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Financial Services Law Insights and Observations

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  • DFPI fines debt collector $375k in first action under the CCFPL

    State Issues

    On September 22, the California Department of Financial Protection and Innovation (DFPI) announced its first enforcement action against a California-based debt collector and debt buyer for allegedly violating the California Consumer Financial Protection Law (CCFPL) by threatening to sue consumers and furnishing negative information to a credit bureau without first notifying consumers about the alleged debt—a practice commonly known as “debt parking.” According to DFPI, consumers complained that their credit scores dropped significantly as a result. The respondent also, among other things, allegedly left voicemails that did not disclose the caller’s identity, threatened illegal lawsuits and wage garnishment (even though it never actually commenced any legal proceedings), and failed to notify consumers in writing within 30 days of transmitting negative information to the credit bureau. Under the order, the respondent is required to pay a $375,000 fine and must desist and refrain from unlawful acts or practices associated with the FDCPA, the Rosenthal Fair Debt Collection Practices Act, and the Consumer Credit Reporting Agencies Act.

    State Issues State Regulators DFPI Enforcement CCFPL Consumer Finance Debt Collection Debt Buyer FDCPA California

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  • Massachusetts securities division settles with broker dealer

    Securities

    On September 15, the Massachusetts Office of the Secretary of the Commonwealth, Securities Division (Division) entered into two consent orders with a broker-dealer firm for alleged failure of supervisory and compliance procedures in violation of the Massachusetts Uniform Securities Act. According to one consent order, the firm failed to, among other things: (i) ensure that its agents with Massachusetts customers were registered in Massachusetts; (ii) have adequate policies and procedures in place regarding state-based requirements for supervisors; and (iii) supervise its agents in Massachusetts. The terms of the order require the company, among other things, to cease and desist from future violations of Massachusetts General Laws and Regulations, register its employees, enhance policy and procedures, and pay a $750,000 fine. The second consent order alleged that the firm failed to, among other things: (i) have reasonable policies in place to detect and monitor a broker-dealer agent’s social media accounts; (ii) “reasonably monitor internal communications between and among its registered persons”; and (iii) adequately discipline an employee after gaining knowledge of his personal use of social media in violation of state laws. The order requires the firm to permanently cease and desist from future violations of Massachusetts General Laws and Regulations, employ a third-party consultant to supervise the firm’s practices regarding employee trading and social media usage, conduct an annual compliance review, and pay an administrative fine of $4 million.

    Securities Massachusetts State Issues Enforcement Broker-Dealer

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  • SEC sues company for misleading investors

    Securities

    On September 21, the SEC filed a complaint against a Puerto-Rico based company and its two managing members (collectively, “defendants”) in the U.S. District Court for the District of Puerto Rico alleging that they offered and sold to retail investors the opportunity to share the profits of a purported Colombian gold mining operation. According to the SEC, the offering, which was unregistered with the Commission, was part of a fraudulent scheme that raised approximately $2.7 million. The complaint also alleges that one of the members and the company authorized advertisements that promised “exorbitant returns on the investment, and provided investors with false and misleading [decks] that misrepresented the status of the mining operations,” while the other member allegedly signed contracts with investors when he had knowledge that the company’s statements to investors were misleading. The SEC’s complaint alleges violations of the registration and anti-fraud provisions of the federal securities laws, specifically, the Securities Act of 1933 and the Securities Exchange Act of 1934. The complaint seeks a permanent injunction against the defendants, a permanent ban prohibiting the defendants’ participation in the issuance, purchase, offer, or sale of securities in an unregistered offering, disgorgement of ill-gotten gains, and civil penalties.

