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Financial Services Law Insights and Observations


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  • District Court grants plaintiff’s injunction in data scraping suit


    On September 30, the U.S. District Court for the Northern District of California certified a stipulation and proposed order regarding a permanent injunction and dismissal to abandon remaining allegations against an Israel-based company and a Delaware company (collectively, defendants) related to their use of data scraping from the parent company of large social media platforms (plaintiff). In 2020, the plaintiff alleged that the defendants developed and distributed internet browser extensions to illegally scrape data from the plaintiff’s platform and other platforms. The order noted that the court’s prior summary judgment decision concluded that the defendants collected data using “self-compromised” accounts of users who had downloaded the defendants’ browser extensions. The order further noted that the defendants stipulated that the plaintiff had established that it suffered “irreparable injury” and incurred a loss of at least $5,000 in a one-year period as a result of one of the companies’ unauthorized access. The order further noted that judgment has been established “based on [the Israel-based company’s] active data collection through legacy user products beginning October 2020, and based on [the Israel-based company’s] direct access to password-protected pages on [the plaintiff’s] platforms using fake or purchased user accounts.” Under the injunction, the defendants are immediately and permanently barred from accessing or using two of the plaintiff’s social media platforms without the plaintiff’s express written permission, regardless of whether the companies are using the platforms directly or via a third party. The defendants are also banned from collecting data or assisting others collect data without the plaintiff’s permission, and are required to delete any and all software, scripts or code that are designed to access or interact with two of the plaintiff’s social media platforms. Additionally, the defendants are prohibited from using or selling any data that they have previously collected from the plaintiff’s social media platforms.

    Courts Privacy, Cyber Risk & Data Security Data Scraping Social Media Data Collection / Aggregation

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  • SEC files charges against fintech company for manipulating crypto-asset securities


    On September 28, the SEC filed a complaint against a Florida-based fintech company, the company’s former CEO, and the CEO of a “market making” firm (collectively, “defendants”) for allegedly perpetrating a scheme to manipulate the trading volume and prices of crypto-asset securities. According the SEC, the company and the former CEO created and distributed a token using several methods, including paying individuals with tokens in exchange for promotions. They then allegedly hired the “market making” firm “to create the false appearance of robust market activity” for the token through the use of customized trading software, and then engaged in unregistered offers and sales of the token in an artificially inflated market in order to generate profits on the company’s behalf. The SEC claimed this scheme yielded more than $2 million for the company. The complaint charges the defendants with violating numerous provisions of the federal securities laws, including certain registration, antifraud, and market manipulation provisions, and seeks permanent injunctive relief, disgorgement with prejudgment interest, civil penalties, and conduct-based injunctions. The SEC also seeks an officer and director bar against the former CEO. Based on the SEC’s announcement, the market making firm’s CEO has consented to a judgment, subject to court approval and without admitting or denying the allegations, which would permanently ban him from violating these provisions and from participating in future securities offerings. The market making firm’s CEO is also ordered to pay $36,750 in disgorgement as well as prejudgment interest of $5,118, with civil monetary penalties to be determined by the court. 

    “Companies cannot avoid the federal securities laws by structuring the unregistered offers and sales of their securities as bounties, compensation, or other such methods,” Associate Director of the SEC’s Enforcement Division Carolyn M. Welshhans said. “As our enforcement action shows, the SEC will enforce the laws that prohibit such unregistered fund-raising schemes in order to protect investors.”

    Securities Enforcement Digital Assets Cryptocurrency Fintech Courts

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  • 3rd Circuit says debt collector owes finder’s fee


    On September 23, the U.S. Court of Appeals for the Third Circuit overturned a district court’s summary judgment ruling in favor of a defendant debt collector. The action concerned whether a federal contract entered between the debt collector and the Department of Education (DOE) required the payment of a finder’s fee to a plaintiff consulting company that helped the defendant secure the contract. The defendant entered into an agreement with the plaintiff to help it secure federal contracts in debt collection in exchange for a finder’s fee. The defendant signed a contract with the DOE in 2014, but did not begin performing work on the contract until 2016 after the agreement with the plaintiff had expired. The defendant refused to pay the finder’s fee, arguing that even though the contract with the DOE was signed while the agreement was still active, the contract had not been “consummated” during the agreement’s applicable period because the defendant was not eligible to receive work orders or start performing work until after the agreement expired. The plaintiff sued, but the district court ruled in favor of the defendant. The plaintiff appealed and the 3rd Circuit reversed, holding that the contract had in fact been “consummated” when it was formed in 2014, and that the defendant owed the finder’s fee. On remand, the district court again granted summary judgment for the defendant, this time on the grounds that the defendant had not “facilitated” the contract with the DOE.

