Chastened ISO Execs Caution Colleagues on How To Avoid Regulators’ Ire

Two independent sales organization executives who ran afoul of government regulators cautioned their industry colleagues Thursday on how to stay out of trouble.

The warnings came during a session at the MidWest Acquirers Association (MWAA) annual conference in Chicago titled “You, Me and the FTC: Personal Stories From Being in the Sights of the Regulators.”

One speaker was Derek DePuydt, now president of Apogee Payment Systems, a Mukwonago, Wis.-based ISO. DePuydt was president of Newtek Merchant Solutions when that Milwaukee-area ISO processed payments for a telemarketer that the Federal Trade Commission claimed was selling a bogus rate-reduction service to credit card holders.

The FTC in 2013 sued Newtek, DePuydt and the telemarketer. The case was resolved with a $1.7 million fine against the defendants. Newtek, which neither admitted nor denied the allegations, also agreed to improve its monitoring and compliance programs and submit reports to the government for the next 15 years. In addition, a federal court ordered DePuydt to pay a $25,000 fine and permanently enjoined him from working with certain merchant types, such as outbound telemarketing firms, buying clubs, and credit card or identity-theft-protection services.

DePuydt, who stepped down as president of Newtek Merchant Solutions in January 2013, told his MWAA audience that he learned of the FTC’s allegations while he was on a golf course, when a friend informed him of an article about the case in a trade publication. He said the incident cost him friends.

“Personally—you really do find out who your friends are,” he said, also noting that being targeted by the government “affects all aspects of your life.”

Both DePuydt and his fellow speaker, Richard “Fred” Joachim, president of Brookfield, Wis.-based iStream Financial Services Inc., which ran into trouble with banking regulators but was not sued, questioned recent regulatory tactics of trying to stop fraudulent merchants by preventing them from accepting consumer payments. Joachim claimed iStream’s case, which involved a multi-level marketer, was “the start of Operation Choke Point.” Critics in the merchant-acquiring industry and Congress claim that controversial program was not just a way to stop fraudulent merchants, but the Obama Administration’s method of marginalizing legal but disfavored industries such as payday lenders, debt collectors, ammunition deals, and others.

IStream and a small-town bank it owned, Kenney, Ill.-based Kenney Bank and Trust, were aggressively questioned by Illinois banking regulators about the marketing merchant, according to Joachim. Much of the questioning involved how much iStream and Kenney Bank knew about the merchant. At the same time, Joachim claimed, the officials seemed to be unable to state violations of specific banking regulations. “It was quite a conversation … the [bank’s] board reacted to being threatened,” he said.

While both DePuydt and Joachim disagreed with governmental actions involving their companies, they urged ISO executives to avoid the trouble they encountered by doing diligent underwriting and paying close attention to chargeback rates and other signs of potential fraud.

“It’s constant monitoring,” said DePuydt. “The goal is to find issues before they happen.” A moment later he added that Newtek’s monitoring system had picked up signals that the telemarketer that led to the FTC’s case was problematic. “Hindsight’s twenty-twenty. It was there, the red lights were there, we just didn’t take action on those red lights,” he said.

Another ISO executive targeted by the FTC, Andy Phillips, chief executive of Cardflex Inc., wrote about his experiences in the June issue of Digital Transactions magazine.