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On February 5, the U.S. District Court for the District of Massachusetts issued an order granting a national bank’s motion to dismiss a multidistrict litigation complaint for failure to state a claim. Plaintiffs, in an attempt to recover losses from an internet phone service company’s pyramid scheme that ran from 2012 to 2014, alleged that the bank assisted the company’s pyramid scheme by, among other things, maintaining depository accounts for the company, receiving interest on funds held in the accounts, processing transactions, and receiving fees for wire transfers. However, the court found that the investors failed to adequately allege that the bank had any actual knowledge of the underlying fraud. “The complaint is devoid of any allegation that the fees, interest, and charges received by [the bank] were anything more than payments for banking services,” the court wrote, and thus “have failed to allege that they were ‘unjust.’”
On October 18, the FTC released a report to Congress outlining the agency’s comprehensive efforts to protect older consumers in the marketplace from fraud, identity theft, imposter scams, deceptive credit schemes, and other unlawful practices. The report, Protecting Older Consumers 2017-2018: A Report of the Federal Trade Commission, discusses (i) scams that target older consumers, including technical support scams; business imposter scams; prizes, sweepstakes, and lottery scams; and family or friend imposter scams; (ii) key FTC enforcement actions taken against companies that allegedly engaged in deceptive schemes that targeted or affected older consumers; and (iii) outreach and education efforts, including fraud prevention campaigns and resources for older consumers. Specifically, the report contains analysis of consumer complaint data from 2017, which revealed that older consumers (especially those over 80) were more likely to report fraud than younger people, and that when they reported losing money to fraud, they lost significantly more money than consumers in their twenties. (See previously InfoBytes coverage here on the FTC’s annual summary of consumer complaints received in 2017).
District Court concludes a small virtual currency is a “commodity” under the Commodities Exchange Act
On September 26, the U.S. District Court for the District of Massachusetts denied a virtual currency trading company’s motion to dismiss, concluding that smaller virtual currencies are commodities that may be regulated by the CFTC. In January, the CFTC bought an action alleging the company violated the Commodities Exchange Act (CEA) and CFTC Regulation 180.1(a) by making false or misleading statements and omitting material facts when offering the sale of their company’s virtual currency. For example, the complaint alleges that the company falsely stated that its virtual currency was backed by gold, could be used anywhere Mastercard was accepted, and was being actively traded on several currency exchanges. Moreover, while consumers who purchased the virtual currency could view their accounts, they were unable to trade it or withdraw funds from their accounts with the company. The company moved to dismiss the case, arguing that the conduct did not involve a “commodity,” specifically one that underlies a futures contract, under the CEA. In denying the motion to dismiss, the court determined that Congress intended for the CEA to cover a certain “class” of items and specific items within that class are then “dealt in.” Because the company offered a type of “virtual currency” and it is “undisputed that there is futures trading in virtual currencies (specifically involving Bitcoin),” the court held that the CFTC sufficiently alleged the company’s product is a “commodity” under the CEA. The court also rejected the company’s other arguments, determining Regulation 180.1(a) was meant to combat the fraud alleged by the CFTC, notwithstanding its use of the term “market manipulation,” and the CFTC adequately pleaded the fraudulent claim under the regulation.
FTC announces settlements with website operators over the sale of fake documents allegedly used for fraud and identity theft
On September 18, the FTC announced three proposed settlements with the operators of websites who allegedly violated the FTC Act’s prohibition against unfair practices by selling fake financial documents used to facilitate identity theft and other frauds, including loan and tax fraud. As previously covered in InfoBytes, identity theft was the second largest category of consumer complaints reported in 2017 according to the FTC. The FTC brought charges against the first defendant, alleging the defendant engaged in the sale of fake pay stubs, bank statements, and profit-and-loss statements, as well as providing a product that allowed customers to edit existing (and authentic) bank statements. The second defendant’s charges include the alleged sale of fake pay stubs, auto insurance cards, and utility and cable bills, while the allegations against the third defendant also include the sale of fake tax forms, bank statements, and verifications of employment. While the defendants’ websites claimed that the fake documents were sold for “‘novelty’ and ‘entertainment’ purposes,” the FTC asserts that the defendants “failed to clearly and prominently mark such documents as being for such purposes and did not state on the documents themselves that they were fake.”
