The FTC Sues Newtek Just Days After Hauling IRN to Court

In a move that indicates federal regulators are getting more serious about policing independent sales organizations and other merchant processors, the Federal Trade Commission on Friday announced it is suing Newtek Merchant Solutions and its former president, Derek Depuydt. The FTC added both Newtek and Depuydt as defendants in an amended complaint against a Florida telemarketer that the FTC alleges defrauded consumers.

This latest action comes just days after the FTC sued another merchant processor, Independent Resources Network Corp., in a similar case. As in the case against IRN, the agency says Newtek abetted a scheme to defraud consumers by processing transactions for a telemarketer that was selling an allegedly bogus rate-reduction service to credit card holders.

The alleged scheme involved promising consumers they would have rates on their outstanding balances cut, that they would save “thousands” of dollars, and that they would pay off their balances faster. In return, the telemarketer, Treasure Your Success, collected upfront fees ranging from $593 to $1,593, according to the FTC complaint.

Newtek processed $2.8 million in transactions for Treasure Your Success over a nine-month period until July 2012, despite inordinately high chargeback rates, the FTC claims. Newtek also neglected to obtain telemarketing scripts before granting a merchant account to TYS, according to the FTC. Nonetheless, the complaint says, Newtek withheld as much as 20% of the telemarketer’s proceeds each month to fund a reserve account against chargeback losses.

Filed in the Orlando Division of U.S. District Court for the Middle District of Florida (the Tampa Division of the same court is handling the FTC’s case against IRN), the complaint accuses the defendants of violations of the FTC Act and of the Telemarketing Sales Rule, and asks for an injunction and unspecified reimbursement for consumers. The 18-year-old TSR makes it a violation to give “substantial” assistance or support to fraudulent telemarketers.

“The matter has just been filed and we will need to review the documents, but we know based on our own internal practices that we have always attempted to abide by the law,” says Eric Turille, president, Universal Processing Services of Wisconsin LLC, in response to a Digital Transactions News request for comment on the FTC’s allegations. Milwaukee-based UPS of Wisconsin does business as Newtek Merchant Solutions. Turille succeeded Depuydt in January.

This latest action by the FTC, coupled with the near-mirror-image case against IRN, underscores a new determination at the agency to police ISOs, at least with respect to telemarketing, says Holli Targan, a payments attorney at Jaffe, Raitt, Heuer and Weiss P.C., Southfield, Mich. The FTC has participated in suits against third-party payment companies in the past, she notes, but its reliance on TSR violations is new. “I have not heard of this particular approach before, utilizing that regulation and going on a sort of aiding-and-abetting idea,” she tells Digital Transactions News. “

After the FTC sued IRN but before the Newtek case was announced, Targan posted a blog item warning ISOs and other merchant processors that the agency will be watching them more closely. It’s unclear how many ISOs process for telemarketers, but, as Targan notes, “if there’s a telemarketer out there, presumably they have a credit card processor.”