Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
On March 12, the U.S. District Court for the Northern District of Illinois granted a national bank’s motion to dismiss a former associate vice president/lending manager’s whistleblower claims that it violated the False Claims Act (FCA) by submitting fraudulent claims and providing false information about loan applications to Fannie Mae and Freddie Mac. The whistleblower alleged that the bank (i) knowingly submitted fraudulent claims for payment to the U.S. government; (ii) told Fannie Mae and Freddie Mac that the applications met underwriting standards; and (iii) later terminated his employment as retaliation for notifying his superiors about the alleged false statements. However, according to the court, the whistleblower failed to sufficiently plead that the bank actually submitted the false claims, did not provide enough specificity as to whom the bank sent the alleged false claims to, and failed to “allege specific facts that link [the bank’s] fraudulent conduct to a claim submitted to the government.” Moreover, the court stated that under the FCA’s public disclosure bar, a whistleblower cannot base his case on allegations raised in prior litigation or publicly disclosed information, and identified several similarities between the whistleblower’s allegations and previously disclosed claims. Because the whistleblower’s FCA claims failed, the retaliation claims were also dismissed.
On March 5, the New Jersey Attorney General's Office and Division of Consumer Affairs filed a lawsuit against two auto dealerships and their owner for allegedly targeting financially vulnerable consumers through the use of predatory sales and loan practices. According to a March 7 press release issued by the New Jersey AG, the defendants allegedly targeted consumers who were unable to qualify for credit at more traditional auto dealerships by offering in-house loans on used vehicles with inflated prices, high interest rates, and terms that presented a high risk of default. When the consumers were unable to make the required payments, the defendants allegedly reclaimed the vehicles and restarted the “sell, finance, and repossess” churning cycle. The AG claims that the defendants’ practices violated the New Jersey Consumer Fraud Act, the Used Car Lemon Law, and the state’s motor vehicle advertising regulations. The complaint asks the court to permanently shut down the defendants’ operations and permanently enjoin the owner from owning, managing, and/or operating any business that advertises and/or sells motor vehicles in the state. The complaint also seeks restitution, civil penalties, and attorneys’ fees.
On March 7, the FTC announced a new legal action and a final settlement issued against individuals and their operations for allegedly engaging in schemes that exploit elderly Americans. The actions are part of an enforcement sweep spearheaded by the DOJ in conjunction with, among others, the FBI, the FTC, Immigration and Customs Enforcement’s Homeland Security Investigations, and the Louisiana Attorney General, which—according to a press release issued the same day by the DOJ—is the largest-ever coordinated nationwide elder fraud sweep, involving multiple cases, over 260 defendants, and more than two million allegedly victimized U.S. Citizens, most of whom are elderly.
According to the FTC’s complaint, the company used deceptive tactics to convince consumers, the majority of whom were older, that their computers were infected with viruses in order to sell expensive and unnecessary computer repair services in violation of the FTC Act, the Telemarketing Sales Rule, and the Restore Online Shoppers’ Confidence Act. Specifically, the company allegedly used internet ads to target consumers looking for email password assistance and once they contacted the consumers, the telemarketers would run phony “diagnostic” tests that falsely showed the consumer’s computer was in danger and needed software and services to be fixed. On February 27, the U.S. District Court for the Southern District of Utah, granted a temporary restraining order against the company and its founder.
The FTC also announced a proposed settlement with a sweepstake operation that allegedly bilked consumers out of tens of millions of dollars through personalized mailers that falsely implied that the recipients had won or were likely to win a cash prize if they paid a fee. As previously covered by InfoBytes, the FTC announced the charges against the company in February 2018, alleging that consumers, most of whom were elderly, paid more than $110 million towards the scheme. The final settlement not only requires the operation to turn over $30 million in assets and cash to provide redress to the victims, but also permanently bans the operators from similar prize promotions in the future. The proposed settlement has not yet been approved by the court.
On February 5, the U.S. District Court for the District of Massachusetts issued an order granting a national bank’s motion to dismiss a multidistrict litigation complaint for failure to state a claim. Plaintiffs, in an attempt to recover losses from an internet phone service company’s pyramid scheme that ran from 2012 to 2014, alleged that the bank assisted the company’s pyramid scheme by, among other things, maintaining depository accounts for the company, receiving interest on funds held in the accounts, processing transactions, and receiving fees for wire transfers. However, the court found that the investors failed to adequately allege that the bank had any actual knowledge of the underlying fraud. “The complaint is devoid of any allegation that the fees, interest, and charges received by [the bank] were anything more than payments for banking services,” the court wrote, and thus “have failed to allege that they were ‘unjust.’”
On October 18, the FTC released a report to Congress outlining the agency’s comprehensive efforts to protect older consumers in the marketplace from fraud, identity theft, imposter scams, deceptive credit schemes, and other unlawful practices. The report, Protecting Older Consumers 2017-2018: A Report of the Federal Trade Commission, discusses (i) scams that target older consumers, including technical support scams; business imposter scams; prizes, sweepstakes, and lottery scams; and family or friend imposter scams; (ii) key FTC enforcement actions taken against companies that allegedly engaged in deceptive schemes that targeted or affected older consumers; and (iii) outreach and education efforts, including fraud prevention campaigns and resources for older consumers. Specifically, the report contains analysis of consumer complaint data from 2017, which revealed that older consumers (especially those over 80) were more likely to report fraud than younger people, and that when they reported losing money to fraud, they lost significantly more money than consumers in their twenties. (See previously InfoBytes coverage here on the FTC’s annual summary of consumer complaints received in 2017).
