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Former Guatemalan Soccer Executive and Judge Sentenced in Investigation
On October 25, Judge Chen of the U.S. District Court for the E.D.N.Y. sentenced the former general secretary of Guatemala’s soccer federation and a former judge to eight months in prison and ordered restitution of $415,000 and forfeiture of $175,000. His sentence comes after a guilty plea to wire fraud and conspiracy in June 2017. He was arrested in 2015 as part of the U.S. government’s investigation into corruption in a soccer association. His sentencing marks the first individual sentenced among a group of more than 40 individuals who have been indicted or pleaded guilty since 2015.
This sentencing comes as part of the U.S. government’s ongoing investigation into corruption in international soccer which has been ongoing. Previous FCPA Scorecard coverage of the investigation can be found here.
California Bans Use of Arbitration Clauses in Fraudulently Created Financial Contracts
On October 4, Governor Jerry Brown signed into law amendments to the state’s code of civil procedure that essentially eliminates the use of forced arbitration in cases of fraudulently created accounts. SB 33 prevents state or federally chartered depository institutions from enforcing arbitration agreements in existing consumer contracts to compel California customers to arbitrate disputes regarding other contracts created “fraudulently without the consumer’s consent or by unlawfully using the consumer’s personal identifying information.”
The law comes at a time when, as previously discussed in InfoBytes, several financial industry groups issued a joint lawsuit challenging the Bureau’s arbitration rule, which prohibits the use of mandatory pre-dispute arbitration clauses in certain contracts for consumer financial products and services. The amendments take effect January 1, 2018.
CFTC Files Anti-Fraud Enforcement Action Against New York-Based Corporation Concerning Bitcoin Investments
On September 21, the U.S. Commodity Futures Trading Commission (CFTC) filed a complaint in the U.S. District Court for the Southern District of New York against a New York-based corporation and its CEO (defendants) for allegedly engaging in fraudulent acts and practices in violation of the Commodity Exchange Act and CFTC Regulations by issuing false account statements in connection with Bitcoin investment solicitations. According to the complaint, the “Bitcoin Ponzi scheme” solicited more than $600,000 from approximately 80 customers to be placed in a pooled fund, executed by the defendants’ computer program called “Jigsaw,” which traded the virtual currency. The CFTC alleges that defendants’ strategy was fake and the “purported performance reports” were false in that they created the appearance of positive Bitcoin trading increases, but the gains were “illusory.” The CFTC further asserts that the “payouts of supposed profits to [pool participants] in actuality consisted of other customers’ misappropriated funds.” In addition, the CFTC alleges that defendants orchestrated a “fake computer ‘hack’” to conceal the scheme. The suit seeks, among other things, disgorgement of profits, civil monetary penalties, restitution, and a ban on commodities trading for the defendants.
House Financial Services Committee Issues Second Interim Report on Bureau’s Role in Fraudulent Accounts Scandal Investigation
On September 19, the Majority Committee Staff of the House Financial Services Committee (Committee) released a second interim report and supporting documents on the investigation of the role the CFPB played in detecting and remedying a major national bank’s practice of opening unauthorized bank accounts. As previously covered in InfoBytes, the first interim report, issued June 6, accused Director Richard Cordray, among other things, of failing to cooperate with the Committee’s “comprehensive investigation.” The second interim report claims the CFPB and Director Cordray failed to comply with the Committee’s repeated requests for documents related to the investigation into the bank’s practices, never conducted its own independent investigation (but, instead, “relied primarily, if not exclusively,” on a third party report), and withheld a crucial Recommendation Memorandum from the Committee for over a year that disclosed analysis of the legal and factual components of the Bureau’s investigation, as well as an evaluation of whether to enter into a settlement. The Committee’s accusations also include claims that Director Cordray allegedly misled Congress about the agency's investigation into the bank’s illegal sales practices and may have “rushed” a settlement with the bank, which resulted in a $100 million fine when it was potentially liable for a statutory civil monetary penalty exceeding $10 billion. Chairman Jeb Hensarling (R-Tex.) said in a press release that “[t]he premature suspension of its investigation means that the CFPB also potentially lost the opportunity to discover recently revealed instances of further consumer harm.”
