SmartBuy network sold items at grossly inflated prices with average effective interest rate of 244 percent

WATERTOWN, NY (May 18, 2010) - Attorney General Andrew M. Cuomo today filed a lawsuit against three nationwide lenders and their affiliated companies for preying on members of the military by selling them grossly overpriced electronics and then trapping them in illegal and open-ended credit plans. Attorney General Cuomo has also notified Defense Secretary Robert Gates and Secretary of the Army John McHugh of the findings of his investigation.

Cuomo’s suit is against Frisco Marketing of N.Y., LLC, doing business as SmartBuy and SmartBuy Computers and Electronics; Integrity Financial of North Carolina, Inc.; Britlee, Inc., doing business as MilitaryZone; GJS Management, Inc. and Rome Finance Company, Inc. and Rome Finance Co. LLC, all owned and/or operated by Fayetteville, N.C.-based John Paul Jordan, Stuart Jordan, and Rebecca Wirt, and Concord, California-based William Collins and Ronald Wilson.

SmartBuy operated in Watertown, N.Y. near Fort Drum, home of the U.S. Army’s 10th Mountain Division. The lawsuit seeks to ban the companies from doing business in New York State, obtain restitution for all victims, and nullify all of the deceptive sales contracts.

Attorney General Cuomo’s investigation determined that SmartBuy and its affiliates purchased laptops, gaming systems, televisions, and electronics from other retailers and then relabeled the items for sale at grossly inflated prices. The company then aggressively targeted members of the military - some of whom were about to deploy to Iraq and Afghanistan - and their families to get them to purchase the items. The investigation found that salespeople were trained to specifically seek out people in uniform and people with military-style haircuts.

“SmartBuy is part of a national network of companies and individuals that seek to profit by defrauding members of the military,” said Attorney General Cuomo. “Our lawsuit not only seeks to bar them from ever doing business again in the state, but also to vindicate the countless soldiers who were preyed upon and defrauded by SmartBuy and its affiliated companies.”

Cuomo’s investigation found that SmartBuy peddled products that were marked up 225 to 325 percent above the original retail price and financed the sales illegally. The sales were made only to members of the military through monthly direct withdrawals from payroll, known as “allotments,” and backed up with agreements giving the company access to the soldiers’ bank accounts. The soldiers were rarely told the final price of the product up front, nor was it explained that they were really opening a line of credit. If a soldier defaulted, SmartBuy and its affiliates illegally contacted the soldiers’ commanding officers. The tactic put service members in an untenable situation because Army regulations forbid soldiers from putting themselves in a financially precarious situation.

In New York, SmartBuy, until recently, operated a storefront and kiosk in the Salmon Run Mall in Watertown. Once the business was notified of the Attorney General’s impending legal action, SmartBuy abruptly shut down the location. Since Attorney General Cuomo’s office filed its notice of proposed litigation against the company, the Attorney General’s Watertown office has received more than 50 additional complaints about SmartBuy’s deceptive operation.

Although SmartBuy stated that its interest rates were between 10 and 19.2 percent, the effective interest rate averaged to 244 percent after adding the enormous, undisclosed markups, and an additional compounded 35 percent kickback retained by the financing end of the scheme (Rome Finance and Integrity Financial). None of the lenders involved are licensed in any state.

The Attorney General’s investigation found that soldiers were approached by aggressive sales representatives with enticements of “good deals.” Among the instances of fraud perpetrated by SmartBuy and its affiliated companies:

* In August 2008, a soldier preparing to deploy to Afghanistan, where his wife was already serving, was told he could get a “really good deal” by “bundling” a purchase including a laptop, iPod, camcorder, and PSP for a monthly $90 direct withdrawal (allotment) from his paycheck. In reality, the final price SmartBuy charged was at least double the normal retail price for the items. Two days later, he attempted to return the unopened items, but he was told by the manager he could not return them without paying a $400 restocking fee in cash.
* In April 2009, a soldier currently serving in Iraq visited the SmartBuy store with his wife and purchased a 47” LCD TV for $4,632.17, plus an additional 12 percent interest. His wife later found the same model for sale at Sam’s Club for approximately $1,100.
* In June 2007, a soldier was told by a SmartBuy sales representative that she could get him a “good deal” on a computer. He ended up in an agreement allowing SmartBuy to charge him $3,945 for the item, which would be available for pickup in two days. That same day, after speaking with his wife and finding the same computer elsewhere for $800, he canceled his order and allotment. Approximately one year later, he began receiving phone calls and emails from a finance company attempting to collect on the nonexistent debt, even while he was deployed in Afghanistan. After he returned home in 2010, a company representative contacted the soldier’s commanding officer over the nonexistent debt. At this point, the company was trying to collect $4,800 from the soldier.

