Las Vegas Sun

May 9, 2024

Internet Fraud Prosecution:

Were philanthropist’s good deeds financed by his bad deeds?

Online Internet Fraud

New York Times

An illustration of a two-faced statue. (Marko Ilic/The New York Times)

Online Internet Fraud

This undated file photo provided by the Davis County Jail, shows Jeremy Johnson, who has pleaded not guilty to a federal mail fraud. Attorneys for Johnson charged with bilking consumers of $350 million are asking a  judge to reconsider his bail.  Johnson was ordered held pending trial, but a judge said he'd consider release if the man could post $1 million bond. The 35-year-old was arrested June 11 at the Phoenix airport carrying a one-way plane ticket to Costa Rica and more than $26,000 in cash. Launch slideshow »

The morning after a catastrophic earthquake leveled buildings and killed thousands of people in Haiti in 2010, an Internet marketing millionaire from St. George, Utah, named Jeremy Johnson decided to cancel all his business meetings and arrange his own ad hoc aid mission.

Johnson, 34 at the time, had never traveled to Haiti before. But his decision to stage a private airlift, using his own aircraft, did not surprise his friends and family. They were used to his impulsive acts of magnanimity.

Six feet tall, with unruly red hair and a toothy grin, Johnson was well known around St. George for deploying his own helicopter to rescue hikers stranded in nearby canyons and for housing families fleeing from polygamous communities. One local resident who befriended Johnson when they were both Boy Scouts described him as “one of the most Christ-like people I have ever come to know.”

In Haiti, Johnson piloted his own helicopter, flying infant formula to remote orphanages, evacuating injured children and delivering 110-pound bags of beans and rice to outskirts of Port-au-Prince, said another friend, Daniel Gardner, who joined him on the mission. On the last day of the 12-day trip, Johnson gave away personal possessions — a baseball cap, his iPod — down to the hiking boots he had been wearing, Gardner recalled. Johnson flew home with his feet clad only in striped Paul Smith socks.

“When I think of Jeremy Johnson, I think of the most generous person I ever met,” said Gardner, an assistant loan officer in Provo, Utah. “Whatever he had, he would give and give and give.”

But what Johnson had to give — and it was quite a bit — may have come from consumers who got taken. The Federal Trade Commission says Johnson was “the mastermind” behind one of the largest and most intricate online marketing frauds ever perpetrated in the United States.

Johnson founded and ran a company called I Works, which, the agency says, marketed programs to help people get government grants for personal needs and earn easy money. According to a civil complaint filed by the FTC, the company lured consumers with online pitches for free or “risk-free” CD-ROMs that required only a nominal shipping fee and then charged their credit cards for recurring online memberships they were unaware of and to which they had not consented.

Over five years, Johnson, along with I Works, company executives and related corporations, supposedly swindled “unwitting consumers” out of more than $275 million, the complaint said. The company also discouraged dissatisfied customers from seeking refunds from their credit card companies, the complaint said, by threatening to report those customers to a company-operated consumer blacklist called badcustomer.com.

All the while, proceeds from the enterprise were used to finance Johnson’s “lavish lifestyles” of helicopters and houseboats, classic cars and poker at a Las Vegas casino, according to a receiver’s report to the court on Johnson’s assets. Some details in the case file read as if they came from an Old West novel: according to testimony from a witness, Johnson supposedly amassed bundles of cash and buried caches of gold.

“This is the anatomy of a really interesting fraud done by a clever guy at the expense of the most vulnerable people,” asserted David Vladeck, a professor at the Georgetown University Law Center who worked on the case in his previous job as director of the FTC’s Bureau of Consumer Protection.

Johnson has repeatedly and vehemently denied wrongdoing; a court filing by his defense team describes the FTC’s argument as “filled with half-truths, distortions and inflammatory rhetoric that is not supported by the evidence.” The purpose of badcustomer.com, for instance, was simply to steer people to his customer service centers, he said in a court filing.

