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On January 21, the SEC announced that it filed suit in the U.S. District Court for the Eastern District of New York against a blockchain company and the company’s founder (defendants) for allegedly “conducting a fraudulent and unregistered initial coin offering (ICO).” The SEC alleges, among other things, that from 2017 until 2018, the defendants raised $600,000 from nearly 200 investors through promoting an ICO of digital asset securities called “OPP Tokens,” using material misrepresentations to create the false impression that the defendants’ platform was creating notable growth in the company. The defendants marketed the tokens by making misstatements to potential investors, greatly exaggerating the numbers of providers that were “willing to do business on, and contribute content to, [defendants’] blockchain-based platform.” The complaint also alleges that in marketing the ICO, the defendants provided a catalog of small businesses eligible to use the defendants’ platform that numbered in the millions, in order to create the false impression that the platform had a huge base of users. In reality, the catalog was not compiled by the defendants, but was simply acquired from a vendor. Additionally, the SEC alleges that the defendants provided numerous customer reviews in its promotions to create the impression that the platform had many users creating content, which were actually reviews stolen from a third-party website. The SEC charges that in addition to the above allegations, the defendants misrepresented that they had filed an SEC registration statement for the ICO. The SEC seeks injunctive relief, disgorgement of profits, civil money penalties, and a permanent bar preventing the founder from serving as officer or director of any public company.
On January 13, the Illinois attorney general announced that he filed two separate suits in the Circuit Court of Cook County against two credit repair companies and three individuals who allegedly engaged in deceptive and fraudulent practices when promoting credit repair services to consumers and collecting debts in violation of the Consumer Fraud and Deceptive Business Practices Act, the Credit Services Organization Act, and the Collection Agency Act.
In the first complaint, the AG alleges a credit repair agency is not registered in Illinois as a credit services organization, and that it, along with its owner, a co-defendant, has not filed the statutorily required $100,000 surety bond with the Secretary of State’s office. The AG’s complaint alleges that the company charges unlawful upfront fees while making false promises that it will increase consumers’ credit scores. When the defendants fail to live up to these promises, they subsequently refuse to refund the money that consumers paid for the credit repair services they did not receive.
In the second complaint, the AG makes the same allegations against a different credit repair company, its owner, and a former employee. In addition, the second complaint also alleges that the company operates as a debt collection agency, but does not possess the requisite state license as a collection agency. Further, the complaint claims that, among other things, the defendants extract payments for “completely fabricated” payday loan debt from consumers who do not actually owe on the loans by using threats and other abusive and harassing collection tactics.
The AG seeks a number of remedies including injunctive relief prohibiting all defendants from engaging in any credit repair business, and prohibiting the second company and its owner and employee from engaging in any debt collection business; rescission of consumer contracts; and restitution to all affected consumers.
On January 15, the SEC filed a brief in a pending U.S. Supreme Court action, Liu v. SEC. The question presented to the Court asks whether the SEC, in a civil enforcement action in federal court, is authorized to seek disgorgement of money acquired through fraud. The petitioners were ordered by a California federal court to disgorge the money that they collected from investors for a cancer treatment center that was never built. The SEC charged the petitioners with funneling much of the investor money into their own personal accounts and sending the rest of the funds to marketing companies in China, in violation of the Securities Act’s prohibitions against using omissions or false statements to secure money when selling or offering securities. The district court granted the SEC’s motion for summary judgment, and ordered the petitioners to pay a civil penalty in addition to the $26.7 million the court ordered them to repay to the investors. The petitioners appealed to the Supreme Court and in November, the Court granted certiorari.
The petitioners argued that Congress has never authorized the SEC to seek disgorgement in civil suits for securities fraud. They point to the court’s 2017 decision in Kokesh v. SEC, in which the Court reversed the ruling of the U.S. Court of Appeals for the Tenth Circuit when it unanimously held that disgorgement is a penalty and not an equitable remedy. Under 28 U.S.C. § 2462, this makes disgorgement subject to the same five year statute of limitations as are civil fines, penalties and forfeitures (see previous InfoBytes coverage here). The petitioners also suggested that the SEC has enforcement remedies other than disgorgement, such as injunctive relief and civil money penalties, so loss of disgorgement authority will not hinder the agency’s enforcement efforts.
