Flooz.com, a purveyor of online currency used as electronic gift certificates, officially ceased operations over the weekend, according to its chief executive, Robert Levitan. It fell victim to a softening economy and a sour investment atmosphere.
But Internet fraud may have sped its demise, a person close to the company said.
The company, this person said, had unknowingly sold $300,000 of its currency, known as flooz, over the last three months to a ring of credit card thieves in Russia and the Philippines, before being alerted by the FBI. A spokesman for the FBI, citing the bureau's policy, declined to say whether it was investigating.)
Stolen credit card numbers were used online to buy the flooz currency, which, until recently, could be used as gift certificates at about 30 retail Web sites, including those of J. Crew, Barnes & Noble and Tower Records. Flooz.com's credit card processing company, which Flooz.com executives would not identify, also alerted the company about the fraud, after the Flooz.com charges showed up on the monthly statements of people whose credit cards, or card numbers, had been stolen.
To cover any future refund requests from those credit card customers, the processor withheld daily reimbursements to Flooz.com from credit card sales and froze other accounts until it held $1 million of Flooz.com's money by the second week of August, the person close to the company said. Because customers were still redeeming thousands of dollars' worth of flooz daily at online merchants, "it created an untenable cash flow situation," the person said.
Flooz.com, which is privately held, said on Friday that it would close operations and file for Chapter 11 bankruptcy protection. Levitan declined to comment on whether credit-card fraud had been detected.
In an interview late last week, he said the company began struggling earlier this year after cuts in spending by its biggest corporate clients, which had bought flooz to use as awards in employee incentive programs. He declined to identify those clients.
Levitan said that until last week company executives had hoped to find a buyer capable of reviving the Web site. "We were trying very hard to satisfy all of our constituencies," he said, "but we could not continue the business in these challenging economic times."
Levitan would not say how many people own flooz currency, but given the company's sales history, that number is almost certainly in the thousands. Depending on how and when they paid for the currency, customers who have not redeemed it may not be able to get a refund from their credit card issuers. Merchants stopped accepting the currency in early August, when Flooz.com informed them that it had suspended its Web site operations.
Flooz.com's problems reflect the difficulty of creating a successful online currency — a point that Beenz.com, another company with its own Internet scrip, underscored last week when it, too, suspended operations. But Flooz.com's troubles also reflect the fragility of credit arrangements for e-commerce businesses that lack a deep well of cash.
And last week, the Internet retailer Buy.com filed documents with the Securities and Exchange Commission saying the company may have to close its operations if it cannot find a replacement for its current credit card processor. On Friday, however, the company said it had renewed agreements with major credit card companies and would continue in business as usual.
James Van Dyke, an analyst with Jupiter Media Metrix, said Internet businesses already paid higher credit card fees than did their traditional counterparts. The higher fees, he said, reflect the higher risk to the processor of doing business with unstable e-commerce companies, as well as the increased risk in serving customers whose true identities are nearly impossible to discern online.
When a retailer is fiscally strained — as is Buy.com, which recently lost its NASDAQ listing — credit card processors are naturally wary that the business will shut down and leave behind a long list of creditors in a bankruptcy proceeding.
When fraud hits, Van Dyke said, it is also typical for banks to protect themselves by tightening credit terms with the merchant. Without a patient and deep-pocketed set of investors to provide enough cash to survive through a crisis — something almost unheard of in today's Internet circles — "the merchant can really get soaked," Van Dyke said.