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Maryland Court of Appeals reverses trial court approval of settlement for interfering with CPD action
On March 3, the Maryland Court of Appeals reversed a trial court’s approval of a proposed settlement in a class action based on fraudulently induced assignments of annuity payments. The class members were recipients of structured settlement annuities from lead paint exposure claims who responded to ads by a structured settlement factoring company (company). The class members then transferred the rights to their settlement annuity contracts to the company, which paid the class members lump sums for the rights at a discount. The class filed a lawsuit against the company in 2016, alleging that it had engaged in fraud in procuring the annuity contract transfers. Around the same time, the Consumer Protection Division of the Maryland AG’s Office (CPD) had filed suit against the company alleging violations of the State Consumer Protection Act. Several months after both actions were filed, the CFPB filed a similar suit against the company based on the same alleged misconduct. All three actions sought similar kids of relief with respect to the same individuals, though the bases for seeking relief and the nature and amount of relief sought differed among the actions.
The class and the company proceeded towards a negotiated settlement, to which the trial court signed a proposed final order, certifying the class and approving the settlement, despite CPD’s opposition to both issues. Following the court’s approval, the company moved for summary judgment in its case against the CPD, which the court granted because it held CPD’s claim for restitution for the same individuals was barred by res judicata; CPD’s claim for injunctive relief and civil penalties is still currently awaiting trial.
Following an appeal, the Court of Appeals granted the company’s petition to consider whether “class members [may] lawfully release and assign to others their right to receive money or property sought for their benefit by [CPD] or [CFPB] through those agencies’ separate enforcement actions” under state and federal consumer protection laws, respectively.
The Court of Appeals held that the lower court erred in approving the settlement, stating that consumers “have no authority, through a private settlement, whether or not approved by a court, to preclude CPD from pursuing its own remedies against those who violate . . . [Maryland’s] Consumer Protection Act, including a general request for disgorgement/restitution.” In particular, the Court of Appeals held that the parties cannot preclude CPD from pursuing the remedies of disgorgement and restitution, as that would directly contravene CPD’s statutory authority to sanction the company for wrongful conduct. For this reason, the Court of Appeals concluded that the trial court’s approval of the settlement must be reversed and remanded the case for further proceedings.
FINRA releases pandemic-related guidance in connection with Company-Related Action submissions
On March 12, FINRA released guidance in connection with Company-Related Action submissions. The guidance provides that FINRA’s Market Operations Department will not deem a Company-Related Action as late for purposes of assessing late fees if an issuer is unable to provide notice sufficiently in advance of the record or effective date due to the Covid-19 outbreak.
CFPB sues regional bank for sales practices
On March 9, the CFPB filed a complaint in the U.S. District Court for the Northern District of Illinois against a regional bank for alleged violations of TILA, the Truth in Savings Act and the Consumer Financial Protection Act relating to the bank’s sales practices. According to the complaint, the bank had instituted a “cross-sell” sales strategy along with sales goals to increase sales to customers. The complaint alleges that, although the bank knew that sales employees “engag[ed] in misconduct in order to meet goals or earn additional compensation,” the bank purportedly “took insufficient steps to properly implement and monitor its program, detect and stop misconduct, and identify and remediate harmed consumers.” The complaint alleges two claims for “abusiveness” in violation of the CFPA, which are the first such allegations since the Bureau issued a policy statement in January regarding its “abusiveness” standard, covered in InfoBytes here. Among other things, the Bureau seeks injunctive relief, monetary relief, disgorgement, and a civil money penalty. After the complaint was filed, the regional bank issued a press release rejecting the charges in the CFPB’s complaint.
FDIC and Fed issue proposed living will guidance for FBOs
On March 6, the FDIC and the Federal Reserve Board issued a joint notice and request for comment on their proposal for updates to resolution plan guidance for certain large foreign banking organizations (FBOs). Pursuant to the Dodd-Frank Act, FBOs must submit resolution plans—also known as “living wills”—which detail the strategic plans for their U.S. operations and subsidiaries for rapid and orderly resolution in bankruptcy in the event that the banks fail or fall under material financial distress. Updates in the proposal focus on the FBO’s derivatives and trading activities and payment, clearing, and settlement activities and are informed by responses from FBOs to the prior 2018 FBO guidance and 2019 domestic guidance. In addition, the proposal contains an appendix of frequently asked questions with answers provided by agency staff. The agencies also seek comments “on objective, quantitative criteria to determine its applicability.” Comments must be received by May 5.
