In the years after a 2011 Times Free Press investigation revealed that a dozen shell companies were making online payday loans at interest rates far higher than those allowed under state law, prosecutors and regulators took no public action - and refused to say why.
Not even cease-and-desist orders sent to the payday companies from the attorneys general of New Hampshire, Maryland, California, Oregon and Pennsylvania spurred Tennessee officials to stop the unlicensed payday lending operation.
But now that New York prosecutors have pieced together and indicted the payday lending syndicate that operated under the noses of the Volunteer State's top law enforcement officials for years, Tennessee officials admit they were held back by a subjective process with unclear lines of responsibility and insufficient resources to pursue such an investigation.
Legal experts have acknowledged that if the usury charges against payday lender Carey Vaughn Brown are true, he could have been subject to prosecution for criminal usury in Tennessee. Yet the onetime used-car dealer was able to continue making allegedly illegal loans from Tennessee until he was shut down by New York regulators in 2013 and then indicted in August.
"I do think there's a problem in Tennessee with prosecuting white-collar crimes," said Mark Pickrell, an attorney and adjunct professor at Vanderbilt Law School. "When it comes to white-collar crime, it takes a lot of resources. It is detail-oriented, takes a lot of documents, takes a lot of witness work. It's a lot harder than 'Joe punched Bob in the nose.'"
The payday case echoes the implosion of an alleged family Ponzi scheme in Soddy-Daisy, in which bankruptcy trustee Jerry Farinash alleged the perpetrators used the family tax business to identify and fleece dozens of retirees and widows. But the admitted ringleader, Jack Edwin Brown, died with no charges to his name.
Tennessee's passive stance in prosecuting homegrown financial scandals sets the Volunteer State apart from aggressive crackdowns on illegal lending, mortgage and debt collection practices at the federal level and in a handful of other states.
The U.S. Consumer Financial Protection Bureau, which now keeps watch over the 12 million consumers who use payday loans, in July charged one of the nation's largest payday lenders, ACE Cash Express, with illegal debt collection practices. The lender agreed to a $10 million settlement in July.
Carey Brown, 55, founder of Chattanooga payday syndicate; Ronald Beaver, 55, his chief operating officer; and Joanna Temple, 58, his legal adviser; plus 14 related businesses.
The charges are one count of criminal conspiracy and 38 counts of criminal usury, according to the Manhattan District Attorney's Office.
BY THE NUMBERS
* 2 -- Payday lending establishments for every Starbucks location nationwide
* 9 -- Transactions the average payday borrower conducts each year
* 12 million -- Consumers using payday loans
* 30 million -- Consumers with debts in collection
* $27 billion -- Annual fees and interest paid by U.S. consumers to payday lenders
* $198 million -- Annual fees and interest paid by Tennessee consumers to payday lenders
Source: Center for Responsible Lending, U.S. Consumer Financial Protection Bureau
A bill under consideration in Congress could bring the full force of the federal government to bear on an industry that has proved difficult to regulate, even as neighboring Georgia found a way to make payday lending generally illegal.
New York officials since 2013 have taken steps to shut down and prosecute dozens of payday lenders, including Brown, who was arraigned and released this month on a $1 million bond. New York took issue with Brown's business model, in which he peddled online loans in the state that carried annual interest rates over 1,000 percent in some cases.
Those loans also would be illegal in Tennessee, which caps payday loans at an APR of around 460 percent.
But Tennessee shied away from enforcing the state's criminal usury code, which could have landed leaders of Brown's Chattanooga syndicate in prison, Pickrell said.
"It is usury, and if the prosecutors were of a mind to go after this guy, they could put him away for a long time just for having multiple victims of usury," Pickrell said. "It's a matter of prosecutorial resources or motivation rather than some flaw in existing law."
Tennessee's usury law allows for jail time up to 11 months and 29 days and fines of up to $2,500 per offense. But Tennessee's attorney general, the state Department of Financial Institutions and the Hamilton County district attorney were unable to explain exactly what it would take for a payday lender to be charged under the law, or say why Brown was never charged in Tennessee.
WHITE COLLAR BLUES
Under Tennessee law, much of the responsibility for white-collar prosecutions rests with the local district attorney, who has wide latitude over whether to bring charges.
Tennessee is the only state whose attorney general is appointed by the state Supreme Court rather than elected. Tennessee Attorney General Bob Cooper has not pursued headline-grabbing white-collar criminal indictments like AGs in other states, where such investigations help win elections.
A survey of news releases issued by Cooper's office from 2011 to 2014 shows that many of Tennessee's biggest legal victories were spearheaded by other states in concert with federal officials against big companies like GE Capital, Toyota and Google.
