DAVID C. SHONKA SARAH SCHROEDER, Cal. Bar No. 221528

Case 4:18-cv-00806-SBA Document 22 Filed 03/02/18 Page 1 of 30

1 DAVID C. SHONKA 2 Acting General Counsel

3 SARAH SCHROEDER, Cal. Bar No. 221528

4

ROBERTA TONELLI, Cal. Bar No. 278738 EVAN ROSE, Cal. Bar No. 253478

5 Federal Trade Commission 901 Market Street, Suite 570

6 San Francisco, CA 94103

7

sschroeder@, rtonelli@, erose@ Tel: (415) 848-5100; Fax: (415) 848-5184

8

9

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

10

OAKLAND DIVISION

11

12 FEDERAL TRADE COMMISSION,

13

Plaintiff,

Case No. 18-cv-00806-SBA

14 vs.

15

FEDERAL TRADE COMMISSION'S

AMERICAN FINANCIAL BENEFITS CENTER, MOTION FOR PRELIMINARY 16 a corporation, also d/b/a AFB and AF STUDENT INJUNCTION, AND

17 SERVICES;

MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT

18 AMERITECH FINANCIAL, a corporation;

THEREOF

19 FINANCIAL EDUCATION BENEFITS CENTER,

20 a corporation; and

Date: May 9, 2018

21 BRANDON DEMOND FRERE, individually and as an officer of AMERICAN FINANCIAL

22 BENEFITS CENTER, AMERITECH

Time: 1:00 p.m. Location: Courtroom 210

1301 Clay Street, 2nd Floor

23

FINANCIAL, and FINANCIAL EDUCATION BENEFITS CENTER,

24

Defendants.

25

Judge:

Oakland, CA 94612

Hon. Saundra Brown Armstrong

26

27

28

Motion for Preliminary Injunction 4:18-CV-00806-SBA

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1

TABLE OF CONTENTS

2

3 4 TABLE OF AUTHORITIES ...................................................................................................... iii

5 I. NOTICE OF MOTION AND MOTION ............................................................................ 1

6 II. INTRODUCTION................................................................................................................. 1

7

III. THE PARTIES................................................................................................................... 2 8

9

A. Plaintiff............................................................................................................................ 2

10 B. Defendants....................................................................................................................... 2

11 IV. DEFENDANTS' UNLAWFUL BUSINESS PRACTICES ............................................ 3

12 A. Defendants Falsely Promise Fixed Monthly Loan Payments, Loan Forgiveness,

13 and Eligibility for Government Programs.............................................................................. 4

14 1. Defendants' Mailers Falsely Promise Student Loan Payment Reduction and

15 Loan Forgiveness .................................................................................................................. 5

16

17

2. Defendants' Sales Calls Reinforce False Promises .................................................. 5

18

3. Defendants Misrepresent Consumers' Eligibility for IDR Programs ................... 7

19 B. Defendants Mislead Consumers to Extract Monthly Charges and Illegal Advance

20 Fees .........................................................................................................9

21 1. Illegal Advance Fees ................................................................................................... 9

22

23

2. Deceptive Monthly Charges..................................................................................... 10

24 C. Defendants' High-Pressure Tactics Prevent Consumers from Discovering

25 Misrepresentations.................................................................................................................. 12

26 D. Defendants Cut Off Consumers' Communications with Loan Servicers and the 27 Department of Education to Prevent Discovery of the Scam ............................................. 14 28

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1 V. THE FTC HAS SHOWN A LIKELIHOOD OF SUCCESS AND THE EQUITIES

2 WEIGH IN FAVOR OF THE REQUESTED RELIEF.......................................................... 15

3

A. This Court Has the Authority to Grant the Requested Relief ................................. 15

4 B. Legal Standard for Issuing a Preliminary Injunction .............................................. 16

5

6

C. The FTC Has Demonstrated a Likelihood of Success on the Merits....................... 16

7

1. Defendants' Misrepresentations Violate the FTC Act .......................................... 16

8

2. Defendants' Misrepresentations and Upfront Fees Violate the TSR................... 18

9

D. The Equities Favor Granting the Preliminary Injunction ....................................... 20

10

VI. THE LIABILITY OF DEFENDANTS .......................................................................... 21 11

12 A. Corporate Defendants Are Liable as a Common Enterprise................................... 21

13 B. Defendant Frere Is Liable for Monetary and Injunctive Relief............................... 22

14 VII. A PRELIMINARY INJUNCTION WITH EQUITABLE RELIEF IS

15 NECESSARY ............................................................................................... 24

16 A. Preliminary Injunction ................................................................................................ 24