In addition to the FTC’s civil case, taking place in the U.S. District Court of Nevada, he is now facing 86 related criminal charges — including conspiracy, money laundering and bank fraud — brought by the U.S. attorney in Utah. Johnson has denied those charges, too.

“We did not commit any fraud whatsoever,” he wrote in an email to an FTC lawyer in 2011.

Over the past 19 months, in an attempt to clear his name, Johnson has mounted a campaign that accuses federal agents of misdeeds, including interfering with his right to a fair and speedy trial. Because of his jeremiads, federal prosecutors asked a judge in federal court in Salt Lake to prohibit him from further public commentary. In May, the judge imposed the order on Johnson, along with others in the criminal case including defendants, defense lawyers and prosecutors, prohibiting them from making public statements about the case.

Melodie Rydalch, a spokeswoman for the U.S. attorney in Utah, said federal prosecutors could not comment on the criminal case because of the order. Peter Kaplan, a spokesman for the FTC, declined to comment on its case “given the posture of the litigation.” But in hundreds of court filings, federal regulators paint a portrait of I Works as an enterprise that went to great lengths to lure online users even as consumer dissatisfaction mounted. Rather than modify their business practices, an FTC court filing says, “defendants adopted strategies that allowed their fraud machine to continue reaping millions of dollars from unsuspecting customers.”

Ronald Yengich, Johnson’s criminal defense lawyer, declined to comment, citing the judge’s order. That leaves Johnson’s friends and family members to plead his case with the public. Gardner, for one, says he doesn’t recognize the portrayal of his friend that he reads about in the papers.

“I want you to know him the way I know him,” Gardner said when I called him recently to ask about the Haiti trip. “He doesn’t have an ounce of selfishness in his body.”

Where friends see a hero, however, consumer advocates such as Vladeck, the former FTC official, see a swindler.

“I can’t decide if he was completely venal or completely clueless,” said Vladeck, a lawyer who has argued First Amendment and civil rights cases before the Supreme Court. “Either he is a great actor or he thought all of this was just fine.”

A gifted proselytizer

In the early 1850s, Johnson’s great-great-grandfather, a sawmill operator named Joel Hills Johnson, helped settle the desolate territory of southern Utah, a landscape of dramatic red sandstone canyons and mesas. Johnson descendants have lived in the area ever since.

When Johnson was growing up in St. George, about a two-hour drive from Las Vegas, the town had fewer than 30,000 residents. While the population has since more than doubled, the place retains a small-town intimacy. During my visit there in April, everyone I met seemed to have some connection to — or at least an opinion about — Johnson. Even a barista at a local espresso joint told me that his mother was a friend of Johnson and that they had attended parties at the Johnsons’ home.

Andy Johnson, one of Johnson’s three younger siblings, still lives in the area and invited me over. He didn’t talk about the lawsuits — he worked for his brother at I Works and is one of the defendants in the civil case — but he was happy to tell stories about their childhood.

He recalled the time the brothers were horsing around at home, sliding down the stairs in a cardboard refrigerator box. When a baby sitter came over, Andy Johnson says, his older brother tossed his shoes into the farthest end of the box and then sniffled that he couldn’t reach them.

“He whipped up some tears and told her, 'My shoes are in the box,'” Andy Johnson recalled. When the baby sitter crawled in to retrieve the shoes, the brothers gave the box a gentle push downstairs. “I think that was the end of the baby sitter.”

Jeremy Johnson was also the kind of child who would set up a lemonade stand only to give away the proceeds, family members say. The Johnsons are members of the Church of Jesus Christ of Latter-day Saints, and their faith emphasizes service. Yet, Johnson’s drive to give to others always seemed singular, his brother said.

“He doesn’t care what it looks like to other people,” Andy Johnson said. “He just tries to do the right thing.”

Jeremy Johnson credits the two years he spent as a Mormon missionary in Independence, Mo., with giving him a hands-on education in marketing; being a missionary allowed him to meet and talk to all kinds of people, says his cousin Nathan Ruben.

