An examination of the steps leading up to the swift demise of one multi-million-dollar lead generation company exposes many lessons that should be quickly learned by others in this business.
By Stipulated Order entered July 5, 2017 by the Federal Trade Commission (FTC), the defendants, Blue Global LLC, a lead generation company, and its CEO, were fined $104 million by the FTC for deceptive trade practices in violation of the Federal Trade Act. Following the Complaint, filed only 2 days before the Stipulated Order, both the company and CEO filed bankruptcy. However, the $104 million dollar fine per stipulation survived the personal bankruptcy of the CEO. It is important to highlight here that deceptive trade practice violations can pierce the corporate veil and impose personal liability on officers of the company.
How third-party lead generation operations work
Lead generators market on behalf of others. For instance, a consumer is searching the Internet for auto insurance. Chances are they will arrive at a site that offers to provide quotes from multiple insurance agents. The site does not sell insurance, but merely gathers lead information from interested consumers and then sells these leads to agents representing various carriers.
A simple lead generation transaction is where one site collects and sells leads directly to the company that will be pursuing or nurturing that lead. For instance, the Rocket Lawyer user base is substantially made up of small businesses. Rocket Lawyer will market small business insurance opportunities to its user base and then sell leads generated directly insurance agents who will reach out to the leads.
A more complex process involves lead aggregators, like Blue Global. In this scenario, a company will set up multiple websites marketing, for instance, residential mortgage loans and offer to match the consumer up with a lender. The lead information, which includes sensitive information necessary to evaluate eligibility, such as social security numbers, will be automatically posted on an aggregation system. This system is available to potentially hundreds of lead purchasers. Via pre-set parameters, lead purchasers virtually instantaneously, evaluate, qualify, bid on and purchase these leads. These lead purchasers may be lenders or may be lead aggregators themselves that will purchase and immediately attempt to sell a lead through a different lead generation system. These markets are fluid and fast.
Enter Blue Global
The most nefarious industry utilizing the lead aggregator system is the consumer loan industry. Loan leads can sell for up to $200 each. This is big business. Enter Blue Global.
Blue Global set up multiple websites to collect lead information from persons interested in obtaining payday loans (or short term small loans), small installment loans (up to $35,000) and auto loans. Blue Global collected from consumers personal and financial information such as social security numbers, bank account and routing information, drivers’ license numbers, income, credit scores, etc. Once received, Blue Global then submitted the lead information to its lead aggregation system.
During a five-year period, Blue Global collected approximately 15 million loan applications and selling 28% of the leads. You can quickly do the math to calculate the potentially massive revenue.
So where did Blue Global go wrong and what are the lessons to learn?
- Blue Global advertised that consumers would be matched with loans with the lowest interest rates and other favorable terms. In fact, there was no effort or even possibility to search for the lowest rate. Blue Global just dumped the leads into the lead aggregation system, and the highest bidder, regardless of terms, purchased the lead.
- Blue Global advertised that loan applications would be submitted to more than 100 lenders. In fact, the pool of potential buyers on the lead aggregation system was composed of many buyers that were not lenders at all. These non-lender buyers may seek to resell the leads to lenders, or use or resell the lead information for other purposes. In fact, only about 2% of leads were actually sold by Blue Global to lenders and therefore Blue Global had no idea how many of such leads were ever purchased by lenders.
- Blue Global represented that all personal information provided in the loan application was safe and secure and shared only with trusted partners. However, application information was transferred via the aggregation system to third parties without making any effort to verify that third parties actually secured the information. Blue Global imposed no security obligations on lead buyers.
- Blue Global represented that most applicants would be approved for loans. In fact, most were not approved for loans.
- Disclaimers on Blue Global’s websites that may have corrected some of the misrepresentations were not conspicuous and were buried in other terms.
- At some point, Blue Global drafted policies that purported to correct problems of misuse of personal information by lead purchasers, but Blue Global did not enforce these policies. For instance, they prohibited remarketing of leads, sharing leads with non-lenders, and limited use of lead information to the consumer’s specific intent, but Blue Global never enforced these terms.
You can question the ethics of the business model used by Blue Global, but Blue Global’s legal problems did not arise from the business model itself, but from its misrepresentations about its business model, as described above.
The lesson is clear. When marketing to collect and resell leads, all of the representations made on the web pages where leads are collected need to be accurate. If disclaimers are posted on the site, then the disclaimers need to be conspicuous (see FTC guidance on conspicuous disclaimers). If the lead generator imposes legal compliance requirements on purchasers of leads, then there needs to be a reasonable effort to monitor and enforce these requirements.
As seen in this case, the potential consequences from FTC actions prosecuting deceptive trade practices can be substantial. Therefore, it is prudent to perform period audits of lead generation operations to verify compliance with applicable legal requirements.
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