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  • Supreme Court Rules Five-Year Statute of Limitations Applies to SEC Civil Penalties

    Courts

    In a unanimous ruling handed down on June 5, the United States Supreme Court held that the SEC is bound by a five-year statute of limitations on civil penalties or the return of illegal profits, citing 28 U.S.C. §2462 of the U.S. Code, which “establishes a [five-year] limitations period for ‘an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture.’” Justice Sotomayor delivered the opinion.

    The decision resolves a New Mexico case dating back to 2009, in which a jury found the defendant liable for misappropriating more than $34.9 million from 1995 through July 2007 from four SEC-registered investment companies under his control. See S.E.C. v. Kokesh, 834 F.3d 1158 (10th Cir. 2016). The district court judge ordered the defendant to pay a $2.4 million civil penalty, nearly $35 million in disgorgement, and more than $18 million in prejudgment interest after finding that §2462 did not apply because “disgorgement” is not a penalty within the meaning of the statute. The defendant appealed the ruling on the grounds that the disgorgement should be set aside because the claims accrued more than five years before the SEC brought its action against him and are consequently barred under the five-year statute of limitations. However, the 10th Circuit affirmed the ruling of the lower court, agreeing that disgorgement was not a penalty.

    The Supreme Court reversed. Justice Sotomayor explained why the Court disagreed with the 10th Circuit panel’s conclusion that disgorgement was not a penalty under the statute. The Court held that disgorgement “bears all the hallmarks of a penalty” and “is imposed as a consequence of violating a public law and . . . is intended to deter, not to compensate.” Consequently, disgorgement represents a penalty, thus falling within the five-year statute of limitations of §2462.

    Courts Securities SEC Disgorgement Appellate Litigation U.S. Supreme Court

  • Do Not Call Violations Net $280 Million Fine for FTC, States

    Courts

    On June 5, the U.S. District Court for the Central District of Illinois ruled in favor of the Federal Trade Commission (FTC) and the states of California, Illinois, North Carolina, and Ohio resolving Do Not Call litigation against a direct-broadcast satellite service provider. The court found the service provider liable for making millions of calls resulting in violations of the Telemarketing Sales Rule (TSR) and the Telephone Consumer Protection Act, among other things. The $280 million in civil penalties, with a record $168 million going to the FTC, is the largest civil penalty ever awarded for violation of the FTC Act.

    Additionally, the court issued a permanent injunction order against the service provider. Among the requirements in the order, the service provider will show within 90 days of the order effective date that they are “fully complying with the safe harbor provisions” and “have made no prerecorded telemarketing calls at any time during the five (5) years immediately preceding the effective date.” The service provider must also hire an expert to ensure compliance with the injunction and telemarketing laws, provide semi-annual compliance materials, and ensure their compliance with the TSR.

    Courts FTC Mortgages UDAAP DOJ Telemarketing Sales Rule Litigation

  • Department of Education Student Debt Collection Contracting Injunction Extended

    Courts

    On May 31, U.S. Court of Federal Claims Chief Judge Susan G. Braden extended her preliminary injunction in a legal dispute involving the awarding of Department of Education (Department) debt collection contracts. She stated the order would stay in place “to preserve the status quo until the viability of the debt collection contracts at issue is resolved.”

    Judge Baden’s order provides several reasons for her decision, all pulled from news reports, including: (i) a CFPB report stating that private collection agencies chosen by the Department offer uncertain value despite great cost; (ii) a New York Times article suggesting that oversight for the Department’s student debt would be transferred to the Treasury Department; and (iii) press reports announcing James Runcie’s resignation. Runcie served as the chief operating officer of the Office of Federal Student Aid.

    The order has prevented the government from collecting on defaulted student loans—a halt which began on March 29 when Judge Braden issued a temporary restraining order in the matter.

    Courts Department of Education Debt Collection Litigation Department of Treasury

  • FDIC Releases List of Enforcement Actions Taken Against Banks and Individuals in April 2017

    Courts

    On May 26, the FDIC released its list of 18 administrative enforcement actions taken against banks and individuals in April. Among the consent orders on the list are civil money penalties for violations of the Flood Disaster Protection Act of 1973 and its flood insurance requirements. Also on the list are a cease and desist order and a civil money penalty assessment issued to a Louisiana-based bank (Bank) for violations of the Bank Secrecy Act (BSA), EFTA, RESPA, TILA, HMDA, and the National Flood Insurance Program. According to the cease and desist order, the FDIC Board of Directors agreed with the Administrative Law Judge’s recommended decision that the Bank engaged in unsafe or unsound practices, which warranted a cease and desist order and civil money penalty. The order also addressed a number of shortcomings identified by the Bank’s examiners, including the following: (i) the Bank’s BSA program lacked adequate internal controls to ensure compliance; (ii) it failed to provide correct and compete electronic funds transfer disclosures to consumers; (iii) borrowers were provided “untimely and improperly completed” good faith estimates; and (iv) the Bank repeatedly failed to accurately report required HMDA information to federal agencies.