    On the second appeal, the 3rd Circuit determined that the agreement specifies that a finder’s fee is owed whenever a “fee transaction is consummated” and defined a fee transaction as “the subsequent consummation of any contract with any Federal government agency for which [defendant] has been invited to compete, and is later awarded a contract to perform, which both parties herein expressly agree shall have arisen due to any ‘teaming’ or ‘subcontracting’ engagement Finder may have facilitated in advance of any such award of a contract by a Federal government agency.” According to the appellate court, it did not matter when the work orders from the DOE began, because the fee transaction was consummated during the agreement period.

    Courts Appellate Third Circuit Debt Collection Finder's Fee Department of Education

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  • States accuse crypto platform of offering unregistered securities

    State Issues

    On September 26, the New York attorney general sued a cryptocurrency platform for allegedly offering unregistered securities and defrauding investors. New York was joined by state regulators from California, Kentucky, Maryland, Oklahoma, South Carolina, Washington, and Vermont who also filed administrative actions against the platform. The states alleged that the platform failed to register as a securities and commodities broker but told investors that it was fully in compliance. According to the New York AG’s complaint, the platform promoted and sold securities through an interest-bearing virtual currency account that promised high returns for participating investors. The NY AG said that a cease-and-desist letter was sent to the platform last year, and that while the platform stated it was “working diligently to terminate all services” in the state, it continued to handle more than 5,000 accounts as of July. The complaint charges the platform with violating New York’s Martin Act and New York Executive Law § 63(12), and seeks restitution, disgorgement of profits, and a permanent injunction.  

    California’s Department of Financial Protection and Innovation (DFPI) said in a press release announcing its own action that it will continue to take “aggressive enforcement efforts against unregistered interest-bearing cryptocurrency accounts.” DFPI warned companies that crypto-interest accounts are securities and are therefore subject to investor protection under state law, including disclosure of associated risks.

    State Issues Digital Assets New York California State Regulators State Attorney General DFPI Courts Cryptocurrency Securities Enforcement

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  • Trade groups object to CFPB’s revised UDAAP exam manual


    On September 28, seven banking industry groups sued the CFPB and Director Rohit Chopra claiming the agency exceeded its statutory authority when it released significant revisions to the UDAAP exam manual in March, which included making clear its view that any type of discrimination in connection with a consumer financial product or service could be an “unfair” practice. (Covered by a Buckley Special Alert.) At the time of issuance, the Bureau emphasized that its broad authority under UDAAP allows it to address discriminatory conduct in the offering of any financial product or service.

    Plaintiff trade groups argued in their complaint filed in the U.S. District Court for the Eastern District of Texas that the Bureau violated its authority outlined in the Dodd-Frank Act by claiming it can examine entities for alleged discriminatory conduct under its UDAAP authority. They contended that “the CFPB cannot regulate discrimination under its UDAAP authority at all because Congress declined to give the CFPB authority to enforce anti-discrimination principles except in specific circumstances,” and that, moreover, the Bureau’s “statutory authorities consistently treat ‘unfairness’ and ‘discrimination’ as distinct concepts.” While the trade groups said they “fully support the fair enforcement of nondiscrimination laws,” they emphasized that they “cannot stand by while a federal agency exceeds its statutory authority, creates regulatory uncertainty, and imposes costly burdens on the business community.”

    The trade groups' suit also claimed that the Bureau violated the Administrative Procedure Act by failing to go through the proper notice-and-comment process when amending the Supervision and Examination Manual. Calling the manual updates “arbitrary” and “capricious,” the trade groups claimed the changes failed to consider the Bureau’s prior position on UDAAP authority and “did not grapple with Congress’s decision to narrowly define the FTC’s unfairness authority to screen out the same kind of power that the CFPB is now claiming for itself.” The complaint also called into question the Bureau’s funding structure, arguing that because the structure violates the Appropriations Clause it should be declared unconstitutional and the exam manual updates set aside.

