WSJ.com - Online 'Autosurf' Scams Use Legal Businesses to Flourish
Here is an article on the Wall Street Journal regarding surf scams using legitimate businesses to scam people.
On Monday, the Securities and Exchange Commission issued a warning to the public: Beware of "paid autosurf" Web sites.
Such sites, most of them of recent origin, promise to pay investors for viewing a few online advertisements. A "member" goes to the site and clicks on an automatic surfer that visits a series of ads, after which the viewer is rewarded with monetary credit.
There are dozens of such sites, some of which are legitimate businesses. But the SEC said that others, especially those promising to pay members huge profits, can be scams.
Yet the scams wouldn't be possible without the help of larger, well-established Internet businesses, raising the question of whether these companies are -- wittingly or unwittingly -- playing a role in the growing scourge of Internet-based frauds.
Yesterday, for example, at least one suspect autosurf site displayed a "PayPal Verified" logo, meaning users could pay and receive funds using the popular PayPal online payment service owned by eBay Inc. And over on eBay's Internet auction site, sellers were advertising inexpensive software templates that would allow buyers to easily set up their own autosurf sites -- which could be used to scam money out of the unwary.
A PayPal spokeswoman says the Web site in question conforms to its policies, but she adds that PayPal is taking a closer look at autosurf sites in light of the SEC's warning. An eBay spokesman says that the company is reviewing the autosurf postings but adds that eBay likely would take no action if the software also has legitimate uses.
The SEC warning was prompted by the recent collapse of one of the biggest paid autosurf sites, 12DailyPro.com, which promised members a 44% profit in just 12 days -- a return that the SEC said amounted to more than 1,300% annually. Members could join 12DailyPro at no charge but got paid only if they "upgraded" to a paid membership and signed on to view ads 12 days in a row. Some investors put in as much as $6,000 every 12 days.
The agency last week moved to freeze funds controlled by the Charlotte, N.C., company that operated 12DailyPro, saying it had defrauded more than 300,000 people of more than $50 million. The agency said 12DailyPro claimed it generated revenue in part from advertisers willing to pay its members to view their online ads. In reality, the SEC charged, at least 95% of revenue came from fees paid by other members, making the site "almost a pure Ponzi scheme."
Named for Charles Ponzi, an Italian immigrant to the U.S. who gained notoriety early in the 20th century, a Ponzi scheme promises huge returns to investors but pays them with money from subsequent investors rather than from revenue generated by business. "Paid autosurf programs have become an enormous industry on the Internet," Randall R. Lee, the head of the SEC's Pacific region, said in a statement. "When these schemes depend on attracting new members in order to pay returns to current members, they are destined to collapse."
Charis Johnson, who operated 12DailyPro, previously has defended the site as legitimate but last week agreed to the SEC's asset-freeze proposal without admitting or denying the allegations. The SEC charged that Ms. Johnson transferred $1.9 million to her personal bank account since mid-2005. Ms. Johnson's attorney, Noell Tin, yesterday said he and his client are looking forward to the SEC process, which he said would lead to money being returned to members and declined to comment further.
A key part of 12DailyPro's operation relied on a small PayPal rival, StormPay Inc. of Clarksville, Tenn. Payments to and from the Web site were made via StormPay and a couple of other small online payment processors.
StormPay officials didn't return calls seeking comment. The company has previously said it voluntarily froze funds related to 12DailyPro about a month ago after being alerted that the Web site may have been part of a fraud. Although the SEC said the amount originally frozen was about $50 million, with additional sums already having been paid out to members, the total involved in the alleged scheme likely was significantly greater.
Instead of being angry with 12DailyPro, many investors in the site have turned their ire on StormPay. "They basically just froze my money, that I felt I was entitled to," says Mike Bromell, of Austin, Texas, who started investing in 12DailyPro in December. "It's just like if I wired you money via Western Union, and Western Union decided to keep it."
PayPal, the dominant force in the online-payment industry, says under its "acceptable use policy" it won't do business with illegal pyramid schemes and "Get Rich Quick" schemes "where the claims of profit or returns on investment are unrealistic or unsupported." It also bans transactions related to online pornography and several years ago stopped doing business with online gambling sites, after reaching a settlement with New York Attorney General Eliot Spitzer.
But PayPal is listed as a payment-processing option on a number of autosurf sites. One, NetInvestAutoSurf.com, promises "members" a return of 1% per day on fees they give the site, and displays a yellow "PayPal Verified" logo. Another, 123eTraffic.com, says on its home page: "Get paid up to $3,100 Monthly -- no selling, no marketing, just surfing! 123eTraffic has to be the fastest, easiest way to make money on the Internet." Email messages directed yesterday to the operators of both sites went unanswered.
