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Financial Services Law Insights and Observations


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  • Financial Stability Board Enhances Compensation Practices Monitoring

    Federal Issues

    On November 13 a federal district judge sentenced Alstom S.A., a French power and transportation company, to pay a record $772 million fine to resolve FCPA charges.  The fine, agreed on by Alstom and various subsidiaries in December 2014 as part of its guilty plea, is the largest criminal FCPA fine ever paid.  For other prior coverage on Alstom, please see here.


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  • CFPB Begins Study of Arbitration Clauses, Extends Comment Period for Overdraft Inquiry

    Consumer Finance

    On April 24, the CFPB released a request for information to inform its study of the use and impact of arbitration clauses in consumer financial services agreements. Through June 23, 2012, the CFPB is seeking information from the public regarding (i) the prevalence of use of these arbitration clauses, (ii) what claims consumers bring in arbitration against financial services companies, (iii) whether claims are brought by financial services companies against consumers in arbitration, and (iv) how consumers and companies are affected by actual arbitrations and outside of actual arbitrations. The study is required by the Dodd-Frank Act and must be completed before the CFPB can begin exercising its Dodd-Frank authority to conduct rulemakings regarding arbitration agreements. Therefore, at this time the CFPB is not seeking comments on whether and how the use of such agreements should be regulated.

    The CFPB also this week extended through June 29, 2012, the comment period for its inquiry into overdraft programs and their costs, benefits, and risks to consumers.

    CFPB Dodd-Frank Arbitration

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  • Fannie Mae Alters Policies for Preforeclosure Sale Process, Delinquency Management, Default Prevention


    On April 25, Fannie Mae issued Servicing Guide Announcement SVC-2012-06, which sets new policies and clarifies several delinquency management and default prevention requirements related to (i) electronic submission of borrower response package documents, (ii) income documentation for employed borrowers, (iii) determining monthly gross income, (iv) modifications of loans secured by leasehold estates, (v) property valuation, and (vi) executing and recording modification agreements. The majority of the changes are effective immediately. The new requirements for determining income are effective for loans evaluated on or after July 1, 2012.

    On the same date, Fannie Mae also published Announcement SVC-2012-07 to establish new policies to expedite the preforeclosure sale process. For all conventional mortgage loans held in Fannie Mae's portfolio, those purchased for Fannie Mae's portfolio but subsequently securitized into Fannie Mae MBS pools, and those originally delivered as part of an MBS pool, the policies (i) establish maximum required response times for preforeclosure sale offers submitted for consideration, (ii) require servicers to provide borrowers with status updates during the evaluation process, and (iii) allow servicers to respond to unsolicited preforeclosure sale offers without first requiring an evaluation for a HAMP modification. Servicers are encouraged to adopt these policies immediately, but must do so no later than June 25, 2012. The Announcement reminds servicers that Fannie Mae may pursue any of its available remedies for failure to comply with these new policies.

    Fannie Mae Mortgage Servicing RMBS HAMP / HARP Servicing Guide

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  • Seventh Circuit Dismisses FACTA Truncation Class Action


    On April 18, the U.S. Court of Appeals for the Seventh Circuit dismissed a class action seeking damages against Shell under the Fair and Accurate Credit Transactions Act (FACTA) for displaying four digits of customers’ credit card numbers on receipts printed at Shell gas stations. Van Straaten v. Shell Oil Products Co. LLC, No. 11-8031, 2012 WL 1340111 (7th. Cir. Apr. 18, 2012). FACTA requires that such receipts truncate card numbers to display no more than the last five digits of the card number. Shell’s practice was to print the last four digits of what it calls the “primary account number,” which is the number appearing before the last five digits of the sequence of numbers appearing on the front of the credit card. The plaintiffs did not allege that Shell’s practice created a risk of identity theft, but that Shell violated FACTA by printing the wrong four numbers. Writing for a three-judge panel, Chief Judge Frank Easterbrook indicated that FACTA does not define the term “card number,” but the panel did not have to define the term, “because we can’t see why anyone should care how the term is defined.” He added that ”[a] precise definition does not matter as long as the receipt contains too few digits to allow identity theft.” As to FACTA’s authorization of $100 to $1,000 for each willful violation, Judge Easterbrook noted that “[a]n award of $100 to everyone who has used a Shell Card at a Shell station would exceed $1 billion, despite the absence of a penny’s worth of injury.”  Because Shell now prints no such digits on its receipts, “the substantive question in this litigation will not recur for Shell or anyone else; it need never be answered.”

