COSTA MESA – Morgan Drexen, a little-known Costa Mesa company, either fleeced at-risk consumers already saddled with debt nationwide or is nobly fighting against broad government overreach by an unconstitutional federal agency.
There appears to be no middle ground between these arguments.
The firm is embroiled in two lawsuits. One was filed against Morgan Drexen by the federal Consumer Financial Protection Bureau and alleges that the company illegally charged up-front fees for debt consolidation services and often failed to provide customers access to a lawyer to assist in eliminating debt.
The other lawsuit – filed by Morgan Drexen – alleges the bureau shouldn’t even exist because it lacks congressional oversight and, during its tenure of more than three years, has engaged in rampant data mining that violates attorney-client privilege.
“The suit challenges the enabling statute that created the super-agency,” Morgan Drexen CEO Walter Ledda said. “If the suit prevails and there is a ruling the CFPB’s structure resides outside of the traditions and Constitution of the United States, Congress will be forced to enact legislation to correct the agency’s lack of oversight, implement checks and balances and address abuses of power.”
But some observers believe Morgan Drexen is engaged in a larger, go-big-or-go-home strategy: destroy the agency that is suing the firm in order to stay in business.
Cue the loyal, dedicated opposition of conservative GOP politicians and right-leaning media to the Dodd-Frank bill – named for Sen. Chris Dodd, D-Conn., and Rep. Barney Frank, D-Mass. – that, along with seeking to regulate the U.S. financial industry, also created the CFPB, which goes after misdeeds in the financial sector and oversees about 110 banks and credit unions with assets of more than $10 billion apiece. Earlier this month, for example, the CFPB ordered banking giant JPMorgan Chase to refund an estimated $309 million to more than 2.1 million customers for illegal credit card practices.
The 2010 Dodd-Frank legislation, aimed at regulating the nation’s financial system after the financial collapse in 2008 – remains anathema to GOP conservatives. Former GOP presidential hopeful Rep. Michele Bachmann, R-Minn., opened the congressional session in January with a bill to repeal Dodd-Frank, and it has been a rallying point among other conservatives.
Now, the result of this latest legal fight involving the Costa Mesa firm appears to be a chance to make hay for conservatives appealing to their base as midterm elections roll around and for Morgan Drexen to get some powerful people in Congress to take up the cause.
Dan Schnur, director of the Jesse M. Unruh Institute of Politics at USC, said there is a history of this that has played out in modern politics.
For instance, an abortion doctor in Pennsylvania earlier this year was convicted of killing three babies after they were born, and that became a talking point in conservative circles.
Another example: charges that the National Security Agency cast a wide net to collect data on phone calls and emails sent by ordinary Americans.
The Morgan Drexen case is no exception, in that both sides are getting mileage out of it.
“As important as the issue may be to a broader audience, there is also the question of how it may play,” Schnur said. “Do you find an issue that plays to the base, or does the issue prove to the base an existing idea?”
Morgan Drexen Integrated Systems was founded in 2007 in a small office in Anaheim by Ledda as a company that created a “paperless workflow that would ultimately reduce operating costs for attorneys and allow them to focus on their clients,” according to its website.
It has grown to 340 employees and maintains working partnerships with more than 100 lawyers around the country.
Ledda, a classically trained violinist who serves on the marketing committee of the Pacific Symphony, said the firm was established to provide services to small law firms that can’t afford their own staff.
He said the CFPB is engaged in unprecedented attacks that it has no business being allowed to do.
“Conservatives theorized that many would be damaged by a tyrannical CFPB,” Ledda said. “Morgan Drexen represents the first company to have survived an aggressive attack by the powerful CFPB, and conservatives have rallied in support of Morgan Drexen’s lawsuit in D.C.”
Rep. Darrell Issa, R-Vista, was a natural ally in the fight against the agency.
Issa spokesman Frederick Hill said the congressman viewed the CFPB created under Dodd-Frank as “a vindictive agency” that was “created under one-party rule.”
