UNITED STATES DISTRICT COURT
Plaintiff, the Federal Trade Commission ("Commission"), by its undersigned attorneys, alleges:
1. This is an action under Sections 13(b) and 19 of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. §§ 53(b) and 57b, to secure preliminary and permanent injunctive relief, including rescission of contracts, cessation of collections and other equitable relief, for defendants' unfair or deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), and the Electronic Funds Transfer Act, 15 U.S.C. § 1693k, in connection with financing of business ventures and other items provided to individuals and small businesses.
JURISDICTION AND VENUE
2. This Court has jurisdiction over this matter pursuant to 15 U.S.C. §§ 45(a), 53(b), and 57b, and 28 U.S.C. §§ 1331, 1337(a), and 1345.
3. Venue is proper in the United States District Court for the District of Massachusetts under 15 U.S.C. § 53(b) and 28 U.S.C. §§ 1391(b) and (c).
4. Plaintiff Federal Trade Commission is an independent agency of the United States Government created by statute. 15 U.S.C. §§ 41-58. The Commission enforces Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), which prohibits unfair or deceptive acts or practices in or affecting commerce. The Commission may initiate federal district court proceedings by its own attorneys to enjoin violations of the FTC Act, including redress for injured consumers. 15 U.S.C. §§ 53(b), and 57b. The Commission also enforces the EFTA, and violations of the EFTA are violations of the FTC Act. 15 U.S.C. § 1693o(c).
5. Defendant MicroFinancial Incorporated ("MicroFinancial") is a Massachusetts corporation with corporate headquarters located at 10M Commerce Way, Woburn, Massachusetts. It transacts business in this district. MicroFinancial stock is publicly traded on the New York Stock Exchange.
6. Defendant Leasecomm Corporation ("Leasecomm") is a wholly-owned subsidiary of MicroFinancial with a principal place of business also located at 10M Commerce Way, Woburn, Massachusetts. It transacts business in this district.
7. At all times material hereto, defendants have been engaged in the business of providing financing to individuals and small businesses, and the related business of collecting alleged debts for that financing, in or affecting commerce, as "commerce" is defined in Section 4 of the FTC Act, 15 U.S.C. § 44.
DEFINITIONS FOR PURPOSES OF THIS COMPLAINT
8. "Customer" is any natural person who is individually liable to pay Leasecomm for financing, either directly or indirectly, e.g., as a cosignor, guarantor, proprietor, or signatory general partner.
9. "Business venture" includes purported profit making ventures (e.g., multilevel marketing programs, pyramid schemes, buyers' clubs, coupon clipping programs, investment opportunities, etc.), regardless of how participation in the venture is characterized (e.g., as investors, members, donors, etc.), seminars, or promotions that seek to induce customers to make money through business or investment, or similar intangible items.
DEFENDANTS' BUSINESS ACTIVITIES
10. Leasecomm's principal business since at least 1997 has been providing financing through contracts it calls "leases" to individuals and small businesses. The contracts purport to be leases for items such as point-of-sale credit card swiping machines ("POS machines") and Internet-based, online payment systems ("virtual terminals"), which have often been sold as part of a purchase of a business opportunity or profit making venture. The business opportunities and profit making ventures include Internet web malls, multilevel marketing programs, pyramid schemes, medical billing software, coupon clipping programs, and similar, often worthless get-rich-quick schemes that consumers have been duped into buying by deceptive practices of the business venture sellers. A typical lease requires total payments of $3,000-4,000 over a 3-4 year period.
11. Customers usually make no upfront payment for their business venture purchase. Instead, the business venture vendors, acting as Leasecomm's agents for selling financing, procure customers' signatures on Leasecomm financing contracts for all or most of the cost of the business venture. After making a successful sales pitch, the vendor presents the Leasecomm contract to the customer amid the various papers the customer signs. Customers have little opportunity to read or understand the complex Leasecomm contracts, which the vendors virtually never explain to them. Even if customers did read all the fine print in the contract, it is unlikely that they would understand or appreciate the rights and remedies that fine print attempts to take away from them. Leasecomm expressly prohibits its vendors from negotiating over or changing any of the contract's boilerplate terms.
12. Typically the only payment the seller receives for the business venture is a lump-sum payment from Leasecomm. In some cases Leasecomm splits the payment between the vendor and a supplier of other goods or services associated with the business venture, like the provider of a POS machine or merchant account services. Thus, Leasecomm is actually financing the whole business venture.