    A statement released by the U.S. Chamber of Commerce, one of the trade group plaintiffs bringing the law suit, says the Bureau “is operating beyond its statutory authority and in the process creating legal uncertainty that will result in fewer financial products available to consumers.” U.S. Chamber Executive Vice President and Chief Policy Officer Neil Bradley added that the “CFPB is pursuing an ideological agenda that goes well beyond what is authorized by law and the Chamber will not hesitate to hold them accountable.”

    Courts CFPB Examination Supervision UDAAP Dodd-Frank Discrimination Administrative Procedure Act

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  • District Court rules in favor of FHFA on shareholders’ net worth sweep claims


    On September 23, the U.S. District Court for the District of Columbia partially granted FHFA’s motion for summary judgment resolving claims brought by Fannie Mae and Freddie Mac (GSEs) shareholders in a lawsuit alleging the government exceeded its authority when it adjusted its Senior Preferred Stock Purchase Agreements (PSPAs) to allow net worth sweeps. The plaintiff shareholders claimed that FHFA acted outside its statutory authority when it adopted a third amendment to the PSPAs, which replaced a fixed-rate dividend formula with a variable one calculated on a quarterly basis (known as the “net worth sweep”). These sweeps, the plaintiffs contended, harmed their future dividend prospects. FHFA disagreed, arguing that the U.S. Supreme Court had already held in Collins v. Yellen (covered by InfoBytes here) that “the Third Amendment [to the PSPAs] was both authorized and a reasonable exercise of FHFA’s broad statutory power” and that “it is time to end this case.” With respect to the plaintiffs’ “remaining claim for breach of the implied covenant of good faith and fair dealing arising under Delaware and Virginia law,” the agency contended that the “Supreme Court unanimously held in Collins that FHFA—exercising its ‘expansive authority in its role as a conservator’—‘reasonably viewed [the Third Amendment] as more certain to ensure market stability’ than ‘the shareholders’ suggested strategy.’ … This holding alone forecloses Plaintiffs’ implied covenant claim.”

    Following several years of litigation, the court granted FHFA’s motion for summary judgment “insofar as no genuine dispute remains on the fact of harm on the theory that plaintiffs were denied dividends that they otherwise were reasonably certain to receive, and insofar as plaintiffs’ proposed alternative remedy of rescission and restitution is barred as a matter of law.” However the court denied the motion “insofar as a genuine dispute of material fact remains on the fact of harm on the theory that plaintiffs’ shares lost much of their value, and in all other respects.” A memorandum opinion was filed under seal as it referenced documents filed under seal by the parties.

    Courts FHFA Net Worth Sweep Fannie Mae Freddie Mac U.S. Supreme Court

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  • District Court criticizes CFPB’s cost-benefit analysis in HMDA change


    On September 23, the U.S. District Court for the District of Columbia granted partial summary judgment to a group of consumer fair housing associations (collectively, “plaintiffs”) that challenged changes made in 2020 that permanently raised coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit under HMDA. As previously covered by InfoBytes, the 2020 Rule, which amended Regulation C, permanently increased the reporting threshold from the origination of at least 25 closed-end mortgage loans in each of the two preceding calendar years to 100, and permanently increased the threshold for collecting and reporting data about open-end lines of credit from the origination of 100 lines of credit in each of the two preceding calendar years to 200. The plaintiffs sued the CFPB in 2020, arguing, among other things, that the final rule “exempts about 40 percent of depository institutions that were previously required to report” and undermines HMDA’s purpose by allowing potential violations of fair lending laws to go undetected. (Covered by InfoBytes here.) The plaintiffs also claimed that the agency’s cost-benefit analysis underlying the 2020 Rule was “flawed because the Bureau exaggerated the ‘benefits’ of increasing the loan-volume reporting thresholds by failing to adequately account for comments suggesting that the savings would be much smaller than estimated, and by relying on overinflated estimates of cost savings to newly-exempted lending institutions with smaller loan volumes.” The plaintiffs asked that the 2020 Rule be vacated and set aside on the grounds that the Bureau acted outside of its statutory authority in issuing the 2020 Rule and violated the Administrative Procedure Act. The Bureau countered that issuing the 2020 Rule was within its scope of authority because HMDA’s text “does not unambiguously foreclose” the agency’s interpretation of the statute.

    The court first determined that promulgation of the 2020 Rule did not exceed the Bureau’s statutory authority because “HMDA grants broad discretion ‘in the judgment of the’ agency to create ‘exceptions’ to the statutory reporting requirements…” “[E]ven a regulation relieving roughly forty percent of institutions from data collection and reporting requirements is an exception to the ‘rule’ of disclosure, which continues to apply to the majority of institutions,” the court wrote, adding that the 2020 Rule preserves the reporting requirements, “as compared to the 2015 Rule, for most institutions, the vast majority of loans, and the vast majority of communities.”

