Hi all Obviously, I'm way-behind on reading the Hettinga-lists, where this story hit my mailbox late last month, but I thought some folks here might find it interesting. Thanks. JMR +++++++++++++++++++++++++++++++++++++++++ <Mr-Rogers>Can you say "non-repudiation" boys and girls? There. I knew you could... </M-R> http://www.nytimes.com/2001/08/27/technology/ebusiness/27ECOMMERCE.html?pagewanted=print August 27, 2001 E-COMMERCE REPORT Seller of Online Currency May Have Been Victim of Fraud By BOB TEDESCHI Flooz.com, a purveyor of online currency used as electronic gift certificates, officially ceased operations over the weekend, according to its chief executive, Robert Levitan. It fell victim to a softening economy and a sour investment atmosphere. But Internet fraud may have sped its demise, a person close to the company said. The company, this person said, had unknowingly sold $300,000 of its currency, known as flooz, over the last three months to a ring of credit card thieves in Russia and the Philippines, before being alerted by the F.B.I. (A spokesman for the F.B.I., citing the bureau's policy, declined to say whether it was investigating.) Stolen credit card numbers were used online to buy the flooz currency, which, until recently, could be used as gift certificates at about 30 retail Web sites, including those of J. Crew, Barnes & Noble (news/quote) and Tower Records. Flooz.com's credit card processing company, which Flooz.com executives would not identify, also alerted the company about the fraud, after the Flooz.com charges showed up on the monthly statements of people whose credit cards, or card numbers, had been stolen. To cover any future refund requests from those credit card customers, the processor withheld daily reimbursements to Flooz.com from credit card sales and froze other accounts until it held $1 million of Flooz.com's money by the second week of August, the person close to the company said. Because customers were still redeeming thousands of dollars' worth of flooz daily at online merchants, "it created an untenable cash flow situation," the person said. Flooz.com, which is privately held, said on Friday that it would close operations and file for Chapter 11 bankruptcy protection. Robert Levitan, Flooz's chief executive, declined to comment on whether credit-card fraud had been detected. In an interview late last week, he said the company began struggling earlier this year after cuts in spending by its biggest corporate clients, which had formerly bought flooz to use as awards in employee incentive programs. He declined to identify those clients. Mr. Levitan said that until last week company executives had hoped to find a buyer capable of reviving the Web site. "We were trying very hard to satisfy all of our constituencies," he said, "but we could not continue the business in these challenging economic times." Mr. Levitan would not say how many people own flooz currency, but given the company's sales history, that number is almost certainly in the thousands. Depending on how and when they paid for the currency, customers who have not redeemed it may not be able to get a refund from their credit card issuers. Merchants stopped accepting the currency in early August, when Flooz.com informed them that it had suspended its Web site operations. Flooz.com's problems reflect the difficulty of creating a successful online currency - a point that Beenz.com, another company with its own Internet scrip, underscored last week when it, too, suspended operations. But Flooz.com's troubles also reflect the fragility of credit arrangements for e-commerce businesses that lack a deep well of cash. And last week, the Internet retailer Buy.com filed documents with the Securities and Exchange Commission saying the company may have to close its operations if it cannot find a replacement for its current credit card processor. On Friday, however, the company said it had renewed agreements with major credit card companies and would continue in business as usual. James Van Dyke, an analyst with Jupiter Media Metrix (news/quote), said Internet businesses already paid higher credit card fees than did their traditional counterparts. The higher fees, he said, reflect the higher risk to the processor of doing business with unstable e-commerce companies, as well as the increased risk in serving customers whose true identities are nearly impossible to discern online. When a retailer is fiscally strained - as is Buy.com, which recently lost its Nasdaq listing - credit card processors are naturally wary that the business will shut down and leave behind a long list of creditors in a bankruptcy proceeding. When fraud hits, Mr. Van Dyke said, it is also typical for banks to protect themselves by tightening credit terms with the merchant. Without a patient and deep-pocketed set of investors to provide enough cash to survive through a crisis - something almost unheard of in today's Internet circles - "the merchant can really get soaked," Mr. Van Dyke said. The fastest-growing method of Internet fraud, Mr. Van Dyke said, involves credit cards and credit card numbers stolen by thieves in Eastern Europe and Russia. Such thieves, he said, "pay 100 brilliant computer programmers $15,000 a year - if they're lucky - to sit there and bang away" at an e-tailer's site, buying goods. "They'll make it look like they're coming to the site through a U.S. router somewhere, so the credit card processors don't pick up on it." After the goods are received by confederates in the United States or shipped abroad, they "end up on a boat dock in Russia, where the stuff is sold for pennies on the dollar," Mr. Van Dyke said, and adding, "Then, when the merchant finds out about the fraud, not only will the credit card companies charge them back for that amount, but they've already lost the merchandise." Flooz.com, which provided a currency that a credit card thief could buy and use like cash online, in some ways gave thieves greater liquidity. And notably, the merchants that conducted business in flooz currency were largely protected from the credit card chargebacks because Flooz.com guaranteed to pay the merchants for all purchases, legitimate or otherwise. Flooz achieved notoriety through an advertising campaign featuring Whoopi Goldberg that began in September 1999. The company raised more than $35 million in venture capital and persuaded dozens of merchants to accept its currency. A fair number of consumers bought into the concept as well: the business sold $3 million of flooz currency in 1999 and $25 million in 2000. Nearly lost in the Flooz.com news, meanwhile, was the fact that Beenz.com also suspended its operations. Beenz.com, based in New York, had been operating as an online rewards company since early 1999 and had raised $86 million in financing, according to Charles Cohen, the company's former chief executive, who was interviewed by telephone in London, where he is based. Rather than buying the company's currency, known as beenz, to redeem on another site, as with flooz, customers earned beenz by spending money or time on certain sites, like MP3.com (news/quote) and the British version of the Excite portal. They could then spend the currency at e-commerce sites that had agreed to accept it. (Customers could even buy flooz with their beenz.) Almost six million people had earned or redeemed beenz, Mr. Cohen said. But because the company made money selling the currency to online retailers, he said, "our customer base collapsed" as many e- tailers folded. Nonetheless, Mr. Cohen insisted the prospects for an Internet currency remained good. "Not only is it possible, but it is inevitable," he said. "Upon reflection, it seems the vehicle for this is more likely the financial institutions, since banks know how to make money out of money." Mr. Cohen said Beenz.com had engaged banks in such discussions. "But they're slow and cumbersome beasts," he said. "We didn't have time to conclude the conversations." To some analysts, the passing of beenz and flooz will barely be felt. "I put them one notch below gift certificates," said Carrie Johnson, an analyst with Forrester Research (news/quote). "And from the beginning, only about 5 percent of online consumers have bought gift certificates." But for some merchants, the failure of Flooz.com, in particular, is a loss worth mourning. "It'll definitely hurt us, and it'll hurt e-commerce as a whole," said Russ Eisenman, director of marketing for TowerRecords.com. Mr. Eisenman said the flooz currency was particularly useful in introducing new shoppers to the Web because purchases made with the currency did not require a credit card and they typically involved well-known merchants. As for the effect on TowerRecords.com, Mr. Eisenman said that on some days last January, gift recipients redeeming flooz made up half the site's business. There will be no such Christmas in January next year. "I had to change my holiday projections based on them not being around," Mr. Eisenman said. "It'll definitely be a blow to us." 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