Free Answering Brief in Opposition - District Court of Delaware - Delaware

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UNITED STATES DISTRICT COURT DISTRICT OF DELAWARE __________________________________________ ) FIRST BANK OF DELAWARE, ) ) Plaintiff, ) ) v. ) 1:08-cv-429-GMS ) FEDERAL DEPOSIT INSURANCE ) CORPORATION, ) ) Defendant. ) __________________________________________) August 4, 2008

DEFENDANT FDIC'S BRIEF IN OPPOSITION TO PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION

Daniel H. Kurtenbach (DC Bar No. 426590) Ashley Doherty (DC Bar No. 336073) Thomas L. Holzman (DC Bar No. 950162) Counsel Federal Deposit Insurance Corporation Legal Division, Corporate Litigation Unit 3501 N. Fairfax Drive, VS-D7022 Arlington, VA 22226 Telephone (703) 562-2237 Facsimile (703) 562-2477 [email protected] [email protected] [email protected] Attorneys for Defendant Federal Deposit Insurance Corporation OF COUNSEL Charles L. Cope (DC Bar No. 70672) Senior Counsel

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TABLE OF CONTENTS Table of Authorities Nature and Stage of the Proceedings Summary of the Argument Statement of Facts Argument I. A Preliminary Injunction Is an "Extraordinary and Drastic Remedy" Designed to Preserve the Status Quo. The Burden of Persuasion Falls on the Bank, as Moving Party, to Satisfy Every Element of the Four-Part Test for Preliminary Injunctions. The Bank Has Failed to Meet the Test for a Preliminary Injunction. A. The Bank Has Failed to Present Any Evidence in Support of Its Motion The Bank Cannot Succeed in Meeting Any of the Four Elements 1. The Bank Cannot Demonstrate That It Has a Reasonable Probability of Success on the Merits The Bank Cannot Demonstrate That It Will Be Irreparably Harmed The Bank Cannot Demonstrate the Absence of Harm to Others If the Preliminary Injunction Is Granted Granting the Preliminary Injunction Would Be Contrary to the Public Interest ii 1 2 2 6

6

II.

7 8

III.

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B.

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2.

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3.

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4.

14 16 19

Conclusion Certificate of Service

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TABLE OF AUTHORITIES Federal Cases American Tel. & Tel. Co. v. Winback & Conserve Program, Inc., 42 F.3d 1421, 1426-7 (3d Cir. 1994) Arthrex Inc. v. DJ Orthopedics LLC, 2002 WL 818062, *4 (D. Del. 2002) Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 506 (1959) Bennington Foods LLC v. St. Croix Renaissance Group, LLP, 528 F.3d 176, 179 (3d Cir. 2008) CityFed Financial Corp. v. Office of Thrift Supervision, 58 F.3d 738, 746 (D.C. Cir. 1995) Clean Ocean Action v. York, 57 F.3d 328, 331 (3d Cir. 1995) Doran v. Salem Inn, Inc., 422 U.S. 922, 931-32 (1975) ECRI v. McGraw-Hill, Inc., 809 F.2d 223, 226 (3d Cir. 1987) Genovese Drug Stores, Inc. v. TGC Stores, Inc. 939 F. Supp. 340, 350-51 (D.N.J. 1996) Hamilton Bank, N.A. v. Office of Comptroller of Currency, 227 F. Supp.2d 1, 8-10 (D.D.C. 2001) Instant Air Freight Co. v. C.F. Air Freight, Inc., 882 F.2d 797, 800 (3d Cir. 1989) Investment Co. Institute v. Federal Deposit Insurance Corporation, 728 F.2d 518, 525 (D.C. Cir. 1984) Kos Pharmaceuticals, Inc. v. Andrx Corp., 369 F.3d 700, 708 (3d Cir. 2004) Mazurek v. Armstrong, 520 U.S. 968, 972 (1997) Munaf v. Geren, 128 S. Ct. 2207, 2219 (2008) Novartis Consumer Health, Inc. v. Johnson & Johnson-Merck Consumer Pharmaceuticals Co., 290 F.3d 578, 586 (3d Cir. 2002) Opticians Ass'n of America v. Independent Opticians of America, 920 F.2d 187, 192 (3d Cir. 1990) Sampson v. Murray, 415 U.S. 61, 88, (1974)

7 12 12

7, 12 10 8 6 8 12

10, 16 7, 11, 16

9, 11 7 7, 14 6

6, 8, 12

8 12

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St. Thomas-St. John Hotel & Tourism Ass'n, Inc. v. Government of U.S. Virgin Islands ex rel. Virgin Islands Dep't of Labor, 357 F.3d 297, 301 (3d Cir. 2004)

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Tom Doherty Associates, Inc. v. Saban Entertainment, Inc., 60 F.3d 27, 33-34 (2nd Cir. 1995) 7 Federal Statutes 12 U.S.C. § 1818(a)(2) 12 U.S.C. § 1818(b) 12 U.S.C. § 1818(c) 12 U.S.C. § 1818(c)(2) 12 U.S.C. § 1818(e) 12 U.S.C. § 1820(b) 12 U.S.C. § 1820(c) 15 U.S.C. § 45(a) Federal Rules Advisory Committee Notes to Fed. R. Civ. P. 6 Fed. R. Civ. P. 5(b)(2)(C) Fed. R. Civ. P. 6(a) Fed. R. Civ. P. 6(d) Federal Regulations 12 C.F.R. § 364 Local Civil Rules D. Del. LR 7.1.2(a) 8 3 2 2 2 2 15 15 1, 9, 15 1 15 15 15 4

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UNITED STATES DISTRICT COURT DISTRICT OF DELAWARE __________________________________________ ) FIRST BANK OF DELAWARE, ) ) Plaintiff, ) ) v. ) 1:08-cv-429-GMS ) FEDERAL DEPOSIT INSURANCE ) CORPORATION, ) ) Defendant. ) __________________________________________)

DEFENDANT FDIC'S BRIEF IN OPPOSITION TO PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION

Nature and Stage of the Proceedings On July 3, 2008, in conjunction with an administrative proceeding previously initiated by defendant Federal Deposit Insurance Corporation (FDIC), the FDIC served the Bank with a Temporary Order to Cease Desist (Temporary Order), together with Findings of Fact and Conclusions of Law (Findings) (attached as Exhibits B and C),1 pursuant to 12 U.S.C. § 1818(c). The Temporary Order prohibits the Bank from acquiring any portfolios of consumer credit card accounts until the Bank submits appropriate operating and capital plans that address and mitigate the risks of its subprime credit card lending programs. Temporary Order at 2-3. First Bank of Delaware (Bank) brought this action against the FDIC pursuant to 12 U.S.C. § 1818(c)(2), seeking a "preliminary or permanent injunction limiting or suspending the enforcement, operation or effectiveness" of the Temporary Order issued by the FDIC.

Temporary Order to Cease and Desist, In the Matter of First Bank of Delaware, No. FDIC-08-151c7b, FDIC-07256b (July 3, 2008); Findings of Fact and Conclusions of Law, In the Matter of First Bank of Delaware, No. FDIC08-151c&b, No. FDIC-07-256b (July 3, 2008).

