Description

On December 20^th, 2019, the FTC formally filed a complaint against Fleetcor and CEO Ron Clarke – the details of which we candidly found stunning

Ø  Fleetcor attempted to preempt the lawsuit with a deceptively worded 8-K designed to minimize the scope of the FTC investigation

Ø  In this write-up, we categorize each charge being levied against Fleetcor / Ron Clarke and lay out the FTC’s unedited allegations and evidence

Ø  We believe the two key takeaways from the FTC lawsuit are:

Ø  Fleetcor has engaged in a brazen and systematic practice by which they seek to defraud their customers through convoluted and hidden fees

Ø  This fraud has been perpetuated and driven directly by CEO Ron Clarke

Ø  Fleetcor has built a system internally that discriminates against the “little guy”, which qualifies customers for excessive fees based on size / sophistication

Ø  We also lay out precedents to show just how rare it is for the FTC to charge a CEO directly in a complaint, which points to the egregiousness of Fleetcor’s crimes

Ø  Fleetcor has been a hedge-fund darling over the last two years due to their ability to generate outsized organic growth through a “unique business model” but we believe this is all about to turn

Ø  We believe the stock could easily trade to $200 or lower as the Company misses earnings estimates and the business model falls under increasing public scrutiny

We believe this is a watershed moment which marks the beginning of the end of the Fleetcor fraud

Analyzing Fleetcor’s Response

On December 19^th, 2019, Fleetcor filed an 8-K in an attempt to preempt the FTC’s formal complaint against the Company and CEO Ron Clarke. The full contents are below:

Ø  In FLEETCOR’s 10-Q filing on November 12, 2019, it disclosed discussions with the Federal Trade Commission (“FTC”) regarding claims relating to its advertising and marketing practices, principally in its U.S. direct fuel card business within its North American Fuel Card business. FLEETCOR has attempted to engage constructively with the FTC to resolve this matter, however, at this time, negotiations are at an impasse, which may result in the filing of a civil complaint by the FTC. The impasse is primarily related to what FLEETCOR believes are unreasonable demands for redress made by the FTC. FLEETCOR continues to believe that the FTC’s claims are without merit and these matters are not and will not be material to the financial performance of FLEETCOR.

Ø  Revenue in the U.S. direct fuel card business was approximately $600 million in the twelve months ending September 30, 2019, with U.S. accepting merchants and business accounts contributing roughly equal amounts. Of the approximately $300 million of business account revenue, avoidable risk related fees such as high-risk credit and late charges contributed about $150 million of revenue in the same time period.

Ø  FLEETCOR takes governance and oversight matters seriously and is confident that it has acted in accordance with all applicable laws. FLEETCOR has taken and will continue to take steps to better serve and inform its customers.

Thoughts:

Ø  Through clever paragraph separation, Fleetcor deliberately misrepresented the scope of the FTC’s investigation. Note how the first paragraph speaks to the FTC complaint and the second attempts to mislead by establishing the scope of the investigation as just the $150 million. The FTC complaint is FAR more wide reaching than just this $150 million of revenue. Notice how Fleetcor does not connect the first paragraph to the second paragraph in any way (that would be an outright lie). Instead they try to mislead the investing community into thinking that they are connected by simply placing the two paragraphs in the same document

Ø  It speaks to the hubris of the Company and its CEO that they would call a major government lawsuit against them “immaterial” 24 hours before they are about to be formally sued. Do you believe the FTC enjoys having their 3-year case that has not even been filed yet be called immaterial and will the FTC now ensure that it is NOT immaterial?

Ø  Fleetcor also announced a hasty ASR which, along with their current outstanding share repurchase authorization, they have been using to aggressively buy back the stock to prop up the security and lure the market into a false sense of complacency (if the stock isn’t down, why should I care?)

Analyzing The FTC Complaint

Ø  The FTC complaint alleges far more wide-ranging fraud than simply the $150 million that Fleetcor highlighted in their previous day filing.

Ø  Specifically, the FTC claims that “FleetCor has enticed businesses to sign up for its fuel cards by making three main claims:

Ø  Customers will save money

Ø  The cards provide fraud controls that protect customers from unauthorized transactions

Ø  The cards have no set-up, transaction, or membership fees, including when used to purchase fuel at any of the thousands of locations nationwide that accept FleetCor fuel cards

Ø  Each of these claims is false or unsubstantiated.”

Ø  Furthermore, the FTC alleges and proves throughout the complaint that:

Ø  Defendant Ronald Clarke (“Clarke”) is the Chief Executive Officer of FleetCor Technologies. At all times material to this Complaint, acting alone or in concert with others, he has formulated, directed, controlled, had the authority to control, or participated in the acts and practices of the Corporate Defendant, including the acts and practices set forth in this Complaint.

