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The Green Sheet Online Edition

May 14, 2007 • Issue 07:05:01

The FTC nabs MPI: A cautionary tale for ISOs

Back in 2002, the Federal Trade Commission took action against Certified Merchant Services Ltd. for the ISO's business practices. To resolve that case without a trial, CMS' owners were forced to sell CMS assets to pay a $23.5 million settlement. But that did not quench the FTC's thirst for ISO blood.

Now, Beaverton, Ore.-based Merchant Processing Inc. is in Uncle Sam's crosshairs. The FTC recently took action against the company. According to the complaint, agents of MPI allegedly failed to disclose the true terms of contracts to some of its merchants.

Stop, pay toll

A federal judge ordered a temporary halt April 12 to MPI's operations, forcing the company into receivership. A stipulated injunction placing control of MPI in the hands of a receiver was agreed to April 30 by all parties, including the ISO's owner, according to FTC Attorney Mary Benfield. The injunction will remain in place until final resolution of the case.

"We allege they represented that the merchants would save money, because MPI told merchants their rates were much less than their previous processing," Benfield said. The government claims MPI did not disclose all fees.

"That was, as we allege, misleading," Benfield added. "We've alleged they did not show merchants the entire contract. The part they often were not able to see was the part that had the different fees."

"My immediate goals are to remediate the issues … and return us to a profitable situation – a competitive growth situation," said Michael A. Grassmueck, who was appointed Receiver of MPI.

In April, The Green Sheet spoke with Grassmueck at the Electronic Transactions Association Annual Meeting & Expo, where he met with candidates to take over management of the firm. "My goal is to find a good, qualified industry person to head up this effort," he said.

The company was on the verge of naming a new manager at press time, said Geoff Winkler, who is running day-to-day operations at MPI. Winkler is Director of Case Management for Grassmueck Group.

Most of the company's merchants, who number somewhere between 3,000 and 5,000, have been saying to MPI's new management "'It's about time,' or 'I knew this was coming,'" Winkler said.

"We have some that never had a problem; others are thankful we're here and feel they can get a hold of us" without being put on hold, he added.

A neutral zone

Grassmueck described himself as a neutral, independent party who is cooperating with both the federal government and MPI's owners.

Grassmueck had temporarily furloughed the staff while he sized up the situation, but he has already re-opened the company. "We are rehiring people," he said. "We're powering back up, as we speak."

Sales staff, however, is not permitted to make calls until he evaluates the company's sales practices, ensuring it is in compliance, he added.

The FTC's four-count complaint alleges that MPI, Vequity Financial Group Inc., Direct Merchant Processing Inc. and Aaron Lee Rian, President of all three companies:

  • Deceived merchants by promising they would save money by processing through MPI
  • Deceived merchants by failing to disclose that surcharges would be made for certain types of transactions and substantial fees would be charged for early cancellation of their processing agreements
  • Falsely claimed MPI would pay off the balances on existing equipment leases for merchants who purchased or leased new equipment from the company
  • Modified contracts without merchants' knowledge after they were signed.

Rian could not be reached for comment. His attorney did not respond to a request for comments.

Winkler said the company in recent weeks has begun honoring its merchant commitments to buy out pre-existing lease agreements. "I've personally started writing those checks," he said.

Customer service dead end

Customer service was also part of the problem, according to the FTC. When merchants contacted MPI's customer service department, employees claimed not to have the power to assist them and were unwilling to transfer them to someone in authority.

Merchants were then transferred to voice mail, but messages were not returned, according to the complaint.

The Better Business Bureau's Web site states the BBB processed 104 complaints lodged against MPI over the past three years.

New management has begun changing the corporate culture. They are replacing a "pass the buck" mentality with a service culture. When merchants call with problems, company representatives are now required to give their names, extension numbers, a promise to get back to them within a specific time frame, and then follow through, Winkler said.

"I've been giving out my personal cell phone number," he added.Winkler has also been trying to line up industry experts to do in-house retraining of merchant level salespeople, which will be necessary before they are allowed to resume sales efforts.

The goal is complete compliance. "We're still … reformulating the contract to make sure it's in compliance," he said. The company also has to set up a back-end department to verify all information after contracts are signed.

Restoration road

"In restoring a company, the first thing [Grassmueck] is doing is shoring up the existing operations, existing customer relations" and sales tactics to ensure that its operations are compliant, said Mary Dees Griffith, who was the Receiver in the FTC's action against CMS.

The sales staff may need retraining, "so they know what is considered appropriate disclosure from the standpoint of the FTC Act," she added.

If the judge issues a preliminary injunction, the case would be set for trial, a process that can take from one year to 18 months. A settlement could bring early closure to the case, as it did at CMS, Dees Griffith said.

"Taking such cases to trial is usually prohibitively expensive for owners: Settlements usually require defendants to pay financial penalties and agree to be barred from practicing in the business, effectively forcing ownership changes of the companies involved, she added.

In 2003, CMS was acquired by First American Payment Systems. The deal ended 18 months of CMS's struggle to rebuild and gave it a fresh start under a new name.

In that case, the FTC claimed CMS had deceptively modified customer contracts, debited customer accounts without authorization, misrepresented goods or services offered, and failed to disclose fees.

As in the current allegations that MPI failed to show merchants the full contract, CMS sometimes failed to provide full contract terms and conditions, including some fees merchants were not privy to. These fees were reportedly used to justify debits from merchants' deposit accounts without notification.

The December 2002 final judgment agreed to by the two officers of CMS named in the suit allowed them to continue in merchant services. But it bars them from debiting merchant accounts before services are provided. They were required to file compliance reports with the FTC for five years.

Beware, ISO roadkill ahead

"This action is a harsh reminder that the acquiring industry has not been forgotten by the FTC," Holli Targan and Sarah Weston, Attorneys with Jaffe Raitt Heuer & Weiss, said in an April 24 memorandum to members of the industry.

The actions criticized by the FTC are similar to those cited in the previous takeover of an ISO and "still hold true.

"This means that, even though your competitors seemingly are ignoring those lessons, any ISO who engages in such practices does so at its own risk," they added.

The FTC's Benfield said ISOs should have nothing to fear if they are making a full disclosure to prospective merchants during the contract negotiation.

When asked if ISOs can expect the FTC to come knocking, Benfield said, "If they're misrepresenting their fees, then yes. If they're saying their fees are lower, it needs to be a truthful statement. They shouldn't be worried as long as they're being truthful." end of article

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