13. Based on the sales pitch by the vendors, customers think they are signing a financing agreement for the entire business venture they are purchasing. In fact, even though the monthly payments under the lease cover the full price of the business venture package plus finance charges, the lease purports to only finance a POS machine or virtual terminal, a computer software license, or some other item that is an incidental part of the business venture. For example, a typical sales contract lists many items included as part of a business venture (e.g., training, web site design, customer leads, a manual, forms, software, merchant account) for a specified price per month (e.g., $70) over a specified term (e.g., 4 years). The corresponding Leasecomm contract in this example would also be for the $70 per month and over 4 years, but would state as the item being financed only one component of the business venture (e.g., a POS machine). Nonetheless, what the customers understand and believe is that for payments of $70 per month over a 4 year period they are purchasing the entire business venture.
14. Leasecomm does not allow its vendors to fill in finance contracts with a truthful description of the business venture. Leasecomm makes the finance contract look like an equipment lease, because Uniform Commercial Code Article 2A ("UCC Art. 2A") equipment lease provisions are significantly more favorable to creditors than the provisions relating to non-lease finance contracts. Finance contracts for business ventures and other general intangible items cannot qualify as Art. 2A leases.
15. For web-based business ventures, the specified item financed in the Leasecomm lease is often a "virtual terminal." This is not a tangible piece of equipment that can be owned by Leasecomm as a lessor or the customer. Rather it is simply the setting up of an online point of sale authorization system and the information necessary to access that account. Virtual terminals are typically available at little or no cost from alternative sources, such as merchant account providers and processors, who then charge the customer a commission when charges or debits are made, plus a small monthly fee.
16. The customer will receive a contract for virtual terminal services included in the papers the vendor provides, along with the sales contract for the principal items being sold (e.g., training, web site design, customer leads, a manual, forms, software, merchant account) and the Leasecomm contract. The virtual terminal service contracts are generally cancellable by either party upon relatively short notice (e.g., one month). The "lease" that Leasecomm writes for that virtual terminal, however, is not cancellable for 36-48 months.
17. The deception continues when Leasecomm and its vendors fail to disclose to customers material facts about the transaction that would lead them to question whether they should enter into the business venture transaction or the finance contract. Leasecomm and its vendors do not explain the involvement of Leasecomm in the transaction so that customers are often unaware that they are entering into a financing transaction with a third party. They also do not explain that the contract purports to make the customer's obligation to pay Leasecomm absolute, that this obligation to pay is based solely on the customer's acceptance of the POS machine or virtual terminal or other item financed, that the customer is agreeing to waive defenses including the defense of fraud in the inducement, and that these provisions may not be enforceable under applicable contract law. Finally, they do not explain that the contract provides that any disputes under the contract will be resolved in a forum distant from the customer's residence.
18. Leasecomm drafts its lease contracts to ensure that customers pay even when the agreement to enter into the lease or the underlying business venture transaction is induced by Leasecomm's vendors' misrepresentations or fraud, or when the products or services fail to perform as represented. Most lease contracts contain a provision that tells customers that they cannot assert any defense or counterclaim:
I fully recognize your right to enforce the lease free from any current or future defenses, offsets or counterclaims.
Most lease contracts also contain a second provision that sets the location for filing collection suits in Massachusetts, regardless of where the customer resides or signed the contract. A typical form of that provision is:
Other provisions require that customers agree to automatic debiting of their bank accounts and require that customers sign a personal guarantee of the lease contract.
19. Leasecomm knows or should know that many of its vendors engage in deceptive practices to sell their business ventures. Leasecomm employees maintain a close relationship with its vendors, and Leasecomm uses a computerized system to track delinquent accounts, default rates, and customer complaints of vendor fraud or misrepresentation. The default rate with respect to particular business ventures often exceeds 30%, and with some vendors has exceeded 50%. Leasecomm also receives large numbers of customer complaints about misrepresentation or fraud concerning these vendors. Despite possessing evidence of serious problems with vendors, Leasecomm rarely terminates a vendor. Instead, it simply reduces the payment it makes to the vendor, retaining a larger share of the customers' payments for itself.
20. Leasecomm does not apply the usual finance industry standards for granting credit. First, the value of the equipment purportedly leased by Leasecomm has no relationship to the value of the lease. POS terminals, which Leasecomm leases for as much as $4,000, have retail value of $400-500 and wholesale cost of approximately $250. Virtual terminals, leased for the same amount, essentially have little or no value. Second, the credit worthiness of the customer is rarely used to deny credit. Instead, Leasecomm applies a matrix for rating both the vendor and the customer to set a discount rate for the lease.
