Visa and MasterCard Sue Over Telemarketing Scam

A vast telemarketing scheme with nationwide tentacles recruited small companies to launder credit card charges, Visa International and MasterCard International contend in a multimillion-dollar fraud lawsuit.

The suit, unsealed today in Los Angeles, says consumers were lured into calling “boiler rooms” by mailings promising free cars, watches and $5,000 cash prizes. Pressure tactics were then used to sell water purifiers, security systems, travel packages and vitamins, and to obtain credit card numbers, it says.

The defendants claimed to check winners’ identities through their credit card numbers and implied Visa and MasterCard sponsored the giveaways, the suit says.

They also misrepresented goods, failed to deliver them and sent multiple bills for the same product, according to the suit. It alleges racketeering, fraud, trademark infringement and interfering with contractual relationships.

“It’s the largest single telemarketing operation that Visa and MasterCard ever came across,” Visa spokesman David R. Brancoli said.

The lawsuit attempts to stop telemarketers from using third parties to process credit card sales drafts. Banks won’t set up Visa and MasterCard accounts for telemarketers because too many customers refuse to pay, leaving the banks holding the bag, the suit says.

The lawsuit, filed in Los Angeles federal court, opens a new front in the companies’ joint war on phone scams, which are estimated to cost Visa and MasterCard $150 million to $200 million a year. Federal Trade Commission officials estimate the yearly loss to consumers is $1 billion.

“People should be incredibly suspicious about giving their (credit card) numbers over the phone,” Brancoli said.

Also under way are criminal fraud investigations by the U.S. Postal Service and the Secret Service, according to the suit and one of the defendants, Lorraine G. Doty.

A key defendant is Donald Gaines of Clearwater, Fla., who the complaint accuses of running boiler rooms and, through a Phoenix business, acting as a broker for small businesses willing to launder charges.

Altogether, the suit names 10 individuals and 11 companies as defendants. “We have documented $4 million in losses, but we’re sure the total is far larger,” said Daniel H. Bookin, a San Francisco lawyer for the credit card companies.

MasterCard and Visa are seeking $10 million in punitive damages, recovery of actual damages, and a ban on the telemarketers having anything to do with credit card accounts.

Telemarketers use small businesses to process sales drafts for a fee of typically 6%, according to the suit. The front businesses, which were not charged, include a men’s clothing store in Virginia, an exercise business in Arizona and a car stereo store in California, the lawsuit alleges.

The defendants include brokers who the suit says ran newspaper ads to find small businesses willing to process sales drafts for the boiler room operations.