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On August 26, the New York governor signed S 6536, which returns the statute of limitations within which the state’s attorney general must bring financial fraud claims under the Martin Act to six years. As previously covered by InfoBytes, in 2018 the New York Court of Appeals issued a ruling that claims brought under the Martin Act are governed by a statute of limitations of three years, not six. According to the majority in that court decision, the three-year period applied because the Martin Act “expands upon, rather than codifies, the common law of fraud” and “imposes numerous obligations—or ‘liabilities’—that did not exist at common law,” which justified the imposition of a three-year statute of limitations. However, Governor Andrew Cuomo noted that “[b]y restoring the six-year statute of limitations under the Martin Act, we are enhancing one of the state’s most powerful tools to prosecute financial fraud so we can hold more bad actors accountable, protect investors and achieve a fairer New York for all.” Effective immediately, S 6536 will amend Section 213 of the state’s Civil Practice Law and Rules to include Martin Act cases among those that must be brought within six years.
On August 8, the U.S. Court of Appeals for the 5th Circuit affirmed a district court ruling that ordered two mortgage companies and their owner to pay nearly $300 million in a suit brought under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The suit accused the defendants of allegedly making false certifications, which reportedly led to mortgages ending in default. The jury agreed that the defendants defrauded the Federal Housing Agency’s mortgage insurance program when a state audit revealed unregistered company branches were used to originate loans in violation of agency guidelines, and the court determined that there was ample evidence to find that the false certifications were a proximate cause of losses from loan defaults. As a result, the government trebled the damages and civil penalties under the FCA from $93 million to roughly $298 million. The defendants appealed the decision, challenging, among other things, the sufficiency of evidence, methodologies presented by the government’s expert witnesses, and the judge’s decision to not order a new trial after dismissing a disruptive juror.
On appeal, the 5th Circuit opined that there was sufficient evidence to support the jury’s findings, and rejected the defendants’ expert witness challenges, holding first that the defendants had waived any argument about the loan default sampling methodology used by one of the witnesses, because their argument that the witness “failed to control for obvious causes of default” never came up “during the extensive negotiations over the sampling methodology that would be used.” The appellate court also concluded that nothing in the record supported the defendants’ argument that the second witness “did not apply the HUD underwriting standards” in his re-underwriting methodology. The appellate court further noted that it has declined to adopt a rule used by other circuit courts that prohibits jurors from being dismissed “unless there is no possibility” that the juror’s failure to deliberate stems from their view of the evidence. Rather, the 5th Circuit held that the district court had grounds to dismiss the juror who “failed to follow instructions, exhibited a lack of candor during questioning, and had engaged in threatening behavior towards other jurors.”
On August 5, the U.S. Court of Appeals for the 6th Circuit reversed the conviction of two individuals for bank fraud, holding that the government had failed to prove that the defendants intended to obtain bank property or defraud the financial institutions that owned the mortgage companies targeted by the scheme. The complaint alleged the defendants—a homebuilder and a mortgage broker—recruited straw buyers to purchase the homebuilder’s homes, in which they obtained more than $5 million from mortgage companies through fraudulent mortgage applications that made several misrepresentations, including overstating the buyers’ incomes and falsely claiming that the buyers planned to live in the homes. During the trial, the government argued that the jury could reasonably infer that the federally insured parent banks controlled the funds, since the mortgage companies were wholly owned subsidiaries of the banks. The government further asserted that the mortgage companies’ funds belonged to the banks because “any losses incurred by the mortgage companies would ‘flow directly up’ to the banks.”
On appeal, the 6th Circuit reversed the defendants’ bank fraud convictions, holding that the mortgage companies held no federally insured deposits, and that while each mortgage company is a wholly owned subsidiary of a bank, the mortgage companies and the banks are distinct entities. As such, the mortgage companies did not qualify as “financial institutions,” as defined under 18 U.S.C. § 20(1). The appellate court also rejected the government’s arguments because Congress had amended § 20 after the events at issue in the case by adding language covering mortgage lenders to its “enumeration of ‘financial institutions,’” thereby demonstrating that mortgage lenders were not covered by the prior version of § 20. In addition, the court also indicated that the government offered no evidence proving that the defendants sought to obtain bank property “by means of” a misrepresentation, pointing out that no evidence was presented to show that any of the misrepresentations on the loan applications ever reached anyone at the parent banks. As such, “the scheme’s effect on the value of the banks’ ownership interests in the mortgage companies was merely ‘incidental’ to the scheme’s goal of defrauding the mortgage companies.” Accordingly, the court held that the government failed to prove that the defendants committed bank fraud.
