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Debt Collector Defends Against Fraud Charges

ENCORE CAPITAL GROUP INC.

CEO: Brandon Black.

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Revenue: $110 million in first quarter 2011; $87 million for like quarter of 2010.

Net income: $13.7 million in first quarter 2011; $10.9 million in like quarter of 2010.

No. of local employees: 300.

Year founded: 1998.

Stock symbol and exchange: ECPG, Nasdaq.

Company description: Buyer and collector of defaulted consumer debt.

Robo-signing allegations leveled by the Minnesota Attorney General’s office at Encore Capital Group Inc. haven’t been resolved, but the San Diego debt collection firm says it continues to discuss the issue with officials.

In late March, Attorney General Lori Swanson issued a press release accusing Encore of fraud in the filing of false affidavits in the collection of consumer debt, usually old credit card debt.

In the statement issued March 28, Swanson said Encore’s subsidiary companies, Midland Funding LLC and Midland Credit Management Inc., “cast a wide net to find people who may owe old bills and often pursue the wrong person all together or pursue people who paid the bills long ago.”

Swanson alleged the Midland subsidiaries often filed thousands of lawsuits against residents of her state for the collection of old purchase debt from large banks, often supporting the suits with robo-signed affidavits. The practice of robo-signing refers to the mass signing of thousands of legal documents without verifying their accuracy.

Encore quickly went on the offensive, issuing a statement the following day that noted the company settled a 2008 lawsuit in February in which Encore faced similar charges of improper use of robo-signed affidavits to support its collection efforts.

Encore Chief Executive Officer Brandon Black said because of the litigation, the company conducted a full analysis of its affidavit process and made changes. In February, Encore disclosed a $5.2 million settlement without admitting guilt.

Bill of Rights for Consumers

As evidence that Encore is committed to conducting its business ethically, the company adopted what it said was an industry-first consumer bill of rights. An entire section in the bill is dedicated to the use of litigation in resolving outstanding debt obligations.

In his remarks at last week’s release of Encore Capital’s first-quarter results, Black said the company has been beset with other litigation, including two national class action suits filed in a San Diego federal court alleging the company violated the Telephone Consumer Protection Act, prohibiting contacting debtors on their cell phones without their consent.

He said the class action litigation is headed to a hearing in July, and that regarding the Minnesota allegations, the company has had preliminary discussions.

The negative publicity didn’t have any impact on Encore Capital’s first-quarter results, which included gross collections for the quarter of $191 million, up 35 percent from the like quarter of 2010, and net income of $13.7 million, or 54 cents per diluted share, compared with net income of $10.9 million, or 44 cents per diluted share, in the like period of 2010.

The earnings number beat analysts’ estimates by a penny and helped boost Encore’s stock, traded under ECPG on the Nasdaq exchange, by 37 cents to close April 27 at $27.87, only a few cents below its 52-week high.

Litigation as a Last Resort

While Black told stock analysts the company prefers to work out debt payment plans with the defaulted borrowers, and tries to avoid litigation because it’s so expensive, “most choose not to engage with us, forcing us to use litigation.”

Despite a flurry of reports of consumers paying down outstanding debt, Black said he foresees no shortage of supply of bad debt that banks are charging off.

In the first quarter, Encore said it spent $91 million to purchase portfolios of bad debt with an aggregate face value of $2.9 billion, for an average purchase price of 3.1 percent of face value. The company also entered into purchase agreements in the past quarter for receivable portfolios with a face value of about $4.7 billion for about $137 million.

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