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District court rules U.S. securities law may cover initial coin offering in criminal case
On September 11, the U.S. District Court for the Eastern District of New York issued a ruling that the U.S. government can proceed with a case for purposes of federal criminal law against a New York-based businessman who allegedly made “materially false and fraudulent representations and omissions” connected to virtual currencies/digital tokens backed by investments in real estate and diamonds sold through associated initial coin offerings (ICOs). The defendant—who was charged with conspiracy and two counts of securities fraud for his role in allegedly defrauding investors in two ICOs—claimed that the ICOs at issue were not securities but rather currencies, and that U.S. securities law was unconstitutionally vague as applied to ICOs. However, the U.S. government asserted that the investments made in the tokens were “investment contracts” and thereby “securities” as defined by the Securities Exchange Act. The U.S. government further argued that the jury should apply the central test used by the U.S. Supreme Court in SEC v. W.J. Howey Co. to determine if a financial instrument “constitutes an ‘investment contract’ under the federal securities laws.” The judge commented that “simply labeling an investment opportunity as ‘virtual currency’ or ‘cryptocurrency’ does not transform an investment contract—a security—into a currency.” Moreover, while the judge cautioned that it was too early to determine whether the virtual currencies sold in the ICOs were covered by U.S. securities law, he concluded that a “reasonable jury” may find that the allegations in the indictment support such a finding.
CFTC wins $1.1 million judgment in cryptocurrency fraud action
On August 23, the U.S. District Court for the Eastern District of New York entered final judgment in favor of the Commodity Futures Trading Commission (CFTC) in its suit against a cryptocurrency trading advice company and its owner (defendants) for allegedly misappropriating investor money through a cryptocurrency trading scam. As previously covered by InfoBytes in March, the court granted the CFTC’s request for a preliminary injunction, holding that the CFTC has the authority to regulate virtual currency as a “commodity” within the meaning of the Commodity Exchange Act and that the CFTC has jurisdiction to pursue fraudulent activities involving virtual currency even if the fraud does not directly involve the sale of futures or derivative contracts. The final judgment orders the defendants to pay over $1.1 million in restitution and civil money penalties and permanently enjoins them from engaging in future activities related to commodity interests and virtual currencies.
Fannie Mae issues updated mortgage industry alert in California
Recently, Fannie Mae’s Mortgage Fraud Program issued an industry alert to mortgage companies operating in California regarding the use of false employment information by mortgage loan applicants. (See previous coverage in InfoBytes here). Fannie Mae extended its alert to Northern California and identified additional employers whose existence could not be verified by Fannie Mae. The alert provides “red flags” to help lenders and originators identify potential mortgage fraud when reviewing employment information.
New Jersey state appeals court reverses $1.8 million ruling against bank over flood damage
On July 30, a New Jersey state appeals court reversed a lower court’s judgment awarding consumers over $1.8 million in connection with allegations that a national bank’s predecessor violated the state’s Consumer Fraud Act (CFA) by misrepresenting information to the town’s planning board in order to secure approvals for a housing development. Specifically, the plaintiffs had argued that, because of misrepresentations to the town’s planning board, the construction of a housing development was approved and resulted in the flooding of their home. According to the plaintiffs, the national bank’s predecessor was aware that their housing section could be susceptible to groundwater runoff but concealed the information from the planning board, and that had the planning board been aware of the information, the board would have denied the plans and the plaintiffs’ home would not have flooded. A jury agreed, and the trial court ultimately awarded the plaintiffs almost $50,000 in treble damages under the CFA claim, and $1.8 million in fees and expenses, along with smaller amounts of damages for nuisance and trespass claims.
On appeal, the panel reversed the damages for the CFA claims, including the fee award, holding that “there is a complete lack of proof of a causal connection” between the predecessor’s misrepresentations and the plaintiffs’ decision to purchase their residence. The court rejected the plaintiffs’ arguments that had the misrepresentations not been made, the construction of the development would have been denied and their house would not have flooded. The court concluded the argument was “speculative and attenuated” and there was no proof the development “would not have been built by another developer.”
