Responding in court papers, Zions argues that it had no knowledge of any warnings. "All of the [government enforcement actions against telemarketers identified by the plaintiffs] were initiated after [Modern Payments] had ceased doing business" with them.
At stake is nearly $40 million that was allegedly withdrawn illegally from victims' accounts between 2007 and 2009, and the reputation of Zions and other banks that face the prospect of making huge settlements or facing money-laundering charges.
According to court documents, the alleged scheme worked like this:
• Corrupt telemarketers induced victims to disclose their bank account information. They also illicitly purchased lists of account numbers with the aim of taking victims' money without even the pretense of a sale.
• Once they had the bank account information, the telemarketers needed partners to process their transactions and take money from victims' accounts. Because most banks won't deal with telemarketers, they needed a third-party "payment processor."
• Those payment processors take the transaction information and convert it into an electronic debt entry. The lawsuit alleges payment processors [such as Modern Payments] bring a "precious commodity" to the table, a relationship with a bank, which allegedly in this case was Zions.
• The bank, using what is known as the ACH, or Automated Clearing House Network, wires the debit to the victim's bank, which results in money being taken from the victim's account and transferred to the payment processor's account. Then the payment processor, after taking its own cut, sends the money to the telemarketing company.
One alleged victim said he thought he was dealing with a Medicare official but instead later discovered that $299.95 was missing from his bank account. The money allegedly went to National Health, a unit of NHS Systems, of Collegeville, Pa., which was a customer of Modern Payments. The FTC in April permanently banned NHS Systems from telemarketing and ordered it to pay a $6.9 million fine after accusing it of defrauding consumers.
In court documents, Zions insists it stopped doing business with NHS in 2008, but its representatives in recent days have said little about the case on the record. James Abbott, director of investor relations, repeated assertions the bank will tell its side of the story in court.
The plaintiffs' side has been more than willing to talk. Howard Langer, a Philadelphia attorney who hopes to represent the alleged victims, said the case is about the integrity of the banking system. "Here you have a bank that effectively gave the keys to every bank account in the United States to a series of companies, all of whom were found to be perpetrating fraud and extracting money from people's accounts without them even knowing about it basically theft."
He said there were victims all across the country, including in Utah.
But a check of federal court records and inquiries to the Utah Division of Consumer Protection and advocates for the elderly failed to turn up the names of any victims.
Also, at this point Zions has not been named in any action by the FTC or any other government agency. It did, however, in its most recent annual report to the Securities and Exchange Commission, acknowledge it was being investigated by the U.S. attorney's offices in New York and Pennsylvania for possible money laundering and processing payments for allegedly fraudulent telemarketers.
Many of the warnings Zions was said to have received centered on the large number of "unauthorized returns" Modern Payments (MP) was seeing as it handled transactions for National Health and other telemarketers.
Such unauthorized returns, according to court documents, occur either when customers stop payment after realizing that they have been scammed or after they discover that unauthorized charges have been posted to their accounts.
The lawsuit alleges unauthorized returns virtually never occur on the ACH Network and that banks typically have no unauthorized returns.
"Zions itself had no unauthorized returns in August 2006, the month before it began processing transactions for [Modern Payments]. However, when MP began entering transactions via Zions' portal to the ACH Network on Sept. 11, 2006, it immediately began to generate an astounding number of unauthorized returns," the suit says. "In its first three weeks, the Federal Reserve reported that the scheme generated over 800 unauthorized returns."
And it supposedly got worse.
"In its first full month [October 2006], there were 1,879 unauthorized returns," the plaintiffs state. "This number continued to grow month after month. The Federal Reserve has revealed that in January 2008 alone, a year into the scheme, Zions had an astonishing 15,387 unauthorized returns."
Moreover, court documents allege that the NACHA the National Automated Clearing House Association has warned banks there is a correlation "between high return rates relating to unauthorized debits and ... fraudulent/deceptive marketing practices."
And plaintiffs added that "in Nov. 2006, just as the scheme was getting under way, Jeanette Fox, NACHA's senior risk investigator, contacted Zions and expressed 'alarm' at the sudden increase in returns. Ms. Fox told Zions that all of the returns were being generated by MP and that a number of MP's customers were on NACHA's 'watch list.' "
But in a deposition, Fox also acknowledges to Zions' attorneys she wasn't aware of any evidence the bank or Modern Payments knew they were processing for fraudulent telemarketers.
In court papers, Zions noted that Modern Payments stopped providing services to NHS after it couldn't bring down its high return rates a direct contradiction of allegations that it "purposefully and knowingly directed [services]" toward a fraudulent scheme.
The FTC also was said to have warned Zions in January 2007. "It informed Zions that 'several' of MP's customers were being investigated regarding consumer complaints of unauthorized charges," the plaintiffs alleged.
FTC spokesman Frank Dorman said he could not confirm that actually took place. "If that happened, it would be non-public information."