Fool Me Once, Fool Me Twice

Two collection agencies - which bought delinquent credit card and other bank debt - raised millions based upon misrepresented collection histories and the misapplication of GAAP.   

Bill Bartmann liked to be larger than life. After the death of his failed oil services company in the 1980s, and his traumatic experiences with creditors (whom he owed nearly $1 million), Bartmann became oddly destined to be what he liked to call a "collector with a heart."

Starting with $13,000 in working capital in 1986, in the midst of the thrift industry failure, Bartmann formed Commercial Financial Services (CFS) and began purchasing defaulted loans at steep discounts from the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation (RTC). By 1992, Bartmann's collection success produced a viable business with 45 employees.

Six years later, CFS had sold $2 billion in delinquent credit card receivable and other bank debt-backed securities and CFS had grown to 3,900 employees, making it Tulsa, Oklahoma's ninth-largest employer. CFS made Inc. Magazine's fastest growing company list three consecutive times and Forbes estimated that Bartmann and his wife, Kathryn, were worth $530 million - each.

A generous man, Bartmann became a civic leader, magnanimous not only to his community, but to his employees. He financed a fledgling singing career for one of his staff and sent another to Calcutta to realize a life-long dream of working with Mother Teresa.

But Bartmann was no saint. His empire would soon crumble - the victim of misrepresenting the collections he was realizing from the delinquent debt he purchased and the disregard generally accepted accounting principles (GAAP). Fooled once, Wall Street should have understood the scam that cost investors hundreds of millions of dollars. But in early March of this year, the FBI raided the former offices of Creditrust, a one-time CFS competitor, and while it may be too early to tell, Creditrust may well have committed the same fraud using the same techniques. Déjà vu all over again?

CFS generated purportedly massive profits by purchasing delinquent credit card debt from credit card issuers at a fraction of face value. Banks and other issuers typically sold the delinquencies at 2 cents to 12 cents on a dollar of face amount, depending on the age of the receivable and other factors. Issuers had incentive to sell the delinquencies because the recovery process was lengthy and labor intensive even if the receivables were placed with outside collection agencies.
Using a kid-glove approach - no pressure or threats - with debtors, Bartmann told analysts that for every 10 cents he spent, he could collect an average of 35 cents. With CFS collections apparently, but falsely, supporting his contention that CFS could more than triple its investment, Bartmann pioneered the securitization of delinquent credit card receivables by pledging thousands of delinquent accounts to secure the bond holders who funded his debt purchases.