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Eleventh Circuit Rules Managing Member of Debt Collection Company Personally Liable for FTC Act Violations
In a ruling handed down on February 10 by an Eleventh Circuit panel in FTC v. Williams, Scott & Associates, LLC, 16-10063, an appellate panel held that a district court acted within its discretion in finding that the managing member of a debt collection company was jointly and severally liable for the amount of net revenue that the company had received while he was involved with the company. The Appellate Court noted, among other things, that the managing member had posed as a law enforcement official seeking payments for debts that consumers did not owe or debts that the company had no authority to collect. Furthermore, in determining the amount for which the individual defendant should be liable, the Appellate Court affirmed the district court’s holding that the total amount of net revenue earned—as opposed to profit—is the correct measure of unjust gains under section 13(b). The Appellate Court noted further that “the disgorgement amount must be limited to the time frame for which the party seeking disgorgement presented evidence of the defendant’s bad acts.”
A copy of the Amended Complaint filed with the district court can be found here.
On February 14, the FTC announced that it has entered a Stipulated Order for Permanent Injunction and Civil Penalty Judgment of $700,000 with a debt collector that allegedly used unlawful tactics to collect on federal student loans and other debts. According to the complaint, filed by the DOJ on behalf of the FTC in the District Court for the Southern District of Texas, agents working for the defendant-debt collectors (i) left messages that illegally disclosed purported debts to individuals other than the debtors without permission to do so; and (ii) contacted consumers multiple times despite being told they had the wrong number or that the person answering did not owe the debt. Furthermore, the company was alleged to have falsely represented to regulators that it would take steps to prevent its employees from making such unlawful calls. In addition to the $700,000 fine, the Stipulated Order also enjoined the company from continuing such practices going forward.
On February 10, the U.S. Court of Appeals for the Seventh Circuit issued an opinion, in which it held that a District Court had erred in failing to consider a bank’s responsibility for nearly $900,000 in losses resulting from a scheme in which defendants persuaded the bank to issue mortgage loans to borrowers who, the defendants knew, were unable to repay the loans. See U.S. v. Litos, et al., Nos. 16-1384, -1385, -2248, -2249, -2330 (7th Cir. Feb. 10, 2017) (Posner, R.). At issue before the appellate court was the propriety of the restitution, in the amount of $893,015. The district judge had ordered the defendants to pay such restitution to the bank, on the ground that they had misled the bank by pretending that the buyers were the source of the down-payment, when it was defendants themselves who had supplied the money.
In remanding the matter with instructions to re-sentence defendants based on the bank’s role in allowing the fraud to occur, the appellate panel determined that the bank’s professed ignorance as to the source of the down payments and the creditworthiness of the loan applicants was “reckless” in light of the information that was available at the time of the transaction. Specifically, the appellate court held that, based on the record, the fraud evident in the loan applications was “transparent,” and that the bank had “ignored clear signs” of problems with the loans. The appellate court held that, as a result, the lower court needed to determine whether the bank’s lack of clean hands rendered it partially responsible for the losses. Among other things, the appellate panel noted statements by the district judge that the loan applications were “a joke on their face” and “laughable,” as well as the fact that the bank had approved multiple loans to the same individuals in short spans of time. Accordingly, the court ordered the district judge to consider whether the bank is entitled to restitution.
On February 14, the SEC announced a settlement with a real estate investment manager based in Arizona over allegations that he defrauded investors. According to the complaint, the investment manager allegedly told investors he would make personal investments in real estate projects which he failed to do, instructed some investors to “falsely state that they were ‘accredited investors’” to avoid registration requirements for the offerings, and falsely represented that he would personally manage the projects when, instead, he entrusted management to a real estate broker who was later imprisoned for other crimes. The settlement requires the investment manager to disgorge $51,358 plus interest of $4,893.98 and pay a penalty of $450,000.
On February 10, the New York Attorney General’s office announced it had reached a settlement in a securities fraud suit filed in 2005 by then-Attorney General Eliot Spitzer. The lawsuit was filed after the company admitted to engaging in improper reinsurance transactions that materially misrepresented loss reserves and misstated underwriting results. The original settlement in 2006 resulted in the company paying $1.6 billion to settle the matter; however, the two individuals involved refused responsibility for the transactions. Now, over 12 years later, and after the two defendants’ arguments were “substantially rejected by the New York Supreme Court, the New York Supreme Court Appellate Division, First Department and the New York Court of Appeals,” the defendants have acknowledged their role in the transactions and agreed to collectively relinquish over $9.9 million they had received as performance bonuses from 2001 through 2004.
Federal Judge Sentences Hacker to Eight Years for Cyber Heists that Caused More than $55 Million in Losses
On February 10, the United States Attorney for the Eastern District of New York announced that the Honorable Kiyo A. Matsumoto levied an eight year prison sentence against a Turkish citizen charged with organizing and carrying out three cyber-attacks on global financial institutions between 2011 and 2013 which resulted in more than $55 million in losses. Last March, the defendant pleaded guilty to “computer intrusion conspiracy, access device fraud conspiracy, and effecting transactions with unauthorized access devices.” Specifically, the defendant and his associates were alleged to have repeatedly hacked into debit card processing systems, manipulated account balances, stole customers’ PINs, and transferred that information to associates who then encoded debit cards with the stolen data in order to make fraudulent ATM withdrawals. The DOJ further alleged that the hackers targeted databases companies maintained for prepaid debit cards and effectively eliminated the card accounts’ withdrawal limits in what are called “unlimited operations.” The defendant was also ordered to pay $55,080,226.14 in restitution as part of his sentence.