Ø The following analysis goes through each charged count in the complaint and present unedited excerpts. The only areas where we have inserted our own commentary are annotated as such.

Count 1 – Deceptive Savings Claims

Defendants have represented, expressly or by implication, that consumers will achieve specific per-gallon savings by using FleetCor’s fuel cards.

Ø  “Despite these claims, customers generally do not experience any savings, due to significant unexpected fees FleetCor charges, as described below, that exceed any savings customers might experience using FleetCor’s cards. These unexpected fees often amount to at least hundreds to tens of thousands of dollars in charges per year per customer.”

Ø  Further, even setting aside fees, customers typically do not achieve the promised per-gallon savings, including because the savings come as rebates and discounts that are not available for fuel purchases at a number of large retailers frequently used by FleetCor’s customers’ drivers. As set forth in fine-print disclaimers at the bottom of the advertisements shown above, these retailers have included Pilot, Texaco, Chevron, and Loves.

Ø  In fact, many customers have not been able to fuel at those tens of thousands of locations nationwide without incurring a transaction fee. Instead, many customers have incurred a “convenience” transaction fee of $2.00 or more per transaction when their drivers have used FleetCor fuel cards at any of a number of large fuel retailers that are frequently used by the drivers—including Pilot, Texaco, Chevron, and Loves—because FleetCor considers those retailers to be part of its non-preferred “Convenience Network.”

Ø  In order to avoid the fee, each time customers fuel, they must first call FleetCor’s customer service line or go through FleetCor’s website or app to determine where they can fuel to avoid the fee. They must then drive to those specific locations, when often, another location that accepts FleetCor fuel cards is closer and more convenient. FleetCor has not disclosed this fee in its advertisements touting nationwide acceptance and convenience.

Ø  Our Note: Fleetcor is DELIBERATELY routing customers to locations further away than necessary in order to have them fuel up at the fee-inducing locations

Ø  In response to a public report highlighting FleetCor’s problematic marketing and fee practices and reporting that, despite FleetCor’s savings claims, customers frequently pay more than the retail price of fuel on each gallon pumped, Defendant Clarke provided “thoughts on what we should do” and asked employees 8 to “calculate the total US retail discount that customers are getting.” Clarke then received an email with this “discount analysis” showing that customers only saved a fraction of a cent per gallon. After receiving this information, Clarke did not direct employees to make any changes to the Company’s per-gallon savings advertising.

Count 2 – Deceptive Fraud Control and “Fuel Only” Claims

Defendants have represented, directly or indirectly, expressly or by implication, that FleetCor’s fuel cards have fraud controls that prevent unauthorized purchases and consumers can restrict cards to “fuel only” purchases.

Ø  Despite these representations, FleetCor has failed to give customers the protections it has promised. In fact, in numerous instances, FleetCor’s fuel cards have permitted purchases of any type of good or service available at a fueling site, regardless of whether a customer selected “fuel only” card access

Ø  Customers generally do not expect that they will be liable when FleetCor’s controls fail to work as advertised. One customer thought it was protected from fraud when it elected to implement FleetCor’s fraud controls. Yet when unauthorized purchases were made on the account, FleetCor told the customer that it was responsible for the purchases. Similarly, another customer complained that, despite the company’s claims that its cards can control fraud, the customer had multiple fraudulent charges that FleetCor refused to refund

Ø  FleetCor has been aware of the harm caused by its practices. In one internal communication from 2017, the Senior Vice President of Product Growth discussed customers’ confusion regarding the account terms and noted, “[B]ecause they hold consumer cards personally, [customers] are accustomed to all [f]raud being taken care of.” The Vice President of Risk Management agreed, responding that holding customers responsible for fraudulent purchases on their accounts “is also the most egregious customer impact we do as it takes customers by surprise (unless they’re really large) based on their experience with consumer card[s].”

Count 3 – Deceptive Fee and Convenience Claims

Defendants have represented, directly or indirectly, expressly or by implication, that FleetCor charges no fees for set-up, transactions, or membership.

Ø  FleetCor has charged customers substantial unexpected fees. Examples of these fees include: Account Administration Fees, Program Fees, Late Fees and Interest and Finance Charges when payments are made on time, High 14 Credit Risk Account Fees, Convenience Network and Out of Network Fees, and Minimum Program Administration Fees. FleetCor often has begun charging customers all or some of these fees only after a few billing cycles have passed. Even if customers read FleetCor’s small-print, multi-page T&Cs, they have not been able to determine from one billing cycle to the next which fees FleetCor will assess, how those fees could be avoided, or how much those fees will cost. Further, FleetCor charges these fees, which include fees that depend on how FleetCor sets up a customer’s account, for transactions, and “for membership,” despite its promise in its marketing materials that there are “[n]o fees for set-up, transactions or annual membership.”

