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Certified Merchant Services Reaches Settlement with FTC

Certified Merchant Services, Ltd. and its affiliates announced that it has entered into a settlement agreement with the Federal Trade Commission (FTC) over the FTC's first-ever and only complaint to date against an Independent Sales Organization (ISO).

The settlement is for an undisclosed amount and will be paid to the FTC over an extended period of time. In addition, it was announced that Mary Dees, acting receiver of CMS, has accepted the position of General Manager for the company.

In February 2002, the FTC filed a complaint alleging CMS participated in "unfair and deceptive practices related to the marketing of credit and debit card merchant accounts to small businesses nationwide."

In its complaint, the FTC stated that the defendant and its principals misrepresented the terms of - and then inserted fine print into - merchant account agreements, allowing the company to fraudulently debit previously undisclosed fees from the merchants' bank accounts.

"Although there has been no finding of guilt, we decided that in the best interests of our merchants and our company, we would resolve this matter through a settlement," Jonathan Frankel, founder and majority shareholder of CMS, said in a statement. "Now we can focus on growing and expanding our business again."

The defendants in the FTC's complaint were Certified Merchant Services, Ltd.; Certified Merchant GP, Inc.; Certified Merchant Services, Inc. (collectively CMS); Jonathan Frankel; Craig Frankel; and Randal A. Best, of Plano, Texas.

CMS has been operating under a federal court-appointed receivership since mid-February 2002, when Judge Paul Brown in the U.S. District Court for the Eastern District of Texas, Sherman Division appointed a receiver team for CMS, initially led by Garrett Vogel, certified public accountant.

Mary Dees, President and CEO of Creditranz.com Inc., President-elect of the Electronic Transactions Association (ETA) and part of the original receiver team, has been acting as sole receiver for CMS since September 2002, when the remaining members of the team, including Vogel, were granted release from duty at the request of CMS, Jon and Craig Frankel and the Federal Trade Commission, in order to lower costs associated with the receivership.

"It was rewarding to know in September that as a result of the company's efforts, the FTC and the Court were comfortable allowing the company's supervision to be decreased to just one person," said Dees.

Along with the announcement of the FTC settlement, Dees has agreed to continue to lead CMS as General Manager on an ongoing basis. She also will continue to serve in her current positions at Creditranz. "I accepted the opportunity because I believe that I can make a difference," said Dees in a statement. "I believe the future is bright for CMS, and I believe that CMS represents what our industry should embrace in terms of ethics, compliance and business practices.

"We are pleased to have the case settled and behind us. We have all worked very hard over the past several months to meet all of our compliance requirements with the highest degree of ethics and integrity. I am excited about the opportunity to be responsible for and direct the efforts of one of the most FTC-compliant companies in our industry."

CMS has come a long way since that dark day in February 2002 when a federal district court issued a temporary restraining order against the defendants, froze the defendants' assets and appointed a receiver to oversee the company's operations.

In December 2002, Dees reported that under guidance of the receivership, CMS had significantly improved its customer service stats, retrained its entire independent sales force and implemented its first Ethics and Compliance Director position, currently held by Angela Papas.

The Ethics and Compliance Director conducts periodic audits of all areas of CMS business, including sales practices and disclosure, rate confirmation and underwriting, contract documentation, customer service and sales call monitoring, analysis of customer service requests and resolutions, and employee ethics and compliance training.

Through an order filed in November 2002, CMS will continue to be supervised and protected under the federal court. CMS and its receiver sought the court order after learning competitors were engaging in activities harmful to the company, such as making false and misleading statements against CMS and using the receivership as a reason for trying to solicit CMS merchants for business or solicit CMS employees or CMS sales agents for employment.

CMS, a private company, anticipates its 2002 revenues will be within 5% of revenues reported in 2001. Plans are in place to grow the business, and CMS hopes to enlist partners to assist in this process.

"Now that we have resolved our issues with the FTC, we expect to see more people express interest in our business, including the opportunity to invest in our future," Jonathan Frankel said. "Finding the right strategic partner is a priority, and we look forward to partnering with someone who shares our intentions to expand this business."

CMS' financial information and the settlement amount have been sealed by the court. Redacted documents concerning the settlement were not yet available to the public at the time this publication went to press.

For more information about the CMS case, you may refer to The Green Sheet:

  • "First Federal Trade Complaint against an ISO" Feb. 28, 2002, issue 02:02:02

  • "An Open Letter from Certified Merchant Services" March 25, 2002, issue 02:03:02

  • "CMS Appoints Permanent Receiver" May 27, 2002, issue 02:05:02

  • "Certified Merchant Services Granted Court Order" Dec. 23, 2002, issue 02:12:02

You also can visit the FTC's Web site, www.ftc.gov.


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