Minnesota Attorney General Sues National Arbitration Forum

by Deepak Gupta

The Minnesota Attorney General today filed a major lawsuit against the Minnesota-based National Arbitration Forum (NAF), one of the nation's largest and most controversial arbitral forums.  NAF is already defending itself against another lawsuit by the City of San Francisco. Its anti-consumer bias is a subject  we've blogged about before, and in 2007, Public Citizen produced an influential report documenting NAF's bias in credit-card cases.

BusinessWeek, which has run several excellent investigative stories on NAF, has this detailed report on today's lawsuit. The St. Paul Ledger also picked up the story, as did the Minneapolis Star-Tribune.

In a nutshell, the suit alleges violations of Minnesota's consumer-fraud, deceptive-trade-practices, and false-advertising statutes based on NAF's concealment of its ties to creditors, its active solicitation of creditors based on promises of providing "leverage" over consumers, and its direct financial affiliation with one of the country's largest debt collectors through a New York hedge fund group.

You can read the read the full complaint at this link. Here's the introduction, which summarizes the main allegations:

INTRODUCTION

1. Just about every American has a credit card. The credit card companies often require—deep in the fine print of the consumer agreement—that the consumer forfeit his or her right to have any dispute resolved by a judge or jury. Instead, the agreements often require that any disputes be resolved exclusively through a private system of binding arbitration—and frequently through the National Arbitration Forum. The Forum represents to the public, the courts, and consumers that it is independent, operates like an impartial court system, and is not affiliated with any party. The consumer does not know that the Forum works alongside creditors behind the scenes—against the interests of consumers—to convince creditors to place mandatory pre-dispute arbitration clauses in their customer agreements and to appoint the Forum as the arbitrator of any disputes that may arise in the future. The Forum does this so that creditors will file arbitration claims against consumers in the Forum, thereby generating revenue for it.

2. 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.

3. 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.

4. Consumers also do not know that—despite representing to the public that it has “no relationship with any party” and does not “counsel our users”—the Forum works closely with creditors behind the scenes to: (1) encourage them to file arbitration claims as an alternative way to collect debt from consumers; (2) draft arbitration clauses, advise creditors on arbitration legal trends, and in some cases, help them draft claims to be filed against consumers; and (3) refer them to debt collection law firms, which then file arbitration claims against consumers in the Forum. In soliciting creditors to use its arbitration services, the Forum makes representations that align itself against consumers, including, for example, that “[t]he customer does not know what to expect from Arbitration and is more willing to pay,” that consumers “ask you to explain what arbitration is then basically hand you the money,” and that “[y]ou [the creditor] have all the leverage [in arbitration] and the customer really has no choice but to take care of the account.”

5. Through its conduct, the National Arbitration Forum has violated Minnesota’s statutory prohibitions against consumer fraud, deceptive trade practices, and false advertising.

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