On May 7, the U.S. Attorney for the Southern District of New York announced mail and wire fraud charges against a debt settlement firm, its owner, and three of its employees. The government alleges the defendants lied to prospective customers about (i) fees associated with the company’s debt relief products, (ii) the company’s purported affiliation with the federal government and leading credit bureaus, and (iii) the results achieved for its customers. On the same day, the CFPB filed a civil complaint against the same debt relief provider and one other company in which the CFPB alleges the firms violated the FTC’s Telemarketing Sales Rule and the Dodd-Frank Act by charging consumers illegal advance fees for debt-settlement services. The CFPB is seeking to halt the operations, collect civil penalties, and obtain customer redress.

On May 7, the DOJ charged two employees of a U.S. broker-dealer and a senior official in Venezuela’s state economic development bank for their alleged roles in what the DOJ describes as a “massive international bribery scheme.” According to an unsealed criminal complaint, the DOJ accuses the broker-dealer employees and the foreign official of violating the FCPA by conspiring to pay $5 million in bribes to the foreign official in exchange for her directing the economic development bank’s trading business to the broker-dealer, which yielded millions of dollars more in mark-ups and mark-downs for the broker-dealer. The government alleges that commissions paid on the directed trades were split with the foreign official through monthly kickbacks and that some of the trades executed for the bank had no discernible business purpose. The government also claims that the kickbacks often were paid using intermediary corporations and offshore accounts, which will be pursued through a separate civil forfeiture action. On the same day, the SEC announced a parallel civil action against the two broker-dealer employees and two other individuals who allegedly participated in and profited from the scheme. The investigations stemmed from a routine periodic SEC examination of the broker-dealer. The DOJ warned others in the financial services industry, particularly brokers, about engaging in similar activities, and the SEC’s handling of this case suggests its examiners are focused on conduct that potentially violates the FCPA.

On April 29, the U.S. Attorney for the Southern District of New York dropped its reverse false claims count in a pending False Claims Act case against a mortgage lender. U.S. v. Wells Fargo Bank, N.A., No. 12-7527. Although the government’s letter does not provide the reasoning behind its decision, during the recent oral argument on the lender’s motion to dismiss, the judge questioned the claim, noting that the obligation to pay at issue is conditional because it depends on an exercise of discretion by the government. The lender’s motion to dismiss remains pending.

On April 24, the U.S. District Court for the Southern District of New York held that a federally insured financial institution may be prosecuted under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) for allegedly engaging in fraud that “affects” the same institution. U.S. v. Bank of N.Y. Mellon, No. 11-6969, 2013 WL 1749418 (S.D.N.Y. Apr. 24, 2013). In this case, the government alleges that the bank and one of its employees provided clients with false, incomplete and/or misleading information about the way it determined currency exchange rates for its “standing instruction” foreign exchange transactions, from which the bank profited, and which ultimately exposed it to “billions of dollars in potential liability.” Based on a lengthy analysis of textual meaning and congressional intent, the court concluded that the “text and purpose of FIRREA amply encompass the alleged conduct,” and that the government’s complaint sufficiently alleged that the bank was negatively affected by the fraud. The decision represents the first time a court has interpreted the meaning of the phrase “affecting a federally insured financial institution” under FIRREA to allow the government to prosecute a financial institution for its own alleged misconduct.

On April 22, the DOJ and the SEC announced parallel actions against a clothing company to resolve allegations that a subsidiary of the company paid bribes to Argentine officials over a several-year period to obtain improper customs clearance of merchandise. The SEC action included the agency’s first non-prosecution agreement (NPA) related to FCPA misconduct, which the SEC determined was appropriate given “the company’s prompt reporting of the violations on its own initiative, the completeness of the information it provided, and its extensive, thorough, and real-time cooperation with the SEC’s investigation.” According to the SEC’s NPA, the company’s cooperation involved (i) reporting preliminary findings of its internal investigation to the staff within two weeks of discovering the illegal payments and gifts, (ii) voluntarily and expeditiously producing documents, (iii) providing English language translations of documents to the staff, (iv) summarizing witness interviews that the company’s investigators conducted overseas, and (v) making overseas witnesses available for staff interviews and bringing witnesses to the U.S. The SEC agreement also required the company to pay over $700,000 in disgorgement and prejudgment interest, while the DOJ required the company to pay a nearly $900,000 penalty.

