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DOJ’s Covid-19 Fraud Enforcement reports ongoing civil fraud and consumer protection actions
On April 9, the DOJ released a report on Covid-19 fraud, organizing various federal enforcement agencies and inspectors general, as well as state strike forces, in their collective pursuits against civil fraud on financial remedies under Covid-19. The Department’s Covid-19 Fraud Enforcement Task Force (CFETF) reported over 400 settlements and judgments and seized over $1.4 billion in fraudulently obtained CARES Act funds.
The report noted that the Civil Fraud Section continues to investigate fraudulent claims under the False Claims Act (FCA) and FIRREA, including with respect to grant recipients, PPE procurement, and payment advances. As two notable examples, a Florida management company paid $9 million for knowingly violating the FCA to obtain PPP loan forgiveness, and a New Jersey public relations firm paid $2.24 million for similar violations where it was found ineligible for the loan since it was registered under the Foreign Agent Registration Act. The DOJ also acted against purveyors of faulty PPE, individuals who tampered with Covid-19 vaccines, and those who sold fraudulent covid products online—filing under the Covid-19 Consumer Protection Act. The DOJ touted its $1 million judgment against a company that marketed vitamins that allegedly protected against Covid-19. Further, the National Unemployment Insurance Fraud Tax Force found hundreds of pandemic fraud leads and has seized over $3.3 billion in suspected pandemic fraud.
DOJ announces settlement against Pennsylvanian bank for alleged redlining
On February 5, the DOJ, together with the State of North Carolina, announced a settlement with a Pennsylvania-based bank (respondent) to resolve allegations that the bank engaged in a pattern or practice of lending discrimination by engaging in “redlining” in Charlotte and Winston-Salem, North Carolina, in violation of the Fair Housing Act and ECOA. The DOJ’s complaint alleged that from at least 2017 through 2021, the bank failed to provide mortgage lending services to predominantly Black and Hispanic neighborhoods in Charlotte and Winston-Salem and discouraged people seeking credit in those communities from obtaining home loans. The DOJ compared the respondent’s performance with other lenders, noting that other lenders generated applications in predominantly Black and Hispanic neighborhoods at two-and-a-half times the rate of respondents in Charlotte, and four times the rate of respondents in Winston-Salem.
Under the two proposed consent orders, the respondent will, among other things (i) invest at least $11.75 million in a loan subsidy fund to increase access to home mortgage, home improvement, and home refinance loans for residents of majority Black and Hispanic neighborhoods; (ii) spend $1 million on community partnerships; (iii) spend $750,000 for advertising, outreach, consumer financial education, and credit counseling focused on the areas at hand; (iv) open three new branches in the areas at hand, with at least one mortgage banker assigned to each branch; (v) hire a director of community lending who will oversee the continued development of lending in communities of color; (vi) retain independent consultants to enhance its fair lending program and better meet communities’ needs for mortgage credit; (vii) conduct a community credit needs assessment and offer a staff training; and (viii) evaluate its fair lending compliance management systems.
SDNY pilots new whistleblower program to protect individuals
On January 12, the SDNY launched its Whistleblower Pilot Program to protect individuals who report company wrongdoing from any future prosecution by the DOJ. The SDNY issued this program to encourage the “voluntary self-disclosure of criminal conduct” within white-collar practice areas undertaken in companies, exchanges, and financial institutions, among others. The program aims to reduce fraud or corporate failures affecting market integrity. Specifically, future whistleblowers who approach SDNY with a claim will enter into a non-prosecution agreement (NPA) only if the following conditions are met: the misconduct is not public and is not already known to the SDNY; the whistleblower discloses the information voluntarily, and is not in response to an inquiry or obligation; the whistleblower must assist in the investigation; the information is truthful; the whistleblower is not a government-elected or an appointed official, among others; and the whistleblower has not engaged in any criminal conduct. The policy also provides prosecutors and supervisors with factors to consider when deciding whether to enter into a NPA with a whistleblower.
Bank to pay $1.9 million to resolve redlining suit
On January 17, the DOJ announced a $1.9 million settlement with a national bank resolving allegations that the bank engaged in unlawful redlining in Memphis, Tennessee by intentionally not providing home loans and mortgage services to majority-Black and Hispanic neighborhoods, thereby violating the Fair Housing Act, ECOA, and Regulation B. In the complaint, the DOJ alleged that from 2015 through at least 2020, the bank (i) concentrated marketing and maintained nearly all its branches in majority-white neighborhoods; (ii) was aware of its redlining risk and failed to address said risk; (iii) generated disproportionately low numbers of loan applications and home loans during the relevant period from majority-Black and Hispanic neighborhoods in Memphis, compared to similarly-situated lenders; (iv) maintained practices that denied equal access to home loans for those in majority-Black and Hispanic neighborhoods, and otherwise “discouraged” those individuals from applying; and others.