On February 17, U.S. District Judge Rudolph Contreras issued an Order granting in part a motion filed by a unnamed "John Doe" recipient of a CFPB civil investigative demand (CID) for an injunction preventing the Bureau from disclosing its identity pending its petition to the Court of Appeals for a stay of the CID. Specifically, Judge Contreras ordered that: “Defendants are ENJOINED, until March 3, 2017” from “publicly disclosing the identify of Plaintiff John Doe Company, by taking actions including, but not limited to, the public filing of either the civil investigative demand . . . or the Director’s Decision and Order [denying] Plaintiff’s Petition" to set aside the CID.
As previously covered by InfoBytes, the John Doe company filed an action against the CFPB back in January seeking to enjoin the Bureau from, among other things, disclosing the existence of an investigation and taking any action against the company unless and until the CFPB is constitutionally structured. The company argued, among other things, that the agency should not be able to identify it as the target of an investigation as publication of the company’s name would bring “irreparable harm” as it tries to defend itself against any enforcement action. Immediately following the District Court's ruling against the company, it lawyers filed a Notice of Appeal with the U.S. Court of Appeals for the D.C. Circuit to try to stop the agency from moving forward.
On February 17, a U.S. District Court held that home sellers who use contracts for deed are required to comply with CFPB Civil Investigative Demands (CIDs) asking for information about possible illegalities in selling or collecting residential property purchase loans. CFPB v Harbour Portfolio Advisors, LLC et al., [Order] No. 16-14183 (E.D. Mich. Feb. 17, 2017). Specifically, the Court found that the Bureau is not “plainly lacking” in jurisdiction to look into contracts for deed, and the CIDs were not unduly burdensome.
Back in November, the CFPB had petitioned the court to enforce CIDs served on Respondents. At issue before the Court was whether the Bureau’s investigative authority extends to the selling, marketing, and servicing of a financial product called an Agreement for Deed (“AFD”), otherwise known as a “contract for deed” or a “land installment contract.” Respondents thereafter petitioned the Bureau to set aside the CIDs, offering three reasons why the CIDs should not be enforced: (i) the CFPB exceeded its authority in issuing the CIDs; (ii) the companies had not been given fair notice that contracts for deed could be covered by federal financial consumer protection laws; and (iii) the CIDs were unduly burdensome and should be modified.
Each of these three arguments was rejected by the court: (i) as to the Bureau’s authority, the court found that objection premature, noting that the Bureau need only establish a “plausible reason” to believe the companies might have information related to violations of the federal financial consumer protection laws; (ii) the court similarly held the “fair notice” argument to be premature at the investigation stage; and (iii) in rejecting Respondent’s arguments that the burden of compliance was excessive, the court noted that the CFPB was entitled to documents that “will help the Bureau develop a complete understanding of Respondents’ practices and operations” and that Respondents’ assertions about the cost of compliance and the burden on its few employees were not corroborated.
Special Alert: D.C. Circuit Grants Petition For Rehearing in PHH v. CFPB; Vacates Judgment Based on Bureau’s Unconstitutionality
Buckley Sandler Special Alert
On February 16, the U.S. Court of Appeals for the D.C. Circuit granted the CFPB’s petition for rehearing en banc of the October 2015 panel decision in CFPB v. PHH Corporation. Among other things, the panel decision declared the Bureau’s single-Director structure unconstitutional and would have allowed the President to remove the CFPB’s Director at will rather than “for cause” as set forth in the Dodd-Frank Act. As a result of the petition for rehearing being granted, the panel’s judgment is vacated and the full D.C. Circuit will hear PHH’s appeal of the $109 million penalty imposed by the CFPB under the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA). Oral argument is scheduled for May 24, 2017.
As discussed in detail in our prior alert, the October panel decision unanimously concluded that the CFPB misinterpreted RESPA, violated due process by disregarding prior interpretations of the statute and applying its own interpretation retroactively, and failed to abide by RESPA’s three-year statute of limitations. However, only two of the three judges on the panel concluded that the CFPB’s status as an independent agency headed by a single Director violated the separation of powers under Article II of the U.S. Constitution. The third panel member, Judge Henderson, dissented from this portion of the opinion on the grounds that it was not necessary to reach the constitutional issue because the panel was already reversing the CFPB’s penalty on other grounds.
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If you have questions about the decision or other related issues, visit our Consumer Financial Protection Bureau practice for more information, or contact a BuckleySandler attorney with whom you have worked in the past.
On February 6, the U.S. District Court for the Northern District of California denied the CFPB’s motion for summary judgment and held that its “intrinsically factual” deception claims would have to be decided at trial. See CFPB v. Nationwide Biweekly, et. al., [Order Denying Motions for Summary J.] No. 15-cv-2106 (N.D. Cal. Feb. 6, 2017). The Bureau alleges that the defendant company—which helps homeowners restructure their mortgage payments to help them pay down their mortgages faster—misrepresented the savings that consumers would gain through its services. Lawyers for the defendants rejected those claims, saying in a court filing last month that consumers were told multiple times about the setup fee and that promises of interest savings are true. Ultimately, Judge Richard Seeborg sided with defendants, disagreeing with the CFPB’s assertion that it had presented “uncontroverted evidence” of deception and that “no reasonable fact finder” could find in defendants’ favor.
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