China Bans Commercial Trading of Initial Coin Offerings
On September 4, the People’s Bank of China and several Chinese regulators reportedly jointly announced plans to ban the commercial trading of bitcoin and other cryptocurrencies. This measure, announced in a statement issued by the Ministry of Industry and Information Technology of the People’s Republic of China, will outlaw all fundraising Initial Coin Offerings (ICOs), and declares ICOs and the sale of virtual currency as unauthorized illegal financing behavior, suspected of illegal sale tokens, illegal securities issuance, and illegal fund-raising, including financial fraud, pyramid schemes and other criminal activities. The statement reportedly stresses that virtual currency in China will not be recognized as a legal form of currency and must not be circulated as currency when financing activities. Furthermore, going forward, all cryptocurrency trading platforms are prohibited in China from acting as central counterparties to facilitate the exchange of tokens for virtual currencies. Additionally, one of China’s bitcoin exchanges reportedly published an announcement on its website saying it will close its bitcoin currency trading platform in the country on September 30.
The SEC recently released an investor bulletin about ICO investment risks and offered fraud prevention guidance. (See previous InfoBytes summary here.) ICO sales are often used to raise capital, and the SEC is monitoring companies who use this method for fraudulent purposes.
FTC Files Complaint Against Operators of Online Discount Clubs and Payment Processors for Allegedly Debiting More Than $40 Million from Consumers Without Their Consent
On August 16, the FTC issued a press release announcing charges against the operators of a group of marketing entities and payment processors (defendants) for allegedly violating numerous laws when they enrolled consumers into online discount clubs and debited more than $40 million from consumers’ bank accounts for membership without their authorization. According to the August 15 complaint, several of the defendants promoted their respective online discount club through websites and telemarking calls to offer services to consumers in need of payday, cash advance, or installment loans. Other defendants then used “Remotely Created Payment Orders” and “Remotely Created Checks” without the consumers’ authorization to debit their bank accounts for the initial application fee as well as automatically-recurring monthly fees. Notably, during the period when one of the discount clubs was launched, several of the defendants were facing contempt proceedings for allegedly violating a 2008 stipulated final order with the FTC in another deceptive debiting scam. The defendants purportedly, among other things, (i) engaged in unfair billing practices; (ii) made false, misleading, and deceptive statements when they represented, “directly or indirectly,” to consumers seeking refunds that they were not entitled to a refund because the entities possessed personal and financial information, which served to confirm that the consumers agreed to “purchase the products or services” or authorize money to be debited from their bank accounts; and (iii) provided “substantial assistance or support” in the way of payment processing services while knowing—or “consciously avoiding knowing”—that the actions being supported were in violation of the Telemarketing Sales Rule. The FTC also claims that hundreds of thousands of consumers called to cancel their memberships and request refunds, with thousands more informing their banks about the unauthorized debits. Additionally, more than 99.5 percent of consumers enrolled in a discount clubs apparently never accessed a single coupon—“the only service for which they had supposedly paid.”
FTC Files Complaint Against Independent Sales Organization and Sales Agents for Alleged Credit Card Laundering Charges
On August 7, the FTC issued a press release announcing charges against 12 defendants, comprised of an independent sales organization (ISO), sales agents, payment processors, and identified principals, for allegedly violating the Federal Trade Commission Act and the Telemarketing Sales Rule (TSR) by laundering credit card transactions on behalf of a “telemarketing scam” operation (operation) through fictitious merchant accounts. According to a July 28 complaint filed by the FTC, the defendants engaged in a scheme with the operation to process credit card charges through merchant accounts set up by the operation under fictitious company names instead of processing charges through a single merchant account under the operation’s name. This type of practice, the FTC claims, is known as “credit card laundering” or “factoring” and violates the TSR. The defendants purportedly (i) underwrote and approved the operation’s fictitious companies; (ii) set up merchant accounts with its acquirer for the fictitious companies; (iii) used sales agents to market processing services to merchants; (iv) processed nearly $6 million through credit card networks; and (v) transferred sales revenue from the transactions to companies controlled by the defendants. The FTC seeks “permanent injunctive relief, recession or reformation of contracts, restitution, the refund of monies paid, disgorgement of ill-gotten moneys, and other equitable relief.”
