PayPal Sued For Role In Traffic Monsoon Scam

Kingsley Ezeude and Chukwuka Obi have started a class action lawsuit against PayPal for over $5 million. PayPal was used by the owner of Traffic Monsoon Charles Scoville to collect millions from his victims. He had used PayPal before in one of his previous scams.

In 2011 PayPal had banned Scoville from using its services following allegations that Scoville was operating a similar “pay-to-click” investment scheme. Yet, despite its knowledge of Scoville’s past pay-to-click schemes and its knowledge that pay-to-click websites have Ponzi/pyramid scheme features, PayPal failed to enforce its own ban and allowed Scoville to open an account for Traffic Monsoon in September 2014, using PayPal’s infrastructure to perpetrate and profit from his new – “pay-to-click” investment fraud Traffic Monsoon.

Here are the details of this class action lawsuit:

Plaintiffs are victims of a Ponzi/Pyramid scheme operated by Charles David Scoville and Traffic Monsoon, LLC (the “Traffic Monsoon Scheme”). The Traffic Monsoon Scheme was facilitated by the knowing assistance and negligent actions of Defendant PayPal, Inc. (“PayPal”). PayPal’s misconduct caused Plaintiffs and the putative class to suffer in excess of $5 million in net losses.

The Traffic Monsoon Scheme affected over 162,000 investors throughout the world. As alleged by the Securities and Exchange Commission in a separate federal action against Traffic Monsoon and Scoville, Traffic Monsoon took in approximately $207 million from these investors.

PayPal served as the payment processor for approximately $134 million worth of those investments and processed a massive amount of transactions on behalf of Traffic Monsoon. Indeed, Traffic Monsoon’s meteoric and highly unusual rise quickly placed that scheme among PayPal’s largest – and “highest risk” – digital content merchants. PayPal also acted as a conduit through which Traffic Monsoon and Scoville siphoned and stole investor money.

The scheme lasted from September 2014 through July 2016. During this time, Traffic Monsoon duped investors into believing it was “a specialized advertising and revenue sharing company” that operated a pay-to-click and Internet traffic exchange program. On its website, Traffic Monsoon falsely told investors that it was not selling investments or operating a Ponzi/pyramid scheme that would pay returns to existing investors with money from new investors.

Traffic Monsoon also concealed from its investors that Scoville, its sole member and operator, had a prior history of defrauding investors through similar pay-to-click investment “businesses.” Unbeknownst to investors – but known to PayPal – Traffic Monsoon was not Scoville’s first fraudulent investment scheme disguised as a “pay-to-click” program. In fact, just as he did with Traffic Monsoon, Scoville ran his prior pay-to-click schemes with PayPal’s support and through PayPal’s infrastructure. Indeed, in 2011 PayPal had banned Scoville from using its services following allegations that Scoville was operating a substantially similar – and similarly fraudulent – “pay-to-click” investment scheme. Yet, despite its knowledge of Scoville’s past pay-to-click schemes and its knowledge that pay-to-click websites have Ponzi/pyramid scheme features, PayPal failed to enforce its own ban and allowed Scoville to open an account for Traffic Monsoon in September 2014, using PayPal’s infrastructure to perpetrate and profit from his new – but similar in its material respects – “pay-to-click” investment fraud.

Traffic Monsoon purported to sell through PayPal seven Internet advertising products, including a product called the “Banner AdPack” (“AdPack”). Traffic Monsoon solicited sales in AdPacks by promising that each investor would receive 1000 visits to the investor’s website, 20 clicks on the investor’s banner advertisement that would be listed on the Traffic Monsoon website, and – crucially – a cash component in the form of sharing in Traffic Monsoon’s daily revenue.

The cash component amounted to a return of 10% of an investor’s investment in AdPacks, payable in two months through PayPal. The cash return was the main reason why Traffic Monsoon investors flocked to Traffic Monsoon.

Investors entrusted Scoville and Traffic Monsoon with their money and trusted and depended on Scoville, with his superior knowledge, to manage their money and share revenue as promised by Traffic Monsoon.

