FTC Alleges Merchant Cash Advance Provider Overcharged Small Businesses Millions

A leading provider of merchant cash advances used deception to lure small business customers, then regularly withdrew money from their accounts without consent even after the customers had repaid the money they owed, according to a Federal Trade Commission lawsuit.

The FTC’s complaint against Yellowstone Capital, Fundry, founder and CEO Yitzhak Stern, and president Jeffrey Reece, alleges that they unlawfully withdrew millions of dollars in excess payments from their customers’ accounts, and to the extent they provided refunds, sometimes took weeks or even months to provide them.

“Small businesses are struggling right now and need responsible sources of financing,” said Andrew Smith, Director of the FTC’s Bureau of Consumer Protection. “Making sure that lenders and funders don’t deceive business borrowers or engage in servicing abuses is a big priority for the FTC.”

Merchant cash advances are a form of financing in which the defendants provide money to a small business up front in exchange for a larger amount repaid through daily automatic payments.

According to the FTC’s complaint, Yellowstone has regularly withdrawn hundreds or thousands of dollars from businesses’ accounts for days after customers had repaid the full amounts owed in their contracts. In some cases, Yellowstone would only refund this money when businesses complained, and even then the refunds could take weeks or months, leaving small businesses without needed cash on hand. The complaint also cites examples of businesses being left with bank overdraft fees as a result of the unauthorized withdrawals.

In addition, the complaint alleges that for years Yellowstone deceived potential customers about the amount of money they would receive, with the amount shown on the contract not reflecting additional fees that would be deducted. According to the complaint, these fees totaled hundreds and even thousands of dollars, and were not revealed to business owners until, in some cases, after their contracts were signed, leading one business owner to tell the defendants, “you guys are like highway robbery.”

Beyond withdrawing unauthorized payments and failing to provide businesses the promised amounts, the complaint also alleges that the defendants relied on deceptive marketing to promote their services. Specifically, the complaint states that Yellowstone promised that business owners would not be required to provide collateral or be subject to a personal guaranty. These promises appeared in online ads and other forms of marketing, but in many instances Yellowstone’s contracts actually required business owners to be personally liable if their business failed to make repayments, as well as put the business and all of its property up as collateral.

The complaint alleges that these practices violated the FTC Act.

The Commission vote authorizing the staff to file the complaint was 4-0-1, with Commissioner Rebecca Kelly Slaughter recorded as not participating. Commissioner Rohit Chopra issued a statement. The complaint was filed in the U.S. District Court for the Southern District of New York.

NOTE: The Commission files a complaint when it has “reason to believe” that the named defendants are violating or are about to violate the law and it appears to the Commission that a proceeding is in the public interest. The case will be decided by the court.

James Lee selected to lead IRS Criminal Investigation

IR-2020-175, August 3, 2020

WASHINGTON — The Internal Revenue Service announced today that James Lee will become the new chief of IRS Criminal Investigation (CI) on October 1.

Lee, currently CI’s deputy chief and a 25-year veteran of the organization, will succeed current Chief Don Fort, who announced last month he will retire on September 30.

“Jim brings a quarter-century of Criminal Investigation management and field experience into this key enforcement role,” said IRS Commissioner Chuck Rettig. “Jim is highly respected throughout the IRS and will continue long-standing working relationships with the civil enforcement functions of the IRS as well as with the Department of Justice’s Tax Division and tax prosecutors throughout the country. He understands the need to support compliant taxpayers by maintaining a strong, robust enforcement effort focused on those who are compliance challenged.”

As Chief, CI, Lee will lead the IRS’s criminal enforcement efforts to investigate tax code violations and other related financial crimes such as money laundering, public corruption, cybercrimes, identity theft, narcotics and terrorist-financing.

Prior to serving as Deputy Chief of CI, he served as the Director of Field Operations, Northern Area where he oversaw CI enforcement programs in the Boston, New Jersey, New York, Ohio and Philadelphia Field Offices. He also previously served in executive roles as the Director of Field Operations, Southern Area and the Director, Strategy.

