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Financial Services Law Insights and Observations


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  • SDNY Grants DOJ's Request To Add Bank Executive To Pending FCA/FIRREA Litigation


    On December 12, the U.S. District Court for the Southern District of New York granted the DOJ’s motion to add a bank executive to a civil fraud suit it filed over a year earlier against a mortgage lender alleged to have falsely certified loans under the FHA’s Direct Endorsement Lender Program. U.S. v. Wells Fargo Bank, N.A., No. 12-7527, slip op. (S.D.N.Y. Dec. 12, 2013). The government alleges that the bank’s vice president in charge of quality control purposefully failed to self-report bad loans to HUD, despite having knowledge of HUD’s reporting requirements, and that he signed annual certifications misrepresenting to HUD that the bank complied with those reporting requirements. The court agreed with the government’s contentions that amending the complaint to add the individual defendant was permissible because (i) the bank would not be unduly prejudiced because the allegations were already at issue in the pending suit and the parties had yet to begin discovery; (ii) the claims that the government would assert were not futile, as the court had already ruled on the validity of the government’s theories of liability under the FCA and FIRREA, and the new defendant would have the opportunity to seek dismissal on other grounds; (iii) there had been no undue delay, because the government had not received authority to add the executive until after the bank’s motion to dismiss was fully submitted, and had not made a final determination to bring the proposed action against the executive until the day it informed the bank of its intention to do so; and (iv) the interests of judicial economy supported joinder insofar as a separate suit against the executive for conduct already at issue here would have been inefficient. The court did not address the bank’s argument that the government knew sooner of its authority to add the executive, ultimately and improperly electing to do so because the bank suspended settlement negotiations.

    DOJ FHA False Claims Act / FIRREA

  • Federal Court Allows FDIC D&O Suit Involving Business Judgment Rule To Proceed


    On November 14, the U.S. District Court for the Southern District of West Virginia denied motions to dismiss filed by former officers and directors of a failed federal thrift who allegedly contributed to the bank’s collapse by failing to exercise due diligence and monitor the bank’s relationship with a third party mortgage loan originator. FDIC v. Baldini, No. 12-0750, 2013 WL 6044412 (S.D. W.Va. Nov. 14, 2013). The former bank officers and directors moved to dismiss the FDIC’s negligence claims, filed as conservators for the failed thrift, arguing that the business judgment rule operates as a substantive rule of law that immunizes the directors and officers from liability for the alleged ordinary negligence. The court held that it is too early in the case to decide whether the officers and directors are entitled to business judgment rule protection. The court reasoned that determining whether the rule applies requires a fact-intensive investigation that is not appropriate for resolution on a 12(b)(6) motion to dismiss. The court noted that even if the rule applies, the FDIC should be permitted an opportunity to rebut that presumption. The court also held that the FDIC’s claims satisfy Twombly and Iqbal pleading requirements by sufficiently alleging that the directors and officers “essentially abdicated oversight completely” in the context of the thrift’s relationship with the third-party broker, which the court held was enough to support claims of not only ordinary, but gross negligence.

    FDIC Directors & Officers

  • SCOTUS To Hear Recess Appointment Case, Potential Implications for CFPB Director


    This morning, the U.S. Supreme Court agreed to hear the federal government’s challenge to a January 2013 decision by the Court of Appeals for the D.C. Circuit that appointments to the National Labor Relations Board (NLRB) made by President Obama in January 2012 during a purported Senate recess were unconstitutional. NLRB V. Noel Canning, No. 12-1281. Last month, the Third Circuit similarly invalidated a different NLRB recess appointment made by President Obama.

    CFPB Director Richard Cordray was appointed in the same manner and on the same day as the NLRB members, and his appointment is the subject of a lawsuit currently pending in the U.S. District Court for the District of Columbia.  Mr. Cordray, whose recess appointment is due to expire at the end of this year, was re-nominated by President Obama this year to serve a full term as director, but his confirmation is being held up in the Senate. All but two Senate Republicans have pledged to oppose Mr. Cordray for the position unless oversight of the CFPB is altered, including by changing its governance structure to a commission structure.