In 2008, SmartBuy’s collective locations across the country brought in between $32 and $36 million. At the Watertown location, SmartBuy financed more than $4 million in unsecured debt to military customers. Attorney General Cuomo’s investigation has determined that all SmartBuy locations across the country are set up in close proximity to large military establishments and communities. Among the findings of the investigation:

* SmartBuy’s merchandise was actually purchased from other retailers, including Sam’s Club, Costco and Wal-Mart. A former employee told investigators she witnessed a coworker taking merchandise purchased from the local Sam’s Club and “preparing” it by removing any Sam’s Club stickers and identifiers from the boxes.
* Before hiring, a prospective employee reported being asked by personnel from SmartBuy’s corporate office how they felt about “selling overpriced items to customers.”
* The operation did not typically hire military service members at SmartBuy because they would then “know what we did here,” according to a former employee.

Cuomo’s lawsuit, filed in State Supreme Court of Jefferson County, seeks to:

* Bar the defendants from doing business in New York State
* Order the defendants to pay restitution to all consumers who purchased items at the Watertown location through the operations’ fraudulent and illegal financing arrangements
* Declare all financing agreements entered into in New York as part of this scam to be null and void
* Direct the business and owners to disgorge all profits derived from each consumer transaction at the Watertown store
* Obtain $5,000 in civil penalties for each deceptive or illegal act, plus $2,000 in costs per act

The defendants operated a similar scheme in Tennessee, which ultimately led to a 2009 court order shutting down the operation in that state. Rome Finance, its agents, assigns, and representatives or affiliates were permanently banned from conducting any business in the State of Tennessee in that case.

Chuck Bell, programs director of Consumers Union, publisher of Consumer Reports, said, “We applaud Attorney General Cuomo for taking action to protect the consumer rights of men and women serving in the military, and seeking restitution for those who were harmed by unfair lending practices. The secretive, high-cost credit financing scheme described in the Attorney General’s complaint is underhanded, unfair, and unconscionable. We hope that the case leads to coordinated action to shut down these unfair practices at other bases around the country, at the earliest possible date.”

Jean Ann Fox, director of financial services for Consumer Federation of America, said, “Service members deserve protection from unfair credit tricks and terms. We congratulate Attorney General Cuomo for taking this important action. High-cost credit and aggressive collection tactics undermine morale and put added stress on Service members and their families.”

Consumers who did business with SmartBuy or any of its affiliated organizations are urged to contact Attorney General Cuomo’s Office at 800-771-7755 or email smartbuy@ag.ny.gov.

Other SmartBuy stores across the country include:

* Fayetteville, NC (Fort Bragg), Cross Creek Mall
* Killeen, TX (Fort Hood), Killeen Mall
* Colorado Springs, CO (Fort Carson), The Citadel
* Lawton, OK (Fort Sill), Central Mall
* El Paso, TX (Fort Bliss), Cielo Vista Mall
* Savannah, GA (Fort Stewart/Hunter Army Airfield), Oglethorpe Mall
* San Diego, CA (Camp Pendleton), Horton Plaza (closed early 2010)

The matter is being handled by Assistant Attorney General-in-Charge of the Watertown Regional Office Deanna R. Nelson, under the supervision of Deputy Attorney General for Regional Affairs J. David Sampson and Special Deputy Chief of Staff Mitra Hormozi.

A copy of the letter sent to Secretaries Gates and McHugh, as well as a copy of the lawsuit can be found online at www.ag.ny.gov.

Comments