Federal and State Agencies Announce $714 Million FX Settlement

On March 19, four federal and state agencies –DOJ, the Department of Labor (DOL), the SEC, and New York Attorney General – entered into a proposed $714 million settlement agreement against a large bank to resolve allegations of fraudulent conduct involving the pricing and misleading representation of a specific foreign exchange product. According to the settlement, for over a decade the bank misled clients about the pricing they received on the bank’s automatic platform used to execute trades on the clients’ behalf. The bank quoted clients prices that were at or near the least favorable interbank rate, purchased the most favorable interbank rate for themselves, and sold the highest prices to clients, profiting from the difference. Under the proposed settlement, the bank will pay (i) a $167.5 million civil penalty to the DOJ to resolve allegations brought under federal statutes including FIRREA and the False Claims Act; (ii) $167.5 million to the State of New York to resolve claims brought under the Martin Act; (iii) $14 million to the DOL for ERISA claims, (iv) $30 million to the SEC to resolve violations of the Investment Company Act, and (v) $335 million to settle private class action suits filed by customers. The bank also agreed to end its employment relationship with senior executives involved in the conduct.

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North Dakota Grants Attorney General Power to Enforce Retail Installment Provisions

On March 12, the Legislative Assembly of North Dakota approved legislation H.B. 1346 amending the North Dakota Retail Installment Sales Act to grant enforcement authority to a state attorney or to the North Dakota Attorney General. Under the new law, the Attorney General has all powers provided under the Act, in addition to powers provided under the state’s Unlawful Sales or Advertising Practices law. The law as amended will be effective August 1, 2015.

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Spotlight: Q&A with BuckleySandler’s Douglas F. Gansler, Former Attorney General of Maryland

Doug-Gansler-webOn January 20, 2015, Douglas F. Gansler, former Attorney General of Maryland, joined BuckleySandler LLP as a Partner in the firm’s Washington, DC, office upon completion of his second term as Maryland Attorney General. An accomplished trial lawyer and appellate advocate with a unanimous victory before the U.S. Supreme Court, Doug’s in-depth knowledge and understanding of complex civil, criminal and enforcement matters will be, as firm Chairman Andrew L. Sandler recently noted, “an invaluable asset for firm clients in navigating the government enforcement challenges they confront on a daily basis.”

As he makes the transition to private practice, Doug is optimistic about the opportunities in front of him and is looking forward to getting to know his new colleagues and meeting with firm clients. He shares some added professional and personal insights for InfoBytes Spotlight. Read more…

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DOJ and State AGs Announce Settlement with Credit Rating Agency

On February 3, the DOJ announced a settlement agreement with a large credit rating agency and its parent company for $1.375 billion – a record amount according to the DOJ – in connection with the agency’s alleged “scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs).” In 2013, the DOJ, along with 19 states plus the District of Columbia, brought the lawsuit against the agency for misrepresenting the securities’ true credit risks through inflated ratings, which led investors to suffer substantial losses right before the financial crisis. While the agency is neither admitting to nor denying the allegations, it has agreed to (i) “retract an allegation that the United States’ lawsuit was filed in retaliation for the defendant’s decision with regard to the credit of the United States;” (ii) abide by the consumer protection statutes set forth by the settling states and DC; and (iii) answer requests from any of the states and DC regarding information on potential violations of the consumer protection laws.

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Massachusetts Suit Against Fannie and Freddie Dismissed

On October 21, a federal judge dismissed the claims brought by the State AG that the GSEs violated state law by putting limits on the sale of pre- and post-foreclosure homes. Commonwealth v. Fed. Hous. Fin. Agency, No. 14-12878-RGS, 2014 BL 295733 (D. Mass. Oct. 21, 2014). In this case, the State argued that the GSEs violated a state law by refusing to sell homes in foreclosure to nonprofit organizations who intended to restructure the loan and sell or rent the property back to the original homeowner at a lower price. The 2012 state law forbids banks and lenders from refusing to consider offers from legitimate buyback programs solely because the property will be resold to the former homeowner. The judge dismissed the lawsuit agreeing with the FHFA, conservator of the GSEs, that the Housing and Economic Recovery Act of 2008 (HERA) allows the FHFA to enforce restrictions under its conservatorship mandate authorized by Congress. Further, the judge noted that “Congress, by enacting HERA’s Anti-Injunction Clause, expressly removed such conservatorship decisions from the courts’ oversight.” The State is expected to appeal the decision.

