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False Advertising and Consumer Fraud

You are here: Home / Resilience / False Advertising and Consumer Fraud

March 16, 2021 By Roman

Purpose:  

Educate how minor missteps by a lead generating media company led to charges for false advertising and misleading consumers. 

Learning Objectives: 

This lesson will help participants: 

  • Identify red flags that may lead government officials to launch an investigation.
  • Describe steps a company may take to prevent being targeted for an investigation.
  • Design corporate messaging systems to show a good-faith effort to comply with all regulations and laws.

Intended Audience: 

People that work in business organizations that rely upon mass marketing to attract prospective consumers.

Key Terms: 

Marketing, Leads, Deceptive Advertising, False Advertisements, Marketing Campaign, Sales Script, Advance Fees.

Lesson to Learn About Advertising and Marketing: 

Business owners rely upon advertising and marketing to help prospective consumers learn about the value a company can provide. If the advertising and marketing succeeds, the prospective consumers (prospect) will reach out to the company. Sometimes the prospect will connect with a company representative; sometimes the prospective consumer will fill out a form that provides the company with permission to contact the prospect. When the prospect provides contact information, that prospective consumer becomes a lead. The company will then provide a sales pitch or offer other sales tactics in an effort to convert the lead into a paying customer. If the government accuses the company of deceptive advertising, or making false advertisements, an investigation and criminal charges may follow.

Situation:  

Matt owned media agency. He employed creative artists to design advertisements for radio, television, or print media. Business owners (clients) would hire Matt’s company to create advertising campaigns to attract prospective customers. Matt’s process would begin by listening to the client and the value proposition the client’s company offered to consumers. Then Matt’s team would collaborate with the client to come up with an effective marketing campaign to attract prospective consumers.

In March 2009, the U.S. Department of Treasury created the Home Affordable Modification Program (“HAMP”). The HAMP incentivized homeowners and financial institutions to work towards mortgage modifications. Theoretically, HAMP would prevent foreclosures and promote the longevity of owner-occupied residences. 

A company that offered mortgage modification service’s hired Matt’s media company. The client tasked the media company with producing television commercials that would attract more prospective consumers. After listening to the client’s needs, Matt’s company produced the commercials. Then, Matt’s media company purchased broadcasting times to air the television commercials.

As consumers saw the television commercials, many called Matt’s client. Those consumers provided the client with their contact information, becoming leads. The client’s sales team relied upon a sales script when then spoke with the leads. That process helped to convert the consumers into paying customers. The client charged the consumer an advanced fee to help the consumers qualify for a mortgage modification. 

The Federal Trade Commission offers “Six sure signs of an advance-fee loan scam.” Those signs include:

  1. A lender who is not interested in a person’s credit history.
  2. Fees that are not disclosed clearly or prominently.
  3. A loan that is offered by phone.
  4. A lender who uses a copy-cat or wanna-be name.
  5. A lender who is not registered in your state.
  6. A lender who asks you to wire money or pay an individual.

If a government agency believes that a company uses advance fees for any type of loan- or credit-modification service, an agency may launch an investigation. In this case, the government alleges that Matt’s company had a role in deceiving consumers into paying advanced fees for services that the consumer did not receive. Further, investigators concluded that Matt’s company used acronyms that deliberately deceived consumers into believing they were working with a government agency.

According to government investigators, the client failed to deliver the service as promised. Authorities launched a civil investigation. That investigation resulted in accusations against the client, but also against the people responsible for producing the ads for the client. Prosecutors brought criminal charges against Matt. Despite a good-faith effort to build a business and create jobs, Matthew’s decisions led to a guilty plea for a felony crime. 

Case Study:

Using his media agency, from approximately May 2009 to February 2013, the owner produced television, radio, and internet advertisements for the National Mortgage Help Center, LLC (“NMHC”), a shell company that the business owner created.

The advertisements purported that NMHC could help struggling homeowners modify their mortgage loans and lower their interest rates. Many of the advertisements implied that NMHC had an affiliation with the federal government. Some of the commercials used President Obama’s image. Other advertisements insinuated that NMHC had an affiliation with the Department of Housing and Urban Development (HUD) or with the Neighborhood Assistance Corporation of America (NACA).

The complaint alleged that by using acronyms—like NAHCA (National Association of Home Counseling Assistance)—the shell company confused consumers. According to government investigators, the media company’s ruse disparaged the reputation of the legitimate home assistance agencies, like the NACA. Such actions violated a number of federal consumer protection and false advertising laws.

The advertisements included a toll-free phone number that prospective customers could use to call for help modifying their mortgages. The advertisements directed “America’s homeowners,” to call the “National Mortgage Help Center.” Theoretically, the advertisement insinuated that callers could possibly “lower their rates to as low as 1% and cut their mortgage payments in half.”  The ads claimed that NMHC employed trained specialists, and that those specialists knew the regulations to provide quick relief that helped thousands of homeowners every day.

In reality, NMHC did not provide such services. Instead, it served as an advertising agency, generating leads that it would pass along to its clients. Since NMHC did not provide mortgage modification services for any homeowners, the government concluded that it misled or deceived consumers. Those who called the toll-free telephone numbers that NMHC advertised got redirected to clients of the media company. The third-party clients, then paid the media company for the “leads.”  

According to the government, the media company’s clients did not provide the service as advertised, and consumers lost fees that they paid in advance. 

In parallel civil litigation stemming from this same activity, First One Lending group, a client of  the media company, did business as “NMHC” and “NMAC,” despite claiming that they were all separate entities. Plaintiffs in that case showed evidence that NMAC’s website looked identical to NMHC’s website and that they shared the same address and telephone number. 

Criminal Exposure

On August 13, 2015, Matt, the owner of the media company pleaded guilty to one count of false advertising. Other members of his advertising team also faced enormous stress and risk from a government investigation. A U.S. District Court Judge sentenced the owner of the media company to serve a sentence of home confinement and probation. He served that sentence for the white-collar crime of producing and disseminating false advertisements for mortgage modification services. The Judge also ordered the owner of the media company to pay a $100,000 fine and $75,794 in restitution.

Recommendation:

Business professionals that communicate messages to consumers should learn more about the risks associated with their work. If government investigators ascertain that the marketing messages misled or deceived consumers in any way, then a series of costly and unpleasant events may follow. 

  • The company may learn that the government opened an investigation.
  • Investigators may begin to question team members.
  • Those team members may or may not speak honestly about their role in the company.
  • The company will need to hire attorneys to defend them against the accusations.
  • Criminal charges may follow.
  • Business decisions may lead to criminal charges for white-collar crimes.
  • Penalties may include the loss of liberty and high monetary penalties.

For these reasons, we recommend that business owners help their team members understand the importance of compliance training. When creating marketing messages, make sure that those messages comply with all fair-trade laws. If a client provides a story about the business model, the company should have a well-documented policy to conduct due diligence. In some cases, it may be wise to hire legal counsel. An attorney may provide a letter of opinion that confirms messaging is in compliance with the law and does not expose the company to accusations of deceptive advertisement.

Sources: 

https://www.upcounsel.com/shell-corporation
https://www.justice.gov/usao-ct/pr/owner-ct-media-agency-advertised-mortgage-assistance-pleads-guilty-false-advertising

Shell Companies and Money Laundering

 

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Filed Under: Resilience

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