    Securities SEC Enforcement Securities Act Securities Exchange Act

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  • OCC issues cease and desist order against bank

    Federal Issues

    On September 20, the OCC announced a cease and desist order issued against a bank for alleged “unsafe or unsound practices” related to “technology and operational risk management,” in addition to the bank’s noncompliance with the OCC’s Interagency Guidelines Establishing Information Security Standards contained in Appendix B to 12 CFR Part 30. Without admitting to or denying the claims, the bank is required by the order to improve information technology and operational risk governance, technology risk assessments, internal controls, and staffing deficiencies. Specifically, the bank must develop an acceptable, written action plan outlining the remedial actions necessary to achieve compliance with the order by addressing the alleged unsafe or unsound practices and noncompliance, which must specify, among other things, a description of the corrective actions, reasonable and well-supported timelines, and those responsible for completing the actions. The order provides that the bank must also establish a Compliance Committee to quarterly submit: (i) “a description of the corrective actions needed to achieve compliance with each Article of the order”; (ii) the specific corrective actions undertaken to comply with each Article of the Order”; and (iii) “the results and status of the corrective actions.”

    Federal Issues OCC Enforcement Cease and Desist Compliance Risk Management

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  • SEC announces first crowdfunding enforcement action

    Securities

    On September 20, the SEC brought its first regulation crowdfunding enforcement action against several entities and related individuals allegedly involved in a fraudulent scheme to sell nearly $2 million of unregistered securities through two crowdfunding offerings. According to the SEC’s complaint, two of the entities issued securities without registering with the SEC, while their principals diverted investor funds for personal use rather than using the funds for the disclosed purposes. These actions, the SEC claimed, violated the antifraud and registration provisions of the Securities Act of 1933 and Securities Exchange Act of 1934. Among other things, the SEC claimed that one of the individuals—“a driving force behind both offerings”—also allegedly concealed his participation in the offerings from the public to hide a past criminal conviction arising from a mortgage fraud scheme out of concern that it could deter prospective investors. The SEC also charged the crowdfunding platform that hosted the offering, and its founder and CEO, with violations of the Securities Act and Regulation Crowdfunding for ignoring red flags about the other defendants. The complaint seeks disgorgement plus pre-judgment interest, penalties, permanent injunctions, and officer and director bars. Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, stressed the importance of full and honest disclosures in these types of offerings: “As companies continue to raise funds through crowdfunding offerings, we will hold issuers, gatekeepers and individuals accountable and enforce the protections in place for all investors.”

    Securities Enforcement SEC Crowdfunding Securities Act Securities Exchange Act

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  • SEC issues whistleblower awards totaling $11.5 million

    Securities

    On September 17, the SEC announced whistleblower awards totaling approximately $11.5 million to two whistleblowers who provided information and assistance leading to a successful SEC enforcement action. According to the redacted order, the SEC paid one of the whistleblowers nearly $7 million for being the initial source that led enforcement staff to open an investigation into hard-to-detect violations and for providing subsequent substantial assistance. According to the SEC, the whistleblower also “made persistent efforts to remedy the issues, while suffering hardships.” The second whistleblower, who provided information several years after the investigation was already underway, was paid more than $4.5 million. The SEC noted that the information was particularly helpful as it was based on the second whistleblower’s more recent experience. However, the SEC reduced the award after determining that the whistleblower delayed reporting to the SEC for several years after becoming aware of the wrongdoing.

    The SEC has awarded approximately $1 billion in whistleblower awards to 212 individuals since issuing its first award in 2012.

    Securities Whistleblower Enforcement SEC Investigations

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  • New Jersey, Texas flag company for crypto practices

    State Issues

    On September 17, the New Jersey Bureau of Securities (Bureau) announced a cease and desist order against a blockchain-based marketplace company for allegedly selling unregistered securities in the form of interest-earning crypto-asset accounts that raised approximately $14 billion. According to the Bureau, the company funded its cryptocurrency lending operations and proprietary trading partially through unregistered securities sales, in violation of the New Jersey Securities Law. The company allegedly solicited investments by depositing certain eligible cryptocurrencies into investors’ accounts at the company and pooling these cryptocurrencies together to fund its income generating activities, including lending and trading operations. According to the order, the company’s website fails to disclose that its product is not currently registered with any federal or state securities regulator, even though it is subject to such requirements. The Bureau also notes that this is the “second time in less than two months that the Bureau has taken action against a cryptocurrency firm for selling unregistered securities in New Jersey.” (Covered by InfoBytes here.)