    Credit Cards Class Action FACTA

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  • FinCEN Reports Increased Mortgage Fraud SARs

    Financial Crimes

    On April 23, the Financial Crimes Enforcement Network (FinCEN) released an update on mortgage loan fraud suspicious activity reports (SARs) for 2011. The report indicates that mortgage fraud SARs increased 31 percent in 2011 compared to 2010, a spike that FinCEN states is directly attributable to mortgage repurchase demands and special filings generated by several institutions. Based on a sample analysis, FinCEN found that in 40 percent of cases resulting in a SAR, the institution turned down the subject’s loan application, short sale request, or debt elimination because of the suspected fraud, indicating improvement in mortgage lending due diligence. Among other things, the report highlights short sales, appraisals, and identity theft as new fraud patterns in 2011 SARs.

    Fraud FinCEN

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  • Freddie Mac Adjusts Residential Loan Mitigation Options


    On April 23, Freddie Mac issued Servicer Guide Bulletin 2012-10, which expands and adjusts certain loss mitigation options to offer additional assistance to struggling borrowers. With regard to state housing finance agency borrower assistance programs, the Bulletin provides requirements for servicer participation in programs funded by the Hardest Hit Fund, and consolidates all requirements related to participation in such programs. Among other things, the Bulletin also implements a previously announced extension of the HAMP and HAFA programs through December 2013, and revises HAMP eligibility requirements for permanent modifications.

    Freddie Mac Mortgage Servicing Loss Mitigation

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  • Banking Regulators Clarify Volcker Rule Compliance Timeline, Senators Push for Final Rule

    Consumer Finance

    In the summer of 2014, on the eve of trial, the SEC settled FCPA charges against two individuals related to Noble Corporation, a global oil and gas drilling services company.  SEC v. Jackson and Ruehlen, No. 12-cv-563 (S.D. Tex.).  The case settled on very favorable terms for the individuals, but had it gone to trial, it would have been the first SEC case in many years to reach that far.  Even with the settlement, the two years of litigation between the SEC and the Noble executives provided a window into the government’s trial strategy on a number of issues, as well as areas where judicial caselaw on the FCPA continues to evolve.

    BuckleySandler represented Mark Jackson, Noble’s former CEO and CFO, in the case, and the views expressed in this post are ours alone.  (See also prior FCPA Scorecard coverage of the case).  Here we highlight several of the lessons learned from the Jackson trial.

    1. The Facilitating Payments Exception May Be Narrower than Previously Thought: It is not news that the government does not like the facilitating payments exception to the FCPA, which permits payments “the purpose of which is to expedite or to secure the performance of a routine governmental action.” 15 U.S.C. § 78dd-1(b).  In the Jackson litigation, though, for the first time the SEC had to spell out its exact view on the exception and how it should be interpreted in practice.  The SEC’s hand was forced by a ruling that it was the SEC’s burden to affirmatively negate the idea that payments were facilitating payments instead of bribes, not the defendants’ burden.  Perhaps unsurprisingly, the SEC reads the facilitating payment exception extremely narrowly – to the point of near irrelevance.

    In essence, the SEC’s briefing and arguments to the Court in Jackson stated that a payor’s actual intent when making a facilitating payment was irrelevant.  Even though the statute speaks of the payor’s “purpose” in making the payment, under the SEC’s reading, the exception is instead strict liability for the payor.  The payor might have believed the action he sought was a routine governmental action – i.e., that was its “purpose.”  But under the SEC’s theory, if it turns out that the payor’s belief was wrong, and under the country’s laws and regulations this was actually a discretionary action by the official, then the payor cannot claim the benefit of the facilitating payments exception and the payment would constitute a bribe.