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Complaint, D.I. 1 at 13. Shortly after filing its complaint, the Bank filed its motion for a preliminary injunction. D.I. 4. The FDIC now opposes that motion.2 Summary of the Argument 1. A preliminary injunction is an "extraordinary and drastic remedy" that is designed to preserve the status quo pending resolution of a dispute. 2. The burden of persuasion is on the Bank, as the party seeking a preliminary injunction, to satisfy every element of the four-part test applicable to grants of such relief: · · · that there is a reasonable probability of success on the merits; that denial of an injunction will cause it to suffer irreparable injury; that harm will not befall other interested persons, including the FDIC as the non-moving party, if a preliminary injunction is granted; and · that granting injunctive relief is in the public interest. 3. The Bank has failed to meet that burden. Specifically, it has failed to offer any evidence in support of its motion; in any event, the Bank could not overcome the evidence offered herewith by the FDIC. Therefore, the Bank's motion for a preliminary injunction should be denied. Statement of Facts The Bank is a state nonmember bank whose primary federal regulator is the FDIC. Findings at ¶¶ 1-3. The Bank does not operate like a regular community bank by making commercial and mortgage loans. Declaration of Doreen R. Eberley (Eberley Decl.) (Exhibit D to

2

Although plaintiff's motion was filed in court on July 14, 2008, no FDIC attorneys had entered an appearance at the time of filing, and thus were not served via ECF. Plaintiff mailed a service copy to FDIC on July 16, 2008, and pursuant to Fed. R. Civ. P. 5(b)(2)(C), service was complete on mailing. The 10-day period under Fed. R. Civ. P. 6(a), beginning July 16, expired on Wednesday, July 30. The additional three-day period under Fed. R. Civ. P. 6(d) expired on Saturday, August 2, making the last day for action Monday, August 4. See Advisory Committee Notes to Fed. R. Civ. P. 6, 2005 Amendments.

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this brief) at ¶ 6. Instead, the Bank has at least fifteen relationships with third party providers, including credit card providers, who service the accounts originated by the Bank, and then buy the receivables charged on those credit card accounts from the Bank on a daily basis. Findings at ¶¶ 5, 6, 9. The Bank targeted most of its credit card products at consumers who had inadequate or poor credit histories and, consequently, limited credit options. Findings at ¶ 7; Eberley Decl. at ¶¶ 7-8. Despite significant reliance on third party providers for many of the Bank's products, the Bank has demonstrated a continued failure to adequately oversee and monitor its third-party lending programs. Findings at ¶ 20; Declaration of Colleen M. Marano (Marano Decl.) (Exhibit E to this brief) at ¶ 6. Because of that failure to manage its third party lending relationships, in both 2006 and 2007, FDIC examinations cited the Bank for numerous unsafe or unsound practices and violations of law. Findings at ¶ 21; Marano Decl. at ¶ 6. The Bank lacks an adequate system of internal controls, internal audit, management information systems, and compliance management over its third party lending programs. Findings at ¶¶ 23-25. The Bank's subprime credit card lending practices caused the Bank to fail to comply with the FDIC's Safety and Soundness Guidelines, 12 C.F.R. § 364, Appendix A. Findings at ¶ 35. The Bank's attempts to correct deficiencies identified by the FDIC were incomplete and ineffective. Notice of Charges at ¶ 118(a); Eberley Decl. at ¶ 17. On June 10, 2008, the FDIC instituted an administrative proceeding against the Bank and CompuCredit Corporation of Georgia. The FDIC's Notice of Charges3 (attached as Exhibit A to this brief) lays out in great detail the violations of laws and regulations and unsafe or unsound

Notice of Charges for an Order to Cease and Desist and for Restitution; Notice of Assessment of Civil Money Penalties; Findings of Fact and Conclusions of Law; Order to Pay; and Notice of Hearing, In re First Bank of Delaware, Wilmington, Delaware, and CompuCredit Corporation, Atlanta, Georgia, No. FDIC-07-256b, No. FDIC07-257k (June 10, 2008).

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banking practices that form the basis for the FDIC's administrative proceeding against the Bank. Specifically, the Bank operated its National Consumer Products Division (NCP Division): · · · · · without effective oversight or adequate supervision, Notice of Charges at ¶ 118(a)-(f); with an inadequate system of internal controls, Notice of Charges at ¶ 119(a)-(c); with an inadequate management information system, Notice of Charges at ¶ 120(a)-(e); with an inadequate internal audit system, Notice of Charges at ¶121(a)-(f); with an inadequate compliance management system, Notice of Charges at ¶ 122(a)-(e); and · without policies, practices or systems that comply with federal policies and guidelines, Notice of Charges at ¶ 123(a)-(e). In connection with its lending activities, the Bank engaged in various unfair or deceptive acts and/or practices, in violation of section 5(a) of the Federal Trade Commission Act (FTC Act), 15 U.S.C. § 45(a). Notice of Charges at ¶ 11. Those practices include: · sending out written solicitations that misled consumers into believing that they would receive a credit card with available credit, without adequately disclosing the significant up-front fees that would be charged, Notice of Charges at ¶¶ 21-40, 49-56, 70-98; · automatically, and with no prior notice, placing consumers who were more than 90 days delinquent on their credit card accounts into a payment reduction program that resulted in an increase in the overall account balances and possibly the imposition of additional fees, Notice of Charges at ¶¶ 41-48; · misleading consumers into believing they would immediately receive credit cards, with their prior charged-off debts transferred to the new cards and reported to consumer

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reporting agencies as being paid in full, when the consumers actually were entered into a debt repayment program, Notice of Charges at ¶¶ 57-69; · · placing improper conditions on extensions of credit, Notice of Charges at ¶¶ 98-99; failing to protect nonpublic, personal information about consumers, Notice of Charges at ¶¶ 100-05; · · improperly discriminating against customers, Notice of Charges at ¶¶106-07; and violating other laws and regulations. Notice of Charges at ¶¶ 108-13.

The Notice of Charges also stated that the Bank engaged in other, management-related, "unsafe or unsound practices." Notice of Charges at ¶¶ 114-23. The FDIC had advised the Bank's board of directors and management of the unsafe or unsound lending practices, especially concerning the Bank's subprime credit card portfolio, in which the Bank had been engaged since at least 2006, and required the Bank to correct those practices. Findings at ¶ 21; Eberley Decl. at ¶¶ 9, 17; Marano Decl. at ¶¶ 9, 12. Through the supervisory process and the filing of the Notice of Charges, the Bank was aware of the FDIC's substantial concerns about the Bank's lack of risk management and oversight over its third party lending relationships. Notice of Charges at ¶ 118(a); Eberley Decl. at ¶¶ 9, 17-18. Despite those concerns, the Bank was finalizing plans to acquire a portfolio of nearly 400,000 credit card accounts with outstanding balances of approximately $220,000,000 that a third party provider was going to service. Findings at ¶¶ 30, 34. When the FDIC learned of the imminent acquisition, the FDIC determined it was reasonable to believe that if the Bank acquired hundreds of thousands more credit card accounts without an adequate risk management infrastructure, it would seriously weaken the financial condition of the Bank. Findings at ¶¶ 38, 39.

