Federal Trade Commission Protecting America's Consumers

A majority of the Commission has voted to file in federal district court in Nevada a Complaint for Permanent Injunction and Other Equitable Relief and a proposed Stipulated Final Consent Order in the above-referenced matter. Although I agree that the Commission should file the Complaint against these defendants and seek injunctive and monetary relief, I have voted against filing this settlement because the proposed Stipulated Final Consent Order lacks an adequate "avalanche clause."

I have long been a proponent of including avalanche clauses in agreements where, based on a defendant's inability to pay, the Commission settles for a monetary judgment that is less than the full amount of consumer injury. An avalanche clause, which generally states that a greater sum-certain monetary judgment will become due and payable in the event a defendant has materially misrepresented his financial condition, serves several useful purposes. An avalanche clause undercuts the incentive for defendants to hide assets as they will remain subject to forfeiture for consumer redress. An avalanche clause can also be judicially economical because it fixes an amount of injury, thus avoiding the need to re-litigate the issue of monetary relief in a subsequent proceeding when the evidence may be stale. And an avalanche clause with a provisional monetary judgment in the full amount of consumer injury serves another important function. Such a full-value avalanche clause sends a clear, unambiguous signal to all fraudsters that their risk exposure upon breach will approximate the amount of injury, not just the amount that a court initially orders paid as monetary relief. Accordingly, I believe that the Commission's orders providing limited monetary relief based on an inability to pay full consumer redress should include an avalanche clause that represents the full amount of consumer injury. Furthermore, exceptions to this policy should be rare.

Here the proposed settlement - while providing appropriate injunctive relief against the two defendants, and partial consumer redress of $155,000 from National Student Financial Aid - fails to include an adequate avalanche clause. Rather the proposed Consent Order provides an avalanche clause covering National Student Financial Aid's ability-to-pay representations in the amount of only $300,000. This amount is more than thirty times below the $10 million or more that National Student Financial Aid grossed from over 40,000 customers through its unlawful promotion and sales tactics. Such a minuscule avalanche clause is simply not appropriate for this case.

For these reasons, I voted against filing the proposed Consent Order.