State AG Monitor

State AGs in the News

Posted in Antitrust, Consumer Financial Protection Bureau, Consumer Protection, Data Privacy, Securities, State AGs in the News, States v. Federal Government

Consumer Protection

Vermont AG Discourages Reuse of Renewable Credit

  • Vermont AG William Sorrell issued official guidance for solar power companies to use when making statements regarding the character of electricity provided by a project facility without factoring in the impact of selling renewable energy credits (RECs) in regional markets. The sale of RECs helps finance solar power projects and they are often sold in advance to larger polluters that need them to offset their emissions.
  • The AG clarifies that he will view it as a violation of the Vermont Consumer Protection Act if a solar power project company makes representations that it will provide electricity to the local community that is “renewable,” “clean,” “green,” etc., but the power provider has already sold the corresponding RECs.
  • The guidance indicates that Vermont law is harmonized with federal law as exemplified in the Federal Trade Commission’s Guides for the Use of Environmental Marketing Claims. The guidance refers to a letter to Green Mountain Power, from the FTC indicating that that once RECs are sold or transferred, the company “has forfeited its right to characterize the power delivered from those facilities as renewable, in any way.”

Consumer Financial Protection Bureau

CFPB Reaches Settlement Over Company’s Attempts to Collect on Unverified Debt

  • The Consumer Financial Protection Bureau (CFPB) has reached an agreement with Collecto, Inc., doing business as EOS CCA, to resolve allegations that the debt collector violated the Fair Credit Reporting Act and the Fair Debt Collection Practices Act by failing to verify the accuracy of the consumer debt it acquired and on which it attempted to collect.
  • The complaint alleged that EOS paid $35.4 million for a portfolio of defaulted consumer cell phone debt with a face value of $2.3 billion, and then proceeded to collect on the debt without verifying the accuracy of the accounts or determining which accounts had been disputed by the individual consumer. It also alleged that EOS reported account information en masse to credit reporting agencies, with knowledge that the information was not necessarily true for all accounts.
  • EOS, without admitting guilt, agreed to enter into a consent order, and will refund at least $743,000 to consumers according to a redress plan to be approved by the CFPB. EOS will pay $1.85 million in civil penalties, and will remove all information reported to credit bureaus related to the unsubstantiated or disputed debts. EOS also agreed to stop associated collection activity, and to refrain from reselling the unsubstantiated debt until such time as it can conduct proper verification.

CFPB Settles Dispute Over Murky Use of Consumer Reports

  • The CFPB reached an agreement with Clarity Service, Inc. and owner Tim Ranney, resolving claims that the self-identified “Credit Bureau for Middle America” violated the Fair Credit Reporting Act (FCRA) when it provided consumer data for marketing purposes to businesses that focused on subprime and high-risk loans.
  • The CFPB alleged that Clarity accessed personal consumer information from third-party credit agencies—in some cases causing the consumer’s file to reflect a credit inquiry—and used that information to create marketing materials to distribute to prospective clients. In addition, the CFPB alleged that Clarity failed to investigate consumer disputes relating to such credit inquiries, even though the company was aware that some information in its consumer files came from unreliable sources.
  • This case demonstrates the importance that under the FCRA consumer credit information may only be used for a “permissible purpose.” The FCRA provides a list of permissible purposes, most of which from a business’s perspective involve a specific consumer request (e.g., opening credit account, employment purpose, underwriting insurance application as requested by consumer, etc.).
  • Clarity agreed to enter into a consent order, the terms of which require it to pay $8 million in civil penalties, and to make changes to its business practices, including: to cease from selling consumer reports to users who lack a permissible purpose; to implement procedures that ensure end users have a permissible purpose and appropriate credentials; and to ensure that consumer disputes are properly investigated.

States v. Federal Government

Colorado Supreme Court Dodges Dispute Between Governor and AG

  • The Colorado Supreme Court denied a petition from Governor John Hickenlooper (Democrat) asking the Court to determine whether Colorado AG Cynthia Coffman (Republican) can participate in a lawsuit filed by multiple State AGs challenging federal pollution regulations, when the Governor does not wish the State to participate.
  • In a one-page decision, the Court declined to exercise its original jurisdiction to decide the dispute, determining instead that the petition did not satisfy Colorado Appellate Rule 21 because there was an “adequate alternative remedy.” As noted by commentators, however, the Court did not indicate what that alternative was.
  • The decision refers to a 2003 Colorado Supreme Court case, People ex rel. Salazar v. Davidson, in which the Court rejected the argument that the AG was limited to exercising only statutory powers, but was instead tasked with representing the people of the State. See 79 P.3d 1221, 1229 (Colo. 2003).

