At the request of the Consumer Financial Protection Bureau, a federal district court entered a final judgment this week against debt relief company Morgan Drexen, Inc., resolving a lawsuit filed by the CFPB in August 2013. The Bureau’s lawsuit against Morgan Drexen alleged that the company charged illegal upfront fees and deceived consumers. The court found that the company violated federal law, prohibited Morgan Drexen from collecting any further fees from its customers, and ordered it to pay $132,882,488 in restitution and a $40 million civil penalty. This decision follows a stipulated final judgment against Morgan Drexen’s president and chief executive officer, Walter Ledda, that the court approved in October. The court found that Ledda violated federal law, banned him from providing debt relief services, and required him to pay restitution and a civil money penalty.
“The CFPB’s victory sends a strong message that debt relief companies break the law when they defraud struggling consumers, and those actions have consequences for which we will hold them accountable,” said CFPB Director Richard Cordray. “The court’s orders against Morgan Drexen and Mr. Ledda ensure that they will never again violate the rights of consumers, and the significant penalties imposed reflect the severity of this illegal conduct.”
Debt Relief Scheme
Morgan Drexen is a nationwide debt relief company that was founded by Walter Ledda in 2007. The CFPB sued Morgan Drexen and Ledda in 2013, alleging that they had violated the Telemarketing Sales Rule and the Dodd-Frank Wall Street Reform and Consumer Protection Act by charging illegal upfront fees for debt relief services and misrepresenting their services to consumers.
The Telemarketing Sales Rule prohibits deception in telemarketing and generally prohibits debt relief providers from charging a fee for any debt relief service until they have actually settled, reduced, or otherwise altered the terms of at least one of the consumer’s debts.
When consumers signed up for Morgan Drexen’s services, the company presented them with two contracts, one for debt settlement services, and the other for bankruptcy-related services. Based on its investigation, the Bureau brought suit alleging that consumers who signed up sought services for debt relief and not bankruptcy, that little to no bankruptcy work was actually performed for consumers, and that the bankruptcy-related contract Morgan Drexen presented to consumers was a ruse designed to disguise impermissible upfront fees for debt relief work.
In January 2015, weeks before trial was scheduled to start, the Bureau learned that Morgan Drexen had created and altered bankruptcy petitions that it submitted to the court as evidence of having provided bankruptcy services.
The CFPB informed the court of its findings and filed a motion seeking the sanction of default judgment against the company. After hearing testimony from Ledda, other Morgan Drexen representatives, and a whistleblower who exposed the company’s conduct, the court issued an order in April 2015 finding that Morgan Drexen misled the court and “acted willfully and in bad faith by falsifying evidence.” On the basis of its findings, the court sanctioned Morgan Drexen by entering default judgment against the company.
Shortly thereafter, in June 2015, the court issued a permanent injunction against Morgan Drexen in which it deemed that the company had charged consumers illegal upfront fees for debt relief services and violated the Telemarketing Sales Rule and Dodd-Frank Act by deceptively describing its services. The court prohibited the company from collecting any more money from customers and banned it from charging upfront fees for debt relief services. Morgan Drexen sought bankruptcy protection the day after the court issued its order, and a trustee was appointed to administer the company’s shutdown and to maintain proper communication with affected consumers.
Final Judgments Against Ledda and Morgan Drexen
The court’s March 16, 2016 final judgment against Morgan Drexen memorializes its June 2015 conclusion that the company violated federal law, and its ruling that the company may not collect any more advance fees for debt relief services, or any more fees at all from its customers. The final judgment also orders Morgan Drexen to:
- Pay $132,882,488 in restitution: Morgan Drexen is required to pay this amount to borrowers who enrolled in the company’s program between Oct. 27, 2010, when the federal ban on upfront fees went into effect, and June 18, 2015, when Morgan Drexen stopped selling debt relief services.
- Pay a $40 million civil penalty: Morgan Drexen must pay this amount to the CFPB’s civil penalty fund.
Because Morgan Drexen has declared bankruptcy, any payment of this judgment will occur through the bankruptcy process.
The court’s October 2015 final judgment against Walter Ledda contains similar findings and injunctive and monetary relief. In that judgment, the court found that Ledda and Morgan Drexen violated the Telemarketing Sales Rule and the Dodd-Frank Act by charging consumers illegal upfront fees for debt relief services, and by making deceptive statements about the company’s services. Under the terms of the final judgment, Ledda will:
- Pay $500,000 to the CFPB for consumer redress: The final judgment requires Ledda to pay $500,000 to the CFPB for use in providing redress to consumers.
- Surrender additional assets: The final judgment requires Ledda to turn over additional assets to the Morgan Drexen bankruptcy estate.
- Pay a civil money penalty: Ledda is required to pay $1 to the CFPB’s Civil Penalty Fund. The Bureau did not require Ledda to pay a larger penalty because of his limited financial resources after repaying harmed consumers.
- Exit the debt relief industry: The court has permanently banned Ledda from providing debt relief services or otherwise working in the debt relief industry.
The court also imposed a $99 million equitable money judgment and $20 million civil money penalty against Ledda, both of which are in large part suspended based on Ledda’s inability to pay. If Ledda fails to make any of the required payments or turn over his assets, or if the CFPB discovers Ledda misrepresented his financial condition, the full $99 million judgment and $20 million penalty will become due immediately.
Attorneys Found In Contempt
After the court’s June 2015 order prohibiting Morgan Drexen from charging fees for debt relief services, two attorneys, Vincent Howard and Lawrence Williamson, took the reins of Morgan Drexen and continued the company’s unlawful conduct. Among other things, Howard and Williamson:
- Hired more than 50 former Morgan Drexen employees, including the company’s former owner and chief technology officer, and former chief financial officer;
- Continued to charge fees to harmed consumers pursuant to the same contracts under which Morgan Drexen charged the consumers unlawful fees; and
- Provided consumers misleading information about Morgan Drexen’s shut-down and contradicted the advice in court-approved letters about how consumers could protect themselves in light of Morgan Drexen’s unlawful conduct.
When the CFPB learned of Howard and Williamson’s actions, it filed a motion requesting that the court hold the attorneys and their law firms in contempt of the court’s order. In October 2015, the court found that the attorneys’ conduct had violated the court’s order, and held the attorneys and their law firms in contempt. The court ordered the attorneys to return all payments they had received from former Morgan Drexen consumers since the court’s June 2015 decision to ban Morgan Drexen from receiving such fees. The court also ruled that the attorneys will be fined $10,000 a day for each day they continue to accept fees from former Morgan Drexen consumers. The attorneys have appealed this order.
A copy of the court’s final judgment against Morgan Drexen and Walter Ledda can be found at: http://files.consumerfinance.gov/f/201603_cfpb_final-judgment-against-defendant-morgan-drexen-inc.pdf
A copy of the civil minutes regarding the judgment can be found at: http://files.consumerfinance.gov/f/201603_cfpb_civil-minutes-regarding-the-final-judgment-against-defendant-morgan-drexen-inc.pdf
A copy of the court’s contempt order concerning the attorneys can be found at: http://files.consumerfinance.gov/f/201603_cfpb_order-holding-vincent-howard-lawrence-williamson-howard-law-pc-the-williamson-law-firm-llc-and-williamson-howard-llp-in-contempt.pdf