    In its review, the Supreme Court will address two questions presented by the government, as well as a third the Court added. The government’s petition asked the court to determine (i) whether the President’s recess appointment power may be exercised during a recess that occurs within a session of the Senate, or is instead limited to recesses that occur between enumerated sessions and (ii) whether the President’s recess appointment power may be exercised to fill vacancies that exist during a recess, or is instead limited to vacancies that first arose during that recess. The Court also signaled its intent to address the issue of Senate pro forma sessions with a question it added - whether the President's recess appointment power may be exercised when the Senate is convening every three days in pro forma sessions. The Court is likely to hear the case in the fall and issue its opinion next year.

    CFPB U.S. Supreme Court U.S. Senate

  • Supreme Court Narrows Application of Alien Tort Statute


    The Supreme Court recently sharply narrowed the potential application of the Alien Tort Statute (ATS), which allows foreign plaintiffs to bring civil actions in U.S. district courts for torts committed in violation of the law of nations or a treaty of the United States. Kiobel v. Royal Dutch Petroleum Co., No. 10-1491, 2013 WL 1628935 (Apr. 17, 2013). Foreign plaintiffs traditionally have sought to use the ATS to hold firms liable for alleged human rights abuse committed by foreign governments. Here, a district court dismissed several claims brought by Nigerian nationals who alleged that several non-U.S. oil companies had aided and abetted the Nigerian government in committing human rights violations. On interlocutory appeal, the Second Circuit dismissed the entire complaint, reasoning that the law of nations does not recognize corporate liability. The Supreme Court unanimously affirmed on different grounds, focusing on when courts can recognize a cause of action under the ATS for violation of the law of nations occurring in a non-U.S. sovereign territory. The Court held that the presumption against extraterritorial jurisdiction applied to claims under the ATS, and nothing in the statute rebutted that presumption; even where claims touch and concern the territory of the United States, they must do so with sufficient force to displace the presumption against extraterritorial application, which requires more than mere corporate presence. The Court’s ruling further limits the risk that foreign plaintiffs might expand ATS claims into new industries, including by bringing claims against financial institutions for global financial crime such as fraud and money laundering, or for financing projects during which alleged human rights abuses are committed.

    Anti-Money Laundering Anti-Corruption

  • Supreme Court Agrees to Review Standard for Enforcement of Forum Selection Clauses


    On April 1, the U.S. Supreme Court agreed to review a decision from the U.S. Court of Appeals for the Fifth Circuit that denied a mandamus petition against a district court that held that when a forum-selection clause designates a specific federal forum or allows the parties to select the federal courts of a different forum, the federal change of venue statute, 28 U.S.C. § 1404(a),—as opposed to Rule 12(b)(3) and 28 USC § 1406—is the proper procedural mechanism for the clause’s enforcement. Atl. Marine Constr. Co., Inc. v. U.S. Dist. Ct. for the W. Dist. of Tex., No. 12-929, 2013 WL 1285318 (cert. granted Apr. 1, 2013). This issue is significant because § 1404(a) applies when venue is proper but a transfer is sought, whereas Rule 12(b)(3) and § 1406 provide for dismissal or transfer of an action that has been brought in an improper venue. Thus, this question turns on whether private parties can, through a forum-selection clause, render venue improper in a court in which it is otherwise proper. The grant of certiorari notes that the majority of federal circuit courts hold that a valid forum-selection clause renders venue “improper” in a forum other than the one designated by the contract and that, in those circuits, the clauses are routinely enforced by motions to dismiss or transfer venue under Rule 12(b)(3) and § 1406. In addition to the Fifth Circuit, the Third and Sixth Circuits follow a contrary rule. The Supreme Court has requested that the parties address two issues in their briefs: (i) whether the Courts decision in Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22 (1988), changed the standard for enforcement of clauses that designate an alternative federal forum, limiting review of such clauses to a discretionary, balancing-of-conveniences analysis under 28 U.S.C. § 1404(a); and (ii) if so, how should district courts allocate the burdens of proof among parties seeking to enforce or to avoid a forum-selection clause?

