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T he Federal Trade Commission announced its first federal district court complaint against an Independent Sales Organization (ISO) for unfair and deceptive practices related to the marketing of credit card and debit card merchant accounts to small businesses nationwide. In its complaint, the FTC stated that the defendant and its principals misrepresented the terms of - and then inserted fine print into - merchant account agreements, allowing the company to fraudulently debit previously undisclosed fees from the merchants' bank accounts.

This complaint may be just the first shot across the bow of the bankcard industry, as the Federal government begins to look closely at how ISOs in general and CMS in particular do business. While the initial focus on the part of the FTC seems to be bankcard-related, the Commission has included CMS's check-conversion business in its complaint, which means that check conversion also will get its first federal scrutiny.

Our readers should know that the FTC files a complaint when it has "reason to believe" that the law has been or is being violated and it appears to the Commission that a proceeding is in the public interest. A complaint is not a finding or ruling that the defendants have actually violated the law.

At the FTC's request, a federal district court has issued a temporary restraining order (TRO) against the defendants, has frozen the defendants' assets and has appointed a receiver to oversee the company's future operations. The FTC filed the complaint against Certified Merchant Services, Ltd.; Certified Merchant GP, Inc.; Certified Merchant Services, Inc. (collectively CMS); Jonathan Frankel; Craig Frankel; and Randal A. Best, of Plano, Texas. The companies also do business under the names Transaction Merchant Services (TMS), Transaction Merchant Services.com and Electrocheck. Jonathan Frankel and Craig Frankel are both officers and directors of CMS. The former is also believed to be the President, and the latter the Vice President and Treasurer, of the corporate defendants.

"Processing credit card transactions is essential for anyone in business," said J. Howard Beales III, Director of the FTC's Bureau of Consumer Protection. "But small-business owners shouldn't have to worry about unauthorized charges from someone who is supposed to be working for them. The FTC will continue to follow up on reports of unfair and deceptive sales and billing practices and stop perpetrators cold." The Commission's Allegations According to the FTC, since at least 1999, CMS and the individual defendants - either directly or through sales agents - initiated contact with small-business owners throughout the United States to induce them to purchase their goods and services, including the establishment of merchant accounts.

The Commission's complaint alleges that CMS and the individual defendants violated the FTC Act by unfairly and deceptively (1) modifying customer contracts; (2) debiting their accounts without authorization; (3) making misrepresentations regarding various goods or services offered; and (4) failing to disclose various charges or fees. Specifically, the complaint states that in numerous instances, after merchants had signed applications and without their knowledge, CMS inserted pages of fine print, including fee and expense information. CMS allegedly then used these pages to justify debits of fees or expenses from the merchants' deposit accounts with no notification.

CMS allegedly tried to disguise these debits, listing "H-Semi," and "H-Can," instead of CMS, as the company withdrawing the fees. The FTC further contends that in many cases CMS debited the fees from the merchants' accounts before providing the merchants with promised card-processing equipment or supplies, before the merchants signed up for processing services or before such services were activated, and even though some merchants had canceled their service.

In addition, according to the complaint, CMS deceptively represented that: - If merchants purchased its services, it would save them money each month on their card-processing expenses. - If merchants were dissatisfied with any services or representations made by the company, they could cancel or transfer the service to another card processor at any time with no further obligation. - There was no minimum monthly fee for the services offered. - If merchants were charged cancellation fees by prior card processors, the company would reimburse them.

Finally, the Commission said that in many instances CMS deceptively failed to disclose, clearly and conspicuously, that it would charge merchants certain fees, including a minimum of $25 if the merchants did not reach a certain level of card sales; a semi-annual fee of between $33 and $50; and a cancellation fee of between $300 and $400 for canceling within three years of signing a service contract. Relief Sought In addition to seeking and securing the TRO and asset freeze, the Commission sought and obtained the appointment of a receiver to oversee CMS's business operations while the FTC seeks to obtain redress from the court to remedy the alleged law violations. As many merchants depend on credit- and debit-card transactions on a daily basis, the Commission proposed a limited asset freeze that would allow the receiver to operate the merchant accounts and deposit net card sales' proceeds into the merchants' deposit accounts.

The Commission vote authorizing staff to file the complaint was 5-0. It was filed in the U.S. District Court for the Eastern District of Texas on Feb. 11, 2002. More information may be found at www.fts.gov.

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