In each year, only a handful of Tennessee white-collar cases that merited news releases -- such as a number of deceptive advertising claims, several attorneys practicing without a license and an $800,000 Medicare fraud settlement with the Chattanooga-based AIM Center -- were led by the state itself.
In fact, Medicare fraud investigations receive special federal task-force funding to clamp down on the practice. Payday lending and other white-collar criminal investigations in Tennessee receive no such stipend, state prosecutors said, which leaves local district attorneys to choose whether to pursue those high-cost investigations on their own dime.
On the other hand, payday lenders have no problem spending money in political and law enforcement circles. Nationally, payday lenders spent $4.7 million lobbying lawmakers in 2012, according to OpenSecrets.org.
Locally, Carey Brown contributed more than $1,000 to Hamilton County Sheriff Jim Hammond in 2012, earning a spot on the sheriff's 71-member "posse," for which Brown received a special identification card.
Brown, a former Georgia resident who now lives in a gated mansion in Ooltewah, also contributed over the years to U.S. Sen. Bob Corker, R-Tenn.; U.S. Rep. Tom Graves, R-Ga., and U.S. Rep. Phil Gingrey, R-Ga.; as well as to national presidential candidates Mitt Romney, Mike Huckabee and Fred Thompson and congressional candidate Weston Wamp, according to OpenSecrets.org.
He has been generous with local civic and charitable organizations, too.
Brown gave to the Chattanooga STEM School, earning a plaque in a classroom. He supported the Chattanooga Area Chamber of Commerce and hosted a membership function at one of his shell companies. In 2012, Brown pledged to give away $1 billion through his Covenant Values Foundation, which was announced with favorable comments from philanthropist Hugh O. Maclellan, whose family founded what is now insurance giant Unum.
Brown had relationships with charities Focus on the Family, Precept Ministries and the pro-life Campaign for Working Families. He sat on the boards of Tennessee Temple University and a handful of other charities. Brown's email signature included the mission statement, "To maximize the growth of the Kingdom, by helping the least of these, through strategic giving from profitable businesses."
CIRCLE OF INACTION
But Brown was giving away money that several states maintain he earned illegally. A Dec. 18, 2011, Times Free Press investigation found that his Chattanooga-based payday lending syndicate was raking in $500 million per year in ultrahigh-interest-rate loans in Tennessee without the required state license.
A complaint by Chattanooga's Better Business Bureau went nowhere, even after Jim Winsett, its president and CEO, was told that state agencies and the attorney general's office were investigating the alleged violations.
"We do not know why the matter was not pursued more aggressively by the Tennessee authorities," Winsett said. "It might be the result of insufficient funding and lack of sufficient staff to investigate such matters properly."
The state Department of Financial Institutions subsequently refused to answer the newspaper's questions about Brown's case, saying its records are sealed by law.
Such secrecy is not unusual, and is designed to protect the reputations and identities of businesses and individuals who are never charged with a crime or are found to be innocent after an investigation, officials have said.
A highly placed source inside Brown's business, who spoke privately given Brown's record of suing employees, told reporters that Brown was negotiating a "consent decree" with the TDFI. But no such decree was ever made public, and TDFI general counsel Tina Miller refused to confirm whether negotiations ever took place or were resolved.
Months later, Brown stopped making loans in Tennessee, though he continued making loans in other states.
A spokeswoman for Tennessee's attorney general said state prosecutors' hands were tied unless the Hamilton County DA requested help.
"The Tennessee Attorney General does not have the jurisdiction to independently pursue this type of case under Tennessee criminal or civil statutes," spokeswoman Sharon Curtis-Flair said in an email. "Jurisdiction for a state criminal prosecution, if supported by the facts, would lie with the appropriate District Attorney."
But retiring DA Bill Cox said he never received a referral from the TDFI indicating that criminal prosecution was warranted.
"It may be against the law, but not everything that's against the law is a crime," Cox said.
Ryan Hughes, chief legislative officer for the TDFI, said the state's process for charging white-collar violators is highly subjective and subject to a number of factors.
"Typically, when conduct is alleged to be criminal in nature, the department collaborates with various law enforcement agencies," Hughes wrote in an email. "Judgments are based on several factors including the nature and severity of the conduct to determine how and whether to prosecute the alleged crime. It may also be determined that the specific activity in question does not sufficiently fall within the criminal statutes."
On the other hand, the heavy workload required to secure a misdemeanor conviction may have dissuaded prosecutors, said Dwight Aarons, an associate professor of law at the University of Tennessee, who teaches a class on white-collar crime.
"If you have someone, and it really sticks in their craw that this ought not to be done, then they might devote the resources and the time to secure a conviction and convince the public as to why this is a moral outrage," Aarons said. "So part of it might be that we have yet to get that crusader in white to make sure that the people struggling financially are not further victimized."