Under the terms of the proposed settlement agreements (see here, here, and here), monetary judgments are imposed against the defendants, who also are permanently prohibited from advertising, marketing, or selling similar fake documents.
On September 21, the FTC announced the nationwide availability of free security freezes and one-year fraud alerts, which were authorized under the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). Specifically, Section 301 of EGRRCPA prohibits a national credit reporting agency from charging a fee to place, remove, or temporarily lift a security freeze. The law also allows parents to obtain a free credit freeze for any of their children who are under 16, and guardians, conservators, and those with a valid power of attorney can obtain a free freeze for the person for whom they have legal authority to act. Additionally, Section 301 extends the duration of the free fraud alert from 90 days to one year. Consumers are required to contact all three nationwide credit reporting agencies to place the security freeze, but only are required to contact one of the three for the fraud alert, as each bureau is obligated to notify the others of a fraud alert.
District Court dismisses NFL season ticket class action because plaintiff received the “reasonably expected fruits under the contract”
On August 30, the U.S. District Court for the District of New Jersey dismissed with prejudice a putative class action alleging that an NFL team’s season ticket sales practices had violated the implied covenant of good faith and fair dealing and the New Jersey Consumer Fraud Act (CFA). The case was centered on the named plaintiff’s claim that the team made representations to him that his purchase of a personal seat license (PSL) would give him an exclusive right to purchase season tickets in a particular seating area in the team’s stadium. The plaintiff alleged that the team ran afoul of the CFA when, counter to its alleged representations, it opened up sales for season tickets in that area to people who had not purchased a personal seat license, thus rendering worthless the license plaintiff had purchased.
The Court dismissed the plaintiff’s claims with prejudice because the plaintiff had received the “reasonably expected fruits under the contract.” The PSL agreement did not promise an exclusive right to purchase seats in a particular area of the team’s stadium, nor did it “purport to extend licensing or equity rights to [p]laintiff to control the ticketing policy for other” seats in that area. Rather, the PSL simply promised the plaintiff the right to purchase two seats in the area he chose, and that right had not been interfered with.
On September 11, the U.S. District Court for the Eastern District of New York issued a ruling that the U.S. government can proceed with a case for purposes of federal criminal law against a New York-based businessman who allegedly made “materially false and fraudulent representations and omissions” connected to virtual currencies/digital tokens backed by investments in real estate and diamonds sold through associated initial coin offerings (ICOs). The defendant—who was charged with conspiracy and two counts of securities fraud for his role in allegedly defrauding investors in two ICOs—claimed that the ICOs at issue were not securities but rather currencies, and that U.S. securities law was unconstitutionally vague as applied to ICOs. However, the U.S. government asserted that the investments made in the tokens were “investment contracts” and thereby “securities” as defined by the Securities Exchange Act. The U.S. government further argued that the jury should apply the central test used by the U.S. Supreme Court in SEC v. W.J. Howey Co. to determine if a financial instrument “constitutes an ‘investment contract’ under the federal securities laws.” The judge commented that “simply labeling an investment opportunity as ‘virtual currency’ or ‘cryptocurrency’ does not transform an investment contract—a security—into a currency.” Moreover, while the judge cautioned that it was too early to determine whether the virtual currencies sold in the ICOs were covered by U.S. securities law, he concluded that a “reasonable jury” may find that the allegations in the indictment support such a finding.
On August 23, the U.S. District Court for the Eastern District of New York entered final judgment in favor of the Commodity Futures Trading Commission (CFTC) in its suit against a cryptocurrency trading advice company and its owner (defendants) for allegedly misappropriating investor money through a cryptocurrency trading scam. As previously covered by InfoBytes in March, the court granted the CFTC’s request for a preliminary injunction, holding that the CFTC has the authority to regulate virtual currency as a “commodity” within the meaning of the Commodity Exchange Act and that the CFTC has jurisdiction to pursue fraudulent activities involving virtual currency even if the fraud does not directly involve the sale of futures or derivative contracts. The final judgment orders the defendants to pay over $1.1 million in restitution and civil money penalties and permanently enjoins them from engaging in future activities related to commodity interests and virtual currencies.
