Timeshares: Closer Look at Diamond Resorts Sales Practices ...

[Pages:3]January 5, 2016

Timeshares: Closer Look at Diamond Resorts Sales Practices in Connection with Efforts to Convert Legacy Monarch Owners

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Policy Update

More legacy owner complaints about Diamond. In our August 14, 2015 article, we discussed legacy Monarch owners' complaints on online forums regarding Diamond's methods to convert legacy Monarch owners. In addition, we also recounted the experience of a legacy Monarch owner who spoke with The Capitol Forum regarding a Diamond Conversion Pitch that he attended at the Cancun resort in Las Vegas in early July. Since the last update, we have reviewed the experience of another legacy Monarch owner who converted to Diamond and two ongoing lawsuits filed by legacy Monarch owners ? and one legacy Sunterra owner ? alleging a variety of improper sales practices in connection with Diamond's conversion efforts.

Acquisition strategy key to growth. As noted in Diamond's regulatory filings, one of the company's key revenue drivers beyond its core business model involves acquiring ongoing resort businesses. Such acquisitions add to Diamond's existing network of resorts, provide additional management contracts and increase the potential new membership base. Diamond most likely depends on legacy owners converting to Diamond memberships to fuel growth. In our view, the sales practice allegations outlined below add to the growing evidence of improper conduct relied upon in connection with the conversion sales pitches.

Litigation, California scrutiny threaten acquisition strategy. The California case is particularly significant, as that state has seen its fair share of lawsuits filed by both consumers including the elderly and former employees. We continue to believe that litigation arising from improper sales practices is likely to land major timeshare operators on the radar of state AGs. Any resulting enforcement action could hamper the ability of timeshare operators to continue to engage in the types of aggressive sales practices that are leading legacy timeshare owners to convert. In our view, this could have a negative impact on the economics of strategic acquisitions going forward.

Summary of Diamond Conversion Pitch

The Capitol Forum was recently contacted by legacy Monarch Owner Alysia Webb regarding her experience with Diamond since it acquired Monarch. As a Monarch owner, Mrs. Webb and her husband accrued 199 points for use every other year. Webb stated that she was perfectly content with her ownership experience with Monarch, but "since converting over to Diamond, it has been a nightmare."

The Webbs converted to Diamond after attending an owners update in the fall of 2014 at the Palm Canyon resort. During the update, the Webbs were subjected to a number of the same high-pressure sales tactics that we detailed in the August article. In particular, they were told that if they did not convert to Diamond, they would face increasing maintenance fees and experience greater difficulty booking reservations. Additionally, they were also informed of a minimum purchase requirement of 3,000 points. According to Diamond sales documents, the minimum purchase requirement for points is only 2,500.

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In October, the Webbs travelled to Sedona for vacation. When Mrs. Webb contacted Diamond to make reservations, the individual that she spoke with stated that she had until October 31 to use all of their points or the Webbs would lose them. Mrs. Webb explained that they had only purchased the points a year ago and had been specifically told that they had two years to use them. The Diamond representative responded by stating that the Webbs had been misinformed by their salesperson. Mrs. Webb was ultimately able to obtain confirmation that she did indeed have two years to use the points purchased in 2014.

Upon arrival at the Sedona resort, Mrs. Webb was very disappointed with the quality of the "Messa suite" that she had reserved. It was "horrible", Webb stated. "A little dark dingy room with no windows," she recalled. After seeing the room, Webb went back down to the front desk to inquire whether there had been a mistake with her reservation. The front desk manager informed her that she was indeed in the correct room and explained that Diamond would upgrade them for $125. Mrs. Webb declined the offer to be upgraded for a fee and informed the sales manager among other things that "Super 8 had better rooms." After some back and forth, the Webbs were reassigned to a more suitable room. "I guess he didn't want me telling the truth in the lobby," Webb surmised.

Lawsuits Lend Insight into Diamond's Business Tactics

A 2015 Florida lawsuit alleges Diamond coerced legacy timeshare owners to convert. In March 2015, several legacy Monarch customers filed a lawsuit in Broward County, Florida against Diamond (Craven et. al. v. Diamond Resorts No. 15-005106) alleging that Diamond was engaging in a deliberate scheme designed to undermine plaintiffs' rights under their Monarch timeshare agreements by seeking to replace those agreements with new contracts with Diamond. Specifically, the complaint alleges that Diamond forces legacy Monarch owners to "upgrade" i.e. pay additional money, in order to be able to continue using legacy Monarch or Diamond properties. A source familiar with the lawsuit believes the sales practices that impacted his clients are indicative of a broader pattern of behavior.