    U.S. Supreme Court

  • California Federal Court First to Outline Factors Governing FIRREA Civil Penalty Awards


    On March 6, the U.S. District Court for the Central District of California identified for the first time factors for courts to consider when assessing a civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). United States v. Menendez, No. CV 11-06313, 2013 WL 828926 (C.D. Cal. Mar. 6, 2013). The DOJ sued a real estate broker, alleging he committed bank fraud when he submitted a false certification on behalf of a homeowner to HUD in connection with the homeowner’s short sale. The DOJ claimed the certification was false because it represented that there were no hidden terms or special understandings with the buyer of the property, when in fact the broker himself, through a company he controlled, also was the buyer of the property and intended to immediately resell the property for a profit of nearly $40,000. Drawing upon principles applied by courts in other civil penalty contexts, the court considered eight factors to assess the civil penalty under FIRREA: (i) the good or bad faith of the defendant and the degree of scienter; (ii) the injury to the public and loss to other persons; (iii) the egregiousness of the violation; (iv) the isolated or repeated nature of the violation; (v) the defendant’s financial condition and ability to pay; (vi) the criminal fine that could be levied for the conduct; (vii) the amount of the defendant’s profit from the fraud; and (viii) the penalty range available under FIRREA.

    In this case, the court found that the first three weighed in favor of a substantial civil penalty: (i) the broker acted with intent to defraud; (ii) HUD suffered a loss; and (iii) the broker’s bank fraud was egregious. The court found that the next two factors favored the broker: (iv) the admissible evidence reflected only a single instance of bank fraud, and (v) the broker recently received a discharge from bankruptcy court and had limited ability to pay. Finally, the court found that the civil penalty requested by the government — nearly $1.1 million — was excessive, considering that (vi) the amount of the criminal penalty for bank fraud was capped at $1 million, and the likely fine under the sentencing guidelines would have been “in the $20-30,000 range;” (vii) the broker’s profit was only approximately $40,000; and (viii) FIRREA precluded a penalty in excess of $1 million when the gain or loss was less than $1 million, as it was in this case. The court awarded a civil penalty of $40,000, an amount proportionate to the broker’s profit.

    Civil Fraud Actions False Claims Act / FIRREA

  • New York Federal Court Holds SEC's FCPA Enforcement Theory "Far Too Attenuated" for Jurisdiction


    On February 19, the U.S. District Court for the Southern District of New York held that the SEC’s allegations of personal jurisdiction over a former CEO of Siemens’ Argentinian subsidiary – a German citizen with no direct ties to the United States – were “far too attenuated from the resulting harm to establish minimum contacts,” and dismissed the case against him for lack of personal jurisdiction. SEC v. Sharef, No. 11-Civ-9073, 2013 WL 603135 (S.D.N.Y. Feb. 19, 2013). In the underlying case, the SEC alleged that, between 1996 and 2007, Siemens employees approved and paid millions of dollars of bribes to Argentinian government officials throughout the life of a contract with the Argentine government, during the renegotiation of that contract, and during an arbitration proceeding after the contract was canceled. The SEC alleged that the CEO participated in the renegotiation of the contract and “pressured” the CFO to approve the bribes. Applying the due process requirements of minimum contacts and reasonableness set forth in International Shoe v. Washington, 326 U.S. 310 (1945), the court reasoned, “[i]f this Court were to hold that [the CEO’s] support for the bribery scheme satisfied the minimum contacts analysis, even though he neither authorized the bribe, nor directed the cover up, much less played any role in the falsified filings, minimum contacts would be boundless.” This decision follows another recent decision in the Southern District of New York regarding personal jurisdiction over foreign FCPA defendants. In that case, the court reached the opposite outcome and found that the SEC had alleged personal jurisdiction because the defendants’ alleged conduct was “designed to violate” U.S. securities laws and thus was “directed toward the United States.” SEC v. Straub, No. 11-Civ-9645, 2013 WL 466600 (S.D.N.Y. Feb. 8, 2013). In Sharef, the court distinguished Straub on the basis that the individuals orchestrated a bribery scheme, “and as part of the bribery scheme signed off on misleading management representations to the company’s auditors and signed false SEC filings.”