FTC files “piggybacking” charges against credit repair operation
On March 9, the FTC filed a complaint against a Colorado-based credit repair company and its owner for allegedly making false representations to consumers regarding their ability to improve credit scores and increase access to mortgages, personal loans, and other credit products in violation of the Credit Repair Organizations Act, the FTC Act, and the Telemarketing Sales Rule. In its complaint, the FTC alleged that the defendants charged consumers illegal, upfront fees ranging from $325 to $4,000 per tradeline with the deceptive promise that they could “piggyback” on a stranger’s good credit, thereby artificially inflating their own credit score in the process. As the FTC explained, “piggybacking” occurs when a consumer pays to be registered as an “additional authorized user” on a credit card held by an unrelated account holder with positive payment histories. The FTC alleged that the defendants’ practices did not, in fact, significantly improve consumers’ credit scores as promised, and that while the defendants claimed on their website that their piggybacking services were legal, the FTC “has never determined that credit piggybacking is legal” and the practice does not fall within the protections of the Equal Credit Opportunity Act. Under the terms of the proposed settlement, the defendants will be banned from selling access to another consumer’s credit as an authorized user and from collecting advance fees for credit repair services. The defendants will also be required to pay a $6.6 million monetary judgment, which be partially suspended due to the defendants’ inability to pay.
House Financial Services Committee sends letter to trade associations regarding responses to Covid-19
On March 11, the House Financial Services Committee issued a letter to several institutions and trade associations stating its concern for citizens impacted by the pandemic in which it urged them to provide assistance. In doing so, it said that “[i]t would be unfair if innocent borrowers were harmed through negative information on their consumer reports. Once negative information is reported to consumer reporting agencies, these consumers are likely to see a reduction in their credit scores, which may limit their ability to access credit in the future.” The letter asked the entities to provide a written response no later than March 20 to describe what their member companies are doing to respond to Covid-19, including specifics on what accommodations the institutions are offering to affected consumers, including their own employees.
CFPB announces advisory opinion program, updates business conduct bulletin, proposes whistleblower award legislation
On March 6, the CFPB announced three new measures it is undertaking to prevent customer harm, including (i) implementing an advisory opinion program; (ii) updating its bulletin regarding responsible business conduct; and (iii) advancing whistleblower award legislation through engagement with Congress. Details of each measure are as follows:
- Advisory Opinion Program. As previously covered by InfoBytes, the Bureau issued three new innovation policies last September to reduce regulatory uncertainty and improve compliance. Similarly, the Bureau’s March 6 announcement states that the advisory opinion program should “provide clear guidance to assist companies in better understanding their legal and regulatory obligations.” The program directs that requests for advisory opinions should be submitted through the CFPB website. The opinions will then be published in the Federal Register and on its website.
- Responsible Business Conduct Bulletin. The amended bulletin, originally released in 2013, “clarif[ies] [the Bureau’s] approach to responsible business conduct” and emphasizes “the importance of such conduct.” The updated bulletin presents four categories of “responsible conduct” that entities are encouraged to adopt to improve the culture of compliance and that the CFPB will use to evaluate whether credit is warranted in an enforcement investigation or supervisory matter, including (i) self-assessment; (ii) self-reporting; (iii) remediation; and (iv) cooperation.
- Whistleblower Award Legislation. The proposed legislative language would amend Title X of the Dodd-Frank Act and authorize the Bureau to create a whistleblower award program. For individuals that volunteer information leading to a “successful enforcement action,” the program would enable the Bureau to provide a monetary award of between 10 to 30 percent of the collected penalty amount, up to $10 million.
OCC proposes licensing policy changes
On March 5, the OCC announced a Notice of Proposed Rulemaking (NPR) and request for comment on proposed amendments that would update and clarify certain licensing policies and procedures and would revise its rules in 12 CFR part 5 to eliminate unnecessary requirements. Proposed changes include, among other things (i) allowing national and federal savings associations to “follow the procedures applicable to state banks or state savings associations…for certain business combinations”; (ii) expanding operating subsidiary notice and expedited review processes to include activities that are substantively the same as activities previously approved by the OCC; (iii) allowing “non-controlling investments and pass-through investments” in non-OCC supervised entities; (iv) creating procedures for citizenship and residency waivers for national bank directors; (v) redefining “troubled condition” in relation to director and senior executive officer changes; and (vi) adding chief risk officer to the list of positions for which a bank in troubled condition must provide notice when making a personnel change. Comments must be received by May 4.
