DEBT COLLECTION

With the seal of Santa Barbara County’s district attorney on its cover, the envelope caught Jennifer Osborn’s attention immediately. And when she opened it, Osborn read something startling: She was being accused of a crime.

The letter, dated October 2008, alleged that Osborn had “violated criminal statutes by issuing a bad check.” She faced up to a year in jail and a $2,500 fine unless she made good, paid $215 in fees and spent a Saturday at a “financial accountability class.”

The letter stunned the college sophomore. Osborn, 20, says she was unaware that a $92 check she had written to her school bookstore had bounced, the result of what she described as a mix-up with her mom.

“Failure to pay in full and schedule class within 10 days from the date of this notice may result in your case being forwarded for criminal prosecution,” the letter said.

Alarmed, Osborn paid the money and signed up for the class. But there were some things she didn’t know then.

Despite the official seal, the letter wasn’t sent by the district attorney’s office. Osborn had no obligation to attend a class to avoid prosecution. And there was virtually no chance she’d be charged with a crime -- in fact, the Santa Barbara district attorney’s explicit policy is to not consider prosecution for bounced checks under $100.

Osborn is among about 2 million people a year who receive similar letters from CorrectiveSolutions, a San Clemente firm that has turned bad checks into a thriving business. The privately held company runs “diversion” programs on behalf of some 150 county district attorneys throughout the U.S., many of them in California. In return, district attorney offices get a cut of the fees.

The Times last year wrote a story detailing the experience a 72-year-old Petaluma woman had with the company after her $26 check bounced.

CorrectiveSolutions’ biggest customer is the Los Angeles County district attorney’s office, which received more than $1 million in “administrative fees” from the company from 2005 to 2008, records show. Orange County prosecutors received more than $490,000 in the same three-year span.

Consumer rights groups and other critics have assailed the company’s letters as dishonest and misleading. The letters carry the district attorney’s seal, even though they’re sent by a private company. Normally, most who bounce small checks would never be referred for prosecution.

“They are renting the prosecutor’s seal, and they are using that name and authority to collect bad check debt,” says Deepak Gupta, director of the Consumer Justice Project at Public Citizen, an advocacy group that joined litigation -- since stayed -- against the company when it was known as American Corrective Counseling Services.

In January, the company reorganized under Chapter 11 bankruptcy protection, sidestepping several consumer lawsuits, and reemerged with the same management under the name CorrectiveSolutions.

Letters sent by the company to bad-check writers in Los Angeles County state that they have violated the law by passing a bad check and include the warning, “A conviction under this statute may be punishable by up to four years in state prison.”

But many who receive such letters cannot be sentenced to prison. Under California law, a person who knowingly writes a bad check can face no more than a misdemeanor -- and one year in county jail -- unless the loss was for more than $200 or the person had a previous bad check or theft conviction.

And the L.A. County district attorney’s office has told CorrectiveSolutions not to bother sending it a case for prosecution if the check was for $500 or less. The office doesn’t have the resources to prosecute such cases, and it doesn’t prosecute misdemeanors in many parts of the county, instead deferring to city attorneys.

Assistant Dist. Atty. Sharon J. Matsumoto, who manages the program for Dist. Atty. Steve Cooley, said the letters weren’t misleading. Although her office wouldn’t prosecute most people who fail to sign up for CorrectiveSolutions diversion, charges theoretically are possible, she said. The office filed about 150 bad-check criminal cases last year, she said.

It’s also accurate that four years in prison is the maximum punishment for writing a bad check, even if the person who receives the letter was ineligible for prison, Matsumoto said.

“What we have is a letter that covers all the possibilities,” she said. “We don’t know that they’re not going to be prosecuted.”

CorrectiveSolutions says its programs don’t target people who inadvertently bounce checks; the company requires merchants to give bad-check issuers a chance to make good on the debt before asking CorrectiveSolutions to intervene.

The company said in a statement that the Santa Barbara City College bookstore sent Osborn two collection notices, to which she did not respond, before referring her case for diversion.

Only those people who fail to respond to merchant collection efforts will receive letters inviting them to attend diversion classes to avoid prosecution, the company said in a statement to The Times.

“Every person in bad-check diversion has been notified several times, by their bank and the merchant, that they wrote a bad check,” the statement said. “People who write bad checks and then fail to subsequently to make good on them are not victims. The victims of this behavior are the community’s merchants that get stuck with those bad checks.”

The private-public partnership was made possible in 1985, when the California Legislature passed a bill that allowed people accused of writing bad checks to avoid prosecution by attending classes administered by district attorneys or private companies under contract with the district attorney.

Prosecutors in all 58 California counties now offer bad-check diversion programs. The L.A. County district attorney’s office ran the program internally for several years until 1999, when it contracted with the American Corrective Counseling Services, the firm that is now CorrectiveSolutions.

The company’s job is to run the diversion program and collect on the checks, returning the amounts due to merchants. If check writers refuse to participate, and if their bad checks meet the threshold set by the individual county, the company refers their cases for possible prosecution.

Last year, the company began collection efforts on more than 87,000 bad checks in Los Angeles County, giving back more than $2 million to merchants. The district attorney’s office would not have the resources to do this itself, Matsumoto said.

“We need to take the resources we have to fight violent crime,” Matsumoto said. “If we weren’t able to do this, there would be a great loss to the merchants in this community.”

There also would be a great loss to CorrectiveSolutions. Last fiscal year, the company and the L.A. County district attorney’s office took in 44% of the $4.2 million collected by the program, with merchants getting the remainder. That split has been roughly the same for the last five years, budget documents show.

In Orange County, fees exceeded restitution during the last three years -- 52% of the $4.6 million collected went to the company and the district attorney’s office.

The district attorneys for Los Angeles, Orange and Riverside counties -- Cooley, Tony Rackauckas and Rod Pacheco -- each declined to be interviewed for this article.

Pacheco spokesman Michael Jeandron issued a statement that said the office’s relationship with CorrectiveSolutions allowed it to focus its resources on fighting violent crime. He declined to address allegations that the company’s collection letters were deceptive or that the arrangement unfairly allowed the company and the district attorney to profit as debt collectors.

The operation has been lucrative. The company’s chief financial officer stated in an affidavit for the bankruptcy that fees for financial accountability classes are the firm’s “primary compensation.”

With a class of 35 students paying a typical fee of $150, the company could clear $5,000 per class. In February, 7,035 people attended such classes nationwide, according to a company e-mail obtained through California public records laws.

Bad-check issuers have been unsuccessful in pursuing remedies in court against American Corrective Counseling Services and CorrectiveSolutions.

A series of class-action lawsuits filed over the last nine years accused ACCS of violating the Fair Debt Collection Practices Act by sending misleading communications and threatening action that was not intended to be taken. The company filed for bankruptcy protection Jan. 19 amid concern that the lawsuits could cause significant liability.

A bankruptcy judge in Delaware approved the sale of ACCS to one of its creditors, which renamed the company CorrectiveSolutions, and wiped out the pending lawsuits.

The prospect of new lawsuits was further dimmed by Congress. In 2006, lobbyists for ACCS persuaded Rep. Barney Frank (D-Mass.) to support legislation exempting bad-check diversion programs from the Fair Debt Collection Practices Act.

The backing of Frank, the top Democrat on the House Financial Services Committee, was crucial to getting the exemption included in a broader financial services bill.

Frank now has second thoughts about the exemption.

“It appears to be that the [district attorneys] in some of these cases have not exercised proper control,” Frank said. “Some members of my staff are looking into it. We do have some things on the agenda.”

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mosi.secret@propublica.org

stuart.pfeifer@latimes.com