17 B. Appointment of a Temporary Receiver ..................................................................... 24

18

19 VIII. CONCLUSION............................................................................................................. 25

20

21

22

23

24

25

26

27

28

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1

TABLE OF AUTHORITIES

2 Cases 3 CFPB v. Irvine Webworks, No. 14-1967 (C.D. Cal. Feb. 2, 2016) (order) .................................. 18 4 CFPB v. Morgan Drexen, 60 F. Supp. 3d 1082 (C.D. Cal. 2014)................................................ 20 5 Delaware Watch Co. v. FTC, 332 F.2d 745 (2d Cir. 1964).......................................................... 21 6 FTC v. A1 DOCPREP, No. 17-cv-07044 (C.D. Cal. Sept. 28, 2017)..................................... 19, 24 7 FTC v. Affordable Media, LLC, 179 F.3d 1228 (9th Cir. 1999)....................................... 16, 20, 23 8 FTC v. Alliance Document Prep., No. 17-7048 (C.D. Cal. Nov. 2, 2017) ............................. 16, 24 9 FTC v. Am. Standard Credit Sys., Inc., 874 F. Supp. 1080 (C.D. Cal. 1994)............................... 23 10 FTC v. Am. Student Loan Consolidators, No. 17-cv-61862 (S.D. Fla. Sept. 26, 2017) ............... 19 11 FTC v. Amy Travel Service, Inc., 875 F.2d 564 (7th Cir. 1989) ............................................. 15, 22 12 FTC v. LLC, 453 F.3d 1196 (9th Cir. 2006)................................................ 16, 18 13 FTC v. Figgie Int'l, Inc., 994 F.2d 595 (9th Cir. 1993)................................................................ 17 14 FTC v. Gill, 71 F. Supp. 2d 1030, 1043 (C.D. Cal. 1999) ............................................................ 17 15 FTC v. H.N. Singer, Inc., 668 F.2d 1107 (9th Cir. 1982) ....................................................... 15, 16 16 FTC v. John Beck Amazing Profits, LLC, 865 F. Supp. 2d 1052 (C.D. Cal. 2012)...................... 21 17 FTC v. Johnson, 96 F. Supp. 3d 1110 (D. Nev. 2015) ................................................................. 18 18 FTC v. M&T Fin. Grp., No. 17-cv-06855 (C.D. Cal. Sept. 19, 2017).......................................... 19 19 FTC v. Network Servs. Depot, Inc., 617 F.3d 1127 (9th Cir. 2010) ............................................. 22 20 FTC v. Pantron I Corp., 33 F.3d 1088 (9th Cir. 1994)........................................................... 15, 17 21 FTC v. Publ'g Clearing House, Inc., 104 F.3d 924 (9th Cir. 1997))...................................... 22, 23 22 FTC v. Southwest Sunsites, Inc., 665 F.2d 711 (5th Cir. 1982).................................................... 20 23 FTC v. Stefanchik, 559 F.3d 924 (9th Cir. 2009).......................................................................... 23 24 FTC v. Student Debt Doctor LLC, No. 17-cv-61937 (S.D. Fla. Oct. 3, 2017) ............................. 19 25 FTC v. Think Achievement Corp., 144 F. Supp. 2d 993 (N.D. Ind. 2000) ................................... 21 26 FTC v. U.S. Oil & Gas, 748 F.2d 1431 (11th Cir. 1984).............................................................. 24 27 FTC v. Warner Commc'ns, Inc., 742 F.2d 1156 (9th Cir. 1984).................................................. 20 28

