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FTC acts against fintech app for misrepresentations made about cash advances
On January 2, the FTC issued a complaint and stipulated order against a personal finance mobile application that offers its users short-term cash advances through “floats.” According to the complaint, the defendant misrepresented its claims to induce users into enrolling in a subscription plan. Specifically, the defendant advertised that its users could instantly receive a cash advance larger than available, claimed cash advance limits would increase over time, and promised to make cash available “instantly” for no extra fee.
According to the complaint, employees have admitted that the defendant company “lie[s]” to users. Users allegedly received misleading advertisements that stated how cash advances or “floats” constitute “free money” when there is actually a $1.99 subscription fee listed in tiny font. Additionally, the defendant advertised that users would receive “money in minutes” for “free” with “no hidden fees” despite having to pay a hidden $4 fee to receive their money instantly. The FTC alleges from user responses that many of them would have not enrolled in this program had they known they would be advanced less than promised. Further, the FTC alleges the defendant discriminates against consumers by categorically refusing to provide cash advances to consumers who receive public assistance benefits or derive income from gig work––even after they pay subscription fees.
Under this order, the FTC found the defendant violated the FTC Act, the Restore Online Shoppers’ Confidence Act (ROSCA), as well as ECOA and its implementing rule, Regulation B. The stipulated order, which names the company’s cofounders in addition to the company itself, prohibits the company from further misrepresentations, requires implementation of a fair lending program, requires a simple cancellation mechanism, and provides for a monetary judgment of $3 million.
FTC, Connecticut file complaint against auto dealer for deceptive and unfair practices
On January 4, the FTC and the State of Connecticut issued a joint complaint against an auto dealer and its owner for alleged violations of the FTC Act and the Connecticut Unfair Trade Practices Act. According to the complaint, the dealership allegedly imposed additional fees, including certification fees, add-on charges, and government charges, without consumers’ explicit consent. The FTC alleged that the dealership made misrepresentations regarding advertised prices, charging consumers additional fees when they would attempt to purchase vehicle, and charged customers for certification fees for vehicles that had been advertised as “certified.” The complaint also alleged that the dealership would charge consumers for add-ons, such as GAP insurance, service contracts, maintenance contracts, and total loss protection with or without express consent, and at times after the consumer specifically declined the add-on. The complaint further alleged that the dealership often stated in advertisements that a vehicle was certified but did not report the sale of that vehicle or pay the certification fee to the manufacturer, so consumers did not receive the actual benefits. The complaint seeks consumer redress, disgorgement of ill-gotten money, civil penalties, and a permanent injunction.
FDIC releases November enforcement actions
On December 29, the FDIC released a list of administrative enforcement actions taken against banks and individuals in November. The FDIC made 12 orders public including, “five consent orders, three prohibition orders, two orders terminating consent orders, one order to pay a civil money penalty (CMP), and one order dismissing both a notice of assessment of CMPs and an order to pay.” Included is a stipulated order and written agreement with a Tennessee-based bank (the Bank) to resolve alleged violations of the Bank Secrecy Act (BSA) and weaknesses in board and management oversight of its information technology function. The Bank agreed to the conditions of the consent order which requires the Bank to, among other things (i) establish an action plan to correct the bank’s Anti-Money Laundering/Countering the Financing for Terrorism (AML/CFT) program deficiencies and alleged violations; (ii) retain qualified IT management; (iii) perform a cybersecurity assessment; and (iv) designate someone responsible for coordinating and monitoring day-to-day compliance with the BSA.
Large bank agrees to proposed settlement agreement; to be decided in February
On November 27, 2023, a large Canadian bank agreed to pay $15.9 million to accountholders in a proposed settlement agreement stemming from a class action suit in which the bank allegedly charged improper non-sufficient fund (NSF) fees. NSF fees are charges by a financial institution when they decline to make a payment from an accountholder’s account after determining the account lacks sufficient funds. Plaintiffs alleged that from February 2, 2019, to November 27, 2023, the bank charged accountholders multiple NSF fees on a single attempted transaction. In the agreement, the bank continues to deny liability. While an agreement has been reached between the two parties, the agreement has yet to be approved by the courts. A hearing has been scheduled for February 13, 2024, in the Ontario Superior Court of Justice to approve the settlement and award the payouts. Accountholders will receive their payouts, “estimated to be in the range of approximately $88 CAD,” deposited directly to their account with the bank. Under the proposed settlement agreement, the representative plaintiff will receive an honorarium of $10,000. As previously covered by InfoBytes, the FDIC warned that supervised financial institutions that charge multiple NSF fees on re-presented unpaid transactions may face increased regulatory scrutiny and litigation risk.
SEC charges DAO for unregistered sale of crypto smart yield bonds
On December 22, 2023, the SEC announced a settlement with a decentralized autonomous organization (DAO) and a second settlement with its founders. The SEC alleged that the DAO failed to register with the Commission for its offering and sale of structured crypto-asset securities. The SEC additionally charged the organization for operating certain pools as unregistered investment companies. According to the SEC, the organization compared its structured crypto-asset securities to asset-backed securities and marketed them to the public. Furthermore, investors could acquire “senior” or “junior” interest which could be pooled and used to generate returns. The orders state that the structured crypto-asset securities attracted significant investments, totaling over $509 million, with fees paid to the organization by investors based on investment size and chosen yield.