    The same day, the Texas State Securities Board issued a notice of hearing to determine whether to issue a proposal for decision for the entry of a cease and desist order against the company for allegedly violating the Securities Act by offering and selling securities in Texas without being registered as dealers or agents, among other things.

    State Issues New Jersey Texas Securities Cryptocurrency State Regulators Enforcement

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  • FTC reaches $6.4 million settlement with remaining defendants in robocalling suit

    Federal Issues

    On September 20, the FTC announced a proposed settlement order resolving charges against the remaining participants in a cruise line telemarketing operation allegedly aimed at marketing free cruise packages to consumers. The FTC alleged the defendants participated in unfair acts or practices in violation of the FTC Act and the Telemarketing Sales Rule (TSR) by, among other things, placing illegal telemarketing robocalls, calling phone numbers on the FTC’s Do No Call Registry, calling consumers who asked not to be called, and transmitting false caller ID information. Under the proposed order, the defendants are permanently banned from engaging in or making telemarketing robocalls, and are also banned from engaging in abusive telemarketing, calling numbers on the Do Not Call Registry (unless express consent is given or other conditions are met), blocking or misrepresenting caller ID information, and violating the TSR. The order also imposes a $6.4 million civil money penalty against the defendants, which will be partially waived once the two individual defendants who controlled four of the corporations involved in the operation each pay a $50,000 civil money penalty. Two other settlement agreements were reached in 2020 with the other defendants (covered by InfoBytes here).

    Federal Issues FTC Act Enforcement Telemarketing Sales Rule UDAP Robocalls

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  • CFPB sues software company for encouraging TSR violations

    Federal Issues

    On September 20, the CFPB filed a complaint against a California-based software company and its owner (collectively, “defendants”) for allegedly violating the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act by substantially assisting or supporting credit-repair businesses that charge unlawful advance fees to consumers. According to the Bureau, the defendants—who market and sell credit-repair business software and other tools to individuals looking to start their own businesses—encouraged these businesses to “charge unlawful advance fees” even though, under the TSR, companies that telemarket their services are prohibited from requesting or receiving fees from consumers until the company has provided consumers with a credit report showing the promised results have been achieved. The TSR also requires that the credit report be issued more than six months after such results have been achieved. The Bureau seeks consumer restitution, disgorgement, injunctive relief, and civil money penalties.

    Federal Issues CFPB Enforcement Telemarketing Sales Rule CFPA

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  • DOJ settles SCRA violations with New Jersey student lending authority

    Federal Issues

    On September 20, the DOJ announced a settlement with a New Jersey’s student lending authority, resolving allegations that the authority obtained unlawful court judgments in violation of the Servicemembers Civil Relief Act (SCRA) against two military servicemembers who co-signed student loans . According to the press release, the DOJ launched an investigation into the authority after receiving a report from the Coast Guard that the authority obtained a default judgment in 2019 against a Coast Guard petty officer who co-signed on behalf of the two student loans. The complaint, filed by the DOJ in the U.S. District Court for the District of New Jersey, states that the authority “obtained default judgments against two SCRA-protected servicemembers” by failing “to file true and accurate affidavits indicating the military status of [the two service servicemembers].” According to the DOJ, lenders can verify an individual’s military status by utilizing a defense data center’s free and public website, or by reviewing their files to confirm military status. The authority allegedly filed affidavits in state court that inaccurately stated that the servicemembers were not in military service, even though the authority had conducted searches in the defense data center’s website that confirmed that the individuals were active military servicemembers.

    The settlement notes that the authority must pay $15,000 each to the two servicemembers who had default judgments entered against them, and must pay a $20,000 civil penalty. Among other things, the settlement also requires the authority to provide compliance training to its employees and to develop new policies and procedures consistent with the SCRA. The settlement also notes that the authority, since the opening of the investigation, has been fully cooperative and has “taken steps to improve its compliance with the SCRA.” 

    Federal Issues DOJ SCRA Military Lending New Jersey Student Lending Courts Enforcement Servicemembers

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