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iBill Under Galanis

WWW- IT’S big. But some say that it’s not as big as it looks and that pornography is an industry that exaggerates the size of everything…

Be that as it may, it’s likely to get bigger than it is now with Jason Galanis, son of John Peter Galanis who is currently the guest of the US Government after having been convicted of bilking investors of $400 million, emerging as the buyer of Internet Billing or iBill, the largest processor of credit-card payments for the purchase of dirty pictures through the Internet.

iBill, not surprisingly, has an interesting history. The company had gone about its business anonymously but with great success as the “engine of Internet porn” till 2002 when InterCept picked it up for $104 million after reassuring its investors that porn constituted a small part of iBill’s business. Subsequently, InterCept, which had racked up revenues of $259 million in 2003, had been compelled to admit that porn made up 85 per cent of iBill’s annual credit-card transactions said to have spiked, at one point of time, to $720 million.

The US being what it is, class-action lawsuits had been filed all over the place charging the company with having understated iBill’s dependence on porn. Eventually, InterCept had settled at $5.3 million and had announced that it was selling the division that held iBill for a rock-bottom $37 million to a group that included management and outside investors. The company had then backed and filled a bit and had finally declared that it would sell iBill alone to an unidentified buyer.

InterCept had continued to buy coy about the identity of the buyer, described primly by it as “another entity,” but the whole world had come to know that this entity comprised iBill’s former chief executive, Garrett Bender, and Jason Galanis.

While everybody agreed that the sins of the father should not be visited on the heads of the sons, the problem here was that the incarcerated father had a major, if not controlling, influence on his son’s business activities which included, among other things, the sinking of a Colorado bank and massive losses for Cargill, the commodity major.

Given the nature of iBill’s business, it is relevant to note here that Galanis describes himself as a “part of the investment banking team” which took Robert Guccione’s Penthouse magazine public in 2002 – and then helped Luis Enrique Fernando Molina, a business associate and Mexican hotel developer whose family controls Pepsi-Gemex, the biggest independent Pepsi bottler outside the US, in a deal involving the investment of another $107 million into Penthouse in a real estate/equity swap. If Galanis’ claim is true, his Penthouse experience should prove of considerable value to iBill, arguably the world’s leading aggregator and gatekeeper between porn sites and the banks which processes iBill’s credit-card transactions but which don’t want to be stuck with the hassles of dealing with a whole bunch of small businesses.

There’s a twist to the tale. As it turns out, InterCept would have been mangled more than it had been if it had hung on to iBill with Visa USA, allegedly at the behest of Washington, introducing new rules under which adult content Web sites are required to pay a $750 fee and register… intimate… .financial details about their operations. The pornwallahs are peeved because they feel that Visa is trying to cash in on their business without having contributed anything to it. They are wrong, of course.

Credit card outfits have, for some time now, been an integral part of the system in which `legitimate’ companies have what has been called a `symbiotic relationship’ with porn merchants and facilitated their business by discreetly processing their credit-card payments and, in certain cases, providing server hosting. InterCept, as a financial services firm which owned iBill, had been one of these legit companies adversely affected by Visa’s new rules. In fact, prior to the sale of iBill, Visa’s revised rules had gouged a good 20 per cent out of its third-party credit-card processing business.

Even worse, MasterCard had declared that iBill was in `noncompliance’ with the credit-card association’s chargeback rules, resulting in an assessment of almost $6 million. Charge-backs, incidentally, constitute one of the biggest hassles of processing credit cards for porn sites – and are as revealing of human nature as the porn business itself. A charge-back happens when a credit card holder gets caught buying dirty pictures or whatever on the Web – and seeks refuge in high moral indignation. He promptly gets in touch with his credit card company and insists – absolutely insists – that somebody else has been buying porn on his card and demands that the relevant charges be cancelled.

That’s the downside. The upside is that charge-backs have done more to keep credit card companies honest than legal or moral considerations.

Back Story: 3/23/2004 – The son of notorious white-collar scamster John Peter Galanis has quietly resurfaced as the buyer of the nation’s largest processor of payments for Internet porn.

Credit-card processor Intercept’s 2002 acquisition of Internet Billing, or iBill, may go down in history as one of the most boneheaded acquisitions ever by a public company. Now, it’s finding it just as embarrassing to get rid of iBill.

IBill is the largest processor of credit-card payments for the purchase of dirty digital pictures (see “Visa’s Porn Crackdown”). It is literally the engine of paid Internet porn. The company had successfully operated anonymously behind the scenes until 2002, when Intercept paid $104 million to acquire iBill from its founders. After first telling investors that porn made up just a minor amount of iBill’s business, Intercept (which had $259 million in revenue for 2003) finally confessed that porn was actually responsible for 85% of iBill’s annual credit-card transactions, which once amounted to as much as $720 million.

Having agreed last month to a settlement of $5.3 million for the various class-action lawsuits that resulted from the company’s understatement of iBill’s dependence on porn, Intercept also announced a deal to relieve itself of the business and sell the division that includes iBill for a lowball $37 million to a group that included management and outside investors (after dropping plans from October to take all of Intercept private). Then, on March 15, the company reversed course yet again and said it would sell iBill separately to yet another buyer, whom the company never disclosed.