District Court concludes a small virtual currency is a “commodity” under the Commodities Exchange Act
On September 26, the U.S. District Court for the District of Massachusetts denied a virtual currency trading company’s motion to dismiss, concluding that smaller virtual currencies are commodities that may be regulated by the CFTC. In January, the CFTC bought an action alleging the company violated the Commodities Exchange Act (CEA) and CFTC Regulation 180.1(a) by making false or misleading statements and omitting material facts when offering the sale of their company’s virtual currency. For example, the complaint alleges that the company falsely stated that its virtual currency was backed by gold, could be used anywhere Mastercard was accepted, and was being actively traded on several currency exchanges. Moreover, while consumers who purchased the virtual currency could view their accounts, they were unable to trade it or withdraw funds from their accounts with the company. The company moved to dismiss the case, arguing that the conduct did not involve a “commodity,” specifically one that underlies a futures contract, under the CEA. In denying the motion to dismiss, the court determined that Congress intended for the CEA to cover a certain “class” of items and specific items within that class are then “dealt in.” Because the company offered a type of “virtual currency” and it is “undisputed that there is futures trading in virtual currencies (specifically involving Bitcoin),” the court held that the CFTC sufficiently alleged the company’s product is a “commodity” under the CEA. The court also rejected the company’s other arguments, determining Regulation 180.1(a) was meant to combat the fraud alleged by the CFTC, notwithstanding its use of the term “market manipulation,” and the CFTC adequately pleaded the fraudulent claim under the regulation.
FTC announces settlements with website operators over the sale of fake documents allegedly used for fraud and identity theft
On September 18, the FTC announced three proposed settlements with the operators of websites who allegedly violated the FTC Act’s prohibition against unfair practices by selling fake financial documents used to facilitate identity theft and other frauds, including loan and tax fraud. As previously covered in InfoBytes, identity theft was the second largest category of consumer complaints reported in 2017 according to the FTC. The FTC brought charges against the first defendant, alleging the defendant engaged in the sale of fake pay stubs, bank statements, and profit-and-loss statements, as well as providing a product that allowed customers to edit existing (and authentic) bank statements. The second defendant’s charges include the alleged sale of fake pay stubs, auto insurance cards, and utility and cable bills, while the allegations against the third defendant also include the sale of fake tax forms, bank statements, and verifications of employment. While the defendants’ websites claimed that the fake documents were sold for “‘novelty’ and ‘entertainment’ purposes,” the FTC asserts that the defendants “failed to clearly and prominently mark such documents as being for such purposes and did not state on the documents themselves that they were fake.”
Under the terms of the proposed settlement agreements (see here, here, and here), monetary judgments are imposed against the defendants, who also are permanently prohibited from advertising, marketing, or selling similar fake documents.
On September 21, the FTC announced the nationwide availability of free security freezes and one-year fraud alerts, which were authorized under the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). Specifically, Section 301 of EGRRCPA prohibits a national credit reporting agency from charging a fee to place, remove, or temporarily lift a security freeze. The law also allows parents to obtain a free credit freeze for any of their children who are under 16, and guardians, conservators, and those with a valid power of attorney can obtain a free freeze for the person for whom they have legal authority to act. Additionally, Section 301 extends the duration of the free fraud alert from 90 days to one year. Consumers are required to contact all three nationwide credit reporting agencies to place the security freeze, but only are required to contact one of the three for the fraud alert, as each bureau is obligated to notify the others of a fraud alert.
District Court dismisses NFL season ticket class action because plaintiff received the “reasonably expected fruits under the contract”
On August 30, the U.S. District Court for the District of New Jersey dismissed with prejudice a putative class action alleging that an NFL team’s season ticket sales practices had violated the implied covenant of good faith and fair dealing and the New Jersey Consumer Fraud Act (CFA). The case was centered on the named plaintiff’s claim that the team made representations to him that his purchase of a personal seat license (PSL) would give him an exclusive right to purchase season tickets in a particular seating area in the team’s stadium. The plaintiff alleged that the team ran afoul of the CFA when, counter to its alleged representations, it opened up sales for season tickets in that area to people who had not purchased a personal seat license, thus rendering worthless the license plaintiff had purchased.
The Court dismissed the plaintiff’s claims with prejudice because the plaintiff had received the “reasonably expected fruits under the contract.” The PSL agreement did not promise an exclusive right to purchase seats in a particular area of the team’s stadium, nor did it “purport to extend licensing or equity rights to [p]laintiff to control the ticketing policy for other” seats in that area. Rather, the PSL simply promised the plaintiff the right to purchase two seats in the area he chose, and that right had not been interfered with.
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.
- 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