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On October 14, the SEC reopened the comment period on proposed rules for listing standards for the recovery of erroneously awarded compensation. According to the notice, the reopened comment period allows for the submission of comments and data on rule amendments first proposed in 2015, and requests comments in response to questions being raised by the SEC now in its reopening release. Among other things, the proposed rules would prohibit national security exchanges and national securities associations to list any issuer of any security unless the issuer adopts a compensation recovery policy that meets certain standards applicable to recovering incentive-based compensation awards based on erroneously reported financial results that are later restated to correct material errors to previously issued financial statements. According to a statement in support of the re-opened comment period on the Dodd-Frank Act rule regarding clawbacks of erroneously awarded incentive-based compensation, SEC Chair Gary Gensler stated that this is “an opportunity to strengthen the transparency and quality of corporate financial statements as well as the accountability of corporate executives to their investors.” Comments are due 30 days after publication in the Federal Register.
On April 27, the U.S. District Court for the District of Illinois granted an Ohio-based bank’s motion to dismiss a consolidated shareholder suit, ruling that investors “failed to allege facts that give rise to a strong inference of scienter” concerning whether bank executives intended to deceive them by not immediately disclosing a federal investigation into unauthorized account openings. The investors claimed, among other things, that bank executives made misleading statements and material omissions in the bank’s securities filings for 2016, 2017, and 2018 by failing to disclose a 2016 CFPB investigation into the bank’s sales practices. After the bank disclosed the investigation in its 2019 filings, the investors alleged the stock price dropped. The Bureau later filed a complaint in 2020 (covered by InfoBytes here) charging that the bank knew that sales employees “engag[ed] in misconduct in order to meet goals or earn additional compensation,” but purportedly “took insufficient steps to properly implement and monitor its program, detect and stop misconduct, and identify and remediate harmed consumers.” The investors claimed that bank executives’ assurances about the bank’s robust risk management and compliance practices “served to conceal [its] faulty reporting structure and their knowledge of its problems,” and that the CFPB’s ongoing litigation against the bank supported an inference of scienter because, among other things, bank executives were allegedly motivated to hide the Bureau’s investigation and underlying account issues because of a pending acquisition.
The court disagreed, ruling that the investors failed to allege any specific facts showing that bank executives knew of reporting structure deficiencies or that they “had personal knowledge of any problematic practices at the time when they made the statements at issue.” The court pointedly stated that it “does not find it appropriate to infer scienter from conclusory statements made in another litigation.” Moreover, with regards to whether bank executives concealed the Bureau’s investigation to make the company appear profitable, the court stated that “the general desire to keep stock prices high to make the company appear profitable or to close a deal” is not enough on its own to “allow a strong inference of scienter.”
On January 15, the OCC announced a $3.5 million penalty against a national bank’s former general counsel for his role in the bank’s incentive compensation sales practices. As previously covered by InfoBytes, in January 2020, the OCC announced charges against the former general counsel and other executives, seeking a lifetime prohibition from participating in the banking industry, a personal cease and desist order, and/or civil money penalties. The January announcement included settlements with three of the executives, and the OCC settled with three others in September 2020 (covered by InfoBytes here).
In addition to the $3.5 million penalty, the consent order against the former general counsel includes a personal cease and desist, and a requirement to cooperate with the OCC in any investigation or proceeding related to the sales practices of the bank. The consent order does not prohibit the former general counsel from holding future executive positions within the industry.
On November 13, the SEC announced charges against a national bank’s former CEO and Chairman, as well as against the former head of the national bank’s community bank (community bank) for their roles in allegedly misleading investors in connection with the bank’s incentive compensation sales program. As previously covered by InfoBytes, in connection with the same misconduct, the SEC announced a Cease and Desist order with the bank for allegedly violating the antifraud provisions of the Securities Exchange Act of 1934. The bank agreed to cease and desist from committing any future violations of the antifraud provisions and to a civil penalty of $500 million.