By all accounts, Jeremy Johnson was a gifted proselytizer. He started his first online venture in 1999, when he was 23. The company was a penny-stock recommendation site called rumorsearch.com. Subscribers who paid to join would post rumors about companies on the site. Then the site’s researchers, one of whom was Andy Johnson, would check the validity of those rumors and follow up with their findings.

RumorSearch attracted several thousand members. It also led to a complaint by the Securities and Exchange Commission. The agency contended that the site had misleadingly promoted a stock and failed to disclose that Johnson had received thousands of that company’s shares in compensation — and had sold them at a profit of $315,848. In 2002, Johnson settled the charges without admitting or denying them.

By then, Johnson had closed RumorSearch and started I Works, another enterprise with an online membership model. Apparently, he developed the idea of marketing a digital clearinghouse for grants while watching a TV pitch for grant books.

“He saw one of those infomercials where this guy was selling catalogs of government grants for $99,” recalled Paul Ruben, an uncle of Johnson and a software engineer in Murray, Utah. “He said: 'That’s the crummiest delivery system I can think of. I can do a lot better with a subscription base and people could sign up and cancel when they didn’t need it anymore.'”

I Works made Johnson a wealthy man. According to a report prepared by the receiver in the civil case, I Works generated more than $50 million in profits that benefited Johnson or was transferred to his affiliates. The report said he spent the money on, among other things, a 22,000-square-foot home in a gated community in a St. George suburb; an office building downtown called Tabernacle Towers; a car lot; houses and land in various parts in Utah; a house in Santa Monica, Calif.; land near Idaho Falls, Idaho; two houseboats; a 1957 Chevrolet Bel Air and other cars; gold bars and coins; and silver coins and palladium bars. He also lost about $1.3 million at a Las Vegas casino and donated $1.5 million to a local church ward, according to the report.

Now the FTC’s allegations of fraud have some Utahans wondering whether Johnson financed his endeavors with ill-gotten gains.

“He did a lot of good out of the country. So you don’t know,” John Miller, a retiree in St. George, told me one Sunday morning as he was filling up his car at a local gas station. “If he’s guilty of what he is accused of, he’s a crook.”

'I felt I had been scammed’

In late 2008, Nicky Miller went looking for a way to open a center for children with disabilities. She had recently lost her job as a pharmacy technician, but before that, she worked for years as a special-education teacher and administrator. She wanted to put that training to use. She just needed financing.

Miller said she landed on a website that featured a photograph of President Barack Obama and offered a free CD-ROM with information on how to find and apply for federal grants. She also said she saw testimonials on the site from consumers enthusing over the grant money they had received. It seemed legitimate to her. After all, Congress had passed a stimulus package that year to buttress the economy.

All she would have to pay, she thought, was $2.29 for shipping and handling.

A few days after signing up, Miller received a disk in the mail titled “Your Federal and Private Grant CD,” a program marketed by I Works. She looked at the information on the disk, but, she says, it was too general to be of use to her.

“It was a waste of time,” Miller, who lives in Minden, Nev., told me recently.

She didn’t think about it again until a few months later, when she checked her bank account statements and noticed debits of $221.52 from entities with names like Grant Search, Center 4 Grants and Business Fund.

She was unemployed at the time and had been watching her spending carefully. Those unexpected charges wiped out her funds, she said, and piled on $245 in bank overdraft fees.

“I was shocked,” Miller said in a declaration submitted as evidence in the civil case by the FTC.

She called Center 4 Grants and learned from a customer service representative that when she ordered the CD, she had been enrolled in different online membership programs — one for $39.95 a month, another for $12.95 a month. The memberships came with free trial periods, which typically allowed people to cancel within a week or two without incurring charges. But Miller said she did not recall seeing disclosures about memberships when she ordered the disk. Eventually, a call center representative canceled the memberships for her and issued a partial refund.

“I felt I had been scammed,” Miller, 60, told me.

Other consumers who gave declarations to the FTC received order confirmations for I Works grant CDs that mentioned memberships.

