In the aftermath of the Federal Trade Commission's legal action this spring, Merchant Processing Inc., under the control of a receiver appointed by the district court, has taken steps to correct the problems that prompted the FTC's injunction.
The company is now moving toward building a profitable and competitive business, according to its new Receiver, Michael Grassmueck. "We ferreted out problems and corrected a number of things that were questionable," he said. "I am extremely pleased with the progress MPI has made."
On April 11, 2007, the FTC filed a complaint in the United States District Court of Oregon against MPI; its owner, 28-year-old Aaron Lee Rian; and two other firms Rian controls, Vequity Financial Group Inc. and Direct Processing Inc.
The FTC alleged the company engaged in fraudulent and deceptive trade practices while selling debit and credit card processing services.
On April 13, the court froze the assets of the defendants and appointed Grassmueck as Receiver for MPI. Grassmueck has more than 20 years of experience as a fiduciary at the federal court level.
The Washington State Attorney General's office also sued the defendants in Washington.
One of Grassmueck's first actions as Receiver was the appointment of Jim Keller as the new Chief Executive Officer. Keller, a certified public accountant with experience in turning around troubled companies, has been with MPI since May 8.
"I selected Jim Keller because he has had considerable experience leading challenged companies," Grassmueck said. "He has faced tough challenges before. I knew we would have challenges; I knew what they would be and I knew we were handing him a plateful. But he has been up to the job."
Since spring, Keller, with Grassmueck's oversight, has been revising MPI's trade practices to ensure absolute transparency. "One of the biggest selling points of this company is the honesty and integrity of its current operations," Keller said.
"I meet with our receiver every week, and both he and the FTC have reviewed our scripts, our sales training materials and our merchant applications. There is no company in the industry whose activities are more closely monitored than those of MPI, and that benefits all our merchants."
Grassmueck also is pleased with MPI's commitment. "The progress that MPI has made in bringing the company into compliance has been absolutely incredible," he said. "Jim has done an outstanding job. It is a real success story."
But MPI should hold off on the celebrations. "There are other bridges to cross," Grassmueck said. "We're not done yet. But I'm pleased to be able to report that MPI is 100% compliant in every way. Of course, as a fiduciary I couldn't have it any other way."
The company has gone through a dramatic restructuring, affecting everything from its merchant agreements to its staff. "Virtually all of the employees were let go," Keller said. "When I started, there were eight to 10 people left here, mostly in customer service and accounting."
At the time of the injunction, MPI employed about 65 people in house and had 30 to 40 independent sales agents. Since then, the company has built its staff back up to about 55 inside support positions and 15 to 18 independent sales agents.
"Very few of those we hired were rehires," Keller said. "I looked at their hire dates - if they had been hired just a couple of months before the court date, I considered them reasonably untainted by what had gone on before."
Between April and June, Grassmueck forbid sales staff from making new calls. Grassmueck told The Green Sheet that he wanted to evaluate the company's sales practices to ensure they were in compliance.
"Giving the FTC a comfort level that we could represent ourselves transparently and with full disclosure to the merchants was the biggest challenge to my credibility," Keller said.
With the help of Global Payment Inc., MPI rewrote its merchant application and gave it to the FTC to review, along with training materials. The FTC made suggestions for revisions, and the company complied. "I don't think there was any aspect of our sales program that we didn't revise with an eye to compliance before we started selling again," Keller said.
"We are pleased with the progress that Jim Keller and his team have made at MPI and will continue to support them as they implement their ongoing initiatives," said Tony Abruzzio, Senior Vice President of Third Party Acquiring for Global.
The Strawhecker Group, a merchant-processing consulting firm, also was retained to assist Grassmueck in evaluating MPI's current business plan, reviewing the sales program and training of employees, and advising in the areas of risk management and underwriting.
"The Strawhecker Group brings a wealth of expertise to the table and has already provided a valuable and detailed review of MPI's operations," Grassmueck said.
Robert Schroeder, the FTC's Assistant Regional Director in the Northwest Region, acknowledges that the FTC has reviewed materials supplied by MPI, but says that it would be inappropriate for the FTC to comment on Grassmueck's progress.
