Metropolitan News-Enterprise


Monday, May 17, 2010


Page 1


Court: Website’s Facilitation of Fraud Violated FTC Act


By SHERRI M. OKAMOTO, Staff Writer


The Ninth U.S. Circuit Court of Appeals on Friday ruled that a company which operated a website through which various con artists and fraudsters drew over 150,000 bad checks totaling over $400 million was liable for violating the Federal Trade Commission Act.

In a decision by Judge M. Margaret McKeown, the three-judge panel ruled that had engaged in a practice that facilitated and provided substantial assistance to a multitude of deceptive schemes by allowing users of its website to create and send unverified checks by post or e-mail.

Through the website, individuals who registered their bank routing and account numbers could submit online requests for a check to be drawn from their account and delivered to a third party. Qchex then converted the information into a negotiable instrument that, when printed, conformed to U.S. banking regulations.

Over the six-year period that was in operation, McKeown noted that the company froze over 13,750 user accounts for fraud. Those accounts had spawned nearly 155,000 checks, supplied over 37,350 bank account numbers, and were the source of checks totaling more than $400 million—an amount more than half of the total drawn during that time.

Qchex also received hundreds of letters and thousands of telephone calls from consumers, banks, and law enforcement agencies complaining about funds drawn from accounts without authorization. Victims included the University of Chicago, Goldman Sachs, the Federal Communications Commission and the Federal Trade Commission.

The FTC eventually filed suit against Qchex asserting it violated 15 U.S.C. § 45, which prohibits businesses from engaging in “unfair methods of competition in or affecting commerce,” defined as a practice or act that “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.”

U.S. District Judge Janis L. Sammartino of the Southern District of California granted summary judgment in favor of the FTC, finding Qchex liable for the “[u]nfair creation and delivery of unverified checks.” She ordered Qchex to disgorge $535,358 in revenue and permanently enjoined it from operating any similar business without taking appropriate, specified measures to protect consumers.

On appeal, Qchex contended that it was both “legally” and “literally” impossible for it to have created any of the checks it sent because “nothing, and certainly not a check….could be created or delivered” without user input.

However McKeown reasoned “[t]his spin ignores the fact that Qchex created and controlled a system that facilitated fraud and that the company was on notice as to the high fraud rate.” She posited that “Qchex’s approach would immunize a website operator that turned a blind eye to fraudulent business made possible only through the operator’s software.”

Without the Qchex website, she explained, users would not have been able to create and deliver checks. “At most, Qchex’s argument shows that Qchex and the users each contributed to the creation and delivery of the checks,” the jurist said.

McKeown further emphasized that Qchex had reason to believe that a vast number of checks were being drawn on unauthorized accounts, but said the company’s actions in issuing those checks “legitimized” them in the eyes of consumers.

Because consumers “are injured for purposes of the Act not solely through the machinations of those with ill intentions, but also through the actions of those whose practices facilitate, or contribute to, ill intentioned schemes if the injury was a predictable consequence of those actions,” McKeown concluded, the FTC Act “easily extends” to Qchex’s conduct.

She went on to clarify that the company’s liability was not premised on a theory of aiding and abetting fraud, but because Qchex itself engaged in behavior that was injurious to consumers in creating and delivering the unverified checks.

Judges Michael Daly Hawkins and Sidney R. Thomas joined McKeown in her decision.

The case is Federal Trade Commission v. Neovi, Inc., 09-55093.


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