Many companies — such as wireless carriers or streaming video services — use similar continuity plans, in which charges recur until a consumer cancels. It’s a standard practice called “negative option” or “advanced consent” marketing. Bundling additional products with an order, a practice called “forced upsells,” is also a standard marketing practice. Both practices are perfectly legal if the marketing is truthful, the disclosures are adequate and the consumer consents.

In Johnson’s case, federal regulators contend that I Works-affiliated sites often displayed the disclosures in small print — and sometimes failed to disclose them at all.

“The scam, operated by 10 individuals through 61 companies,” an FTC memorandum to the Nevada court says, “has tricked consumers into providing their credit and debit card information and has repeatedly billed these consumers for Internet-based memberships they never agreed to join.”

At its height, “the scheme was ensnaring 15,000 consumers per day,” the document says.

The complaint also contends that promotional testimonials from satisfied customers were false. Johnson, court filings say, had created his own grant program. Called Grant-A-Day, it gave money to individuals for things such as utility bills or college textbooks. The testimonials on the sites, court filings say, came from people who received money through this program, not from government grants. (Court filings for the defense don’t deny that assertion but contend that the testimonials were nonetheless authentic and came with disclaimers like “results may vary.”)

Johnson wrote in an email to the agency in 2011 that he had attended an FTC workshop in Washington in 2007 on how to comply with marketing regulations for programs with recurring fees and that his websites had displayed clear disclosures.

“I attended your conference on negative options. We hired attorneys to review our websites to ensure they were compliant,” Johnson wrote in the email. “We never, at any time, used a false testimonial, and we did not ever develop a website without all the terms and conditions of the offer clearly disclosed.”

Karra Porter, a lawyer in Salt Lake City who represents I Works, Johnson’s wife and parents, and 24 other companies named as defendants in the case (though not Johnson), said the disclosures were prominent enough that, out of some 10 million membership enrollments, I Works’ customers canceled about 3 million during the free trial period.

Johnson’s family members and friends say his private philanthropy, like the Grant-A-Day program, is powerful testimony to his good intentions. When business was flush, they say, he even liked to give out $100 bills to needy strangers shopping at the local Wal-Mart during the Christmas season.

But Johnson’s accusers do not see a contradiction between his charitable acts and their allegations that he defrauded consumers. They see a connection.

“There is a Robin Hood aspect to Jeremy’s behavior,” said Vladeck, the former FTC official — the difference being that Johnson, he asserted, defrauded needy consumers to give to the needy.

'Roads led back to St. George’

In late December 2010, Johnson flew emergency supplies to people stranded by floods in southern Utah. A few days later, the FTC filed its suit against him.

Flooding Hero Sued by FTC in Alleged Internet Scam,” a headline in the Salt Lake Tribune read. That same week, the Deseret News newspaper, despite acknowledging the lawsuit, placed Johnson atop its list of people who “made a difference” that year and symbolized “the greatness Utah has to offer.”

It was as if there was no reconciling the local hero with the man charged with running what the FTC described in a court filing as a “well-oiled fraud machine.”

Jeremy Johnson founded I Works in 2000. But it wasn’t until 2009 that federal regulators began looking into the company in earnest. That year, Visa noticed a growing number of cardholders seeking to reverse charges — a procedure called a chargeback — for certain online membership programs.

If customers reverse 1 percent or more of a merchant’s charges, the banks that process its credit and debit card transactions may terminate the company’s accounts and place it in a terminated-merchant file — a blacklist that reduces the company’s ability to obtain new merchant accounts. That is what befell a number of I Works entities.

But federal regulators did not immediately connect the various high chargeback rates to I Works itself because the company was operating under so many different names and programs: Easy Grant Finder, Bottom Dollar, Business Funding Success, Fast Gov Grants and many more, according to court filings.

“At the time we started, we did not know that all roads led back to St. George,” Vladeck said.

The FTC’s pursuit of Johnson is part of a larger law-enforcement crusade to rid online marketing of malefactors. Over the past few years, the agency has shut down a number of online operators who marketed free trials and then charged sizable recurring fees.