Ø  FleetCor has not provided a billing invoice to customers specifying fees. Instead, in a separate report, FleetCor has listed some, but not all, of the individual fees it has assessed. If customers do find out about one or more of the fees, call FleetCor, and convince a customer service representative to waive the fees, FleetCor often subsequently replaces the complained-about fees with different fees. FleetCor’s own employees have characterized the company’s practices as “add[ing] arbitrary fees and run[ning] off all the accounts.”

Ø When FleetCor’s revenue fell, Clarke issued a directive to employees to prepare “recovery ideas” to increase fees to replace revenue shortfalls.

Ø  FleetCor’s CEO was actively involved in efforts to create fees, knew how and when the company was charging them, and that the company re-enrolled customers in certain fees after those customers asked FleetCor to remove the fees from their statements.

Ø  Clarke also knew of the Company’s poor notification practices when charging customers a fee for the first time. For example, he asked by email, “‘what notification’ does a customer get when they are put into a fee for the first time[?]” A senior executive responded, “none. Other than T&C change.” Despite his awareness of public reports and customer complaints of the company’s unexpected fees, including of the company “tacking on extra fees that have no real explanation,” Clarke did not change the company’s fee notification practices.

Count 3 – Deceptive Fee and Convenience Claims (Cont’d)

Defendants have represented, directly or indirectly, expressly or by implication, that FleetCor charges no fees for set-up, transactions, or membership.

Ø  Internal emails indicate that FleetCor treated this fee [Program Fee] as a catch-all provision that allowed the company to charge a multitude of fees. Specifically, one FleetCor representative asked whether FleetCor’s “changes to the program fee 20 section seem broad enough for us to charge whatever program fees we want?” In response, another employee stated, “We would have to come up with some benefit or tie it to a new add/on product. Unlike [our] Fuelman [card] we can’t just add arbitrary fees and run off all the accounts.”

Ø  Clarke also directed the effort to minimize public criticism of the company’s practices, without fixing those practices. For example, when FleetCor’s fee and billing practices became the subject of a second round of public reporting, Clarke emailed internally, “Here we go again!” He then ordered employees to “fix the BBB rating ASAP…..just like we did last time. Pls advise what we can do to get at this.” Clarke did not fix the practices that caused the criticism.

Ø  One circumstance under which some FleetCor T&Cs mention it might charge these fees is if the customer operates in the trucking or transportation industry. FleetCor’s fuel cards, however, are marketed primarily to the trucking industry and many customers fall into this category.

Ø  At one point, employee error led to FleetCor accidentally listing the HRF on the customer invoice. The President of FleetCor’s North America Partner division, in response to finding out that the HRF was going to be on a customer invoice said, “Crap! Please keep me informed.” Another employee said, “This will cause a lot of noise and our odds of keeping this fee will go down and our odds of losing customers will go up.” FleetCor has used the term “noise” in internal documents to discuss customer complaints.

Ø  In numerous instances, when customers have noticed unauthorized fees on their accounts and called FleetCor to complain, the company has stopped charging those specific fees only temporarily (anywhere from one month to one year), before re-imposing them without notice. In numerous instances, when customers have succeeded in complaining about one fee and getting it removed, FleetCor has swapped it with another fee to make up for the lost revenue. Internal communications reflect, for example, that in 2016 FleetCor began charging a Card Fee of $2.00 per card per month to customers who had complained about the Minimum Program Administration Fee. FleetCor has waived the Card Fee if a large business notices it and complains about it. When smaller businesses have called to complain about the Card Fee, FleetCor often has reduced the Card Fee to $1.00 per card.

Ø  Our Note: The little guys get screwed.

Count 3 – Deceptive Fee and Convenience Claims (Cont’d)

Defendants have represented, directly or indirectly, expressly or by implication, that FleetCor charges no fees for set-up, transactions, or membership.

Ø  FleetCor has charged customers without authorization for a number of programs, including programs the company calls “FleetDash,” “FleetAdvance,” and “Clean Advantage.” FleetCor has charged customers monthly, quarterly, or per-gallon fees, including fees ranging from $9.95 to $29.97 per month, $50 per quarter, or 5¢ per gallon for these programs on a recurring basis

Ø  As with card fees, sometimes FleetCor has not initially charged for program membership, and then later has begun imposing charges. Internal documents reflect that FleetCor understood that this approach would be much more profitable than having customers take action to choose to be in any of these programs.

