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 alleged in court papers that 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, they said.
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 a plea bargain worked out over the weekend, prosecutors dropped the racketeering allegation, which had been a central part of its case. That allowed the defendants to plead guilty to the crime without acknowledging that the scheme was an organized crime operation.
Under the deal, 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.”