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Accordingly, on July 3, 2008, approximately three weeks after issuing the Notice of Charges, the FDIC served the Bank with the Temporary Order and the Findings. The Temporary Order prohibits the Bank from acquiring any portfolios of consumer credit card accounts until the Bank submits appropriate operating and capital plans that address and mitigate the risks of its subprime credit card lending programs. Temporary Order at 2-3. The Temporary Order does not preclude either the Bank, or its third party providers from continuing to conduct any of its existing third party lending programs. The Temporary Order is limited to preventing the Bank's acquisition of additional portfolios of a single type: consumer credit card accounts. Further, the Bank can once again acquire additional consumer credit card portfolios as soon as it complies with the requirements of the Temporary Order to put appropriate operating and capital plans in place. Argument I. A Preliminary Injunction Is an "Extraordinary and Drastic Remedy" Designed to Preserve the Status Quo. As the Supreme Court recently reiterated, "A preliminary injunction is an `extraordinary and drastic remedy'; it is never awarded as of right." Munaf v. Geren, 128 S. Ct. 2207, 2219 (2008) (internal citations omitted); see also Doran v. Salem Inn, Inc., 422 U.S. 922, 931-32 (1975) ("The standard to be applied . . . in deciding whether a plaintiff is entitled to a preliminary injunction is stringent."). The U.S. Court of Appeals for the Third Circuit has stated that "an injunction is `an extraordinary remedy, which should be granted only in limited circumstances.'" Novartis Consumer Health, Inc. v. Johnson & Johnson-Merck Consumer Pharmaceuticals Co., 290 F.3d 578, 586 (3d Cir. 2002), quoting Instant Air Freight Co. v. C.F. Air Freight, Inc., 882 F.2d 797,

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800 (3d Cir. 1989); see also American Tel. & Tel. Co. v. Winback & Conserve Program, Inc., 42 F.3d 1421, 1426-7 (3d Cir. 1994). "[O]ne of the goals of the preliminary injunction analysis is to maintain the status quo, defined as the last, peaceable, noncontested status of the parties." Kos Pharmaceuticals, Inc. v. Andrx Corp., 369 F.3d 700, 708 (3d Cir. 2004) (internal citation and quotation marks omitted); see also St. Thomas-St. John Hotel & Tourism Ass'n, Inc. v. Government of U.S. Virgin Islands ex rel. Virgin Islands Dep't of Labor, 357 F.3d 297, 301 (3d Cir. 2004) ("Purpose of a preliminary injunction is merely to preserve the relative positions of the parties until a trial on the merits can be held.") II. The Burden of Persuasion Falls on the Bank, as Moving Party, to Satisfy Every Element of the Four-Part Test for Preliminary Injunctions. A preliminary injunction should not be granted "unless the movant, by a clear showing, carries the burden of persuasion." Mazurek v. Armstrong, 520 U.S. 968, 972 (1997), quoting 11A C. Wright, A. Miller, & M. Kane, Federal Practice and Procedure, § 2948 at 129-30 (2d ed. 1995)(emphasis in original). "[W]hat is at issue here is not even a defendant's motion for summary judgment, but a plaintiff's motion for preliminary injunctive relief, as to which the requirement for substantial proof is much higher." Id. "Moreover, where the relief ordered by the preliminary injunction is mandatory and will alter the status quo, the party seeking the injunction must meet a higher standard of showing irreparable harm in the absence of an injunction." Bennington Foods LLC v. St. Croix Renaissance Group, LLP, 528 F.3d 176, 179 (3d Cir. 2008), citing Tom Doherty Associates, Inc. v. Saban Entertainment, Inc., 60 F.3d 27, 3334 (2nd Cir. 1995). Before granting a preliminary injunction, a "District Court must be convinced that the following factors favor granting preliminary relief: (1) the likelihood that the moving party will

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succeed on the merits; (2) the extent to which the moving party will suffer irreparable harm without injunctive relief; (3) the extent to which the nonmoving party will suffer irreparable harm if the injunction is issued; and (4) the public interest." Novartis Consumer Health v. Johnson & Johnson, 290 F.3d at 586, citing Clean Ocean Action v. York, 57 F.3d 328, 331 (3d Cir. 1995). "Only if the movant produces evidence sufficient to convince the trial judge that all four factors favor preliminary relief should the injunction issue." Opticians Ass'n of America v. Independent Opticians of America, 920 F.2d 187, 192 (3d Cir. 1990), citing ECRI v. McGrawHill, Inc., 809 F.2d 223, 226 (3d Cir. 1987). III. A. The Bank Has Failed to Meet the Test for a Preliminary Injunction. The Bank Has Failed to Present Any Evidence in Support of Its Motion. The Bank's Motion for a Preliminary Injunction asserts that the Temporary Order will cause "irreparable harm" to the Bank; that it will harm unidentified "other interested persons"; and that a preliminary injunction would "serve the public interest." PI Motion, D.I. 4 at ¶¶ 6-9. However, the Bank has produced no evidence whatsoever, either testimonial or documentary, to support these claims.4 As the Bank itself argues, a preliminary injunction cannot issue unless the movant establishes "that denial of injunctive relief will result in irreparable injury." PI Motion, D.I. 4 at 3. Given the Bank's failure to present any evidence of irreparable harm, or any evidence that would satisfy the other three elements required for issuance of an injunction, the Bank's Motion for a Preliminary Injunction should be denied. However, as discussed below, a review of the

Contrary to D. Del. LR 7.1.2(a), which requires that a moving party clearly articulate in the body of the motion the grounds in support of the relief requested, or accompany the motion with a supporting brief or memorandum, plaintiff's scanty, unaccompanied motion offers only a few vague allegations and suggests that a supporting memorandum will be coming along at some indeterminate point in the future. See D.I. 4 at 5.

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Bank's allegations and the record shows plainly that the Bank would fail to meet all elements of the four-part test. B. The Bank Cannot Succeed in Meeting Any of the Four Elements. 1. The Bank Cannot Demonstrate That It Has a Reasonable Probability of Success on the Merits. In its Complaint for injunctive relief (D.I. 1 at 12), the Bank recites its claims that the FDIC "has not established, and cannot establish" the various facts and conclusions underlying the Notice of Charges. Contrary to plaintiff's claims, the FDIC has set out, in exhaustive detail, the violations of laws and regulations and the unsafe and/or unsound practices requiring the FDIC to act. The 40-page Notice of Charges (not including the extensive exhibits) is attached as Exhibit A to this brief, and sets out the factual and legal underpinnings for the FDIC's actions. In addition, Exhibit C to this brief sets out the specific actions and violations that required the FDIC to take immediate action by means of the Temporary Order. In further support, the FDIC offers two sworn declarations, by Doreen R. Eberley, Regional Director of the FDIC's New York Region (Exhibit D), and Colleen M. Marano, Supervisory Bank Examiner (Exhibit E), testifying in detail to the circumstances leading the FDIC to take remedial action against the Bank. The U.S. Court of Appeals for the D.C. Circuit has stated that 12 U.S.C. § 1818(c) (providing for temporary orders to cease and desist) "requires a showing that there is a reasonable, not merely a theoretical, possibility of insolvency or other serious financial weakening of a bank before the FDIC may issue a temporary cease and desist order." Investment Co. Institute v. Federal Deposit Insurance Corporation, 728 F.2d 518, 525 (D.C. Cir. 1984), citing S. Rep. No. 1482, 89th Cong., 2d Sess. 1 (1966), U.S. Code Cong. & Admin. News at 3532-33; see also CityFed Financial Corp. v. Office of Thrift Supervision, 58 F.3d 738, 746

