A federal district court in Maryland denied a motion to dismiss the Federal Trade Commission’s complaint against Financial Education Services and its principals alleging that they unlawfully marketed credit repair services and promoted an illegal pyramid scheme.

The defendants claim to “improve consumers’ credit scores by removing all negative items from their credit reports and adding credit building products,” practices which the FTC alleges are a sham. Further, according to the FTC’s May 2022 complaint, the defendants charge consumers prohibited advance fees to use these services without providing them the requisite disclosures.  The FTC labels another aspect of the defendants’ operations—which encourages consumers to become sales agents who market their services to, and recruit, secondary consumers—an illegal pyramid scheme.  The complaint alleges that these practices violate Section 5 of the FTC Act, the Credit Repair Organizations Act and the Telemarketing Sales Rule.

The defendants moved to dismiss the individual principals from the case and to preclude the FTC from obtaining permanent injunctive and monetary relief.  On the first point, they argued that the FTC failed to plausibly assert whether they possess the authority necessary to control the business entities and knew or should have known about the entities’ purported deceptive practices.  They also argued that the complaint targeted only their alleged past conduct, which falls outside the prospective scope of the FTC Act’s permanent injunctive remedies.

The court rejected these arguments, holding: (i) that the FTC plausibly demonstrated that the principals have the authority to control the business entities and possess “an awareness of a high probability of deceptiveness and intentionally avoided learning of the truth,” and (ii) that the present and ongoing nature of the alleged deceptive conduct was apparent from the complaint.

Finally, the court noted that the FTC invoked both Sections 13(b) and 19 of the FTC Act to prosecute its claims.  Section 19(a)(1) authorizes the Commission to enforce any rule promulgated under the FTC Act “respecting unfair or deceptive acts or practices,” and Section 19(b) contemplates the “refund of money,” the “return of property,” or the “payment of damages” to remedy consumer injuries resulting from any such violation.  Since both the Credit Repair Organizations Act and the Telemarketing Sales Rule qualify as rules promulgated under the FTC Act “respecting unfair or deceptive acts or practices,” the court held that the FTC may petition it for monetary relief to “redress” the alleged consumer injuries.

In announcing that the court had temporarily shut down the scheme last May, Samuel Levine, Director of the FTC’s Bureau of Consumer Protection, said: “These defendants collected millions in junk fees as part of a pyramid scheme that peddled phony credit repair products.  We are pleased that the court shut down this operation and froze its assets, and we will continue to pursue firms that prey on families’ economic pain.”