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CFTC, DOJ, SEC file charges in crypto fraud scheme
On December 13, the SEC filed a complaint against the former CEO/co-founder (defendant) of a collapsed crypto exchange for allegedly orchestrating a scheme to defraud equity investors. According to the SEC, from May 2019 to November 2022, the defendant raised over $1.8 billion from investors who bought an equity stake in his company in part because they believed his representations that the platform had “top-notch, sophisticated automated risk measures in place.” The complaint alleged, among other things, that the defendant orchestrated “a massive, years-long fraud” to conceal (i) the undisclosed diversion of customers’ funds to the defendant’s privately-held crypto hedge fund; (ii) the undisclosed special treatment afforded to the hedge fund on the company platform, including providing it with a virtually unlimited “line of credit” funded by the platform’s customers; and (iii) the undisclosed risk stemming from the company’s exposure to the hedge fund’s significant holdings of overvalued, illiquid assets, such as the platform-affiliated tokens. The complaint further alleged that the defendant used commingled funds at his hedge fund to make undisclosed venture investments, purchase lavish real estate purchases, and give large political donations. The SEC’s complaint charged the defendant with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC is seeking injunctions against future securities law violations; an injunction that prohibits the defendant from participating in the issuance, purchase, offer, or sale of any securities, except for his own personal account; disgorgement of his ill-gotten gains; a civil penalty; and an officer and director bar.
The defendant was also indicted by a grand jury in the U.S. District Court for the Southern District of New York on wire fraud, commodities fraud, securities fraud, money laundering, and campaign finance charges.
The CFTC also filed a complaint against the former CEO/co-founder, in addition to the collapsed crypto exchange and the hedge fund for making material misrepresentations in connection with the sale of digital commodities in interstate commerce. Specifically, the CFTC alleged that the exchange’s executives, at the former CEO’s direction, created a number of exceptions to benefit his hedge fund, including adding features in the underlying code to permit the hedge fund to “maintain an essentially unlimited line of credit” on the trading platform through an “allow negative flag,” which allowed the hedge fund to withdraw billions of dollars in customer assets from the company. The CFTC is seeking restitution, disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act and CFTC regulations, as charged.
Later, on December 21, the SEC and CFTC filed charges (see here and here) against the former CEO of the hedge fund and the former chief technology officer of the collapsed crypto exchange for their roles in the scheme to defraud equity investors. The agencies stated that investigations into other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing.
CFPB to issue $95 million in redress to victims of student loan debt relief operation
On December 13, the CFPB announced that it will distribute more than $95 million in redress to over 87,000 consumers harmed by a student loan debt relief operation. As previously covered by InfoBytes, the CFPB, along with the Minnesota and North Carolina attorneys general, and the Los Angeles City Attorney (together, the “states”), announced an action against the defendants for allegedly deceiving thousands of student loan borrowers and charging more than $71 million in unlawful advance fees. In the complaint filed October 21, 2019, and unsealed on October 29, 2019 in the U.S. District Court for the Central District of California, the Bureau and the states alleged that since at least 2015, the defendants have violated the CFPA, the TSR, and various state laws by charging and collecting improper advance fees from student loan borrowers prior to providing assistance and receiving payments on the adjusted loans. The CFPB also claimed that the defendants automatically put loans in forbearance and submitted false information to loan servicers to qualify customers for lower monthly payments.
CFPB and FHFA release updated loan-level mortgage data on borrowers’ pandemic experiences
On December 13, the CFPB and FHFA published updated loan-level data from the National Survey of Mortgage Originations. (See also FHFA announcement here.) The publicly available data highlights borrowers’ experiences when obtaining a mortgage during the Covid-19 pandemic. Key highlights from the updated data include: (i) in 2020 a higher percentage (48 percent) of borrowers reported that a paperless online mortgage process was important; (ii) 21 percent of borrowers reported that their mortgage closing did not occur as originally scheduled (up from 17 percent in 2019); (iii) an increased number of borrowers reported that they were very familiar with available interest rates, with 78 percent of borrowers (up from 67 percent in 2019) stating that they were very satisfied with the interest rate that they qualified for; and (iv) borrowers who refinanced in 2020 versus 2019 were better off financially, with 76 percent of borrowers who refinanced reporting that they were not concerned about qualifying for a mortgage in 2020.