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(D.C. Cir. 1995)("Because OTS reasonably believes . . . [t]he temporary cease and desist order was thus proper")(emphasis added). The United States District Court for the District of Columbia described the standard for upholding a temporary cease and desist order as follows: A number of courts have adopted the prima facie framework as a useful tool of analysis for determining whether the agency has acted appropriately in issuing a temporary cease and desist order. In these cases, the courts have held that a prima facie case requires "a verified statement of the specific facts giving rise to the violations or improprieties". . . . . . . [T]he "object of judicial review [of a temporary cease and desist order] is to ensure that a factual and statutory basis exists for the agency's action and that the temporary order comports with the scope of the [agency's] powers." **** . . . [T]he issuance of a temporary cease and desist order . . . is an emergency measure, which is to be used without pause or delay for presentations or negotiations where the [agency] determines that the allegedly unsafe or unsound banking practices are likely to cause harm to the financial condition of the bank. [The agency] made such a determination, and so long as that determination is properly supported, the bank's challenge to the issuance of the Temporary Cease and Desist Order must fail. Hamilton Bank, N.A. v. Office of Comptroller of Currency, 227 F. Supp.2d 1, 8-10 (D.D.C. 2001) (noting that the district court's jurisdiction does not extend to independent consideration of the underlying administrative proceeding) (internal citations and footnotes omitted). Here, the extensive Notice of Charges and Findings, together with the Eberley and Marano declarations, serve as "verified statement[s] of the specific facts giving rise to the violations or improprieties," show clearly that a "factual and statutory basis exists for the agency's action," and demonstrate "a reasonable, not merely a theoretical, possibility of insolvency or other serious financial weakening" of the Bank. The evidence presented by the FDIC demonstrates that the Bank lacks an adequate system to manage the credit card portfolio it

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currently maintains. Adding new portfolios, without a system to assess and account for the compliance, legal, reputation, counterparty, funding, operational, capital, and other risks associated with acquisition of a credit card portfolio, creates a "reasonable, not merely a theoretical, possibility of . . . serious financial weakening" of the Bank. Investment Co. Institute v. Federal Deposit Insurance Corporation, 728 F.2d at 525. Accordingly, the Bank cannot demonstrate a reasonable probability of success on the merits, and its motion for a preliminary injunction should be denied. 2. The Bank Cannot Demonstrate That It Will Be Irreparably Harmed. The Bank alleges that if it is prevented from immediately acquiring additional portfolios of credit card accounts, it will be deprived of "significant annual income" that would "meaningfully increase the Bank's non-interest income." PI Motion, D.I. 4 at ¶ 6(a). The Bank also alleges that it would be deprived of unspecified "other potentially-lucrative business opportunities" and that its "reputation and goodwill" would "likely" be injured. Id. at (b), (c). These allegations are not only unsupported, they are insufficient. The alleged economic injury to the Bank is not of the magnitude required to justify a preliminary injunction. The Bank does not claim that, absent an injunction, it would suffer bankruptcy, the type of injury that "sufficiently meets the standards for granting interim relief, for otherwise a favorable final judgment might well be useless." Doran v. Salem Inn, Inc., 422 U.S. at 432; see also Instant Air Freight Co. v. C.F. Air Freight, Inc., 882 F.2d 797, 802-03 (3d Cir. 1989) (no irreparable injury where movant retained twenty percent of its business and no evidence showed it was "likely to cease its existence"); CityFed Financial Corp. v. Office of Thrift Supervision, 58 F.2d at 746 ("City Fed is not truly threatened with bankruptcy."). Moreover, as the Third Circuit has held, it is insufficient to allege even that a company will "lose

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its entire investment" if it is not plausible that the company will also go out of business. Novartis Consumer Health v. Johnson & Johnson, 290 F.3d at 597, distinguishing Genovese Drug Stores, Inc. v. TGC Stores, Inc. 939 F. Supp. 340, 350-51 (D.N.J. 1996) (where the district court "was persuaded that an injunction would have put the defendant out of business").5 The Bank's allegation that it would "likely" suffer injury to its reputation or goodwill is also insufficient. The Bank conjectures that "other potential sellers of credit card accounts would be unlikely to sell their accounts to the Bank, thus depriving the Bank of . . . goodwill." Complaint, D.I. 1 at ¶ 27. However, injunctive relief is not appropriate where a movant fails specifically to identify "any third parties with whom it has suffered a loss of reputation." Bennington Foods v. St. Croix Renaissance Group, 528 F.3d at 179. In sum, each element of injury alleged by the Bank is purely speculative. None suffices to make a showing of irreparable injury to the Bank. In the absence of such a showing, the Bank's motion must be dismissed. "The basis of injunctive relief in the federal courts has always been irreparable harm." Sampson v. Murray, 415 U.S. 61, 88, (1974), quoting Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 506 (1959). 3. The Bank Cannot Demonstrate the Absence of Harm to Others If the Preliminary Injunction is Granted. As is clear from the Notice of Charges, the Findings, and the declarations, the FDIC has determined that the Bank's proposed actions "are likely to cause a significant dissipation of the Bank's assets or earnings, or are likely to weaken the condition of the Bank." Findings at 9. In other words, there is substantial evidence that if the preliminary injunction is granted and the Bank purchases a portfolio of subprime credit card accounts, injury will follow to the Bank itself, and depending on the weakening of the financial condition of the Bank likely caused by the
5

Similarly, "loss of market share is insufficient to support a finding of irreparable harm." Arthrex Inc. v. DJ Orthopedics LLC, 2002 WL 818062, *4 (D. Del. 2002), cited in PI Motion, D.I. 4 at ¶ 3.

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acquisition, the Bank's shareholders, creditors, depositors and other customers would be harmed substantially as well. See, e.g., Eberley Decl., Ex. D at ¶ 11 ("[I]f the credit card marketing is determined to be unfair or deceptive, the bank may be held responsible for any monetary penalties, reimbursements, and any other actions (such as shutting down the program) necessary to promptly address the concerns.") and ¶¶ 24, 27 ("The Bank relies on CompuCredit to purchase these receivables and could not fund the entire $204 million in available credit by itself if CompuCredit defaults . . . . The value of CompuCredit's credit card receivables are deteriorating due to economic factors, which increases the risk that CompuCredit will be unable to fulfill its obligation."); Marano Decl., Ex. E at ¶ 11("[As of] March 31, 2008, the total outstanding loan balance for all [of the Bank's] NCP Division products increased more than two-fold to $682 million, which represented more than 18 times the Bank's capital reserves. Subprime credit card receivables represented approximately 80% of that balance.") and ¶ 17 ("[T]he [Bank's] Plan does not include provisions to reimburse consumers for prepaid annual fees if their credit cards have to be shut off.") Because the Bank has demonstrated to the FDIC no effort to quantify the various risks it faces in acquiring any new credit card portfolio, it is reasonable to think such risk could be substantial and could cause harm to the Bank's shareholders. Eberley Decl. at ¶ 34. For example, the Bank has not demonstrated that it has accounted for the risk that the solicitation or issuance of some or all of the credit card accounts it seeks to purchase violated consumer protection statues; if this were the case, the Bank could face substantial liability. Eberley Decl. at ¶¶ 32-33. Depending on the amount, such liability could lead to substantial harm to depositors, creditors, or the deposit insurance fund. Eberley Decl. at ¶ 35. To succeed on its motion for a preliminary injunction, the Bank must demonstrate that interested parties (including the Bank itself) will not be substantially harmed if the preliminary

