Crime in the Suites: An Analyis of Current Issues in White Collar Defense
Posts Tagged ‘Administrative Law’
Aug 13

Law Enforcers Place Online Payday Lenders in Their Cross Hairs

At least six federal agencies, including the U.S. Department of Justice (DOJ), the Consumer Protection Financial Bureau (CFPB), and the Federal Trade Commission (FTC), are currently coordinating a broad crackdown of the online payday lending industry. The agencies are trying to shut down companies that offer short-term loans online at very high interest rates.

The online payday lending industry is rapidly growing. Online payday lending volume rose by 10 percent to $18.6 billion in 2012. Online payday loans now account for nearly 40 percent of the payday lending industry.

The Department of Justice has issued civil subpoenas to more than 50 financial companies, including banks and payment processors, that connect borrowers with online lenders. Federal agencies are also pressuring banks to cut ties with online lenders to prevent the lenders from being able to access consumers’ bank accounts. The scope of the investigation shows that the crackdown is focused not just on the individual lenders, but also the infrastructure that supports the lenders.

Multiple state agencies are also involved in investigations of the online payday lending industry. State regulators have brought actions against online payday loan companies under various laws, such as usury laws that limit the amount of loans that can be provided to borrowers or cap the interest rates for the loans.

Earlier this month, New York State’s top financial regulator ordered 35 online payday lenders to stop offering loans that were in violation of the state’s usury laws and urged more than 100 banks to cut off access to the online payday lenders. At least nine states, including California, Colorado, Minnesota, Oregon and Virginia have also all taken action against individual online payday loan companies in the past year.

On August 12, 2013, the New York Attorney General’s Office sued Western Sky Financial, an online lender, and its affiliates alleging that they charged interest rates that were 10 times higher than rates allowed under the state usury law. Western Sky Financial operates on the land of the Cheyenne River Sioux Reservation in South Dakota and has already been the target of actions by regulators in Colorado, Oregon and Minnesota. Indian tribes are a major player in the online payday loan industry, with lenders forming partnerships and operating on tribal lands. Lenders have argued that they are part of a sovereign nation and not subject to federal or state laws.

Last year the FTC sued several companies for their payday loan practices, but some of the defendants sought to have their case dismissed, claiming that their affiliation with an American Indian tribe made them immune from those federal statutes. Last month a federal magistrate judge ruled that the FTC has authority over payday lending companies, regardless of their tribal affiliations, and that all companies are subject to regulation under the Federal Trade Commission Act, the Truth in Lending Act, and the Electronic Fund Transfer Act.

The online payday lending industry is attracting increasing scrutiny from both federal and state regulatory agencies, and more enforcement actions are very likely to come soon. Online payday lenders need to be sure that they are complying with all federal and state laws to avoid being in the government’s crosshairs.

Oct 05

State AGs Challenge Legality of New Dodd-Frank Regulatory Group

Three states have joined a lawsuit to challenge the constitutionality of the Financial Stability Oversight Council (FSOC), a Dodd-Frank-created regulatory body headed by the Treasury secretary. The panel, composed of top financial regulators, is charged with overseeing broad threats to the financial system, and has the power to liquidate failing non-bank financial institutions it views as a threat to the that system. The attorneys general of Michigan, Oklahoma, and South Carolina are challenging the legality of the FSOC, arguing that the panel is too powerful and should be subject to additional checks and balances.

The states are bringing their claim as a subset of a larger suit filed by the Competitive Enterprise Institute, a conservative think tank that is also challenging the constitutionality of the power granted to the Consumer Financial Protection Bureau (CFPB). The states do not join the challenge to the CFPB but makes claims only against the FSOC. The state attorneys general argue that the FSOC’s liquidation power creates “death panels for American companies” with little outside oversight.