21. Leasecomm's approach to debt collection is very aggressive. It uses the contract provisions described in Paragraph 18, above, to the fullest extent possible to obtain payment from customers and obtain judgments, if necessary. This is true even when the customers have been defrauded and received nothing of value.
22. Leasecomm is usually unresponsive to customers' disputes or claims of fraud against vendors. It relies heavily on the wording of the contract to tell customers that they have no defense to Leasecomm's demand for payment. For example, collectors will point out that the customer accepted a POS machine and that was the only product named in the lease. When the customers argue that the lease really financed an entire business venture that was fraudulent, and the POS machine was worthless without the rest of the package, the collectors will still insist that obligation to pay in full is absolute and that the customers have no defense.
23. One example of how Leasecomm treated complaints of fraud involved InfoDirect, a vendor that ran a pyramid scheme. Its organizers made their money by requiring the purchase of overpriced computers, financed by Leasecomm, to participate in the scheme. According to Leasecomm's own complaint records, the computers (if delivered at all) were typically low-end or used and defective models leased for $3,300. The total lease volume was $5.2 million. Of the 1,882 deals, 1,483 went into default, most early in the lease term.
24. Leasecomm wrote letters to InfoDirect complaining about the poor payment rate. Nonetheless, it continued to accept new leases for nearly a full year after it had notice from customer complaints and defaults that there was a serious problem with the product delivered. Leasecomm also sued one-third of the InfoDirect customers for non-payment.
25. Another example involved one of Leasecomm's largest vendor for virtual terminal business ventures at seminars, Executive Credit Services. This company accounted for $16 million in business during 1999-2000, with nine thousand customers and a default rate of over 30%. Leasecomm's internal records show many complaints about software and websites never working. Leasecomm rejected virtually every claim. An example of a "reason" for rejecting a claim was:
The fact that Executive Credit Services sold its business ventures at seminars means that customers had little chance to read over all the purchase and finance documents, and even less opportunity to consult with a lawyer before signing them.
26. Another example involved Roma Computer, a company selling worthless web site business ventures. Leasecomm financed the computers that customers purchased, ostensibly to access their website. One customer complained that she "received the equipment, but never used it; still has equipment; was under the impression after seminar that they would get a website and could make lots of money." [Cryptic spellings from Leasecomm's complaint database expanded for readability.] The customer also complained about not receiving an expected printer. Leasecomm denied the complaint completely because "the free printer has nothing to do with the lease agreement." Leasecomm simply ignored the complaint about the worthless website business venture.
27. Leasecomm employees also make deceptive statements on the Internet concerning customers' ability to raise defenses to paying. There are a number of Internet websites set up for customers to share information on how to deal with Leasecomm. Employees of Leasecomm, acting under pseudonyms and denying their connection to Leasecomm, regularly post messages with misleading statements about customers' lack of defenses and their absolute obligation to pay Leasecomm.
28. Contrary to representations by Leasecomm, customers have a number of substantive defenses that could be raised, particularly where business ventures or other intangible items are financed. The most significant is that business ventures or other intangible items are not subject to being leased under UCC Art. 2A and that, therefore, the leases may be voidable or unenforceable in whole or part. At the very least, under applicable contract law, those provisions of the lease that Leasecomm claims require payment regardless of performance or fraud may be unenforceable, and customers may have other defenses, such as that the customers did not actually accept the products or that their entry into the contract was induced by fraud or deception. They also may have counterclaims based on the EFTA.
29. Customers rarely have the opportunity to raise any defenses. Leasecomm regularly files its collection suits in Massachusetts, despite the fact that most of the customers reside in other states. Leasecomm has sued over 27,000 customers in the past three years in Massachusetts. Few of the customers can afford the expense of litigation in a distant forum and most cases have ended in default judgments. Thus, customers have no real opportunity to raise defenses to the validity of the contract.
30. Even customers who do obtain counsel are hampered by the misleading Leasecomm contracts. Courts may take individual contracts at face value unless there is evidence that the contract is part of a pattern and practice of fraud and deception. Given the amounts in controversy, typically under $5,000, it would be extremely difficult for customers' lawyers to develop the evidence concerning Leasecomm's regular practice of incorrectly describing what was financed. Making complex arguments about the inappropriate use of UCC Art. 2A by Leasecomm would also be very costly. Finally, the potential witnesses for the customer are likely to be in the customer's local area, distant from the Massachusetts court. Customer challenge to the distant forum clause in the Leasecomm's contracts is similarly difficult.
