FTC Garners $643,000(+) in Settlements with Defendants in "Demand Draft" Fraud Case

The Federal Trade Commission has negotiated settlements including more than $643,000 in consumer redress with three defendants in its case against the perpetrators of a magazine subscription telemarketing scheme who allegedly used false promises of valuable prizes and a variety of other misrepresentations to get consumers to divulge their checking account numbers. The defendants then debited the consumers’ checking accounts without their authorization, the FTC had charged. Matthew Corbitt Mizell, Jr., former president of corporate defendant Crestwood Enterprises, Inc., of Macon, Georgia, has agreed to pay $493,000 in consumer redress under his settlement with the FTC. Kent L. Holbrook, Crestwood’s current president and a new defendant in the case, has agreed to relinquish any claim he has on the assets of Crestwood and the other corporate defendants, including $150,000 in Crestwood funds frozen at the FTC’s request when this action was filed. Holbrook and Mizell also agreed that in the future, they will not submit for payment any check on any consumer’s account without the consumer’s written signature on the check. The settlement also includes a $13.4 million judgment against Crestwood, which will remain under the control of a court-appointed receiver. The receiver will attempt to collect as much of the judgment as possible.

The settlement follows FTC charges filed in March against Crestwood, four other firms and five individuals based out of Atlanta, Georgia, and Somerville, New Jersey. The charges remain pending against the other defendants, although the federal district court in Atlanta has issued a preliminary injunction halting the allegedly deceptive practices, finding that, absent such relief, the FTC has shown that the defendants would continue the misrepresentations and unauthorized debiting.

In its complaint detailing the charges in the Crestwood case, the FTC said the firms did business under the names Wholesale Magazines, Premium Magazine, Magazine Express, Magazines Unlimited, Magazines of America, Magazines Limited and Magazine Distributors of America. The complaint alleges that they sold their magazine subscription packages by placing cold sales calls to consumers and misrepresenting a variety of things, including the purpose for which they wanted consumers’ checking account numbers. According to the complaint, despite the fact that many consumers were told that their accounts would not be debited, or that they would be debited for only a nominal periodic fee, the defendants sought the account information for the sole purpose of debiting consumers’ accounts for large lump sums, typically close to $300.

The FTC warned consumers when it filed the charges in this case that fraudulent telemarketers are using a variety of misrepresentations to obtain consumers’ checking account numbers and then using “demand drafts” or “phone checks” -- which look just like checks and are created using consumers’ account information -- to debit checking accounts without the consumers’ signatures, or their knowledge or authorization. The FTC suggested that consumers guard their bank account numbers with the same diligence they use in guarding their credit card numbers and to suspect fraud and hang up immediately if a telemarketer asks them for the numbers of the bottom of their checks for any purpose other than to debit their accounts. These and other tips are included in a free FTC brochure for consumers titled “Automatic Debit Scams.”

The FTC’s Telemarketing Sales Rule, among numerous other provisions, details three methods telemarketers may use to obtain consumers’ express, verifiable authorization before debiting their accounts. Under the settlements Mizell and Holbrook have signed with the FTC, however, they can only submit for payment checks that bear the consumer’s written signature. The settlement also prohibits Mizell and Holbrook from transferring their customer lists so that these consumers will not be pursued by other telemarketers. In addition, the two settling individuals have waived any claim to assets of the corporate defendants, including assets frozen under an FTC-obtained court order, and Holbrook has agreed to turn over to the court-appointed receiver all funds, books, keys and other items related to the operation of the companies. Finally, the receiver will remain in control over Crestwood, and the settlement contains various provisions designed to assist the receiver in collecting funds on the $13,401,500 judgment against the firm.

The FTC votes to file the amended complaint adding Holbrook as a defendant and the consent judgments settling the charges against Mizell, Holbrook and Crestwood were 5-0, with Commissioner Mary L. Azcuenaga issuing a concurring statement in which she said she believed that the settlement should have prohibited Holbrook and Mizell from using unauthorized demand drafts in any context, not just in connection with a telemarketing operation.

The papers were filed in U.S. District Court for the Northern District of Georgia, Atlanta Division, late on Friday, June 21. They require court approval to be binding on the defendants.

NOTE: A consent judgment is for settlement purposes only and does not constitute an admission by the defendant of a law violation. Consent judgments have the force of law when signed by the judge.

Copies of the “Automatic Debit Scams” brochure, the amended complaint and the consent judgments in this case, and Commissioner Azcuenaga’s full statement are available from the FTC’s Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC’s World Wide Web site at: http://www.ftc.gov

(FTC File No.X960026)
(Civil Action No. 1 96-CV-0615-FMH)