May 2 (Reuters) - Artsana, a maker of child car booster

seats, last year agreed to settle claims that it had misled

customers about how to use its products, offering $50 to people

who had bought Chicco-brand seats.

The company, which did not admit wrongdoing in the settlement,

knew it sold roughly 875,000 such seats, yet court records show

that by the end of October it had received more than 3.3 million

claims for payment.

Faced with a wave of questionable claims, Artsana reversed

itself and urged the court not to approve the settlement it had

negotiated to end the litigation.

"Criminals targeted the claims process in this case using

sophisticated methods to generate large numbers of fraudulent

claims," Artsana's attorneys told the federal court in

Manhattan.

The court sided with Artsana and put the settlement on hold,

telling lawyers to return after they had sorted out the fraud

issue. The case is still pending, so no claims have been paid,

records show.

Fraudulent claims have exploded in the last year, siphoning

money out of settlements and threatening the class action system

itself, said lawyers and claims administrators interviewed by

Reuters.

More than 80 million claims submitted in 2023 showed

"significant" signs of fraud, up more than 19,000% since 2021,

according to a report expected to be released on Thursday by

digital payment processor Digital Disbursements, which works

with class action claims administrators.

"It's an existential threat to the whole process," said

Chris Chorba, a partner at Gibson, Dunn & Crutcher who

represents Artsana.

In settlements where a company agrees to pay a set amount,

fraudulent claims can reduce the pool of money available for

consumers actually entitled to a recovery, the experts said. In

cases where companies agree to pay each claimant individually,

fraud can blow up the cost of settling.

Exactly how much money is stolen from settlements through

fraud is hard to quantify, said Steve Weisbrot, president and

CEO of claims administrator Angeion Group, because successful

fraudsters evade those trying to stop them. He said it is

reasonable to think millions of dollars have been siphoned out

of settlements in recent years.

"Someone is making money off of it, or it would stop,"

Weisbrot said.

Plaintiffs' attorney Don Beshada, whose software company

Claimscore evaluates settlement claims for fraud, said he has

identified at least eight settlements in federal and state

courts that have been attacked by a similar wave of fraudulent

claims since last year.

Among the cases Beshada and other administrators flagged was a

class action against Grande Cosmetics over claims that its

eyelash growth serum contained a chemical that required

regulatory approval. The company settled the case without

admitting liability for a little over $6 million. By April, 6.5

million claims had been filed, with just over 110,000 ultimately

deemed valid by Claimscore and claims administrator Angeion

Group, court records show.

Neither Grande nor its lawyers responded to requests for

comment. The company and attorneys for the class have urged the

judge to approve the settlement, with plaintiffs' attorneys

noting the number of claims deemed valid represented a

significant portion of the 1 million customers the company had

estimated were affected. The judge has yet to issue a ruling.

About 80% of the 14 million claims were likely fraudulent

in a $45.5 million settlement in a class action accusing tobacco

giant Altria ( MO ) with misleading consumers about the addictiveness

of its Juul products, administrators from Epiq Global told the

California federal court. Altria ( MO ) settled without admitting

liability.

Neither Altria ( MO ) nor its lawyers responded to requests for

comment. The settlement, approved in March, will be divided

among all claims the administrators deem valid.

Fraud is generally more common in cases involving

allegations of false advertising or defective products that

yield small payouts and may not require proof of purchase,

lawyers and claims administrators say. Companies settling such

cases are generally released from liability for essentially all

allegations, so even class members who get little or no payout

cannot sue again.

This is not a new problem. In 2018, Reuters reported on scammers

using automated bots to submit fake claims in class actions. But

experts say fraudulent claims now are increasingly submitted not

by bots but by groups of people using stolen identities and

addresses, collecting payouts via check or digital payment. Some

claims administrators suspect fraudsters use masked or stolen IP

addresses to hide their locations.

In the short-term, weeding through all those claims can

mean more money for administrators who charge defendant

companies more to review a higher number of claims, Weisbrot

said.

But in the long run, companies may become less willing to

settle cases if they believe their money will go to fraudsters,

said Chorba, the defense attorney who has represented several

companies whose settlements have been targeted.

Plaintiffs' attorneys, including Eli Wade-Scott, the head of

the class action practice at plaintiffs' firm Edelson, told

Reuters fake claims are undermining efforts to improve the rate

of claims by people who actually are entitled to part of the

settlement. The attorneys said overly stringent tactics by

administrators to crack down on fraud could make things harder

for real claimants.

"Claims rates have to be excellent and those claims have to

be real," Wade-Scott said.