The Business of Collecting Consumer Debt
With credit purchases easier than ever, it’s not surprising that consumer debt collection companies are all but minting money. U.S. banks hold more than one trillion dollars in credit card loans. When borrowers default, the consumer debt is packaged and sold to bidders. In 2018 bidders are only paying 10 to 15 cents for every dollar of loans purchased. American Banker.
Good news for credit collection companies, profits are up. “Encore Capital Group, one of the largest publicly traded collectors, probably will see profit jump 31 percent this year  to a record $109 million, according to the average estimate of four analysts surveyed by Bloomberg.” American Banker.
Scammers Follow the Money
It’s no wonder the consumer debt collection business is attracting new players, and creating commercial lawsuits. Take for instance Jay B. Ledford of Westlake, Texas (and Las Vegas, Nevada) and Kevin Merrill of Towson, Maryland. Ledford supplemented his living as an accountant by purchasing and even repairing consumer debt. Also, Merrill had been in the business of collecting debt. Maybe as they reached their 50s, they grew weary of the business. Or, maybe they just got greedy. One thing is clear: both Merrill and Ledford now face a host of fraud charges by the SEC.
According to the SEC Complaint, over a five year period, Ledford and Merrill convinced 230 investors to hand over $345 million for their Ponzi scheme.
Individuals, families and funds invested. Many of these investors may never have been party to even a breach of contract suit, and rarely have required the services of a commercial lawyer. “These investors included small business owners, restauranteurs, construction contractors, retirees, doctors, lawyers, accountants, bankers, talent agents, current and former professional athletes, and financial advisors.“ SEC Complaint.
How Many Ferrari’s Does it Take to Fill One Garage?
Of the $40 million Ledford took, he transferred $17 million to personal bank accounts. He purchased a Ferrari, a seven-carat diamond ring and a 23-carat diamond bracelet. And when the Ponzi scheme didn’t satisfy his gambling urge, Ledford transferred $13 million to casinos.
Merrill grabbed at least $45 million for his personal stash, transferring $7 million to personal bank accounts. With just over $10 million, he purchased 25 automobiles including several Ferraris and Lamborghinis, a Rolls Royce, a Bugatti Veyron and a Pagani Huayra Diablo. The $5.5 million house in Naples Florida he purchased was accompanied by $2 million in renovations. And just for a little extra excitement, Merrill transferred $1 million to casinos.
Details of the alleged scam from the SEC Complaint
Ledford and Hill employed a number of different promises and investment vehicles to obtain people’s money. To simplify the explanation, the SEC grouped the investors in the following manner: Investor “A,” The Dallas Group, The Boulder Group, et al. Below are summaries of just two of the schemes:
Investing More When Investments Are Performing Well
Individual Investor “A” invested $1.8 million in several different funds. “A’s” first $500,000 investment was supposed to be invested in two different funds. After that investment was supposedly working out well, “A” invested another $500,000, purportedly in other funds. Defendants used “A’s” money to pay other investors and credit card debt, make payments to relatives, and purchase luxury items.
Fake Company Mimics Real Company
The Dallas Group invested $30 million. They became suspicious when defendants told the Group that they needed investors to purchase an auto loan portfolio with Santander for $316 million. The Group saw the assets marketed on a public forum and questioned defendants. Defendants explained they were in the final bidding, and developed additional measures to keep the Dallas Group comfortable. Santander Consumer USA often did business as SCUSA. Defendants established a fake company, SCUSA Financial, Inc. and opened a bank account to give the appearance the purchase of the portfolio was legitimate, even though defendants never actually purchased the portfolio. The scam worked, and The Dallas Group invested.
Throughout the Ponzi scheme, frequently the defendants communicated with investors providing plenty of specific documentation—falsified, of course. For example:
Ledford and Merrill established several businesses to enhance the legitimacy of the transactions. Ledford alone maintained 20 entities.
Ledford employed Fort Worth resident Cameron R. Jezierski to help produce fake documents such as asset purchase overviews, debt portfolio spreadsheets with anticipated returns, purchase agreements and collection reports.
Due Diligence Lies
For the investment portfolios, allegedly the defendants claimed they purchased assets that were never purchased. They sold duplicative interests in the same debt portfolio. They also developed and distributed fake purchase and sale agreements, with accompanying wire transfer documents.
Debt Collection Software
Defendants even used debt collection software, DebtMaster, to record details of fake transactions.
When clever people with knowledge of an industry want to commit fraud, investor beware. What steps can you take to try to protect your investments?
Don’t Fall For Easy Excuses
The Dallas Group questioned defendants about a purported investment that defendants found for sale on a public forum. Dive deeper for answers. Don’t worry about annoying the person who has your money. If you ask a question about your investment and the person who has your money gets annoyed with the question, you may want to demand a return of your investment.
Examine Details Closely
A corporation is easy to set up. One of the defendants established 20 entities to perpetrate this fraud. The Santander scam could have been uncovered with due diligence. Admittedly, these defendants produced a lot of detail to keep people from becoming suspicious. More documentation is not necessarily indicative of a good investment.
Don’t Let Your Money Ride
You may not want to invest too much money in one place. If someone says that you have earned money in one investment, you may want to hold off in automatically reinvesting with the same company or people. Take some money off the table.
Business scams are not “one-size-fits-all.”
Fraud occurs in all kinds of legitimate businesses, not just in Ponzi schemes. We suggest that you never get too comfortable with business relationships. When investing your money, take your time and do your research. And, whenever you find yourself in need of a commercial lawyer or a breach of contract attorney, we are ready to help.