Two years after the Drew Cloud controversy, LendEDU ordered to pay FTC $350,000

We’re not going to pretend to be shocked that the Federal Trade Commission’s recent findings that LendEDU, a New Jersey-by-way-of-Delaware startup, has, in the words of the FTC itself, “deceptively promoted financial products.” These findings have resulted in an agreement that LendEDU will pay a settlement of $350,000 to the FTC.

The startup, which came out of the University of Delaware’s Horn Entrepreneurship program in 2015 and received a $5,000 grant from UD’s VentureOn program, was lauded during the university’s 2016 commencement.

Two years later, the Chronicle of Higher Education reported that The Student Loan Report, apparently an independent news site run by a man named Drew Cloud who had been quoted in news outlets such as The Washington Post and The Boston Globe, was, in fact, run by LendEDU without disclosure and that this Drew person did not exist.

When Technical.ly reported, in 2018, that LendEDU’s deceptive tactics were an example for startups of what not to do, we received some pretty scathing pushback from members of the Horn faculty, who said in an emailed letter that we should have focused more on “the positive outcomes that resulted from LendEdu’s actions.”

We stood by the article calling LendEDU deceptive, because it was.

That was then.

Neither LendEDU nor Horn has responded to requests for comment on this week’s news that LendEDU had been ordered to pay up after its Bureau of Consumer Protection filed a complaint against the startup.

The new complaint focused on two areas:

• Paid product rankings misrepresented as unbiased
• Reviews presented as feedback from consumers that were in fact by LendEDU employees

“LendEDU told consumers that its financial product rankings were based on objective and unbiased information about the quality of the product being offered, but in fact LendEDU sold its rankings to the highest bidder,” said Andrew Smith, director of the Bureau of Consumer Protection, in a statement published by the FTC. “These misrepresentations undermine consumer trust, and we will hold lead generators like LendEDU accountable for their false promises of objectivity.”

The commission voted 5-0 to issue the proposed administrative complaint and to accept the proposed consent agreement with Shop Tutors Inc. (the name of the original tutoring platform that evolved into LendEDU) and individual operators Nathaniel Matherson, Matthew Lenhard and Alexander Coleman.

Commissioner Rebecca K. Slaughter issued the following statement on the matter:

“Our dedicated staff in the Division of Financial Practices assembled a powerful complaint that underscores how pay-to-play greed and deception have corrupted the ratings and rankings on which consumers increasingly rely to make informed purchasing choices online.

“… I write separately to highlight the importance of this case in addressing a cutting edge market practice that I fear is becoming increasingly common online: purportedly neutral rankings and recommendations that actually reflect paid product placement. … Companies that engage in pay-to-play rankings and ratings should take heed: This conduct robs consumers of vital information, pollutes our online marketplaces, and violates the law, which will result in serious consequences.”

Sustaining a startup is tough and requires “out-of-the-box” thinking — the kind that can lead to things like the black hat SEO practices that were eventually penalized by Google. Pay-to-play rankings and ratings aren’t that different. It works, until it gets shut down. Like black hat SEO, it’s not good for longevity.

To most of the world reading about the FTC settlement, it’s not really about Delaware; LendEDU had been located in New Jersey since 2016. But the connection is there. It remains to be seen what, if any, impact the settlement will have on this state — but for companies gaming the system in the online marketplace, it looks like the impact will be major.