Data Privacy

U.S. House Committee Clears Data Security Act

  • The House Financial Services Committee voted to approve the Data Security Act of 2015 (H.R. 2205). The bill would establish a national standard for data security and breach notification for financial institutions and retailers. Industry groups came out in support of the bill, indicating that “[it] would increase protections for consumers by ensuring all entities that handle sensitive financial data have a robust process to protect data in place.”
  • The bill, however, is not without detractors among consumer watchdog groups (including ConsumerWatchdog.org). These groups are calling it a Trojan Horse, as it appears to offer enhanced national data protection, but would preempt state laws on data security and breach notification that are in many cases more vigorous than the bill. The groups also noted, along with earlier arguments from 47 State AGs, that a uniform federal standard would lack flexibility and prevent future innovations at the state level.

EU Reaches Accord on Data Privacy and Breach Notification Law

  • The European Parliament, Council, and Commission reached agreement to advance the Network and Information Security Directive, the first EU-wide law on data privacy and breach notification.
  • The Directive will require “operators of essential services” to implement security measures and notify national authorities in the event of a data breach. Essential services are listed in the Directive to include the following sectors: energy, transport, banking, stock exchange, health care, water, digital infrastructure, and digital service providers.
  • Once the Directive text is finalized and published in the EU Official Journal, Member States will have 21 months to implement it, and six additional months to identify the firms to be deemed operators of essential services.

Securities

SEC EB-5 Enforcement Actions Highlight Problems for Attorneys Moonlighting as Brokers

  • The Securities and Exchange Commission (SEC) filed a series of enforcement actions centered around the EB-5 visa program, alleging that the indicated lawyers acted as unregistered securities brokers in violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934. The EB-5 program offers permanent residence in the U.S. to foreign citizens provided they make certain specified investments in U.S. businesses.
  • Although many of the actions were settled through SEC cease-and-desist proceedings, the SEC filed a complaint in federal court against immigration attorney Hui Feng, and his law firm, alleging that although Feng has never registered as a securities broker, he received commissions, often through overseas bank accounts, from various investment promoters in exchange for referring his EB-5 applicant clients to make investments in the promoters’ offerings. Over a four-year period, Feng and related entities allegedly received almost $5 million in commissions and future payment obligations in connection to such referrals. The SEC also argues that Feng committed a breach of his fiduciary and legal duties by failing to disclose to his clients that he was earning such commissions.
  • In the case against Feng, the SEC is seeking an injunction, disgorgement, and civil penalties. The administrative settlements focused on disgorgement without civil penalties.

Antitrust

European Commission Pursues Smartphone Chipmaker on Two Fronts

  • The European Commission has filed charges against Qualcomm Inc., for abusing a dominant position in worldwide markets by allegedly paying a major customer to exclusively use its 3G and 4G chipsets, and by selling 3G chipsets below cost in order to prevent a smaller competitor from staying in the market.
  • Qualcomm indicated that it is cooperating with the Commission, and that it “look[s] forward to demonstrating that competition in the sale of wireless chips has been and remains strong.” Under EU antitrust rules, if the Commission finds a violation, it can impose fines up to 10 percent of the chipmakers annual global revenue. For 2014, Qualcomm reported $26.49 billion in revenue.
  • Last month, Korean competition authorities issued a preliminary report accusing Qualcomm of charging anticompetitive licensing fees, a claim that Qualcomm indicated was “a serious misapplication of law.” However, in February Qualcomm agreed to pay $975 million to settle similar allegations by Chinese regulators of using a dominant position to charge unfair license fees.

State AGs in the News

Posted in Charities, Consumer Financial Protection Bureau, Consumer Protection, Data Privacy, False Claims Act, Financial Industry, Securities, State AGs in the News

Charities

California AG Questions the “Charity” Behind Car Donation Organizations

  • California AG Kamala Harris, together with district attorneys for Los Angeles and Ventura counties, filed lawsuits against People’s Choice Charities and Cars 4 Causes, including relevant officers and directors, for alleged violations of state laws on deceptive practices, unfair competition, fiduciary duties, and charitable trusts. The two charities solicit donations in the form of used cars, which they sell and then allegedly donate the proceeds to charities selected by the donors.
  • The AG’s complaints allege that the organizations (and related persons) spent proceeds from the sale of donated cars disproportionately on administrative and operational costs —97 percent for People’s Choice; 87 percent for Cars 4 Causes—while indicating to donors that the majority of the proceeds would go toward the designated charity. In addition, the complaints allege that both organizations falsely reported to state and federal tax authorities greater levels of donations to charities than they actually made. For example, the AG alleges that Cars 4 Causes reported $15.9 million was donated, but in reality gave $5.4 million.
  • The complaints seek damages from both organizations, including punitive damages. In addition, the AG is seeking civil penalties under the California Business and Professions Code of $2,500 per violation, and is asking that both organizations be involuntarily dissolved.