Under the consent order, which is subject to court approval, the bank will, among other things, invest $1.3 million in a loan subsidy fund to enhance home mortgage, home improvement, and home refinancing access in the specified neighborhoods. The bank will also allocate $375,000 in advertising, outreach, and financial counseling to specified neighborhoods, and allocate $225,000 to community partnerships for services boosting residential mortgage credit access in the specified areas. Additionally, the bank will assign at least two mortgage loan officers to serve majority-Black and Hispanic neighborhoods in the bank’s service area and appoint a Director of Community Lending who will oversee the continued development of lending in communities of color.
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).
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.
FDIC agrees to settle with CEO and board members after District Court dismissal
On December 7, the U.S. District Court for the Eastern District of Louisiana dismissed a lawsuit brought by the FDIC against the chairman, president and CEO and board members of a state-chartered Louisiana bank after the parties reached a confidential settlement. In 2017, the State of Louisiana closed the bank and appointed the FDIC as the bank’s receiver. According to the DOJ’s press release, the bank’s former chairman, president and CEO was found guilty of 46 counts of bank fraud, conspiracy and other charges related to the bank’s collapse and has been sentenced to 14 years in prison and required to pay $214 million in restitution in August 2023. The FDIC also brought a civil action alleging that the bank’s chairman, president and CEO abused his incremental lending authority and the bank’s board loan committee approved improper credit extensions. The FDIC claimed it was entitled to recover $165 million from the bank in its capacity as its receiver: the loans consisted of $114 million for the bank’s chairman’s alleged commission of “gross negligence and breaches of fiduciary duty” and $51 million for the bank’s “gross negligence in approving other credit extensions.” More specifically, the bank’s chairman, president and CEO “recklessly” approved improper credit extensions, while the bank’s board loan committee violated “prudent business practices” by approving director loans.
DOJ seizes $9 million in crypto from criminal scammers
On November 21, the DOJ seized nearly $9 million in stablecoins from cryptocurrency scammers after the criminals exploited over 70 victims. The DOJ seized stablecoins, a certain crypto asset pegged to a central bank’s currency, tied to the U.S. dollar. The scammers employed a long-con technique called “pig butchering” which is a tactic to build and exploit a victim’s trust over time by creating fake romantic enticements meant to swindle victims into handing over money. The criminals targeted and convinced victims to “make cryptocurrency deposits by fraudulently representing that the victims were making investments with trusted firms and cryptocurrency exchanges.”
The DOJ was able to trace the stolen funds based on the funds’ cryptocurrency addresses as part of a money laundering technique known as “chain hopping… used to ‘layer’ the proceeds of criminal activity into new cryptocurrency ecosystems, all to obfuscate the… ownership of those proceeds.” The DOJ worked with the U.S. Secret Service to trace the victim’s deposits, and it was originally alerted from victim reports made on the FBI’s Internet Crime Complaint Center and the FTC’s Consumer Sentinel Network.
DOJ and DOE share success after first year of student loan bankruptcy discharge process
On November 16, the DOJ and DOE announced a successful first year of their new student loan bankruptcy discharge process during 2022. The discharge process extinguishes a borrower’s obligation to pay back either some or all of a student loan in bankruptcy based on undue hardship. The DOJ cites two previous standards used by bankruptcy courts to determine if a borrower’s repayment would cause an undue hardship: the Brunner and Totality Tests. The DOJ’s guidance simplified the current standards to enhance “consistency and equity in the handling of these cases” and applies in both Burner and Totality Test jurisdictions. The guide permits a court to grant a discharge if three conditions are satisfied: (i) “the debtor presently lacks an ability to pay the loan”; (ii) “the debtor’s inability to pay the loan is likely to persist in the future”; and (iii) “the debtor has acted in good faith in attempting to repay the loan.”
The DOJ reported the success of their new guidance with several findings: (i) there were 632 cases filed in the first 10 months of the new process, a significant increase from recent years; (ii) this process was used by 97 percent of all borrowers; (iii) 99 percent of borrowers received either full or partial discharges; and (iv) two bankruptcy courts adopted this process. The DOJ is optimistic that some or all these trends will continue.
SEC and DOJ charge two co-CEOs operating a $100 million fraud scheme
On November 9, the SEC and DOJ charged two co-CEOs of a tech investment firm for allegedly directing a $100 million fraud scheme. The two individuals were the founders of a failed Fresno-based technology company and were charged with “conspiring to commit wire fraud and taking more than $100,000,000 from various businesses and individuals” under U.S.C. § 1349. The two founders allegedly misled investors through falsified documents, bank records, auditing reports, and accounting statements.
The DOJ alleges that, as recently as January 2022, “[the two individuals lied] to board members, investors, lenders, and others about [the company’s] finances to obtain investments, loans, and other funding… Much of the money went towards paying payroll, including the [co-CEOs’] $600,000 per year salaries.” Authorities discovered the alleged fraud scheme back in May 2023 when the company failed to make payroll and then terminated all its 900 employees. If convicted, the two founders face a maximum statutory penalty of 20 years in prison each and a $250,000 fine.