Alleged mobsters guilty in vast Net, phone fraud

[R.A. Hettinga]

<http://www.msnbc.msn.com/id/6928696/print/1/displaymode/1098/>
  MSNBC.com

Alleged mobsters guilty in vast Net, phone fraud
Mafia scheme said to have netted $659 million over 7 years
By Mike Brunker
Reporter
MSNBC
Updated: 8:22 p.m. ET Feb. 14, 2005


Writing a sudden ending to what authorities say is one of the biggest
consumer fraud cases ever prosecuted, alleged members of one of New York's
most notorious Mafia families pleaded guilty Monday to conspiracy and fraud
charges stemming from an Internet and phone billing caper that bilked
consumers out of more than $650 million.

Prosecutors say the principals of the scheme, which ran from 1996 to 2003,
are members of the Gambino crime family, an outfit better known for such
muscle-and-blood criminal enterprises as gambling, loan sharking,
protection rackets and creative bookkeeping for construction projects and
garbage collection.

But in this case, prosecutors said, the hoods targeted phone customers and
Internet users, tricking them into responding to too-good-to-be-true offers
of free porn, psychic readings, dating services and sports picks, and then
putting the hurt on their pocketbooks with a series of unauthorized credit
card and telephone charges.

The mobsters also ripped off two federally supervised funds that subsidize
rural phone companies through another billing scam.

Alleged mastermind, Gambino 'capo' enter pleas
Among those who entered guilty pleas Monday in U.S. District Court in
Brooklyn - on the day jury selection was to have begun - were the alleged
mastermind of the scheme, Richard Martino, 45, known in the New York
tabloids as the "X-rated mobster," and 45-year-old Salvatore Locascio,
described by authorities as a Gambino "capo," or captain.

 Under the plea bargain, Martino pleaded guilty to one count of conspiracy
to commit mail and wire fraud and one count of extortion for forcefully
trying to extract a $1 million payment from a porn industry rival. Martino
faces up to 10 years in prison and agreed to forfeit $15 million under the
deal.

Locascio entered a guilty plea to a single count of  money laundering and
also faces up to 10 years in prison and forfeiture of $4.7 million.

Three other alleged mob associates - Dennis Martino, brother of Richard
Martino, Thomas Pugliese and Andrew Campos - pleaded guilty to a count of
conspiracy to commit mail and wire fraud. A fourth man, Zev Mustafa,
pleaded guilty to money laundering in connection with the scheme.

Daniel Martino, Pugliese and Campos each face up to five years in prison
and agreed to forfeit a total of $2.1 million, while Mustafa faces up to 10
years in prison and will forfeit $1.7 million.

Prosecutors allege that Richard Martino, a Gambino "soldier," directed the
scheme and paid $8 million of the proceeds directly to Locascio, the leader
of his "crew," and funneled at least $40 million more into Gambino family
coffers.

Bank, phone company purchased
The elaborate scheme brought in so much money that the defendants and
various co-conspirators were able to purchase a telephone company and bank
in Missouri, according to court documents. They also created at least 64
shell companies and opened a host of foreign bank accounts through which to
pass their ill-gotten gains, the documents said.

 In an indictment returned in March 2003, prosecutors alleged a two-headed
scheme:

People who called 1-800 phone numbers advertising free samples of phone
sex, psychic hot lines and dating services unwittingly triggered recurring
monthly charges that appeared on their phone bills as "voice-mail services"
and other innocuous services.

At the same time, the scheme trapped Web surfers seeking adult content on
the Internet by enticing them to enter their credit card information for
"free" tours, only to begin billing them between $20 and $90 a month.

 The defendants routinely changed corporate billing names and merchant
banks to stay one step ahead of authorities and foil Visa USA's
fraud-detection system, according to court documents. In 1999, they began
processing credit transactions in Guatemala to further muddy the waters,
the documents said.

Prosecutors charged that the Web sites used in the Internet scam were part
of a joint venture formed in 1996 between Crescent Publishing Group Inc., a
Manhattan company that published such high-profile adult magazines as
Playgirl and High Society, and Lexitrans Inc. of Overland Park, Kan., a Web
hosting company that they said was secretly controlled by Richard Martino.