FTC testifies before House subcommittees about combating consumer fraud
On July 26, the Director of the FTC’s Bureau of Consumer Protection, Andrew Smith, testified before subcommittees of the U.S. House Committee on Oversight and Government Reform regarding the FTC’s program to combat consumer fraud. The prepared testimony discusses the FTC’s anti-fraud program and highlights the agency’s enforcement actions against illicit companies that pose as government agents, such as the IRS, to convince consumers and small businesses to send them money. The FTC touts the steps taken to spur development of technological solutions to unlawful robocalls, including call-blocking and call-filtering products. The testimony also focuses on the FTC’s efforts to curb payment processors from assisting fraudulent actors in violation of the FTC Act. The FTC notes that the Commission has brought 25 actions against payment processors that failed to comply with requirements to ensure their systems were not being used to process fraudulent merchant transactions. The FTC emphasized that while the “overwhelming majority” of payment processors abide by the law, when certain processors do not, they cause “significant economic harm to consumers and legitimate businesses.”
New Jersey appeals court says statute of limitations does not apply in allegedly fraudulent mortgage application
On July 13, the Superior Court of New Jersey Appellate Division reversed a trial court’s decision, ruling that a deceased homeowner’s family (defendants) had provided sufficient evidence to show that a division of a national bank (lender) had knowingly engaged in predatory lending practices when it approved a fraudulent mortgage application in violation of the New Jersey Consumer Fraud Act (Act). According to the opinion, in 2007 when the now deceased homeowner purchased a house, the lender may have been complicit in creating and approving a fraudulent loan application that, among other things, stated falsely that (i) the homeowner was a small business owner with a monthly income of $30,000 rather than $1,500, and (ii) the down payment came from the homeowner, when it supposedly came from a second mortgage offered to him from the same lender. The homeowner defaulted on payments in 2010 and passed away in 2012. In 2015, the defendants responded to a foreclosure complaint filed by the bank, alleging that the Act barred plaintiff’s claims due to the lender’s fraudulent actions, including the aforementioned material misrepresentations. However, the trial court granted summary judgment to the lender on the grounds that claims of fraud brought by the defendants were “untenable” and outside the statute of limitations. The appellate court disagreed and remanded to allow for discovery, ruling that the defendants were permitted to introduce evidence of fraud in defense of the homeowner’s estate even through the statute of limitations had expired. “The doctrine of equitable recoupment permits a defendant to assert an otherwise stale claim and avoid the statute of limitations, where the defendant uses the claim as a shield instead of a sword,” the appellate court stated.
DOJ announces task force on market integrity and consumer fraud
On July 11, the Deputy Attorney General, Rod Rosenstein, announced the establishment of a new task force on market integrity and consumer fraud pursuant to an Executive Order (EO) issued by President Trump on the same day. The task force, led by Rosenstein, will provide guidance for the investigation and prosecution of cases involving fraud on the government, financial markets, and consumers. The announcement lists a wide range of fraudulent activities, including (i) cyber-fraud; (ii) fraud targeting older Americans and service members; (iii) securities and commodities fraud; and (iv) corporate fraud affecting the general public, such as money laundering and other financial crimes. Rosenstein emphasized that the task force will work to achieve “more effective and efficient outcomes” to identify and stop fraud “on a wider scale than any one agency acting alone.”
While the EO requests senior officials from numerous federal agencies be invited by the DOJ to participate in the task force, Rosenstein was joined by acting Director of the CFPB, Mick Mulvaney; Chairman of the SEC, Jay Clayton; and Chairman of the FTC, Joe Simons in the announcement. Mulvaney stated, “[t]he Bureau takes its mandate to enforce the law seriously, and the Bureau will continue to apply the law to achieve this end of combatting fraud against Americans…. This task force is an example of the growing cooperation of the Bureau’s work with other federal and state authorities to combat a multitude of bad actors out there today.”