On April 4, the U.S. Attorney for the Southern District of New York and HUD officials announced a civil fraud suit alleging FCA and FIRREA claims against a mortgage lender and its president for falsely certifying loans and other actions under the FHA’s Direct Endorsement Lender Program. Many of the allegations mirror those in prior mortgage fraud cases brought by the government, including claims that the lender failed to maintain adequate quality control processes, incentivized employees to expedite loan approval, failed to disclose to HUD all loans containing evidence of fraud or other serious underwriting problems, and made repeated false certifications to HUD. However, this is only the second time the government has brought claims based on the FHA’s annual certification process, as opposed claims based on certifications of individual loans. The complaint also alleges that the firm’s president and owner personally performed underwriting and provided false certifications to HUD in a number of instances. The government’s decision to name an individual also may evidence a new trend in its mortgage fraud enforcement practices. The government claims that to date HUD has paid more than $12 million in insurance claims on loans underwritten by the lender. The complaint does not specify total damages, but does seek more than $40 million in treble damages and penalties on the FCA claims.

On March 20, 2013, Michael Bresnick, Executive Director of DOJ’s Financial Fraud Enforcement Task Force gave a speech at the Exchequer Club of Washington, DC highlighting recent accomplishments of the Task Force and outlining its priorities for the coming year. He began by discussing a number of areas of known focus for the Task Force, including RMBS fraud, fair lending enforcement, and servicemember protection. He then outlined three additional areas of focus that the Task Force has prioritized, including (i) the “government’s ability to protect its interests and ensure that it does business only with ethical and responsible parties;” (ii) discrimination in indirect auto lending; and (iii) financial institutions’ role in fraud by their customers, which include third party payment processors and payday lenders.

The third priority, which was the focus of Mr. Bresnick’s remarks, involves the Consumer Protection Working Group’s prioritization of “the role of financial institutions in mass marketing fraud schemes — including deceptive payday loans, false offers of debt relief, fraudulent health care discount cards, and phony government grants, among other things — that cause billions of dollars in consumer losses and financially destroy some of our most vulnerable citizens.”  He added that the Working Group also is investigating third-party payment processors, the businesses that process payments on behalf of the fraudulent merchant. Mr. Bresnick explained that “financial institutions and payment processors . . . are the so-called bottlenecks, or choke-points, in the fraud committed by so many merchants that victimize consumers and launder their illegal proceeds.” He said that “they provide the scammers with access to the national banking system and facilitate the movement of money from the victim of the fraud to the scam artist.” He further stated that “financial institutions through which these fraudulent proceeds flow . . . are not always blind to the fraud” and that the FFETF has “observed that some financial institutions actually have been complicit in these schemes, ignoring their BSA/AML obligations, and either know about — or are willfully blind to — the fraudulent proceeds flowing through their institutions.” Mr. Bresnick explained that “[i]f we can eliminate the mass-marketing fraudsters’ access to the U.S. financial system — that is, if we can stop the scammers from accessing consumers’ bank accounts — then we can protect the consumers and starve the scammers.”   Read more…

On March 8, Senator Ron Wyden (D-OR) released a letter to Attorney General Eric Holder advising the DOJ about claims made to the Senator’s office by a “long-time professional in the mortgage industry” that banks and mortgage servicers have engaged in a “systematic effort” to double bill borrowers for certain foreclosure-related fees. The letter identifies a major default service provider with whom other banks and servicers allegedly have been complicit in establishing a fraudulent fee structure that increased foreclosure rates and led directly to other servicing problems, including robosigning. Senator Wyden offers that in addition to being potentially fraudulent, the practices described may violate the False Claims Act. The letter explains that Fannie Mae and Freddie Mac, which currently operate under government conservatorship, are improperly being asked to pay fees that the servicers also are passing on to borrowers. The letter, a copy of which also was sent to the federal housing and banking agencies, seeks a DOJ investigation into these allegations, or a report from the DOJ about any investigation conducted to date. The Senator also (i) seeks guidance from the DOJ about actions Congress can take with regard to foreclosure billing transparency, including a “RESPA-like policy,” (ii) asks whether Fannie Mae’s and Freddie Mac’s policies regarding certain of the fees at issue should be implemented industry-wide, and (iii) requests an investigation of competition in the title industry and alleged pricing and market manipulation practices.

On February 19, the DOJ announced a settlement with a $338 million Texas community bank to resolve allegations that the bank engaged in a pattern or practice of pricing discrimination on the basis of national origin. Specifically, the DOJ alleged, based on its own investigation and an examination conducted by the FDIC, the bank violated ECOA by charging Hispanic borrowers higher interest rates on unsecured consumer loans compared to the rates charged to similarly situated white borrowers. The consent order requires the bank to establish a $700,000 fund to compensate borrowers who may have suffered harm as a result of the alleged ECOA violations. It also requires that the bank (i) establish uniform pricing policies, (ii) create a compliance monitoring program, (iii) provide borrower notices of non-discrimination, and (iv) conduct employee training. The new requirements apply not only to unsecured consumer loans, but also to all residential single-family real estate construction financing, automobile financing, home improvement loans, and mortgage loans.