The sad reality is that Traffic Monsoon’s advertising business was a scam designed to disguise its sale of unregistered securities in a Ponzi scheme, perpetrated through PayPal’s infrastructure and with its knowledge and crucial assistance. Traffic Monsoon made 99% of its revenues from the sale of AdPacks, which took place through PayPal; it could not pay investors revenues without the sales of additional AdPacks. Nor could Traffic Monsoon deliver the advertising services promised in the AdPacks that investors purchased. Instead, Traffic Monsoon relied on money from newer investors in AdPacks – collected through and maintained at PayPal – to pay, through PayPal, the revenue sharing promised to earlier investors.

PayPal played a crucial – indeed, indispensable – role in the Traffic Monsoon scheme. PayPal transferred investor money to Traffic Monsoon and transferred new investor money from Traffic Monsoon to earlier investors, in Ponzi scheme fashion. PayPal served as the payment processor for approximately $134 million worth of investments in the Traffic Monsoon Scheme. In an unusual and highly atypical departure from its core business – payment processing – PayPal aggregated and held Traffic Monsoon’s money – millions of dollars – in PayPal Account Number XXXXXX7752 (“PayPal Account 7752”) until investors requested to withdraw their earnings. As a result of withdrawal requests, PayPal also paid out these earnings that totaled approximately $61 million. When the scheme was exposed in July 2016, Traffic Monsoon had approximately $23 million in PayPal Account 7752.

PayPal played this crucial role with knowledge of Traffic Monsoon’s fraud and misrepresentations to investors, acquired through its past experience with Scoville’s previous iterations of the Traffic Monsoon fraud; its review of Traffic Monsoon’s website as part of its account verification process; its ongoing review of the high-risk, unusual Traffic Monsoon account; its processing of Traffic Monsoon’s Ponzi/pyramid transactions; and its handling of inquiries from numerous Traffic Monsoon investors.

While PayPal prides itself on its anti-fraud detection and advertises its anti-fraud detection abilities as a key safety feature of its infrastructure, its internal controls were severely lacking or nonexistent with regard to its oversight of its Traffic Monsoon-related activities.

PayPal was aware that Scoville had previously operated similar pay-to-click businesses that PayPal banned from using its services following allegations that the businesses were Ponzi/pyramid schemes. PayPal is also aware that pay-to-click businesses raise concerns regarding fraud and that some have Ponzi/pyramid scheme features. Indeed, PayPal has placed holds or bans on other pay-to-click businesses. Yet PayPal did not enforce its own ban on Scoville’s use of its services. By knowingly allowing Scoville’s new pay-to-click scheme, Traffic Monsoon, to use its services, PayPal departed from its own policy that prohibits the use of its services for “transactions that . . . support pyramid or ponzi schemes.” (PayPal Acceptable Use Policy.)

PayPal was aware that Traffic Monsoon was falsely representing to investors that it sold advertising services, not investments. Scoville told PayPal (but not investors) that Traffic Monsoon offered investments, which PayPal noted in PayPal Account 7752. When PayPal reviewed Traffic Monsoon’s website to verify the information provided by Scoville, PayPal learned that Traffic Monsoon was a pay-to-click scheme; represented to investors that Traffic Monsoon sold advertising services, not investments; and promised to make payments to investors in pyramid scheme fashion.

PayPal also knew that Traffic Monsoon was a Ponzi/pyramid scheme. PayPal actively monitored Traffic Monsoon’s PayPal account. It was aware of each investment and each withdrawal from the account. PayPal was aware that Traffic Monsoon was making Ponzi/pyramid scheme payments to investors and that Traffic Monsoon’s Ponzi/pyramid scheme was growing exponentially in classic Ponzi/pyramid scheme fashion.

PayPal provided substantial assistance to the Traffic Monsoon Scheme by allowing Traffic Monsoon to use its services in an extraordinary and atypical manner. It allowed Traffic Monsoon to use its services to support a Ponzi/pyramid scheme, which is a violation of PayPal’s acceptable use policy. PayPal also allowed Traffic Monsoon to use PayPal Account 7752 to hold millions of dollars of investors’ funds. This activity is an extreme departure from PayPal’s business as a “a leading technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide.” (PayPal Holdings, Inc. Annual Report for Fiscal Year Ended December 31, 2015 at 1.). It is also unusual, because PayPal accounts are not FDIC insured and do not bear interest. As a result, Traffic Monsoon was holding millions of dollars in an unsecured account without earning any interest on that balance, and all the interest earned by those funds throughout this time was accruing to PayPal itself – a highly atypical source of income for PayPal.