Recently, Fannie Mae’s Mortgage Fraud Program issued an industry alert to mortgage companies operating in California regarding the use of false employment information by mortgage loan applicants. (See previous coverage in InfoBytes here). Fannie Mae extended its alert to Northern California and identified additional employers whose existence could not be verified by Fannie Mae. The alert provides “red flags” to help lenders and originators identify potential mortgage fraud when reviewing employment information.
On July 30, a New Jersey state appeals court reversed a lower court’s judgment awarding consumers over $1.8 million in connection with allegations that a national bank’s predecessor violated the state’s Consumer Fraud Act (CFA) by misrepresenting information to the town’s planning board in order to secure approvals for a housing development. Specifically, the plaintiffs had argued that, because of misrepresentations to the town’s planning board, the construction of a housing development was approved and resulted in the flooding of their home. According to the plaintiffs, the national bank’s predecessor was aware that their housing section could be susceptible to groundwater runoff but concealed the information from the planning board, and that had the planning board been aware of the information, the board would have denied the plans and the plaintiffs’ home would not have flooded. A jury agreed, and the trial court ultimately awarded the plaintiffs almost $50,000 in treble damages under the CFA claim, and $1.8 million in fees and expenses, along with smaller amounts of damages for nuisance and trespass claims.
On appeal, the panel reversed the damages for the CFA claims, including the fee award, holding that “there is a complete lack of proof of a causal connection” between the predecessor’s misrepresentations and the plaintiffs’ decision to purchase their residence. The court rejected the plaintiffs’ arguments that had the misrepresentations not been made, the construction of the development would have been denied and their house would not have flooded. The court concluded the argument was “speculative and attenuated” and there was no proof the development “would not have been built by another developer.”
- Daniel P. Stipano to discuss "Dynamic customer due diligence and beneficial ownership from KYC to ongoing CDD and the new rule implementation" at the Puerto Rican Symposium of Anti-Money Laundering
- Michelle L. Rogers to discuss "Preparing for servicing exams in the current regulatory environment" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jon David D. Langlois to discuss "Regulatory risks of convenience fees" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- APPROVED Webcast: NMLS Annual Conference & Ombudsman Meeting: Review and recap
- Brandy A. Hood to discuss "Keeping your head above water in flood insurance compliance" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Melissa Klimkiewicz to discuss "Servicing super session" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jessica L. Pollet to discuss "Law & compliance speedsmarts" at the American Financial Services Association Law & Compliance Symposium
- Daniel P. Stipano to discuss "Lessons learned from recent high profile enforcement actions" at the Florida International Bankers Association AML Compliance Conference
- Moorari K. Shah to provide "Regulatory update – California and beyond" at the National Equipment Finance Association Summit
- Sasha Leonhardt and John B. Williams to discuss "Privacy" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Aaron C. Mahler to discuss "Regulation B/fair lending" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Heidi M. Bauer to discuss "'So you want to form a joint venture' — Licensing strategies for successful JVs" at RESPRO26
- Jonice Gray Tucker to to discuss "DC policy: Everything but the kitchen sink" at CBA Live
- Jonice Gray Tucker to discuss "Small business & regulation: How fair lending has evolved & where are we heading?" at CBA Live
- Daniel P. Stipano to discuss "Lessons learned from ABLV and other major cases involving inadequate compliance oversight" at the ACAMS International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "A year in the life of the CDD final rule: A first anniversary assessment" at the ACAMS International AML & Financial Crime Conference
- Moorari K. Shah to discuss "State regulatory and disclosures" at the Equipment Leasing and Finance Association Legal Forum
- Hank Asbill to discuss "Creative character evidence in criminal and civil trials" at the Litigation Counsel of America Spring Conference & Celebration of Fellows
- Hank Asbill to discuss "Pay no attention to the man behind the curtain: Addressing prosecutions driven by hidden actors" at the National Association of Criminal Defense Lawyers West Coast White Collar Conference
- Daniel P. Stipano to discuss "Keep off the grass: Mitigating the risks of banking marijuana-related businesses" at the ACAMS AML Risk Management Conference
- Daniel P. Stipano to discuss "Mid-year policy update" at the ACAMS AML Risk Management Conference
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program