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NY Department of Financial Services Settles With Auto-Dealer
On December 19, the New York Department of Financial Services announced a recent settlement with a Long Island-based auto lender to resolve allegations of violations of several consumer protection laws including the DFA, TILA, NY Banking Law, and NY Financial Services Law. According to the consent judgment, the Defendants allegedly (i) failed to notify consumers who made overpayments on their accounts; (ii) miscalculated the interest charged to customers; and (iii) endangered the security of its customer information by leaving loan files openly around common areas. As part of the settlement, the auto dealer must (i) pay $3 million in penalties; (ii) pay full restitution plus nine percent interest to all affected customers; (iii) liquidate all remaining loans; and (iv) surrender its licenses in all states.
CFPB Announces Enforcement Action Against Telecommunications Company for Alleged Unauthorized Third-Party Charges
On December 17, the CFPB filed a complaint in the Southern District of New York against a telephone company for allegedly charging its customers tens of millions of dollars in unauthorized third-party charges. According to the CFPB’s press release, for roughly a decade the company “crammed” consumers’ wireless bills with illegal charges by outsourcing payment processing for digital purchases – such as apps, games, and movies – to vendors known as “billing aggregators.” The CFPB alleges that the company failed to properly monitor the aggregators’ billing of customers as a payment processor for the third parties, and violated Dodd-Frank and the CFPA by (i) allowing third party vendors to attach illegitimate charges to consumers’ bills; (ii) billing customers for the unauthorized charges without their consent; (iii) failing to heed red flags showing that the system “was a breeding ground for unauthorized charges”; and (iv) failing to respond to consumer complaints. The complaint seeks refunds for consumers and penalties.
Second Circuit Overturns Two Insider Trading Convictions
On December 10, the U.S. Court of Appeals for the Second Circuit overturned, and further, dismissed two of the DOJ’s insider trading convictions. United States of America v. Newman and Chiasson, Nos. 13-1837-cr(L), 13-1917-cr(con) (2nd Cir. Dec. 10, 2014). In a 28-page decision, the Court noted “erroneous” jury instruction, the Government’s lack of evidence that personal benefit was received by the alleged insiders, and the inability to prove the alleged insiders actually knew that they were trading on inside information. The ruling now narrows the scope of what constitutes insider trading and will likely impact other pending insider-trading cases. It is anticipated that the Government will appeal the Court’s decision.
DOJ Announces Arrests and Charges Against Debt Collection Company
On November 19, the DOJ issued a press release announcing charges against six employees of a Georgia-based debt collection company for allegedly running a $4.1 million dollar debt collection scam. According to the press release, from approximately 2009 to May 2014, the accused employees allegedly falsely represented themselves as affiliated with various law enforcement agencies, and made a variety of false statements to consumers in an attempt to coerce them into making payments to the debt collection company. The action appears to be the first case in which multiple federal agencies – U.S. Attorneys’ Office, CFPB, FBI, and the FTC - have taken a coordinated action against a debt collector. The complaint was filed in the Southern District of New York.
Second Circuit Court of Appeals Prohibits Courts from Granting Garnishment Orders Against Foreign Bank Branches
On November 14, the Second Circuit Court of Appeals upheld the District Court for the Southern District of New York’s October 23 ruling that prohibited courts from granting garnishment orders against certain banks for assets maintained at bank branches. The Second Circuit noted that it had previously certified to the New York Court of Appeals the following question: “whether the separate entity rule precludes a judgment credit from ordering a garnishee bank operating branches in New York to restrain a debtor’s assets held in foreign branches of the bank.” The New York Court of Appeals held that according to New York’s separate entity rule, a creditor does not have the authority to freeze assets held at a foreign branch. The New York Court of Appeals rejected the plaintiffs’ argument that in Koehler v. Bank of Bermuda Ltd., 12 N.Y.3d 533 (2009), New York abandoned the requirements of the separate entity rule, observing that “abolition of the separate entity rule would result in serious consequences in the realm of international banking to the detriment of New Yorkʹs preeminence in global financial affairs.ʺ Upholding the District Court’s October 23 ruling, the Second Circuit Court of Appeals ordered that the District Court annul the restraining order on the defendants’ assets. Motorola Credit Corp. v. Nokia Corp., No. 13-2535-cv (2d Cir. Nov. 14, 2014).
