By Bradley O. Cebeci and Jennifer Cho

The Federal Trade Commission recently filed an enforcement action and proposed settlement against two Nevada companies—Seed Consulting, LLC and Credit Navigator, LLC—and their principals, alleging that defendants conspired with other bad actors in a “credit card stacking” scheme to defraud consumers. The proposed settlement requires the companies to stop applying for credit card products on behalf of consumers in exchange for a fee and further requires that they pay $2.1 million to FTC, which will then be distributed to consumers.

The Scheme

According to FTC’s Complaint, the scheme began with a number of companies (many of which are also being sued by FTC and other law enforcement agencies) offering a path to financial freedom through seminar and coaching packages purporting to teach consumers how to make money by investing in real estate or operating an online business. Consumers were lured in through free or low-cost events only to learn that the “real” training would cost tens of thousands of dollars that consumers, who were often cash-strapped to begin with, simply could not afford.

That is where Seed Consulting and Credit Navigator came in. The training companies told consumers that Seed and Credit Navigator were essentially funding companies, through whom they could obtain capital to grow their nascent businesses or invest in real estate or securities. However, neither Seed nor Credit Navigator are lenders and did not provide any form of financing themselves. Instead, both operated a “credit card stacking” operation—i.e. applying for multiple smaller lines of credit in a specific order to access a larger unsecured line of credit than any one business or personal credit card could offer. For a fee of $3000 to $4000, Seed and Credit Navigator aimed to obtain at least $50,000 in total credit lines for each of their customers across a half dozen or more credit cards. In order to do so, they often inflated consumers’ income on the applications by $100,000 or more. Seed and Credit Navigator justified this practice on the pretext that the figures purportedly reflected the additional income their customers could anticipate earning in the next year as a result of participating in seminars and programs offered by the training companies.

Seed’s and Credit Navigator’s practices resulted in consumers obtaining numerous credit cards and significantly more credit than the banks would otherwise provide. Once the consumers had the credit cards in hand, they would use them to pay for the seminars and coaching packages offered by the training companies (along with their fee to Seed/Credit Navigator). Beyond the referral relationship, FTC’s Complaint alleges that once Seed or Credit Navigator obtained numerous credit cards for customers, they would inform the training companies that those customers now had funds available to them and specify the exact amount of total funds available. This allowed the training companies to pitch additional costly products or services to consumers that ultimately enriched Seed and the training companies.

Not surprisingly, most consumers who fell victim to the scheme did not earn substantial money through the training companies’ programs and are ultimately unable to pay off the balances from the cost of the trainings on the credit cards.

The Complaint alleges that Seed and Credit Navigator, by participating in and perpetuating this scheme, violated the FTC Act, the Telemarketing Sales Rule, the Credit Repair Organizations Act, and the Consumer Review Fairness Act.

Takeaway

Credit card stacking is not in itself an illegal practice. The FTC’s decision to pursue Seed and Credit Navigator flowed from the companies’ alleged role in assisting and facilitating others engaged in deceptive schemes. Andrew Smith, the FTC’s Bureau of Consumer Protection Director, highlighted this enforcement action in a recent blog post, noting that the FTC’s enforcement action against Seed “is one of many cases” that the FTC has brought “alleging that a company can be liable for assisting and facilitating or otherwise participating with other companies in misconduct.”

Other examples include actions against companies for:

• Processing payments for fraudulent merchants (see RevenueWire, Qualpay, and Complete Merchant Solutions);
• Providing fulfillment services in connection with a deceptively sold product (see com);
• Creating deceptive campaigns for advertisers (see Traffic Jams);
• Operating an advertising platform on which deceptive claims are made (see Tapjoy);
• Purchasing leads that were generated through deception or other law violations (see Career Education Corp (CEC), Media Mix, EduTrek, Grand Bahama Cruise Line, and Alliance Security);
• Profiting from sales by distributors who make misleading earnings or product claims (see AdvoCare, as well as MLM warning letters sent in April and June 2020).

So, the message to online businesses is clear: choose your partners wisely.

Bradley O. Cebeci is a Partner, and Jennifer Cho is an Associate Attorney, with Rome & Associates, APC. Brad and Jennifer focus on Payments and Digital Marketing Law.