FatWallet / Nordstrom Fraudsters Sentenced to Two Years in Prison

August 13, 2012 · 0 comments

If you’re a hardcore online shopper, particularly one who haunts the deal forums, chances are, you’ve taken advantage of some sort of glitch in the effort to snag a deal — a pricing mistake, a website that allowed you to stack two coupons when you were only supposed to use one, using a new email address to take advantage of an offer for new customers only when you’ve shopped at that store before.

Brothers Andrew S. Chiu and Allen J. Chiu took it to a whole ‘nother level.

I reported on the Chiu brothers’ fraud back in April, but here’s the Cliffs Notes version:

In 2007, they started placing orders at Nordstrom through the FatWallet cashback program — expensive items, which they would then claim they didn’t receive.  They’d keep the goods plus they’d get a refund from Nordstrom.  By 2008, Nordstrom finally caught on to them and banned the brothers from ordering online, although they kept trying.

Around Dec. 2009 or thereabouts, Nordstrom implemented an automated fraud prevention program.  It stopped the Chius’ orders from going through, but it didn’t stop FatWallet from getting a commission for the sales of those orders that never shipped.  FatWallet’s automated system didn’t realize that there was any fraud going on, and in turn, paid the Chius cash back.

When the brothers figured this out in Jan. 2010, they changed tactics:  instead of friendly fraud, the goal was then to place lots of Nordstrom orders through FatWallet under different accounts so they would get cash back without detection.  And they would’ve gotten away with it, too, if it weren’t for those meddling kids:  Ebates.

Ebates bought FatWallet in August of 2011 and within a month had found the glitch, stopped paying the Chius cashback, and reported the fraud to Nordstrom.  In March of this year, the Chius were charged with wire fraud.  They pled guilty in April, and on Friday, their sentence was handed down:

Two years in prison.

They actually got off lightly, as the maximum potential sentence was 20 years in prison and a $250,000 fine.  And they got off even lighter than the terms of their plea agreement, which called for a max of 30 months in prison.

Who were the victims here?

1.  Nordstrom.  From the cashback scheme alone — not counting the “friendly fraud” with the boys ordering products, claiming they didn’t get them, keeping them, and getting a refund — Nordstrom shelled out $1.4 million in sales commission on fraudulent orders that never even shipped.

2.  Linkshare.  This middleman company connects online merchants with the websites that advertise them — in this case, connecting Nordstrom and FatWallet.  Linkshare  received $1.4 million in sales commission, keeping part of it as profit (which no doubt Nordstrom’s going to want back), then paying a portion of the commission to their affiliate, FatWallet.

3.  FatWallet.  Cashback sites make money by receiving sales commission (via a network like Linkshare) and then sharing part of that with their members in the form of cash back.  They paid the Chius over $650,000 in cashback.  Obviously Nordstrom will be wanting back the rest of what Linkshare paid them, that they kept for themselves.

4.  Ebates.  Ebates had to have overpaid for FatWallet because of falsely inflated sales volume due to the brothers’ hijinx.  Then they had the admin costs of investigating the fraud, stopping it, and cooperating with law enforcement and prosecutors to bring the boys to justice.  And since they now own FatWallet, they’ll be the ones to have to pay Nordstrom back for the portion of the sales commission that FatWallet kept after paying the Chius.

If you’re curious about what happened to the $650,000 in the Chius’ ill-gotten gains, the Feds were able to seize almost a million dollars from the brothers, who had made some investments and profited from those also.

And if you’re curious about how it was that neither Linkshare nor FatWallet noticed an additional $24 million in sales at one retailer in a 20 month period…and how it was that Ebates caught it within a month of buying FatWallet…you’re not alone.

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