FTC vs Seek Capital Lawsuit

The FTC has initiated major legal proceedings against Seek Capital, a small business lender, due to its deceptive and unfair business practices. Here are the key details:

Legal Complaint Details

The FTC has confidently taken legal action in the U.S. District Court for the Central District of California, targeting Seek Capital and its CEO, Roy Ferman, with a formal complaint that alleges:

• Financial Impact: The company's actions have resulted in losses exceeding $37 million for small business owners.

• Violations: Breach of the FTC Act, Telemarketing and Consumer Fraud and Abuse Prevention Act, Telemarketing Sales Rule, and Consumer Review Fairness Act of 2016

Deceptive Business Practices

Seek Capital engaged in several unethical practices:

• Misleading Advertising: Marketed themselves as "the market leader in business loans for small businesses" while not actually providing loans

• High-Pressure Sales Tactics: Used aggressive telemarketing techniques to attract clients

• Unauthorized Credit Card Applications: Unauthorized applications for personal credit cards were submitted using the names of business owners.

Exploitative Fees:

• Charged 10% of total credit card amounts

• Imposed up to $995 early termination fees

• Prevented negative online reviews through contractual clauses

The FTC's Multifaceted Response to Seek Capital's Practices

The FTC's response to Seek Capital's alleged misconduct was a comprehensive legal action aimed at stopping the company's practices and seeking redress for affected consumers.

1. Filing a Formal Complaint

The FTC filed a formal complaint in the U.S. District Court for the Central District of California against Seek Capital and its CEO, Roy Ferman. This complaint detailed the alleged violations of various consumer protection laws, including:

Section 5(a) of the FTC Act

This section prohibits "unfair or deceptive acts or practices in or affecting commerce". The FTC asserted that Seek Capital's misrepresentations about its services, deceptive fee practices, and manipulation of online reviews constituted violations of this act.

Telemarketing and Consumer Fraud and Abuse Prevention Act and Telemarketing Sales Rule

These regulations address deceptive telemarketing practices. The FTC claimed that Seek Capital's telemarketers made false or misleading statements about their services and used high-pressure sales tactics, violating these rules.

Consumer Review Fairness Act of 2016

This act protects consumers' rights to post honest reviews about businesses. The FTC alleged that Seek Capital's actions to suppress negative reviews and manipulate online ratings violated this act.

2. Seeking a Range of Relief

In addition to detailing the alleged violations, the FTC's complaint requested various forms of relief from the court:

• Permanent Injunction: The FTC sought a permanent injunction to prevent Seek Capital from continuing its alleged deceptive practices in the future.

• Preliminary Injunctive Relief: The FTC also requested preliminary injunctions and other immediate actions to protect consumers from further harm while the case was pending. This included potentially freezing assets, gaining access to the company's premises, and appointing a receiver to oversee the company's operations.

• Monetary and Other Relief: The FTC sought monetary relief for the consumers who were harmed by Seek Capital's alleged scheme. This could include refunds, contract rescission (cancellation), and public notifications to inform consumers about the case and their potential rights.

3. Public Statements and Press Release

The FTC issued a press release announcing its action against Seek Capital and highlighting the deceptive nature of the company's practices. This release served to:

• Alert the Public: The FTC's public announcement aimed to warn consumers about Seek Capital's alleged scheme and potentially prevent others from falling victim to similar practices.

• Deter Future Misconduct: By publicizing the case and its potential consequences, the FTC aimed to deter other companies from engaging in similar deceptive lending practices.

The FTC's response to Seek Capital demonstrates its commitment to protecting small businesses from predatory lending practices. By pursuing legal action and raising public awareness, the FTC sought to hold Seek Capital accountable for its alleged actions and prevent further harm to consumers.

10 Ways To Avoid Lawsuit Similar to Seek Capital

1. Truthful Advertising

Ensure all advertising and marketing materials truthfully and accurately represent the services offered. Avoid using terms like "business loans" if the product being offered is actually credit cards. Seek Capital ran afoul of this principle by extensively advertising "business loans" and related terms when they were actually offering a service that resulted in consumers receiving personal credit cards.

2. Transparent Fee Disclosure

Clearly and conspicuously disclose all fees associated with the services, before any contracts are signed. This includes origination fees, closing costs, interest rates, and any other charges that may apply. Seek Capital allegedly violated this principle by failing to adequately disclose upfront fees, and by surprising consumers with fees after they signed the contracts.

3. Accurate Information

Do not submit false or misleading information on credit card applications or any other financial documents. Ensure all information provided is accurate and truthful. Seek Capital inflated consumer income and made other false statements on credit card applications to boost approvals and increase their fees.

4. Avoid High-Pressure Sales Tactics

Refrain from using high-pressure sales tactics, such as pressuring consumers to sign contracts immediately or make quick decisions without adequate time for review. Seek Capital's telemarketers were accused of using these tactics, including repeated calls described as "incessant" and "harassing."

5. Respect Consumer Cancellation Rights

Honor consumer cancellation requests and provide clear instructions on how to cancel agreements. Do not mislead consumers about their right to cancel or impose unfair or excessive cancellation fees. Seek Capital imposed hefty termination fees on consumers trying to cancel their agreements. They also discouraged consumers from taking time to review contracts, sometimes even implying they could lose their financing if they did not sign immediately.

6. Authentic Online Reviews

Do not manipulate or distort online reviews. This includes refraining from posting fake positive reviews, deleting negative reviews, or offering incentives for positive feedback. Seek Capital pressured consumers to leave 5-star reviews before receiving funding, deleted negative reviews, and encouraged employees to post positive reviews.

7. Compliance with CRFA

Ensure contracts comply with the Consumer Review Fairness Act, which prohibits clauses that restrict consumers from posting negative reviews. Seek Capital's contracts included a clause prohibiting consumers from leaving negative reviews for three years.

8. Obtain Express Informed Consent

Obtain express, informed consent from consumers before applying for any financial products on their behalf. Consumers should be fully aware of the types of products being applied for and the associated terms and conditions. Seek Capital submitted credit card applications without the consumers’ knowledge or approval.

9. Monitor Third-Party Relationships

Carefully vet and monitor relationships with lead generators and other third-party partners to ensure their marketing practices align with ethical standards and legal requirements. Seek Capital's practices in this area were not explicitly detailed, but it's clear that lead generators played a role in connecting the company with consumers.

10. Prioritize Clear Communication

Use clear and straightforward language in all communications with consumers. Avoid jargon or technical terms that may be confusing. While the sources don't provide specific examples of confusing language, Seek Capital's marketing materials and sales tactics seemed to prioritize emphasizing "business loans" and "lines of credit," which ultimately proved misleading.

By adhering to these best practices, alternative business lenders can demonstrate a commitment to ethical conduct, transparency, and consumer protection. This will help foster trust with borrowers and mitigate the risk of legal challenges or regulatory scrutiny.

Our Opinion

It's crucial to distinguish predatory lenders from legitimate ones. Many alternative lenders operate ethically, providing essential services to businesses overlooked by traditional banks. This incident highlights the necessity for transparent operations and the promotion of fair lending standards.

It's also a call to action for all lenders to rigorously review and improve their disclosure and lending practices to align with legal standards and ethical norms.

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