CHICAGO (CN) – Discover Financial Services faces more than $120 million in penalties for deceptive marketing condoned by its executives, shareholders say in a derivative complaint.
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Attorneys general in West Virginia, Missouri and Hawaii have filed lawsuits accusing Discover of charging consumers without their consent for add-on products such as identity theft protection and credit score tracking, according to the federal complaint.
Named plaintiff James Groen sued Discover Financial Services and 17 of its corporate officers.
“Defendants’ faithless acts have exposed Discover to tens of millions of dollars in damages as well as severely injured Discover’s reputation, goodwill and standing in the business community,” the complaint states.
“Discover is one of the world’s largest credit card issuers. Discover earned more than $300 million in annual revenue from the sale of several optional fee-based financial products in each of the last two years. Discover markets these products to its customers to provide financial security against hardships such as job loss, sickness, identity theft, lost wallets, and low credit scores. Discover, however, often enrolled consumers in these products based on highly deceptive and misleading telemarketing calls. The deceptive marketing practices include charging some consumer for the products without the consumer’s consent or knowledge of the cost or product they were signing up for.
“Defendants condoned the deceptive marketing of these add-on products. Discover is in a position to do this because, unlike a typical telemarketer, it has access to the person’s personal and financial information.”
Discover settled a class action fraud complaint for $10.5 million and has reserved $110 million to settle an investigation by the Federal Deposit Insurance Corporation and Consumer Financial Protection Bureau, the complaint states.
“Although Discover has been severely injured, defendants have not fared nearly so badly. Defendants pocketed tens of millions of dollars in salaries, fees, stock options, and other payments that were not justified in light of the violations of law at Discover that occurred during their watch. These payments wasted valuable corporate assets and unjustly enriched defendants to the detriment of Discover,” Groen claims.
Among other things, he says, Discover pushed a Payment Protection Plan, ostensibly to protect borrowers from defaulting if they lose their job or are hospitalized, on customers who do not qualify for benefits.
“While on defendants’ watch, Discover relied upon a deceptive practice known as ‘post claims underwriting’ to accomplish this strategy. This is the practice of asking few or no questions of the cardholder at the time of sale to determine if the customer is likely to qualify for benefits should the need arise. When the customer attempts to use the ‘benefits’ of the Payment Protection Plan, Discover denies the benefits for reasons that were not disclosed at the time of sale. For example, numerous retired senior citizens are charged for the Payment Protection Plan even though they are excluded from ever receiving unemployment benefits,” the complaint states.
It adds: “Discover’s telemarketers employee numerous deceptive tactics to elicit an affirmative response from the cardholder without the cardholder actually understanding that they are supposedly agreeing to purchase an optional product for a monthly fee, thereby tricking some consumers into unknowingly signing up for the plans.”
Groen claims: “Had the defendants abided by their duty of loyalty, these improper marketing tactics would not have occurred and the unlawful activity would not have continued for nearly a decade.”
He seeks damages for breach of fiduciary duty, corporate waste, and unjust enrichment.
Groen is represented by James Barz of Robbins, Geller, Rudman & Dowd.
Here are the individual defendants: David Nelms, Mark Graf, Carlos Minetti, Harit Talwar, Lawrence Weinbach, Jeffrey Aronin, Mary Bush, Gregory Case, Robert Devlin, Follin Smith, Michael Moskow, Thomas Maheras, Cynthia Glassman, Richard Lenny, Roy Guthrie, Mary Georgiadis and Phillip Laskawy.