Federal judge reverses injunction against credit repair services direct seller, Financial Education Services Inc.
By: Stephanie Ramirez
There is a counter story. There is a narrative on the other side, so [the judge] balanced those sorts of things saying, wait a second, this isn’t all bad. There’s obviously good out there. And if there’s good, then it’s got to be worth at least an opportunity to salvage.
— Richard Epstein, Partner, Greenspoon Marder LLP
On May 23, the Federal Trade Commission (FTC) took swift action against a Michigan-based direct selling company that offers credit repair services, when it issued a motion to shut it down and freeze all assets. Just over a month after the closure, a judge has reversed this order allowing the company to continue operating under the observation of a monitor.
Financial Education Services Inc. (FES), also doing business as United Wealth Services among others, offers services including: credit restoration, wills, living trusts, smart credit, travel, LifeLock, Debt Zero, credit builder, financial literacy, youth financial literacy, and power of attorney, according to a company LinkedIn page.
After hearing oral arguments in the U.S. District Court for the Eastern District of Michigan, U.S. District Judge Bernard A. Friedman issued an order on June 30 denying a motion for preliminary injunction, vacating the temporary restraining order he issued on May 24 to Financial Education Services Inc. and some of its executives. In addition, the order terminated the asset freeze and converted the receivership to a monitorship. According to the company’s legal team, it will take some time to bring the company back online so it may conduct business again under the assigned monitor, who will report back regularly to the court and the FTC.
The May 24 order was immediately issued after the FTC filed a complaint on May 23 alleging that FES and its owners, Parimal Naik, Michael Toloff, Christopher Toloff and Gerald Thompson, as well as a number of its related companies, bilked consumers for more than $213 million. The complaint alleged that, since 2015, FES has operated an unlawful credit repair scam that has deceived consumers across the country, and its investment opportunity is an illegal pyramid scheme. The FTC alleged that the company’s practices violate the FTC Act, the Credit Repair Organizations Act and the Telemarketing Sales Rule.
The complaint against FES contained several unfounded accusations, according to the company’s legal team, and in their opinion it did not follow ordinary administrative actions prior to filing the complaint.
“They did no investigation here. They did no investigation of the company. They did a background investigation secretively, but they never reached out to the company,” says Richard Epstein, a partner with the litigation practice group at Greenspoon Marder LLP and a member of the FES legal team.
According to Epstein, typically the FTC might have issued a Civil Investigation Demand, or CID—a legal document that does not require court approval and seeks documents or other information related to an FTC investigation.
“They (the FTC) never sent a CID,” states Epstein. “They never took any depositions in an investigational hearing, which is something they often do, far more frequently before going after a company the size of this one. They did not actually try to find out what the company was doing internally and assumed that none (of the rules) were being followed, and that’s what they portrayed to the judge.”
Basis for FTC Original Complaint
“There are two elements of this case that they (the FTC) targeted,” says Epstein. “One is MLM and the other is credit repair. There is an ongoing effort by both the Federal Trade Commission and the Consumer Financial Protection Bureau to target the credit repair marketplace.”
In connection with FES’s marketing and sale of credit repair services and investment opportunities:
- The FTC claims that FES violated Section 5(a) of the FTC Act, which prohibits unfair or deceptive acts or practices in or affecting commerce.
- The FTC claims that FES violated Title IV of the Consumer Credit Protection Act, which prohibits untrue or misleading representations and requires certain affirmative disclosures in the offering or sale of “credit repair” services. The Act also bars companies offering credit repair services from demanding advance payment, requires that credit repair contracts be in writing, and gives consumers certain contract cancellation rights.
- The FTC claims that FES violated the Telemarketing Sales Rule, which requires telemarketers to make specific disclosures of material information; prohibits misrepresentations; sets limits on the times telemarketers may call consumers; prohibits calls to a consumer who has asked not to be called again; and sets payment restrictions for the sale of certain goods and services.
Along with the May 23 filing, the FTC also submitted a declaration from Dr. David Givens, an economist in the Consumer Protection Division of the Bureau of Economics at the FTC, to support its claim that the company was operating as a pyramid scheme.
While Givens emphasizes in the declaration that he had not seen company data on enrollment, purchasing, compensation or tenure, he concluded that based on the materials made available to him by the FTC’s Bureau of Consumer Protection that FES is operating in a manner consistent with being a pyramid scheme. He summarized that selling FES services to customers likely results in negligible consumer value, and, in any case, does little to advance FES Agents in the investment opportunity.
Epstein opines that these types of cases are almost always based on stories told by consumers and that a judge weighs heavily on that.