Lee began his IRS CI career in 1995 as a special agent in Detroit. He moved into the CI leadership ranks and has held positions of increasing responsibility throughout his career including Supervisory Special Agent in the New Orleans Field Office; Headquarters Senior Analyst in the International and Financial Crimes Sections; Assistant Special Agent in Charge within the Boston Field Office; and Special Agent in Charge of the New Orleans Field Office and later the Chicago Field Office.

Lee has a Bachelor of Business Administration Degree with a concentration in Accounting from Tiffin University in Ohio.

He will follow Fort into CI’s top position. Fort, who was named CI Chief in June 2017 will retire after a long career, which began in 1991 as a special agent in CI’s Baltimore District.

“Don has been a remarkable leader and champion for IRS Criminal Investigation,” Rettig said. “He has a distinguished career and the entire IRS leadership team appreciates everything he has done to uphold the law and support tax administration. We look forward to Don’s remaining time at the IRS as well as Jim taking on a new role and building on the great tradition in CI.”

Readout from a Treasury/Small Business Administration (SBA) Roundtable Discussion with Minority Depository Institutions

WASHINGTON – On July 30, 2020, Deputy Secretary of the Treasury Justin Muzinich, U.S. Small Business Administration (SBA) Administrator Jovita Carranza, and other senior Treasury and SBA officials participated in a roundtable discussion with National Bankers Association Chairman Kenneth Kelly and executives from several minority depository institutions (MDIs).  The discussion focused on the MDIs’ experiences as lenders in the Paycheck Protection Program (PPP), including their work to serve small businesses in low- and moderate-income communities.  Administrator Carranza and Deputy Secretary Muzinich thanked the MDIs for their continued efforts in ensuring that PPP funds reach all communities in need.  As of July 24, 2020, 171 MDIs had participated in the PPP, approving over 120,000 loans for more than $10 billion.

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Acting Comptroller of the Currency Presents Varo Bank, N.A. Its Charter

News Release 2020-99 | July 31, 2020

WASHINGTON, D.C.—Acting Comptroller of the Currency Brian P. Brooks issued the following statement after presenting Varo Bank, N.A. its official charter:

It is a great honor to present Varo Bank its full-service national bank charter. For more than 157 years, national bank charters have signified to the world that this bank meets our high standards necessary for it to operate across the country under a single, uniform regulatory framework, subject to a single primary prudential supervisor. National bank charters inspire confidence because they are accompanied by value-added supervision and access to world-class experts. A national bank charter is both a privilege, which Varo has earned, and a responsibility, which it has embraced.

Varo Bank’s opening on August 1, 2020, represents the evolution of banking and a new generation of banks that are born from innovation and built on technology intended to empower consumers and businesses.

As a new national bank, Varo joins the world’s most respected system of financial institutions and has the opportunity to become a household name as many other national banks have become. I congratulate Varo founder Colin Walsh and all the men and women of Varo Bank, N.A. on this important occasion and wish them great success serving the banking needs of their community and customers.

Media Contact

Bryan Hubbard
(202) 649-6870

FTC Sues California Marketer of $23,000 COVID-19 “Treatment” Plan

The Federal Trade Commission charged a California-based company called Golden Sunrise Nutraceutical, Inc. with deceptively advertising a $23,000 treatment plan as a scientifically proven way to treat COVID-19, the disease caused by coronavirus.

Billboard for COVID-19 TreatmentAccording to the FTC’s complaint, Golden Sunrise began marketing its Emergency D-Virus plan as a treatment for COVID-19 in March 2020. Advertising on billboards, their websites, and social media, Golden Sunrise falsely claims that the company’s supplements—ImunStem, Aktiffvate, and AnterFeerons—are “uniquely qualified to treat and modify the course of the Coronavirus epidemic in CHINA and other countries,” and that users can expect the “disappearance of viral symptoms within two to four days,” the FTC alleged.