“The data released today provide a clear view of borrower sentiment about the mortgage process during the COVID pandemic in 2020,” said Saty Patrabansh, FHFA Associate Director for the Office of Data and Statistics. “This data should be helpful to analysts and policymakers in understanding the complete experience of mortgage borrowers and identifying what challenges may still exist in mortgage lending.”
FDIC proposes signage amendments, issues revised guide on supervisory appeals process
On December 13, the FDIC held a meeting, during which board members approved a notice of proposed rulemaking (NPRM) to modernize and amend the rules “governing the use of the official FDIC sign and insured depository institutions’ (IDIs) advertising statements to reflect how depositors do business with IDIs today, including through digital and mobile channels.” According to the FDIC’s announcement, the NPRM would amend part 328 of its regulations by updating the requirements for when the FDIC’s official sign can be displayed. Institutions would also be required to use signs that differentiate insured deposits from non-deposit products across banking channels and provide disclosures to consumers alerting them to when certain financial products are not insured by the FDIC, are not considered deposits, and may lose value.
Acting Chairman Martin Gruenberg noted that there have not been major changes to these rules since 2006. FDIC board member and CFPB Director Rohit Chopra issued a statement in support of the NPRM, noting that the financial sector has evolved significantly since 2006, and “[b]anks increasingly offer uninsured products, physical branches look different, more than 65% of banked households primarily bank online or through their mobile phone, and convoluted bank-nonbank partnerships have proliferated.” He specifically highlighted several of the proposed changes, including: (i) requiring banks to physically segregate the parts of the branch used for accepting insured deposits from other areas where uninsured products are offered; (ii) requiring banks to display digital FDIC signs on their websites and mobile apps, including clear notifications on relevant pages where uninsured products are offered; (iii) requiring disclosures that deposit insurance does not protect against the failure of nonbanks and, if relevant, that pass-through deposit insurance coverage is not automatic or certain; and (iv) clarifying that crypto assets are uninsured, non-deposit products. Comments on the NPRM are due 60 days after publication in the Federal Register.
On the same day, the FDIC adopted proposed changes to the Guidelines for Appeals of Material Supervisory Determinations. The board solicited public comments in October on the proposed changes (covered by InfoBytes here). The revised Guidelines add the agency’s ombudsman to the Supervision Appeals Review Committee (SARC) as a non-voting member (the ombudsman will be responsible for monitoring the supervision process after a financial institution submits an appeal and must periodically report to the board on these matters). Materials under consideration by the SARC will have to be shared with both parties to the appeal (subject to applicable legal limitations on disclosure), while financial institutions will be allowed to request a stay of material supervisory determination during a pending appeal. Additionally, the division director is given the discretion to grant a stay or grant a stay subject to certain conditions, and institutions will be provided decisions in writing regarding a stay. The revised Guidelines take effect immediately.
9th Circuit affirms ruling for CFPB in deceptive solicitations case
On December 13, the U.S. Court of Appeals for the Ninth Circuit affirmed summary judgment in favor of the CFPB against a California-based student financial aid operation and its owner (collectively, “defendants”), which were sued for allegedly mailing deceptive solicitations to individuals that advertised help in applying for scholarships. As previously covered by InfoBytes, the defendants allegedly engaged in deceptive practices when they, among other things, represented that by paying a fee and sending in an application, consumers were applying for financial aid or the defendants would apply for aid on behalf the students. But, according to the Bureau, the consumers did not receive the promised services in exchange for their payment. The case was stayed in 2016 while the owner defendant faced a pending criminal investigation, until the court lifted the stay in 2019 after finding the possibility of the civil proceedings affecting the owner defendant’s ability to defend himself in the criminal proceeding “speculative and unripe.” In 2021, the U.S. District Court for the Southern District of California issued an order granting in part and denying in part the CFPB’s motion for partial summary judgment and granting the agency’s motion for default judgment (covered by InfoBytes here). The order required the defendants to pay a $10 million civil money penalty and more than $4.7 million in restitution. Additionally, default judgment was entered against the defendants on the merits of the Bureau’s claims, which included allegations that the defendants failed to provide privacy notices to consumers as required by Regulation P. The defendants appealed.