Last year, Central Coast Nutraceuticals, a company that used free trials and negative options to market acai berry supplements and “colon cleansers,” settled FTC charges that it had defrauded consumers out of $80 million. Federal regulators also won a $359 million judgment against an online marketer in Canada who, the agency said, lured consumers in the United States and four other countries with offers of “free trials” for weight-loss pills, teeth whiteners, information about government grants and a work-at-home program.

But Vladeck says Johnson led a vastly more complex enterprise; a receiver’s report to the court describes it as a “spider web of entities.”

In the civil suit, the FTC contended that Johnson and associates incorporated more than 50 shell companies — using mail-drop addresses and straw owners — to trick merchant banks into setting up new merchant accounts.

Johnson has denied this. He has told family members that I Works opened new companies and merchant accounts to root out fraud among several hundred marketing websites that I Works regularly used to steer customers to its own product sites.

“By creating different entities, they would be able to identify more easily who was committing fraud against them,” said Porter, the lawyer for I Works. “This is a recognized method of combating fraud.”

Soon after the FTC filed its suit, Johnson closed I Works. A couple of months later, agency lawyers persuaded a judge in the case to grant a preliminary injunction, effectively shuttering I Works, and to appoint a court-supervised receiver to take charge of the assets so that money would be available for refunds to consumers should the FTC prove its charges. The court also prohibited Johnson from marketing grant programs, among other things, pending the case’s outcome.

That was the moment when Johnson’s supporters say they became convinced that federal officials were out to railroad him. By depriving him of his money, the FTC had stripped him of his ability to pay for a lawyer to defend himself against the government’s allegations, Johnson wrote in a court filing in May. Although he has a court-appointed lawyer in the criminal case, he is now representing himself in the civil case.

FTC lawyers, however, have contended in court filings that Johnson still has access to substantial finances because he transferred assets, such as ownership of his home as well as $1 million in silver bars and coins, to family members and associates. For that reason, the FTC in January named Johnson’s parents and his wife, Sharla, as relief defendants in the civil case. They are “not charged with participating in the I Works scheme,” the agency said, “but allegedly received ill-gotten gains from it that the FTC seeks to recover.”

The receiver, a company called Robb Evans & Associates, based in Los Angeles, says I Works has proved to be one of the most complicated asset-tracing cases it has ever tackled. In addition to benefiting from the more than $50 million in profits from I Works, the receiver contended in a report, Jeremy Johnson routed about $51 million in additional funds to other companies or individuals.

“A significant amount of money was filtered through a number of entities in an apparent attempt to conceal assets,” Brick Kane, the president of Robb Evans, told me.

The receiver’s pursuit of the assets is an expensive endeavor: it has charged $3.9 million in fees and expenses through the end of last year that comes out of the I Works receivership.

“We are still tracing,” Kane said. “There are still unanswered questions in this case.”

Porter said that there was nothing untoward — or even unusual — about the company moving assets through holding companies and other entities.

Fighting back, undaunted

Johnson still lives with his wife and their two daughters in their Tuscan-style manor with an outdoor pool and pond in a suburb of St. George. Well-fed orange tabby cats strut about the grounds like royal peacocks, as if they own the place.

Johnson has not been making his mortgage payments, and there is a lien on the house. Friends and family members, including Paul Ruben, his uncle, put up about $2.8 million of their own property as a bond to secure his release from jail after he was arrested in the summer of 2011 on one count of mail fraud.

While his living situation seems precarious and his legal troubles unlikely to go away soon, Johnson has been anything but resigned. He has been tweaking his accusers with a high-profile campaign to clear his name.

It began with an email sent at the end of 2011 to various federal officials, more than a dozen U.S. senators and a handful of journalists. The email came from an official-sounding account: [email protected]. But Johnson had registered the address. And he had an announcement.

Rather than sign a settlement agreement being proposed by the FTC, he wrote, he and other defendants were preparing to publicly accuse federal agents of serious misconduct. They had even set up a website for this purpose. They called it evilftc.com.

