Operators of Debt Company Settle Charges
Operators of a Santa Ana-based debt-relief company and a complex web of affiliates have agreed to pay $3.8 million to settle charges that they scammed consumers out of $84.3 million by falsely promising to negotiate discounted payoffs to creditors, the Federal Trade Commission said Wednesday.
The FTC shut down the telemarketing and direct mail operation in May 2004, alleging that National Consumer Council Inc. was “masquerading as a nonprofit.” Despite paying large fees, many clients wound up so much deeper in debt that they had to file for bankruptcy protection, the FTC said in a lawsuit filed in Santa Ana federal court.
A court-appointed receiver has been liquidating the assets of National Consumer and its affiliates and has returned to consumers about $24 million that had been held in trust accounts for repayment of creditors.
The companies would pay an additional $1 million to consumers as part of the negotiated settlement, bringing the total payments from defendants to $4.8 million, the FTC said.
The agreed-to settlement, which has not yet been approved by a judge, contained no admissions of wrongdoing or liability by the defendants, said Jennifer Larabee, an attorney in the FTC’s Western regional office in Los Angeles.
National Consumer billed itself as a nonprofit educational organization. But debt-strapped people who went to it for help were instead referred to for-profit affiliates, authorities said. These affiliates allegedly advised clients to make payments to them, instead of their creditors, with the understanding that the affiliates would negotiate reduced payments on their behalf once their savings totaled about 25% of what they owed.
Larabee said 19,000 of the consumers involved with National Consumer Council -- more than 42% of participants -- quit the program, typically “because they were [still] getting hammered by their creditors, facing collection demands and sometimes lawsuits, and it just got too difficult.”
Fewer than 2% of participants completed the program with negotiated settlements of all their debts, she said.
The agreed-to orders against individual defendants associated with the alleged scam were as follows, the FTC said:
* Walter Haines, Paul Kardos and Walter Ledda would be required to pay $605,000, $1.86 million and $1.36 million, respectively. Each defendant also would have a suspended judgment of $84.3 million, the amount of unreturned fees their operation received from consumers. Failure to pay the judgments, or a finding that they had misrepresented their financial status, would make them liable for the entire $84.3 million.
* Mary Beth Harper and Martha Levitsky would have a suspended judgment of $17.8 million -- the amount their company, Financial Rescue Services Inc., one of the entities involved in the alleged debt-relief scam, collected from consumers.
* Harvey Warren would have a suspended monetary judgment of $84.3 million for fees received from consumers, and would be liable for that amount if found to have misrepresented his financial condition.
The stipulated settlement would allow the defendants to again start negotiating with creditors on behalf of debt-burdened consumers. But the defendants would be barred by court order from making false claims for any product or service, and would have to disclose that creditors could continue to impose late fees and penalties, and could even sue consumers, until a settlement was reached.
Michael Lawrence, an attorney for the individual defendants, didn’t return a call seeking comment. When National Consumer Council and its affiliates were shut down, a spokeswoman for the company denied wrongdoing, telling The Times that the operation had helped many consumers.
The National Consumer Council cluster of companies was one of three debt-relief operations whose settlements with the FTC were announced Wednesday. All told, the agency estimated that the three operations had taken in more than $100 million by falsely promising easy debt relief. They will pay a collective $6 million in redress to consumers.
The wide gap between money raised and money returned is typical in such cases, Larabee said.
“It’s the same as in any other telemarketing operation -- the money goes to running the operation,” she said. “Unfortunately most of our cases work out this way. Getting back most of the fees is impossible.”