Amanda Pires, a PayPal spokeswoman, says both Web sites are "within the bounds of our policies." Ms. Pires says the sites don't have characteristics of typical pyramid schemes -- they allow free membership, and members don't make most of their money by referring other members to the site. As for the "PayPay Verified" logo, Ms. Pires says it "means not much," except that PayPal has confirmed that the customer is linked to a real bank account.
Still, she says, these are "a new type of business we are just starting to see on the Web. We are monitoring these businesses very closely to ensure there are no violations with our existing policies, and to ensure there are no issues reported to us by our customers."
Robert L. FitzPatrick, who wrote a book about pyramid schemes, "False Profits," reviewed several autosurf Web sites accepted by PayPal and says they are "thinly disguised Ponzi schemes." PayPal, he adds, is "trying to narrowly define a pyramid scheme because PayPal makes money every time there is a transaction."
Tucker Ronzetti, a Coral Gables, Fla., attorney who has represented investors in class-action suits related to Ponzi schemes, says third parties, such as payment processors, could be held liable under state laws for "aiding and abetting" an Internet fraud. But, he says, such cases are rare and difficult to prove, because the third party must have "actual knowledge" of the fraud.
"On the one hand," he says, "you've got to applaud PayPal for trying to monitor this. It's a legitimate problem, and innocent people are being victimized. On the other hand, if they're looking at the definition of a pyramid or Ponzi scheme in too strict or picayune a fashion, they may be allowing these schemes to flourish."
Many sites similar to 12DailyPro continue to operate. They come and go: One Web site offering advice about online investment programs lists more than 2,200 sites that have become defunct. One reason for the proliferation of copycat sites may be the easy-to-use software templates, or "scripts," that allow anybody to instantly set up an autosurf Web site with built-in links to online payment processors.
Hani Durzy, an eBay spokesman, says the company prohibits the sale of products directly related to fraud. But he notes that the SEC itself said that autosurf programs can be legitimate, and unless the software templates specifically are marketed as allowing Ponzi schemes or the like, eBay probably would allow them.
Write to Mark Maremont at mark.maremont@wsj.com
WSJ.com - Online 'Autosurf' Scams Use Legal Businesses to Flourish
On Monday, the Securities and Exchange Commission issued a warning to the public: Beware of "paid autosurf" Web sites.
Such sites, most of them of recent origin, promise to pay investors for viewing a few online advertisements. A "member" goes to the site and clicks on an automatic surfer that visits a series of ads, after which the viewer is rewarded with monetary credit.
There are dozens of such sites, some of which are legitimate businesses. But the SEC said that others, especially those promising to pay members huge profits, can be scams.
Yet the scams wouldn't be possible without the help of larger, well-established Internet businesses, raising the question of whether these companies are -- wittingly or unwittingly -- playing a role in the growing scourge of Internet-based frauds.
Yesterday, for example, at least one suspect autosurf site displayed a "PayPal Verified" logo, meaning users could pay and receive funds using the popular PayPal online payment service owned by eBay Inc. And over on eBay's Internet auction site, sellers were advertising inexpensive software templates that would allow buyers to easily set up their own autosurf sites -- which could be used to scam money out of the unwary.
A PayPal spokeswoman says the Web site in question conforms to its policies, but she adds that PayPal is taking a closer look at autosurf sites in light of the SEC's warning. An eBay spokesman says that the company is reviewing the autosurf postings but adds that eBay likely would take no action if the software also has legitimate uses.
The SEC warning was prompted by the recent collapse of one of the biggest paid autosurf sites, 12DailyPro.com, which promised members a 44% profit in just 12 days -- a return that the SEC said amounted to more than 1,300% annually. Members could join 12DailyPro at no charge but got paid only if they "upgraded" to a paid membership and signed on to view ads 12 days in a row. Some investors put in as much as $6,000 every 12 days.
The agency last week moved to freeze funds controlled by the Charlotte, N.C., company that operated 12DailyPro, saying it had defrauded more than 300,000 people of more than $50 million. The agency said 12DailyPro claimed it generated revenue in part from advertisers willing to pay its members to view their online ads. In reality, the SEC charged, at least 95% of revenue came from fees paid by other members, making the site "almost a pure Ponzi scheme."