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Federal, State Mortgage-Related Investigations Yield Largest Ever Civil Settlement

On August 21, the DOJ announced that a large financial institution agreed to resolve federal and state mortgage-related claims through what the DOJ characterized as the largest ever civil settlement with a single entity. The agreement actually resolves numerous federal and state investigations related to various alleged practices conducted by the institution and certain former and current subsidiaries that it acquired during the financial crisis. Such allegations relate to the packaging, marketing, sale, arrangement, structuring, and issuance of RMBS and collateralized debt obligations (CDOs), as well as the underwriting and origination of mortgage loans. In total, the institution agreed to pay $9.65 billion in penalties and fines and provide $7 billion in relief to borrowers. Of the more than $9 billion in civil payments, $5 billion resolves several DOJ investigations related to RMBS and CDOs under FIRREA, as well as the allegedly fraudulent origination of loans sold to Fannie Mae and Freddie Mac or insured by the FHA. The origination investigations centered on alleged violations of the False Claims Act in the selling of, or seeking of government insurance for, loans alleged to be defective. Other penalty payments resolve RMBS-related claims by the SEC, the FDIC, and several states. In total, the state participants will receive nearly $1 billion, with California and New York obtaining the largest amounts at $300 million each. An independent monitor will be appointed to oversee the borrower relief provisions, which will require the institution to: (i) offer principal reduction loan modifications; (ii) make loans to “credit worthy borrowers struggling to obtain a loan”; (iii) make donations to certain communities harmed during the financial crisis; and (iv) provide financing for affordable rental housing. The institution also agreed to provide funding to defray any tax liability that will be incurred by borrowers who receive certain types of relief if Congress fails to extend the tax relief coverage of the Mortgage Forgiveness Debt Relief Act of 2007.

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Ninth Circuit Holds State AG Credit Card Add-On Suits Belong In State Court

On August 1, the U.S. Court of Appeals for the Ninth Circuit held that neither the federal question statute nor the Class Action Fairness Act provide a federal district court with subject matter jurisdiction over the Hawaii Attorney General’s (AG) suit against credit card issuers over allegedly deceptive marketing of add-on products. Hawaii v. HSBC Bank Nev., N.A., No. 12-263, 2014 WL 3765697 (9th Cir. Aug. 1, 2014). The Hawaii AG filed suits in state court against several credit card issuers asserting three state law causes of action based on allegations that the issuers deceptively marketed and enrolled Hawaii cardholders in various debt protection products. After the issuers removed the cases to federal court, the district court refused to remand, holding that at least one claim in each case was preempted by the National Bank Act. The court reasoned that the AG implicitly challenged the “rate of interest” on outstanding credit card balances by alleging the issuers charged “significant fees” for “minimal benefits” and had “increased profits by substantial sums,” and explained that the National Bank Act completely preempts state laws regulating the interest rates charged by nationally chartered banks. The appeals court disagreed, concluding—as the Fifth Circuit did last year in a similar case—that regardless of how state law labels the claims, the AG’s complaints did not challenge the “rate of interest” that issuers charged and are not preempted. Further, the court held that CAFA does not provide an alternative basis for federal jurisdiction because the AG’s suits are common law parens patriae suits that specifically disclaimed class status, and, as such, they are not class actions.

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CFPB, FTC, And State Authorities Coordinate Action Against Foreclosure Relief Companies

On July 23, the CFPB, the FTC, and 15 state authorities coordinated to take action against foreclosure relief companies and associated individuals alleged to have employed deceptive marketing tactics to obtain business from distressed borrowers. The CFPB filed three suits, the FTC filed six, and the state authorities collectively initiated 32 actions. For example, the CFPB claims the defendants (i) collected fees before obtaining a loan modification; (ii) inflated success rates and likelihood of obtaining a modification; (iii) led borrowers to believe they would receive legal representation; and (iv) made false promises about loan modifications to consumers. The CFPB and FTC allege that the defendants violated Regulation O, formerly known as the Mortgage Assistance Relief Services (MARS) Rule, and that some of the defendants also violated the Dodd-Frank Act’s UDAAP provisions and Section 5 of the FTC Act, respectively. The state authorities are pursuing similar claims under state law. For example, New York Attorney General Eric Schneiderman announced that he served a notice of intent to bring litigation against two companies and an individual for operating a fraudulent mortgage rescue and loan modification scheme that induced consumers into paying large upfront fees but failed to help homeowners avoid foreclosure.