However, Schroeder did state that receivers chosen by the court generally are very experienced. "You can be sure if we had any serious concerns about the progress the company was making, we would be in court talking about it," he said.
According to Keller, the newly hired sales staff finished training in June and started selling in July. "Seeing those first deals come in has been very exciting," he said.
Now that sales have resumed, Keller hopes to double MPI's sales force in the next three to six months.
"My focus is to have an infrastructure that will support our growth, and I'm very comfortable that we have the support staff to handle that kind of growth," he said.
MPI has approximately 5,000 merchants, mostly from small businesses, with an average processing volume on $12,000 to $15,000 per month. "That's a good niche for us," Keller said.
The majority of MPI's current merchants are along the East and West coasts, so Keller plans to target the Midwest to increase the company's merchant base. "We certainly lost some merchants through all this," he said. "But we didn't lose as many as I expected. I've been very pleased with how many merchants we were able to save."
Grassmueck and Keller also launched a major overhaul of the company's customer service operations, which were mentioned by the FTC as a part of the problem. In the three years prior to the Court's injunction, the Better Business Bureau had processed 104 complaints against MPI.
"When I started, I sent a survey to our merchants to see where we stood," Keller said. "We got beat up pretty badly in the area of customer service." On a scale up to 10, with one being the worst, more than 40% of responses rated customer service at two.
With the numbers in, Keller had to take a deeper look at where the problems were stemming from. According to Keller, when he started with MPI, customer service was "absolutely overwhelmed" with call volume. Now with the restructuring, the average wait time is less than two minutes.
"I go down to customer service and just stand there and listen for a few minutes every day," he said. "It's a different ball game. There is a lot of respect for our merchants now that I don't think was apparent in the old company."
Keller noticed a "big change" in culture, especially in the attitude toward merchants. "They weren't treated as our bread and butter," he said. "They weren't treated as our reason for existing. But they are now."
Tech support staff also fared badly in the merchant survey, and Keller said they have all been completely retrained. "There are very few tech support issues we can't handle ourselves anymore," he said.
Another of the FTC's complaints was MPI falsely agreed to pay off the balances on existing equipment leases for merchants who bought or leased new equipment from the company. But, in fact, they left the merchants with two simultaneous leases.
According to Grassmueck's preliminary report to the court submitted in July, one of the largest unresolved merchant issues involved those lease buyouts that were promised but never fulfilled. Grassmueck also identified a number of customers no longer processing transactions with MPI but who were still being charged a minimum monthly fee.
The FTC is seeking preliminary and permanent injunctions to stop the alleged fraudulent practices, as well as refunds for the merchants it says MPI harmed.
In May, MPI began writing reimbursement checks to merchants for existing leases with other processors. "I'm not sure how many there were," Keller said. "At least one hundred. It felt like I was signing checks every day."
Merchants who no longer process with MPI will have their complaints addressed by the court. Keller said they keep a log of complaints and their resolution, if any, for the FTC.
Grassmueck noted the log is one piece of evidence that shows Keller is turning MPI around. "Our complaint log started with a lot of names on it," he said. "The log has dwindled down to almost nothing as we address those complaints. It is a benchmark of how well we are doing."
Schroeder said the case is still pending in Federal Court. He added that it is too early to know when the case could be resolved, as there is a wide range of possible outcomes.
"A settlement agreed on by all parties could happen quickly," he said. "A summary judgment could be issued once the discovery process is completed - that could be six to nine months; or the litigation could be completed - that can take more than a year."
Grassmueck speculates that if the FTC prevails in this case, the outcome of a 2004 processing industry case - the FTC v. Certified Merchant Services - could prove a road map for what the court decides to do.
In that case, the FTC accepted $23.5 million in redress to settle charges that CMS violated the FTC Act. The payment to the FTC came from the forced sale of CMS' assets.
"In my outsider's view, it seems that there is a tension between some of the practices in this industry and the FTC," Grassmueck said. "I'm sure people in this industry will be watching this case closely to see just where their boundaries are."
Grassmueck and Keller acknowledge that MPI has made huge strides in becoming both compliant and financially sound. "We're alive and well, and processing," Keller said. "We're a very customer service-oriented company now, and our merchants will see that in all our actions."
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