Electronic Payment Processor Halted from Facilitating Fraudulent Telemarketing Transactions

The Federal Trade Commission has filed a complaint in U.S. district court charging Electronic Financial Group, Inc. (EFG) and its principals with providing assistance to fraudulent telemarketers seeking to drain funds from consumers’ checking accounts. The FTC alleges that the defendants violated the law by processing transactions through the Automated Clearing House Network (ACH Network) for numerous fraudulent telemarketers and by engaging in the deceptive marketing of their own advance-fee debit cards – the First Freedom Financial card and the AmeriOne card.

On July 8, 2003, after a contested hearing, the court entered a temporary restraining order enjoining the defendants (EFG; EFG Card Services, Inc.; and their principals, Paul McClinton, Jerry Federico, and Randy Balusek) from: making misrepresentations in the course of marketing or providing of customer service for ACH transactions, debit cards, and credit-related goods or services; processing ACH transactions or causing consumers’ accounts to be debited when certain conditions are met, including when the debit purportedly was authorized as a result of telemarketing; and violating the Telemarketing Sales Rule (TSR). The court also appointed a temporary monitor over the corporate defendants who is responsible for reviewing defendants’ business practices and reporting to the court prior to the preliminary injunction hearing.

According to the FTC, EFG, located in Waco, Texas, provides a variety of electronic payment services to clients in the United States and Canada. Among its services, EFG processes electronic debits and credits to consumer bank accounts through the ACH Network. The ACH Network is a nationwide electronic funds transfer system that provides for the rapid interbank clearing of electronic payments. According to the Commission, the defendants processed ACH transactions on behalf of numerous fraudulent outbound telemarketing operations – a number of which the FTC previously sued as scams. Some of EFG’s clients are telemarketing companies with whom EFG enters into a direct contractual agreement to provide ACH processing services. Other EFG clients are other ACH processors, who in turn have contractual relationships with the telemarketers.

The FTC’s complaint alleges that the defendants violated the TSR by providing substantial assistance and support to numerous client telemarketers whom they knew (or consciously avoided knowing) were engaged in business practices that violated the TSR. The FTC further alleges that EFG assisted and facilitated at least four client telemarketers engaged in deceptively selling advance-fee credit cards, and a fifth client engaged in deceptively selling a lottery scam. In addition, the complaint alleges that in providing ACH payment processing services to merchants engaged in outbound telemarketing, the defendants engaged in an unfair practice by systematically breaching a contractual provision with its bank that required EFG to adhere to the National Automated Clearing House Association Operating Rules (NACHA Rules) governing the ACH Network. The NACHA Rules include a rule specifically prohibiting the processing of ACH transactions on behalf of merchants engaged in outbound telemarketing to consumers with whom such merchants have no existing relationship.

The complaint also alleges that in April 2000, the defendants engaged in the marketing and sale of their own advance-fee debit cards – first the First Freedom Financial card and then the AmeriOne card. In both scams, the defendants allegedly subcontracted the marketing of the cards to third parties, electronically debited the bank accounts of consumers who purchased the products, and provided customer services related to the products. The defendants sold the First Freedom card through telemarketing and sold the AmeriOne card exclusively over the Internet. Both cards are “stored value” cards – meaning that they could only be used by consumers to draw against funds previously deposited with EFG. According to the FTC, the defendants charged consumers a one-time advance fee of between $80 to $100, as well as a $9.95 monthly service fee for these cards, and targeted sales of the cards to consumers with poor credit records who could not qualify for conventional credit cards. In May 2003, the FTC alleges, the defendants began marketing a new advance-fee card product, known as the United USA Card, making many of the same misrepresentations used in the First Freedom and AmeriOne ventures.

The complaint alleges that the defendants violated the FTC Act by deceptively marketing the AmeriOne and First Freedom cards and engaging in the unauthorized charging and debiting of consumers’ bank accounts for the AmeriOne Card. Specifically, the complaint alleges that, in the course of the marketing and provision of customer service regarding advance-fee debit cards, including the First Freedom and AmeriOne cards, the defendants misrepresent that such cards are credit cards, and that the AmeriOne card is affiliated with MasterCard by using the MasterCard logo. The complaint also alleges that the defendants misrepresent that they report consumers’ AmeriOne card account activity to the three major credit bureaus, thereby improving consumers’ credit ratings.

The FTC is seeking redress for consumers and disgorgement of fees unlawfully earned through processing for fraudulent telemarketers.

The Commission vote authorizing staff to file the complaint was 5-0. The complaint was filed in the U.S. District Court for the Western District of Texas, Waco Division, on July 7, 2003.

NOTE: The Commission files a complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendant has actually violated the law. The case will be decided by the court.

Copies of the complaint 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, D.C. 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. 032-3061)
(Civil Action No. W-03-CA-211)