FTC Files First Complaint Concerning Credit Card Merchant Account Sales and Billing Practices

The Federal Trade Commission today announced its first-ever federal district court complaint against an Independent Sales Organization (ISO) for unfair and deceptive practices related to the marketing of credit- and debit-card merchant accounts to small businesses nationwide. An ISO is an individual or organization that solicits or services accounts for banks involved in the credit card payment system. In its complaint, the FTC stated that the defendant and its principals misrepresented the terms of - and then inserted fine print into - merchant account agreements, allowing them fraudulently to debit previously undisclosed fees from the merchants' bank accounts. At the FTC's request, a federal district court has issued a temporary restraining order (TRO) against the defendants, has frozen the defendants' assets, and appointed a receiver to oversee the company's future operations.

The FTC filed the complaint against Certified Merchant Services, Ltd.; Certified Merchant GP, Inc.; Certified Merchant Services, Inc. (collectively CMS); Jonathan Frankel; Craig Frankel; and Randal A. Best, of Plano, Texas. The companies also do business under the names Transaction Merchant Services (TMS), Transaction Merchant Services.Com, and Electrocheck. Jonathan Frankel and Craig Frankel are both officers and directors of CMS. The former is also believed to be the president, and the latter the vice president and treasurer, of the corporate defendants. Best, who lists his principal residence in Idaho, is also an officer and director of CMS and is allegedly the CEO of the corporation.

"Processing credit card transactions is essential for anyone in business," said J. Howard Beales III, Director of the FTC's Bureau of Consumer Protection. "But small business owners shouldn't have to worry about unauthorized charges from someone who is supposed to be working for them. The FTC will continue to follow up on reports of unfair and deceptive sales and billing practices, and stop perpetrators cold."

According to the Commission, since at least 1999, CMS and the individual defendants - either directly or through sales agents - initiated contact with small business owners throughout the United States to induce them to purchase their goods and services, including the establishment of merchant accounts.

The Commission's complaint alleges that CMS and the individual defendants violated the FTC Act by unfairly and deceptively: 1) modifying customer contracts; 2) debiting their accounts without authorization; 3) making misrepresentations regarding various goods or services offered; and 4) failing to disclose various charges or fees.

Specifically, the complaint states that in numerous instances, after merchants had signed applications and without their knowledge, CMS inserted pages of fine print, including fee and expense information. CMS allegedly then used these pages to justify debits of fees or expenses from the merchants' deposit accounts with no notification. CMS allegedly tried to disguise these debits, listing "H-Semi," and "H-Can," instead of CMS, as the company withdrawing the fees. The FTC further contends that in many cases CMS debited the fees from the merchants' accounts before providing the merchants with promised card-processing equipment or supplies, before the merchants signed up for processing services or before such services were activated, and despite the fact that some merchants had cancelled their service.

In addition, according to the complaint, CMS deceptively represented that:

1) if merchants purchased their services they would save money each month on their card processing expenses; 2) if merchants were dissatisfied with any services or representations made by the company they could cancel or transfer the service to another card processor at any time with no further obligation; 3) there was no minimum monthly fee for the services offered; and 4) if merchants were charged cancellation fees by prior card processors, the company would reimburse them.

Finally, the Commission said that in many instances CMS deceptively failed to disclose, clearly and conspicuously, that they would charge merchants certain fees, including a minimum of $25 if the merchants did not reach a certain level of card sales; a semi-annual fee of between $33 and $50; and a cancellation fee of between $300 and $400 for cancelling within three years of signing a service contract.

In addition to seeking and securing the TRO and asset freeze, the Commission sought and obtained the appointment of a receiver to oversee CMS's business operations while the FTC seeks to obtain redress from the court to remedy the alleged law violations. As many merchants depend on credit- and debit-card transactions on a daily basis, the Commission proposed a limited asset freeze that would allow the receiver to operate the merchant accounts and deposit net card sales' proceeds into the merchants' deposit accounts.

The Commission vote authorizing staff to file the complaint was 5-0. It was filed in the U.S. District Court for the Eastern District of Texas on February 11, 2002.

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. A complaint is not a finding or ruling that the defendants have actually violated the law.

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. 012-3193)
(Civil Action Number: 4:02cv44)