However, the AGs’ argument overlooks both the substance of the provision and the background against it was implemented. Far from lacking oversight, the FSOC must undergo a multi-level, multi-branch review in order to liquidate a financial institution. In order to initiate liquidation proceedings, first there must be a written recommendation for the Treasury Secretary to appoint the FDIC as a receiver for the failing company. The recommendation must contain a host of information including an evaluation of the likelihood of a private-sector alternative to prevent default. Then there must be a two-thirds vote of the Fed Board of Governors and a two-thirds vote of the FDIC or SEC, or the affirmative approval of the Director of the Office of Federal Insurance in order to appoint a receiver.

If the company does not consent to the appointment of the FDIC as a receiver, the matter goes to U.S. District Court for the District of Columbia, where a judge may strike the receivership if it determines that the secretary’s decision was arbitrary and capricious. Finally, the Government Accountability Office must review and report to Congress on any receivership appointment.

This liquidation power is not entirely new. For decades, the FDIC has had the ability to take over failing federally insured banks. The difference is that this new provision extends to non-bank financial companies. This provision was enacted in direct response to the recent financial crisis, in which the federal government had to step in to save financial institutions whose risky investments threatened to collapse the American economy. The role of the FSOC is to eliminate the expectation that the U.S. government will shield the institutions from losses in the event of a future failure, while simultaneously ensuring an orderly liquidation for failed companies.

At this time, the FSOC has not taken action to liquidate any financial institutions. It has, however, designated a number of nonbank financial institutions as “Systematically Important Financial Institutions” (SIFI). Institutions designated as SIFI are subject to more stringent oversight, including stress tests, higher capital levels and tougher liquidity requirements.

The FSOC began making SIFI designations in July of this year, with the fairly uncontroversial designation of eight financial market utilities. On Monday the FSOC announced that it is considering a number of additional non-banks for SIFI designation. AIG has confirmed that it is one of the institutions under consideration, a development that the company said it both expected and welcomes. Other non-banks rumored to be under consideration as SIFIs include MetLife, Prudential, and General Electric.

It appears that the state AG’s are contesting the FSOC’s liquidity authority out of fear that it gives too much power to federal regulators. However, history has shown how economically dangerous it is for financial institutions to be left to their own devices with little oversight or accountability. The FSOC’s powers are constitutional and within the bounds of the law. The states’ challenge should not survive judicial scrutiny, and the FSOC’s liquidation power should be upheld.

Mar 20

Appeals Ruling Stresses Value of SEC Voluntary Settlements

Judge Jed Rakoff’s November 2011 ruling rejecting Citigroup’s settlement with the Securities and Exchange Commission sent tremors through the securities compliance world by challenging the seemingly well-accepted practice of permitting corporations to settle civil claims with the agency without admitting wrongdoing. But in its order granting a stay of the Citigroup proceedings pending appeal, the U.S. Court of Appeals for the Second Circuit has raised significant questions about Judge Rakoff’s previous ruling.

As we reported earlier, in November 2011, Judge Rakoff rejected the SEC’s proposed $285 million settlement with Citigroup on the ground that it was not fair, adequate, reasonable or in the public interest – primarily because it followed the common practice of permitting Citigroup to settle the case without admitting the allegations against it. The SEC appealed the ruling and sought a writ of mandamus, seeking to set aside the order altogether. Citigroup joined in the SEC’s motion.

On March 15, 2012, the Second Circuit granted the stay. In doing so, the court focused on three factors. First, the court faulted Judge Rakoff for failing to give sufficient weight to the SEC, as an executive administrative agency, to make discretionary decisions of governmental policy in the public interest. Second, in addressing Judge Rakoff’s stated concern that the settlement was not fair to Citigroup (because it imposed substantial relief without any proof of the underlying allegations), the court noted that it was unnecessary for the courts to protect a private, sophisticated, well-counseled litigant like Citibank from entering into a voluntary settlement in which it gives up things of value without admitting liability. Finally, the court noted that a rule that would not permit settlements without proof (or admission) of liability would be tantamount to a rule barring parties from compromising, and observed that there was no precedent to support the existence of such a rule.

