The Consumer Financial Protection Bureau is suing Morgan Drexen Inc. and its president and CEO Walter Ledda, for allegedly charging illegal upfront fees for debt-settlement services and for deceiving consumers.
The federal watchdog filed the suit in federal district court Tuesday and claims the company -- which it describes as a debt-relief company -- violated the Telemarketing Sales Rule and the Dodd-Frank Wall Street Reform and Consumer Protection Act. These forbid deceptive acts, practices and telemarketing and prohibit debt-relief firms from charging a fee before services have been given.
According to the CFPB, Morgan Drexen allegedly had consumers sign two contracts, one for debt-settlement services and the other for bankruptcy services. However, the company provided little to no bankruptcy services, but still charged fees. The CFPB considers the bankruptcy contract as a way to disguise illegal fees. Ledda was included in the suit, because he works closely with the day-to-day operations and owns 93 percent of the company.
The CFPB says the ruse affected more than 22,000 consumers since October 2010, charging them millions of dollars in upfront fees. The lawsuit also contends that the company misled consumers by advertising no upfront fees and guaranteeing that consumers would be debt-free in months.
"This company took advantage of people who were struggling," said CFPB Director Richard Cordray in a statement.
In its first statement released Tuesday, Morgan Drexen called the lawsuit "abusive" and "procedural gamemanship," that distracts from a lawsuit the company filed against the CFPB in July. In the suit, Morgan Drexen calls into question the constitutionality of the agency and said it didn't have any lawful standing to obtain personal financial data from the company.
"Now (the CFPB) is engaging in vexatious and litigious conduct by creating a distracting separate lawsuit rather than allowing its constitutional structure to be evaluated in a fair and reasonable procedure by a judge in D.C.," according to the initial statement from Morgan Drexen.
The company released a second statement later Tuesday saying that it is not a debt-settlement company, but rather a support services company for attorneys. The statement also said that Morgan Drexen does not charge any fees; only the attorneys who hire the company charge fees for their work, which "is not out of line for their industry" and "do so in compliance" with federal laws, according to the Morgan Drexen statement.
This isn't Morgan Drexen's first run-in with authorities over its practices. In May, Wisconsin's financial regulator ordered the company to pay $6.1 million in restitution and fines for allegedly violating consumer protection laws regarding debt negotiation. The company was also ordered to shutter its operations in the state. Morgan Drexen is fighting the ruling in court.
Follow me on Twitter: @JannaHerron