.
Consumer advocates called this an obvious abuse, but they didn't know the half of it.
According to the FTC, BadCustomer.com was owned by a shell company called Bottom Dollar Inc., itself controlled by Johnson through I Works -- and BadCustomer.com was created to help Johnson and his associates as a cyberthug to keep credit card holders trapped in the alleged scam.
Federal agents say that I Works lured consumers through various websites that offered supposedly free or risk-free information about government grants that would pay the personal expenses of consumers. The I Works-controlled websites also marketed other bogus Internet-based money-making opportunities or stay-healthy plans, the FTC said. Victims would provide credit card or bank account information to offset $1.99 or $2.99 fees for "shipping and handling." But instead of these nominal charges, they soon would find themselves billed for ill-disclosed or undisclosed initial charges of as much as $189 -- and for recurring monthly fees as high as $59.95.
Forced upsells Known in the trade as "forced upsells," these fees were nearly impossible to cancel through I Works, the FTC said. So, hundreds of thousands of desperate customers began asking their credit card companies for charge-backs -- those temporary credits that are posted to accounts while a complaint is being investigated.
The enormous volume of charge-backs pushed Johnson's companies into monitoring programs established by Visa and MasterCard when suspicious activity is detected. This, in turn, blocked access to credit card billing systems. So, in response, the FTC said, Johnson and his associates "tricked banks into giving them continued access to these billing systems by creating 51 shell companies with figurehead officers and by providing the banks with phony 'clean' versions of their websites."
Perhaps reflecting the arrogance of the alleged scamsters -- or a misplaced and warped sense of humor -- one such front company was named: CPA Upsell Inc.
Still, the charge-back requests kept coming. That's where BadCustomer.com came in, according to the FTC -- as an attempt to intimidate credit card holders and I Works victims from even requesting a charge-back, lest they end up on the self-appointed credit card blacklist.
BadCustomer.com's role "[The defendants] have also attempted to drive down their charge-back rates by threatening to report consumers who seek charge-backs to an Internet consumer blacklist they operate called 'BadCustomer.com' that will 'result in member merchants blocking [the consumer] from making future purchases online,'" the FTC said in its complaint. "And they have attempted to counter the large number of complaints about their conduct by flooding the Internet with supposedly independent positive articles and other Web pages."
Filed in U.S. District Court in Nevada, where I Works has several Internet servers, the case resulted in a preliminary injunction signed in February by Chief U.S. District Judge Roger Hunt. Under the order, the assets of Johnson and all of the cited companies have been frozen and placed under the control of a federally appointed receiver. The defendants also are prohibited from marketing products in any way resembling those sold through I Works, may not use the credit card information they have harvested and must block public access to BadCustomer.com and all other websites used by the alleged scheme.
As a result, BadCustomer.com no longer is in operation.
Johnson ended up in a Phoenix jail after federal agents arrested him en route to Costa Rica, where he reportedly has a home. The mail fraud charge involves the sending of CD-ROMs in relation to the I Works scheme, prosecutors said. A spokeswoman for the U.S. Attorney's Office in Salt Lake City told the Salt Lake Tribune that a grand jury could consider other charges. Johnson's attorney told the newspaper that Johnson had been cooperating with the federal government and the arrest came as a surprise. The charging document says Johnson has extensive resources in Costa Rica, Belize and the Philippines.
Guerard, the FTC's lead attorney in the case, said no settlements have been arranged and it is proceeding through the normal stages of discovery.
She also said that the BadCustomer/I Works affair should serve as another warning to consumers, especially those who use credit cards to purchase dodgy services over the Internet.
"They should be very suspicious of government grant claims and weight loss claims," Guerard said. "When looking at a website, they should be very careful. They should look to see if something is free and, if it is free, they need to ask: 'Why do I have to give these people my credit card information?'"