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Billing Company has Porn Ties

LOS ANGELES – As many as 87% of U.S. consumers are still worried about using their credit cards to make Internet purchases, according to one recent survey. Stephane Touboul says he has the killer app that could reinvent Internet purchasing.

His company, ChargeMeLater, allows consumers to buy online and pay for it simply by entering the sum of the last four digits of their social security number. Touboul uses a proprietary algorithm that corroborates the identity of users based on a search of multiple databases and their phone numbers, validates their ages and addresses, makes sure they’re good for the money, and then sends a bill to the user’s house. “We have created a mechanism that could really change the face of commerce on the Internet,” boasts Touboul from his Secaucus, N.J., headquarters.

But Touboul has some big problems that stand between him and Internet enlightenment for the masses: the Federal Trade Commission and attorneys general in 20 states. In a lawsuit filed in May, and echoed in the state actions, the FTC accuses Touboul and his other company, Alyon Technologies, of “unjust enrichment,” “unfair” billing, violations of the FTC’s Pay-Per-Call Rule and other mischief. At the time of the lawsuit, Touboul said he was “stunned by the FTC’s decision to initiate this unwarranted action,” since the company had already “voluntarily” discussed the issues with the FTC and “implemented measures” to protect consumers.

According to the FTC complaint, Touboul’s sin was his deceptive use of a “dialer,” a downloadable software program that disconnects computer users from their regular Internet Service Provider and reconnects them to a server that charges at a rate of $5 per minute. Insult to injury, the FTC also alleges that Touboul’s company gave consumers the runaround when they called to complain, and then sicced a collection agency on them when they didn’t pay up. “There are a lot of underlying elements that are not directly connected to this case,” says Touboul, darkly. “The FTC at this point has marching orders above them. It’s almost like a witch hunt. They’re on a fishing expedition.”

Touboul claims he was preparing to sign up blue-chip companies for his billing system, but the FTC lawsuit has put those plans on hold. Although a judge refused the FTC’s request for a temporary injunction against Touboul, the lawsuit is still pending and Touboul has already instituted many of the FTC’s demands for better disclosure and dispute resolution.

“The commission doesn’t have as a goal putting companies out of business,” says Elizabeth Horn, the assistant director of marketing practices for the FTC’s Bureau of Consumer Protection. “We like compliance with the law and redress for consumers billed without authorization.”

It doesn’t help Touboul’s case that the primary business transacted with dialers is the purchase of Internet porn. Touboul, for instance, works closely with the benignly named Electronic Group Interactive of Barcelona, Spain. But go to Electronic Group’s main Nocreditcard.com site, and you’re immediately redirected to something called sex-explorer.com. From there, you can select a dialer, or even use a broadband connection, to access “200 girls live!–100% uncensored,” “gay porn live,” “teens & students,” and a bottomless collection of porn that would make U.S. Attorney General and obscenity crusader John Ashcroft turn purple with rage. And that’s just Electronic Group’s own site.

The privately held company claims its dialer is outsourced to porn sites on 15,000 servers in 250 countries, many of which use Touboul’s Alyon for bill processing. The FTC has zinged several dialer outfits, and the intermediary billing aggregators such as Alyon that collect the money either by direct billing, as with Alyon, or by deviously “cramming” charges onto consumers’ phone bills. In 2000, for instance, the FTC charged an outfit called Verity International with deceptively billing consumers for dialer calls to Madagascar to access porn sites at a rate of $4 per minute, despite the fact that the calls were actually going to London at rates as low as 8 cents per minute. The FTC won a permanent injunction against the firm in November 2002.

In a similar case around the same time, the FTC went after RJB Telcom for reconnecting consumers’ computers to sites such as AsianHeat.com, Teensteam.com and worse, then billed them without confirming whether the person who owned the phone line was actually the person accessing the Web sites, much less if they were adults. The FTC won a final judgment against RJB as well. In other instances, dialer firms have “hijacked” modems in the dead of night and racked up big phone bills.

Apparently fed up with the porn baggage, one public company is taking a big loss and dumping its Internet porn processor. Intercept announced last month that it was selling its InterCept Payment Solutions unit for $37 million (and taking a $135 million non-cash charge) after acquiring the unit’s biggest business, porn biller Internet Billing, for $104 million in 2002. (The company subsequently said it would sell iBill separately, but didn’t give a specific amount.) In addition to handling credit card payments for porn sites, iBill’s Web900 service also processes dialer payments for dildo-lesbians.com, nudehorsebackride.com and largebreasts.org, among many more sites too gross to mention. In addition to its other sins, bankrupt telco MCI went under holding over $2 million of Web900’s money, according to Intercept.

The stench from the porn trade and the FTC crackdown is the main reason Stephane Touboul is trying to distance his company from the Alyon name, morphing into ChargeMeLater and another firm, Affirme. “Once a brand is affiliated with the adult industry, it becomes very unlikely that mainstream companies, no matter how good the deal is, will be willing to utilize its services,” he says.

Whether folks who buy Internet porn are worthy of being defended by the taxpayer is a matter of legal interpretation. But Touboul hasn’t taken the criticism lying down. In addition to fighting the FTC (while attempting to settle with the states), he’s also sued and won a $27 million judgment against the business that owns Rip-Off Report, a self-appointed consumer complaint site where Alyon is a favorite target.

All told, Touboul claims he’s invested $10 million between capital costs and legal fees. Were it not for the porn association and the various lawsuits, Touboul’s system is a timely solution to a problem that’s getting worse for online merchants, porn or otherwise.

Fed up with chargebacks (when someone demands a refund) and fraud, MasterCard, Visa and the rest of the credit card industry have recently tightened the noose on Internet purchases. American Express has refused to handle porn transactions since 2000, and PayPal, now owned by eBay, ceased to deal with the trade in May. As of October, merchants whose customers demand refunds of as little as 1% of sales using a credit card face hefty fines and possible expulsion from the card processing network, a fatal blow for an Internet retailer. A dialer system allows buyers to bypass credit cards altogether and pay with their phone bill, or on a separate bill.

“I’m not giving up,” vows Touboul. “The point of creating this company was not to be involved in the adult industry. We needed a platform to prove our system would work, and the adult industry was willing to take a risk on it.” But the cost of that risk may end up being too high a price for Touboul’s ambition of going mainstream.
 

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