AmeriDebt Founder Faces Trial Next Week

FTC Alleges Misuse Of Tax-Exempt Status

Andris Pukke invoked the Fifth Amendment at a Senate hearing. (By Jonathan Ernst For The Washington Post)

Andris Pukke was the founder of what was once one of the nation's largest and most aggressively marketed debt-management firms, but according to federal regulators, what he was really doing was misleading debt-burdened consumers into paying high fees to support his lavish lifestyle.

Pukke, the founder of the defunct Germantown company AmeriDebt Inc., was scheduled to face a civil trial beginning tomorrow, but late last week, his estranged wife, Pamela Pukke, settled with the Federal Trade Commission and the trial was postponed a week, prompting speculation that he might also settle.

According to the FTC, AmeriDebt falsely billed itself as a nonprofit organization while Pukke milked clients, earning more than $80 million, which he and his wife spent on expensive cars; luxury foreign vacations; and multimillion-dollar homes in Maryland, Florida and California.

His wife had been a co-defendant because the FTC argued that she had benefited financially from the alleged fraud even if she didn't participate in it.

Pukke and his lawyer have portrayed the 36-year-old former executive as an astute businessman who used cable television, toll-free telephone service and the Internet to modernize the credit-counseling business and make it more accessible, efficient and convenient. In so doing, Pukke says, he saved consumers millions of dollars by arranging credit card repayment plans that reduced interest rates and eliminated late fees. And he has said in legal filings that he had no knowledge of fraud or wrongdoing.

The trial, which had been expected to last about six weeks, is the latest step in the government's crackdown on the credit-counseling industry, which for decades has advised consumers on ways to reduce debt, often through repayment plans that avoid bankruptcy.

As consumer debt skyrocketed over the past two decades, a new breed of credit counselor emerged, one that relied heavily on television advertising to promote its services and toll-free telephone lines to dispense advice, replacing the person-to-person consultations offered by older firms.

As more aggressive firms proliferated, so did consumer complaints, prompting the Internal Revenue Service to begin auditing 60 credit-counseling organizations, including AmeriDebt, in late 2003 to see if they were misusing their tax-exempt status to benefit their owners. Those audits continue.

More recently, the U.S. Postal Inspection Service began looking into the business activities of a number of firms run by Pukke or his relatives to determine whether any committed mail fraud by receiving payments from consumers under false pretenses.

The FTC sued in November 2003, accusing AmeriDebt of deceptive and misleading business practices. The lawsuit and a related class action by former clients of both AmeriDebt and a related firm are the subjects of the now-postponed trial. If the trial occurs, the two cases will be heard simultaneously by U.S. District Judge Peter J. Messitte, who will rule on the FTC's case and part of the class action. A jury also will be empaneled to decide some of the class-action issues. However, Messitte has ruled that he will decide after the verdict whether the jury's findings will be binding or advisory.

Today, AmeriDebt is out of business. In November 2003, as state and federal law enforcement officials were about to file lawsuits against the company, AmeriDebt stopped accepting new clients. It filed for bankruptcy protection in June 2004 and subsequently sold its client list to another third-party debt-management firm.

Both the FTC and class-action lawsuits contend that AmeriDebt falsely advertised itself as a nonprofit organization that offered free consultations and charged no upfront fees. But consumers who sought AmeriDebt's help were charged a high initial fee, often several hundred dollars, hidden as a "voluntary contribution," the FTC lawsuit says.

Additionally, the suits say, AmeriDebt funneled the fees to another company created and run by Pukke, a for-profit firm called DebtWorks Inc. that did the data processing for AmeriDebt and other credit counseling firms, most of them run by either Pukke's relatives or friends. The lawsuits say DebtWorks paid Pukke and his wife more than $70 million from 1998 to 2003, before Pukke sold the company to a group of DebtWorks managers.

Pukke has repeatedly denied the charges. In an interview in 2001, he told The Washington Post: "No one ever talks about the good these companies are doing for people, helping hundreds of thousands of people get out of debt by saving them thousands in interest and late fees."

Since law enforcement officials began investigating AmeriDebt and DebtWorks, Pukke has invoked his Fifth Amendment right not to inciminate himself. He did so during a 2004 Senate hearing at which he also asked that no cameras or television lights be directed at him. His request was denied.

In legal filings, Pukke says consumers benefited substantially from AmeriDebt because its debt repayment plans helped them pay credit card bills faster and at less expense. According to one of his expert's calculations, AmeriDebt clients saved $154 million. Savings would have been even greater -- $3 billion -- if all consumers had stayed with their repayment plans instead of dropping out, according to the expert witness.

Pukke said in his filings that he created DebtWorks to reduce AmeriDebt's operating costs. It was the only firm that could handle AmeriDebt's increasing volume and offered a great financial deal, according to the filings. AmeriDebt and DebtWorks were separate companies, according to Pukke, even though their offices were separated by only a parking lot. Their proximity was not surprising, he said. "DebtWorks set up its operations in the vicinity of its largest customer."

The FTC said its lawsuit "represents Andris Pukke's 'third strike.' " In 1996, he pleaded guilty in Pittsburgh to a federal charge of trying to defraud consumers by falsely promising debt-consolidation loans. The U.S. attorney said Pukke collected more than $38,000 in what the U.S. attorney's office called a "sham" lending operation. Pukke agreed to refund the money and not engage in any advance-fee-for-loan operation in the future. He was sentenced to three years of probation and fined $5,000.

In 1999, the District of Columbia sued AmeriDebt, Pukke and another of his firms -- Infinity Resources Group Inc. -- charging deceptive practices in promising but not delivering debt-consolidation loans. The suit was settled in May 2002; the defendants agreed to make refunds without admitting wrongdoing.

The FTC, finding that consumers paid AmeriDebt $172 million in fees, is asking Messitte to order Pukke to refund that amount to consumers. But it is unclear how much money would be available for refunds.

Concerned that Pukke might be dissipating his assets, the FTC persuaded Messitte in April 2005 to order a freeze on his assets, pending the outcome of the case. Messitte also named a receiver to control Pukke's funds after the FTC and class-action plaintiff lawyers detailed a pattern of lavish spending and money transfers to offshore accounts and trusts. In September, the receiver said Pukke was hiding millions of dollars in assets and continuing to spend money extravagantly despite the freeze, including $6.4 million for a home in Laguna Beach, Calif. The receiver said Pukke used a high school friend to make the down payment on the house after Pukke's girlfriend toured it, with a man real estate agents said looked like Pukke.

Pukke filed for bankruptcy protection in July 2005, listing assets of $53.4 million, including $24 million in real estate (four multimillion-dollar properties, two in Newport Beach, Calif., and two in Miami), and $13.6 million in liabilities.

Those liabilities don't include the lawsuits; $300 million in IRS claims; or Pukke's legal fees, which in September totaled $4.5 million.

Messitte told Pukke's lawyer John B. Williams -- whose usual hourly rate is $575 -- that while Pukke was entitled to a defense, it was not to be at "Cadillac rates." He appointed an examiner to determine what Williams should be paid.