Acting on a whistleblower's tip, the state of Delaware is pursuing civil action against dozens of U.S. retail giants claiming they schemed to deprive the state of hundreds of millions of dollars in unclaimed property in the form of unspent gift card balances.

Household names like Netflix, Overstock.com, Polo Ralph Lauren, Shell Oil, Shutterfly, Skechers, Sony Electronics, Applebee's, California Pizza Kitchens, Houlihan's Restaurants, Ulta Cosmetics and several more are the target of Delaware's action, along with Card Compliant, the service provider the companies hired to help them manage their gift card programs. Delaware says the companies are required under unclaimed property rules to hand over to the state the unspent balances on gift cards that are idle for five years. The retailers named in the suit all are incorporated in Delaware, giving the state authority over the companies to collect and manage unclaimed property they accumulate.

Known for its zealous pursuit of unclaimed property, Delaware says the companies conspired with Card Compliant to hide abandoned gift card balances rather than report them and remit them to state authorities. The complaint, filed in Superior Court in the state, says Card Compliant created “sham contracts portraying themselves as ‘holders' of unredeemed gift cards in exchange for an annual fee” when in fact the unredeemed gift cards remained in the possession of the retail companies under some creative accounting entries.

State officials say the scheme was carried out using shell corporations in other states that do not regard gift card balances as abandoned property subject to unclaimed property law. The state also names the National Restaurant Association as a defendant because it promoted the plan to its members for a fee. Delaware kept the complaint under seal from June 2013 until recently, when it was unsealed, indicating the state plans to pursue it in earnest, says Bob Peters, managing director at Duff & Phelps.

Delaware's whistleblower, called the “relator” in the case, is William Sean French, former controller and vice president of CardFact, which was acquired by Card Compliance. French operated the business out of the basement of his home in Columbus, Ohio, Delaware's complaint says. He's the “quintessential whistleblower,” says Peters. After working for CardFacts, French later held positions at Kelmar Associates, a third-party contingent fee audit firm hired by Delaware and many other states to conduct unclaimed property audits, according to Peters. “He was an officer in the company who encouraged other companies to enter into planning to avert having to remit unclaimed gift cards as unclaimed property,” he said.

In its complaint, Delaware seeks penalties and damages of more than triple the amount of unused gift card balances for more than two dozen companies, plus the maximum “relator's share” to be awarded to French. Peters says the case sends out a beacon to any company that has entered into any kind of planning with respect to unredeemed gift card balances. “There are literally hundreds of thousands of companies that have done some kind of planning in this area,” he says. “Just how solid is the planning that other companies have embarked on? This lays out a roadmap if states are looking to poke a hole in any of that planning.”

Topics