Issa, who sits on the House Oversight and Government Reform Committee, has been critical of CFPB Director Richard Cordray and the agency since its inception, and the CFPB took a beating by House Republicans on Sept. 12, when Cordray had a heated exchange with Rep. Sean Duffy, R-Wis.
Duffy compared the CFPB’s data-mining actions to those of the NSA’s broad collection of private data and argued the agency isn’t being transparent about why it’s gathering the data.
“America has said I’m all right with my phone company having information about my phone records, but, man, am I outraged when the federal government takes that information from me,” Duffy said. “And you’re here to protect consumers and you’re taking this financial data that they have said is OK for a financial institution to have and you’re taking it and you’re not giving them any transparency about the information you’re taking, how much you’re taking, who you’re taking it from. That is incredibly frustrating.”
Critics argue the data collected by the agency as well as bankruptcy files sought in the case against Morgan Drexen are both a breach of attorney-client privilege and a massive invasion of privacy. The CFPB countered by saying it needs the bankruptcy contract information to expose what it views as “a ruse designed to disguise the illegal upfront fees the company is charging consumers for debt-relief services as bankruptcy-related fees.”
CFPB spokesman Samuel Gifford said in charging documents that Morgan Drexen violated the Telemarketing Sales Rule and the Dodd-Frank Wall Street Reform and Protection Act.
As Americans faced defaulting on debts, Gifford said Morgan Drexen preyed upon customers who looked to escape those fiscal burdens and ended up making millions off of 22,000 customers who enrolled for those services – often advertised on late-night television channels. He said the firm’s fees were typically between $1,500 and $2,000 per client.
The lawsuit claims Morgan Drexen used salespeople – working on commission – to offer clients two contracts: One was for debt-settlement services, and the other for bankruptcy-related services.
Gifford said the bankruptcy services through a lawyer were rarely made available, and people were paying a monthly fee and continued to rack up charges while nothing was being done for them.
The company argued it is the lawyers it contracts with who get the fees.
Steve Rhode, a consumer debt expert and analyst who has tracked the Morgan Drexen cases, said the firm’s larger defense strategy appears to be centered on defunding the CFPB.
Hill, at Issa’s office, said the CFPB’s budget should be under the purview of Congress. The agency is funded as a percentage of the Federal Reserve budget and is capped at 12 percent of the 2009 operating expenses of the Federal Reserve System, but isn’t subject to budgetary approval from Congress – a talking point that Ledda has used to rally support among conservatives in Congress who see Dodd-Frank as the wellspring of a centralized government without checks and balances.
The CFPB’s fiscal year budget for 2013 was $541 million – under the cap by $56.6 million.
Rhode said Morgan Drexen is probably fearful of the CFPB because it moves more quickly than the Federal Trade Commission, which was the primary police force tackling consumer fraud. Ledda has had his own run-ins with the FTC, including a do-not-call complaint that resulted in a settlement in 2005.
“We’ve had the FTC before and it does a very good job, but they can’t move as quickly as the CFPB,” Rhode said.
Schnur said both Morgan Drexen and conservatives will likely continue to use the fight for their own benefits and success in a midterm election isn’t necessarily defined by broad media coverage.
“This is a harder sell than the NSA issue because it’s more difficult for most voters to relate to in their daily lives,” he said. “If an advocate can break through into the broader media universe, that’s a nice bonus for them, but the primary value of this kind of issue is to motivate their core base of supporters.”
ABOUT MORGAN DREXEN
According to the company, Morgan Drexen’s name is derived from two names. Morgan stems from name the Morgan horse – a breed that can participate in a diverse range of activities, including pulling carriages or doing competitive sporting events.
Drexen is a derivative of Drexel Burnham Lambert – a large investment firm that offered a wide array of financial services but ultimately went bankrupt amid Securities and Exchange Commission violations in the ‘90s. It’s most famously tied to junk bond financier Michael Milken.
Contact the writer: dmontero@ocregister.com or 714-796-7831