In return for allowing the atypical and extraordinary use of its services, PayPal profited greatly from the Traffic Monsoon Scheme. PayPal earned fees from the hundreds of thousands of transactions made by Traffic Monsoon investors. PayPal also earned interest on the millions of dollars of investors’ funds that PayPal uncharacteristically held in PayPal Account 7752 (which as of February 2016 had a balance of approximately $61 million).

PayPal also provided substantial assistance to Traffic Monsoon and Scoville’s fraud by cloaking Traffic Monsoon with a false air of legitimacy that reasonably caused investors to believe that their transactions with Traffic Monsoon were legitimate and protected from fraud. Indeed, PayPal allowed Traffic Monsoon to display its name on Traffic Monsoon’s website and use an email address, “paypal@trafficmonsoon.com.” PayPal created a false sense of security by allowing Traffic Monsoon to use its services in an atypical, fraudulent manner, while at the same time publicly assuring Traffic Monsoon investors that PayPal employs proprietary fraud and risk modeling to assess risk and detect fraud associated with its accounts. For example, on its website, PayPal represents to the public: “Know your payments are secure, whether you’re buying or selling, get the security you expect plus purchase or seller protection on all eligible transactions.” In addition, PayPal must comply with risk rules set by payment card processors and banks. Accordingly, PayPal implements specific business processes and supervises merchant accounts to detect whether merchants are engaged in illegal or high-risk activities. (PayPal Holdings, Inc. Annual Report for Fiscal Year Ended December 31, 2015 at 17.) For example, “For ‘high risk’ merchants, [PayPal] must either prevent such merchants from using our PayPal services or register such merchants with the payment card networks and conduct additional monitoring with respect to such merchants. (Id.) High risk activities are “primarily the sale of certain types of digital content.” (Id.)

By creating a false air of legitimacy as to Traffic Monsoon, PayPal assisted Traffic Monsoon’s ability to deceive investors into purchasing AdPacks through PayPal, with the false belief that Traffic Monsoon was selling digital advertising services, instead of investments in a Ponzi/pyramid scheme.

PayPal also substantially assisted the scheme by facilitating Traffic Monsoon’s continued retention of investors’ funds in PayPal Account 7752.

In January 2016, PayPal suspended withdrawals from PayPal Account 7752. PayPal told Scoville that the exponential growth in a short time frame and very low chargebacks associated with the account marked it as a Ponzi scheme.

Remarkably, while aware that Traffic Monsoon was a Ponzi/pyramid scheme and suspending withdrawals, PayPal continued to allow the Traffic Monsoon Scheme to victimize more investors by accepting deposits from new investors for another 30 days, until February 2016. PayPal allowed Traffic Monsoon to receive investments from new victims despite its knowledge that Traffic Monsoon was a Ponzi/pyramid scheme. Indeed, PayPal allowed these deposits from new investors despite having set up a specific phone number for Traffic Monsoon investors to call PayPal regarding their concerns about Traffic Monsoon.

In February 2016, PayPal finally prohibited any additional investment in Traffic Monsoon through its services. PayPal instituted a “freeze” on PayPal Account 7752 that prohibited any deposits or withdrawals from the account. Although this freeze was supposed to last until August 2016, PayPal prematurely removed the freeze in July 2016. Thereafter, PayPal allowed Scoville to withdraw millions of dollars from PayPal Account 7752, through numerous withdrawal transactions of up to $100,000 each, several times daily for nearly a month.

On July 26, 2016, in response to a complaint filed by the SEC against Traffic Monsoon and Scoville alleging securities fraud, the United States District Court for the District of Utah issued a temporary restraining order against Traffic Monsoon and Scoville. This order essentially shut down the Traffic Monsoon Scheme. The court has since granted a preliminary injunction against Traffic Monsoon based on its findings that Traffic Monsoon operated as a Ponzi scheme, which was inherently deceptive, that sold securities in violation of the law. The court also appointed a receiver to protect the assets of Traffic Monsoon. The case remains pending.

– Source Ezeude et al v. PayPal, Inc. et al

Conclusion

There are some very powerful claims made in this lawsuit and it looks like PayPal has a lot to answer for. Why would you allow someone you banned from your service to open another account and bring in millions for the very thing you banned him for before?  I hope PayPal will shut these types of scams down much sooner in the future and return the money to the victims instead of the owner of the scam.