“We will no longer remain silent and let you mislead the media with your lies and deceit,” Johnson wrote in the email included in court filings. “We are compiling documentation to prove that we are innocent of your allegations.”

By then the site, along with an accompanying Twitter feed of the same name, had gone live. Johnson used the power of free speech and the ease of the Internet to try to reposition himself as a victim of a government conspiracy rather than a businessman accused of deceptive marketing.

The site came with a tagline: “Dirty Deeds by Big Government.” In addition to rebutting the FTC’s allegations, it leveled accusations of its own. The site contended, for instance, that the leading FTC lawyer in the case had improperly called Johnson while he was in jail, interfering with his right to due process. (Vladeck said the “FTC had no choice but to contact Jeremy directly” because the agency believed Johnson was acting at that time as his own lawyer in the civil case.)

When FTC lawyers investigated, they discovered that Johnson, along with his brother Andy Johnson and others, had registered at least 30 domain names — including ftcscam.com and ftccorruption.com. Calling Jeremy Johnson’s activities “shenanigans” and “harassment” (and his opinions “meritless and scandalous”), government lawyers filed an emergency motion, asking a judge to shut down the sites.

Judge Roger Hunt of U.S. District Court denied the FTC’s motion in the main, ruling that Johnson could continue to express his opinion as long as the sites did not misrepresent themselves as government entities. Johnson has since toned down evilftc.com.

Johnson had won the first skirmish in his campaign against the government, but the judge did admonish him not to go too far. Referring to a site that Johnson had set up to criticize the receiver, which he called “RobbEvansfraud.com,” Hunt said, “You need to understand, sir, you are accused in this case of using the Internet to deceive people.”

The judge added: “When you use this procedure, process of multiple websites, which, in the court’s view, deceive or intended to misrepresent or deceive or mischaracterize the court, its appointed receiver or a governmental agency, it’s going to be difficult for you to convince me that you do not use the Internet to deceive at the time of trial.”

But the judge’s warning did not seem to daunt Johnson’s campaign. In January, a video appeared on YouTube accusing federal prosecutors in the criminal case of threatening Johnson and his family with the aim of pressuring him to accept a plea deal. (Prosecutors have publicly denied the accusations.)

“Jeremy felt it was better to get the truth out than to sit and be quiet, which is not his nature,” Ruben said.

Lumberjacking, for now

The government seems determined, too. Federal prosecutors have asked Judge Miranda Du of district court in Las Vegas to stop almost all discovery in the civil case. If she decides in the government’s favor, the civil suit would effectively be put on hold while federal prosecutors pursued the criminal charges. Banned from marketing grant programs while the cases proceed, Johnson recently bought a portable sawmill on eBay and is lumberjacking in forests near where his great-great-grandfather had a sawmill. But he has not disappeared into the woods.

Where many other online marketers who sold similar products using similar techniques eventually agreed to settle FTC charges of deceptive practices, Johnson continues to proclaim his innocence.

“Imagine for a moment the possibility that I have done no wrong,” he recently wrote in a report prepared for a police detective in Salt Lake City.

In that event, he said, government officials would be to blame for ruining his business, seizing and selling his worldly goods, putting him in jail and, perhaps most significant to a marketer for whom believability is everything, diminishing his reputation “from one that was known for good to that of a mastermind of a $300 million fraud.”

The canyon lands of Utah seem to breed legendary characters who write their own rules. One of them, born in 1866 and called Robert LeRoy Parker, later took the name Butch Cassidy.

“The leader of the Wild Bunch was a friendly, gay, reckless and coolly daring young man whom everyone liked, even the sheriffs who chased him,” Wallace Stegner wrote of the outlaw in his book “Mormon Country” in 1942. “He thumbed his nose at pursuing posses.”

The government’s account of Johnson follows a similar narrative, albeit updated for the online era, wherein a congenial schemer and his loyal crew, operating on the wild frontier of e-commerce, manage for a time to elude the Internet sheriffs.

“I would hate to think there is someone bigger than Jeremy out there that we missed,” Vladeck said. “In this field, Jeremy is a whale.”

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