Named for Charles Ponzi, an Italian immigrant to the U.S. who gained notoriety early in the 20th century, a Ponzi scheme promises huge returns to investors but pays them with money from subsequent investors rather than from revenue generated by business. "Paid autosurf programs have become an enormous industry on the Internet," Randall R. Lee, the head of the SEC's Pacific region, said in a statement. "When these schemes depend on attracting new members in order to pay returns to current members, they are destined to collapse."
Charis Johnson, who operated 12DailyPro, previously has defended the site as legitimate but last week agreed to the SEC's asset-freeze proposal without admitting or denying the allegations. The SEC charged that Ms. Johnson transferred $1.9 million to her personal bank account since mid-2005. Ms. Johnson's attorney, Noell Tin, yesterday said he and his client are looking forward to the SEC process, which he said would lead to money being returned to members and declined to comment further.
A key part of 12DailyPro's operation relied on a small PayPal rival, StormPay Inc. of Clarksville, Tenn. Payments to and from the Web site were made via StormPay and a couple of other small online payment processors.
StormPay officials didn't return calls seeking comment. The company has previously said it voluntarily froze funds related to 12DailyPro about a month ago after being alerted that the Web site may have been part of a fraud. Although the SEC said the amount originally frozen was about $50 million, with additional sums already having been paid out to members, the total involved in the alleged scheme likely was significantly greater.
Instead of being angry with 12DailyPro, many investors in the site have turned their ire on StormPay. "They basically just froze my money, that I felt I was entitled to," says Mike Bromell, of Austin, Texas, who started investing in 12DailyPro in December. "It's just like if I wired you money via Western Union, and Western Union decided to keep it."
PayPal, the dominant force in the online-payment industry, says under its "acceptable use policy" it won't do business with illegal pyramid schemes and "Get Rich Quick" schemes "where the claims of profit or returns on investment are unrealistic or unsupported." It also bans transactions related to online pornography and several years ago stopped doing business with online gambling sites, after reaching a settlement with New York Attorney General Eliot Spitzer.
But PayPal is listed as a payment-processing option on a number of autosurf sites. One, NetInvestAutoSurf.com, promises "members" a return of 1% per day on fees they give the site, and displays a yellow "PayPal Verified" logo. Another, 123eTraffic.com, says on its home page: "Get paid up to $3,100 Monthly -- no selling, no marketing, just surfing! 123eTraffic has to be the fastest, easiest way to make money on the Internet." Email messages directed yesterday to the operators of both sites went unanswered.
Amanda Pires, a PayPal spokeswoman, says both Web sites are "within the bounds of our policies." Ms. Pires says the sites don't have characteristics of typical pyramid schemes -- they allow free membership, and members don't make most of their money by referring other members to the site. As for the "PayPay Verified" logo, Ms. Pires says it "means not much," except that PayPal has confirmed that the customer is linked to a real bank account.
Still, she says, these are "a new type of business we are just starting to see on the Web. We are monitoring these businesses very closely to ensure there are no violations with our existing policies, and to ensure there are no issues reported to us by our customers."
Robert L. FitzPatrick, who wrote a book about pyramid schemes, "False Profits," reviewed several autosurf Web sites accepted by PayPal and says they are "thinly disguised Ponzi schemes." PayPal, he adds, is "trying to narrowly define a pyramid scheme because PayPal makes money every time there is a transaction."
Tucker Ronzetti, a Coral Gables, Fla., attorney who has represented investors in class-action suits related to Ponzi schemes, says third parties, such as payment processors, could be held liable under state laws for "aiding and abetting" an Internet fraud. But, he says, such cases are rare and difficult to prove, because the third party must have "actual knowledge" of the fraud.
"On the one hand," he says, "you've got to applaud PayPal for trying to monitor this. It's a legitimate problem, and innocent people are being victimized. On the other hand, if they're looking at the definition of a pyramid or Ponzi scheme in too strict or picayune a fashion, they may be allowing these schemes to flourish."
Many sites similar to 12DailyPro continue to operate. They come and go: One Web site offering advice about online investment programs lists more than 2,200 sites that have become defunct. One reason for the proliferation of copycat sites may be the easy-to-use software templates, or "scripts," that allow anybody to instantly set up an autosurf Web site with built-in links to online payment processors.
Hani Durzy, an eBay spokesman, says the company prohibits the sale of products directly related to fraud. But he notes that the SEC itself said that autosurf programs can be legitimate, and unless the software templates specifically are marketed as allowing Ponzi schemes or the like, eBay probably would allow them.
Write to Mark Maremont at mark.maremont@wsj.com
WSJ.com - Online 'Autosurf' Scams Use Legal Businesses to Flourish
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