On July 25, the U.S. Court of Appeals for the 9th Circuit held that the Commodity Future Trading Commission (CFTC) had the enforcement authority to bring a $290 million fraud action against a trading platform, concluding that the district court improperly dismissed the action. According to the opinion, the CFTC brought an action against a trading platform alleging that it was an illegal and unregistered leveraged retail commodity transaction market for precious metals. The platform moved to dismiss the action, arguing that the Dodd-Frank Act did not give the CFTC the power to pursue stand-alone fraud claims without allegations of manipulation and that the Commodity Exchange Act’s “registration provisions do not apply to retail commodities dealers who ‘actual[ly] deliver’ the commodities to customers within twenty-eight days.” The district court agreed, and dismissed the action.
On appeal, the 9th Circuit concluded the district court erred in dismissing the CFTC’s claims, holding that the CFTC had the authority under Section 6(c)(1) of the CEA to take action against the entity for fraudulently deceptive activity. Specifically, the appellate court held that the CFTC could bring an action for “fraudulently deceptive activity, regardless of whether it was also manipulative,” concluding the district court erred when it interpreted the use of the word “or” in the CEA’s prohibition of the use of “any manipulative or deceptive device or contrivance” to mean “and.” Moreover, the appellate court rejected the platform’s “actual delivery” argument, concluding that the platform’s practice of storing the goods in depositories, and “maintain[ing] total control over accounts,” with the ability to liquidate at any time, amounts to “sham delivery, not actual delivery.” The appellate court looked to the legislative history of Dodd-Frank and observed that, “[i]f Congress wanted only to ensure enough inventory it could have said so. It did not; it required ‘actual delivery,’” which would require some “meaningful degree of possession or control by the customer.”
On July 24, the OCC issued Bulletin 2019-37 to provide fraud risk management principles for all OCC-supervised institutions. The Bulletin supplements previously issued notices addressing corporate and risk governance, and focuses on fraud risk, operational risk, and the need for strong governance and sound risk management principles. According to the OCC, strong governance is vital to managing an institution’s exposure to fraud and must include a strong corporate culture that discourages imprudent risk-taking. However, the OCC noted that fraud risk management should be commensurate with the bank’s risk profile. The Bulletin highlights several preventative and detective controls, including (i) developing anti-fraud policies and procedures, such as ethics policies, codes of conduct, and identity theft programs; (ii) creating anti-fraud awareness campaigns; (iii) establishing fraud risk management training programs for employees and contractors and educating customers on preventative measures; (iv) implementing a system of controls intended to prevent employees and third parties from conducting fraudulent transactions, such as opening or closing of bank accounts; (v) conducting background investigations for new employees and periodic checks for existing employees and third parties; (vi) providing sound training and information security programs; and (vii) establishing processes for customer identification, customer due diligence, and beneficial ownership identification and verification. Additionally, the OCC stated that senior management should understand the institution’s exposure to fraud risk and associated losses.
On July 16, the Financial Crimes Enforcement Network (FinCEN) discussed efforts designed to restrict and impede business email compromise (BEC) scammers and other illicit actors who profit from email compromise fraud schemes. BEC schemes, FinCEN reports, generally involve “criminal attempts to compromise the email accounts of victims to send fraudulent payment instructions to financial institutions or business associates in order to misappropriate funds or to assist in financial fraud.” An updated advisory provides current operational definitions and general trends in BEC schemes, information concerning the targeting of non-business entities and data by these types of schemes, and risks associated with the targeting of vulnerable business processes. The advisory also discusses opportunities for information sharing between financial institutions concerning subjects and accounts affiliated with BEC schemes in the interest of identifying risks of fraudulent transactions and money laundering. An in-depth strategic Financial Trend Analysis of Bank Secrecy Act (BSA) data explores industries targeted by BEC scammers as well as employed methodologies, and highlights BSA information collected by regulated financial institutions. Suspicious activity report highlights reveal a nearly tripling of attempted BEC thefts—from $110 million per month in 2016 to $301 million per month in 2018 on average. FinCEN’s release also discusses its Rapid Response Program as well as international information sharing initiatives addressing BEC schemes and associated fraudulently-induced transactions.
On June 24, the U.S. Court of Appeals for the 9th Circuit reversed the dismissal of a non-customer class action against a California bank alleging the bank knowingly assisted a fraudulent scheme, in violation of California law. The class action asserts eight claims against the bank under California law, including aiding and abetting fraud and conspiracy to commit fraud, for allegedly “knowingly assist[ing] a $125 million fraudulent scheme” initiated by one of the bank’s clients. The district court dismissed the action, holding the consumers “had not pleaded sufficient facts giving rise to a plausible inference that [the bank] knew [its client] was misappropriating funds.”
On appeal, the 9th Circuit disagreed, concluding the consumers plausibly alleged specific allegations concerning the bank’s actual knowledge of the client’s misappropriation and fraud. The appellate court noted that while generally banks owe no duty to non-customers under California law, an exception exists when a bank “‘knowingly makes itself a party to a fraud, [it] must make good the loss that results from the misappropriation.’” The appellate court concluded that several allegations made by the consumers were plausible based on the bank using “atypical banking procedures,” which included “repeatedly making advances at [the client]’s request without obtaining supporting documentation or verifying that [the client] used the advanced proceeds appropriately (despite indications to the contrary) and extending maturity dates on short-term loans year after year (even when [the client] was in default).”
