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Third Circuit Affirms District Court's Decision Asserting FTC's Authority over Companies' Data Security Practices
On August 24, the U.S. Court of Appeals for the Third Circuit affirmed the Federal Trade Commission’s authority to hold companies accountable for their data security practices under Section 5 of the FTC Act (15 U.S.C. § 45(a)), which declares unlawful “unfair or deceptive acts or practices in or affecting commerce.” FTC v. Wyndham Worldwide Corp., No. 14-3514 (3rd Cir. Aug. 24, 2015). The unanimous ruling found that deficient cybersecurity practices that fail to protect consumer data against hackers may be found to be “unfair” practices under the Act, subject to FTC enforcement. The FTC had sued Wyndham for allegedly deficient cybersecurity practices that enabled hackers to obtain payment card information from over 619,000 consumers. Wyndham argued that it lacked fair notice that the FTC had the authority to police data security practices under Section 5, but the Third Circuit disagreed, pointing out that the FTC has offered specific public guidance on data security over the years, and has filed multiple complaints and consent decrees raising unfairness claims based on inadequate cybersecurity that put companies on notice of its enforcement authority in this space.
Former Ohio Deputy Treasurer Extradited to Serve 15 Years in Prison for Role in Bribery and Money Laundering Scheme
On August 26, a former deputy treasurer of Ohio was extradited from Pakistan to serve a 15-year prison term in the U.S. for his involvement in a bribery and money laundering scheme spanning from January 2009 through January 2011. According to his 2013 guilty plea, the former deputy treasurer misused his position as a state official to direct official state of Ohio business to a securities broker in return for bribes. With the assistance of a Chicago businessman, the deputy treasurer concealed the broker’s payments by funneling them through (i) accounts connected to a landscaping business; and (ii) an attorney and lobbyist who was both a friend and business partner. The broker, who paid more than $500,000 in bribes, collected roughly $3.2 million in commissions as a result of 360 securities trades on behalf of the Office of the Ohio Treasurer.
Sentenced in abstentia on December 1, 2014 by a Ohio federal judge, the former state official was also ordered to forfeit $3.2 million in illegal profits. The securities broker, lobbyist, and the Chicago businessman were each sentenced in late 2014 to serve 45 months, 48 months, and 18 months in prison, respectively, for their roles in the scheme.
DOJ and SEC Announce Parallel Action Against Former Investment Banking Analyst and Two Individuals for Alleged Involvement in Insider Trading Scheme
On August 25, the DOJ unsealed an indictment charging three defendants each with (i) one count of conspiracy to commit securities and tender offer fraud; (ii) 13 counts of securities fraud; (iii) 13 counts of tender offer fraud; and (iv) three counts of wire fraud. In a parallel action, the SEC filed a complaint in the Central District of California against the same three individuals, asserting that the three individuals violated certain provisions of the Securities Exchange Act by participating in a scheme that involved “coordinated, illegal trading in stock and stock options of two separate companies that participated in merger activity” in which the same investment bank played an advisory role. According to the SEC, having learned of impending acquisitions involving two of the investment bank’s clients and other companies, one of the investment bank’s former analysts allegedly provided information regarding the transaction to a friend before any public announcements were made. The friend then communicated the information to a third individual, and the two made a series of trades in the two companies’ securities. When the acquisitions were publicly announced, both companies’ stock prices increased, resulting in profits of more than $670,000 for the two individuals on the receiving end of the former analyst’s inside information. The SEC’s complaint seeks a final judgment ordering the three defendants “to pay disgorgement of their ill-gotten gains plus prejudgment interest and penalties, and permanent injunctions from future violations of [certain] provisions of the federal securities laws.”
CFPB Spotlights Credit Reporting Industry in Latest Complaints Report
On August 25, the CFPB released the second of its monthly complaint reports, highlighting complaints received from consumers regarding the credit reporting industry. In its latest snapshot report, the CFPB revealed a 56 percent increase in the number of credit reporting complaints submitted by consumers between June 2015 and July 2015, and a 45 percent increase in credit reporting complaints from last year. The report also stated that 77 percent of credit reporting complaints involved inaccurate information on consumers’ credit reports. Despite the large volume of data used to prepare the report, the Bureau cautioned that the data is not normalized and that company-specific information should be considered in context of a company’s size.
Fannie Mae Announces New Mortgage Product for Low- and Moderate-Income Borrowers
On August 25, Fannie Mae announced that it will begin offering HomeReady, a mortgage loan product featuring new flexibilities for lower to moderate income borrowers. For the first time, income from a non-borrower household member can be considered as a means to qualify for a Fannie loan. In addition, borrowers can include funds received from other sources, such as income from non-occupant parents or rental income from a basement apartment, to satisfy income requirements. Both first-time and repeat homebuyers can qualify for a HomeReady mortgage with a down payment as low as 3 percent. The new product requires borrowers to complete an online housing-counseling course. Fannie Mae is expecting to begin accepting deliveries under the HomeReady guidelines towards the end of 2015, and will soon issue additional details to assist lenders through a Selling Guide announcement.
FinCEN Issues NPRM Establishing BSA/AML Requirements for Investment Advisers
On August 25, FinCEN issued a Notice of Proposed Rulemaking (NPRM) seeking to adopt minimum Bank Secrecy Act (BSA) and anti-money laundering (AML) standards that would be applicable to investment advisers. Under the proposal, investment advisers would be required to implement AML programs and report suspicious activity, among other safeguards. The NPRM states that the proposal would cover investment advisers registered or required to register with the SEC. The proposal would also add such investment advisers to the definition of “financial institution.” This would result in investment advisers being required to file currency transaction reports and to comply with recordkeeping and other requirements applicable to financial institutions. With respect to supervisory authority, FinCEN stated that it would delegate its authority to the SEC for purposes of examining investment advisers for compliance with the proposed requirements.
