Two FatWallet Cash Back members recently pled guilty to wire fraud for using FatWallet's Cash Back program as a vehicle to swindle money from Nordstrom. According to the United State Department of Justice, Brothers Allen and Andrew Chiu were originally barred from Nordstrom.com in 2008 due to “excessive claims for refunds” for merchandise that the brother's claimed was never delivered.
In January 2010, the brothers discovered that they could exploit a glitch in Nordstrom's systems that treated some unprocessed orders as successful affiliate transactions generating commissions to FatWallet who then paid the brothers. According to court documents, through at least December 2011, the brothers then made $23 Million in invalid purchases, generating $1.4M in commissions and fees (of which the Chius received $650K).
Some members in FatWallet's forums are fairly unrepentant. A few of the quotes we've seen:
Wow! I have received many free cashbacks due to order cancellation but this is amazing!! FWIW, the free cashbacks were from *deleted*, *deleted*, Canon (no longer) and eBay (no longer available and only on certain type of cancelled transaction). sabhinav
I assume it was fraud because nothing ever shipped? Would this also be considered fraud if they shipped and then returned to the store? IronFist99
An open question is whether FatWallet returned its share of the illgotten gains. The court documents are pretty clear that the brothers only received $650K of the lost commissions and fees. Nordstrom continues to allow FatWallet to participate in Nordstrom's affiliate program, offering 2.5% cash back.
This particular case highlights some of the challenges advertisers face when deciding to work with loyalty programs. While affiliate marketing in general requires merchants carefully track inventory and related commissions, loyalty programs increase the importance of rock-solid systems exponentially. A merchant is simply exposed to a far wider group of "affiliate's" than through their own direct program. We would also expect that affiliates that effectively have sub-affiliates increasingly find that their merchant partners demand improved compliance practices.
FatWallet is also pursuing the Chiu brothers in federal court. The original complaint (filed in January 2012) indicates that "FatWallet has become exposed to a claim that it repay the affiliated merchant a sum equal to the amount the affiliated merchant paid to FatWallet".
There were a few other interesting aspects of the FatWallet Complaint:
- The dates seem to be different from those mentioned in the DOJ filing. The FatWallet filing indicates that the brothers created "at least a dozen FatWallet accounts"
- FatWallet "discovered the Chiu Brothers' fraud in early October 2011", notified Nordstrom and suspended all payments to the Chiu Brothers. The Chiu Brothers continued to make purchases and Nordstrom apparently continued to credit FatWallet.