Fannie Mae issues industry alert concerning borrower employment scheme in Southern California
On May 24, Fannie Mae’s Mortgage Fraud Program issued an industry alert to mortgage lenders in Los Angeles County identifying 34 entities and businesses listed as employers on loan applications, the existence of which could not be confirmed by Fannie Mae. In the event one of the identified companies is provided as a borrower’s place of employment, Fannie Mae warns lenders to exercise caution when reviewing the entire loan file and “take appropriate steps to prevent the institution from being the victim of fraud.” The alert provides additional fraud detection and prevention steps, including encouraging awareness of third-party originators/brokers, educating staff, and reporting suspicious activity.
SEC obtains court order halting allegedly fraudulent initial coin offering
On May 29, the SEC announced it obtained a court order halting an alleged fraud involving an initial coin offering (ICO) that raised as much as $21 million from investors in the U.S. and overseas. In addition, the court approved an emergency asset freeze and appointed a receiver for the firm allegedly responsible for the scheme, the SEC said in its press release. According to the SEC’s complaint filed May 22 in California federal court, the firm’s president and one of two firms he controls allegedly violated the antifraud and registration provisions of the federal securities laws, by, among other things, (i) making misleading statements to investors about the nature of business relationships with the Federal Reserve and nearly 30 well-known companies, and (ii) including “fabricated, misleading, and/or unauthorized” testimonials from corporate customers on the firm’s website designed to “establish a presence and seeming expertise.” A second firm controlled by the defendant has also been charged with violating antifraud provisions. Among other things, the SEC seeks permanent injunctions, the return of profits associated with the fraudulent activity, plus interest and penalties, and a ban prohibiting the president from participating in ICOs in the future.
FTC issues annual summary of consumer complaints
On March 1, the FTC issued its annual summary on consumer complaints received by the agency over the past year, highlighting trends in various categories such as fraud and identity theft. The report, Consumer Sentinel Network Data Book 2017 (2017 Data Book), provides category breakdowns and national and state specific data extrapolated from the Consumer Sentinel Network (CSN)—a secure online database of millions of consumer complaints available only to law enforcement agencies. In compiling the 2017 Data Book, CSN collected and analyzed nearly 2.7 million consumer complaints—a decrease from the nearly 3 million complaints it received in 2016. However, total loses reported for 2017 increased by $63 million to nearly $905 million in total losses due to fraud.
The 2017 Data Book provides a breakdown of complaints sorted into 30 top categories. Highlights include the following:
- States. Florida, Georgia, and Nevada were the top states for fraud complaints, while Michigan, Florida, and California were the top states for identity theft complaints.
- Top categories. While there were 1.1 million fraud reports filed overall (42.5 percent of all reports), debt collection remained the top complaint in 2017, amounting to 22.7 percent of all complaints. Identity theft (13.8 percent) and imposter scams (13 percent) rounded out the top three. “While we received fewer overall complaints in 2017, consumers reported losing more money to fraud than they did the year before,” said Tom Pahl, Acting Director of the FTC’s Bureau of Consumer Protection in a press release issued by the agency. “This underscores the importance of the FTC’s work in educating consumers and cracking down on the scammers who try to take their money.” Rounding out the top ten consumer complaints for 2017 were: telephone and mobile services; banks and lenders; prizes, sweepstakes, and lotteries; shop-at-home and catalog sales; credit bureaus, information furnishers, and report users, auto related complaints, and television and electronic media.
- Military. Fraud and identify theft were the largest category of complaints from military consumers—the majority reporting imposter scams, credit card fraud, and bank fraud. Military retirees and veterans submitted the highest number of reports.
- Fraud losses by age. The 2017 Data Book includes data broken out by age groups for the first time. Younger consumers aged 20-29 reported losing money to fraud more than consumers over age 70, but for older consumers who reported losing money, the median amount lost was greater.
Additional information about the 2017 Data Book is available here.