SEC awards more than $28 million to seven whistleblowers
On December 22, 2023, the SEC announced awards totaling more than $28 million to seven whistleblowers whose information and assistance led to a successful SEC enforcement action. According to the redacted order, five of the whistleblowers provided significant information early in the investigation, participated in voluntary interviews, provided supporting documents to SEC staff, and identified key witnesses. The SEC also added that the whistleblowers made several attempts to internally report their concerns to company management. Two whistleblowers provided significantly less information than the other five later into the investigation, but still qualified for a percentage of the monetary sanctions collected in the covered action. Creola Kelly, Chief of the SEC’s Office of the Whistleblower, stated that “[t]hese whistleblowers provided valuable information and substantial assistance that played a critical role in the SEC returning millions of dollars to harmed investors.”
One claimant’s whistleblower award application was denied because they did not communicate directly with the SEC staff responsible for the Covered Action Investigation and none of the information provided by the claimant was forwarded to the responsible staff. As such, the claimant did not provide original information that led to the successful enforcement action.
Payments to whistleblowers are made out of an investor protection fund, established by Congress, which is financed entirely through monetary sanctions paid to the SEC by securities law violators.
CFPB, DOJ sue developer over predatory lending
On December 20, the CFPB and the DOJ issued a press release announcing the filing of a complaint against four affiliated Texas-based entities (collectively, the “developer”) alleging bait-and-switch land sales and predatory financing. The agencies claim the developer violated ECOA and FHA by targeting thousands of Spanish-speaking borrowers with predatory seller financing. The complaint also alleges the developer misrepresented or omitted material information regarding the seller-financed flood-prone lots having “the infrastructure necessary to connect water, sewer, and electrical services pre-installed,” and regarding flood risk. The complaint also claims that the developer did not provide purchasers with a property report before the purchaser entered into the subject agreement. Further, according to the complaint, the developer marketed the lots primarily in Spanish, but required borrowers to sign important transactional documents written in English only. The action also includes claims brought under other laws and regulations. Notably, this is the first federal court lawsuit the CFPB has brought under the Interstate Land Sales Full Disclosure Act of 1968 (ILSA).
FTC temporarily halts business opportunity scheme
On December 19, the FTC announced that the U.S. District Court for the Eastern District of Pennsylvania granted a temporary restraining order against a business opportunity scheme for allegedly engaging in deceptive acts. The court’s order barred the defendants from making misrepresentations about any business or money-making opportunity and froze the defendant’s assets. According to the FTC’s complaint, the business opportunity scheme violated the FTC Act’s prohibition of “unfair or deceptive acts or practices in or affecting commerce” and the Telemarketing Sales Rule by, among other things, (i) making misrepresentations regarding earnings from their products and services; (ii) furnishing “success coaches” with marketing materials to be used for new member recruitment, thus providing the means for the commission of deceptive acts or practices; (iii) making misrepresentations regarding profitability to persuade consumers to pay for membership, digital products, and marketing packages; (iv) making misrepresentations regarding material aspects of an investment opportunity; and (v) facilitating outbound calls that deliver prerecorded messages to encourage consumers to purchase its products, also known as robocalls. Beyond the temporary restraining order and asset freeze, the FTC is seeking a permanent injunction and other equitable relief.
DOJ announces crackdown on fraud networks targeting consumer accounts
On December 15, in conjunction with the DOJ’s Consumer Protection Branch efforts to crack down on fraud, the DOJ unsealed two cases against groups that allegedly stole money from consumer accounts with financial institutions. According to the DOJ, the groups used “deceptive tactics” to cover the fraud, and in the two cases, the Department is seeking “temporary restraining orders and the appointment of receivers to stop defendants from dissipating assets.”
The first case (in the U.S. District Court for the Southern District of Florida) involves a group that allegedly committed bank and wire fraud and stole millions from consumers and small businesses by repeatedly creating sham companies. According to the complaint, since at least 2017, the defendants operated fraud schemes disguised as legitimate online marketing service providers by fabricating websites, forging consumer authorizations for charges, and establishing a “customer service” call center to handle complaints. The defendants allegedly obtained bank account information from individuals and small businesses without permission and utilized payment processors to make unauthorized debits to accounts. The DOJ claims that, to carry out the fraud, the defendants used remotely created checks, which are created remotely by a payee using the account holder’s information but without their signature. The second case (in the U.S. District Court for the Eastern District of California) bears many similarities to the first case, including the type of alleged fraud scheme. Both cases also involve the use of “microtransactions,” which are low-dollar fake transactions designed to artificially lower the apparent rate of return or rejected transactions. The defendants in the second case in particular allegedly gathered large deposits from their merchant clients and used those funds to initiate microtransactions that appeared as if they were payments for the merchants’ goods and services. Essentially, according to the Department’s complaint, the merchants paid themselves: the funds initially paid to the defendants were returned to the merchants as microtransactions, while the defendants allegedly collected a percentage of the transactions as service fees.
Fed enters into written agreement with Ohio bank
On December 19, the Federal Reserve Board announced a written agreement with an Ohio state-chartered bank and its holding company to address certain deficiencies identified during a recent examination of the bank. Under the agreement, the bank and its holding company agreed to: (i) use the bank’s resources as a “source of strength”; (ii) submit a written plan to enhance board oversight and management; (iii) conduct a third-party assessment of the bank’s staff; (iv) submit an enhanced written investment policy that includes “periodic analysis of the investment portfolio, including, but not limited to the assessment of market risk, credit risk, interest rate risk, and liquidity risk of the underlying investments”; (v) improve the bank’s investment portfolio management and interest rate risk management practices; (vi) implement an enhanced liquidity risk management program; and (vii) submit a written plan regarding sufficient capital (among other corrective actions).