Ø  FleetCor has discussed steps to make it difficult for customers who notice the charges to opt out of these programs. For example, one FleetCor employee queried whether opt-outs should be handled the same as they have been for other fees: “I would assume that we do not want to allow a client to opt-out of fees without speaking to a rep so that we can keep the opt-out rate as low as possible.” In many instances, customers who have noticed the charges have been unable to cancel without calling and speaking to a FleetCor representative.

Count 4 – Deceptive Fee and Billing Practices

In numerous instances, Defendants have represented, directly or indirectly, expressly or by implication, that consumers owe the total amount due on their bills.

Ø  FleetCor’s billing procedures make it difficult for customers to know they have been charged unexpected fees. To bill customers, FleetCor issues a short (typically one-page) customer invoice. FleetCor’s customer invoice provides the payment due date and the total balance due, but does not include a description of the fees FleetCor has charged the customer during that billing cycle or even a separate line item indicating the total amount of the fees charged.

Ø  FleetCor has required customers to take extra steps to find information regarding the fees FleetCor charged during the billing cycle. Specifically, customers must access their Fleet Management Report (“FMR”) through an online portal (delivery of the FMR via email, fax, or mail delivery incurs a fee). In it, FleetCor lists some, but not all, of the individual fees that have been assessed. The content and appearance of the FMR has varied by fuel card. On the first page of some FMRs, there has been a product purchase summary labeled “Summary of Transactions This Reporting Period for all Vehicles in Your Fleet”: 68. This summary has contained an “OTH CHARGES” column, which has provided only a total amount. “OTH CHARGES” has not been accompanied by any description of what charges it includes. Generally, this column has been populated only with an amount in the “Total” line. Although not stated in the summary, the Total in this particular FMR consists of the fees that FleetCor has assessed.

Ø  Defendant Clarke frequently educated himself on company practices, including how fees appeared on billing documents. In one internal email exchange about how fees are presented to customers, Clarke asked to see the billing documents himself, writing, “pls forward me an actual invoice or statement …. so that I can see how we display [the Minimum Program Fee].” In response, he received three customer invoices and three FMRs (which FleetCor has not provided to customers along with their invoices). The invoices – the billing documents reflecting the total balance due – did not disclose any of the fees being charged. Nevertheless, Clarke did not direct any changes to the Company’s billing practices.

Count 5 – Unfair Fee and Billing Practices

In numerous instances, Defendants have billed consumers for fees, interest, and finance charges, and programs for which consumers have not provided express, informed consent.

Ø  Numerous customers were unable to view or pay their bills when FleetCor migrated to a new payment and billing platform in December 2016, Global Fleetnet (“GFN”). In numerous instances, when customers could view their bills, those bills had significant errors. For instance, at least 18,000 customers have received invoices that reflected a lower balance than FleetCor claims they actually owed, causing FleetCor to deem those customers as having underpaid. Despite failing to provide timely invoices or invoices it deems accurate, FleetCor has assessed late fees and finance charges to the customers who have made payments when they received those invoices or based on those invoices. FleetCor did not automatically refund customers for the fees and finance charges that were improperly assessed. Instead, FleetCor put the onus on customers to call and complain. Customers who did not notice the charges and did not call to complain never received refunds for the improper fees.

Ø  In numerous instances, FleetCor has charged customers Late Fees and related Interest and Finance Charges even when the customers have paid their balance in full by the due date. Numerous customers have complained about such fees, interest, and charges, which typically have ranged from hundreds to thousands of dollars in a single billing cycle. 43. When customers have noticed that FleetCor charged Late Fees for timely payments, in many instances, customers have called FleetCor and FleetCor representatives have admitted that FleetCor may take days to process or post payments, and may charge Late Fees as a result.

Ø  FleetCor’s customers continued to experience a variety of problems accessing and paying their bills even after the GFN transition was completed. In February 2017, FleetCor employees noticed that the company had assessed an abnormally high volume of late fees and finance charges to customers. Upon further inquiry, the employees determined that FleetCor had assessed the fees against customers who had not received their bill before the due date. Despite becoming aware of the error, FleetCor determined that it would not proactively refund late fees. Indeed, in an internal email, the Director of Revenue Management stated, “There is nothing we can do now, so we think we will let the Call Center know th[ere] could be some noise coming from this and they can follow a lenient waiver policy for those late fee & finance charge[s].”

Ø  Our Note: PLEASE name ONE other Company that finds a significant internal billing error and does NOT proactively refund their customers for the fees caused as a result of this error.

Ron Clarke Knew.

