Report calls for probe of debt firm

Bankruptcy court official looks at AmeriDebt assets transfer

`This ... should be vigorously pursued'

Potentially `fraudulent' deal involved, examiner says

September 14, 2004|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

The transfer of AmeriDebt's assets to a for-profit affiliate started by AmeriDebt's former chief executive should be investigated as potentially fraudulent, according to a bankruptcy court examiner looking into the nonprofit credit counseling agency's finances.

The examiner, appointed by the U.S. Bankruptcy Court in Greenbelt, also noted in a report filed this past weekend that the Internal Revenue Service has filed a claim against the Montgomery County agency for more than $15 million, in anticipation that its nonprofit status might be revoked.

AmeriDebt is one of the new breed of credit counselors that emerged in the 1990s promising to wipe out consumers' debt through management plans. It became one of the nation's largest credit counseling agencies through its advertising blitz and had nearly 97,000 clients enrolled in plans as of early last year.

Under a debt management plan, a consumer makes a consolidated monthly payment to a counseling agency, which disburses the money to creditors. Creditors have traditionally supported the nonprofits by giving them a percentage of recovered debt, but some nonprofits also began charging consumers, too. AmeriDebt has said its fees are voluntary, but regulators have claimed that AmeriDebt kept a client's first month's payment, which typically amounted to 3 percent of outstanding debt and left clients deeper in debt.

As AmeriDebt and similar counseling groups grew, so did scrutiny of their business practices. Last year, AmeriDebt was sued by the Federal Trade Commission and the states of Illinois, Missouri, Minnesota and Texas for deceptive practices, including charging excessive and poorly disclosed fees. In response, AmeriDebt stopped advertising and enrolling new customers last fall. In June, it filed for Chapter 11 bankruptcy protection. Today, it has nine employees and about 57,000 clients, including an estimated 2,600 Marylanders.

The examiner's report grew out of a request in June by the U.S. Trustee for the bankruptcy court to appoint a trustee to run AmeriDebt. The U.S. Trustee argued that AmeriDebt's managers had abdicated the management and finances to Ballenger Group, a Frederick for-profit company that has been paid millions of dollars to process AmeriDebt's client accounts.

Examiner Raymond J. Peroutka Jr. was appointed last month to review AmeriDebt's finances and relationship with Ballenger. The report and a decision to appoint a Chapter 11 trustee will be considered at a hearing today.

Complicated finances

AmeriDebt's finances have always been complicated, and various lawsuits in the past year have tried to piece together the connection between the nonprofit agency, for-profit affiliates and Andris Pukke, whose wife, Pamela Shuster, founded AmeriDebt in December 1996. Pukke had been convicted in 1996 of a federal felony related to a loan scheme.

In 1999, while Pukke was chief executive, he created a for-profit company called DebtWorks, according to the examiner's report. A few months later, AmeriDebt agreed to sell its assets to DebtWorks and hire the for-profit company to process AmeriDebt's client accounts.

For processing accounts, AmeriDebt paid DebtWorks a one-time fee of $50 for each current client, $100 for each new customer plus a $25 monthly service fee for each customer making a payment. The price tag of the assets and right to service accounts was $425,000.

DebtWorks didn't pay any money upfront to AmeriDebt, but deducted the purchase price from payments it would have received from AmeriDebt for processing, the examiner said.

The arrangement was lucrative for DebtWorks. From 1999 to last year, AmeriDebt's annual revenue soared from $15.8 million to $48.7 million, and much of that money went to DebtWorks for processing. Over those years, AmeriDebt paid DebtWorks $107 million in processing fees.

An indication of how profitable the arrangement was for DebtWorks, Peroutka said, is that Ballenger initially agreed to pay $101.8 million last year for 51 percent of Pukke's interest in the company's assets. Ballenger was formed with Pukke's help in late 2002 to acquire DebtWorks, and some of Ballenger's managers came from DebtWorks.

Last October, Ballenger completed the purchase of the remaining interest and the original price was cut, placing the total price tag at $43.1 million.

"Mr. Pukke held a position of control within the Debtor's operations. His decision to set up DebtWorks and transfer assets should be subject to considerable scrutiny," Peroutka said in his report. The examiner said the "potential fraudulent" transfer needs to be investigated.

"We are aware that a more rigorous factual analysis of this potential claim is needed and that legal obstacles may exist," Peroutka said. "But we feel strongly that this issue should be vigorously pursued."

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