    We will have to wait for the next case to see whether the SEC’s arguments successfully narrow the exception, but prior to the settlement in Jackson, the Judge rejected the SEC’s motion for partial summary judgment regarding the facilitating payments exception without a written ruling. 

    1. Content of Foreign Law Is Important: Because the SEC’s argument about facilitating payments turned on whether the sought-after actions were, in fact, discretionary on the part of the officials, the content of Nigerian law and what if anything it said about the temporary import permits at issue became the subject of expert testimony and extensive briefing. Expert witnesses included a former Nigerian customs official, the former U.S. Ambassador to Nigeria, and a think-tank expert on Nigeria.  Evidence included numerous published and unpublished Nigerian codes and regulations.  Finally, the SEC filed a Motion for a Determination of Foreign Law under Fed. R. Civ. P. 44.1.

    The lessons here are twofold.  First, if the SEC’s view is accepted and whether a payment qualifies as an acceptable facilitating payment depends on the content of foreign law, then the burden will be extremely high on the front end for any company making what it believes to be a facilitating payment.  Rather than incur the expense of hiring local attorneys to investigate local law in every country, though, the practical effect will be that companies will stop making facilitating payments entirely (presumably what the government would prefer).  Second, litigating almost any FCPA case in the future will likely require expert witnesses on the local law at issue, greatly increasing costs for both the government and defendants.

    1. A “Corrupt” Payment, to the SEC, Means Any Payment Meant to Influence Any Act: To be prohibited under the FCPA, a payment must be made “corruptly.” 15 U.S.C. § 78dd-1(a).  37 years after the FCPA was passed, there still is no universally accepted definition for what “corruptly” means, either in the statute or caselaw.  The Judge in Jackson drew from multiple sources to define “corruptly” as “an act done with an evil motive or wrongful purpose of influencing a foreign official to misuse his position.”  In the view of the defendants, if they believed the payments were made to obtain something the company was already entitled to, that could not be an instance of an official “misusing” his position because the official was just doing something he was supposed to do anyway.  To the SEC, though, as it argued to the Court, any act done by an official in response to a payment is a “misuse” of his position: all that is required is an intent that the payment “influence any act or decision made by an official in his official capacity – regardless of any ‘entitlement’ to that act or decision.’”

    Here, too, we will have to wait for another case to finally decide the validity of the SEC’s new position on “corrupt” payments; the Judge in Jackson denied all parties’ motions for summary judgment on this issue, without written opinion.

    1. Judges Are Still Confused By the FCPA, Too: In numerous areas, the caselaw is still unclear on issues such as facilitating payments, the meaning of “corruptly,” and the exact type of internal controls needed under the FCPA’s internal controls provisions (15 U.S.C. § 78m(b)(2)(B)). Indeed, one of the arguments the defendants in Jackson used to justify the need for expert testimony in certain areas was that if even the Judge expressed confusion on these areas – as he did, on several occasions – how could a jury be expected to sort it out without guidance?

    1. The Statute of Limitations Has New Teeth: Conduct in FCPA cases tends to be historic, reaching years, if not a decade, back. Investigations then take years before any enforcement decisions are made.  The conduct in the Jackson case was no different; the Complaint filed in 2012 alleged violations dating back to 2003.  The defendants challenged the Complaint on statute of limitations grounds, arguing that the SEC’s claims for civil monetary penalties were almost entirely barred.  The SEC countered with the idea that the fraudulent concealment doctrine delayed the running of the statute.

    After the Judge dismissed the original Complaint with leave to amend, the SEC filed an Amended Complaint, but soon faced a bigger challenge – the Supreme Court’s decision in Gabelli v. SEC, 568 U.S. __, 133 S. Ct. 1216 (2013), which rejected the use of the discovery rule in SEC civil monetary penalty cases.  Rather than face the possibility that the Judge in Jackson would extend Gabelli to its logical conclusion and bar the use of the fraudulent concealment doctrine as well, the SEC ultimately stipulated that it would not seek civil monetary penalties for conduct before May 2006.  The narrowed set of claims significantly reduced the potential liability facing the defendants in Jackson.  The overall issue of whether fraudulent concealment continues to be a viable argument for the SEC is still being sorted out courts around the country and may reach the Supreme Court again in the future.

