WASHINGTON -- The federal government's consumer financial watchdog on Tuesday sued Morgan Drexen Inc., of Costa Mesa, alleging it charged more than 22,000 customers millions of dollars in illegal upfront fees to help them resolve outstanding debts.
The suit by the Consumer Financial Protection Bureau says Morgan Drexen and its chief executive, Walter Ledda, illegally deceived consumers into signing up for costly bankruptcy-related services by telling them they would be "debt-free in months."
An investigation, however, found that "little to no bankruptcy work is actually performed for consumers," the bureau said.
The contract for those services "is a ruse designed to disguise the illegal upfront fees the company is charging" that typically amount to hundreds of dollars per customer, the bureau said.
Federal law prohibits companies from charging fees for debt-relief services until the debt has been settled or its terms have been altered.
“This company took advantage of people who were struggling,” CFPB Director Richard Cordray said. “The company charged consumers illegal fees and deceived them about the services provided.”
Since October 2010, more than 22,000 Morgan Drexen customers signed up for its bankruptcy program, the bureau said. Despite paying the upfront fees, "only a tiny fraction of consumers who work with the company ever become debt-free" the bureau said.
The suit, filed in U.S. District Court in Los Angeles, ratchets up a dispute between the bureau and Morgan Drexen, which provides services to consumers through debt-relief lawyers.
In July, the company filed a suit against the bureau in U.S. District Court in Washington, D.C. The suit said the bureau lacked the authority to demand documents and sensitive financial records about the company's customers.
The suit says such data mining violates attorney-client privilege. Some Republican lawmakers have criticized the bureau for its data collection efforts.
Morgan Drexen's suit also alleges that the bureau's structure is unconstitutional because it is funded directly by the Federal Reserve, outside the congressional appropriations system. The arrangement allows the bureau to avoid proper checks and balances, the suit said.
The company said Tuesday the bureau was "overreaching" and "attempting to regulate lawyers practicing law."
Morgan Drexen also said the bureau was engaging in "procedural gamesmanship" by filing a lawsuit in Los Angeles instead of simply fighting the D.C. suit.
The bureau was "creating a distracting separate lawsuit rather than allowing its constitutional structure to be evaluated in a fair and reasonable procedure by a judge in D.C."
In May, Wisconsin's banking regulator ordered Morgan Drexen to pay $6.1 million in restitution and fines for violating state debt-collection laws. The company is challenging the order.