On appeal, the defendant-appellant argued that he was not subject to the Bureau’s authority because he provided nonfinancial advice on “free” scholarships and that the solicitations were not deceptive. The appellate court noted that the CFPA lists ten different categories of covered persons, one of which is “providing financial advisory services … to consumers on individual financial matters or relating to proprietary financial products or services ….” Because the solicitations dealt with the topic of financial aid and scholarships for college tuition, the 9th Circuit concluded that “[a]dvising students to exhaust scholarship opportunities before taking on debt is no less ‘financial’ than advising students to leverage their unique access to federally subsidized loans.” The appellate court noted that the defendant’s “advice covered the entire gamut of financial aid and was undoubtedly financial in nature.” The appellate court further noted that the defendant “is incorrect that scholarships are not financial in nature merely because they do not have to be repaid,” and that “the ordinary meaning of financial is broad and encompasses both cash financing and debt financing. Indeed, the definition of ‘finance’ specifically contemplates raising funds, regardless of their origin, for college tuition.”
Supreme Court agrees to hear second appeal over student debt relief plan
On December 12, the U.S. Supreme Court granted a petition for certiorari in a student debt relief challenge currently pending before the U.S. Court of Appeals for the Fifth Circuit. As previously covered by InfoBytes, the DOJ filed an application on behalf of the Department of Education (DOE) asking the U.S. Supreme Court to stay a judgment entered by the U.S. District Court for the Northern District of Texas concerning whether the agency’s student debt relief plan violated the Administrative Procedure Act’s (APA) notice-and-comment rulemaking procedures. In a brief unsigned order, the Supreme Court deferred the DOE’s application for a stay, pending oral argument. The Supreme Court said it will treat the application as a “petition for a writ of certiorari before judgment,” and announced a briefing schedule will be established to allow the case to be argued in the February 2023 argument session to resolve the legality of the program. Oral arguments are scheduled for February 28, 2023.
The Supreme Court said it will consider whether the respondents (individuals whose loans are ineligible for debt forgiveness under the plan, as covered by InfoBytes here) have Article III standing to bring the challenge. The Supreme Court will also consider whether the DOE’s plan is “statutorily authorized” and “adopted in a procedurally proper manner.”
This is the second case concerning the Biden administration’s student debt relief plan that the Supreme Court has agreed to hear. On December 1, the Supreme Court agreed to hear the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit, which temporarily prohibits the Secretary of Education from discharging any federal loans under the DOE’s student debt relief plan. (Covered by InfoBytes here.)
District Court says consumer not provided meaningful opportunity to opt-out of arbitration provision
On December 9, the U.S. District Court for the Southern District of New York denied a defendant bank’s motion to compel arbitration in an action alleging the bank’s policy on overdraft fees caused customers to pay fees on accounts that were allegedly “never actually overdrawn.” Plaintiff filed a putative class action against the defendant seeking monetary damages from the defendant’s assessment and collection of these fees, and the defendant moved to compel arbitration. The court considered, among other things, whether 2014 and 2021 versions of the bank’s deposit account agreements constituted a request for the plaintiff to enter into a new agreement, in addition to whether “the extent to which a party subject to an agreement containing an arbitration provision with an optout clause . . . has a continuing obligation or opportunity to opt-out of arbitration each time the contract is amended or whether the party is bound by their assent to or rejection of arbitration at the first instance the opt-out procedure is offered.”
