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Dive Brief:
- The Securities and Exchange Commission is investigating a card pricing error issue that Discover Financial Services disclosed earlier this year, the company disclosed in a Thursday regulatory filing.
- In its latest quarterly filing with the SEC, the company said it’s “cooperating with an SEC investigation into the card product misclassification matter.” The error, first disclosed by the company in July, affected merchants and merchant acquirers.
- In Thursday’s filing, Discover also said the card product misclassification has resulted in the company and its subsidiaries being “named as defendants in various lawsuits, including putative class actions on behalf of affected merchants, a putative class action on behalf of shareholders and shareholder derivative actions.”
Dive Insight:
Beginning in 2007, the Riverwoods, Illinois-based card company misclassified certain credit card accounts into its highest merchant and merchant acquirer price tier, resulting in overcharges.
The issue “underscored deficiencies” in the company’s corporate governance and risk management, former CEO Roger Hochschild said in July, just weeks before he resigned abruptly in August. The company is currently searching for a new CEO.
Earlier this year, Discover added a $365 million liability to its balance sheet for issuing refunds to merchants and merchant acquirers affected by the misclassification. As of the end of the third quarter, the liability balance was $376 million, Thursday’s filing said.
Discover Chief Financial Officer John Greene said last month that the company had shared findings of an internal investigation into the issue with certain regulators, but he didn’t specify which regulators. An outside law firm assisted the company with its investigation into the issue.
When asked last month about the timing of a resolution on the card pricing issue, Greene said he expected Discover executives would continue to engage with regulators and was “hopeful that by the end of the year, we’ll have a view.”
No disbursements had yet been made as of the end of the third quarter, given the company continues to craft its plan to refund merchants and merchant acquirers, and discuss its plans to do so with regulators, the filing said.
Spokespeople for Discover didn’t immediately respond to requests for comment. The SEC didn’t immediately respond to a request for comment.
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