    Dodd-Frank Federal Reserve

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  • New York Appellate Court Holds that Federal Law Does Not Preempt State Contract and Consumer Protection Laws in Gift Card Suit


    On October 9, James Rama, a former Vice President of Florida-based defense contractor IAP Worldwide Services, Inc., was sentenced in the U.S. District Court for the Eastern District of Virginia to 120 days in prison for conspiracy to violate the anti-bribery provisions of the FCPA.  Rama pleaded guilty to the conspiracy charge on June 16 for his role in a scheme by IAP to pay more than $1.7 million in bribes to Kuwaiti officials to win a government contract intended to provide nationwide surveillance capabilities for several Kuwaiti government agencies.  Rama had faced a recommended sentence under the Sentencing Guidelines of between 57 and 60 months, but received a substantially shorter sentence in part due to his cooperation with authorities during their investigation.  Prosecutors had recommended that Rama received a one year sentence, while the defense had requested just supervised release.  IAP previously‎ entered into a non-prosecution agreement with the DOJ and agreed to pay $7.1 million to resolve the allegations against the company.

    Class Action Gift Cards

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  • State Law Update: Vermont and Nebraska Address Mortgage Licensing


    Vermont Adjusts Mortgage Licensing Law. On April 20, Vermont enacted H 565, which, in relevant part, amends definitions and exceptions related to the licensing of mortgage loan originators, mortgage brokers, and other consumer lenders to (i) permit owner financing without obtaining a license, (ii) expand the types of properties that can be sold and financed by the owner without having to obtain a license, and (iii) expand exceptions applicable to practicing attorneys.

    Nebraska Issues Interpretation of Mortgage Originator, Processor, and Underwriter Licensing Rules. Recently, the Nebraska Department of Banking and Finance issued several interpretive opinions relating to mortgage loan originator, processor, and underwriter licensing. For mortgage loan originator licensing, one opinion provides examples of activities or situations that would and would not require licensure as a mortgage loan originator. A separate opinion identifies the factors and documentation the Department will consider when evaluating the “financial responsibility” of a person seeking a mortgage loan originator license. Additional separate guidance (i) clarifies the licensing responsibilities of clerical employees of licensed or registered mortgage bankers or installment loan companies, (ii) asserts that loan processing and underwriting activities are essential to origination and therefore entities performing those services must register as mortgage bankers, and (iii) establishes requirements pertaining to the use of the NMLS unique identifier on solicitations and advertisements. All of the interpretive opinions took effect April 16, 2012.

    Mortgage Licensing Mortgage Origination

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  • SEC Announces $28 Million RMBS Settlement


    On September 28, the SEC filed a settled complaint in Washington, D.C. federal court against Tokyo-based Hitachi, Ltd. for alleged FCPA books and records and internal controls offenses.  According to the SEC’s Complaint, the company failed to accurately report payments made to the African National Congress (ANC), South Africa’s ruling political party, in connection with a multi-billion dollar plan to build new power stations in the country. Hitachi purportedly sold a 25-percent stake in a South African subsidiary to a company that was a front to funnel funds to the ANC. The SEC alleges that Hitachi was (i) aware that it had partnered with a “funding vehicle” for the ANC; (ii) encouraged the front company to continue using its political influence to obtain additional government contracts; and (iii) agreed to pay “success fees” to the front company.  Hitachi did not admit wrongdoing in the settlement and agreed to pay a $19 million penalty.

    In its announcement, the SEC’s Director of Enforcement, Andrew Ceresney, cited Hitachi’s “lax internal control environment” as the factor that led to the conduct described in the complaint.  Continuing the trend of international cooperation in FCPA investigations, the SEC also thanked the African Development Bank and the South African Financial Services Board for their assistance with the investigation.

    RMBS SEC Subprime

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