We frequently post about negative option marketing in this blog, but our focus has been the FTC’s enforcement actions against businesses that utilize this marketing strategy. We haven’t written as much about a different risk: payment processors and financial institutions caught in the crosshairs of a court-appointed receiver for their relationships with companies engaged in allegedly unlawful “negative option” marketing. Recently, two FTC enforcement actions in the Central and Southern Districts of California highlight these risks.
In Federal Trade Commission v. Triangle Media Corporation et al. (the “Triangle Action”), the FTC sued Triangle for engaging in an alleged scheme to offer fake “free trials” of personal care products and dietary supplements to obtain consumers’ credit and debit card information.
According to the FTC, Triangle then applied recurring charges to consumers’ cards without authorization. In a later, unrelated action, the FTC brought charges against Apex Capital Group, LLC for essentially the same activity (the “Apex Action”). In both cases, the courts granted the FTC’s request and recommendation that a receiver be assigned to oversee, manage, and preserve the assets of both sets of defendants. In an interesting turn, the same receiver, Thomas McNamara of McNamara LLP (the “Receiver”), was recommended by the FTC, and accepted by the courts, as the Receiver for Triangle’s and Apex’s assets.
Subsequently, the FTC filed an amended complaint in the Apex Action that accused Apex’s credit card payment processor, Transact Pro, of credit card laundering and chargeback manipulation in violation of Section 5 of the FTC Act. Both Apex and Transact Pro entered into a settlement with the FTC requiring a stipulated judgment ordering the parties to pay monetary relief.
The Apex Defendants were ordered to pay $60,300,000, which was imposed jointly and severally on the corporate defendants and one individual defendant, Phillip Peikos, who was an officer of Apex. David Barnett, another officer, was ordered to pay $47,300,000 in his individual capacity as well. Both judgments require the complete payment and transfer of specified assets of the defendants, after which the remainder of the judgment would be suspended. The Transact Pro Defendants were ordered to pay $3,500,000, which was imposed jointly and severally on the corporate defendants and one individual defendant, Mark Moskvins, who was the owner of Transact Pro.
Then, in a surprising turn of events, the court-appointed Receiver sued Wells Fargo—the bank used by the defendants in both the Triangle and Apex Actions—alleging that Wells Fargo engaged in illicit activity, including, but not limited to, aiding and abetting fraud, conspiracy to commit fraud, breach of fiduciary duty, negligent supervision, and violating the California Unfair Competition Law.
Specifically, the complaint alleged that Wells Fargo’s alleged “high-pressure sales culture” drove Wells Fargo bankers to use “atypical banking procedures,” including:
- Ignoring red flags that Apex’s and Triangle’s deposit accounts were being set up for shell companies for a high-risk internet business (i.e., accounts funded with minimal deposits and corporations found in states requiring no identification of beneficial owners).
- Ignoring high chargebacks rates.
- Accepting fraudulently obtained funds.
- Failing to follow Wells Fargo policies and U.S. banking regulations that could have revealed the fraud. Filing a single complaint arising out of two different receiverships is novel.
On July 8, 2021, Wells Fargo moved to dismiss the complaint on several grounds, including that the Receiver cannot plausibly allege facts showing that Wells Fargo actually knew about, or substantially assisted in, Apex’s or Triangle’s schemes. Wells Fargo’s motion to dismiss is pending.
Most recently, the court in the Apex Action denied Well Fargo’s motion to intervene, in which Wells Fargo argued that, in light of the Supreme Court’s decision in AMG Capital Management, LLC v. Federal Trade Commission, the stipulated judgment entered against Apex was no longer consistent with the law. Because the Receiver’s lawsuit against Wells Fargo was based on that judgment, Wells Fargo argued that the Receiver’s lawsuit should be limited or wholly precluded, and Wells Fargo was entitled to intervene in the FTC Action. The Receiver has submitted Wells Fargo’s denial in the Apex Action as supplemental authority in its attempt to stop Wells Fargo’s motion to intervene in the Triangle Action as well.
Regardless of how these cases are resolved, this situation highlights the risk of liability that financial intermediaries face for their customers’ alleged conduct and the necessity of sufficient customer onboarding programs and continuing oversight.
Venable has advised numerous payment processors and financial institutions regarding compliance policies and consumer monitoring efforts, including regarding compliance with advertising and marketing laws. For more insights about advertising law, bookmark our All About Advertising blog, and subscribe to our monthly newsletter.