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Financial services firm settles SEC’s American Depositary Receipts allegations
On March 22, the SEC announced a settlement with a financial services firm to resolve allegations that certain associated persons on its securities lending desk allegedly “improperly borrowed” pre-released American Depositary Receipts (ADRs)—“U.S. securities that represent shares in foreign companies”—from non-firm brokers who did not own the foreign shares required to support those ADRs. The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if (i) the brokers receiving the ADRs have an agreement with a depositary bank; and (ii) “the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents.” The SEC alleged that the firm’s practices violated the Securities Act of 1933 and led to “inappropriate short selling and dividend arbitrage that should not have been occurring.” Moreover, the SEC claimed that the firm’s supervisory policies and procedures “failed to prevent and detect” the securities laws violations. The firm neither admitted nor denied the SEC’s allegations, but agreed to pay more than $4.4 million in disgorgement, roughly $725,000 in prejudgment interest, and a civil money penalty of approximately $2.9 million. The SEC’s order acknowledges the bank’s cooperation in the investigation.
Hong Kong energy executive sentenced to three years in prison for Chad and Uganda bribes
According to the DOJ, on March 25 a Hong Kong executive was sentenced in the SDNY to a 36-month prison sentence. He headed up a private Chinese energy company and was sentenced “for his role in a multi-year, multimillion-dollar scheme to bribe top officials of Chad and Uganda in exchange for business advantages.”
He was convicted of money laundering, violating the FCPA, and conspiracy after a week-long trial in December 2018. The DOJ alleged that starting in the fall of 2014, he used his US-based NGO to cover up a scheme in which he offered $2 million in cash to the President of Chad concealed in gift boxes, in exchange for the company receiving oil rights from the government; the President rejected the bribe. In Uganda, the DOJ alleged that he gave $1,000,000 in cash payments to the Foreign Minister of Uganda and the President of Uganda.
FTC reaches settlements with mega-robocallers
On March 26, the FTC announced settlements issued against four separate operations for allegedly placing billions of illegal robocalls to consumers selling auto warranties, debt-relief services, home security systems, veterans’ charities and Google search results services. The actions are part of the FTC’s ongoing efforts to combat illegal robocalls. According to the FTC, the companies—along with several of their affiliates and leaders—allegedly violated the FTC Act and the Telemarketing Sales Rule (TSR), including its Do Not Call provisions.
Proposed settlements issued against two related operations and their leaders—who, according to the FTC’s complaint, developed and enabled a software dialing platform that resulted in more than one billion robocalls—ban the defendants from engaging in telemarketing activities utilizing an autodialer, and imposes judgements ranging from $1 million to $2.7 million, of which two are fully suspended due to the defendants’ inability to pay. The FTC also reached a final settlement against defendants who allegedly placed robocalls to pitch fake debt-relief services promising lowered credit card interest rates and interest payment savings. The order permanently bans the defendants from engaging in telemarketing and debt-relief services, and imposes a $3.15 million judgment, which will be suspended following the turnover of available assets. Separately, the FTC reached a proposed settlement with a defendant who allegedly used robocalls promoting fake veterans’ charities to solicit donations, which he eventually sold for his own benefit. The proposed order bans the defendant from engaging in telemarketing services or soliciting charitable contributions, prohibits him from making future misrepresentations, and imposes a $541,032 monetary judgment, which will also be suspended following the turnover of available assets. Finally, the FTC announced proposed settlements against three defendants (see here, here, and here) whose Florida-based operations allegedly violated the TSR by falsely claiming to represent Google and making threats and promises to businesses concerning search results and page placements. The terms of the proposed settlements, among other things, ban the defendants from deceptive sales practices, and require the defendants to disclose their identities during telemarketing sales calls. Monetary judgements imposed against the defendants and their companies range from $1.72 million to $3.62 million, and will be partially suspended due to their inability to pay.
OCC announces interagency examination procedures for prepaid accounts rule
On March 26, the OCC released Bulletin 2019-16, which announces that the FFIEC Task Force on Consumer Compliance developed new interagency examination procedures to reflect the amendments to Regulations Z and E under the CFPB’s Prepaid Accounts Rule (covered by InfoBytes here), which go into effect on April 1. Specifically, the examination procedures reflect (i) Regulation E requirements covering disclosures, limited liability and error resolution, periodic statement, and posting of account agreements; and (ii) Regulation Z requirements covering overdraft credit features with prepaid accounts.
SEC issues $50 million whistleblower award; third-highest ever
On March 26, the SEC announced awards totaling $50 million to two whistleblowers for volunteering information that led to a successful enforcement action, with one whistleblower receiving $37 million (the third-highest SEC award to date) and the other receiving $13 million. While details of the related enforcement action were not made public, the SEC’s award order noted that one of the whistleblowers “provided information and documentation that were of a significantly high quality and critically important,” including documents that “were akin to ‘smoking gun’ evidence.” As previously covered by InfoBytes here and here, the SEC awarded $50 million to two joint whistleblowers in March 2018 and $39 million to a single whistleblower in September 2018—the two highest awards given by the SEC so far. Since the program’s inception in 2012, the SEC has awarded more than $376 million to 61 whistleblowers.
