‘Risk-free’ scamsters boasted a worldwide website and financial network

Tip of the Iceberg

The FTC recently put to bed a long-running dispute with an array of companies stretching from Wyoming to the United Kingdom. The companies were run by two gentlemen from California, Phillip Peikos and David Barnett, who the FTC alleged offered more than 50 products through more than 1,000 websites.

Ambitious, certainly, but there’s nothing wrong with that. It’s how they managed customer payments that landed them in hot water.

The FTC alleged that Peikos and Barnett used their products – the usual passel of weight-loss, clear-skin, sexual-performance and cognitive-improvement offerings – as bait to obtain credit and debit card information from unknowing consumers. The products were offered through “free” or “risk-free” trials with a typical shipping or handling fee of $4.95. A full month’s supply of product would be shipped to the customer – but if the customer failed to cancel the offer, they would be charged $90 a month until a cancellation call was placed.

The FTC claimed that Peikos and Barnett’s advertisements failed to explain the terms of the “free” trial, and that the cancellation process was overly difficult. The pair was charged with a variety of violations of the FTC Act and the Restore Online Shoppers’ Confidence Act (ROSCA).

The Takeaway

After ordering the pair to cease activity, the FTC entered into a settlement in 2018. In addition to the prohibitions against future transgressions, Peikos and related defendants were forced to pay $60 million and Barnett $47.3 million as part of the settlement. The total yield from these orders after suspended payments was anticipated to be somewhere between $3 million and $6 million.

But the recent final order settled an additional layer of charges against a Latvian financial institution called SIA Transact Pro (along with its one-time CEO). In the FTC’s amended complaint, filed May 2019, SIA Transact was implicated in the dispute as the financial enabler for Peikos and Barnett, illegally maintaining merchant accounts for the pair and enabling them to evade financial oversight.

The final order banned SIA Transact from processing payments for “certain categories of merchants” and subjected the company to enhanced screening and monitoring procedures. The company was also hit with a $3.5 million judgment.

There’s a lot of ground to cover in this case. But diving into the court documents will provide the curious reader with a fascinating look at the inner financial, corporate and technological workings of a thoroughly modern fraud. This case is also another example of the FTC’s careful attention to marketing and financial schemes that potentially violate ROSCA, and the waves of consequences that may befall the creators and financiers of such business schemes for the sake of consumer protection.