And the dominoes keep falling. Last week, the National Arbitration Forum was sued by the Minnesota Attorney General. The suit alleged that the Forum had financial ties to a hedge fund that also owned one of the largest debt collection law firms in the country. That debt collection firm just happened to be NAF’s biggest customer. This allegation suggested a clear conflict of interest and rebutted the Forum’s longstanding claims of neutrality. Just days later, in a stipulated settlement, NAF agreed to completely stop arbitrating consumer disputes altogether. This was a huge victory for consumers. As my friend and fellow consumer attorney Sam Glover put it, the NAF agreeing to stop arbitrating consumer claims “is like McDonald’s agreeing to stop making hamburgers.”
Today, as reported by the Wall Street Journal, the American Arbitration Association has also agreed to stop accepting consumer debt collection disputes. It is unclear whether this is a permanent pullout or whether its merely a PR move just before Congress is scheduled to discuss the Arbitration Fairness Act. Either way, it appears the tide is starting to turn against mandatory consumer arbitration.
The National Arbitration Forum, a private arbitration company that is used extensively by the debt collection industry to circumvent the court process, was sued yesterday by Lori Swanson, the Minnesota Attorney General. The allegations in the lawsuit, if true, will confirm consumer advocates’ worst suspicions about the NAF.
The NAF has long been the bane of consumer advocates because of a suspected bias against consumers. The forum has denied these allegations and repeatedly maintained that it is a neutral decision maker. But the new lawsuit alleges that NAF is financially tied to a New York hedge fund group that owns one of the nation’s largest debt collection operations:
- “The consumer also does not know—and the Forum hides from the public—that the Forum is financially affiliated with a New York hedge fund group that owns one of the country’s major debt collection enterprises. Beginning in 2006 and through 2007, Accretive, LLC (a family of New York hedge funds under the control of an investment manager named J. Michael Cline and his associates), engineered two transactions. In the first transaction, Accretive formed several private equity funds under the name “Agora” (meaning “Forum” in Greek), which in turn invested $42 million in the National Arbitration Forum and obtained governance rights in it. In the second transaction, three of the country’s largest debt collection law firms (Mann Bracken of Georgia, Wolpoff & Abramson of the District of Columbia, and Eskanos & Adler of California) merged into one large national law firm called Mann Bracken, LLP. Accretive then formed and funded (partly using federal money from the U.S. Small Business Administration) a debt collection agency called Axiant, LLC, which acquired the assets and collections operations of Mann Bracken.”
- “Through these transactions, the Accretive hedge fund group simultaneously took control of one of the country’s largest debt collectors and became affiliated with the Forum, the country’s largest debt collection arbitration company. In 2006, the Forum processed 214,000 consumer debt collection arbitration claims, of which 125,000—or nearly 60 percent—were filed by the law firms listed above. The Forum conceals its affiliations with the collections industry through extensive affirmative representations, material omissions, and layers of complex and opaque corporate structuring.”
The lawsuit goes into great detail about the murky corporate web that has been created to hide this obvious conflict of interest from the public. The lawsuit further alleges that NAF, through a secret marketing campaign, encourages debt collectors to use arbitration to collect debts. One such marketing campaign, revealed in the lawsuit, lists the following benefits for debt collectors using NAF:
- “[t]he customer does not know what to expect from Arbitration and is more willing to pay;”
- “[t]hey [customers] ask you to explain what Arbitration is then basically hand you the money;” and
- “You have all the leverage and the customer really has little choice but to take care of this account.”
The lawsuit further alleges the NAF encourages debt collectors to include mandatory binding arbitration clauses in their contracts, and in some cases, provides sample arbitration clauses to certain debt collectors. There are also allegations about the creation of “talking points” to deflect questions about the NAF’s financial ties to the debt collection industry and allegations of the forum giving deliberately misleading answers to a reporter that questioned the forum’s ties with the hedge fund.
You can read the full text of the lawsuit here. It’s long, but well worth the read if you’re interested in the gory details.
7/20/09 update: That didn’t take long. The Star-Tribune reports that Lori Swanson and the NAF have agreed to settle the lawsuit. And its a big win for Swanson. The NAF agreed to stop accepting any new consumer arbitration or taking part in processing or administrating any new consumer arbitration nationwide. The company must stop administering arbitration involving consumer debt including credit cards, consumer loans, utilities, telecommunications, health care and consumer leases. The forum will be allowed to continue to arbitrate internet domain name disputes and other business to business matters. The settlement takes effect on July 24, 2009. Under the terms of the NAF, the forum did not concede any liability for the accusations in Swanson’s lawsuit. My take on the situation: good riddance, NAF.