Notably, in 2013, the FTC accused the same “telemarketing scam” operation of allegedly promoting “worthless business opportunities” to consumers and falsely promising that they would earn thousands of dollars. A 2015 summary judgement resulted in over $7 million in consumer injury. (See previous InfoBytes coverage here.)
Enforcement Actions Announced by CFTC for Fraud, Registration Violations in Florida
On July 11, the CFTC announced that the U.S. District Court for the Middle District of Florida entered an order for final judgment by default against two individuals and their company for fraudulently soliciting investors in a commodity pool, misappropriating pool participants’ funds, and committing futures fraud, among other things. According to the CFTC complaint filed on January 26 of 2017, the defendants fraudulently marketed their company to prospective participants, materially misrepresented their past trading success using fabricated high rates of return, provided account statements to investors showing fictitious increases in value, and failed to disclose defendant’s previous permanent injunction on trading.
In addition to imposing a permanent injunction on trading and registration, the Court ordered defendants to pay civil monetary penalties of almost $1.85 million as well as restitution of $459,613. An appointed monitor will oversee the defendants’ payment of restitution. The Court also required one of the defendants to affirmatively disclose his violations in any future marketing materials, presentations, speeches or websites. The required disclosure names his violations, the amount of restitution and civil penalties he must pay, along with the case numbers of his CFTC actions.
Both of the defendants recently pleaded guilty to related criminal charges. One defendant was sentenced to one year and one day in prison in connection with her guilty plea to one count of obstruction of justice, and the other defendant is awaiting sentencing in connection with his guilty plea to one count of wire fraud.
Hawaii Enacts Law to Prohibit Release of Credit Information of Children, Others
On July 5, Hawaii Governor David Y. Igge signed into law H.B. 651, which was devised to protect children and certain other individuals from identity theft and credit fraud. The law applies to “protected consumers,” defined as minors under the age of 16 years, incapacitated persons, and individuals with appointed guardians or conservators.
Based on research suggesting that minors may be targeted for identity theft due to their clean credit reports, the legislation permits representatives of protected consumers to place and remove security freezes on protected consumers’ credit files. Because one impediment to requesting such a freeze is the lack of an existing credit file, the legislation also requires consumer credit reporting agencies (CRAs) to create records for the protected consumers. A CRA may not release the protected person’s file when it is in a security freeze until the representative requests a removal of the freeze. In order to request a security freeze or a freeze removal, a protected person’s representative must provide proper identification and evidence of authority to the CRA. Additionally, with a few exceptions, the CRA may charge a fee not to exceed five dollars for each freeze or removal of a freeze to a protected person’s credit file.
The law will go into effect on January 1, 2018.
Former DOJ Fraud Compliance Counsel Resigns, Criticizes President
Hui Chen, formerly Compliance Counsel Expert in the DOJ Fraud Section, is speaking out about the reasons for her May 2017 resignation, which she has attributed to unacceptable conduct by the President and his Administration. Chen was hired by DOJ in November 2015 after serving as Global Head for Anti-Bribery and Corruption and Standard Chartered Bank. She was the first lawyer to hold this position at the DOJ.
In a June 25 LinkedIn post, Chen unleashed several criticisms against the President, including regarding lawsuits, conflicts of interest, and ongoing investigations. She said that she would “not tolerate” those conducts in a company, but “worked under an administration that engaged in exactly those conduct.” Chen further elaborated on her criticisms in a July 4, 2017 interview with CNN, stating that the firing of FBI James Comey tipped the scales in favor of resignation.
The DOJ had previously posted an opening to hire a new Compliance Counsel, but that listing has now expired. It is not clear if anyone has been hired to replace Ms. Chen.