According to the SEC’s brief, historically, courts have used disgorgement to prevent unjust enrichment as an equitable remedy for depriving a defendant of ill-gotten gains. More recently, five statutes enacted by Congress since 1988 “show that Congress was aware of, relied on, and ratified the preexisting view that disgorgement was a permissible remedy in civil actions brought by the [SEC] to enforce the federal securities laws.” The agency notes that the Court has recognized disgorgement as both an equitable remedy and a penalty, suggesting, however, that “the punitive features of disgorgement do not remove it from the scope of [the Exchange Act’s] Section 21(d)(5).” Regarding the petitioner’s reliance on Kokesh, the brief explains that “the consequence of the Court’s decision was not to preclude or even to place special restrictions on SEC claims for disgorgement, but simply to ensure that such claims—like virtually all claims for retrospective monetary relief—must be brought within a period of time defined by statute.”
In addition to the brief submitted by the SEC, several amicus briefs have been filed in support of the SEC, including a brief from several members of Congress, and a brief from the attorneys general of 23 states and the District of Columbia.
On January 9, the Minnesota attorney general announced that an internet service provider (ISP) agreed to pay nearly $9 million in order to resolve allegations that it overcharged customers for phone, internet and cable services. In a separate action, on December 10, the Washington attorney general’s office announced that it entered into a $6.1 million consent decree with the same ISP to resolve similar claims of deceptive acts and practices. As previously covered by InfoBytes, the ISP entered into settlements over the same alleged actions with the states of Colorado on December 19, and Oregon on December 31.
On December 10, the U.S. District Court for the Eastern District of New York issued a memorandum and order denying an international bank’s motion to dismiss a DOJ suit filed in 2018. As previously covered in InfoBytes, the DOJ alleges the bank and several affiliates violated the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) by misleading investors and rating agencies in offering documents and presentations regarding the underwriting quality and other important attributes of the mortgages they securitized into residential mortgage-backed securities (RMBS) for sale to investors during the financial crisis. Specifically, the complaint alleges (i) “mail fraud affecting federally-insured financial institutions (FIFIs)”; (ii) wire fraud affecting FIFIs; (iii) bank fraud; (iv) “fraudulent benefit from a transaction with a covered financial institution (FI)”; and (v) “false statements made to influence the actions of a covered FI.” The DOJ seeks the maximum civil penalty.
According to the district court’s memorandum, the bank’s motion to dismiss sets forth a number of arguments, including, among other things, a failure to sufficiently plead fraudulent intent and the particular circumstances constituting fraud, and a lack of personal jurisdiction, all with which the court rejected. Specifically, the bank suggested that the DOJ’s complaint did not show that the bank “acted with fraudulent intent,” or that the bank committed “bank fraud, [made] fraudulent bank transactions, and [made] false statements to banks.” The memorandum rejects the bank’s claims, adding that personal jurisdiction over the bank and its affiliates is shown “based on [the bank’s] origination of loans” in New York.
On November 8, the DOJ announced that it charged the principals and co-founders (collectively, “defendants”) of a mortgage short sale assistance company with allegedly defrauding mortgage lenders and investors out of half a million in proceeds from short sale transactions. The DOJ also alleged the defendants’ actions defrauded Fannie Mae, Freddie Mac, and HUD. According to the announcement, from 2014 to 2017, the defendants negotiated with lenders for approval of short sales in lieu of foreclosure, and falsely claimed during settlement that the lenders had agreed to pay loss mitigation service fees from the proceeds of short sales. The defendants allegedly obtained around 3 percent of the short sale price from the settlement agent, which was separate from fees paid to real estate agents and closing attorneys, among others. In order to further deceive lenders, the defendants would then file fabricated documents to justify or conceal the additional fees being paid to the company. The defendants were charged with conspiracy to commit wire fraud, and one co-founder was also charged with aggravated identity theft.
On October 21, the FTC announced two separate actions involving social media and online reviews. In its complaint against a skincare company, the FTC alleged that the company misled consumers by posting fake reviews on a retailer’s website and failed to disclose company employees wrote the reviews. The FTC asserted that the retailer’s customer review section is “a forum for sharing authentic feedback about products,” and the company and owner “represented, directly or indirectly, expressly or by implication, that certain reviews of [the company] brand products on the [retailer’s] website reflected the experiences or opinions of users of the products.” The FTC argued that the failure to disclose that the owner or employees wrote the reviews constitutes a deceptive act or practice under Section 5 of the FTC Act because the information would “be material to consumers in evaluating the reviews of [the company] brand products in connection with a purchase or use decision.” In a 3-2 vote, the Commission approved the administrative consent order, which notably does not include any monetary penalties. The order prohibits the company from misrepresenting the status of an endorser and requires the company and owner to disclose the material connection between the reviewer and the product in the future.