The FTC sent Golden Sunrise a letter in April 2020, warning that it should immediately remove all advertising claims that the products could prevent, treat, or cure COVID-19. Yet Golden Sunrise continues to market the plan as a COVID-19 treatment, the FTC alleged.

“We warned the defendants not to falsely market their product as an effective treatment for COVID-19, but they didn’t stop,” said Bureau of Consumer Protection Director Andrew Smith. “As this case makes clear, the FTC is prepared to sue companies that continue to make deceptive health claims about COVID-19 or other serious diseases.”

The defendants also have promoted and sold a range of dietary supplements as treatments for cancer and Parkinson’s disease, as well as many other different serious health conditions and diseases. Some of the defendants’ treatments cost as much as $170,000 to $200,000. In reality, they are comprised mainly of various herbs and spices and the health claims are unsubstantiated, according to the FTC.

The FTC also alleges that the defendants falsely claim their products and treatment plans have been reviewed and accepted by the FDA, and designated safe and effective.

The Commission vote authorizing the staff to file the complaint was 4-0-1, with Commissioner Rebecca Kelly Slaughter not participating. The complaint was filed in the U.S. District Court for the Eastern District of California. In addition to Golden Sunrise Nutraceutical, Inc., the FTC complaint names as defendants Golden Sunrise Pharmaceuticals, Inc., and the companies’ principals, Huu Tieu and Dr. Stephen Meis.

Treasury Sanctions Chinese Entity and Officials Pursuant to Global Magnitsky Human Rights Executive Order

Washington – Today, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned one Chinese government entity and two current or former government officials in connection with serious rights abuses against ethnic minorities in the Xinjiang Uyghur Autonomous Region (XUAR). These designations include the Xinjiang Production and Construction Corps (XPCC), Sun Jinlong, a former Political Commissar of the XPCC, and Peng Jiarui, the Deputy Party Secretary and Commander of the XPCC. The entity and officials are being designated for their connection to serious human rights abuse against ethnic minorities in Xinjiang, which reportedly include mass arbitrary detention and severe physical abuse, among other serious abuses targeting Uyghurs, a Turkic Muslim population indigenous to Xinjiang, and other ethnic minorities in the region.

“As previously stated, the United States is committed to using the full breadth of its financial powers to hold human rights abusers accountable in Xinjiang and across the world,” said Secretary Steven T. Mnuchin.

This action is being taken pursuant to Executive Order (E.O.) 13818, “Blocking the Property of Persons Involved in Serious Human Rights Abuse or Corruption,” which builds upon and implements the Global Magnitsky Human Rights Accountability Act.

These designations are the latest U.S. government actions in an ongoing effort to deter human rights abuses in the Xinjiang region. On July 1, 2020, the U.S. Department of State, along with the U.S. Department of the Treasury, the U.S. Department of Commerce, and the U.S. Department of Homeland Security, issued the Xinjiang Supply Chain Business Advisory, advising businesses with potential supply chain exposure to Xinjiang to consider the reputational, economic, and legal risks of involvement with entities that engage in human rights abuses in Xinjiang, such as forced labor. On May 22, 2020, the U.S. Department of Commerce added nine PRC entities related to human rights abuses in the Xinjiang region to the Commerce Entity List; this action complemented the October 2019 addition to the Commerce Entity List of 28 entities engaged in the PRC repression campaign in the Xinjiang region. Also, in October 2019, the U.S. Department of State announced a visa restriction policy under section 212 (a)(3)(C) of the Immigration and Nationality Act for PRC and Chinese Communist Party (CCP) officials responsible for, or complicit in, human rights abuses in Xinjiang.

The XPCC is a paramilitary organization in the XUAR that is subordinate to the Chinese Communist Party (CCP). The XPCC enhances internal control over the region by advancing China’s vision of economic development in XUAR that emphasizes subordination to central planning and resource extraction. The XPCC’s structure reflects a military organization, with 14 divisions made up of dozens of regiments. Chen Quanguo (Chen), who was designated on July 9, 2020 for his connection to serious human rights abuse, is the current First Political Commissar of the XPCC, a role in which he has exercised control over the entity. Chen is also the current Communist Party Secretary of XUAR, and has a notorious history of intensifying security operations in the Tibetan Autonomous Region, where he was deployed before arriving in Xinjiang to tighten control over members of Tibetan ethnic minority groups. Following his arrival in Xinjiang, Chen began implementing a comprehensive surveillance, detention, and indoctrination program targeting Uyghurs and members of other ethnic minority groups. The XPCC has helped implement Chen’s CCP policy in the region.