    FCPA Anti-Corruption SEC

  • Washington Federal Court Holds Standard Business Practices Insufficient to Support Arbitration Claim


    On February 15, the U.S. District Court for the Western District of Washington held that a cable company could not force arbitration of a dispute by relying only on its standard business practices to support its claim that the plaintiff agreed to arbitrate. Permison v. Comcast Holdings Corp., No. C12-5714, 2013 WL 594304 (W.D. Wash. Feb. 15, 2013). A cable customer with accounts in Colorado and Washington sued the company alleging TCPA violations. The cable company sought to compel arbitration, claiming that “Welcome Kit” materials executed by the customer included an agreement to arbitrate. In support of its motion to compel arbitration with regard to the Colorado accounts, the cable company submitted an affidavit describing its standard business practice, which requires technicians to provide customers with the Welcome Kit, and obtain customer signatures on certain terms and conditions included in the Kit. The court held that reliance on standard business practices is insufficient. Instead, the court stated, the cable company must produce business records or testimony showing that the customer actually received the arbitration agreement and assented to its terms. The court noted that the cable company presented actual evidence with regard to the Washington account, but held that it is not clear whether that contract, and its arbitration clause, impact the customer’s TCPA claims because of imprecise pleading. The court denied the company’s motion to compel arbitration and granted the customer leave to clarify his claims. The court’s holding follows a recent 10th Circuit decision that affirmed a district court’s dismissal of claims based on unrefuted declarations submitted by a TV and internet service provider’s employees concerning its standard practices for entering into agreements provided to customers in writing by the installation technician at the time the services were installed.


  • California District Court Unseals FCA Complaint Filed Against Numerous Banks


    Last week, after the government declined to intervene in the case, the U.S. District Court for the Central District of California unsealed a qui tam False Claims Act (FCA) complaint filed by a whistleblower in April 2012 against numerous banks. U.S. ex rel Hastings v. Wells Fargo Bank, N.A., No. 12-3624, Complaint (C.D. Cal. Apr. 26, 2012). The relator claims that the banks knowingly endorsed for FHA-insurance mortgage loans originated in transactions where down payment gift programs were used fraudulently. According to allegations in the complaint, the banks’ programs generated gift funds by manipulating the sales price to pass FHA down payment assistance fees onto the buyer. Further, the alleged system forced the borrower to repay the down payment gift, a violation of FHA policy. The relator alleges that the banks then submitted to HUD false certifications for the non-compliant endorsed loans, upon which HUD relied to issue FHA mortgage insurance. The relator claims that the government was required to pay, and will continue to have to pay, FHA benefits on defaulted loans that contained material violations, and seeks treble damages and penalties under the FCA, a cease and desist order against the lenders, and a civil penalty of $5,500 to $11,000 for each alleged violation of the FCA.

    FHA False Claims Act / FIRREA

  • Fourth Circuit Affirms Marital Privilege Does Not Apply to Emails Exchanged Using Employer's Computer


    On December 13, the U.S. Court of Appeals for the Fourth Circuit held that the marital privilege does not protect information included in emails exchanged via a spouse’s employer-owned computer and network. United States v. Hamilton, No. 11-4847, 2012 WL 6200731 (4th Cir. Dec. 13, 2012). In an appeal of his criminal conviction on bribery charges, a Virginia lawmaker argued that the email evidence used to convict him was admitted in violation of the marital communications privilege. That common law privilege generally protects privately made communications between spouses. On appeal, the court extended by analogy the U.S. Supreme Court’s holding in Wolfe v. United States, 291 U.S. 7 (1934) to modern technology and held that the lawmakers use of his employer’s computer to send the allegedly privileged communications constituted a voluntary disclosure of the communications, thus waiving the privilege. The court explained that the district court did not err in admitting the communications based on its reasoning that the lawmaker did not take any steps to protect the communications in question, even with knowledge that his employer had in place a policy that permitted the employer to inspect emails stored on its system. As the court explained, the lawmaker was required to acknowledge his employer’s policy each time he logged-on to his work computer, and therefore had no reasonable expectation of privacy. After dispensing with the lawmakers’ other claims on appeal, the appeals court upheld the district court’s conviction.

    Privacy/Cyber Risk & Data Security


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