 Surprise guilty pleas
The surprise guilty pleas on Monday, following negotiations that lasted
through the weekend, pre-empted what would have been one of the most
closely watched mob trials in years.

Using the power of plea bargains, prosecutors already had peeled off a
number of alleged co-conspirators who were expected to testify against
Martino and Locascio, including:
Norman Chanes, a 58-year-old millionaire advertising executive and movie
producer (co-producer of the 2000 film "Blue Moon," starring Ben Gazzara,
Rita Moreno and "Sopranos" cast member Vincent Pastore), who allegedly
advertised the 1-800 phone numbers used in the telephone fraud in magazines
and newspapers around the country.
Bruce Chew, 57, who was CEO of Crescent Publishing Co. Chew was a defendant
in a Federal Trade Commission lawsuit against Crescent Publishing that led
to a $30 million settlement in November 2001.
 Kenneth Matzdorff, a 48-year-old Missouri businessman who allegedly acted
as a front man to purchase the Cass County Telephone Co. in Peculiar, Mo.,
and the Garden City Bank in Garden City, Mo., on behalf of Richard Martino
and others. Matzdorff pleaded guilty in January to conspiracy to commit
mail and wire fraud charges under a plea agreement.

Another figure in the case who might have been called to testify is Carl
Ruderman, a 60-something-year-old publisher and philanthropist who
reportedly was the secret owner of Crescent Publishing.

 'The invisible man' of porn
Ruderman, dubbed "the invisible man" of porn by fellow skin magazine
publisher Al Goldstein in 1989 for his low profile, was never charged with
any crime, reportedly because he told authorities that he delegated
responsibility for day-to-day operations of Crescent Publishing to Chew and
had no knowledge of the billing scam.

 One former Crescent employee said that Ruderman certainly lived up to the
"invisible man" sobriquet at the company's Manhattan offices.

"We used to call him the Wizard of Oz, because you never saw the guy," said
the employee, who spoke with MSNBC.com on condition of anonymity. "I saw
him twice the whole time I worked for him."

Former Gambino crime boss John Gotti Sr., forever known as the "Dapper
Don," also had been expected to testify from the grave.

Longtime New York newspaper crime reporter Jerry Capeci, who now publishes
his work on the Ganglandnews.com Web site, said prosecutors had planned to
play a tape of a wiretapped conversation from January 1990 in which Gotti
sings the praises of newly minted mobsters Martino and Locascio, who had
just been inducted into the Gambino family.

'I like the Richies'

"I want guys that done more than killing," Capeci quotes Gotti as saying on
the tape, obtained from a listening device planted in an apartment above
the Ravenite Social Club in Manhattan's Little Italy. "I like the Richies.

 They're young - twenty-something, thirty-something -- 
 They're beautiful
guys. 
 Ten years from now, these young guys we straightened out, they're
going to be really proud of them."

Gotti died in prison at the age of 61 on June 10, 2002, from complications
of head and neck cancer while serving a sentence of life without parole for
murder and racketeering.

The criminal case was filed more than three years after the FTC announced
that it had filed suit, along with the New York attorney general's office,
to stop Crescent Publishing from "illegally billing thousands of consumers
for services that were advertised as 'free,' and for billing other
consumers who never visited the Web sites at all." The suit did not address
the phone billing portion of the scam.

In announcing the suit in August 2000, the FTC estimated that the "free
tour Web sites" had generated income of $188 million between 1997 and
October 1999, including $141 million in the first 10 months of 1999 alone.

According to Luke Ford, a pioneer blogger and keen observer of the Internet
porn scene, the scheme was able to roll up such huge numbers because of
deals Crescent made with two Internet traffic brokers - Serge Birbrair and
Yishai Habari - that resulted in millions of porn-seeking surfers a day
being directed to the sites.

Traffic brokers allegedly 'made millions'
"Yishai and Serge made millions off the scam and escaped FTC prosecution
because they only functioned as traffic brokers," Ford wrote on his Web
site.

Neither Birbrair nor Habari responded to e-mail requests for comment.