The XPCC was designated today for being owned or controlled by, or for having acted or purported to act for or on behalf of, directly or indirectly, Chen.

The following individuals are also designated today for having acted or purported to act for or on behalf of, directly or indirectly, the XPCC:

  • Peng Jiarui, the Deputy Party Secretary and Commander of the XPCC.
  • Sun Jinlong, a former Political Commissar of the XPCC.

SANCTIONS IMPLICATIONS

As a result of today’s action, all property and interests in property of the entity and individuals named above, and of any entities that are owned, directly or indirectly, 50 percent or more by them, individually, or with other blocked persons, that are in the United States or in the possession or control of U.S. persons, are blocked and must be reported to OFAC. Unless authorized by a general or specific license issued by OFAC or otherwise exempt, OFAC’s regulations generally prohibit all transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons. The prohibitions include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any blocked person or the receipt of any contribution or provision of funds, goods or services from any such person.

Concurrent with this action, OFAC is issuing a general license to authorize certain wind down and divestment transactions and activities related to blocked subsidiaries of the XPCC through 12:01 a.m. eastern daylight time, September 30, 2020. For details, see General License No. 2.

GLOBAL MAGNITSKY

Building upon the Global Magnitsky Human Rights Accountability Act, the President signed E.O. 13818 on December 20, 2017, in which the President found that the prevalence of human rights abuse and corruption that have their source, in whole or in substantial part, outside the United States, had reached such scope and gravity that it threatens the stability of international political and economic systems. Human rights abuse and corruption undermine the values that form an essential foundation of stable, secure, and functioning societies; have devastating impacts on individuals; weaken democratic institutions; degrade the rule of law; perpetuate violent conflicts; facilitate the activities of dangerous persons; and undermine economic markets. The United States seeks to impose tangible and significant consequences on those who commit serious human rights abuse or engage in corruption, as well as to protect the financial system of the United States from abuse by these same persons.

Information on the individuals and entities designated today.

Information on the Department of State actions under 7031(c).

Information about the Xinjiang Supply Chain Business Advisory.

Information about the Commerce Entity List additions, and additional information about the Commerce Entity List additions.

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FTC Announces Staff Reports on Car Buying and Financing Experience, Results of Auto Buyers Study

Two new staff reports from the Federal Trade Commission highlight some of the challenges and confusion consumers can face in buying and financing a car, particularly relating to charges for add-on items after the initial price negotiation that can lead to them paying more than expected.

The reports are based, in part, on a study of auto buyers conducted by the FTC that consisted of in-depth interviews with 38 consumers about the car buying and financing process.

A staff report from the FTC’s Bureau of Consumer Protection (BCP) notes a number of issues that arose in the study, from the advertising that draws consumers in through the entire car buying experience.

The BCP report notes that consumers were sometimes not aware of key terms of sales and financing contracts, and it points in particular to issues that potentially keep them from having an accurate picture of the amount they are paying. One issue noted was focusing on monthly payments rather than considering other important terms as well, like the total price of the vehicle and the amount and length of the financing.

The later stages of the buying and financing process, including the sale of “add-ons” like extended warranties, service plans, and GAP (guaranteed asset protection), and meeting with the dealer’s financing office for additional negotiations after seemingly negotiating a price with a salesperson, also present issues, according to the report.

When it comes to add-ons, the BCP report notes a number of issues that caused consumers significant confusion in the study, including limited or no discussion of charges for add-on products in the contracts, questions about whether the add-ons are a mandatory part of the purchase or financing, and unexpected limitations on add-on products such as extended warranties or service plans.  

