Last month, Delaware filed a lawsuit against Blackhawk Engagement Solutions (DE), Inc., the successor to Parago, Inc. The November lawsuit alleges that the rebate fulfillment processor for a number of large consumer corporations has not cooperated with state authorities and has failed to turn over requested information relating to rebates.
The audit began in February 2011. On February 12, 2015, Delaware issued a summons to the company for the production of documents related to uncashed rebate check payments that were returned to the client companies or subject to an express per-transaction fee discount representing anticipated slippage. According to the complaint, Parago has not responded to the summons other than to say it would require a court order before producing the requested information. Delaware is requesting the Chancery Court to order Parago to comply with the subpoena and to cooperate with the audit.
This is not the first time that a rebate processor has been subject to an unclaimed property audit and subsequent litigation. From 2003-2010, Young America and its clients were the subject of a similar audit. In Young America's case, the rebate processor kept the slippage as part of the contractual relationship with its client companies. In that case, the District Court in Iowa said that the states could seek payment from the retail clients even though Young America had kept the slippage, that the states may look to see who has the obligation to pay and not where the money is currently located. Sprint, T-Mobile, and Walgreens all settled with the participating states thereafter. Sprint is also listed as a Parago customer in the current litigation.
At this time, the audit has not resulted in any assessments against Parago or any of its clients. However, if Parago is ordered to cooperate, the audit may result in future assessments against one or more companies. This audit is also similar in nature of other Kelmar audits, where the state is using third-parties to assess compliance for the third-party's clients. In 2014, Kelmar, on behalf of Arkansas, began an audit of Computershare, Broadridge, and other stock transfer agents. In those audits, Kelmar was requesting information relating to the transfer agents' clients, often times in breach of certain confidentiality provisions between the transfer agent and its clients.
As this audit methodology becomes more widespread, it is important to review the contractual obligations, policies, and procedures with your third-party vendors relating to potential unclaimed property. While internal processes may be strong, holders could still have exposure to audits and assessments, including penalties and interest, due to actions of third-party vendors. Barganier can advise you on best practices to ensure the strictest level of unclaimed property compliance.