Federal Trade Commission Garners $23.5 Million In Settlement of Certified Merchant Services Case

The Federal Trade Commission has accepted $23.5 million to settle charges that Certified Merchant Services (CMS) violated the FTC Act while providing merchants with credit-card payment services. The payment to the FTC came from a forced sale of CMS’s assets, and the parties agree that it will provide full redress to merchants. The sale was part of a stipulated final judgment and order which also permanently bars the defendants from falsifying merchants’ signatures; altering or adding to signed documents relating to merchant accounts; certain billing and debiting practices; and misrepresenting the savings that merchants would achieve by doing business with CMS. The restrictions of these practices have been in effect since December 30, 2002, but the FTC collected the judgment recently and could not disclose it until ordered by the United States District Court for the Eastern District of Texas on January 5, 2004.

The stipulated final judgment and order settled the FTC’s first-ever complaint against an Independent Sales Organization (ISO) for practices related to the marketing of credit- and debit-card merchant accounts to small businesses nationwide.

The FTC filed its complaint in February 2002 against Certified Merchant Services, Ltd.; Certified Merchant GP, Inc.; Certified Merchant Services, Inc., and CMS-LP (collectively CMS); and Jonathan Frankel, Craig Frankel, and Randall Best of Plano, Texas. The companies also did business under the names Transaction Merchant Services (TMS), Transaction Merchant Services.Com, and Electrocheck. Jonathan Frankel and Craig Frankel were both officers anddirectors of CMS. The Commission amended its complaint in June 2002. Defendant Best settled the Commission’s amended complaint separately. In both settlements, the defendants neither admitted nor denied the allegations of the amended complaint.

The Commission’s amended complaint alleged that CMS and the individual defendants contacted small business owners throughout the United States to induce them to establish merchant accounts and, in the process, violated the FTC Act by unfairly and deceptively: 1) modifying customer contracts; 2) debiting customer accounts without authorization; 3) making misrepresentations regarding various goods or services offered; and 4) failing to disclose various charges or fees.

The CMS corporations, Jonathan Frankel, and Craig Frankel agreed to a stipulated final judgment and order which settles all Commission charges against them. The order contains both injunctive and monetary provisions. Under its terms, in connection with the advertising, promotion, offering, or sale of goods or services in commerce, the defendants are permanently barred from falsifying signatures and from altering or adding to – or assisting others in altering or adding to – signed documents relating to merchant accounts without the consent of these merchants. This prohibition covers any changes made to the material terms of such documents, including, but not limited to, increased rates and added fees and expenses.

In addition, in connection with providing card processing or check conversion processing, the defendants are permanently barred from debiting, billing, or receiving money, or assisting others in doing the same: 1) from merchants before the defendants have provided the merchants with the promised card processing services or goods; 2) from merchants for check conversion processing before the merchants have signed up for and activated such services; and 3) from merchants for services or goods after the merchants have cancelled in writing. If the defendants cannot defer automatic debiting, the order requires them to reimburse any debits that fall into the categories above.

Further, the order permanently bars the defendants from making, or assisting others in making any misrepresentation of material fact, including, but not limited to the following claims: 1) if merchants buy the defendants’ services, they will save money on their business expenses, including their card processing expenses; 2) if merchants are dissatisfied with any services or misrepresentations made by the defendants, they can cancel or transfer to another card processor at any time without further obligation; 3) there is no monthly minimum fee or expense associated with merchant accounts or the services offered by the defendants; 4) there are no fees or expenses in addition to the discount rate and per-transaction fee agreed to by the merchants; 5) if merchants are charged cancellation fees by prior credit card processors, the defendants will reimburse the merchants; and 6) if merchants have an existing equipment lease, the defendants will buy the remainder of the lease. The order also bars the defendants from failing to disclose, clearly and conspicuously either orally or in writing, any material fact relating to fees, as detailed in its provisions.

The order states that if the defendants obtain the signature of any merchant on a contract pertaining to the sale of any goods or services, they are barred from failing to provide the merchant – at that time – with a copy of the executed document. The order also requires the defendants to take “reasonable steps” to monitor the conduct of their “agents, representatives, employees, or independent contractors” in complying with the terms of the order, and requires them to file compliance reports with the FTC for five years.

Finally, the order required the defendants to undertake all reasonable efforts to sell the corporate assets to an unrelated third party to pay the judgment amount. This provision resulted in the payment to the FTC of $23,575,488 for use in providing redress to merchants and to cover administrative costs. The order includes specific compliance and monitoring terms as well.

The stipulated final order was filed by Judge Paul Brown of the U.S. District Court for the Eastern District of Texas, Sherman Division, on December 30, 2002. On January 27, 2003, the court made public a partially sealed version of the order. The judgment amount remains under seal; however, on January 5, 2004, the court ordered that the payment made to the FTC to satisfy the judgment was not covered by the seal and could therefore be made public.

NOTE: Stipulated orders are for settlement purposes only and do not constitute an admission or denial of law violations. Stipulated orders have the force of law when signed by a judge.

Copies of the redacted stipulated final order are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, DC 20580. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

(FTC File No. 012-3193; Civ. Action No. 4:02cv44)