Discover Faces Shareholder Lawsuit Over Marketing Tactics

Discover Financial Services (DFS) is facing a new lawsuit over the marketing of its payment protection and other fee-based credit card products — this time from one of its own shareholders.

James F. Groen, a Discover investor, argues in a complaint filed Tuesday that the company used "highly deceptive and misleading telemarketing calls" to sign consumers up for its insurance-like payment protection program and similar products, like identity-theft protection.

Those practices are being investigated by regulators at the Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau, which have said that they plan to take a joint enforcement action against the company.

As such, the company has "exposed [itself] to tens of millions of dollars in damages as well as severely injured [its] reputation, goodwill, and standing in the business community," according to Groen's complaint. Discover has estimated damages from that action at $110 million or more.

So far, the company has agreed to a class-action settlement of $10.5 million and a $2 million settlement with the attorney general of Minnesota on related charges. Discover is still involved in lawsuits filed by AGs in Hawaii and West Virginia, and is being investigated by Missouri's AG.

Meanwhile, officials at the CFPB and the Office of the Comptroller of the Currency last month slapped Capital One with a $210 million enforcement action over the marketing of its payment protection products.

In this newest lawsuit, Groen lists 17 Discover executives and directors as defendants, including Chairman and Chief Executive David Nelms and Chief Financial Officer Mark Graf.

The complaint argues that the company's officers and directors breached their fiduciary duties, contributed to corporate waste and received unjust enrichment from the marketing of the products, which bring in hundreds of millions of dollars in annual revenue each year. It asks that the defendants pay the company for the amount of damages sustained and that the court directs the company to "take all necessary actions to reform and improve its corporate governance and internal procedures" to avoid a repeat incident.

The lawsuit was filed in the Eastern Division of the U.S. District Court for the Northern District of Illinois.

A Discover spokesman declined to comment.

For reprint and licensing requests for this article, click here.
Consumer banking
MORE FROM AMERICAN BANKER