In dissent, a panel judge argued that the consumers made no specific allegations of the bank’s actual knowledge of the fraud, noting that the complaint is “vague and lengthy” and just “a series of common banking practices dressed up in ominous language.” Additionally, the judge noted that California courts traditionally only find actual knowledge in “‘extreme circumstances,’” and have previously “refused to hold banks liable in far more egregious cases than this.”
On April 8, the Ohio Court of Appeals affirmed summary judgment for a bank, its employees, and the plaintiff’s former husband (collectively, “defendants”), concluding, among other things, that under the Ohio Consumer Sales Practices Act (OCSPA) the defendants could not be considered “suppliers,” transactions with national banks are not covered, and bank employees were not considered “loan officers.” According to the opinion, a homeowner filed a lawsuit alleging the defendants fraudulently opened a home equity line of credit by allowing the plaintiff’s former husband to sign the homeowner’s name with the bank employees’ assistance in notarizing the signature. The homeowner alleged various claims, including that the defendants violated the OCSPA’s provision prohibiting a “supplier” from committing “an unfair or deceptive act or practice in connection with a consumer transaction.” The lower court granted summary judgment in favor of the defendants. The homeowner appealed, arguing that the bank employees were acting as “loan officers” and therefore, they qualified as “suppliers” under the OCSPA. The appellate court noted that while the term “supplier” does include “loan officer,” the statute explicitly states that “loan officer” does not include “an employee of a bank…organized under the laws of this state, another state, or the United States.” Moreover, the OCSPA provides that consumer transactions do not include transactions with financial institutions, except in certain circumstances, which are not applicable to the action. Therefore, the lower court did not err in its summary judgment ruling.
FTC obtains $2.7 million judgment against “free samples” operation; settles deceptive marketing matter
On April 11, the FTC announced that the U.S. District Court for the Northern District of Illinois ordered a New York-based office supply operation to pay $2.7 million to resolve allegations that the defendants targeted consumers, such as small businesses, hotels, municipalities, and charitable organizations, by deceptively misrepresenting the terms of their “free samples.” Specifically, the FTC alleged in 2017 that the defendants violated the Telemarketing and Consumer Fraud and Abuse Prevention Act (Telemarketing Act) and the Unordered Merchandise Statute by calling consumers with offers of free product and then billing the consumers after shipping the samples. In some instances, the FTC stated, consumers refused the offer of the free product, but the defendants sent it anyway. Once the samples were shipped, the FTC claimed the defendants sent follow-up invoices demanding payment for the product, and would then send dunning notices and place collection calls. Under the terms of the order, the defendants are permanently banned from advertising, marketing, promoting, offering for sale, or selling any type of unordered merchandise, or from misrepresenting material facts, and are required to pay $2.7 million to be refunded to affected consumers.
Separately, on April 10, the FTC announced proposed settlements (see here and here) issued against twelve corporate and four individual defendants for allegedly claiming their “cognitive improvement” supplements increase brain power and performance. According to the complaint, the defendants’ deceptive acts and practices included using “sham news” websites to market false and misleading efficacy claims, such as fraudulent celebrity endorsements and fictitious clinical studies. Furthermore, the FTC alleged that, while the defendants claimed to offer a “100% Money Back Guarantee” on their supplements, consumers found it difficult or nearly impossible to get a refund, and that some consumers were allegedly charged for supplements they ordered but never received. The proposed settlements, among other things, prohibits the specified behavior and impose monetary judgments of $14,564,891 and $11,587,117, both of which will be partially suspended due to the defendants’ inability to pay.
On March 15, the FDIC announced a settlement with an accounting firm to resolve a professional negligence action stemming from allegations that the firm failed to detect a massive mortgage fraud in its audits of an Alabama-based bank that failed in 2009. According to a July 2018 order entered by the U.S. District Court for the Middle District of Alabama, the court originally ruled that the accounting firm owed more than $625 million in damages for negligent audits. The court’s findings, among other things, determined that the firm “did not design its audits to detect fraud,” which prevented it from detecting the mortgage fraud scheme.
One member of the FDIC Board, Martin J. Gruenberg, released a statement noting that he “voted against authorizing the settlement because the settlement did not include a written admission of liability” from the accounting firm.
- Hank Asbill to discuss "The federal fraud sentencing guidelines: It's time to stop the madness" at a New York Criminal Bar Association webinar
- Buckley Webcast: From there to here – Anticipating comparative redlining claims
- Daniel P Stipano to moderate "Digital identity: The next gen of CIP" at the American Bankers Association/American Bar Association Financial Crimes Enforcement Conference