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injunction is granted. That is, the Bank must show, under a very high burden of persuasion, that the consequences predicted by the FDIC will not happen under any reasonable scenario. This the Bank cannot do. Under the proposed transaction, the Bank will acquire nearly 400,000 additional subprime credit card accounts with almost $220 million in outstanding balances. Eberley Decl., Ex. D at ¶ 33. This is not inconsequential and cannot be reversed. The facts are straightforward and compelling. Highly seasoned experts in determining the condition of banks (see Eberley Decl. at ¶¶ 1-4, Marano Decl. at ¶¶ 1-4) have concluded that allowing the transaction to occur, without a sound risk management plan in place at the Bank, would reasonably (and perhaps inevitably) have serious adverse consequences affecting a variety of interests. Under the exacting burden of persuasion it must carry here, the Bank cannot make a "clear showing" (Mazurek v. Armstrong, 520 U.S. at 972) that the FDIC's conclusions are unreasonable or unsupported and thus cannot refute the FDIC's determination of harm if the transaction is allowed to occur. Accordingly, the Bank cannot satisfy this element of the fourpart test. 4. Granting the Preliminary Injunction Would Be Contrary to the Public Interest. The facts of this case compel the conclusion that the proposed injunction would seriously impede the FDIC's ability to deal swiftly with violations of laws and regulations and unsafe or unsound banking practices that threaten not only this Bank but the public's confidence in the soundness of the nation's banking system. As set forth in the Notice of Charges, the Bank has failed to ensure it has systems in place to protect the public from illegal or unsafe or unsound credit card marketing and lending practices. Notice of Charges at ¶ 122; Eberley Decl. at ¶ 19. Additionally, some or all of the

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credit card accounts in the portfolio to be acquired were issued in violation of applicable laws, including section 5 of the Federal Trade Commission Act. Findings at ¶ 25; Eberley Decl. at ¶ 33. Because the Bank has not demonstrated that it has systems in place to assess the risks associated with the credit card portfolios it intends to acquire, it can not protect those customers or the public interest by ensuring that the almost 400,000 credit card accounts were originated or are maintained in accordance with applicable laws. Marano Decl. at ¶¶ 14-17. As a federal bank regulator, the FDIC has been vested by Congress with a broad range of enforcement powers and authorities, from examining banks (12 U.S.C. § 1820(b)) to conducting investigations (12 U.S.C. § 1820(c)) to terminating the deposit insurance of an institution (12 U.S.C. § 1818(a)(2)) to removal of individuals from the banking industry (12 U.S.C. § 1818(e)). A key component of that enforcement authority is the ability to issue temporary cease and desist orders (12 U.S.C. § 1818(c)) and have those temporary orders enforced by the courts (12 U.S.C. § 1818(d)). However, in the case of an open, operating bank such as First Bank of Delaware, the temporary cease and desist order may be the only effective method of rapidly intervening to prevent a bank from carrying out schemes that are likely to weaken the bank, put individual customers and potential customers at risk of losing money, or damage the public's confidence in the banking system. In giving the FDIC and other federal bank regulators the authority to issue temporary cease and desist orders, Congress did two things: First, it required that such authority only be used in the context of a larger, full and fair administrative proceeding initiated by a notice of charges and statement of facts and providing for an administrative hearing. 12 U.S.C. § 1818(b). Second, in providing for judicial review of a temporary cease and desist order, Congress specifically chose the vehicle of an injunction, "an extraordinary remedy, which should be

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granted only in limited circumstances." Instant Air Freight Co. v. C.F. Air Freight, Inc., 882 F.2d at 800. In this way, the due process rights of the financial institution are balanced with the needs of federal regulators to carry out their statutory mandates and maintain the status quo pending resolution of the issues set out in the notice of charges. This structure reflects the dual public interests at stake in situations like this: an interest in a full and fair process that protects the rights of individuals and businesses and an interest in a sound and secure national financial system in which regulators can address violations of law and unsafe practices swiftly. Contrary to the Bank's assertion in its motion (D.I. 4 at ¶ 9), the administrative proceedings initiated by the Notice of Charges are designed to ensure due process and that "a factual and statutory basis exists for the agency's action." Hamilton Bank, N.A. v. Office of Comptroller of Currency, 227 F. Supp. 2d at 8. The Bank has failed to demonstrate that granting a preliminary injunction and allowing it to purchase more subprime credit card accounts would somehow serve the public interest. On the contrary, the public interest is quite clearly served by allowing a full and fair administrative process to proceed on the facts and circumstances contained in the Notice of Charges. Further, the public interest is served by taking seriously the risks foreseen by the Bank's regulator and temporarily maintaining the status quo until those perceived risks can be fully explored in the administrative process or voluntarily mitigated by the Bank. Accordingly, the Bank cannot meet the fourth element of the four-part test for injunctive relief. Conclusion The Bank has failed to meet the heavy burden of persuasion required to justify a preliminary injunction that would disturb, rather than maintain, the status quo. The Bank has failed to demonstrate that it is likely to succeed on the merits, that it will suffer an irreparable

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injury if a preliminary injunction is denied, that interested parties will not be harmed if a preliminary injunction is granted, or that granting the preliminary injunction would serve the public interest. By contrast, the FDIC has demonstrated that the Bank's proposed acquisition of approximately 400,000 more subprime credit card accounts, when the Bank lacks the ability to properly manage the accounts that it already has, or would constitute further unsafe or unsound practices likely to seriously weaken the condition of the Bank. Therefore, the Bank's motion for a preliminary injunction should be denied.

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Respectfully submitted this 4th day of August, 2008,

/s/ Daniel H. Kurtenbach______ Daniel H. Kurtenbach (DC Bar No. 426590) Ashley Doherty (DC Bar No. 336073) Thomas L. Holzman (DC Bar No. 950162) Counsel Federal Deposit Insurance Corporation Legal Division, Corporate Litigation Unit 3501 N. Fairfax Drive, VS-D7022 Arlington, VA 22226 Telephone (703) 562-2237 Facsimile (703) 562-2477 [email protected] [email protected] [email protected] Attorneys for Defendant Federal Deposit Insurance Corporation OF COUNSEL Charles L. Cope (DC Bar No. 70672) Senior Counsel

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CERTIFICATE OF SERVICE I hereby certify that on August 4, 2008, the foregoing BRIEF IN OPPOSITION TO PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION was sent to the following via First Class Mail, postage prepaid: Larry J. Stein Jeremiah S. Buckley Matthew P. Previn Robert B. Serino BUCKLEY KOLAR LLP 1250 24th Street, N.W., Suite 700 Washington, DC 20037

/s/ Daniel H. Kurtenbach______ Daniel H. Kurtenbach Counsel, Federal Deposit Insurance Corporation

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EXHIBIT A

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FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D. C.

