A California federal judge has ordered debt relief company Morgan Drexen Inc. to pay the Consumer Financial Protection Bureau more than $173 million to resolve an August 2013 lawsuit claiming the company collected illegal upfront fees for debt settlement service and ran deceptive advertisements.
The lawsuit alleged the company and CEO Walter Ledda violated the Telemarketing Sales Rule and the Dodd-Frank Wall Street Reform and Consumer Protection Act. The court prohibited Morgan Drexen from collecting any further fees from its customers.
The company allegedly had presented consumers who signed up for services with two contracts - one for debt settlement services and the other for bankruptcy-related services. The CFPB alleged that the bankruptcy-related contract Morgan Drexen presented to consumers was a ruse designed to disguise impermissible upfront fees for debt relief work.
Weeks before a trial was scheduled to start, the CFPB in January 2015 learned that Morgan Drexen allegedly had created and altered bankruptcy petitions that it submitted to the court as evidence of having provided bankruptcy services.
The CFPB told 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 those findings, the court sanctioned Morgan Drexen at that time by entering default judgment against the company. The company then sought bankruptcy protection and a trustee was appointed to administer the company’s shutdown and to maintain proper communication with affected consumers.
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.
Howard and Williamson soon were found to have allegedly:
- 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 closing 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's and Williamson’s alleged actions, it filed a motion requesting that the court hold the attorneys and their law firms in contempt of the court order. Last October, the court granted that motion and ordered the attorneys to return all payments they had received from former Morgan Drexen consumers since the court’s June 2015 decision banning the firm from accepting 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, who couldn’t be immediately reached for comment, have appealed that order.
"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."