“Unfortunately, the way it works is the judge gives full value to all consumer complaints,” states Epstein. “And it’s been that way in litigation with enforcement agencies for decades. I’m not going to criticize the process because it is what has been developed over the years.”
According to Epstein, roughly 500 consumer complaints have been filed against FES in the FTC’s consumer complaint portal since 2015, and he states that the company has upwards of 600,000 customers, not including its agents in the business.
He also adds that the company had received a number of Better Business Bureau complaints over the years and that they had resolved all but a few of the most recent ones since they were subject to a receivership.
“People complain, whether rightly or wrongly, they complain,” says Epstein. “And most consumer-facing businesses generate a number of complaints.”
Basis for Denial of Motion for Preliminary Injunction
Epstein shares that FES offered in their arguments on June 30 approximately 18 consumer testimonials, affidavits, declarations of some real success stories—both FES agents as well as customers who benefited from the use of several of the FES products.
In addition to the customer affidavits and testimonials, the defense also offered a declaration from an expert to provide a rebuttal to the declaration provided by the FTC.
Epstein and FES’s full legal team from Greenspoon Marder LLP asked Branko Jovanovic, Ph.D., principal with The Brattle Group, an international economic consulting firm, to review the FTC’s complaint and opine on the allegations regarding the product offerings of FES. They also asked the firm separately to provide an analysis on the charge that FES was operating as an illegal pyramid scheme.
While Jovanovic’s access to detailed company data was also limited due to the receivership, based on the data provided to him by company officials, he opined that FES has several key features differentiating them from typical MLM companies. He suggested that these features mitigated common sources of potential harm to MLM distributors, according to the FTC’s Business Guidance Concerning Multi-Level Marketing.
Jovanovic’s declaration states:
No incentive for inventory loading and front loading – Two common sources of potential harm to MLM distributors are inventory loading and front loading, whereby the distributor accumulates inventory at their own cost, which they may or may not be able to sell at a later date. However, because of the nature of FES’s products, FES agents have no incentive to accumulate an inventory of products.
Visibility into consumers – The majority of companies with an MLM compensation model do not require sale receipts to document sales to ultimate customers,
and therefore have little or no visibility into the demand for their product. In contrast, FES has full visibility into the purchases of ultimate customers.
No ongoing consumption – The nature of FES’s products is such that it may not necessitate continuous consumption—while some of the offered products provide lasting benefit, others may be of limited use to customers once they have accomplished
Jovanovic also pointed out that distinguishing companies with legitimate MLM compensation models from those that operate as pyramid schemes is not a straightforward endeavor. Although the FTC has created a body of literature through which it has communicated features of MLM companies that it views as problematic, the exact criteria for establishing the differences between a legitimate MLM company and one operating as a pyramid scheme remain unfortunately vague.
Epstein believes what the judge ended up seeing was that the receiver who was appointed and spent roughly a month in the business, controlling and evaluating the business processes, found and described a business that actually had a fairly robust compliance infrastructure in place.
“There is a counter story. There is a narrative on the other side, so [the judge] balanced those sorts of things saying, wait a second, this isn’t all bad,” says Epstein. “There’s obviously good out there. And if there’s good, then it’s got to be worth at least an opportunity to salvage.”
What’s Next for FES?
The court’s denial of a preliminary injunction and lifting of the asset freeze is a departure from the usual FTC playbook where courts have traditionally rubber stamped the FTC’s contention that a multilevel marketing company is an illegal pyramid scheme, according to Larry Steinberg, chair of the Buchalter law firm’s MLM industry group.
“Here the judge seems to be demanding actual evidence based on specific facts, and is not willing to simply accept the agency’s unsubstantiated allegations,” Steinberg opines. “But there will undoubtedly be further motions, and possibly an appeal, as the case progresses, and the FTC has access to the company’s books and records.”
From the June 30 hearing transcript, the judge remained fairly neutral and expressed his strong belief that FES will work or move to modify any business operations to be fully compliant and within the law going forward since there will be so many watching the business. His decision ultimately was to appoint the receiver as the monitor who will stay on for an undisclosed amount of time. The monitor is there to make sure the businesses are being conducted according to the law.
“There’s a lot of discussions that have occurred during this week, and management is going back in, but there’s going to be a transition,” states Epstein. “The business is not up and running and selling yet. It’s going to be some days down the road, but soon.”
The appointment of the monitor is indefinite, and Epstein suspects it could be 18 months to two years before the case is settled, which will be either by settlement or some sort of judicial resolution.
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