American Savings Discount Club (ASDC) and two individual defendants will establish a redress fund of nearly $3 million, will be subject to a lifetime ban on credit-related telemarketing, and will face a lifetime telemarketing bond of $500,000. ASDC has agreed to these provisions in order to settle a complaint that the Federal Trade Commission filed jointly with the Attorney General's Offices of Virginia, Wisconsin, and North Carolina. The complaint alleged that the company pitched a fraudulent advance-fee loan promotion to hundreds of thousands of consumers nationwide. According to the FTC, the defendants enrolled consumers who signed up for the purported advance-fee loan program, without their knowledge, in a "discount club," and required them to be "members" of the club for three months prior to applying for the promised loan. Additionally, the defendants charged consumers a $30 monthly membership fee to remain in the club and be "eligible" to apply for the loan.
"The defendants took advantage of consumers who were in financial need, providing little or nothing in return for their up-front payment, and misled them about the likelihood of securing a low-interest loan," said J. Howard Beales III, Director of the FTC's Bureau of Consumer Protection. "It is believed that the defendants collected almost $50 million over five-years, with only $9 million paid out to consumers through loans, discounts, or other benefits," Beales said.)
In their complaint against defendants ASDC (also known as The Tungsten Group), Tungsten Group II (a sales arm of ASDC), Robert J. Demellweek, and David Vincent Jensen, the FTC and attorneys general charged that each violated Section 5 of the FTC Act, the Commission's Telemarketing Sales Rule (TSR), and relevant state laws. The complaint stated that, in connection with their advance-fee loan scheme, the defendants' telemarketers represented that consumers would get a low-interest loan between $500 and $1,500 in exchange for an up-front payment of $100. That $100 consisted of a $40 administrative fee and the first and last monthly loan payments of $30 each. If the consumer agreed, the defendants deducted $100 from his or her bank account almost immediately via electronic transfer. According to the complaint, the defendants told many consumers who tried to cancel that the $40 fee was non-refundable.
Only after the money was debited, however, did consumers find that the defendants had enrolled them in a "discount club," in which consumers could purportedly receive reduced prices on gas, oil changes, prescription drug purchases, and other items. The consumers also learned that, contrary to what they thought, they had not been "pre-approved" for the loan, but could only apply for a loan after paying the $30 membership fee for three months. Those consumers who did get a loan paid a loan repayment fee - above and beyond the monthly fee - resulting in total payments of nearly $41 per month for a 12-month, $500 loan.
In addition, according to the FTC, those consumers who chose not to cancel their "discount club" membership found that it was nothing more than a Ponzi scheme. That is, the sole source of the loans to other consumers was the defendants' own funds, with an ever-increasing number of consumers needed to fund the new loans. If the defendants charged one consumer $100 on one day, for example, they would have to find four additional consumers to be able to loan that first consumer $500. Consumer expectations thus grew exponentially, with less and less money available to pay out.
Under the terms of the order, the defendants will pay nearly $3 million, with a net amount of approximately $2.5 million available for consumer redress. If they are found to have misrepresented their financial condition or to have hidden assets, however, the order would require the court to enter a $40 million judgment against the defendants.
In addition, the order bans the defendants for life from telemarketing credit-related products or services and for three years from any telemarketing or sales of any credit-related goods or services. The order also imposes a lifetime bond requirement mandating that they post a $500,000 bond before conducting any telemarketing or sales of credit-related goods or services. It also prohibits the defendants from making misrepresentations similar to those alleged in the complaint and from violating the TSR. Finally, it requires the defendants to comply with the state laws they are alleged to have violated.
The Commission vote authorizing staff to file the complaint and proposed consent order was 5-0. It was filed in U.S. District Court for the Eastern District of Virginia, Norfolk Division and signed by the judge on July 30, 2002. The FTC was assisted in investigating this matter and reaching the consent agreement by the Attorney General's Offices in Virginia, Wisconsin, and North Carolina. Each also was a co-plaintiff in the original complaint.
NOTE: This consent decree is for settlement purposes only and does not constitute an admission by the defendant of a law violation. Consent decrees have the force of law when signed by the judge.
Copies of the complaint and consent order are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.
(FTC File No. X020020)