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CFPB, State AGs Weigh In On TILA Rescission

This week, the CFPB and 25 states filed amicus briefs in Jesinoski v. Countrywide Home Loans, Inc., No. 13-684, a case pending before the U.S. Supreme Court that may resolve a circuit split over whether a borrower seeking to rescind a loan transaction under TILA must file suit within three years of consummating the loan, or if written notice within the three-year rescission period is sufficient to preserve a borrower’s right of rescission. In short, the CFPB argues, as it has in the past, that no TILA provision requires a borrower to bring suit in order to exercise the TILA-granted right to rescind, and that TILA’s history and purpose confirm that a borrower who sends a notice of rescission in the three-year period has exercised the right of rescission. The state AGs similarly argue that TILA’s plain meaning allows borrowers to preserve their rescission right with written notice. In so arguing, the government briefs aim to support the borrower-petitioner seeking to reverse the Eighth Circuit’s holding to the contrary. The majority of the circuit courts that have addressed the issue, including the Eight Circuit, all have held that a borrower must file suit within the three-year rescission period.

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Federal, State Authorities Obtain Another Major RMBS Settlement

On July 14, the DOJ, the FDIC, and state authorities in California, Delaware, Illinois, Massachusetts, and New York, announced a $7 billion settlement of federal and state RMBS civil claims against a large financial institution, which was obtained by the RMBS Working Group, a division of the Obama Administration’s Financial Fraud Enforcement Task Force. Federal and state law enforcement authorities and financial regulators alleged that the institution misled investors in connection with the packaging, marketing, sale, and issuance of certain RMBS. They claimed, among other things, that the institution received information indicating that, for certain loan pools, significant percentages of the loans reviewed as part of the institution’s due diligence did not conform to the representations provided to investors about the pools of loans to be securitized, yet the institution allowed the loans to be securitized and sold without disclosing the alleged failures to investors. The agreement includes a $4 billion civil penalty, described by the DOJ as the largest ever obtained under FIRREA. In addition, the institution will pay a combined $500 million to settle existing and potential claims by the FDIC and the five states. The institution also agreed to provide an additional $2.5 billion in borrower relief through a variety of means, including financing affordable rental housing developments for low-income families in high-cost areas. Finally, the institution was required to acknowledge certain facts related to the alleged activities.

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Illinois AG Sues Student Debt Relief Firms

On July 14, Illinois Attorney General (AG) Lisa Madigan announced that her office filed separate civil lawsuits (here and here) in state court against two student debt relief firms and their principals.  The lawsuits allege that the defendants violated several state consumer protection statutes relating to their deceptive student debt relief practices and collection of improper fees.  The AG claims that the unlicensed companies and their sole principals improperly accepted upfront fees from student borrowers while claiming to have enrolled them in sham loan forgiveness programs or other legitimate loan relief programs that were available to borrowers free of charge.  The lawsuits also allege that the defendants engaged in extensive false and misleading advertisements that misrepresented their expertise, affiliation with the U.S. Department of Education, and the debt relief programs available to borrowers.

The AG maintains that these practices violate several state consumer protection statues, including:

  • The Illinois Consumer Fraud and Deceptive Business Practices Act, prohibiting unfair and deceptive business practices, including making false representations and failing to disclose material facts to consumers;
  • The Credit Services Organizations Act, prohibiting unlicensed parties from acting as “debt settlement providers” or accepting illegal fees; and
  • The Debt Settlement Consumer Protection Act, prohibiting parties from accepting upfront payment for debt relief services.

The lawsuits seek injunctive and non-monetary relief in the form of permanent injunctions against each defendant and a rescission of all contracts with Illinois residents.  The AG is also pursuing a variety of monetary damages and penalties, including restitution, costs of prosecution and investigation, and civil penalties of $50,000 for each statutory violation with additional penalties for those conducted with the intent to defraud or perpetrated against elderly victims.