The FTC also entered into a proposed settlement with a now-defunct company and its owner for allegedly selling fake social media followers and subscribers to motivational speakers, law firm partners, investment professionals, and others who wanted to boost their credibility to potential clients; as well as to actors, athletes, and others who wanted to increase their social media appeal. According to the FTC, the company “provided such users of social media platforms with the means and instrumentalities for the commission of deceptive acts or practices,” in violation of Section 5(a) of the FTC Act. The Commission unanimously voted to approve the proposed court order, which bans the company from selling or assisting others in selling “social media influence.” The proposed order imposes a $2.5 million monetary judgment against the company owner, but suspends the majority upon the payment of $250,000.
On September 24, Financial Crimes Enforcement Network (FinCEN) Director Kenneth Blanco spoke at the Federal Identity (FedID) Forum and Exposition, discussing the role of FinCEN in combatting fraud and cybercrime and highlighting concerns regarding identity crimes. Blanco noted that FinCEN sees approximately 5,000 account takeover reports each month, a crime that “involves the targeting of financial institution customer accounts to gain unauthorized access to funds.” Moreover, FinCEN sees a high amount of fraud through account takeovers via fintech platforms, where cybercriminals use fintech data aggregators to facilitate account takeovers and fraudulent wires. Blanco stated that cybercriminals create fraudulent accounts and are able to “exploit the platforms’ integration with various financial services to initiate seemingly legitimate financial activity while creating a degree of separation from traditional fraud detection efforts.”
Additionally, Blanco discussed how cybercriminals use business email compromise (BEC) fraud schemes to target financial institutions and relayed FinCEN’s efforts to combat these schemes. As previously covered by InfoBytes, in July, FinCEN issued an updated advisory, describing general trends in BEC schemes, information concerning the targeting of non-business entities, and risks associated with the targeting of vulnerable business processes. Blanco also discussed (i) FinCEN’s final rule titled the “Customer Due Diligence Requirements for Financial Institutions,” (the CDD Rule) (prior coverage by InfoBytes here); and (ii) FinCEN’s December 2018 joint statement with federal banking agencies encouraging innovative approaches to combatting money laundering, terrorist financing, and other illicit financial threats when safeguarding the financial system (previously covered by InfoBytes here).
U.S. enforcement authorities seize $3.7 million, arrest 281 for involvement in Business Email Compromise schemes
On September 10, the DOJ announced a coordinated effort with the U.S. Department of Homeland Security, the U.S. Department of the Treasury, the U.S. Postal Inspection Service, and the U.S. Department of State, against a series of Business Email Compromise (BEC) scams. The effort was conducted over a four-month period, resulting in the seizure of nearly $3.7 million and the arrest of 281 individuals in the U.S. and overseas, including 167 in Nigeria, 18 in Turkey and 15 in Ghana, along with arrests in France, Italy, Japan, Kenya, Malaysia, and the U.K. According to the DOJ, “BEC, also known as ‘cyber-enabled financial fraud,’ is a sophisticated scam often targeting employees with access to company finances and businesses working with foreign suppliers and/or businesses that regularly perform wire transfer payments.” BEC scams can involve requests for paper checks and may not actually “compromise” an email account or computer network. The DOJ notes that many BEC scams are perpetrated by foreign citizens, who are often members of transnational criminal organizations.
As previously covered by InfoBytes, the Financial Crimes Enforcement Network (FinCEN), in July, discussed efforts designed to restrict and impede Business Email Compromise (BEC) scammers and other illicit actors who profit from email compromise fraud schemes and issued an updated advisory, providing general trends in BEC schemes, information concerning the targeting of non-business entities, and risks associated with the targeting of vulnerable business processes.
On August 29, the SEC announced it had settled with a cryptocurrency company and its two founders to resolve allegations that the company defrauded investors and operated an unregistered exchange. The SEC’s complaint alleges that the defendants raised more than $13 million from investors through the sale of digital tokens without registering the offerings with the SEC. According to the complaint, the defendants misrepresented that purchasers of digital tokens would receive stock in the company, as well as obtain access to a global marketplace attracting millions of consumers, despite the fact that the latter did not exist. This led to investors allegedly losing more than two-thirds of their investments in the company, the SEC claims. The company also allegedly operated an illegal, unregistered national security exchange offering trading in a single security. The SEC’s press release states that, while the defendants neither admit nor deny the allegations, the company will pay disgorgement, prejudgment interest, and a civil penalty of approximately $8.4 million, while the two founders will each pay more than $850,000.
- Hank Asbill to discuss "The federal fraud sentencing guidelines: It's time to stop the madness" at a New York Criminal Bar Association webinar
- Daniel P Stipano to moderate "Digital identity: The next gen of CIP" at the American Bankers Association/American Bar Association Financial Crimes Enforcement Conference