The court noted that the plaintiff’s account, which was opened in 2004, was governed by a 2002 version of an agreement that did not contain any dispute resolution provisions, nor did it require mandatory arbitration. However, the agreement did include a change of terms provision that stated customers “could be ‘bound by these changes, with or without notice.’” The agreement was amended in 2008 to include an arbitration provision and contained an opt-out clause allowing customers to reject the arbitration provision within 45 days of opening an account. In 2014, the defendant sent a notice to customers about further modifications made to initial account disclosures. The 2014 notice stated that customers could opt out of the entire amended agreement, which contained the arbitration clause, if they closed their account within 60 days. If they chose not to close the account, customers would be deemed to have accepted the amended agreement. A 2021 amendment agreement also included the arbitration provision. The defendant argued that the plaintiff is subject to the arbitration provision because he could have opted out as early as 2008 but chose not to and continued to use his account after receiving the 2014 notice.
The court disagreed, stating that the plaintiff would still have been obligated to arbitrate disputes under a survival clause in the 2008 contract, which said that the arbitration clause “shall survive the closure of your deposit account.” The court found that the 2014 notice did not provide the plaintiff a meaningful opportunity to opt out of arbitration. Moreover, because the plaintiff was unable to opt out under the 2008 agreement, “no contract to arbitrate was formed, and [the plaintiff] was not required to opt out again when [the defendant] amended the contract in or about January 2014 or thereafter.” “The lack of notice and absolute lack of opportunity for [the plaintiff] to opt out render the 2008 [agreement] unconscionable under New York law, which seeks to ‘ensure that the more powerful party’ — here, [the defendant] — ‘cannot ‘surprise’ the other party with some overly oppressive term,’ like an arbitration provision with an opt-out procedure that could never be exercised,” the court wrote.
NYDFS's Harris to serve as the state banking representative on the FSOC
On December 13, the Conference of State Bank Supervisors (CSBS) announced that NYDFS Superintendent Adrienne A. Harris will serve as the state banking representative on the Financial Stability Oversight Council (FSOC). According to the announcement, in 2013, Superintendent Harris joined the Obama Administration as a Senior Advisor in the U.S. Department of Treasury prior to being appointed as the Special Assistant to the President for Economic Policy. In this role, she managed the financial services portfolio, focusing on the implementation of Dodd-Frank, and developed strategies for financial reform, consumer protections, cybersecurity and housing finance reform. According to James M. Cooper, president and CEO of CSBS, Harris’s “background and experience at both the federal and state level will be an asset for the council as it manages emerging risk during a time of economic uncertainty.”
OFAC designates over 150 vessels
On December 9, the U.S. Treasury Department’s Office of Foreign Assets Control announced sanctions pursuant to Executive Order 13818 against two individuals and the networks of entities they control, along with eight other affiliated entities. Additionally, this action identifies 157 People’s Republic of China flagged fishing vessels in which these entities have an interest. According to OFAC, the designations “demonstrates the U.S. government’s ongoing effort to impose tangible and significant consequences on those engaged in serious human rights abuse, including on those vessels engaged in illegal, unreported, and unregulated (IUU) fishing.” OFAC also noted that this is the first time Treasury has designated an entity listed on the NASDAQ stock exchange. As a result of the sanctions, all property and interests in property belonging to the sanctioned persons that are in the U.S. or in the possession or control of U.S. persons are blocked and must be reported to OFAC. Further, “any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked.” U.S. persons are prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons, unless exempt or authorized by a general or specific OFAC license.
SEC issues $20 million whistleblower award
On December 12, the SEC announced an award totaling nearly $20 million to a whistleblower whose new information and assistance led to a successful SEC enforcement action. According to the redacted order, the whistleblower provided new information, met with SEC staff multiple times, and cooperated in the investigation, which allowed SEC staff to more quickly and efficiently investigate complex issues.