In the Matter of
FIRST BANK OF DELAWARE WILMINGTON, DELAWARE

) ) )

)
)

)

(Insured State Nonmember Bank)
And

) ) ) )

COMPUCREDIT CORPORATION ATLANT A, GEORGIA An Institution-Affliated Party of: FIRST BANK OF DELAWARE WILMINGTON, DELAWARE
(Insured State Nonmember Bank)

)
) ) ) ) ) ) )
)

NOTICE OF CHARGES FOR AN ORDER TO CEASE AND DESIST AND FOR RESTITUTION; NOTICE OF ASSESSMENT OF CIVIL MONEY PENALTIES; FINDINGS OF FACT AND CONCLUSIONS OF LAW; ORDER TO PAY; AND NOTICE OF HEARING

FDIC-07-256b FDIC-07-257k

The Federal Deposit Insurance Corporation (FDIC), being of

the opinion that

First Bank of Delaware, Wilmington, Delaware (Bank) and CompuCredit Corporation,
Atlanta, Georgia (CompuCredit), an institution-affliated party of

the Bank, have engaged

in violations oflaw and/or regulations and in unsafe and/or unsound banking practices
and, unless restrained, the Bank and CompuCredit will continue to engage in such

practices and violations in conducting the business of the Bank, hereby institutes this
proceeding to determine whether appropriate orders should be issued against the Bank
and CompuCredit under the provisions of sections 8(b)(I), 8(b)(6), and 8(i) of

the Federal

Deposit Insurance Act (FDI Act), 12 U.S.c. §§ 1818(b)(l), 1818(b)(6), and 1818(i). The

FDIC hereby issues this NOTICE OF CHARGES FOR AN ORDER TO CEASE AND DESIST AND FOR RESTITUTION; NOTICE OF ASSESSMENT OF CIVIL MONEY

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PENALTIES, FINDINGS OF FACT AND CONCLUSIONS OF LAW; ORDER TO PAY; AND NOTICE OF HEARING (collectively, NOTICE) pursuant to the provisions
of the FDI Act, 12 U.S.c. §§ 1811-1831aa, and the FDIC's Rules of

Practice and

Procedures, 12 C.F.R. Part 308, and alleges as follows:

JURISDICTION

1. The Bank is, and at all times relevant to this proceeding has been, a
corporation organized, existing, and doing business under the laws of the State of
Delaware with its principal place of

business in Wilmington, Delaware.

2. The Bank is, and at all times relevant to this proceeding has been, a
"State nonmember bank" within the meaning of section 3(e)(2) of

the FDI Act, 12 U.S.c.

§ 1813( e )(2); an "insured depository institution" within the meaning of section 3( c )(2) of

the FDI Act, 12 U.S.c. § 1813(c)(2); and subject to the FDI Act, 12 U.S.c. §§ 18111831aa, the FDIC's Rules and Regulations, 12 C.F.R. Chapter III, and the laws of

the

State of

Delaware.

3. CompuCredit is, and at all times relevant to this proceeding has been, a
corporation organized, existing, and doing business under the laws of the State of
Georgia, and has its principal place of

business in Atlanta, Georgia.

4. Since at least February 2005, pursuant to contractual arrangements, the

Bank and CompuCredit have engaged in credit card lending activities throughout the
United States targeted at, among others, consumers who have inadequate or poor credit
histories and, consequently, have limited credit options.
5. At all times relevant to this proceeding, CompuCredit has been an
the FDI Act, 12

"institution-affliated party" as that term is defined in section 3(u) of

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U.S.C. § 1813(u), and for

purposes of

section 8(b) and 8(i) of

the Act, 12 U.S.C. §§

1818(b) and 1818(i).

6. Continental Finance Company, LLC (Continental Finance) is, and at all

times relevant to this proceeding has been, a limited liability company organized,
existing, and doing business under the laws of the State of

Delaware, and has its principal

place of

business in Newark, Delaware.
7. Since at least March 2006, pursuant to a contractual arrangement, the

Bank, through Continental Finance, has conducted credit card lending throughout the United States targeted at, among others, consumers who have inadequate or poor credit
histories and, consequently, have limited credit options.
8. The FDIC is the "appropriate Federal banking agency", as that term is
defined in section 3(q)(3) of

the FDI Act, 12 U.S.C. § 1813(q)(3), with respect to the

Bank, and has jurisdiction over the Bank and CompuCredit, as an institution-affliated
party of the Bank, and the subject matter of

this proceeding.

9. At all times relevant to this proceeding, the Bank's acts and practices, as

described in this NOTICE, have been in or affecting "commerce," as that term is defined
in section 4 of

the Federal Trade Commission Act (FTC Act), 15 U.S.c. § 44.

VIOLATIONS OF SECTION 5 OF THE FEDERAL TRADE COMMISSION ACT

(as to the Bank and CompuCredit)
10. At all times relevant to this proceeding, CompuCredits acts and

practices, as an institution-affliated party of the Bank, as described in this NOTICE, have
been in or affecting "commerce," as that term is defined in section 4 of

the FTC Act, 15

U.S.c. § 44.

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11. Beginning in at least February 2005, the Bank and CompuCredit

engaged in unfair or deceptive acts and/or practices in violation of section 5( a) of the

FTC Act, 15 U.S.c. § 45(a) (Section 5), in connection with their lending activities as
more fully alleged below.

12. CompuCredit is engaged in and, since at least 1997, has been engaged in
the business of

providing various consumer credit products, including credit cards, short-

term installment loans (ILPs) and related financial services throughout the United States.

CompuCredit offers these products and services by, among other things, entering into
contracts with banks, including the Bank, pursuant to which CompuCredit markets and
services credit products.
13. On or about February 16,2005, the Bank and CompuCredit first entered

into an Affnity Card Agreement (CompuCredit Affinity Agreement) providing for,
among other things, the marketing and issuance of credit cards.
14. At all times relevant to this proceeding, there has been a CompuCredit

Affnity Agreement or a successor amended and/or restated Affnity Agreement in place
between the Bank and CompuCredit (hereafter collectively, CompuCredit Affnity
Agreements).
15. Pursuant to the CompuCredit Affinity Agreements, the Bank issues the

credit cards and owns the credit card accounts. CompuCredit markets the credit cards
and services the accounts on behalf of the Bank. CompuCredit also purchases the credit
card receivables from the Bank on a daily basis, and pays the Bank a monthly fee based
upon the number of account statements processed.
16. Since at least 2005, the Bank and CompuCredit marketed credit cards

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throughout the United States under certain brand names including Tribute MasterCard,

Imagine MasterCard, Purpose Advantage Credit Card and the Embrace Visa Card

(collectively, CompuCredit Cards). The Tribute and Imagine MasterCards are referred to
internally by the Bank and CompuCredit as the Little Rock cards (Little Rock Cards).
17. Pursuant to the CompuCredit Affinity Agreements, CompuCredit had

the sole and exclusive right to solicit applications for the CompuCredit Cards.

CompuCredit created, designed, and distributed the marketing materials; established the credit cards' terms and conditions; developed the underwriting and credit criteria; and
maintained customer service functions.
18. The CompuCredit Affnity Agreements required CompuCredit to submit

to the Bank for prior review and approval before they were used in connection with the

CompuCredit Cards: (a) all marketing and solicitation materials such as mail
solicitations, telemarketing scripts, promotional material and advertising marketing; (b)

administrative materials such as manuals, training materials, policies, and written

procedures; and (c) consumer materials including cardholder agreements, billing
statements, statement inserts, and form letters.
19. As the credit card issuer and the account owner of

the CompuCredit

Cards, the Bank was responsible for ensuring that the marketing and solicitation practices for the CompuCredit Cards complied with all applicable laws, including
Section 5.
20. Pursuant to the CompuCredit Affnity Agreements, CompuCredit was

responsible for ensuring that the marketing and solicitation practices for the CompuCredit
Cards complied with all applicable laws, including Section 5.