    An additional eight actions listed by the FDIC related to unsafe or unsound banking practices and breaches of fiduciary duty, including five removal and prohibition orders. There are no administrative hearings scheduled for June 2017. The FDIC database containing all of its enforcement decisions and orders may be accessed here.

    Courts Consumer Finance Enforcement FDIC Litigation National Flood Insurance Program Bank Secrecy Act EFTA RESPA TILA HMDA Flood Insurance Flood Disaster Protection Act

  • City Agrees to Settlement of Housing Discrimination Suit with DOJ

    Courts

    On May 26, the Department of Justice (DOJ) and the city of Jacksonville, Florida (city), agreed on a settlement over claims that the city violated the Fair Housing Act (FHA) and the Americans with Disabilities Act (ADA). The DOJ alleged that the city denied permission for the development of permanent supportive housing for individuals with disabilities in an historic district and discriminated on the basis of the intended residents’ disabilities.

    The settlement provides for a civil penalty of $25,000 to be paid to the U.S. Treasury as well as the creation by the city of a $1.5 million grant to be awarded to a qualified developer of permanent supportive housing in the community. The city also agreed to take additional specific steps to comply with the requirements of the ADA and FHA.

    Two other plaintiffs whose suits were consolidated with the DOJ’s—Ability Housing, Inc. and Disability Rights Florida, Inc.—also received compensation for reasonable attorneys’ fees and other costs.

    As part of the settlement, the city denied any wrongdoing alleged by the DOJ.

    Courts State Issues DOJ FHA Department of Treasury Litigation

  • Government Settles False Claims Act Suit for $23 Million

    Courts

    On May 26, the DOJ ended a False Claims Act case with a $23 million settlement. The case, brought by whistleblowers against a pharmacy goods provider (company), involved alleged fraudulent Medicaid claims and kickbacks to pharmacies that prescribed one of the company’s drugs. The qui tam action, originally filed in 2007, resulted in the company agreeing to pay nearly $13 million to the U.S. within seven business days of the settlement, of which the government will pay the whistleblowers $3.7 million. Additionally, the company will pay over $10 million toward state Medicaid settlements.

    Courts False Claims Act / FIRREA Fraud Whistleblower DOJ

  • Payday Lenders Argue Case for Operation Choke Point Injunction, Claim Regulator Activities Violate Their Rights to Due Process

    Courts

    On May 19, a group of payday lenders filed a brief with the Court of Appeals for the District of Columbia claiming a U.S. district court judge was wrong to deny their request for a preliminary injunction against regulator activities they claim violate their rights to due process. (See Advance America v. FDIC, et al, 2017 WL 2212168 (C.A.D.C.).)  As previously discussed in InfoBytes, the lenders claim the DOJ’s “Operation Choke Point” initiative—designed to target fraud by investigating U.S. banks and the business they do with companies believed to be a higher risk for fraud and money laundering—is a threat to their survival. The lenders’ brief alleges that federal agencies, including the DOJ and the FDIC, began as early as June 2008 to expand the interpretation of “reputation risk.” According to the lenders, reputation risk originally referred to risk to a bank’s reputation that arose from its own actions; however, the regulators expanded that to apply to risks that could arise from activities of a bank’s customers, which meant “bank servicing businesses identified as ‘high risk’ would be required to incur significant additional regulatory compliance costs and  face the risk of increased regulatory scrutiny.” This, the lenders assert, became a justification to pressure banks to sever their banking relationships with payday lenders.

    Notably, the U.S. district court judge refused to issue a preliminary injunction and was not persuaded that the lenders would be able to prove that these regulatory actions caused banks to deny services the lenders needed to operate.

    However, the lenders claim in their brief that they can show a violation of their procedural due process rights under three theories: “stigma-plus,” “reputation-plus,” and “broad preclusion.”