Tennessee's stance on what the Center for Responsible Lending calls "predatory loans" may stem from the fact that the state is, in effect, the birthplace of such loans. The late Toby McKenzie, for whom UTC's McKenzie Arena is named, made millions of dollars in the 1990s pioneering high-interest, unsecured loans for those without access to traditional credit.
Cleveland, Tenn.-based Check Into Cash, founded in 1993 by former Credit Bureau of Cleveland owner Allan Jones, was also an early entrant into the payday lending world, and today is one of the largest such lenders across the U.S.
Payday loans are extremely popular among consumers. And nontraditional lenders receive far fewer consumer complaints than mainstream banks and mortgage lenders, according to the TDFI's annual report.
Tennessee, which has specifically legalized payday loans, has not followed the current wave of legal pressure to clamp down on the practice, said Diane Standaert, legislative counsel for the Center for Responsible Lending.
"We're seeing more states refusing to legalize payday loans, and some states that used to legalize them and now they're not," she said. "This is a question that the public in Tennessee must decide."
But Jabo Covert, senior vice president for government affairs at Check Into Cash, said loans made in line with state rules provide an important service for customers who need short-term cash to make ends meet.
A blanket ban on payday loans would be like a blanket ban on the mortgage business after Bank of America was forced to pay billions of dollars to federal regulators for illegal loans made in the run-up to the mortgage crisis, he said.
"Does that mean that mortgages are bad? Does that mean that every mortgage by big mortgage banks is criminal? No, it means the regulators say they did some things that went astray of the law," Covert said. "Every payday loan is not bad; every payday loan is not illegal."
Check Into Cash only operates in states where it can comply with the law and turn a profit, Covert said. Hence, the company does not do business in New York, which limits lenders to annual rates of 25 percent. That's far too low for short-term, unsecured loans that many borrowers fail to repay.
"We follow all federal, state and local laws at great cost to us, we don't make the profit that other people make, and we spend a lot more on regulation and compliance than other people do," Covert said.
Brown's syndicate made plenty of profit, pulling in about $150 million in fees and interest in 2012, according to the Manhattan district attorney's indictment.
Brown claimed that his loans were legal because he was operating from the Internet and was subject to more permissive federal, rather than state, rules governing interest rates. He asserted that he was immune to state laws under the Interstate Commerce Clause, which would have given federal rather than state agencies the power to regulate his business.
Brown went to great lengths to avoid falling under state statutes.
For the payday lending website FourSeasonsCash.com, Brown worked with Martin "Butch" Webb, a member of the Cheyenne River Sioux Tribe, which as a federally recognized tribe enjoys sovereign immunity from state laws. Brown installed servers in Bermuda and other overseas locations so that websites MyCashNow.com, DiscountAdvances.com and PayDayMax.com could appear that they were international in scope when in fact they were operated from Chattanooga.
Those legal tactics and their legal champion, Brown's attorney Joanna Temple, will come under scrutiny when Brown's case is heard in New York.
PAYING FOR PROSECUTION
Payday lenders' complex corporate structures and legal maneuvers, combined with prosecutors' lack of funding and legislative support to enforce state rules, is leading some policymakers to push for regulations with more teeth. But such solutions are still in the planning stages.
A bill filed in the U.S. House and Senate would cap interest rates at 36 percent per year, well below what payday lenders say they need to charge in order to make a profit on unsecured loans and could preempt states' ability to legislate their own financial affairs. Its House sponsor is by Rep. Steve Cohen, D-Tenn.
"Protecting consumers from predatory lenders -- whether they claim to operate in Tennessee or elsewhere -- has always been and will continue to be a priority of Congressman Cohen," said Ben Garmisa, Cohen's communications director.
However, with just days left in the legislative session, the bill has not been considered by the House Financial Services Committee.
The Consumer Financial Protection Bureau, which has begun to take over enforcement of some federal lending laws from other agencies, also has promised to clamp down on certain aspects of payday lending. But the agency has yet to release new rules for payday lenders or issue guidance detailing how it may proceed.
The short-term solution -- enforcing existing state laws -- would likely require specific funds earmarked by legislators to combat white-collar crimes, similar to money dedicated for Medicare fraud, drug trafficking and sexual crimes against minors, said Pickrell, who has worked as an attorney for 22 years on both sides of white-collar crimes.
"There are choices," he said.
"When we decide where we spend our money, and how we organize our officers and prosecutors into teams, we are deciding what crimes are going to be prosecuted. When you increase resources for prosecuting certain offenses, you're going to get more prosecution."
Contact staff writer Ellis Smith at 423-757-6315 or firstname.lastname@example.org with tips and documents.