On February 6, U.S. and U.K. authorities announced that a Japanese financial institution and its British bank parent company agreed to pay roughly $612 million to resolve criminal and civil investigations into the firms’ role in the manipulation of the London Interbank Offered Rate (LIBOR), a global benchmark rate used in financial products and transactions. The U.S. DOJ announced that the Japanese firm agreed to plead guilty to felony wire fraud, admit its role in in the manipulation scheme, and pay a $50 million fine. In addition, the DOJ filed a criminal information and deferred prosecution agreement (DPA) against the parent company for its role in manipulating LIBOR rates and participating in a price-fixing conspiracy in violation of the Sherman Act. As a result, the parent company agreed to pay an additional $100 million penalty, admit to specified facts, and continue to assist the DOJ with its ongoing investigation. The DPA acknowledges the remedial measures undertaken by the bank’s management to enhance internal controls, as well as additional reporting, disclosure, and cooperation requirements undertaken by the bank. Domestic and foreign regulators also announced penalties and disgorgement to resolve parallel civil investigations, including a $325 million penalty obtained by the CFTC, and a $137 million penalty imposed by the U.K. Financial Services Authority.

On February 5, the DOJ filed a lawsuit in the Central District of California against a major credit rating agency, alleging that the firm defrauded investors in residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) by issuing inflated ratings that misrepresented the securities’ true credit risks, and by falsely representing that its ratings were uninfluenced by its relationships with investment banks. According to the complaint, the agency publicly represented that its ratings of RMBS and CDOs were objective and independent, notwithstanding the potential conflict of interest posed by the agency being selected to rate securities by the investment banks that sold those securities. The complaint alleges that, in fact, fear of losing market share and profits led the company to (i) weaken the ratings criteria and analytical models it used to assess credit risks posed by RMBS and CDOs, and (ii) issue inflated ratings on hundreds of billions of dollars’ worth of CDOs. When CDO’s rated by the agency failed, investors lost billions of dollars. The DOJ brings claims under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), alleging that the company engaged in (i) mail fraud affecting federally insured financial institutions, (ii) wire fraud affecting federally insured financial institution, and (iii) financial institution fraud, and seeks civil penalties up to the amount of the losses suffered as a result of the alleged violations. The DOJ believes Read more…

On January 30, the DOJ announced that Assistant Attorney General for the Criminal Division Lanny Breuer will leave the department on March 1, 2013. Mr. Breuer was confirmed for the position in April 2009. The DOJ press release credits him with taking “significant steps to fight corruption at home and abroad,” including by increasing enforcement of the Foreign Corrupt Practices Act, and “protecting the integrity of our banking systems and fighting financial fraud.” With regard to the latter, the release cites Mr. Breuer’s LIBOR investigation, and his efforts to develop the division’s Money Laundering and Bank Integrity Unit to support enforcement of the Bank Secrecy Act.

On January 29, Senators Sherrod Brown (D-OH) and Charles Grassley (R-IA) sent a letter to U.S. Attorney General Eric Holder complaining that settlements obtained by the DOJ from financial institutions alleged to have contributed to the financial crisis “involve penalties that are disproportionately low,” both in relation to the institutions’ profits and the amount of harm the institutions are alleged to have caused. The Senators charge that the DOJ’s “prosecutorial philosophy”, which includes giving consideration to the impact of a prosecution or large penalty against an institution on the broader financial system, erodes public confidence and undermines the department’s institutional standing. The Senators seek responses to a series of questions about the DOJ’s approach to post-financial crisis enforcement, including its use of outside experts in making decisions regarding prosecution of the largest financial institutions.

On January 15, the Department of Justice (DOJ)  announced that it reached a settlement with a Michigan community bank regarding alleged redlining practices. In its complaint, the DOJ charged that between 2006 and 2009, the bank served the credit needs of white neighborhoods in the Saginaw and Flint, Michigan metropolitan areas to a significantly greater extent than it served the credit needs of majority African-American neighborhoods. Under the terms of the consent order, the bank is required to open a loan production office in an African-American neighborhood in Saginaw, invest $75,000 in a special financing program to increase the amount of credit the bank extends to majority African-American neighborhoods in and around Saginaw, invest $75,000 in partnerships with organizations that provide credit, financial, homeownership, and/or foreclosure prevention services to the residents of those neighborhoods, and invest $15,000 in outreach that promotes the bank’s products and services to potential customers in those neighborhoods.