The BCP report also cites issues after consumers negotiate a price with the dealership sales staff and are sent to meet with the “finance and insurance” office, pointing to multiple instances in the study where the previously negotiated price was changed during this process. The report notes that dealers should honor discounts and sales terms promised to consumers through the entire sales process, or not make them in the first place.

The report also states that consumers were at times not aware of the terms they had agreed to, with some only discovering key elements of their contracts while reviewing the documents as part of the FTC study. The report notes that the sheer length of the car sales process can overwhelm consumers and make it difficult for them to adequately review the paperwork presented to them.

A companion report about the study is issued jointly by BCP and the Commission’s Bureau of Economics (BE). The joint report provides a detailed description of the study’s methodology and analysis of the results of the in-depth consumer interviews, as well as a discussion of how the study fits within the existing framework of academic research into the car buying and financing processes. The report analyzes the responses collected in the study and how they compare to existing literature about how consumers move through the car-buying process.

The BCP-BE report also includes a number of overall lessons from the study regarding consumers’ approaches to the car purchasing and financing process and their understanding of many elements of the process. It notes a number of areas where consumers did not understand the process, including what terms were negotiable, the purchase process and terms and conditions of add-ons, and other important terms included in transaction paperwork.

The Commission vote to issue the reports was 4-0-1, with Commissioner Rebecca Kelly Slaughter recorded as not participating.

IRS grants additional relief for rehabilitation credit deadlines

IR-2020-173, July 30, 2020

WASHINGTON — Because of the burdens the COVID-19 pandemic has placed on taxpayers claiming the rehabilitation credit, the Internal Revenue Service today issued Notice 2020-58 (PDF) that provides additional relief to taxpayers in satisfying the substantial rehabilitation test.

Projects must satisfy the “substantial rehabilitation test” within a 24- or 60-month period for determining whether the rehabilitation work is sufficient to qualify a building for the rehabilitation credit.

The Tax Cuts and Jobs Act (TJCA) generally requires the rehabilitation credit to be claimed over a five-year period for amounts that taxpayers pay or incur for qualified rehabilitation expenditures after December 31, 2017. However, taxpayers may claim the credit all in one year under pre-TCJA rules for projects that qualify under a transition rule.

The notice issued today allows taxpayers that have a measuring period under the substantial rehabilitation test ending on or after April 1, 2020, and before March 31, 2021, now have until March 31, 2021 to satisfy the test. This relief applies to the substantial rehabilitation test for claiming the credit or qualifying under the TCJA transition rule.

Previously, the IRS issued Notice 2020-23 (PDF) that provided additional time for satisfying the substantial rehabilitation test.

Additional tax relief related to the COVID-19 pandemic can be found on IRS.gov.

IRS issues proposed regulations for TCJA’s simplified tax accounting rules for small businesses

IR-2020-174, July 30, 2020

WASHINGTON — The Internal Revenue Service today issued proposed regulations (PDF) updating various tax accounting regulations to adopt the simplified tax accounting rules for small businesses under the Tax Cuts and Jobs Act (TCJA).

For tax years beginning in 2019 and 2020, these simplified tax accounting rules apply for taxpayers having inflation-adjusted average annual gross receipts of $26 million or less (known as the gross receipts test).

Taxpayers classified as tax shelters cannot use the simplified rules even if they would meet the gross receipts test.

Prior to the TCJA, certain taxpayers could determine whether they were eligible to figure taxable income under the cash method of accounting by meeting a different gross receipts test. That gross receipts test was met if the taxpayer’s average annual gross receipts for all prior taxable years did not exceed $5 million.

After the TCJA, a taxpayer meets the gross receipts test and can use the cash method if average annual gross receipts for the three-taxable year period ending immediately before the current taxable year are $25 million (adjusted for inflation) or less.

The TCJA also exempted taxpayers meeting the gross receipts test from the uniform capitalization rules. Tax reform also added an exception to the requirement to use an inventory method if their inventory is treated as non-incidental materials and supplies, or in accordance with the applicable financial statement (AFS). If they do not have an AFS, taxpayers can use their books and records. The proposed regulations issued today implement these statutory changes and provide clarifying definitions.