    • The lenders describe the “stigma-plus” theory as requiring them to show they were stigmatized in connection with an “alteration of their background legal rights” without any due process protections. They believe they can prove this occurred because they were labeled as high-risk customers and denied access to the banking system with no legal protections.
    • The “reputation-plus” theory would require a deprivation of banking services in connection with defamatory statements that harmed their reputation, the lenders claim. The lenders contend this can be proved because the “’stigmatizing charges certainly occurred in the course of the termination of the accounts, which is all that is required for a reputation-plus claim to succeed.” Each lender claims to have lost a relationship with at least one bank due to false regulator claims that the relationships could threaten the bank’s stability.
    • The “broad preclusion” theory also applies, the lenders assert, because the regulators’ statements to banks have prevented them “pursuing their chosen line of business.”

    Furthermore, the lenders take issue with the U.S. district court judge’s position that they are required to show they lost all access to banking services in order to show a due process violation. They also argue that a loss of their constitutional right to due process is a sufficient irreparable injury to justify a preliminary injunction.

    Courts Payday Lending Consumer Finance Prudential Regulators CFPB DOJ Operation Choke Point

  • City of Philadelphia Sues National Bank for Discriminatory Lending Practices

    Lending

    On May 15, the City of Philadelphia filed a lawsuit against a national bank (Bank) alleging that it violated the Fair Housing Act by engaging in discriminatory lending practices that targeted minority borrowers. (See City of Phila. v. Wells Fargo & Co., Case No. 2:17-cv-02203-LDD, 2017 WL 2060317 (E.D. Pa.).) The complaint alleges that beginning in 2004 and continuing through the present, the Bank engaged in “a continuous and unbroken discriminatory pattern and practice of issuing higher cost or more onerous mortgage loans to minority borrowers” while offering better terms to similarly situated non-minority borrowers. The City’s complaint alleges discrimination under both disparate treatment and disparate impact theories. The City claims that the Bank has a long history of both redlining (the practice of refusing to make loans in minority neighborhoods) and reverse redlining (the practice of targeting higher cost loans or loans with less favorable terms to minority neighborhoods). The complaint further describes a pattern of knowing and intentional discrimination by the Bank, relying on statistical analyses finding, among others, that: (i) a loan for a home in a predominantly minority neighborhood was 4.7 times more likely to go into foreclosure than a loan on a home in a mainly white neighborhood; (ii) African American and Latino borrowers were more than twice as likely to receive a high-cost loan as white borrowers; and (iii) when credit scores were factored in for borrowers with FICO scores of more than 660, African American borrowers were more than 2.5 times more likely than white borrowers to receive a high cost loan, and Latino borrowers more than twice as likely. As a result of the foreclosures and vacant homes, the City says it suffered a suppression of property tax revenue and increased cost of providing services such as police, fire fighting, and other municipal services.

    City of Miami Suit. As previously covered in InfoBytes, the Supreme Court recently ruled that municipal plaintiffs may be “aggrieved persons” authorized to bring suit under the Fair Housing Act (FHA) against lenders for injuries allegedly flowing from discriminatory lending practices, although the five-justice majority held that such injuries must be proximately caused by the FHA violations. The Supreme Court returned the City’s lawsuit to the U.S. Court of Appeals for the Eleventh Circuit because, while the Court found that the City’s injuries appeared to be a foreseeable result of the lender’s practices, this was not enough to establish proximate cause. Therefore, it remains to be seen whether the City can show proximate cause.

    Lending Courts FHA Mortgage Lenders Consumer Finance Redlining

  • Fourth Circuit States Violation of FCRA that Fails to Demonstrate a Concrete Injury Not Enough for Standing

    Courts

    On May 11, the U.S. Court of Appeals for the Fourth Circuit issued an opinion vacating a nearly $12 million judgment in a class action brought on behalf of a 69,000 member class, concluding that a credit reporting agency’s decision to list a defunct credit card company—rather than the name of its current servicer—on an individual’s credit report does not, without more, create a sufficient injury under the Fair Credit Reporting Act (FCRA) for purposes of Article III standing. Furthermore, although the lead plaintiff alleged that he suffered a cognizable “informational injury,” in that he was denied the source of the adverse information on the report, the appeals court found that he failed to “demonstrate a concrete injury” as a result of the allegedly incorrect information listed on the credit report. (See Dreher v. Experian Info. Sols., Inc., No. 15-2119, 2017 WL 1948916 (4th Cir. May 11, 2017).)