CFPB & NYDFS File Suit Against Two Pension Advance Lenders Over Misleading Consumers Related to Costs, Risks Associated to Advance Payments
On August 20, the CFPB, along with the New York Department of Financial Services (NYDFS), filed a joint complaint in federal court against two pension advance lenders and three of their managers for allegedly misleading consumers regarding the costs and risks associated with the companies’ pension advance loans. The CFPB and NYDFS contend that both companies coerced consumers into borrowing against their pensions by marketing the product as a sale rather than a loan, and misrepresented or failed to disclose interest rates and fees on lump-sum cash advances offered for agreeing to redirect the full or partial amount of the consumer’s pension payments over an extended period. In separate allegations, the NYDFS contends that both companies violated New York state specific laws related to usury and deception, and unlawfully transmitted money without a proper license. The complaint follows guidance issued earlier this year highlighting three business practices consumers should avoid when conducting business with pension advance lenders.
Former Bank Executive Sentenced to 30 Months in Prison for Role in TARP Fraud Scheme
On August 20, former bank executive Charles Antonucci was sentenced to 30 months in prison for his role in organizing a scheme involving self-dealing, bank bribery, embezzlement of bank funds, attempting to fraudulently obtain more than $11 million from the Troubled Asset Relief Program (TARP), and participating in a $37.5 million fraud scheme that left an Oklahoma insurance company in receivership. Antonucci pled guilty to the charges in 2010 pursuant to a cooperation agreement with the government. He was the first defendant convicted of fraud of TARP funds, which was a program established in 2008 to provide liquidity to troubled financial institutions during the financial crisis. The judge also ordered Antonucci to forfeit $11.2 million to the United States and to provide $54.6 million in restitution to the victims of his crimes, including, among others, the bank’s shareholders and the FDIC. Antonucci’s plea and sentencing was before U.S. District Judge Naomi Reice Buckwald of the Southern District of New York. The case was handled by the Southern District of New York’s Office of Complex Frauds and Asset Forfeiture Units, with investigative assistance from the Office of the Special Inspector General for TARP.
United States District Court: Mortgagor Lacks Standing to Bring RESPA Claim
On August 11, the U.S. District Court for the District of New Hampshire rejected the addition of a potential RESPA claim to plaintiff’s complaint due to lack of standing, and the court dismissed the remaining counts for failure to state a claim. Sharp v. Deutsche Bank National Trust Company, As Trustee For Morgan Stanley ABS Capital Inc. Trust 2006-HE3, No. 14-cv-369 (D.N.H. Aug. 11, 2015). Although plaintiff and his father were both mortgagors on the mortgage document, the promissory note identified plaintiff’s father as the sole borrower for the loan. After plaintiff’s father died and plaintiff defaulted on the mortgage, plaintiff sought to enjoin the bank’s subsequent foreclosure proceedings. Plaintiff moved to amend his complaint to add a RESPA claim based on the bank’s allegedly inadequate responses to his requests for information pursuant to 12 C.F.R. § 1024.35 and 12 C.F.R. § 1024.36. The court determined that plaintiff lacked standing to assert his RESPA claim because the RESPA provisions at issue only applied to borrowers, not mortgagors like plaintiff. The court also rejected plaintiff’s argument that his status as the successor-in-interest to his father under 12 C.F.R. § 1024.38 established standing to bring the RESPA claim. The court confirmed that plaintiff was protected by 12 C.F.R. § 1024.38, but the court relied on the CFPB’s official interpretation of 12 C.F.R. § 1024.38 to determine that no private right of action existed to enforce the rule. The court also dismissed plaintiff’s original claims that sought to enjoin foreclosure by asserting that the bank (i) lacked authority to foreclose because the bank could not demonstrate that it was an assignee of the mortgage and (ii) it breached the implied covenant of good faith and fair dealing by pursuing foreclosure despite plaintiff’s request to postpone it. The court held that the bank had authority to foreclose because New Hampshire law did not require the bank to record the assignment in order to exercise the statutory power of sale. Regarding plaintiff’s second claim, the court determined that the bank did not breach the implied covenants because its actions were consistent with its contractual rights and there was no duty to postpone the foreclosure sale upon plaintiff’s request.
Large Multinational Financial Services Company Settles FCPA Charges Relating to Internships
On August 18, the SEC announced a settlement with a large multinational financial services company over allegations that the company had violated the FCPA by giving internships to family members of government officials working at a Middle Eastern sovereign wealth fund in hopes of retaining or gaining more business from that fund. The order entered as part of the settlement quoted emails between company employees purportedly demonstrating that the company gave the internships in hopes of keeping and growing the business relationship with the fund. The SEC also alleged that the company gave the internships to the family members without requiring that they pass through the competitive screening process the company typically requires for interns. Finally, the SEC alleged that the company had inadequate controls to prevent the improper hiring of relatives of government officials. The company paid $14.8 million to settle the charges, with $8.3 million in disgorgement, $1.5 million in pre-judgment interest, and a $5 million penalty.
The company previously disclosed in January 2015 that it had received a Wells Notice concerning possible FCPA violations in connection with the internships. The settlement follows earlier press reports of a broad SEC investigation into bank hiring practices in Asia, and appears to be the first settlement resulting from the investigation.