SDNY Judge Approves RMBS Consent Judgment But Questions Second Circuit's Standard For Reviewing Agency Consent Judgments
On August 5, U.S. District Court for the Southern District of New York Judge Jed Rakoff approved a consent judgment between the SEC and a financial institution to resolve allegations that the institution violated securities laws in connection with certain mortgage-backed securities. SEC v. Citigroup Global Markets Inc., No. 11-7387, 2014 WL 3827497 (S.D.N.Y. Aug. 5, 2014). Earlier this year, the U.S. Court of Appeals for the Second Circuit vacated and remanded the district court’s earlier decision to reject the proposed settlement, holding that the proper standard for reviewing a proposed enforcement agency consent judgment is whether the proposed consent decree is fair and reasonable, and in the event the agreement includes injunctive relief, whether “the public interest would not be disserved.” On remand, Judge Rakoff approved the consent judgment stating that based on the underlying record, “the Court cannot say that the proposed Consent Judgment is procedurally improper or in any material respect fails to comport with the very modest standard imposed by the Court of Appeals.” Judge Rakoff noted his concern, however, that “as a result of the Court of Appeals decision, the settlements reached by governmental regulatory bodies and enforced by the judiciary’s contempt powers will in practice be subject to no meaningful oversight whatsoever.”
SDNY Orders Bank To Pay $1.3 Billion Following Verdict In GSE Civil Fraud Case
On July 30, the U.S. District Court for the Southern District of New York ordered a bank to pay a nearly $1.3 billion civil penalty after a jury found the bank liable in October 2013 on one civil mortgage fraud charge arising out of a program operated by a mortgage lender the bank had acquired. The case was the first in which the government alleged violations of FIRREA in connection with loans sold to Fannie Mae and Freddie Mac. The government originally sought damages of $1 billion based on alleged losses incurred by Fannie Mae and Freddie Mac. Subsequently the government argued the penalty should be calculated not based on loss to the GSEs, but rather based on gross gain to the lender, in order to accomplish “FIRREA’s central purpose of punishment and deterrence.” The government calculated a gross gain of $2.1 billion, and requested that the court impose a penalty in that amount.
In its order on civil penalties, the court noted that FIRREA provides no guidance on how to calculate a gain or loss or how to choose a penalty within the broad range permitted. To quantify the gain or loss on the 17,611 loans at issue, the court focused on the general principle that the “civil penalty provisions of FIRREA are designed to serve punitive and deterrent purposes and should be construed in favor of those purposes.” The court determined that both gain and loss should be viewed in terms of how much money the lender “fraudulently induced” the GSEs to pay. Even though many of the loans were in fact high quality, the Court included all of the loans in the gain and loss analysis because the jury found that the lender engaged in an intentional scheme to defraud the GSEs and that the lender intended to represent loans as being materially higher quality than they actually were. The court reasoned that the “happenstance that some of the loans may still have been of high quality should not relieve the defendants of bearing responsibility for the full payments they received from the scheme, at least not if the purposes of the penalty are punishment and deterrence.” As a result, the Court found the proper measure of both gain and loss to be the amount Fannie and Freddie paid for all loans at issue, and set $2,960,737,608 as the statutory maximum for the penalty. As a compensating factor, the court considered that 57.19 percent of the loans were not materially defective and reduced the penalty to 42.81 percent of the statutory maximum, or $1,267,491,770.
