PayPal sued for facilitating Traffic Monsoon Ponzi fraud
Known throughout the MLM underbelly for it’s prohibition of Ponzi and pyramid schemes, PayPal nonetheless still pops up as a payment processor for various schemes.
The problem with PayPal’s current fraud detection mechanisms is that, by the time it’s detected, the damage has already been done or PayPal quietly freeze the account.
No information is communicated to victims of the scheme and often the fate of the seized funds remains a mystery.
When PayPal froze Traffic Monsoon’s investor fund account in January, 2016, approximately $61 million of invested funds were frozen.
Despite appearing to freeze the account on suspicion of fraud, PayPal continued to allow affiliate investment transfers into the account for another 30 days.
PayPal purportedly represented to Traffic Monsoon’s owner, Charles Scoville, that the freeze would remain in place until August, 2016.
Scoville promptly reassured Traffic Monsoon affiliates that nothing was amiss and to sit tight and wait it out.
As revealed by the SEC, PayPal prematurely released the funds on July 11th.
Scoville quietly began withdrawing $26.1 million dollars into private bank accounts he controlled. PayPal were fully aware of these transactions and despite earlier suspicions of fraud, had no problems authorizing them.
Two Canadian Traffic Monsoon investors have taken a stand, and through a class-action lawsuit now seek to hold PayPal accountable.
Kingsley Ezeude and Chukwuka Obi describe themselves as ‘victims of a Ponzi/Pyramid scheme operated by Charles David Scoville and Traffic Monsoon‘.
Ezeude invested $2216.43 into Traffic Monsoon, Obi invested $2238.90. All deposits were made through PayPal and just prior to the freeze on affiliate withdrawals.
Even before he launched Traffic Monsoon, Charles Scoville was a well-known figure throughout the MLM underbelly.
Prior to launching Traffic Monsoon in 2014 Scoville operated Ad Hit Profits, a 125% ROI Ponzi scheme. That’s in addition to a number of schemes, all of which used PayPal in part or in full to process affiliate deposits.
According to Ezeude and Obi’s lawsuit, PayPal froze Scoville’s PayPal account for fraud sometime after May, 2011.
Scoville was using the account to operate six fraudulent schemes at the time, none of which survived the freeze.
Ad Hit Profits was launched in May, 2013 and had collapsed by October.
In September 2014, PayPal authorized Scoville to open up a new account for Traffic Monsoon.
Scoville told PayPal that Traffic Monsoon’s business was “Investments – general” and provided PayPal with Traffic Monsoon’s website address.
Over the next sixteen months, PayPal would ultimately process $134 million dollars in stolen Ponzi funds for Scoville.
Ezeude and Obi claim PayPal’s review of Traffic Monsoon should have identified it was
similar to the businesses previously operated by Scoville that PayPal had banned from using its services following allegations of fraud.
Yet despite this, for sixteen months PayPal had no problems with Scoville operating the account.
PayPal also was aware that Traffic Monsoon was operating a Ponzi/pyramid scheme and that Traffic Monsoon was commingling investor money and paying existing investors with new investors’ money, in obvious Ponzi/pyramid scheme fashion.
As deposits into the Traffic Monsoon PayPal account skyrocketed throughout 2015, rather than set off alarm bells, PayPal lavished praise on Scoville’s business model.
PayPal praised Traffic Monsoon on the performance of its account with the low chargebacks – further demonstrating PayPal’s ongoing monitoring of Traffic Monsoon’s account and of the transactions in that account.
In December 2015, PayPal told Scoville that Traffic Monsoon’s account was one of the best performing accounts in its category.
The class-action lawsuit alleges that PayPal knew Traffic Monsoon was a Ponzi scheme but kept quiet because they were profiting off transaction fees. PayPal also allegedly earned interest on the account, even after they froze it.
The initial freeze was for 180 days and was supposed to last until August, 2016.
PayPal explained that the freeze on PayPal Account 7752 expired “unbeknownst to PayPal employees monitoring the account” – a clear demonstration of PayPal’s inadequate control systems and of the fact that crucial information regarding Traffic Monsoon’s fraud was not being shared across PayPal departments that needed to be aware of such information.
This negligence on PayPal’s behalf is alleged to have generated “millions of dollars” for proposed Class Representatives (Traffic Monsoon affiliates).
While PayPal prides itself on, and advertises, its anti-fraud detection systems, its internal controls were lacking at best, and nonexistent at worst, with regards to its oversight of its Traffic Monsoon-related activities.
Further, the internal communications between various PayPal departments and individuals charged with interacting with customers, overseeing customer accounts, and detecting and preventing fraud or misconduct in the PayPal accounts either broke down or were nonexistent.
Seeking to represent over 100,000 Traffic Monsoon affiliates, Ezeude and Obi’s lawsuit seeks damage as a result of PayPal
- aiding and abetting fraud
- aiding and abetting breach of fiduciary duty
- negligence and gross negligence and
- violation of California Corporations Code
At the time of publication PayPal has yet to respond to the lawsuit.
The case docket reveals summons were issued to defendants PayPal Inc. and Paypal Holdings Inc. on May 5th. A Case Management Conference has been scheduled for August 8th.
Patrick Pretty was first to spot Scoville’s representation to PayPal that Traffic Monsoon was an investment opportunity. A copy of Ezeude and Obi’s lawsuit is linked by Ethan Vanderbuilt at the end of his own article covering the story.
Update August 10th 2017 – PayPal requested additional time to respond to the lawsuit, which was granted on June 29th.
The Initial Case Management Conference has been continued to September 13th.
Update September 14th 2017 – On September 7th PayPal filed a Motion to Dismiss and Motion for Stay (of) Proceedings.
A Case Management Conference has been scheduled for December 6th, hopefully around which we’ll get orders on PayPal’s two pending motions.
Update 8th December 2017 – Pending the outcome of Scoville’s appeal in the SEC case, Ezeude and Obi’s lawsuit against PayPal has been stayed.