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1 FTC v. World Wide Factors, Ltd., 882 F.2d 344 (9th Cir. 1989) ............................... 15, 16, 20, 21 2 In re Cliffdale Assocs., 103 F.T.C. 110 (1984) ....................................................................... 16, 17 3 In re Pfizer, Inc., 81 F.T.C. 23 (1972) .......................................................................................... 16 4 Kraft, Inc. v. FTC, 970 F.2d 311, 322 (7th Cir. 1992).................................................................. 17 5 New Mexico ex rel. King v. CreditArbitrators, LLC, No. CV 12-16, 2014 WL 12581756 (D.N.M. 6 Mar. 26, 2014)........................................................................................................................... 19 7 SEC v. Keller Corp., 323 F.2d 397 (7th Cir. 1963) ...................................................................... 24 8 Simeon Mgmt. Corp. v. FTC, 579 F.2d 1137 ................................................................................ 16 9 Southwest Sunsites, Inc., 105 F.T.C. 7 (1985) .............................................................................. 17 10 Thompson Medical Co., 104 F.T.C. 648 (1984) ........................................................................... 16 11 U.S. v. Odessa Union Warehouse Co-op, 833 F.2d 172 (9th Cir. 1987) ...................................... 16 12 Statutes 13 15 U.S.C. ? 45................................................................................................................................. 1 14 15 U.S.C. ? 45(a), ..................................................................................................................... 2, 16 15 15 U.S.C. ? 53(b) .......................................................................................................................... 15 16 15 U.S.C. ?? 41-58 ......................................................................................................................... 2 17 16 C.F.R. ? 310 ............................................................................................................................... 1 18 16 C.F.R. ? 310.4 .......................................................................................................................... 19 19 16 C.F.R. ? 310.6(5) ..................................................................................................................... 18 20 16 C.F.R. ?? 310.2 ........................................................................................................................ 18 21 Federal Rules of Civil Procedure R. 65 ........................................................................................ 15 22 23 24 25 26 27 28

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1 I. NOTICE OF MOTION AND MOTION

2

PLEASE TAKE NOTICE that on May 9, 2018 at 1:00 p.m., or as soon thereafter as the

3 matter can be heard, in the courtroom of U.S. District Judge Saundra Brown Armstrong of the

4 Northern District of California, 1301 Clay Street, Oakland, California, the Federal Trade

5 Commission ("FTC" or "Commission") will respectfully move the Court for an order granting a

6 preliminary injunction against Defendants to stop continuing violations of Section 5 of the FTC

7 Act, 15 U.S.C. ? 45, and the Telemarketing Sales Rule ("TSR"), 16 C.F.R. pt. 310.

8

To protect consumers from additional harm and preserve assets for eventual restitution to

9 victims, the FTC asks this court to issue a preliminary injunction including appointment of a

10 temporary receiver. A neutral receiver would prevent further harm to consumers and would

11 locate and secure assets and records without disrupting any legitimate business activity.

12 II. INTRODUCTION

13

The FTC seeks a preliminary injunction to halt a deceptive debt relief operation that has

14 bilked consumers out of millions of dollars. Since 2014, Defendants have operated a sprawling

15 student loan debt relief enterprise. Defendants misrepresent the cost and features of federal

16 student loan repayment and forgiveness programs in order to extract fees from the very

17 struggling consumers these programs are designed to help. To lure consumers, Defendants send

18 mailers claiming consumers are eligible for federal programs that would permanently reduce

19 their monthly loan payments or result in "total loan forgiveness." Defendants charge consumers

20 an advance fee of between $600 and $800 purportedly to enroll them in these federal programs.

21 In addition to charging illegal advance fees, Defendants collect and retain monthly fees that

22 consumers believe are being applied to pay down their loans. Consumers often only discover

23 that the fees did not go to paying off their loans, but instead went directly to Defendants, when

24 they receive a past due notice from their loan servicer. In many instances, not only has their loan

25 balance not diminished, but it has also accrued interest.

26

Over 300 consumers nationwide have complained about Defendants to government

27 agencies, their loan servicer, and the Better Business Bureau ("BBB"). Complaining consumers

28 consistently report the same deceptive practices alleged by the FTC in this case.

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1

Along with this Memorandum, the FTC is submitting overwhelming evidence of

2 Defendants' scheme. This evidence includes, among other things: hundreds of consumer 3 complaints;1 statements from Defendants' former employees that the company is a "scam";2

4 recordings and transcripts of consumer calls and undercover calls by government investigators

5 that capture Defendants' misrepresentations; declarations from consumers victimized by

6 Defendants; a declaration from a servicer of federal loans that has received dozens of complaints

7 about Defendants; a declaration from the BBB about the complaints it has received about

8 Defendants and its investigation into Defendants' conduct; hundreds of consumer complaints

9 about Defendants filed with the BBB, the FTC, or other government agencies; and financial

10 records indicating that Defendants have dissipated their assets, and are likely to continue doing

11 so unless the Court grants the requested relief.