According to the complaint filed in the U.S. District Court for Northern District of California against the former head of the community bank, from mid-2014 through mid-2016, the former head publicly endorsed the bank’s incentive compensation program as a measurement of the bank’s success, when in reality, the metrics were allegedly inflated by unused and unauthorized accounts. Moreover, the complaint alleges that the former head signed sub-certifications that attested to the accuracy of the bank’s public disclosures, when she “knew or was reckless in not knowing” that the incentive compensation program depicted in the disclosures were materially false or misleading. The complaint seeks a permanent injunction, disgorgement, and civil penalties.
Additionally, the SEC issued a cease and desist order against the bank’s former CEO and Chairman, alleging that in 2015 and 2016 he certified statements filed with the SEC regarding the community bank’s incentive compensation program, after being put on notice that the bank was misleading the public about the program. The order issues a $2.5 million civil penalty against the former CEO and Chairman.
On September 21, the OCC announced settlements with three former senior executives of a national bank for their roles in the bank’s incentive compensation sales practices. According to consent orders (see here and here), the OCC alleged that two of the individuals either “knew or should have known” about the sales misconduct problem and its root cause, but allegedly failed to, among other things, appropriately consider concerns about the “unreasonably high sales goals” and the associated risks of incentivizing sales of secondary deposit products. The third individual—previously in charge of identifying human resource risks—allegedly approved incentive compensation plans that overly incentivized sales and failed to respond to or escalate information received about unreasonable sales goals. In addition to paying civil money penalties, the individuals—who did not admit or deny wrongdoing—have each agreed to cooperate with the OCC in any investigation, litigation, or administrative proceeding related to sales misconduct at the bank.
As previously covered by InfoBytes, in January, the OCC reached settlements with three other former senior executives in January for their alleged roles in the bank’s sales practices misconduct, and issued notices of charges against five others.
On July 20, the U.S. Court of Appeals for the Ninth Circuit affirmed (in a published and an unpublished opinion) a $142 million class action settlement between a nationwide class of consumers and a national bank, concluding the class was unified by a claim under federal law. The published opinion specifically affirmed the district court’s holding that the class satisfied the predominance requirement under Rule 23 of the Federal Rules of Civil Procedure. In the unpublished memorandum disposition, the 9th Circuit affirmed the district court’s certification of the settlement class, approval of the settlement, award of attorneys’ fees, and approval of notice.
As previously covered by InfoBytes, the settlement covers a 2015 class action lawsuit regarding retail sales practices that involved bank employees creating deposit and credit card accounts without obtaining consent to do so. In April 2017, the bank agreed to expand the original settlement class to include claims dating back to May 2002, resulting in a settlement amount of $142 million. The district court certified the class and approved the settlement. Objectors appealed, arguing that the class did not satisfy the predominance requirement, because the court did not do a choice-of-law analysis.
On appeal, the 9th Circuit upheld the district court’s rulings on the settlement, concluding that the district court did not abuse its discretion in holding the class met the federal predominance requirements. Specifically, the appellate court held that the FCRA claim unified the class, allowing the class to “show that the FCRA’s elements were proven by a common course of conduct.” Moreover, the appellate court concluded that the “existence of potential state-law claims did not outweigh the FCRA claim’s importance.” In a separate unpublished memorandum opinion, the appellate court affirmed, among other things, the award of attorney’s fees, which were “well below the 25% benchmark.”
On February 21, the DOJ and SEC announced that one of the nation’s largest banks agreed to a settlement including a $3 billion monetary penalty to resolve investigations regarding their incentive compensation sales program. (See the DOJ’s Statement of Facts here). As previously covered by InfoBytes, the OCC also recently issued charges against five of the bank’s former executives, and announced settlements with the former CEO and operating committee members for allegedly failing to adequately ensure that the bank’s sales incentive compensation plans operated according to policy.
The SEC alleged in its Cease and Desist order that the bank violated the antifraud provisions of the Securities Exchange Act of 1934. The SEC’s press release states that in addition to agreeing to cease and desist from committing any future violations of the antifraud provisions, the bank agreed to a civil penalty of $500 million, which the SEC will return to harmed investors.
The bank also settled the DOJ’s civil claims under the Financial Institutions Reform, Recovery and Enforcement Act. According to the settlement, the bank accepted responsibility, cooperated in the resulting investigations, and has taken “extensive remedial measures.” In addition, the DOJ’s press release states that it entered into a three-year deferred prosecution agreement with the bank regarding the bank’s sales incentive compensation practices.