“None of those names have been made public,” said an Intercept spokeswoman. “I can’t respond.”

For good reason. It turns out the identity of what Intercept only characterizes as “another entity” has become an open secret among folks close to the deal, and not for reasons that will enhance Intercept’s shaky reputation. In addition to iBill’s former chief executive, Garrett Bender, the other person leading the buyers is none other than Jason Galanis, son of John Peter Galanis, the notorious white-collar crook who bilked investors of $400 million before he was thrown in prison, where he still resides. As Forbes reported in 2000 (see “The Long Reach Of John Peter Galanis”), the disgraced father has had heavy if not controlling influence on Jason’s businesses, which have been involved in the spectacular blowup of a Colorado bank and millions in losses for commodity giant Cargill.

Unlike his father, Jason Galanis has never been convicted of a crime. He has, however, had at least one scrape with the law. While serving as chief executive in 2001 of something called EGX Funds Transfer (formerly known as Incubator Capital), a once-publicly traded financial processing outfit, Galanis and his brother and sometimes-business partner Derek were arrested as part of a big Drug Enforcement Agency bust of a San Diego ecstasy manufacturing and distribution ring. Although all the charges were dropped against Jason, Derek was convicted and sentenced to 11 years in jail.

Derek’s attorney, Janice Deaton of San Diego, says she will soon file an appeal of Derek’s conviction, citing “prosecutorial misconduct” and asking for a “huge reduction in sentence based on his actual role.” She describes Derek as a “very minimal player,” and adds, “he didn’t participate in this for any financial gain, and didn’t contribute any money.” Deaton says both of the Galanis brothers knew one of the principals of the drug ring, Dennis Alba, from prior business dealings, which is how they got caught up in the bust.

But Deaton contends just the brothers’ name alone was enough to arouse suspicion. “Their dad is what got Derek in trouble,” she says. “There were other people more involved than Derek who got their cases dismissed. It’s the Galanis name. It’s really a shame.” Although Deaton didn’t represent Jason in the matter, she said she’s spoken with him frequently, and says she’s “impressed with him as a businessperson.”

In an e-mail exchange, Jason Galanis acknowledges the heavy burden of his father’s name in the DEA bust. “Unfortunately, I was again maligned by indirect inferences about my relatives, which are, admittedly colorful people. One cannot choose their relatives,” he says. “This has haunted me for my entire career. My father left our family when I was 16, when he was indicted and arrested. He has been incarcerated almost my entire adult life…Since my brother’s incident, I have wanted nothing further to do with my father or his poor life choices.”

At the same time, Galanis also contends he is only acting as an intermediary for a “handsome fee” in the iBill deal, not as a principal, on behalf of a “Dr. Molina.” Molina is apparently Luis Enrique Fernando Molina, a Galanis business associate and Mexican hotel developer whose family controlled Pepsi-Gemex, the largest independent Pepsi bottler outside the United States. But others familiar with the deal say Galanis is more deeply involved than he lets on.

“My role has been a central on in making the transaction come together,” says Galanis. “It is possible that peripheral parties could form the wrong impression.”

Galanis similarly described himself as a “part of the investment banking team” that took Robert Guccione’s Penthouse magazine public in 2002, then helped Molina in a deal in November to put another $107 million into Penthouse in a real estate/equity swap. But according to Securities and Exchange Commission filings, Galanis was identified as recently as last fall as the only person associated with Penthouse Financial, a separate company from Guccione’s teetering empire that controls Penthouse’s racy website. Galanis now says it was more of a licensing deal, and that the contract has since been terminated.

Galanis’ Penthouse experience provides a nice bit of synergy with iBill, perhaps, but iBill’s role in the Internet economy–at least the part where people pay for stuff–can’t be understated. The company acts as the critical aggregator and gatekeeper between thousands of websites, porn or otherwise, and the bank that ultimately processes the bulk of iBill’s credit-card transactions and doesn’t want the aggravation of dealing with all those pipsqueak businesses. The bank in this case happens to be First Financial Bank, a subsidiary of $8.5 billion (2003 sales) blue chip financial processor First Data (nyse: FDC – news – people ).

The fact that First Data would have to sign off on any deal that hands over a treasure trove of sensitive credit-card data to Galanis, or whomever he purports to represent, probably doesn’t sit well with the conservative Greenwood Village, Colo., company, which also owns Western Union, TeleCheck and now Concord EFS. First Data is already said to also be looking to exit from the porn payments business. The company has been shopping around its more than $1 billion porn and high-risk merchant portfolio, made up mostly of iBill and a handful of other big porn payment intermediaries like it. Considering the business only contributes $10 million to First Data’s $1.4 billion in profits, the risk to First Data’s hard-earned reputation seems hardly worth the hassle.

Like intercept, First Data is also keeping quiet about the possible deal. “First Data does not selectively comment on its business plans,” said a First Data spokesperson in a statement. “It is not our practice to make public the details of our specific contractual arrangements or our business relationships with our clients.”

But if you were clearing credit cards for the likes of, and my, you’d probably keep quiet about it too.



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