The proposed regulations issued today also provide guidance for small businesses with long-term construction contracts and the requirements for exemption from the percentage-of-completion method and the uniform capitalization rules. For taxpayers with income from long-term contracts reported under the percentage-of-completion method, guidance is provided for applying the look-back method after repeal of the corporate alternative minimum tax and enactment of the base erosion and anti-abuse tax (BEAT).

For more information about this and other TCJA provisions, visit IRS.gov/taxreform.

FTC Acts to Stop Deceptive Insulation and Energy-Savings Claims

The Federal Trade Commission sued four companies that sell paint products used to coat buildings and homes, alleging that they deceived consumers about their products’ insulation and energy-savings capabilities.

In complaints filed in federal court, the FTC charged that the companies falsely overstated the R-value ratings of the coatings, making deceptive statements about heat flow and insulating power.

“Companies touting the energy-saving properties of their products must have scientific support for their claims,” said Andrew Smith, Director of the FTC’s Bureau of Consumer Protection. “When they don’t, the FTC will step in to make sure they do.”

A product’s R-value is a measure of its resistance to heat flow: the higher the R-value, the greater the insulating power. Using R-value and other product information, consumers can improve the energy efficiency of their homes by purchasing the right products to meet their energy saving needs.

The FTC filed complaints against the following four companies:

Superior Products International II, Inc. The FTC’s complaint against the Kansas-based Superior Products and its officer, J.E. Pritchett, alleges that they market their Super Therm and Sunshield roof and wall coatings using deceptive energy-savings and R-value claims. Specifically, the complaint states the defendants falsely claim that the products provide significant energy savings of “between 40% and 70%” for consumers when applied to a home or other building. In addition, the FTC contends, while the defendants claim that the products have an R-value (or equivalency) of R-19, they are unable to substantiate these claims, and the coatings actually have R-values of significantly less than one.

SuperTherm, Inc. The FTC’s complaint against the Arizona-based SuperTherm, and its officers, Roberto and Susana Guerra, alleges that they market MultiCeramics Insulation coating using deceptive R-value claims, falsely stating that the product provides the equivalent of R-19 insulation. The Commission alleges, however, that the defendants are unable to substantiate these claims, and that MultiCeramics Insulation actually has an R-value of less than one.

SPM Thermo-Shield, Inc. The FTC’s complaint against the Florida-based SPM Thermo-Shield, and its officers, Peter and George Spiska, alleges that they deceptively market their Thermo-Shield Roof Coat, Thermo-Shield Exterior Wall Coating, and Thermo-Shield Interior Wall Coating as have R-values of R-22 and R-21, and that they provide significant energy savings for consumers when applied to homes or other buildings. The complaint states these R-value claims are false, however, and that the company’s coatings actually have R-values that are lower than one. Moreover, defendants have no substantiation for their energy-savings claims.

F & G International Group Holdings, LLC and FG International, LLC. The FTC’s complaint against the Georgia-based F&G and FG, and their shared officer, J. Glenn Davis, alleges that they market their FGI-4440 Insulation Coating using deceptive R-value claims. Specifically, while the defendants claim that FGI-4440 provides “an equivalent R value greater than 30,” they cannot substantiate the claims, and FGI-4440 has an actual R-value of less than one. The FTC also alleges that the defendants falsely claim that testing supports their R-value claims for FGI-4440.

The Commission vote authorizing the staff to file each complaint was 4-0-1, with Commissioner Rebecca Kelly Slaughter not participating. The FTC filed the complaint against the Superior Products defendants in the U.S. District Court of the District of Kansas; the complaint against the SuperTherm defendants in the U.S. District Court for the District of Arizona; the complaint the SMP Thermo-Shield defendants in the U.S. District Court for the Middle District of Florida; and the complaint against the F & G International Group defendants in the U.S. District Court for the District for the Southern District of Georgia.