BusinessWeek: November 9, 1998

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 News: Analysis & Commentary: SCANDALS

HOW CFS MADE BAD DEBTS PAY SO WELL
An anonymous letter lays out questionable practices

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HOW CFS MADE BAD DEBTS PAY SO WELL

TABLE: The Rise and Fall of Commercial Financial Services


William R. Bartmann has always been one for dramatic gestures. When his company, Commercial Financial Services Inc., was riding high in 1997, the Tulsa entrepreneur flew more than 2,000 employees and guests to the Caribbean for a three-day celebration. Now that CFS appears to be unraveling, he is exiting with the same sense of drama.

On Oct. 27, Bartmann stunned a gathering of nearly 100 investor representatives by announcing he is temporarily stepping aside, in the wake of allegations of shaky financial dealings. The rest of his board--his wife, Kathryn, business partner Jay L. Jones, and independent director R. James Woolsey, in office less than a month--resigned. The sole remaining CFS director, Peter Wachtell, a new outsider, will determine if the 3,900-employee company is viable while he oversees a probe by outside lawyers and auditors.

PUZZLING SUCCESS. Bartmann's departure capped a week of turmoil for the company that pioneered the business of buying up bad credit-card debts and securitizing them. Since Oct. 21, Moody's, Standard & Poor's, Duff & Phelps Credit Rating, and Fitch IBCA have all suspended or cut ratings on CFS deals after receiving a letter alleging improprieties at CFS. The company has not missed any payments on its $1.6 billion of deals outstanding, but Fitch says it expects CFS to default on some notes. "Is this company potentially self-supporting or a Ponzi scheme?" says Stephen C. Macy, a vice-president at Moody's Investors Services.

The sudden plunge follows an equally breathtaking rise. Since he began securitizing consumer loans in 1995, Bartmann has leaped onto the Forbes 400 list, landed on the cover of Inc. magazine, and was among BUSINESS WEEK's 1997 Entrepreneurs of the Year.

But rivals in the business always questioned how Bartmann could pay top dollar for charge-offs, or about 10 cents on the dollar, and collect the 30 cents or more he claims he can get. Mitchell J. Bonilla, vice-president of ContiAsset Receivables Management in San Diego, notes that banks typically collect 15 cents to 23 cents on the dollar over three to five years on bad credit-card debt. "How can one organization claim to outperform the rest of the industry?" asks Bonilla.

Increasingly, investors fear, the answer may be fraud. In a letter dated Sept. 30, according to some of the rating agencies and CFS, an anonymous writer claimed CFS pumped up collections by selling nearly worthless receivables at inflated prices to a company with ties to CFS shareholders. Also, the writer suggested that Jones, Bartmann's business partner, was falsifying computer data to show more performing loans.

At first Bartmann denied the accusations. But on Oct. 20, he told investors "there appears to be some basis for certain of these allegations" about receivables sales. And at the Oct. 27 meeting, according to the company and attendees, Bartmann told investors Jones did have a relationship with DIMAT, the company purchasing the receivables, though he said he only learned of it on Oct. 19. Bartmann denied any connection to DIMAT himself, but revealed that he recently paid Jones $50.8 million for CFS shares. Jones could not be reached for comment, and Bartmann's wife didn't return calls. Bartmann denies that he's done anything improper, and says, "I do not believe anybody has. Now, it's a question of the investigation."

Bartmann's fall is sending shock waves through this fledgling industry, and CFS is looking for potential buyers or partners. Investors are moving cautiously--since dismantling CFS would only dry up collections. In the meantime, CFS employees had canceled a 50th-birthday celebration for Bartmann. "Somehow, it didn't feel like much fun," says W. Wayne Learned, director of CFS operations. Bartmann's investors would surely agree.

By Wendy Zellner in Dallas

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TABLE

The Rise and Fall of Commercial Financial Services

1986

After Bill Bartmann's oil-field-pipe company goes bust, he, his wife, and a partner buy nonperforming Federal Deposit Insurance Corp. loans and make collection calls from their kitchen table. Commercial Financial Services is born.



MAY 1995

CFS becomes one of the first to securitize nonperforming consumer loans.



MARCH 1997

Bartmann takes 2,275 employees and guests on a Caribbean cruise.



NOVEMBER 1997

CFS forms international affiliate.



AUGUST 1998

CFS buys Arkansas savings and loan.



OCTOBER

Ratings agencies receive letter from anonymous source, alleging improper sales of receivables by CFS and falsification of data.



OCT. 27

Bartmann steps aside, pending completion of an investigation into CFS.



DATA: CFS, BUSINESS WEEK

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