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CFPB Director urges Congress to increase deposit insurance limits following a bank failure
On November 18, CFPB Director Rohit Chopra released a statement in connection with an FDIC Board of Directors closed meeting to discuss deposit insurance reform following the failure of a small community bank in Oklahoma. The bank’s collapse was allegedly due to fraudulent misconduct, and according to Chopra, the failure left some local depositors facing losses as their account balances exceeded federal deposit insurance limits. Chopra noted a disparity in deposit insurance protection available for depositors at small banks compared to the protections offered to depositors of larger institutions (which likely serve larger firms) following the banking issues from March 2023.
Chopra called for Congress to remove or dramatically increase the limits on federal deposit insurance for payroll and other non-interest bearing operating accounts. He argued that the current system advantages large banks and their clients unfairly by effectively granting them “free deposit insurance” that is not available to depositors of smaller banks.
FCC warns gateway provider not to transmit “illegal” robocalls
On October 18, the FCC issued a public notice to all US-based voice service providers regarding a cease and desist letter that it had sent to a “gateway” telecommunications provider instructing it to halt transmission of apparently unlawful foreign robocalls in the US. The FCC stated that the calls impersonate financial institutions and deceive recipients into providing sensitive information.
The FCC warned the gateway provider that it is unlawful to call cell phone numbers using prerecorded messages without prior express consent or an emergency purpose. It instructed the gateway provider to mitigate the illegal traffic within 48 hours or potentially face permissive and mandatory blocking of all its traffic and removal from the Robocall Mitigation Database, which would compel all intermediate and terminating voice service providers to cease accepting the gateway provider’s calls. In parallel, the FCC instructed US-based voice service providers that if the gateway provider failed to mitigate the apparently illegal traffic in a timely manner, voice service providers may block voice calls or cease to accept traffic from the gateway provider, without liability.
The FCC took these actions after the gateway provider failed to provide evidence of consent for these calls or dispute their illegality. The cease and desist letter detailed five specific calls transmitted by the gateway provider that contained prerecorded messages claiming to be from bank customer support centers and warning of fraudulent transactions. The FCC emphasized that such calls exploit consumer fears and undermine legitimate financial institutions’ efforts to protect their customers.
California amends its criminal code to include mortgage fraud and consumer protections
On September 24, the Governor of California approved AB 3108 (the “Act”), amending the Financial Code and Penal Code to address mortgage fraud and consumer protections. The Act prohibits knowingly filing any document with a county recorder that contains material misstatements, misrepresentations or omissions. It expands the definition of mortgage fraud to include actions by mortgage brokers who knowingly allow borrowers to sign documents with misleading loan terms. Additionally, the Act mandates that mortgage brokers ensure borrowers can repay their loans based on their income and financial resources, other than the equity in their homes.
The Act also amends the Penal Code under Section 532f, specifying that mortgage fraud includes making deliberate misrepresentations during the mortgage lending process. It criminalizes instructing borrowers to sign personal loan documents under the guise of business loans. In addition, the Act introduces a consumer counseling notice requirement for loans covered under the Act. Specifically, this notice must inform borrowers that they could lose their homes if they fail to meet their loan obligations and advise them to consult with a qualified independent credit counselor.
Senate Democrats request bitcoin ATM fraud information
On September 11, Senate Democrats sent a letter addressed to ten of the largest CEOs of bitcoin ATMs calling for “immediate action” to address reports that the ATMs may be contributing to financial fraud against elderly Americans. The senators’ letter emphasized the growing prevalence of ATMs and their supposed association with criminal activity because of their anonymity and irreversibility of cryptocurrency transactions. The letter also cited a 2021 FBI Public Service Announcement detailing how scammers exploited ATMs by directing victims to withdraw money and deposited it into ATMs using QR codes linked to the scammers’ cryptocurrency wallets.
To gain a clearer understanding of the measures that these companies are taking to address this issue, the senators have requested responses to questions by October 4. These questions cover topics such as: (i) the display of fraud warnings on BTMs; (ii) identification requirements for transactions; (iii) transaction size limits; (iv) daily deposit limits; (v) measures to reverse fraudulent transactions; (vi) fraud insurance; and (vii) customer support for defrauded individuals.
SEC charges company for defrauding customers for $6M via false IPO
On August 26, the SEC filed a complaint and demand for a jury trial against a South Dakota corporation, its China-based investment adviser, and their CEO for allegedly defrauding investors out of millions of dollars in violation of several securities laws. The SEC alleges the defendants made false statements about guaranteed returns, the safety of client investments, the investment adviser’s business relationships, and the status of an IPO — which never occurred. According to the complaint, the defendants stopped communicating with investors and the website used to access funds was taken down.
The SEC seeks several forms of relief in its complaint, including a permanent injunction preventing the defendants from continuing their alleged fraudulent activities, disgorgement of funds, and civil penalties. Additionally, the SEC requested that the CEO be barred from serving as an officer or director of a public company.