FTC reaches settlements with affiliate marketers
On March 5, the FTC announced settlements with four groups of affiliate marketers that, among other things, allegedly violated the FTC Act by using deceptive marketing tactics and earnings claims to persuade consumers to pay thousands of dollars each for business coaching and investment “mentoring” services. The FTC alleged in the first complaint that certain defendants sold membership packages for an online business coaching scheme, and then, when the business coaching scheme went out of business, created their own branded programs and systems that claimed consumers would be able to start their own online marketing businesses and earn substantial income. The defendants also allegedly encouraged consumers to open multiple credit lines to finance the purchases of these programs. The FTC claimed that the defendants “used straw signers and shell companies and provided banks and payment processors with ‘dummy’ websites to evade scrutiny by bank underwriters and obtain multiple merchant accounts to process credit card payments from consumers.” According to the FTC’s second complaint, the other defendants made deceptive earnings claims in order to recruit consumers into the now-defunct business coaching scheme and earned millions of dollars as a reward. In both complaints, the FTC claimed that most consumers who purchased the products suffered large losses and mounting debts.
Under the terms of the settlements, each of the defendants is permanently banned from selling or marketing any business coaching programs or money-making methods, and must pay judgments of (i) $3.35 million to be paid in full for potential consumer redress (order here); and (ii) monetary judgments totaling $38.1 million, which will be partially suspended due to the defendants’ inability to pay (orders here, here, and here).
SEC’s disgorgement authority examined during Supreme Court oral arguments
On March 3, the U.S. Supreme Court heard oral arguments in Liu v. SEC. As previously covered by InfoBytes, the principal question at issue in this case is whether the SEC’s authority to seek “equitable relief” permits it to seek and obtain disgorgement orders in federal court. Petitioners—a couple found to have defrauded investors and ordered to disgorge $26.7 million by a California federal court—argued that disgorgement is not a form of “equitable relief” available to the SEC. Respondent SEC contended that Congress enacted several statutes that anticipated the SEC’s use of disgorgement, including the Securities Exchange Act and the Sarbanes-Oxley Act, and that historically, disgorgement has been used as an equitable remedy to deny wrongdoers of their ill-gotten gains.
Counsel for the petitioners made three primary arguments before the Court: (i) the SEC is only authorized to use the powers conferred upon it by Congress and disgorgement is not one of them; (ii) though the statute allows the SEC to seek equitable relief, disgorgement as the SEC has used it is akin to a penalty and “penalties are not equitable relief.”; and (iii) “Congressional silence…does not give an agency any authority to act, much less the authority to punish” in a manner that exceeds its existing statutory authority
Petitioners’ counsel fielded questions from Justices Ginsburg, Alito, and others that probed the limits of the petitioners’ position. The justices asked, among other things, whether disgorgement could ever be ordered by the SEC; whether it could be ordered if the profits are paid out to injured parties; and whether the Court’s holding in Kokesh v SEC, that disgorgement as a penalty should be controlling only when determining the applicable statute of limitations, which was the issue presented in that case. Petitioner’s counsel stated that “the rule should be, if you’re giving the money back to the investors, then [the SEC] can take it and not otherwise, because…then it’s just a punishment.”
Respondent’s counsel argued that the Court’s ruling in Kokesh was limited to determining the applicability of the statute of limitations. He also urged that “courts should continue to order disgorgement but compute it in accordance with traditional general equitable rules, not in accordance with any SEC-specific formula.” In response to a question from Justice Sotomayor regarding the proper recipient of disgorged funds, respondent’s counsel said that if the defrauded investors can be located, the SEC’s practice it to return disgorgement amounts to them. However, he noted that sometimes, such as in FCPA actions, there are no obvious victims to whom the money could be returned. Justice Kavanaugh asked if it would be proper for the Court to insist that the amounts received from a disgorgement order be returned to defrauded investors if at all possible. Respondent’s counsel conceded this would be within the Court’s authority, but added that the “core purposes of disgorgement are to prevent the wrongdoer from profiting from its own wrong and to deter future violations, and disgorgement can serve those traditional purposes, regardless of where the money ends up.”
On rebuttal, petitioner’s counsel asserted that “the scope of disgorgement has grown over time in part because it is not grounded in statutory text.” He contended that “there is no precedent for using an accounting to compel funds to be paid to the Treasury.” Justice Ginsburg pressed petitioner’s counsel regarding statutes that appear to be predicated on disgorgement being available. Petitioner’s counsel suggested those statutes might show that Congress was aware that courts were ordering disgorgement, but that was “not an authorization, and authorization is what’s needed…to inflict a penalty.” He closed by asking the Court to reverse the case, saying that the petitioners were already responsible to pay their entire gains from the fraud, and “anything more would go beyond the equitable principle that no individual should be permitted to profit from his or her own wrong.”