    However, the court agreed with the plaintiffs that the cost-benefit analysis for the 2020 Rule’s increased reporting threshold for closed-end mortgage loans was arbitrary and capricious. The court expressed criticism of the cost-benefit analysis used by the Bureau to justify setting the minimum number of closed-end loans in each of the two preceding calendar years at 100, and found that the Bureau failed to adequately explain or support its rationales for revising and adopting the closed-end reporting thresholds under the 2020 Rule. The Bureau “conceded the new rule would cause identifiable harms to the public, but effectively threw up its proverbial hands, citing an inability to incorporate these harms into its analysis as quantifiable ‘costs,’ and moved on to the next topic of discussion,” the court said.

    The Bureau “exaggerated the savings to ‘covered persons’ under the new rule, and did not engage appropriately with the nonquantifiable ‘harms’ of the 2020 Rule, and the disparate impact of those harms on the traditionally underserved populations HMDA is intended to protect, even as it conceded the revised threshold would certainly result in some harm to consumers,” the court said, questioning the Bureau’s analysis of disparate impacts on rural and low-to-moderate-income communities. The court determined that the plaintiffs identified several flaws in the Bureau’s cost-benefit analysis supporting the increased closed-end mortgage loan threshold, thus rendering this aspect of the 2020 Rule “arbitrary, capricious and requiring vacatur.” The court asked the Bureau for a “more reasoned explanation as to whether and how the cost-benefit analysis accounted for the ongoing need to collect data on home mortgages pursuant to other statutory requirements and underwriting purposes, and why, when a lender must collect and report multiple data points for each mortgage and loan application, the marginal cost of collecting the additional, HMDA-specific data points is so significant that the increased reporting threshold of the 2020 Rule renders unique cost savings.”

    Courts HMDA Mortgages CFPB Fair Lending Administrative Procedure Act Regulation C

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  • 3rd Circuit: Debt buyer not required to be licensed under Pennsylvania law


    On September 19, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s ruling in an FDCPA suit, finding that a defendant debt buyer was not required to be licensed under Pennsylvania law when it attempted to collect interest that had accrued at a rate of more than 6 percent under the original credit card agreement. According to the opinion, the plaintiff opened a credit card with a bank, which had an interest rate of 22.9 percent. The plaintiff defaulted on a debt he accrued on the card, and the debt was subsequently charged-off and sold by the bank to the defendant. The plaintiff argued that the defendant violated the FDCPA since the interest rate was limited by the Pennsylvania Consumer Discount Company Act (CDCA), which states that an unlicensed firm “in the business of negotiating or making loans or advances of money on credit [less than $25,000]” may not collect interest at an annual interest rate over 6 percent. The district court granted the defendant’s motion to dismiss, ruling that the defendant was entitled to collect interest above 6 percent because it held a license under a different state law.

    On the appeal, the 3rd Circuit found that the CDCA applies to companies that arrange for or negotiate loans with certain parameters, and that there is nothing in the plaintiff’s amended complaint to suggest that the defendant is in the business of negotiating loans. The appellate court noted that the plaintiff’s allegations “indicate that [the defendant] purchases debt, such as [plaintiff’s] credit card account that [the bank had] charged off. But even with that allegation as a starting point, it is not reasonable to infer that an entity that purchases charged-off debt would also be in the business of negotiating or bargaining for the initial terms of loans or advances.” The appellate court further noted that “the amended complaint cuts against such an inference: it alleges that [the bank], not [the defendant], set the annual interest rate for [plaintiff’s] use of the credit card for loans and advances at 22.90%. Thus, with the understanding that negotiate means ‘to bargain’ and not ‘to transfer,’ [the plaintiff’s] allegations do not support an inference that [defendant] is in the business of negotiating loans or advances.”

