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Commissioners discuss importance of restoring FTC’s authority
On July 28, the House Committee on Energy and Commerce’s Subcommittee on Consumer Protection and Commerce held a hearing titled “Transforming the FTC: Legislation to Modernize Consumer Protection” to discuss, among other things, the importance of restoring the Commission’s ability to secure monetary relief from companies and individuals that violate the law. Testifying before the subcommittee were FTC Chair Lina M. Khan and Commissioners Noah Joshua Phillips, Rohit Chopra, Rebecca Kelly Slaughter, and Christine S. Wilson. Khan and the Commissioners discussed pending federal legislation intended to modify the FTC’s authority and addressed severe resource constraints affecting the FTC’s attempts to address the increasing number of global mergers and acquisitions, as well as the large number of consumer complaints related to Covid-19 pandemic-related marketplace abuses. They noted that despite these challenges, “thanks in part to the civil penalty authority provided by this Subcommittee in the COVID-19 Consumer Protection Act,” (covered by InfoBytes here) “the Commission has successfully halted dozens of COVID-related scams.”
Khan and the Commissioners also discussed the importance of restoring the FTC’s ability to secure monetary relief from those that violate the law, which was limited following the U.S. Supreme Court’s recent decision in AMG Capital Management v. FTC (covered by InfoBytes here). “[P]ending cases today involve $2 billion in potential relief to victims, which is not available after AMG,” the testimony provided. “Unless the agency has clear authority to obtain monetary relief, this decision will continue to impede our ability to provide refunds to Americans harmed by deceptive, unfair, or anticompetitive conduct.” Moreover, a recent decision issued by U.S. Court of Appeals for the Third Circuit “held that the language in Section 13(b) of the FTC Act describing a company that ‘is engaged in, or is about to engage in’ illegal conduct means the FTC can initiate enforcement actions only when a violation is either ongoing or ‘impending’ at the time the suit is filed.” This decision, the FTC claimed, “limits the Commission’s ability to hold accountable entities who engaged in illegal conduct that occurred entirely in the past.
7th Circuit vacates $59 million CFPB penalty against mortgage-assistance relief companies
On July 23, the U.S. Court of Appeals for the Seventh Circuit vacated a 2019 restitution award in an action brought by the CFPB against two former mortgage-assistance relief companies and their principals (collectively, “defendants”) for violations of Regulation O. As previously covered by InfoBytes, in 2014, the CFPB, FTC, and 15 state authorities took action against several foreclosure relief companies and associated individuals, including the defendants, alleging they made misrepresentations about their services, failed to make mandatory disclosures, and collected unlawful advance fees. The district court’s 2019 order (covered by InfoBytes here) held one company and its principals jointly and severally liable for over $18 million in restitution, while another company and its same principals were held jointly and severally liable for nearly $3 million in restitution. Additionally, the court ordered civil penalties totaling over $37 million against company two and four principals.
In 2021, the principals urged the 7th Circuit to vacate the judgment, arguing, among other things, that the restitution order used the company’s net revenues instead of net profits in determining restitution and that they were exempt from liability because Regulation O exempts properly licensed attorneys engaged in providing mortgage-assistance relief services as part of the practice of law, provided they comply with state law and regulations. The principals also disagreed with the district court’s finding that they acted recklessly in calculating the civil penalty amount, contending that “they were not aware of a risk that their conduct was illegal.”
The 7th Circuit reviewed the application of the U.S. Supreme Court’s ruling in Liu v. SEC, which held that a disgorgement award cannot exceed a firm’s net profits (covered by InfoBytes here). While the Bureau argued that Liu focused on disgorgement and not restitution, the appellate court held that the Bureau’s interpretation was “too narrow a reading of Liu.” According to the appellate court, “Liu’s reasoning is not limited to disgorgement; instead, the opinion purports to set forth a rule applicable to all categories of equitable relief, including restitution.” The appellate court vacated the restitution award and remanded the suit for recalculation based on net profits.
With respect to the alleged violations of Regulation O, the appellate court affirmed the district court’s ruling, concluding that attorneys who are subject to liability for violating consumer laws “cannot escape liability simply by virtue of being an attorney.” However, the appellate court vacated the recklessness finding in the civil penalty calculation pertaining to certain of the defendants, writing that “[a]lthough we have found that they were not engaged in the practice of law, the question was a legitimate one. We consider it a step too far to say that they were reckless—that is, that they should have been aware of an unjustifiably high or obvious risk of violating Regulation O.” The appellate court ordered the district court to apply the penalty structure for strict-liability violations. Additionally, the 7th Circuit remanded an injunction which permanently banned the principals from providing “debt relief services,” finding that the injunction requires “some tailoring” as the violations at issue involved mortgage-relief services and not debt-relief services.
Mississippi AG reaches $3.7 million settlement with auto finance company
On July 21, the Mississippi attorney general announced a settlement with an auto finance company to resolve alleged violations of the Mississippi Consumer Protection Act. The AG claimed the auto finance company, among other things, allegedly placed consumers into loans with a high probability of default and engaged in aggressive collection practices. Under the terms of the settlement, the auto finance company will pay $3.7 million to the state, including $1.8 million in consumer restitution, and will stop collecting on loans allegedly extinguished under Mississippi law. Additionally, the auto finance company (i) will account for a borrower’s ability to pay and set a reasonable debt-to-income threshold; (ii) may not require dealers to sell any ancillary products; (iii) will “monitor dealers for possible inflation, power booking, or expense deflation”; (iv) may “not misrepresent a consumer’s prospect of redeeming a vehicle that has been repossessed”; (v) may not require borrowers to make payments through methods requiring additional third-party fees; and (vi) will notify all relevant credit reporting agencies that the borrowers’ debts have been extinguished.
OFAC reaches $1.4 million settlement with money transmitter
On July 23, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced a $1.4 million settlement with a New York-based online money transmitter for 2,260 apparent violations of multiple sanctions programs. According to OFAC’s web notice, between February 4, 2013 and February 20, 2018, the company allegedly processed 2,241 payments for parties located in sanctioned jurisdictions and regions, including the Crimea region of Ukraine, Iran, Sudan, and Syria, as well as 19 payments on behalf of sanctioned persons identified on OFAC’s List of Specially Designated Nationals and Blocked Persons. Identified deficiencies in the company’s sanctions compliance program related to screening, testing, auditing, and transaction review procedures allowed persons in these jurisdictions and regions and those on the SDN List to engage in roughly $802,117.36 worth of transactions, OFAC stated. The apparent violations—related to commercial transactions that the company processed on behalf of its corporate customers and card-issuing financial institutions—allegedly occurred as a result of weak algorithms, business identifier code screening failures, backlogs, and a failure to monitor IP addresses or flag addresses in sanctioned locations.
In arriving at the settlement amount, OFAC considered various aggravating factors, including that (i) the company failed to exercise sufficient caution or care for its sanctions compliance obligations; (ii) the company had reason to know users were located in sanctioned jurisdictions and regions based on common indications it had within its possession; and (iii) the apparent violations harmed six different sanctions program.
OFAC also considered various mitigating factors, including that (i) senior management quickly self-disclosed the apparent violations upon discovery and provided substantial cooperation during the investigation; (ii) the company has not received a penalty notice from OFAC in the preceding five years; and (iii) the company has taken remedial measures to minimize the risk of recurrence, including terminating the conduct leading to the apparent violations, retraining compliance employees, enhancing screening software, putting flagged transactions into a pending status rather than completing them, and conducting a daily review of customers’ and counter-parties’ identification documents.
CFPB marks 10th anniversary
On July 21, the CFPB marked its 10 year anniversary. Prepared remarks published by acting Director Dave Uejio highlighted Bureau activities taken over the past decade in consumer empowerment and racial equity, as well as recent actions in response to the Covid-19 pandemic. With respect to enforcement, Uejio noted that since 2011, the Bureau’s work has led to approximately $14.4 billion in consumer relief and $1.7 billion in civil penalties. According to a Bureau blog post, during this time period more than 183 million consumers and consumer accounts have received economic redress and consumers have filed more than 3 million complaints. Additionally, over 7 million consumers have accessed the Bureau’s Covid-19 educational materials. “In the decade to come, we will continue to use all the tools at our disposal to empower American consumers and work to ensure the financial markets they interact with are fair, transparent, and competitive,” Uejio wrote.
SEC settles with company over ETP implementation failure
On July 19, the SEC announced a settlement with a financial services company for its role in alleged compliance failures connected to volatility-linked-exchange traded products (ETPs). According to the order, the issuer of the ETP, which was designed to track short-term volatility expectations in the market as measured against derivatives of a volatility index, warned the company that it was not suitable to hold the product for extended periods of time, and that the product’s offering documents proved that the product’s value was likely to decline. The SEC alleged that the company violated the Advisers Act and Advisers Act Rule, such as Section 206(4), because the company failed to adopt reasonably designed written policies and procedures directed at ETPs and failed to implement its existing policies and procedures. The order includes allegations that the company prohibited brokerage representatives from soliciting sales of the product and placed other sales restrictions of the product, but did not place similar restrictions on some financial advisers’ use of the product in discretionary managed client accounts. The order further noted that the company allegedly adopted a concentration limit on ETPs but failed to implement a system for monitoring and enforcing that limit for five years. The order, which the company consented to without admitting or denying the findings, imposes a civil money penalty of approximately $8 million and $96,344 in disgorgement, and requires the company to cease and desist from committing or causing any future violations of Section 206(4) of the Advisers Act and Advisers Act Rule.
OFAC reaches multiple settlements with companies that conspired to export equipment to Iran
On July 19, OFAC announced a $415,695 settlement with the United Arab Emirates (UAE)-based head regional office of a Sweden-based equipment company for apparent violations of the Iranian Transactions and Sanctions Regulations (ITSR). According to OFAC’s website notice, between 2015 and 2016, the UAE company allegedly conspired with Dubai- and Iran-based companies to export equipment from the U.S. to Iran. As a result, the UAE company caused its U.S.-based affiliate to indirectly export goods to Iran by incorrectly listing a Dubai-based company on its export documentation as the end-user. The conspiracy also allegedly included the organization of additional sales of the equipment in the same manner as the initial sale, which ultimately ended when the U.S. Department of Commerce’s Bureau of Industry and Security requested post-shipment verification that showed certain products in question were reexported to Iran.
In arriving at the settlement amount, OFAC considered various aggravating factors, including that (i) the UAE company did not voluntarily self-disclose the apparent violations; (ii) the UAE company “willfully violated the ITSR” by conspiring to export goods from the U.S. to Iran by “obfuscating the end-user’s identity from its U.S. affiliate,” thus causing the U.S. affiliate to violate the ITSR; (iii) multiple managers had actual knowledge of the conduct giving rise to the apparent violations; and (iv) the UAE company “caused harm to the integrity of the ITSR by circumventing U.S. sanctions and conferring an economic benefit to Iran’s energy sector.”
OFAC also considered various mitigating factors, including that (i) none of the relevant subsidiaries, including the UAE company, have received a penalty notice from OFAC in the preceding five years; (ii) the UAE company, through the U.S. affiliate, conducted an internal investigation resulting in numerous remedial measures, including taking disciplinary actions against participating individuals, adopting an enhanced review and screening process for Iran-related transactions, and conducting additional in-person training; and (iii) the UAE company, through the U.S. affiliate, provided substantial cooperation to OFAC during the investigation.
OFAC separately reached a $16,875 settlement with a Virginia-based U.S. subsidiary for its apparent ITSR violations arising from this matter. The Virginia subsidiary did not voluntarily self-disclose the apparent violations, but agreed to the settlement on behalf of a former Pennsylvania-based subsidiary that allegedly referred a known Iranian business opportunity to its foreign affiliate in Dubai. This foreign affiliate, OFAC claimed, then “orchestrated a scheme to export goods” from the U.S. to Iran.
SEC obtains TRO and asset freeze against investment scam
On July 19, the SEC announced that it had obtained a temporary restraining order and asset freeze to halt an ongoing fraud offering by a Las Vegas-based company and two individual defendants, including a recidivist, (collectively, “defendants”) that allegedly raised more than $12 million from nearly 300 retail investors. According to the complaint, the defendants violated several provisions of securities laws by allegedly promising investors that their money would be invested in securities, bitcoin, and other cryptocurrencies based on recommendations made by an “[a]rtificial intelligence supercomputer,” which allegedly “consistently generate[d] enormous returns” and allowed the defendants to guarantee fixed returns of 20-30 percent annually with compounding interest. However, the SEC alleged that over 90 percent of the defendants’ funds came from investors, and that the defendants did not use these funds for the stated purposes. Rather, defendants transferred millions of dollars to one of the individual defendant’s personal bank accounts, paid millions of dollars to promoters who led investors to the defendants, and made “Ponzi-like” payments to other investors. The complaint seeks permanent injunctions, disgorgement, prejudgment interest, and civil penalties.
FTC settles over illegal telemarketing practices
On July 16, the FTC announced a $1.6 million settlement with a New Jersey-based septic tank cleaning company, its officers, and an individual connected to the officers (collectively, “defendants”) for allegedly making illegal robocalls to consumers, including tens of millions of calls to numbers listed on the FTC’s Do Not Call Registry. The complaint, which was filed on behalf of the FTC by the DOJ in July, alleged that the defendants violated the FTC Act and the Telemarketing Sales Rule, among other things, by engaging in illegal telemarketing practices, including the use of prerecorded messages. The defendants allegedly falsely told consumers they were calling from an unnamed “environmental company” to provide consumers with “free info” regarding their septic tank cleaning products. In addition, the defendants allegedly sent letters to customers “threatening to direct their purportedly delinquent accounts to a collection agency or legal department even though [the company] never intended to send customer accounts to either a collections agency or legal department.” Under the terms of the stipulated final order, the defendants are, among other things: (i) permanently banned from engaging in telemarketing; (ii) prohibited from making misrepresentations to consumers regarding referrals to attorneys or collection agencies or material facts concerning goods or services; (iii) prohibited from billing or attempting to collect payments from any consumers connected to the sale of their septic tank cleaning products; and (vi) required to notify all customers with unpaid balances that their balances have been cancelled. A $10.2 million monetary judgment will be partially suspended after the officers pay approximately $1.6 million and the individual pays $15,000 to the U.S. Treasury.
SEC announces whistleblower awards totaling approximately $4 million
On July 21, the SEC announced that it awarded a whistleblower approximately $3 million for providing information that, according to the redacted order, led to a successful SEC enforcement action. The SEC noted that the whistleblower helped open the investigation and conserved resources by giving valuable information and ongoing assistance, such as providing documents that helped staff understand key components in the investigation.
Earlier on July 15, the SEC announced that it awarded a whistleblower more than $1 million for providing information that, according to the redacted order, also led to a successful SEC enforcement action. The SEC noted that the whistleblower helped conserve significant staff time and resources by giving valuable information and ongoing assistance, such as participating in interviews with enforcement staff, and providing documents that helped staff understand key components in the investigation.
The SEC has awarded approximately $942 million to 186 individuals since issuing its first award in 2012.