OFAC sanctions individuals and entities for transferring over a billion dollars and euros to IRGC
On March 26, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions against “25 individuals and entities, including a network of Iran, UAE, and Turkey-based front companies,” for allegedly transferring “over a billion dollars and euros” in funds to the Islamic Revolutionary Guard Corps (IRGC) and Iran's Ministry of Defense and Armed Forces Logistics (MODAFL). Among other things, the designated individuals and entities also procured vehicles worth millions of dollars for MODAFL, which was also sanctioned, along with Iran’s IRGC-controlled bank and currency exchange arm, for allegedly providing assistance and banking services to the IRGC-Qods Force. According to OFAC, the sanctions were issued pursuant to Executive Order 13224, which “provides a means by which to disrupt the financial support network for terrorists and terrorist organizations.” As a result, all property and interests in property belonging to the identified individuals and entities subject to U.S. jurisdiction are blocked and must be reported to OFAC, and U.S. persons are generally prohibited from entering into transactions with them. In addition, OFAC noted that persons who engage in transactions with the designated individuals and entities may be exposed to sanctions themselves or subject to enforcement action. Moreover, OFAC warned foreign financial institutions that, unless an exemption applies, they may be subject to U.S. sanctions if they knowingly facilitate significant transactions for any of the designed individuals or entities.
Visit here for continuing InfoBytes coverage of actions related to Iran.
West Virginia amends provisions related to regulated consumer loans
On March 26, the West Virginia governor signed HB 3143, which amends the requirements for regulated consumer lending in the state to provide that a person making or taking assignment of consumer loans, or “undertaking direct collection of payments,” must first be licensed by the state’s Commissioner of Banking. Among other things, the act also adjusts the threshold amounts “for which certain finance charges can be imposed” on consumer loans, including revolving loan accounts. For instance, (i) on loans less than $3,500 that are not secured by real property, the finance charge “may not exceed 31 percent per year on the unpaid balance of the principal amount”; and (ii) on loans between $3,500 and $15,000, the finance charge “may not exceed 27 percent per year on the unpaid balance of the principal amount.” The act also provides restrictions relating to when finance charges may be imposed again, and states that, in certain cases, the “financing of [] charges is permissible and does not constitute charging interest on interest.” The act further clarifies that the new licensing provisions exclude “any collection agencies as defined and licensed by the West Virginia Collection Agency Act of 1973.” HB 3143 is effective June 7.
Montana adds capital and net worth requirements for mortgage servicers and originators
On March 19, the Montana governor signed HB 107, which amends the Montana Mortgage Act to, among other things, add capital requirements for mortgage servicers and net worth requirements for mortgage originators licensed in the state. The bill provides that a failure to meet or maintain the outlined standards could result in a license application denial or the suspension or revocation of a current license. Additionally, the bill adds a definition for mortgage “servicer providers” and authorizes the banking division of the Montana Department of Administration to adopt rules to (i) define false, deceptive, or misleading advertising; and (ii) establish requirements for licensee advertising using the internet. The bill is effective October 1.
1st Circuit: “Sustained Overdraft Fees” are not interest under the National Bank Act
On March 26, the U.S. Court of Appeals for the 1st Circuit affirmed a district court’s decision to dismiss putative class action allegations that a bank charged usurious interest rates on its overdraft products, finding that the bank’s “Sustained Overdraft Fees” are not interest under the National Bank Act (NBA). The plaintiff filed a lawsuit against the bank in 2017, alleging that sustained overdraft fees should be considered interest charges subject to Rhode Island’s interest rate cap of 21 percent, and that because the alleged annual interest rates exceeded the cap, the fees violated the NBA. The district court, however, dismissed the case, ruling that the sustained overdraft fees were service charges, not interest charges.
On appeal, the split three-judge panel held that, because the sustained overdraft fees did not constitute interest payments under the NBA and the OCC’s regulations interpreting the NBA, the class challenges cannot move forward. The panel stated that the agency’s interpretation in its 2007 Interpretive Letter is due “a measure of deference.” The panel found the agency’s interpretation persuasive because “[f]lat excess overdraft fees (1) arise from the terms of a bank’s deposit account agreement with its customers, (2) are connected to deposit account services, (3) lack the hallmarks of an extension of credit, and (4) do not operate like conventional interest charges.”
In dissent, Judge Lipez noted that, while the OCC interpretive letter laid out a clear case for overdraft fees as service, not interest charges, it was silent on the question of “Sustained Overdraft Fees.” He wrote that “[s]ilence, however, is not guidance, and we would thus need to infer a ruling on a debated issue from between the lines of the Letter.” Furthermore, he could “not see how we can defer to an interpretation that the OCC never clearly made on an issue that it previously described as complex and fact-specific.”
Virginia, North Dakota establish GAP waiver requirements
On March 21, the Virginia governor signed SB 1325, which provides a framework within which guaranteed asset protection (GAP) waivers may be offered in the state. Among other provisions, the act (i) clarifies that any cost to the borrower for the sale of a GAP waiver, in compliance with TILA, should not be considered a finance charge or interest; (ii) states that neither the extension of credit nor the sale or lease of a motor vehicle “may be conditioned upon the purchase of a GAP waiver;” (iii) requires creditors to comply with GAP waiver obligations; (iv) requires a GAP waiver to include disclosures regarding the cancellation of the GAP waiver during a free look period; and (v) establishes requirements and restrictions for GAP waiver cancellations, including refund provisions. The act also provides that GAP waivers are not insurance and are exempt from Virginia's licensing requirements. The act is effective July 1.
Separately, on March 20, the North Dakota governor signed HB 1181, which clarifies that GAP waivers effective on or after August 1 are not insurance and are exempt from the state’s insurance laws. Among other things, the act also (i) clarifies contractual liability coverage; (ii) outlines required disclosures that must be stipulated with the sale of a GAP waiver; and (iii) specifies GAP waiver cancellation conditions and refund provisions.