In November 2001, the FTC announced that Crescent Publishing and the
company's principal officers, Chew and David Bernstein, had agreed to pay
$30 million to settle the suit. The settlement also barred the company from
"charging, debiting or billing consumers" for any Web site services without
first obtaining a $10 million bond that could be used "to satisfy any
judgment entered against the defendants" following trial.

 Doug Wolfe, an FTC attorney who worked on the case, said that despite the
settlement, many victims never received compensation.

"Our biggest problem was we had to rely on the company's data to link
individuals to cards," he said. As of late 2004, the redress center
established to administer claims had issued refund checks to 189,646
accounts but had been unable to match names and credit card information for
887,793 others, he said.

Wolfe said the agency never uncovered any link between Crescent and
organized crime, but there were signs that this wasn't your run-of-the-mill
Internet fraud case.

 "It certainly was unique in my experience in terms of the number of
entities through which the money appeared to be moving," Wolfe told
MSNBC.com. "At the same time there were some unusual legal maneuvers.
Individuals on the eve of testifying would suddenly fire their lawyers 

and there was a general reluctance on the other side to engage in civil
discovery."

Phone bill 'cramming' comes under scrutiny
While the Internet operation was taking a hit, the scheme in which
consumers' phone bills were being improperly charged - a practice known as
"cramming" - also was coming under scrutiny.

Martino et al bought the Cass County Telephone Co.,or CassTel, a county
telephone company in Peculiar, Mo., (pop. 2,600) with 8,000 customers,
using Matzdorff as a front man and hiring him to run the company, according
to the indictment. Martino also gave Matzdorff $3 million in February 2001
to buy the Garden City Bank in Garden City, Mo., for purposes of credit
card processing, it said.

At the same time, prosecutors say Martino also formed a billing company
called USP&C to place the bogus charges on customers' phone bills and
charge the credit cards of surfers who visited Crescent Publishing's porn
sites.

 Matzdorff told prosecutors in New York that USP&C set up a call center to
handle complaints from outraged customers that handled an average of 17,000
calls a week at the height of the scheme.

Though USP&C billed telephone customers on behalf of numerous companies and
gave varying descriptions of the services allegedly provided, the billing
agent's high charge-back rate began to attract attention from phone
regulators.

Complaints prompted wave of refunds
In 1999, the California Public Utilities Commission investigated USP&C's
business conduct and found that of $51.5 million in billings to California
customers over the previous 18 months, 52 percent were refunded after
customers complained. The PUC eventually fined USP&C $1.75 million for
improper billing, but it was never able to collect it.

Estimates of the amount netted by the scam have grown steadily since the
March 2003 indictment was unsealed, when prosecutors estimated that the
Internet end of the operation netted $230 million while the phone scam
brought in approximately $200 million in revenue.

Later, federal charges filed in Kansas added $9 million to that tally,
money that prosecutors said the mob-run companies stole by overbilling two
federally supervised telecommunications funds - the Universal Service
Administrative Co. and the National Exchange Carriers Association.

But sources familiar with the case told MSNBC.com that the estimate swelled
recently when prosecutors obtained more information indicating that the
phone "cramming" actually generated at least $420 million, bringing the
overall total to $659 million.

Given the riches the Gambino family allegedly struck in what experts say
apparently was its first major foray into Internet crime, it is surprising
that authorities say the Crescent Publishing case is still the exception to
the Cosa Nostra rule.

Dave Thomas, chief of the FBI's Computer Intrusion Section, said in an
interview published Nov. 29, 2004, by the trade publication Network World
Fusion that there is no evidence indicating that the Mafia has moved into
Internet crime in a big way.

No 'big move' to Internet
"We haven't seen a big move with the traditional Italian-based Mafia groups
to the Internet ... not like we have with the Eastern European hacking
groups," he said. "But as the money (to be made) becomes more and more
widely publicized, they probably will."

Capeci, the crime reporter who specializes in the mob, said there should be
no doubt about that.

"There's no question Locascio's crew is a bit more advanced or
sophisticated than many other mob families, but the trend among the
gangsters is to move away from the stuff that the law enforcement community
is well aware of and to move into new things," he said. "And there's
nothing they won't do if they can figure out how to do it."

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R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
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