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i. Little Rock Cards Program
21. The Bank and CompuCredit marketed the Little Rock Cards through

pre-screened direct mail solicitations, inbound and outbound telemarketing, and on the
Internet.

22. As described below, the written solicitations for the Little Rock Cards

misled consumers into believing that they would receive a MasterCard credit card with

$300 in available credit. The solicitations also failed to disclose adequately the
significant up-front fees that consumers would be charged.
23. Beginning approximately July 2005, the Bank issued 366,908 Little

Rock Cards to consumers who responded to these solicitations and there were more than

271,700 active accounts as ofJune 2006.
24. The Bank and CompuCredit targeted consumers whose credit scores

were typically between 450 and 600, and who had limited credit options.
25. The Little Rock products were marketed as MasterCard credit cards with

an initial credit limit of

typically $300 with no deposit required, no deposit fee, and/or no

application fee.

26. However, initial fees, typically consisting of an annual fee of $150 and

an account opening fee of $29, were charged and posted to the consumer's Little Rock
account immediately after the consumer applied for and was issued a card.
27. The Bank and CompuCredit also typically charged the consumer a

monthly maintenance fee of $6.50. In some instances, this fee was posted to the

consumer's account immediately after the consumer was issued a card. In other
instances, the monthly maintenance fee was not billed to the account until the consumer

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made his or her first purchase.

28. The Little Rock Cards initial fees and charges typically of$185.50
reduced the consumer's available credit from $300 to $114.50 before the consumer ever
used the card.
29. As part of

this program, consumers were required to make an initial

minimum payment of $20, sometimes referred to as an "activation payment," before the
Little Rock Cards could be used.

Deceptive Marketing Materials and Practices
30. At all times relevant to this proceeding, the Bank and CompuCredit

marketed the Little Rock Cards by sending consumers direct mail solicitation packages.
31. A typical and illustrative direct mail solicitation package contained the

following items: (l) an outside envelope; (2) a one-page cover letter; (3) a one-page
document titled "MasterCard Pre-Qualified Acceptance Certificate"; (4) a folded insert

titled "Introducing: the Tribute MasterCard" or "Introducing the Imagine MasterCard";
and (5) a two-sided document titled "Summary of Credit Terms" on one side and "Terms
of Offer" on the other.
32. A typical and illustrative direct mail solicitation package repeatedly and

with bold emphasis used words and phrases like "pre-qualified," "no application fee,"
and "no deposit required." The cover letter of

the solicitation package stated that the

consumer was pre-qualified for an unsecured Tribute MasterCard or Imagine MasterCard
with a credit limit of $300.
33. The solicitation failed to adequately disclose that consumers would be

immediately billed the $150 annual fee, the $29 account opening fee, and for certain

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solicitations, the $6.50 monthly maintenance fee. The solicitation package also did not
adequately disclose that consumers would be required to make an initial payment before

their Little Rock Card would be activated. For some solicitations, the package did not
adequately disclose that once the card was used, a $6.50 monthly account maintenance
fee would be charged to the account.

34. A typical and illustrative direct mail solicitation package manipulated
the words used or omitted words, the placement and size of

the text, and the overall

arrangement of

the solicitation packages to represent, expressly or by implication, that

consumers were pre-approved to receive a credit card that had $300 in available credit.
35. These direct mail solicitation packages, when viewed as a whole, were

deceptive in nature because they failed to adequately disclose the actual available credit,
the fees and costs of the Little Rock Cards, and the impact of

the fees and costs on the

available credit.
36. The solicitation package instructed consumers who wished to obtain the

Tribute MasterCard or the Imagine MasterCard to complete and return the "Acceptance
Certificate," call a toll-free number, or respond over the Internet.
37. Upon the consumer's acceptance of

the Little Rock Card direct mail

solicitation offer, if

the consumer was approved for the card, he or she was sent a

fulfillment package.
38. The fulfillment package included the consumer's Little Rock Card that

was not activated, a copy of

the Bank Credit Card Agreement, and a payment coupon

informing the consumer that an initial payment of $20 was required before the card could
be activated and used. The package also listed a phone number the consumer could call

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to pay the initial payment by telephone. The $20 payment was applied against the
consumer's Little Rock Card account balance.

39. A typical and illustrative fulfillment package included in small type and

on the reverse side of the credit card carrier information that there is an "annual fee," an

"account opening fee," and a "monthly maintenance fee." This information was not as
clear or prominent as, or in any proximity to, the representations about how to activate
the card.

40. The fulfillment package led consumers to believe that they were

obligated to make only a $20 payment to activate the card, and did not disclose or

disclosed inadequately that significant up-front fees had already been charged to their
accounts.

One Percent Minimum Payment Program for Past Due Accounts

Little Rock Card
41. At all times relevant to these proceedings, in numerous instances, the

Bank and CompuCredit automatically, and with no prior notice, placed consumers who

were more than 90 days delinquent on their Little Rock Card account into a payment
reduction program known as the "1 % Minimum Payment Program."
42. At all times relevant to these proceedings, neither the payment reduction

program, nor its terms and conditions, were adequately disclosed or explained to
consumers prior to their being placed in the program.
43. Under this program, consumers were allowed to pay either 1 % of

their

outstanding balance or $10, whichever was greater.
44. The Bank and CompuCredit represented, expressly or by implication, to

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consumers whose accounts were more than 90 days past due that enrollment in this
program would help them become current on their accounts.
45. The Bank and CompuCredit failed to disclose the effects of

the reduced

minimum payments, including that such payments may not cover all the fees and charges assessed during the period of reduced minimum payments, resulting in an increase in the overall account balance and possibly the imposition of additional fees including, but not
limited to, overlimit fees.
46. By reason of

the foregoing, the Bank and CompuCredits failure to

disclose, or failure to disclose adequately, material information regarding the 1 %

Minimum Payment Program was a deceptive act or practice in violation of Section 5.
47. By reason of

the acts and practices described in paragraphs 10 through 46,

the Bank and CompuCredit violated Section 5 as follows:
(a) The Bank and CompuCredit represented, expressly or by

implication, that consumers were "pre-qualified" to receive a Little Rock Card with $300

of available credit by opening an account. In fact, consumers who responded to the
solicitations and opened an account received only $114.50 or $121 of

available credit due

to the significant fees billed immediately to their accounts. Therefore, the Bank and

CompuCredits representations regarding the amount of credit that consumers would
receive were false or misleading and a deceptive practice.
(b) The Bank and CompuCredit represented, expressly or by

implication, that consumers were "pre-qualified" to receive a credit card with $300 of
available credit with "No deposit required," "No deposit fee," and "No application fee."
The Bank and CompuCredit failed to disclose, or failed to disclose adequately, that

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consumers would be charged substantial up-front fees, including an annual fee, an
account opening fee, and a monthly maintenance fee. In light of

the representations

made, the Bank and CompuCredits failure to disclose, or the failure to disclose
adequately, the material information about the up-front fees that consumers would be
charged, was a deceptive practice.
(c) The Bank and CompuCredit represented, expressly or by

implication, to consumers whose accounts were more than 90 days delinquent that
enrollment in the 1 % Minimum Payment Program would help them become current on
their accounts. The Bank and CompuCredit failed to disclose the effects of

the reduced

minimum payments, including that such payments may not cover all fees and charges
assessed during the period of reduced payments, resulting in an increase in the overall

account balance and possibly the imposition of additional fees including, but not limited
to, overlimit fees. The Bank and CompuCredits failure to disclose this material

information, or to disclose it adequately, was a deceptive practice.

