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In a December 5 press release, FINRA announced that it has fined Credit Suisse Securities (USA) LLC $16.5 million for anti-money laundering (AML), supervision and other violations. FINRA’s determination and penalty were based primarily on two deficiencies in the investment bank’s suspicious activity monitoring program. First, Credit Suisse relied too heavily on its registered representatives “to identify and escalate potentially suspicious trading, when, in practice, such high-risk activity was not always escalated and investigated, as required.” And, second, FINRA found that the firm failed to properly implement its automated surveillance system to monitor for potentially suspicious money movements.
A federal jury has ordered two Texas-based home mortgage entities and their chief executive to pay nearly $93 million for defrauding the U.S. government into insuring thousands of risky loans, the Department of Justice announced on November 30.
The mortgage companies and their former CEO were found liable for violating the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) by, among other things, failing to maintain an adequate quality control program; and submitting false annual certifications regarding quality control requirements. Specifically, the government contended that defendants operated over 100 “shadow” branch offices that originated FHA-insured mortgage loans without obtaining the necessary HUD approval, and which were therefore not subject to HUD oversight.
Ultimately, the jury awarded $92,982,775 in total damages, including $7,370,132 against the CEO specifically—a sum that is subject to mandatory tripling. Further penalties relating to the FIRREA violations are expected, which U.S. District Judge George Hanks will set at a later date.
On December 7, the American Bankers Association (ABA) filed a lawsuit in federal court seeking to overturn a final rule published by the National Credit Union Administration (NCUA) in that morning’s Federal Register. The final rule purports to “implement changes in policy affecting: The definition of a local community, a rural district, and an underserved area; the chartering and expansion of a multiple common bond credit union; the expansion of a single common bond credit union that serves a trade, industry or profession; and the process for applying to charter, or to expand, a federal credit union.”
ABA’s law suit contends, among other things, that by “fail[ing] to adhere to the limitations on federal credit unions established by Congress,” the NCUA’s final rule “upsets the balance Congress struck between granting federal credit unions tax-favored status and limiting their operations to carefully circumscribed groups or localities that share a common bond.” Under the final rule, scheduled to take effect Feb. 6, Federal Credit Unions (FCUs) can apply to serve entire geographic regions, so-called “rural districts” up to 1 million people (which include the entirety of Alaska, North Dakota, South Dakota, Vermont or Wyoming), and areas contiguous to their existing service areas. NCUA is also facilitating easier conversions to community charters.
On December 7, the CFPB announced that it had entered into consent orders with three reverse mortgage companies to settle claims that their advertisements for those mortgages were deceptive under the Mortgage Acts and Practices Advertising Rule. The alleged misconduct included deceptive advertising campaigns that misrepresented, among other things: (i) the risk of losing home and the right to remain in the home; (ii) expected costs and mortgage payments; (iii) government affiliations of the mortgage company; and (iv) the effectiveness of a reverse mortgage credit product to eliminate debt.
The consent orders require the companies to make clear and prominent disclosures in their reverse mortgage advertisements and implement systems to ensure they are following all laws. One of the three firms also cannot imply affiliation with the government and must maintain complete and accurate records. In addition, the consent orders impose civil penalties ranging from $65,000 up to $400,000.
- American Advisors Group Consent Order
- American Advisors Group Stipulation
- Reverse Mortgage Solutions Consent Order
- Reverse Mortgage Solutions Stipulation
- Aegean Financial Consent Order
- Aegean Financial Stipulation
Federal District Court Holds Claims Brought by CFPB Alleging Deceptive Conduct Must Meet Heightened Rule 9(b) Standard
In a recent case, a California District Court held that CFPB’s claims alleging deceptive conduct under the Telemarketing Sales Rule (“TSR”) against a credit repair company failed to meet the heightened pleading requirement under Fed. R. Civ. P. 9(b), under which a plaintiff must “state with particularity the circumstances constituting fraud” – including pleading “the time, place, and specific content of the false representations.” CFPB v. Prime Marketing Holdings, LLC, CV 16-07111-BRO, Dkt. No. 32 (C.D. Cal. Nov. 15, 2016).
Specifically, the court in Prime Marketing Holdings concluded that the CFPB’s general allegations of deception “failed to identify any specific instances where the defendant made such a misrepresentation” including, for instance, “what representations were made, when these representations were made and to whom they were made.” Id. at 12-13. Based on this finding, the court dismissed without prejudice the four deception-based claims. Id.
In its first insider trading decision in nearly two decades, the US Supreme Court ruled unanimously to uphold an insider trading conviction of an individual who traded while aware of material non-public information received from a friend who received no financial benefit in exchange. Salman v. United States, No. 15-628, 2016 WL 7078448 (U.S. Dec. 6, 2016).
The defendant in Salman was convicted in 2013 for trading on confidential information obtained through his brother-in-law even though Salmon he gained no tangible financial benefit. The appeal thus presented the Justices with the central question of how to define a “personal benefit” garnered from insider information. In upholding Salman’s conviction, the Supreme Court affirmed that a user of financial tips breaches fiduciary duty with respect to “insider information” from a relative, whether or not the person giving the information receives a tangible financial benefit. In so holding, the Court also undercuts a narrower interpretation in a case decided by the Second Circuit in 2014 that held that the person who provides the tips must receive something of value in exchange for inside information given to family or friends.