31. Leasecomm aggressively enforces its judgments in the customers' local forum. With a judgment already entered, it is almost impossible for customers to challenge Leasecomm in the subsequent judgment enforcement actions. Had Leasecomm filed the suits in the local forum in the first instance, customers might have been able to appear and present a defense, either with an attorney or on their own.
32. Leasecomm adds to the consumer injury by imposing high collection fees, not only for late payments, but for every collection call it makes and letter it sends. These fees provide significant profits to Leasecomm. In many cases, by the time Leasecomm commences collection in court, the amount sought substantially increases the total payments due under the lease.
VIOLATIONS OF SECTION 5 OF THE FTC ACT
33. In numerous instances, in connection with the financing of business ventures, Leasecomm represents, expressly or by implication, directly or indirectly, that the finance contract the customer is entering into with Leasecomm finances all or a substantial portion of the customer's purchase of the business venture.
34. In truth and in fact, in most or all cases the finance contract, by its terms, finances only discrete equipment or services associated with the business venture, such as a credit card swiping terminal or a virtual terminal.
35. Therefore, the representations set forth in Paragraph 33 above are false or misleading and constitute deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a).
36. In numerous instances, in connection with the financing of business ventures, Leasecomm represents, expressly or by implication, directly or indirectly, that it is financing the customer's purchase of a business venture.
37. Leasecomm fails to disclose:
38. These facts would be material to consumers in their purchase or use of the product. The failure to disclose these facts, in light of the representation made in Paragraph 36 above is a deceptive in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a).
39. In numerous instances in connection with the financing of business ventures, Leasecomm represents, expressly or by implication, directly or indirectly, that customers have waived all defenses, or are precluded from raising any defenses or counterclaims, including defenses of fraud in the inducement or that material provisions of the financing contract are unenforceable.
40. In truth and in fact, in numerous instances, customers have and can raise defenses and counterclaims, including defenses of fraud in the inducement or that material provisions of the financing contract are unenforceable.
41. Therefore, the representations set forth in Paragraph 39 are false or misleading and constitute deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a).
42. In numerous instances, in connection with the financing of business ventures, Leasecomm's practices of including in its finance contracts provisions authorizing it to file lawsuits in venues other than the customer's place of residence or the location where the customer executed the contract, and of filing lawsuits under finance contracts in venues other than the customer's place of residence or the location where the customer executed the contract, are likely to cause substantial injury that cannot be reasonably avoided, and are not outweighed by countervailing benefits to consumers or competition.
43. Therefore, Leasecomm's practices, as alleged in paragraph 42 above, are unfair and violate Section 5(a) of the FTC Act, 15 U.S.C. § 45(a).
44. In the course of providing financing to consumers, defendants have regularly conditioned the extension of credit on the consumers signing a contract that includes compulsory electronic funds transfers from accounts established primarily for personal, family, or household purposes, in violation of the EFTA, 15 U.S.C. § 1693k, and Reg. E, 12 C.F.R. § 205.10 (e).
45. Pursuant to the EFTA, 15 U.S.C. § 1693o(c), every violation of the EFTA and Reg. E constitutes a violation of the FTC Act.
46. By engaging in violations of the EFTA and Reg. E as alleged in paragraph 44 above, defendants have engaged in violations of the FTC Act.
47. Consumers throughout the United States have suffered substantial monetary loss as a result of defendants' unlawful acts or practices. In addition, defendants have been unjustly enriched as a result of their unlawful practices. Absent injunctive relief by this Court, defendants are likely to continue to injure consumers and to harm the public interest.
THIS COURT'S POWER TO GRANT RELIEF
48. Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), empowers the Court to grant injunctive and other ancillary relief, including consumer redress, reformation or rescission of contracts, and cancellation of purported debts, to prevent and remedy violations of any provision of law enforced by the Commission.
49. The Court, in the exercise of its equitable jurisdiction, may award other ancillary relief to remedy injury caused by defendants' violations.
PRAYER FOR RELIEF
Plaintiff requests that the Court, as authorized by Sections 13(b) and 19 of the FTC Act, 15 U.S.C. §§ 53(b) and 57b, and pursuant to its own equitable powers:
Dated: May 22, 2003
WILLIAM E. KOVACIC
RANDALL H. BROOK