48. The actions alleged in paragraphs 9 through 47 above beginning in at least
July 2005, represent the Bank and CompuCredits violations of Section 5 related to the
Little Rock Cards.

II. Purpose Advantage Credit Card Program
49. Beginning in at least September 2005, the Bank and CompuCredit,

through its two subsidiaries, CARDS Credit Services, LLC and Purpose Solutions, LLC, marketed the Purpose Advantage credit card (Purpose Advantage) through the Internet as

a "guaranteed", "pre-approved" credit card with a minimum credit limit of$50 and "no
enrollment fees."

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50. Beginning approximately September 2005, the Bank and CompuCredit

originated more than 26,000 Purpose Advantage accounts.
51. The Internet solicitations for the Purpose Advantage card misled

consumers into believing that they would receive a credit card with a guaranteed

minimum amount of credit of $50 and that there were "no enrollment fees."
52. However, initial fees, typically consisting of an annual participation fee of

$9.99 and a processing fee of$4.99, were charged to the consumer's account
immediately after the consumer was approved to receive the Purpose Advantage credit
card and before the consumer ever received and used the card.
53. The annual participation fee of$9.99 and the processing fee of$4.99

reduced the consumer's available credit from $50.00 to $35.02 before the consumer ever
received and used the card.

Deceptive Marketing Materials and Practices
54. At all times relevant to this proceeding, the Bank and CompuCredit,

through its subsidiaries, CARDS Credit Services, LLC and Purpose Solutions, LLC,

marketed the Purpose Advantage credit card over the Internet as a "guaranteed" "preapproved" credit card with "no enrollment fees" and with a minimum credit limit of $50.
55. The Internet solicitation failed to disclose, or failed to adequately disclose,

that the consumer would be immediately charged a $9.99 annual participation fee and a
$4.99 account processing fee prior to receiving and ever using the card.
56. The Bank and CompuCredits failure to disclose, or disclose adequately,

the significant up-front fees in its solicitations described in paragraphs 49 through 55 was
a deceptive practice in violation of Section 5.

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III. The Embrace Visa Program
57. At all times relevant to these proceedings, beginning in March 2006, the

Bank and CompuCredit marketed the Embrace Visa card to consumers with unpaid debts

that were charged offby prior creditors, including debts that were no longer subject to
suit under the applicable statute of limitations and debts that were no longer being

reported to consumer reporting agencies because they were outside the seven-year
limitation set forth in section 605 of

the Fair Credit Reporting Act (FCRA), 15 U.S.C. §

1681 c.
58. These unpaid

debts had been previously purchased by Jefferson Capital
Com puC red

Systems, LLC (Jefferson Capital), a wholly-owned subsidiary of

it. Jefferson
the state of

Capital is a limited liability company organized and existing under the laws of

Georgia with its principal place of

business in St. Paul, Minnesota.

59. As described below, the Embrace Visa card direct mail solicitations

misled consumers into believing that they would immediately receive credit cards, with
their prior debts transferred to the new cards and reported to consumer reporting agencies
as paid in fulL. In fact, consumers who applied for the Embrace Visa card entered into a

debt repayment program. Consumers did not qualify for a credit card until they paid
between 25% - 50% of

their charged off debt within a specified time frame, and even if

they made the required payments, consumers would receive a nominal credit line.
60. To market the Embrace Visa card, the Bank and CompuCredit arranged

for consumers to receive direct mail solicitations from Jefferson CapitaL. The Bank and

CompuCredit, through Jefferson Capital, targeted consumers with charged off debt with

principal balances between $200 and $10,000. These direct mail solicitations included an

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introductory letter from Jefferson Capital, the card offer letter, and a "Condensed Bank
Credit Card Agreement."
61. The Bank and CompuCredit used several versions of the Embrace Visa

card solicitation, depending on the amount of the original charged off account balance.
All of

the direct mail solicitations offered consumers a "no annual fee unsecured credit

card" and stated in bold type, "You're Pre-Approved for the Embrace Visa Card" or

"You're Pre-Approved for the New Embrace Fresh Start Solution and Visa Card." The
solicitations encouraged consumers to "Sign Up Today!" and proclaimed, "Soon you can
enjoy all the convenience and benefits Visa has to offer."
62. The Embrace Visa card direct mail solicitations informed consumers that
Jefferson Capital "made an arrangement with the issuer of

the Embrace Visa card to

provide you with the opportunity to receive a no annual fee unsecured credit card." Consumers were also told that they were "Pre-Approved for the Embrace Visa Card."
Consumers were not told that CompuCredit is both the parent company of Jefferson
Capital and the company responsible for marketing the Embrace Visa card for the Bank.

63. The Embrace Visa card solicitations included a letter from Jefferson

Capital stating that the offer was "an opportunity to satisfy this debt and enjoy the

convenience of a new Visa card." The solicitations represented to consumers that their
charged off debt would be "transferred to a new Embrace Visa account as the first

transaction on your new account." The solicitations further represented that "(aJs an
added bonus, once you qualify to receive a Embrace Visa card, we will see to it that the
credit bureaus are notified that your former account has been paid in fulL."
64. These representations in the Embrace Visa card solicitations led

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consumers to believe that: (a) they would immediately receive an Embrace Visa card

upon acceptance of their "Pre-Approved" application; and (b) their charged off debt
would be immediately transferred to an Embrace Visa card account and reported to
consumer reporting agencies as "paid in fulL."
65. In fact, consumers who received the Embrace Visa card solicitations were

not "pre-approved" to receive a Visa credit card. Rather, the Embrace Visa card program
was an attempt to collect consumers' charged off debt balances by enrolling consumers in
a debt repayment plan and, in some instances, renewing both the statute of limitations and
the credit reporting periods on consumers' charged off debt.
66. Moreover, consumers' charged off debts were not transferred to a

Embrace Visa card account "as the first transaction on (theJ new account" or reported as

"paid in full" when consumers responded to the solicitations. Instead, consumers were
required to pay between 25% and 50% of their originally charged off debt within 12
months before the remaining balance was transferred to the Embrace Visa card account
and the charged off debt was reported as paid in fulL. Only then did the consumer
become eligible for the Embrace Visa card.
67. Even if a consumer made suffcient payments to receive the Embrace Visa
the amount of

card, the available credit was typically only about 5% of

the charged off

debt balance that was transferred to the card. As a result, the Embrace Visa card
provided the consumer with little utility for purchases or cash advances.
68. By reason of

the acts and practices described in paragraphs 9 through 20

and 57 through 67, the Bank and CompuCredit violated Section 5 as follows:

(a) The Bank and CompuCredit represented, expressly or by

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implication, that upon ac