Providian Gets Hammered After Connecticut Opens Investigation

The stock of Providian Financial (PVN Quote) was battered Monday after Connecticut's attorney general opened an investigation on the credit card company's issuance and billing practices.

The company is already under investigation by the San Francisco district attorney's office for complaints about its billing practices, and about a dozen lawsuits seeking class-action status have been filed against the firm in the last six months.

Providian's shares fell 23%, closing down 26 1/4 to 89 1/4.

The complaints against the company include failure to credit payments in a timely manner to customer accounts, charges for unauthorized services and inadequate disclosure of interest rates and fees, attorney general Richard Blumenthal of Connecticut said in a statement. The complaints are similar to the ones in the San Francisco investigation and in the lawsuits.

In an interview, Blumenthal said, "There is a general industrywide inquiry into privacy violations by credit card issuers and banks in the credit card business, and this concern is part of our information request."

Konrad Alt, Providian's chief public policy officer, responded in a statement: "We have confidence in the integrity of our business practices and are prepared to defend them."

Providian issues cards to consumers with bad credit. Because of its involvement in a high-risk business, Providian "expects its customers to pay for the privilege of credit," explained Jennifer Scutti of Prudential Securities. It did that by charging higher fees and automatically attaching services, such as insurance protection, to its credit products. "The basic practice is not bad," Scutti said, "but it's the approach and ultimately the fees that are the problem." She rates the company a hold and her firm has not done any underwriting for Providian.

Customers have also complained that the company charged late fees on payments that had arrived on time. In July, Providian announced it would put aside $20 million to refund those customers. It has taken other steps to introduce more customer-friendly policies, such as eliminating the automatic attachment of fee-based services and allowing extra time for payments, among other things.

"Have they done enough?'' Scutti asked. "That's the question of the hour."

Before Connecticut's investigation was disclosed, Providian's shares had rallied over the past couple of weeks on news of strong third-quarter earnings, raised earnings forecasts for 1999 and 2000, speculation of settlement talks with the San Francisco district attorney's office and positive general trends in the industry.

But concerns about the company have escalated again. "There's the potential for a domino effect,'' Scutti said. "We thought perhaps San Francisco was an isolated case, but now there's Connecticut, and who's to say the same won't happen in New York or Florida or anywhere else?"

Added analyst David Berry of Keefe, Bruyette and Woods, "The gloomiest scenario is that we have 48 more D.A.s asking the same questions 48 more times." Berry rates the company a buy and his firm has done no underwriting for Providian.