PHH Response Due Date Pushed Back as Solicitor General Permitted to Respond to CFPB's Petition in PHH Corp. v. CFPB by December 22
As discussed previously, the D.C. Circuit ordered PHH to respond to the CFPB’s petition for en banc review of the October 2016 three-judge panel decision in PHH Corp. v. CFPB. In an Unopposed Motion for Leave to file the United States' Response, filed December 1, the Office of the Solicitor General sought permission to file its own responsive briefing on or before December 22. In an Order issued December 1, the D.C. Circuit granted the Solicitor General’s request, but also moved back the due date for PHH’s responsive papers so that both responses are now due on December 22.
Earlier in the week, on November 30, two groups filed amicus briefs in support of the CFPB’s petition together along with motions requesting an invitation from the court. The first brief was submitted by a group of leading consumer protection organizations, while the second brief was filed by a group of 21 current and former members of Congress.
On November 22, a federal judge in Texas issued a nationwide preliminary injunction blocking the enactment of the Department of Labor's (DOL’s) new overtime salary threshold under the Fair Labor Standards Act. In his order—issued in response to a lawsuit brought by 21 states and several business groups—Judge Amos L. Mazzant, III noted that the DOL does not have the authority to utilize a salary-level test or an automatic updating mechanism. By granting the preliminary injunction, the judge has delayed the rule (which was set to take effect on December 1) from becoming effective until further legal proceedings may occur. Plaintiffs’ motion for summary judgment, which seeks to invalidate the final rule, has already been briefed.
In an order released November 10 in LabMD, Inc. v. FTC, the Eleventh Circuit stayed the execution of an FTC data security enforcement order against LabMD Inc. pending the appellate court’s own ruling on whether the agency acted on an unreasonable interpretation of what security companies must provide. LabMD, Inc. v. FTC, No. 16-16270-D, Order Granting Stay (11th Cir. Nov. 10, 2016).
The FTC had ruled in July that LabMD’s data security practices violated the FTC Act, clarifying and expanding upon the FTC’s authority to regulate corporate data security practices. After an FTC administrative law judge denied LabMD’s request to stay enforcement until the medical company had exhausted its remedies on appeal, LabMD appealed to the Eleventh Circuit, which granted the stay in a unanimous decision.
Noting that the case turns upon whether the FTC’s interpretation of the FTC Act is reasonable, the Appellate cCourt granted the stay based on its finding that (i) “there are compelling reasons why the FTC’s interpretation may not be reasonable”; (ii) complying with the FTC’s Order would cause LabMD irreparable harm given its financial situation, (iii) there would be no substantial injury to other parties given that LabMD is no longer operating, and (iv) the public interest factor was neutral. The appeal will now proceed on the merits of LabMD’s arguments for reversal of the FTC’s enforcement order.
On November 8, the Supreme Court heard oral arguments in Bank of America Corp. v. City of Miami, addressing whether the Fair Housing Act permits Miami to sue mortgage lenders as an “aggrieved person” for alleged racial discrimination in the sale, rental, and financing of housing. The questions presented to the Court for decision are whether (i) the language in the Fair Housing Act that limits standing to sue to “aggrieved person[s]” means that Congress meant to impose a more narrow standing requirement than that in Article III of the Constitution; and (ii) the proximate cause standard in the Fair Housing Act requires that the plaintiffs show more than the possibility that the defendants could have foreseen the harm that occurred through a chain of consequences.
- Daniel P. Stipano to discuss "High standards: Best practices for banking marijuana-related businesses" at the ACAMS AML & Anti-Financial Crime Conference
- Daniel P. Stipano to discuss "Wait wait ... do tell me! Where the panelists answer to you" at the ACAMS AML & Anti-Financial Crime Conference
- Matthew P. Previn and Walter E. Zalenski to discuss "Is valid when made ... valid?" at the Women in Housing & Finance Partner Series webinar
- Warren W. Traiger and Caroline K. Eisner to discuss "CRA modernization and the OCC final rule" at CBA Live
- Daniel R. Alonso to discuss "Transnational corruption: A chat with former U.S. federal prosecutors in New York" at Marval Live Talks
- Sherry-Maria Safchuk and Lauren Frank to discuss "New CFPB interpretation on UDAAP" at a California Mortgage Bankers Association Mortgage Quality and Compliance Committee webinar
- Thomas A. Sporkin to discuss "Managing internal investigations and advanced government defense" at the Securities Enforcement Forum
- H Joshua Kotin to discuss "Mortgage servicing in a recession: Early intervention, loss mitigation and more" at the NAFCU Virtual Regulatory Compliance Seminar
- Daniel R. Alonso to discuss "Independent monitoring in the United States" at the World Compliance Association Peru Chapter IV International Conference on Compliance and the Fight Against Corruption
- Jonice Gray Tucker to discuss "The future of fair lending" at the Mortgage Bankers Association Regulatory Compliance Conference
- Michelle L. Rogers to discuss "Major litigation" at the Mortgage Bankers Association Regulatory Compliance Conference
- Kathryn L. Ryan to discuss "Pandemic fallout – Navigating practical operational challenges" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute