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OCC issues cease and desist order against Japanese bank for BSA/AML issues
On February 22, the OCC announced a cease and desist order against three U.S. branches of a Japanese bank for allegedly violating the Bank Secrecy Act (BSA). According to the order, after an examination of the branches’ BSA/Anti-Money Laundering and OFAC compliance programs, the OCC identified alleged deficiencies in the branches’ BSA compliance program, including (i) internal controls; (ii) suspicious activity monitoring, which resulted in untimely suspicious activity report filings; (iii) foreign correspondent due diligence program; and (iv) trade finance monitoring. The OCC did not issue a monetary penalty against the branches and noted in the order’s announcement that the branches have already begun corrective actions. This action demonstrates U.S. banking regulators’ continued scrutiny of the BSA compliance programs of U.S. branches and subsidiaries of non-U.S. banks that provide international access to the U.S. financial system.
As previously covered by InfoBytes, in November 2017, the OCC issued a consent order with the branches that required corrective actions related to OFAC compliance. The branches continue to operate under this order.
UK SFO declines to prosecute individuals in British aviation company and British pharmaceutical company corruption investigations
The U.K.’s Serious Fraud Office (SFO) announced on February 22 that it was ending two long-running corruption-related investigations – one of a aviation company and the other of a pharmaceutical giant – without bringing charges against any individuals.
In 2017, the aviation company paid $650 million to settle an SFO investigation into a government kickbacks scheme. In connection with the resolution of the SFO’s charges, the aviation company admitted to bribing government officials in Russia, India, China, Nigeria, and elsewhere in exchange for contracts worth hundreds of millions of pounds. The aviation company also paid $170 million to resolve related charges brought by the DOJ, with the DOJ later charging five individuals for their alleged participation in the bribery scheme.
Although the SFO announced in 2014 that the pharmaceutical company was under investigation, the SFO never disclosed the subject matter of that investigation. In its only announcements about the case, the SFO has noted simply that the investigation concerned the company’s “commercial practices.” In 2012, the pharmaceutical company had paid $3 billion in the U.S. to settle charges brought by U.S. prosecutors concerning alleged off-label marketing, and in 2014 was convicted in China of bribing doctors and hospitals to improve sales, but it remains unknown whether the SFO’s investigation related to one of these known issues or something different.
The SFO director explained in a public statement that the decision to decline prosecution of any individuals in connection with these investigations was because “there is either insufficient evidence to provide a realistic prospect of conviction, or it is not in the public interest to bring a prosecution in these cases.”
District Court denies class certification in RMBS action
On February 15, the U.S. District Court for the Southern District of New York denied class certification in an action brought by an investment company against a bank acting as trustee for five residential mortgage-backed securities trusts in which the company invested. The investment company filed a class action suit against the trustee asserting claims for breach of contract, breach of the duty of trust, and violations of the Trust Indenture Act. Among other things, the allegations concern whether the trustee “failed to fulfil certain contractual duties triggered by the discovery of breaches of ‘representations and warranties’” when the underlying mortgages allegedly were found not to be of the promised quality. The investment company also alleged that the trustee failed to exercise its rights to require the companies that sold the mortgages in question “to cure, substitute, or repurchase the breaching loans.”
In dismissing class certification, the court found that questions of law or fact common to all class members did not dominate individual issues. The court held that there was no proof that the liability claims of potential class members who held certificates in one trust would be relevant to the claims of other potential class members in one of the other trusts, and that the individualized questions “involve relatively complex legal and factual inquiries—requiring considerable resources in comparison to those questions which are capable of class-wide resolution.”
NY high court keeps one RMBS suit alive, rejects another
On February 19, the New York State Court of Appeals issued two rulings in cases brought by a trustee against a seller and sponsor of three residential mortgage-backed securities (RMBS) trusts.
The first action involved a lawsuit filed by the trustee more than six years after the execution of the relevant Pooling and Servicing Agreement (PSA). The seller/sponsor moved to dismiss the complaint asserting that it was time-barred because the trustee failed to comply with the sole remedy provision within the six-year statute of limitations. The trustee alleged that its claim was timely because it should relate back to a similar action a certificate holder had timely filed against the seller/sponsor. The lower court granted the motion to dismiss the action with prejudice and the appellate division affirmed. On review by the state’s highest court, the Court affirmed, noting that a complaint only can relate back to a prior action where a valid pre-existing action has been filed. In this instance, the Court found that the certificate holder’s action was not valid because, as lower courts concluded, the PSA’s no action clause prevented the certificate holder from bringing an action against the seller/sponsor on behalf of itself or the trustee. Thus, there was no valid claim for which the trustee’s claim could relate back.
The second case involved a different action brought by the same trustee against the same seller/sponsor related to a different RMBS trust. In that case, the lower court dismissed the action without prejudice, concluding the action was timely-filed, but the trustee failed to comply with the sole remedy provision of the PSA and other controlling agreements. Specifically, the lower court concluded the trustee failed to provide notice of the suspected breach, allowing the loan originator 90 days to cure or repurchase the allegedly non-compliant loans. The appellate division affirmed the dismissal without prejudice, allowing the trustee to refile. The seller/sponsor appealed, arguing the case should be dismissed with prejudice because the trustee did not comply with its obligations under the sole remedy provision within the six-year limitations period. The Court of Appeals disagreed, determining the sole remedy provision is “a procedural condition precedent that does not impact the running of the six-year statute of limitations,” and therefore, does not foreclose refiling of the action. Thus, the action was properly dismissed without prejudice as CPLR 205(a) states that if a timely-filed action that has been terminated for any reason other than those specified in the statute, a second action based on the same transactions or occurrences can be commenced within six months of dismissal of the first action.
FTC and NY claim of deceptive supplement advertising gets new life
On February 21, the U.S. Court of Appeals for the 2nd Circuit issued a summary order reversing the lower court’s dismissal of an FTC and New York State action, which alleges a biotechnology group’s (defendants) marketing campaign for a dietary supplement was deceptive under the FTC Act. According to the opinion, defendants claimed in advertising and marketing materials that a suite of dietary supplements (i) improve memory and provide other cognitive benefits; (ii) the effects are clinically proven; and (iii) have an active ingredient that “supplements” brain proteins. The FTC and New York State brought an action alleging deceptive marketing in violation of the FTC Act because the defendants study of the supplements showed “no statistically significant improvement in the memory and cognition of the participants,” and the few positive findings did not “provide reliable evidence of a treatment effect.” The lower court dismissed the action, finding the challenge to the study “never proceed[ed] beyond the theoretical” as the complaint only showed there were “possibilities that the study’s results do not support its conclusion.”
On appeal, the 2nd Circuit found the complaint adequately alleges that the results of the study contradict representations made in the marketing materials, such as, the supplement “improved memory for most subjects within 90 days,” and concluded the lower court erred in dismissing the action.
CFPB releases Small Entity Compliance Guide on parts of the Payday Rule
On February 20, the CFPB released the Small Entity Compliance Guide covering the payment-related requirements of the Payday, Vehicle Title, and High-Cost Installment Lending Rule, which, among other things, prohibits payday and certain other lenders from making a new attempt to withdraw funds from an account where two consecutive attempts have failed unless consumers consent to further withdrawals. (Detailed coverage on the Rule’s payment provisions available here.)
Notwithstanding the Bureau’s recently issued proposed rulemakings (covered by InfoBytes here), which, if finalized, would rescind certain provisions of the Rule related to underwriting standards and seek to delay the Rule’s compliance date for the underwriting provisions until August 2020, the payment-provisions will take effect August 19, 2019.
District Court lets credit inquiry suit go forward
On February 19, the U.S. District Court for the District of Maryland denied a bank’s renewed motion to dismiss FCRA claims by a consumer alleging the bank accessed his credit report without a permissible purpose. Specifically, the consumer alleged his credit report included two credit inquires by the bank for “promotional” purposes but that he never received any offers of credit from the bank. According to the consumer, a bank representative told him to dispute the “illegitimate” credit inquiry with the credit reporting agency, and so he filed suit. The bank moved to dismiss, arguing the facts allegedly failed to establish the bank obtained the credit report without a permissible purpose. The court, however, held that the consumer’s allegations that he did not receive an offer of credit and that a representative advised him the inquiry was illegitimate were sufficient to establish—at the motion to dismiss stage—that no firm offer of credit was extended. In response to the bank’s argument that the consumer’s alleged emotional distress damages based on “invasion of privacy” were implausible—because they would have occurred whether or not there was a permissible purpose for the credit pull—the court noted that unauthorized credit disclosures have been “long seen as injurious,” and that the bank cannot attack the harm experienced by the consumer simply because the “harm would still have existed if [the bank] had acted lawfully.”
2nd Circuit: Owner personally liable for debt collection companies’ violations
On January 11, the U.S. Court of Appeals for the 2nd Circuit affirmed a district court’s decision that two individual co-owners were jointly and severally liable for nearly $11 million for debt collection activities conducted by their companies (corporate defendants) that violated the Federal Trade Commission Act (FTCA) and the FDCPA. According to the opinion, the corporate defendants misrepresented that they were investigators calling from a “fraud unit” or a “fraud division,” falsely accused debtors of committing check fraud, threatened consumers with criminal prosecution if the debts were not paid, and contacted friends, family, employers, or co-workers, “telling them that the debtors owed a debt, had committed a crime in failing to pay it, and faced possible legal repercussions.” The district court held that the co-owners were personally liable for the $10,852,368 calculated by the FTC, which represented the total amount received by the corporate defendants from consumers as a result of their actions. One of the co-owners appealed the decision that he was personally liable and argued that the district court erred in determining the amount of equitable monetary relief.
On appeal, the 2nd Circuit agreed with the district court that the co-owner “had both sufficient authority over the [c]orporate [d]efendants, and knowledge of their practices, to be held individually liable for their misconduct as a matter of law.” The court also upheld the disgorgement amount, reasoning that the FTC’s process to determine the amount was entitled to a presumption of reliance because it was based on the submission of more than 500 consumer complaints concerning the corporate defendants’ debt collection practices, aggressive collection scripts, and audio recordings of twenty-one of the twenty-five debt collectors “falsely telling consumers that the employees were law enforcement personnel or ‘processors.’” Moreover, the court noted that the co-owner failed to submit proof that the corporate defendants earned some or all of their revenue through lawful means.
SEC: No fine for self-reported unregistered ICO
On February 20, the SEC announced a cease-and-desist order with a cybersecurity startup for conducting an unregistered Initial Coin Offering (ICO), which the company self-reported. According to the order, in late 2017, the startup conducted an unregistered ICO, which raised approximately $12.7 million in digital assets. The money was used to finance the startup’s plan to “develop[] a network in which participants could rent spare bandwidth and storage space on their computers and servers to others for use in defense against certain types of cyberattacks.” The SEC noted that the tokens offered and sold were considered securities because a purchaser would have a reasonable expectation of obtaining a future profit from the investment. The startup did not register the ICO nor did it qualify for an exemption to the registration requirements. The SEC did not impose a monetary penalty because, according to the order, in the summer of 2018 the startup self-reported the unregistered ICO and offered to take prompt remedial actions. The order requires the startup to return the funds to investors who purchased the tokens and register the tokens as securities.
IT outsourcing company resolves FCPA investigations
On February 15, an information technology and business process outsourcing company paid $25 million to settle SEC civil charges that it violated the FCPA. The SEC alleged that the company paid $3.6 million in bribes through its construction contractor to senior government officials in India in order to obtain permits needed to build, among other things, a large office campus in Chennai. To resolve the SEC’s allegations, the company paid $19 million in disgorgement and a $6 million penalty.
The DOJ declined to bring criminal charges against the company, citing, among other factors, the company’s voluntary self-disclosure, comprehensive investigation, full cooperation and remediation, and its preexisting compliance program. The company issued a statement highlighting that the matter did not concern any of the company’s work with clients and did not affect any of the services it provides to clients.
On the same day the settlement was announced, two former company executives—the president and chief legal officer—were hit with civil and criminal charges for allegedly authorizing $2 million in bribes and directing the creation of false contractor change orders to mask payment of the bribes. The former executives are charged with violating the anti-bribery, books and records, and internal accounting controls provisions of the FCPA. Pursuant to its letter agreement with DOJ, the company is required to fully cooperate in the ongoing prosecutions.