Brothers Scam $650,000 in Cashback From FatWallet

Last update here, 4/26
The FBI reports that a guilty plea was entered on Monday for wire fraud, by two brothers who had received $650,000 in cashback from FatWallet for fraudulent orders at Nordstrom.

The story starts back in 2008, when brothers, Andrew S. Chiu of Anaheim, CA, and Allen J. Chiu, of Dallas, got into trouble with Nordstrom.com and were banned from making purchases from their website.  Seems they had a scam going where they were placing orders and then claiming that they never received the merchandise and they wanted a refund.  (How much they had defrauded Nordstrom for at that point isn’t disclosed.)  In the industry this is known as “friendly fraud,” and it’s estimated to make up about half of all overall fraud losses for online merchants.

The Feds’ charges say that by January 2010 the brothers were again shopping at Nordstrom.com, this time through FatWallet.  They had found a way to place orders that would ultimately be canceled — their credit card wouldn’t be charged and the items wouldn’t ship — but FatWallet was still paid sales commission as if they WERE legit orders…so FatWallet, in turn, paid the Chiu brothers the cashback they had “earned” for “shopping” at Nordstrom.

Before I go further, here’s a quick primer on how cashback works:  Nordstrom, like many other major retailers, partners with the Linkshare affiliate network to find suitable websites (cashback sites, bloggers, etc.) to run their banner ads or otherwise advertise their online store.  They give Linkshare a sales commission for their services.

Linkshare gives the website partners that they approve for Nordstrom (aka, the “affiliates”) a set of specially coded links and banners.  When a shopper clicks through them and places an order, this coding puts a cookie on the shopper’s machine that IDs the website partner and awards them with sales commission.  So Linkshare shares their commission with the website partners.

When the website partner is a cashback site like FatWallet, the cashback site shares THEIR commission with their member as a reward for going through their link rather than directly typing Nordstrom.com (or whatever) into their browser bar.  The cashback site appends a member ID component to the affiliate link Linkshare provides, so that when Linkshare sends them the sales commission, the cashback site knows which shopper to credit with their kickback.

So to recap…in this case, the Chiu brothers placed orders at Nordstrom that were canceled but never shipped, but Nordstrom still paid the sales commission to Linkshare, who paid FatWallet a cut, who paid the Chius a cut (cashback).

Between January 2010 and October 2011, the Chius had racked up over $23 million in fraudulent orders, which had generated $1.4 million in commission for the fake sales, and the Chiu brothers had been paid cashback of over $650,000.  The loophole/scam was uncovered in October 2011, just one month after FatWallet had been bought by Ebates.  (Interesting timing, and I’ll revisit that in a second.)

Nordstrom’s website partners earn 5% commission from Linkshare, and usually cashback sites offer their members about half of what they earn.  FW currently offers members 2.5% cashback for Nordstrom, which is in line with industry standards.

Okay, at this point, I have to ask:  how could FatWallet not notice that their Nordstrom sales had skyrocketed?  No red flags?

And Nordstrom, seriously, I know they’re a huge company, but they didn’t notice that they bled $1.4 million in sales commission but their actual sales didn’t increase by $23 million?

And the middleman, Linkshare…where were the red flags there?  Their reporting system processed an extra $23 million in sales for Nordstrom in 22 months and nobody batted an eye?  And if $23M in sales generated $1.4M in commission, that means they earned around 6%.  They gave 5% to FatWallet (who gave 2.5% to the Chius).  So the difference, 1%, was a sweet perk for Linkshare.  I’m sure Nordstrom’s wanting that back.

The press release goes on to say that the Feds have been able to recoup over $970,000 of that $1.4 million the brothers helped steal from Nordstrom in this scam.  How much of that was returned by Linkshare, FatWallet, and the brothers, isn’t spelled out in the press release.  (The brothers say that the feds have seized $800,000 in assets from them, although the feds say they “just” stole $650,000 in the scam.  Keep reading for where this $800K number came from.)  Whatever the case, it’s clear that Nordstrom is still owed some money, though.

The brothers pleaded guilty to wire fraud on Monday, and will be sentenced on July 13th.  Under the terms of the plea agreement, the prosecutors will recommend a sentence of no more than 30 months in prison, but Judge Ricardo S. Martinez can impose whatever sentence he wants to the limit of the law:  a max of 20 years in prison and a $250,000 fine.