One of the specific sales tactics referenced in the complaint is very similar in nature to a tactic discussed in our August report. According to the complaint, Diamond sales reps claimed during sales presentations that plaintiffs had each been sent a time sensitive communication regarding an opportunity to upgrade at a discounted price, but failed to respond in a timely manner and as a result the offer expired. The sales reps then claimed that they could provide a similar offer at a higher price as long as plaintiffs signed the contract on the same day as the presentation. The complaint alleges Diamond's sales personnel falsely claimed that the company had sent a communication regarding a special offer as part of a broader effort to create a false sense of urgency.

A California lawsuit alleges that Diamond engaged high-pressure sales tactics directed towards the elderly in an effort convert them from Monarch. In October 2014, several legacy Monarch owners and one legacy Sunterra owner filed a lawsuit against Diamond in San Diego Superior Court (Ferrao et. al v. Diamond Resorts No. 37-2014-00036172). Among the individual plaintiffs, a common theme emerged including subjection to highpressure sales tactics, inadequate time to review contract documents and false reliance on a number of misrepresentations made by Diamond sales personnel.

Specific Allegations Contained in the California Complaint

Pamela and George Crowder. The Crowders purchased a timeshare from Monarch in 2007 and attended a Diamond sales presentation in March 2014 at Rancho Cordova, California. A month prior to attending the presentation, Ms. Crowder (64 at the time) was diagnosed with a terminal brain tumor and told that she only had

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between 12 to 18 months to live. The complaint alleges that the Crowders informed the Diamond sales representatives both orally and in writing of Ms. Crowders diagnosis and that the sole reason they elected to attend the presentation was in order to purchase the necessary number of points to enable the Crowders to stay in New York City to attend that year's Macy's Thanksgiving Day Parade. The Crowders claim that they were assured by company sales representatives that if they purchased 48,200 points, booking a vacation in New York City to attend the parade would be "no problem." Based on that representation, the Crowders allege that they paid in excess of $100,000 in conversion and upgrade fees. However, in April 2014 when Mrs. Crowder attempted to make reservations for her family trip in November 2014, she was allegedly informed by a Diamond representative that "Diamond Resorts does not own any property in New York City and cannot arrange for you to go there." Instead, she was offered a location several hours outside of New York City.

Rebecca Whitson. Ms. Whitson purchased a timeshare from Sunterra in 2007 and was invited to attend a Diamond sales presentation in 2013. At that presentation, Whitson claimed she was informed that she needed to upgrade or risk not being able to book reservations in the future and that switching from points to weeks would result in access to more locations and better availability. Whitson also alleges that she specifically informed the sales represenative that she was interested in upgrading in order to travel to Hawaii and was told that booking in Hawaii would be "no problem." According to the complaint, Whitson attempted on several occasions to make reservations in Hawaii but was informed each time that there were no rooms available. In one instance, Whitson claims that she was told by a reservations agent that there might be availability if she were willing to break up the trip for "2 days here or 3 days there". However, there were gaps in between the available dates during which Whitson would be responsible for securing her own accommodations.

Jordan Simone. Ms. Simone attended a Diamond sales presentation in Sedona, Arizona in July 2012. Ms. Simone who was over the age of 65 at the time says that the Diamond sales rep falsely claimed that: availability would not be an issue; purchasing points was a property investment and that Diamond would assist her with selling her points should she ever desire to do so; and first year maintenance fees would be waived if she purchased the day of the presentation. Simone claims that after signing the contract, first year maintenance fees were not waived and that she attempted to make reservations on several locations but was unable to book any of her desired locations that sales reps claimed would be available during the presentation. The complaint also references an instance when Simone was able to make a reservation at a "beach front property" but upon arrival discovered that "the property was fenced in, had a large retaining wall, restricted parking and a service road all in the way of the beach and the property did not even have beach access."

Sharon Ferraro. Ferraro purchased a timeshare interest from Monarch for $19,000 in 2004. In May 2013, Ferraro who was over the age of 65 at the time attended a Diamond sales presentation in Palm Springs, California. According to the complaint, a Diamond sales representative claimed that Ferraro had "no choice but needed to upgrade her membership with Diamond, or over time, there would be few or no resorts for her to choose from." The complaint further alleges that Ferraro was also told that that upgrading represented an "investment opportunity" because the value of her points would appreciate and that her maintenance fees would decrease. Contrary to those representations, Ferraro asserts that the value of her points has not increased and that her maintenance fees have increased.

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