Feds Slap Sprint With Cramming Suit

For a decade, Sprint (NYSE:S) opened the gates to customers’ mobile phone accounts, allowed third parties to ring up millions of dollars per year in unauthorized charges, and took a hefty cut of the revenue, charges a lawsuit filed in federal court by the Consumer Financial Protection Bureau.

The financial regulator's announcement Wednesday came on the heels of media reports that the Federal Communications Commission will fine Sprint for unauthorized billing practices, commonly known as “cramming.” In October, the FCC reached a $105 million settlement with AT&T (NYSE:T) over "cramming" allegations -- the largest enforcement action in the agency's history. The Federal Trade Commission filed suit concerning similar allegations against T-Mobile in July.

But Wednesday’s action is the first lawsuit against a telecommunications company from the CFPB, which has signaled growing interest in how mobile banking affects consumers. The lawsuit targets Sprint as a payments processor, and seeks an unspecified amount of consumer restitution and civil fines under the Consumer Financial Protection Act of 2010, the law that created the bureau in the wake of the financial crisis.

During a conference call with reporters, CFPB officials declined to comment on how far their enforcement authority over “payment processors” would extend to other products, such as Apple Pay. Yet while Deputy Enforcement Director Jeffrey Ehrlich said he “couldn’t speak to other products that we haven’t investigated,” he repeatedly emphasized the bureau’s interest in “mobile.”

“If a company is processing payments over a mobile network, it's something the bureau clearly has jurisdiction over,” Ehrlich said.

"When we use our wireless accounts to make purchases, our carriers, such as Sprint, act as payment processors," CFPB Director Richard Cordray stated in prepared remarks. "They place the charges for those purchases on our wireless bills instead of on a credit card or other form of payment."

The filing accuses Sprint of letting third parties bill customers for products they didn't know about, or consent to, from 2004 through 2013. These products, or "premium short messaging services," the suit says, included goods like ringtones, digital wallpaper, and text messages that delivered "flirting tips, horoscopes and other digital content." Each product generated charges that ranged from one-time fees of 99 cents, to recurring subscriptions of about $9.99 a month, and channeled "hundreds of millions of dollars" to Sprint, according to the lawsuit.

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The practice thrived because Sprint "automatically" enrolled customers in its third-party billing system, and because the company didn't keep an eye on the merchants that were allowed to access that system, the CFPB alleges.

In response to the lawsuit, a spokeswoman for Sprint, Stephanie Vinge Walsh, issued the following statement: “We are disappointed that the CFPB has decided to target Sprint on this issue, and we strongly disagree with its characterization of our business practices. Sprint took considerable steps to protect wireless customers from unauthorized third-party billing and is an industry leader in proactively preventing unauthorized charges."

Walsh added that the company has consistently "encouraged any customers who think they may have incurred an unauthorized third-party charge on their phone bill to contact Sprint to resolve the issue.”

During the CFPB briefing, Ehrlich said the bureau "coordinated" with the FCC on the enforcement action, and will continue to work with the telecom regulator.