Bankruptcy Court Refuses To Dismiss Class Suit Claiming Bank's Credit Reporting Practices Violated Bankruptcy Code
On July 22, the U.S. Bankruptcy Court for the Southern District of New York rejected a bank’s motion to dismiss a putative class action adversary proceeding alleging that certain of the bank’s credit reporting practices violated U.S. bankruptcy law. In re Haynes, No. 11-23212, 2014 WL 3608891 (S.D.N.Y. Jul. 22, 2014). The named plaintiff-debtor alleged that the bank charged off and sold his debt, which was subsequently discharged in bankruptcy, but failed to correct his credit report that listed the debt, post-discharge, as being only “charged off,” rather than being “discharged in bankruptcy.” The bank moved to dismiss for failure to state a claim, arguing that because it sold the debt pre-bankruptcy, it did not have an obligation under the FCRA or Sections 727 and 524(a) of the Bankruptcy Code to correct the debtor’s credit report. The court denied the bank’s motion on the grounds that (i) the bank continues to have an economic interest in the debt—notwithstanding its sale—because the bank continues to receive a percentage payment of the proceeds of each debt repaid to it and forwarded to the debt’s purchaser; and (ii) by failing to correct the credit reports, the bank is enhancing its purchasers’ ability to collect on the debt.
D.C. Circuit Holds Government False Claims Case Not Precluded By National Mortgage Settlement
On June 10, the U.S. Court of Appeals for the District of Columbia affirmed the district court’s decision not to enjoin the federal government from pursuing alleged False Claims Act violations against a bank that argued such claims were precluded by the terms of the National Mortgage Settlement. United States v. Bank of Am. Corp., No 13-5112, 2014 WL 2575426 (D.C. Cir., Jun. 10, 2014). The bank sought to halt a suit filed by the government in the Southern District of New York (SDNY), in which the government alleges that the bank’s certification of loans as eligible for FHA insurance under the FHA’s Direct Endorsement Lender Program violated the False Claims Act. The bank asserted that the National Mortgage Settlement contains a comprehensive release for certain liability with respect to its alleged FHA mortgage lending conduct. The appeals court held that the agreement releases only the narrower category of liability for loans based on allegations that the bank’s annual certification was false without regard to whether any such loans contain material violations of HUD-FHA requirements, , and held that distinct loan-level violations for such loans would provide an independent basis for liability. However, the appeals court agreed that the SDNY must construe the government’s complaint and “ensure that the claims are litigated in a manner that comports with the [National Mortgage Settlement] Release’s limitations.” The appeals court agreed with the bank that some of the government’s claims “tread on the verge of the released claims, referencing false annual certifications explicitly.” The appeals court noted that the government repeatedly conceded that, to comport the SDNY suit with the National Mortgage Settlement release terms, “material violations do need to be demonstrated with respect to individual loans,” and cautioned the government that, should prosecution of its claims depart from that concession, the bank may seek appropriate relief.
SDNY Certifies Interlocutory Appeal In Lender-Placed Insurance Dispute
On April 3, the U.S. District Court for the Southern District of New York certified an interlocutory appeal of an order denying a motion to dismiss filed by a group of insurers facing class allegations of unlawful lender-placed insurance practices. Rothstein v. GMAC Mortgage, LLC, No. 12-3412, 2014 WL 1329132 (S.D.N.Y. Apr. 3, 2014). In declining to dismiss the case, the court held, among other things, that the filed rate doctrine did not bar borrowers' claims because the doctrine applies only where the challenged rate is one imposed directly by an insurer, and does not apply to lender-placed insurance where a third-party—the lender or servicer—acquires the insurance at a filed rate and bills the borrower for the costs. On the insurers’ motion for interlocutory appeal, the court held that the issue of whether the filed rate doctrine applies is a question of law that could be dispositive and for which there is substantial ground for a difference of opinion, and that the potential to avoid protracted litigation warranted certification for appeal. BuckleySandler represents the insurers in this action.