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New York AG Civil Suit Targets International Bank’s “Dark Pool”, Relationships With High-Frequency Traders

On June 25, New York Attorney General (AG) Eric Schneiderman announced the filing of a civil suit against a large international bank alleging that, from 2011 to the present, the bank violated the Martin Act by making false statements to clients and the investing public about how, and for whose benefit, the bank operates its private securities trading venue, i.e. its dark pool. The AG claims that the bank actively sought to attract high frequency traders to its dark pool, and provided such traders advantages over others trading in the pool, while telling clients and investors that it implemented special safeguards to protect them from such high-frequency traders. Specifically, the AG alleges that the bank: (i) falsified marketing materials purporting to show the extent and type of high frequency trading in its dark pool; (ii) falsely marketed the percentage of high frequency trading activity in its dark pool; (iii) made a series of false representations to clients about its “Liquidity Profiling” service; (iv) falsely represented that it routed client orders for securities to trading venues in a manner that did not favor its own dark pool; and (v) secretly provided high frequency trading firms informational and other advantages over other clients trading in the dark pool. The suit seeks an order requiring the bank to pay damages, disgorge amounts obtained in connection with the alleged activities, and make restitution of all funds obtained from investors in connection with the alleged acts.

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Florida Strengthens Data Breach Law

On June 20, Florida Governor Rick Scott signed SB 1524, which significantly revises and strengthens the state’s data breach notice law, making it among the toughest in the country. The bill shortens the timeline for providing notice of a data breach to require notice to consumers within 30 days of the “determination of a breach.” The bill also adds a parallel requirement to notify the state attorney general’s office for an incident affecting more than 500 state residents. The bill also provides that consumer notice by email will no longer require an E-SIGN consent. The new law clarifies the application of data breach requirements by amending the definition of “covered entity” to mean “a sole proprietorship, partnership, corporation, trust, estate, cooperative, association, or other commercial entity that acquires, maintains, stores, or uses personal information.” The bill also expands the definition of “personal information” to add, as was done in California last year, user name or e-mail address, in combination with a password or security question and answer that would permit access to an online account. The bill requires covered entities to take reasonable measures to (i) protect and secure data in electronic form containing personal information and (ii) dispose, or arrange for the disposal, of customer records containing personal information within its custody or control when the records are no longer to be retained. Finally, the bill revised the risk of harm provision in two noteworthy ways: (i) like Connecticut and Alaska, law enforcement must be consulted to employ the exemption to noticeand (ii) the exemption appears to cover only consumer notice, not AG notice. The changes take effect July 1, 2014.

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Federal, State Authorities Announce Substantial Mortgage Settlement

On June 17 the DOJ, the CFPB, HUD, and 49 state attorneys general and the District of Columbia’s attorney general announced a $968 million consent judgment with a large mortgage company to resolve numerous federal and state investigations regarding alleged improper mortgage origination, servicing, and foreclosure practices. The company agreed to pay $418 million to resolve potential liability under the federal False Claims Act for allegedly originating and underwriting FHA-insured mortgages that did not meet FHA requirements, failing to adhere to an effective quality control program to identify non-compliant loans, and failing to self-report to HUD the defective loans it did identify. The company also agreed to measures similar to those in the National Mortgage Settlement (NMS) reached in February 2012.  In particular, the company will (i) provide at least $500 million in borrower relief in the next three years, including by reducing the principal on mortgages for borrowers who are at risk of default, reducing mortgage interest rates for current but underwater borrowers, and other relief; (ii) pay $50 million to redress its alleged servicing violations; and (iii) implement certain changes in its servicing and foreclosure activities to meet new servicing standards. The agreement is subject to court approval, after which compliance with its terms, including the servicing standards, will be overseen by the NMS Monitor, Joseph A. Smith Jr.

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New York AG Obtains Agreement From Bank To Alter Customer Account Screening

On June 16, New York Attorney General (AG) Eric Schneiderman announced that a national bank agreed to adopt new policies governing its use of a credit bureau that screens individuals seeking to open checking or savings accounts. The agreement is the first to come out of the AG’s ongoing investigation of the use of credit bureaus by major American banks. As the basis for its investigation, the AG’s office asserts that individuals who are deemed by one of these credit bureaus to present a credit or fraud risk are typically denied the opportunity to open an account, and that these credit bureau databases “disproportionately affect lower-income Americans, often punishing them for relatively small financial errors and forcing them to resort to fringe banking services that are more costly than mainstream checking and savings accounts.” According to the AG’s press release, under the terms of the agreement, the bank will continue screening customers for past fraud but will no longer seek to predict whether customers present credit risks. The bank also committed to expand its support for the Office of Financial Empowerment (OFE)—a New York City agency that provides financial education and counseling to low-income New Yorkers—by donating $50,000 to help OFE provide counseling for applicants who are rejected by the bank on the basis of a credit bureau report. The bank plans to implement the changes nationwide.

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