12 III. THE PARTIES

13

A. Plaintiff

14

Plaintiff FTC is an independent agency of the United States Government created by

15 statute. 15 U.S.C. ?? 41-58. The FTC's responsibilities include enforcing the FTC Act's

16 prohibitions on unfair or deceptive conduct, 15 U.S.C. ? 45(a), as well as enforcing the Rules it

17 has promulgated under its rulemaking authority, including the Telemarketing Sales Rule

18 ("TSR"), 16 C.F.R. pt. 310.

19

B. Defendants

20

Defendants American Financial Benefits Center ("AFBC"),3 AmeriTech Financial

21

22 1 Ortiz Att. EE-GG; Stiner Att. A; Lee Att. A-B. Throughout this document, declarations are 23 cited to by the last name of the declarant and the paragraph of the declaration referenced (i.e.,

Ortiz ? 1). Attachments to declarations are cited to by the declarant's last name and reference to 24 the specific attachment (i.e., Ortiz Att. A).

2 Dowdell Att. A-2 ("The company knows they are scamming people"); Stiner Att. L-11 ("It's a 25 giant scam"); Stiner Att. J ("They have clients all over that they are scamming"); Hamilton ? 16 26 ("they were running a scam"); Bufano ? 14 ("AFBC and AmeriTech are shady companies. They

scam people by making it seem like clients' monthly payments are going towards their student 27 loans, when in fact all the funds go to the company."); Martinez ? 14; see also Ortiz Att. HHH.

3 AFBC was incorporated in California in February 2011. Ortiz Att. A. AFBC has also done 28 business as "AFB" and "AF Student Services." Rhode ?? 5-6, Atts. C-D.

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1 ("AmeriTech"),4 and Financial Education Benefits Center ("FEBC")5 are California 2 corporations holding themselves out as doing business in this district.6 As described below in

3 Section VI.A, AFBC, AmeriTech, and FEBC (collectively "Corporate Defendants") operate as a

4 common enterprise to defraud consumers with their student loan debt relief scheme. Together, 5 Corporate Defendants have collected over $28 million from their 22,000 customers.7

6

Individual Defendant Brandon Demond Frere ("Frere") owns and operates the

7 Corporate Defendants.8 Frere resides in this district and, in connection with this matter, transacts

8 or has transacted business in this district.9 As explained below in Section VI.B, Frere is

9 individually liable for the Corporate Defendants' actions.

10 IV. DEFENDANTS' UNLAWFUL BUSINESS PRACTICES

11

Defendants capitalize on the financial hardship of many student loan borrowers.

12 Defendants induce consumers to enroll in, and pay money for, their "student debt relief" program

13 using a combination of lies, false promises, and calculated omissions. Defendants make false or

14 unsubstantiated claims: (1) that consumers qualify for plans that will permanently lower their

15 monthly loan payments and/or lead to loan forgiveness; and (2) that consumers' monthly

16 payments to Defendants will be applied towards consumers' loans. Defendants also require

17 consumers to provide advance payment for work to be performed relating to consumers' student

18 loan debts, in violation of the TSR.

19

Defendants tout themselves as experts in student loan debt relief,10 and consumers rely on

20 this expertise when enrolling with Defendants.11 Targeting consumers who are "unfamiliar or

21

4 AmeriTech was incorporated in California in October 2015. Ortiz Att. D.

22 5 FEBC was incorporated in California in October 2015. Ortiz Att. G.

23

6 Ortiz ?? 6, 8-9, 11-12, Atts. A-B, D-E, G-H. 7 Ortiz Att. GGG at 2; George ? 8. This likely underestimates the fees Defendants have collected

24 from consumers. The FTC has not obtained banking records for FEBC. Defendants have stated

that FEBC's finances are kept "completely separate" from those of AmeriTech. Ortiz Att. CCC 25 ? 21. If this is accurate, FEBC likely collected funds not included in the $28 million figure. 26 8 Ortiz Atts. A-B, D-E, G-H, EEE at 2-3 (Frere is the only owner with more than a 5% interest in

each AFBC, AmeriTech, and FEBC.); see infra, Section VI.B. 27 9 Ortiz Att. B (listing Brandon Frere's address as 925 Lakeville St., #175, Petaluma, CA 94952).

10 Ortiz Att. EEE at 7 ("The Companies are experts in understanding the student loan programs 28 for which their customers are enrolled."); Vildasol ? 5. Defendants refer to their employees as

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