SEC launches new council to coordinate securities enforcement
On July 19, the SEC announced the creation of a new council to combat securities fraud across federal, state, and local agencies. The new council, named the Interagency Securities Council, will hold quarterly meetings to discuss scams, trends, and mitigation strategies to improve collaboration among agencies, share information, and provide resources to officials who may not have experience with securities law.
The council will include representatives from over 100 departments and agencies, including the DOJ, state attorneys general offices, and local police departments. It will also serve as a platform for sharing information and best practices among law enforcement agencies. The SEC will lead the council’s efforts and stated that the council will enhance its ability to protect investors by fostering stronger partnerships with other law enforcement agencies and improving information sharing.
District Court grants FTC’s TRO and asset freeze against debt company
Recently, the U.S. District Court for the Middle District of Florida granted an order brought by the FTC against a debt relief company for violations of several statutes. The court agreed that the defendants have: (i) made deceptive representations in the marketing of student loan debt relief services; (ii) made false advertisements by posting fabricated reviews; (iii) provided documents in a language other than the one defendant used to offer debt relief services; and (iv) misrepresented an affiliation with the U.S. Department of Education. The allegations violated Section 5(a) of the FTC Act and three violations of the FTC’s Telemarketing Sales Rule (TSR), a violation of Section 521 of GLBA. The court issued a temporary restraining order and an asset freeze.
There were four components to the court’s order. Regarding the first component, the defendants were prohibited from (i) misrepresenting any facts, (ii) misrepresenting any endorsements, (iii) failing to provide documents in the same language as the primary language used by the purchaser, (iv) providing debt relief services, and (v) initiating certain outbound telephone calls. Second, the court prohibited the release of customer information, including selling or transferring personal customer information. Third, the court issued an asset freeze, forbidding asset transfer or liquidation. Fourth, the court provided for certain duties and obligations of asset holders and third parties who received notice of the court’s order.
New York Attorney General issues judgment against crypto-asset firm
On June 14, the New York Attorney General, Letitia James, announced a stipulation and consent to judgment against a crypto-asset company for allegedly misleading investors on the risks of its program. Under the order, the defendants agreed to distribute all digital assets through its platform as restitution on an in-kind, “coin-for-coin” basis, with distributions to be made in the same amount and types of crypto-assets loaned by the investors. The stipulation followed a May 20 settlement with the company worth $2 billion.
The defendants were permanently restrained and enjoined from engaging in any conduct under the Martin Act and Executive Law § 63(12), as well as offering a cryptocurrency lending product in New York State. However, the order specified that if future state or federal legislation permitted crypto lending in the state, the defendant may seek permission from the New York AG to lift the ban. The defendants further agreed to fully cooperate with the New York AG as it continued to investigate the matter. The order also required the defendants to disclose to consumers within thirty days of its execution that the defendant is not registered with the SEC or the CFTC, along with detailing risk factors, among other disclosure requirements. The defendants neither admitted nor denied the allegations in the complaint, aside from admitting to personal and subject matter jurisdiction.
New York Attorney General sues crypto companies, alleging billion-dollar pyramid scheme targeting immigrant communities
On June 6, New York Attorney General Letitia James announced legal actions against two companies (with the same founders) for allegedly participating in illegal pyramid schemes. The complaint alleged these schemes defrauded hundreds of thousands of investors, including more than 11,000 New Yorkers, out of more than a billion dollars in crypto-assets. The AG alleged that the companies’ activities specifically preyed upon immigrant communities, notably New Yorkers of Haitian descent, using prayer groups and digital communication channels like social media to make false promises of high returns.
According to the complaint, one of the companies offered fraudulent returns from mining cryptocurrency, but never delivered on the promised profits and bonuses, eventually collapsing in 2019. The complaint then alleged the promoters of the collapsed company founded a new company that also promised high returns and bonuses. According to the complaint, from 2019 to 2023, investors deposited more than $1 billion worth of cryptocurrency into the new company, yet a minuscule fraction (less than $26 million) was actually used for trading on the company’s platform before its collapse in May 2023.
The Attorney General’s legal action will seek a permanent ban on the company and the associated individuals from conducting any securities or commodities business within New York and disgorgement and damages for the victims.
Texas issues a cease and desist order against a securities firm
On April 22, the Securities Commission of the State of Texas issued an Emergency Cease and Desist Order pursuant to the Texas Securities Act against respondents for allegedly offering investments in a digital gold vault that “purportedly secured physical gold and generates passive income using fintech and blockchain technology,” and are therefore subject to the Securities Act. The Securities Commission alleged that the investments were being “illegally, deceptively and fraudulently offered in Texas” and issued the Emergency Cease and Desist Order to “stop the scheme and protect the public from immediate and irreparable harm.” Respondents were ordered to immediately cease and desist from: (i) offering any security in Texas until the security is properly registered or exempt from registration; (ii) acting as securities dealers, agents, investment advisors, or investment advisor representatives in Texas until they are registered with the Securities Commissioner or exempt from registration; (ii) engaging in any fraud in connection with the offer for sale of any security in Texas; and (iv) offering securities in Texas through an offer containing a statement that is materially misleading or otherwise likely to deceive the public.