    Courts Licensing FDCPA Debt Collection Debt Buyer Appellate Third Circuit Consumer Finance Pennsylvania

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  • District Court rules beneficiary bank without actual knowledge of wire transfer misdescription is not liable


    On September 22, the U.S. District Court for the Middle District of Louisiana granted summary judgment to a defendant beneficiary bank in an action concerning a fraudulent wire transfer that was allegedly sent to a hacker instead of the intended recipient. According to the opinion, the originating bank executed a wire transfer on behalf of the commercial plaintiff to a supplier.  However, a hacker had inserted false account information into the supplier’s email to the plaintiff, causing the plaintiff’s instruction to the originating bank to indicate the wrong account at the beneficiary bank. As a result, the funds were deposited by the beneficiary bank into an account for which the account number did not match its account name. A large sum of the plaintiff’s money was thereupon withdrawn by a hacker from the account into which the funds had been deposited. The plaintiff sued asserting several claims, including, negligence and gross negligence, violations of the EFTA and the Louisiana’s Uniform Commercial Code (UCC), and aiding fraud. After all the claims except for the UCC claim were dismissed, the defendant moved for summary judgment on the grounds that it did not violate the UCC “because it did not have actual knowledge that the wire transfer at issue misdescribed the beneficiary prior to payment of the wire transfer as contemplated by that statute.”

    The court ruled that based on the evidence, no reasonable juror could find that the defendant had actual knowledge of the misdescription at the time it made the transfer, explaining that the defendant did not have actual knowledge that a hacker had accessed the plaintiff’s wire transfer order, provided false instructions, and changed the target account number to its own. The court stated that under Louisiana law, a bank’s liability for completing a wire transfer that misidentifies a beneficiary or account number depends on whether it has “actual knowledge prior to payment that there was a misdescription of a beneficiary”—constructive knowledge is not actionable, the court said. The defendant also did not have actual knowledge of the misdescription prior to the payment, but rather acquired actual knowledge of the misdescription roughly two weeks later when the originating bank alerted the defendant of the alleged fraud. The court further contended that under Louisiana law a beneficiary bank that uses a fully automated payment system for wire transfers is allowed “to act on the basis of the number without regard to the name if the bank does not know that the name and number refer to different persons.”

    Courts State Issues Louisiana Fraud Wire Transfers

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  • District Court grants partial summary judgment to debt collector in credit reporting and debt collection action


    On September 21, the U.S. District Court for the District of Maryland partially granted a defendant debt collector’s motion for summary judgment in a credit reporting and debt collection action. The plaintiff disputed debt related to two electric bills for two different residences that were eventually combined into one account. After the plaintiff informed the electric company that she would not be paying the bill, the debt was eventually referred for collection to the defendant. The plaintiff disputed the debt, and the defendant conducted an investigation. The plaintiff continued to contend that the defendant was certifying the debt without proof and claimed the defendant’s agents called her a liar and incorrectly asserted that she had not made payments. The defendant argued that it was entitled to summary judgment on the plaintiff’s FCRA and FDCPA claims, contending, among other things, that FCRA 1681e(b) “expressly applies to [credit reporting agencies] and not to furnishers.”

    The court first reviewed the plaintiff’s FCRA claims as to whether the defendant conducted a reasonable investigation. The court stated that the plaintiff bore the burden to establish whether the defendant failed to conduct a reasonable investigation, and noted that because she failed to provide certain evidence to the defendant “there is no genuine dispute that the investigation conducted by [defendant] was not unreasonable” or that the defendant reported accurate information to the CRAs about the debt. With respect to some of the FDCPA claims, the court denied the defendant summary judgment on the basis that the plaintiff created a genuine dispute about whether the defendant violated § 1692d (the provision prohibiting a debt collector from engaging in harassment or abuse). According to the opinion, evidence suggests that the defendant’s agents incorrectly informed the plaintiff that she had never made a payment on one of the accounts, called her a liar when she protested this information, and used a “demeaning tone” in their communications. “[A] reasonable jury could conclude that the language would have the natural consequence of abusing a consumer relatively more susceptible to harassment, oppression, or abuse,” the court wrote.

    Additionally, the court ruled on Maryland state law claims introduced in the plaintiff’s opposition to summary judgment. The court ruled against her Maryland Consumer Debt Collection Act claim regarding the alleged use of abusive language, writing that the agents were not “grossly abusive” and that the plaintiff failed to generate a genuine dispute on this issue. Nor did the plaintiff show a genuine dispute as to whether the debt was inaccurate or that the defendant knew the debt was invalid. The court also entered summary judgment in favor of the defendant on the plaintiff’s Maryland Consumer Protection Act and Maryland Collection Agency Licensing Act claims.

    Courts FCRA FDCPA Consumer Finance State Issues Maryland Debt Collection Credit Report

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