    The 2014 class action complaint against the credit reporting agency was filed by an individual who—when undergoing a background check for a security clearance—received a credit report that listed a delinquent credit card account with a creditor that had transferred the debt to a new servicer that was not listed as a source of information. When servicing the defunct company’s accounts, the new servicer had decided to do business using the creditor’s name, and directed the credit reporting agency to continue to reflect that name on the tradeline appearing for those specific accounts on its credit reports. The plaintiffs asserted that the credit reporting agency “deliberately [withheld] and inaccurately [stated] the identity of the source of reported credit information,” in violation of the FCRA. The credit reporting company sought summary judgment on the claims, arguing that the individual and the class lacked standing under the FCRA. However, the district court ruled in favor of the member class finding that the credit reporting company “committed a willful violation of . . . the [FCRA].”

    In vacating the district court’s ruling, the Fourth Circuit opined that under the FCRA, a plaintiff “must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.” The Fourth Circuit concluded that the individual could not clear the first hurdle. To establish “injury in fact,” the plaintiff must show that he or she suffered an invasion of a legally protected interest that is concrete and particularized. While the plaintiff alleged that the credit reporting agency had violated the FCRA by failing to “clearly and accurately disclose to the consumer . . . [t]he sources of the information [in the consumer’s file at the time of the request],” the Fourth Circuit concluded that the statutory violation alone did not create a concrete informational injury sufficient to support standing. “Rather, a constitutionally cognizable informational injury requires that a person lack access to information to which he is legally entitled and that the denial of that information creates a ‘real’ harm with an adverse effect.” In this instance, “the account had no legitimate effect on the [plaintiff’s] background check process, and [t]hus receiving a creditor’s name rather than a servicer’s name—without hindering the accuracy of the report of efficiency of the credit report resolution process—worked no real world harm.” Instead, the Fourth Circuit categorized the plaintiff’s allegations as chiefly “customer service complaints”—a type of harm unrelated to those Congress sought to prevent when enacting the FCRA.

    Courts FCRA Appellate Class Action

  • PHH v. CFPB Update: D.C. Circuit Hears Oral Arguments Before En Banc Court

    Courts

    On May 24, the en banc U.S. Court of Appeals for the D.C. Circuit heard oral arguments in the matter of PHH Corp. v. CFPB. The parties and the Department of Justice generally presented their arguments as expected based on their briefs. However, questions from some members of the court indicated doubts about the conclusion by a panel of the court in October 2016 that the CFPB’s structure was unconstitutional. In particular, multiple members of the court repeatedly pressed PHH’s counsel on whether prior Supreme Court decisions upholding the constitutionality of the Federal Trade Commission and other independent agencies led by presidential appointees who could only be removed “for cause” prevented the D.C. Circuit from concluding that the president lacked sufficient authority over the CFPB’s Director.

    Notably, however, in response to statements by PHH that current CFPB Director Richard Cordray could remain in his position after the expiration of his term in July 2018 until a successor was confirmed by the Senate, the CFPB’s counsel stated that, in the Bureau’s view, the “for cause” removal limitation no longer applied once the Director’s term expired, and the president could then remove the Director “at will.”

    In contrast to the constitutional issue, the questioning on other aspects of the case was minimal and did not indicate that the en banc court was inclined to revisit the panel’s determination that the CFPB misinterpreted the Real Estate Settlement Procedures Act (RESPA) when applying it to PHH’s practices, violated due process by failing to give PHH proper notice of its interpretation, and improperly failed to apply RESPA’s statute of limitations in its administrative proceedings.

    At the direction of the en banc court, the oral arguments in PHH followed those in Lucia v. SEC, a case addressing whether the SEC’s administrative law judges (ALJs) violate the appointments clause of the U.S. Constitution. Although this issue was not discussed during the PHH oral arguments, the CFPB originally brought its claims against PHH before an ALJ borrowed from the SEC and the court had previously suggested that a finding that the SEC ALJs were improperly appointed could also justify reversal of the CFPB’s decision against PHH. (See previous Special Alert here.)

    A decision from the en banc court is not expected for months. Importantly, while questioning during oral argument is often used as a barometer of the potential outcome of a case, the questions asked by a judge do not necessarily indicate how that judge will vote on a particular issue. Judges often use oral argument to see how the parties and their colleagues will respond to hypotheticals, rather than to share their views of the case.

    Courts Consumer Finance CFPB RESPA PHH v. CFPB Mortgages Litigation Single-Director Structure

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