On January 23, the OCC issued a notice of charges against five former senior executives for allegedly failing to adequately ensure a national bank’s incentive compensation plans regarding sales practices operated in accordance with bank policy. (See previous InfoBytes coverage here.) The relief sought by the OCC against these individuals could include a lifetime prohibition from participating in the banking industry, a personal cease and desist order, and/or civil money penalties. Under federal law, the individuals may request a hearing to challenge the allegations and relief sought by the OCC. The same day, the OCC also announced settlements with the bank’s former chairman/CEO, its former chief administrative officer and director of corporate human resources, and its former chief risk officer for their alleged roles in the bank’s sales practices misconduct. According to the OCC, the actions serve to, among other things, reinforce the agency’s expectations that management and employees of regulated entities comply with applicable laws and regulations.
In September, the CFPB published documents related to an investigation into whether a national bank opened credit card accounts without customer authorization in violation of various federal laws and regulations, including the Fair Credit Reporting Act and the Consumer Financial Protection Act’s ban on unfair or abusive practices. In March 2019, the Bureau issued a civil investigative demand (CID) to the bank seeking, among other things, “a tally of specific instances of potentially unauthorized credit card accounts,” as well as a manual assessment of card accounts that were never used by the customer. The bank argued in its petition to modify or set aside the CID that it had already provided information to regulators showing that it did not have a “systemic sales misconduct issue,” and cited to the OCC’s broad review into sales practice issues at mid-size and large national banks, which has not, according to the bank, identified systemic issues with bank employees opening unauthorized accounts without consumer consent. Among other things, the bank also contended that the CID was unduly burdensome—requiring manual account-level assessments—and said the CFPB should end its investigation because the facts “refute an investigation’s initial hypothesis.” The bank further argued that the inquiry into its sales practices should be conducted by CFPB supervisory staff instead of as an enforcement investigation, which would be “the proper mechanism for resolving any remaining issues when an investigation fails to uncover evidence warranting [e]nforcement action.”
Concerning the bank’s argument that the CID was unduly burdensome, the Bureau stated in its order denying the petition that the bank had failed to “meaningfully engage” with the Bureau during the course of the investigation in a way that merited modification to the terms of the CID. Moreover, with regard to whether the investigation should be conducted by supervisory staff, the Bureau countered that “[t]his is not a request properly made in a petition to modify or set aside a CID, for the same reasons that it is not proper to use a CID petition to ask that the Bureau close an investigation because (in the recipient’s view) it has already shown that it engaged in no wrongdoing.”
On August 22, a tribal nation issued a press release announcing a $6.5 million settlement with a national bank to resolve allegations related to the opening of deposit and credit card accounts for customers without consent. In 2018, the tribal nation’s suit was dismissed by a district court ruling (previously covered by InfoBytes here), which rejected the tribal nation’s claims under the Consumer Financial Protection Act, holding that the claims were barred by res judicata, as they had previously been litigated under the CFPB’s 2016 consent order and the tribal nation was in privity with the CFPB. (InfoBytes coverage of the CFPB action available here.) The tribal nation appealed the decision to the U.S. Court of Appeals for the 10th Circuit, and on August 20, an order granting a stipulation to dismiss the appeal with prejudice was entered by the court. While the stipulation does not provide any details, the tribal nation’s press release notes that the “settlement compensates the Nation, as well as avoids the uncertainty and expense of continued litigation.”
- Buckley Webcast: State supervision, enforcement, and multistate coordination
- Benjamin W. Hutten to discuss “Latest on AML regulations and impact of economic sanctions” at a Mortgage Bankers Association webinar
- Hank Asbill to discuss “Ethical issues at sentencing” at the 31st Annual National Seminar on Federal Sentencing
- Benjamin W. Hutten to discuss “Fundamentals of financial crime compliance” at the Practicing Law Institute
- Benjamin W. Hutten to discuss “Ongoing CDD: Operational considerations” at NAFCU’s Regulatory Compliance & BSA Seminar