The appellate court noted that both parties were united in seeking the stay and in opposing the district court’s order, with the result that the panel did not have the benefit of adversarial briefing. For that reason, the Court stated that it would appoint counsel to argue in support of the district court’s position.

Given the enormous resources that would be expended if the SEC’s case against Citigroup were to go forward without the settlement, and given that Judge Rakoff’s ruling would invalidate a common practice in securities regulatory litigation, it is not surprising that the Second Circuit was willing to stay the trial court proceedings until it has a full opportunity to consider this case. The unsettled status of the issues presented in the Citigroup appeal will obviously pose significant challenges to parties seeking to settle SEC litigation in the near term. How the Second Circuit resolves the matter could have a significant effect on the SEC’s enforcement practice during a period in which it claims to be ramping up its efforts in this arena

posted in:
Civil Remedies
Dec 30

Judges’ New Scrutiny of Settlements May Make Life Difficult for Defendants

Recent headlines about the Securities and Exchange Commission have focused on Judge Jed S. Rakoff’s recent rejection of the agency’s proposed settlement of fraud charges with Citigroup Global Markets. In that case in the U.S. District Court for the Southern District of New York, Judge Rakoff rejected the Citigroup settlement because, in his view, there were no established facts on which to base a decision whether the settlement was “fair, reasonable, adequate and in the public interest.” The SEC and Citigroup have appealed Judge Rakoff’s decision, which is on hold as the U.S. Court of Appeals for the Second Circuit decides whether to grant an expedited hearing in the case.

Judge Rakoff’s decision is already having significant ramifications. In a December 20, 2011, letter to the SEC, Judge Rudolph T. Randa of the U.S. District Court for the Eastern District of Wisconsin cited Judge Rakoff’s Citigroup decision and requested that the commission provide a factual predicate showing the fairness and appropriateness of its proposed settlement of fraud charges against Koss Corporation, a Milwaukee-based maker and seller of stereo headphones. Like Judge Rakoff, Judge Randa would like the SEC to provide to the Court a factual predicate showing “the proposed final judgments are fair, reasonable, adequate and in the public interest.”

Koss and its chief executive, Michael J. Koss, were accused of maintaining materially inaccurate financial statements, books and records from 2005 through 2009 – a period during which the company’s chief accountant embezzled more than $30 million from the company. Koss and the company were also charged with failing to maintain adequate financial controls.

In addition to asking for a more detailed factual presentation, in his December 20 letter, Judge Randa also questioned whether he should – or even could – grant the relief that is specified in the proposed SEC-Koss settlement. The agreement would settle the case without any admission or denial of the charges (as is customary in SEC civil settlements). But the agreement also proposes the entry of an injunction restraining Koss from violating the same securities laws it was accused of violating, and would require the company to maintain adequate records and a system of internal accounting controls.
“If enforcement becomes necessary,” Judge Randa noted in his letter, “the terms of such a vague injunction would make it difficult for the court.”

The SEC has until January 24, 2012, to respond to Judge Randa’s letter, and an SEC spokesman has indicated that the agency intends to “provide the court with the information as requested.”

Citigroup and Koss are not the first companies to have judges call into question the adequacy of their proposed settlements with the SEC. In 2009, Judge Rakoff questioned the adequacy of a proposed settlement with the Bank or America, and settlements with Barclays and in an unrelated case with Citigroup were also questioned by federal district judges in Washington, D.C.

Going forward, the SEC may have to reconsider the way in which it settles civil enforcement matters with companies or, at a minimum, the way in which it presents those settlements to the courts for approval. The interesting question will be whether the need to present a factual predicate for the fairness of a settlement will still permit the SEC to settle cases with companies allowing the companies to avoid any admission of liability.