This isn’t the end of the troubles for the Chiu brothers, though.  FatWallet filed a civil suit against Andrew and Allen Chiu in U.S. District Court’s western Wisconsin district on January 5th of this year.

FW’s lawsuit says that the Chius created “at least a dozen” bogus accounts on FatWallet under different email addresses, and their first cashout was on or around Jan. 5, 2009, by Allen, and they mailed him a check.  (They have a pending period of 91 to 121 days, so that would be for purchases made through early July to October 2008.)  And since that time, he or his brother have made “hundreds” of requests for payment of their FW balances, at one point bringing their parents into the scam and trying to get checks mailed out in their name.

FatWallet says in the suit that this continued until early October 2011 when FW discovered the loophole and alerted “the affiliated merchant” (duh, again… Nordstrom) but “the affiliated merchant continued to credit FatWallet for the Chiu Brothers’ canceled purchases.”

FW suspended all payments to the brothers at that point, but “since early October 2011, the Chiu Brothers have repeatedly attempted to obtain the balances in their cash back accounts by changing payee names, payee addresses and payment methods.”  The FW suit, filed on 1/5, says that the Chius’ latest cashout attempt at that point was on Dec. 8, 2011.

FW is saying they have four grounds for damages to be awarded:  Theft-by-Fraud (false representation that they were entitled to the cashback they requested), violation of the Computer Fraud and Abuse Act (exceeding authorized access to FW’s computers with intent to defraud), Breach of Contract (violating the FW User Agreement by “failing to comply with all applicable laws, rules, and regulations”), and Unjust Enrichment (accepting cashback on purchases they intentionally canceled).

FatWallet is asking the court to award them actual damages, consequential damages, all investigative and legal costs, exemplary damages of THREE TIMES FatWallet’s actual damages, and “such further relief as the Court deems just and reasonable.”  Also, they want an injunction against the Chiu brothers from further accessing the site.

The Chiu brothers’ response, filed on February 17th, was to plead the Fifth.  At that point they had not been charged by the Feds but they were aware of an active criminal investigation, and they said that responding to FW’s lawsuit could cause them to incriminate themselves.  They asked the court to stay the case — basically to put it on hold.  They added that as of that date the U.S. Attorney’s Office had already “seized and retained possession of more than $800,000 from the Chius.”

On March 13th, FatWallet okayed the motion to stay, but asked the court to require the Chius to file a written update or schedule a status conference in around 90 days to update everyone on the status of the criminal proceedings.

Now back to that point about the FatWallet sale to Ebates.  FatWallet didn’t notice this situation and report it until a month after Ebates bought FatWallet.  This had gone on unnoticed for 21 months prior.  Coincidence?  Was it that FW’s account management staff is completely inept and the Ebates team caught it?  Did FW find out before October and sit on the info because they wanted the sale to Ebates to go through?  Or (and I don’t want to believe this, but…) could FatWallet have known/suspected this was going on ALL ALONG and just turned the other cheek?

Also, I have to wonder, have other cashback sites been ripped off by Nordstrom cancellations?  If not by the Chius, then by other members who happened across the glitch?  I want to hear from you, on or off the record — please send me an email if you’re an insider at another rewards program.  I’d also like to know (again, confidentially if you’d prefer) what the likelihood is that this was actually going on undetected by Linkshare and FatWallet.

Stay tuned to CompareRewards.com for the latest.

Interesting reading:  FatWallet’s forum post about the Chius’ criminal case, in which members state that there is another merchant known to have this same glitch (paying cashback despite order cancellations), they discuss whether this should be a criminal case at all vs. a civil one, and they ruminate on the questionable morality within the deal shopping community in general.  Another FatWallet forum post here.

More:  Seattle Times got a response quote from Nordstrom spokeswoman Tara Darrow and FatWallet President Ryan Washatka.  Darrow blames the fraud on poor communication between Nordstrom and FatWallet.

Still more:  the criminal indictment – U.S. v. Allen J. Chiu and Andrew S. Chiu

Also, the least surprising job opening ever.  Um, yeah, the last guy’s pounding the pavement.  If there even WAS a last guy.