Pyramid Scheme Alert (PSA) provides current and historical news items that are of interest to our members and visitors. None of the reports or commentaries is intended to imply that any of the referenced companies have been charged or convicted as illegal pyramid schemes.
Wall Street Journal:
FBI, SEC Probe Web Sites Offering Large Returns for Looking at Ads
By MARK MAREMONT
February 10, 2006; Page A1
Last spring, a Web site called 12daily-Pro.com began offering viewers an amazing financial deal: a 12% daily return on membership fees.
All they needed to do was to view a dozen advertisements a day on the Web site, the company said. The site would then pay returns to visitors based on how much they invested in membership "upgrades."
Now federal and state authorities are investigating 12dailyPro and sites making similar offers as possible Internet-era variations on a classic Ponzi scheme. Named for Charles Ponzi, an Italian immigrant to the U.S. who gained notoriety early in the 20th century, a Ponzi scheme is a fraud that promises outsize returns to investors but pays them with money from subsequent investors, rather than revenue generated by business.
The 12dailyPro site is among the largest of the dozens of what are called "autosurf" Web sites that have cropped up on the Internet. With names like Auto.ExchangeTrade.com and vegasurf.com, the sites piggyback on a legitimate trend -- the surge in Internet advertising -- by promising generous returns to members who agree to view their ads.
The pitch on one such Web site, SurfCityAutoSurf.com, is typical. "Yes, it's true," says a message on its home page, "you can actually earn up to $100.00 Daily or $3,200 Monthly simply by autosurfing [watching websites]."
On 12dailyPro, visitors were allowed to become members free. To earn cash, they had to "upgrade" their membership in increments of $6, with a maximum investment at any one time of $6,000.
The sites have drawn scrutiny amid a widening law-enforcement focus on Internet crimes. The Federal Bureau of Investigation has made Internet fraud the agency's third-highest priority, after counterterrorism and counterintelligence, and says its Internet Crimes Complaint Center received 207,000 complaints in 2004, the most recent year for which figures are available, up 66% from the prior year.
The agency says only a small percentage of those were investment frauds, but that people fleeced out of small amounts may not report alleged fraud to authorities.
"We are definitely seeing a bunch more scams" on the Internet, which allows criminals a measure of anonymity and the ability to operate from anywhere, said Peter Norell, a securities-fraud supervisor at the FBI's Los Angeles office. Autosurfing sites can in theory be legitimate, he said, but often are "straight ripoffs. Who can deliver 12% per day?"
The 12dailyPro site is under investigation by the FBI, the Securities and Exchange Commission and at least two states, said people familiar with the investigation. In recent days, amid those probes, the main payment processor for 12dailyPro, StormPay Inc., has frozen the funds it was supposed to pay to members.
One law-enforcement official involved in the probe said "a significant number of people" likely lost millions of dollars in the aggregate. The site recently claimed it had 300,000 members from around the world, some putting in $6,000 at a time. The Web site of 12dailyPro still was operating as of yesterday.
Based in Charlotte, N.C., 12dailyPro is run by a woman named Charis Johnson, who managed the site through a North Carolina-registered company she also operated called LifeClicks LLC.
In a statement issued yesterday through her attorney, Ms. Johnson blamed a commercial dispute with StormPay for the unavailability of funds owed to 12dailyPro members. Ms. Johnson said StormPay demanded it be the exclusive provider of payment services for 12dailyPro, then soon after froze the accounts and funds after "falsely accusing us of misrepresenting our business model."
She said 12dailyPro had never missed a payment to members until the problems with StormPay arose. LifeClick's lawyers are "evaluating our legal options," she said, adding that the company is "cooperating fully with all investigations."
StormPay officials said they cut off payments after being alerted to possible fraud at 12dailyPro. In a recent interview, StormPay Chief Executive Steve Girsky said, "We have done nothing wrong." Asked if he believed 12dailyPro was a legitimate operation, he said his company initially had no reason to question it, but "upon further investigation we had a hard time making these returns work."
On its site, 12dailyPro states that earnings to members are financed in part with "incoming member fees," as well as advertising and unspecified "off-site investments." On a recent visit, most of the advertisers seemed to be small, little-known Internet companies, including other autosurf sites.
Several members said that although 12dailyPro promised 12% daily returns, the actual returns were far less, since the amount returned by the company included the initial fee paid by members. A member who invested $600, for instance, would be credited 12 days later with $864. Because $600 of that included the original investment, the actual return was $264, or 44% over the 12-day period, 3.67% a day on average -- still more than any bank would pay.
One customer of the site was Mike Wing, an unemployed bookkeeper in Grand Ledge, Mich., who said he heard about 12dailyPro from a business contact in December and decided to give it a spin. "I was chasing a dream," he said. "I was looking at making $700 to $1,000 a week."
Tapping into his Individual Retirement Account, Mr. Wing said, he initially put in $1,000, then added $1,000 a week later. After getting paid his return on the first investment, he plowed in more and eventually recruited 10 Internet acquaintances to join 12dailyPro. The site promises members who recruit others a share of the newcomers' earnings.
Mr. Wing said he worried that "something was not quite right" about the high interest rate but was attracted by the stories of big payouts to others. Then, last week, a $1,700 payment he was expecting didn't come through. A few days later, 12dailyPro announced its funds had been frozen.
"I feel like an idiot," he said. "I won't ever get back into the autosurf" business.
Another investor, Ryan Hartman, a Houston lawyer, sent LifeClicks a threatening letter on Feb. 7 demanding $1,432.24 -- what he said was his $996 initial investment made in late December plus 44% interest over 12 days, based on the returns offered by the site -- or he would commence a lawsuit.
A third investor, Matt White of Great Britain, said he joined the site in October. He said he was partly convinced by postings on various Web bulletin boards, with one member claiming he earned $50,000 in one month, he said.
Mr. White said he was putting in the maximum $6,000 at a time, and when his account was frozen he and his wife together were owed more than $30,000. Even so, he said, he figures he still is about $10,000 ahead.
Asked if he thought the gains were too good to be true, Mr. White said, "I suppose there was a possibility it was a Ponzi scheme. You always had that at the back of your mind." He added: "144% in 12 days? You don't get that from your bank."
A key figure in spotlighting the site was Barry Minkow, a former carpet-cleaning executive convicted of running a Ponzi scheme in the 1980s who has turned to helping regulators and investigators unravel fraud.
Mr. Minkow said he launched his own investigation of 12dailyPro in December after receiving a complaint about the site, and contacted the FBI. Mr. Minkow also contacted StormPay, the processing company, which is based in Clarksville, Tenn.
Write to Mark Maremont at firstname.lastname@example.org