For those defendants – particularly companies – that seek to settle cases without admissions of liability, increased judicial scrutiny of SEC settlements may make it harder for them to resolve civil enforcement matters easily. In addition, if that scrutiny leads to more settlements in which companies admit liability, it may become more difficult for individual targets of investigations to defend themselves against legal claims and in the court of public opinion. The resolution of the Citigroup and Koss cases may give some hint of where things may be headed for those seeking to settle SEC cases in the future.

posted in:
Civil Remedies
Sep 17

Suit Against FTC Asks: Did Agency Change Advertising Rules in Middle of Game?

Is there a way to hold a government agency like the Federal Trade Commission (FTC) accountable for the cost to businesses of what a company says are abrupt and systemic changes in regulatory standards? POM Wonderful LLC, a Los Angeles-based juice company, is trying to do just that by suing the FTC in District Court.

The FTC is reportedly investigating POM for alleged false advertising but hasn’t filed a complaint against the company. POM claims in its own lawsuit, filed in U.S. District Court in the District of Columbia, that the agency is already inventing new deceptive-advertising law on its own – without going through the required rule-making procedures — and is getting ready to enforce it against POM.

Specifically, POM says the FTC is now requiring that advertisers obtain prior approval by the Food and Drug Administration before making claims that a product treats or prevents disease and that they must have two well-controlled studies before making non-disease claims.

POM alleges that the FTC has put out these new, obligatory advertising standards for the entire food industry not by going through formal rule-making that would give the industry a chance to have input, but simply by publishing consent orders that it entered into with Nestle U.S.A. and Iovate Health Sciences, Inc. POM says the FTC gave POM copies of these consent orders and told POM that these standards now have the force of law and delineate the “new definition of deception.” POM says this action flies in the face of 20 years of FTC rules and regulations on food advertising.

POM alleges that the FTC is violating POM’s First Amendment rights to engage in truthful speech and is damaging POM’s good will and brand identification as a healthy juice company. Another notable argument that POM makes is a claim of due process deprivation in violation of the Fifth Amendment.  The company alleges that the FTC’s actions have disrupted its business and devalued the “tens of millions of dollars” invested in research that was conducted in accordance with the FTC’s prior standards.

POM makes valid points. Companies ought to be able to reasonably rely on government standards so that they can decide how to allocate their resources. That is why federal agencies are required to undertake formal rule-making procedures and to allow businesses time to respond to proposed rules and, if necessary, to modify their practices in advance of the rules’ implementation.

But regulators sometimes see such procedures as tedious and time-consuming. Hence the common practice of many agencies of making changes on the fly through settlement agreements with investigated companies. As POM alleges was done by the FTC, an agency may settle out with a company by requiring that company to implement more stringent measures. Since the agreement is private and between two parties, that document may contain any measure the two parties agree upon – whether or not common practice and whether or not more stringent than current regulatory standards. One of the wrinkles in agencies’ use of such settlement agreements, though, is that these agreements often impact more than just the parties to the agreement.

The parties to the consent decree win (sort of) in that they keep the agency at bay. The agency wins in that it expeditiously (and extrajudiciously) gets to tighten its reins on companies subject to its regulations. But outside companies – which have diligently and reasonably relied on published regulations – may find themselves at a significant loss.

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About Ifrah Law

Crime in the Suites is authored by the Ifrah Law Firm, a Washington DC-based law firm specializing in the defense of government investigations and litigation. Our client base spans many regulated industries, particularly e-business, e-commerce, government contracts, gaming and healthcare.

Ifrah Law focuses on federal criminal defense, government contract defense and procurement, health care, and financial services litigation and fraud defense. Further, the firm's E-Commerce attorneys and internet marketing attorneys are leaders in internet advertising, data privacy, online fraud and abuse law, iGaming law.

The commentary and cases included in this blog are contributed by founding partner Jeff Ifrah, partners Michelle Cohen and George Calhoun, counsels Jeff Hamlin and Drew Barnholtz, and associates Rachel Hirsch, Nicole Kardell, Steven Eichorn, David Yellin, and Jessica Feil. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

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