The FTC complaint notes through direct written communication that Ron Clarke knew of and directed almost every single element of Fleetcor’s fraudulent and deceptive billing practices

Ø Ron Clarke often himself commissioned research to examine Fleetcor’s fee practices, received adverse results / feedback, then chose to do absolutely nothing

Ø We find it exceptionally incredible that Ron Clarke initiated a study to prove that Fleetcor saves its customers’ money in response to Citron / Capitol Forum’s previous reports AND RECEIVED RESULTS FROM HIS OWN COMPANY THAT INDICATE THAT FLEETCOR IN FACT SAVES CUSTOMERS VIRTUALLY NOTHING

Ø If anyone should be biased, it would be Fleetcor themselves. Yet even they concluded that their business results in no value for their customers. We shudder to think what an outside analysis would discover!

Ø We believe Ron Clarke’s explicit knowledge and direction of these rampant illegal / deceptive practices opens him up personally to significant civil and potentially criminal liability

The bar for the FTC to charge a CEO is extremely high

As a final proof point, we would like to highlight how exceedingly high the bar is for the FTC to charge a CEO in a complaint along with a Company. This implies significant wrongdoing on Ron Clarke’s part for the FTC to rise to this level.

Ø  The following are a list of precedents where the CEO of the Company was or was not charged.

The Top Questions Bulls Need To Be Asking Themselves

Ø  Do I find it odd that Fleetcor would choose not to settle this case and have the Company’s actions exposed to the public eye? What must the FTC be demanding in order to have reached this impasse and if they were truly “immaterial” penalties, why wouldn’t Fleetcor have settled?

Ø  What do I think the FTC thinks when they see a Company repurchasing their stock and claiming their case they have been working on for three years is “immaterial”

Ø  Do the business practices alleged by the FTC sound like that of a normal and ethical business or more akin to a scheme?

Ø  Do the business practices alleged by the FTC sound like a normal $30 billion Company or more akin to what you would expect from a microcap fraud?

Ø  Should I be paying almost 20x EBITDA for a Company whose sole business model is to find illegal ways to layer on hidden additional fees onto their customers while not actually providing any value proposition (i.e. savings) to customers, and do I believe this hidden-fee driven growth can continue?

Ø  Do I believe that buyside estimates for accelerated organic growth are achievable next year as that would involve Fleetcor continuing to layer on additional hidden fees while under significant FTC scrutiny?

Ø  Do I believe the elimination of these 100% incremental margin feels will materially impact Fleetcor’s financials?

Ø  Am I prepared to deal with the likely impending media coverage which will be digging into the wrongdoing being committed at Fleetcor and potential whistleblowers coming forward?

Ø  Is Fleetcor’s management, a team which is committing these alleged acts against their own customers, a Company I can trust with my money at these elevated valuation levels?

Ø  Do I believe Fleetcor can prop their share price up forever through hasty share repurchases and ASRs?

Ø  Should I be listening to Sell-side analysts who for the last two years have claimed the FTC won’t investigate FLT because the bar is higher when dealing with small businesses than consumers, they’re doing nothing wrong, etc.? Should I believe bullish analysts that the allegations laid out in the previous slide will be resolved simply by a small fine and Fleetcor increasing the font on their Terms & Conditions from size 3 to size 3.5?

Ø  Am I prepared for the EU to file suit?

Ø  Am I prepared for potential criminal charges against Fleetcor and Ron Clarke?

Key Takeaways

Ø  Fleetcor’s stock, which is unchanged since the disclosure of the FTC investigation, has not even begun to price in the ramifications of this lawsuit

Ø  We believe that over the coming months as more and more details begin to be released, investors will wake up to the true nature of FLT’s business practices

Ø  Consensus numbers for next year anticipating double digit organic growth (actually an acceleration for this year) are unattainable as Fleetcor will not be able to deploy their typical system of ever-escalating and illegal fees in light of heightened FTC scrutiny

Ø  Fleetcor management is not to be trusted. Who would you trust – a CEO as depicted above or the FTC which has spent years building this case?

Ø  Fleetcor’s stock price has been artificially inflated due to share repurchases which will soon end as the Company’s leverage climbs and they enter their quiet period

Ø  Fleetcor’s CEO has known or directed all of these alleged activities and holds potentially significant civil and criminal liabilities

Ø  Fleetcor’s activities are ultimately all designed around defrauding “the little guy”, the customer with the lack of sophistication / awareness to catch these charges and realize that they are, in reality, receiving zero savings from FLT’s product

Catalyst

Continued FTC disclosures

Incremental media exposees and potential whisteblowers

Organic growth and earnings misses in 2020