Consumer Financial Protection Bureau

Congress Pushes Back on CFPB Methodology

  • The Consumer Financial Protection Bureau (CFPB) has found itself under increased scrutiny by the U.S. House of Representatives’ Financial Services Committee in the CFPB’s attempts to assess racial discrimination in auto lending practices.
  • The Committee issued a Report that faults the CFPB’s decision to use disparate impact analysis—a statistical estimation methodology that does not account for certain race-neutral factors—to determine whether auto lenders engaged in racial discrimination. The Report further alleges, through references and quotes from internal CFPB emails, that the CFPB was aware of the flaws in its method, but still went forward with enforcement actions against major auto lenders.
  • The practice at the core of this issue is whether auto dealers (a group that is statutorily exempted from regulation by the CFPB) should be allowed to give discounts, or put markups on the rates offered by their network of auto lenders. The CFPB has argued (and brought enforcement actions) that giving auto dealers discretion over the final interest rate charged to the buyer leads to African-American, Hispanic, and Asian and Pacific Islander borrowers paying higher interest rates than white borrowers. The House Report argues that the CFPB doesn’t even know which borrowers fall under which category, and is instead relying on statistical correlations between last names and zip codes to “guess” a borrower’s race or ethnicity.
  • In response, the House has passed a bill to limit the CFPB’s authority to regulate auto lending. Although it will likely face challenges in the Senate, the “Reforming CFPB Indirect Auto Financing Guidance Act,” passed the House with the support of 88 Democrats and 244 Republicans. It seeks to revoke 2013 CFPB guidance that asks auto lenders to impose limits on, or eliminate, dealership discretion to adjust the rates offered by lenders when arranging a consumer auto loan.

Consumer Protection

FTC Questions the Healing Power of Copper

  • The Federal Trade Commission (FTC) entered into a settlement agreement with Tommie Copper, Inc., resolving allegations that the sportswear clothing maker violated the FTC Act by claiming that its products infused with copper relieved severe and chronic pain caused by arthritis and other diseases.
  • The FTC alleged that the company made false or unsubstantiated efficacy claims, through advertisements and testimonials, that its compression products provided “pain relief without a pill” while alluding to copper’s “anti-inflammatory properties” and power to “stimulate blood flow.”
  • The stipulated judgment entered liability against Tommie Copper for $86.8 million, but the FTC reduced the amount defendants must pay to $1.35 million based on a determination of the company’s finances. The stipulated judgment also prohibits the company from making further claims that its products provide pain relief, can be used to treat chronic or severe pain, or making any other health-related claims unless the company can substantiate them through results based on appropriate testing procedures.

Data Privacy

Plaintiff Banks Find Revised Settlement Offer to Be on Target

  • After rejecting an earlier offer for $19 million, a group of lenders suing Target Corp for losses suffered as a result of the 2013 data breach agreed to settle their class action claims for $39.4 million.
  • The plaintiffs, which included banks, credit unions, and other MasterCard issuers, sued Target for damages associated with the costs to reimburse customers for fraudulent charges and to issue new credit and debit cards in the wake of Target’s point of sale data breach that compromised over 40 million credit card accounts.
  • In its most recent filing with the SEC, Target indicated that it has spent $290 million in costs related to the breach, including a previous settlement with Visa card issuers for $67 million. Still looming are investigations by the FTC, State AGs, and potential shareholder lawsuits.

False Claims Act

DOJ Settles With Labs Over Food-Sensitivity Testing

  • The U.S. Department of Justice (DOJ) reached a settlement agreement with Pharmasan Labs, Inc.; NeuroScience, Inc.; and their respective owners, (together, “defendants”) to resolve allegations that the testing labs violated the False Claims Act by seeking Medicare reimbursement for unnecessary or experimental tests.
  • The lawsuit specifically alleged that Pharmasan altered its billing codes to conceal information that would have indicated that the tests were for food sensitivity testing (not covered by Medicare), and instead used a code for general allergic reactions. In addition, Pharmasan sought reimbursement for tests ordered by nonphysicians, which is prohibited by Medicare.
  • Under the settlement, defendants agreed to forfeit $2.8 million already seized, and to pay an additional $5.7 million in civil penalties. They also entered into a corporate integrity agreement that mandates a compliance program complete with annual claims review, risk assessment for erroneous Medicare and Medicaid reimbursement claims, and senior executive certification. The whistleblower, a former billing manager at Pharmasan, will receive $1.13 million from the proceeds.

Financial Industry

New York DFS Seeks Increased Counterterrorism and Anti-Money Laundering Protections

  • The New York Department of Financial Services (DFS) has proposed a new rule to require regulated financial institutions to increase and document their efforts to monitor transactions and clients for risks of terrorist financing, sanctions violations, and money laundering.
  • The proposed rule, which has a 45-day period for public comments, outlines a series of new obligations for regulated institutions to create and maintain a Transaction Monitoring Program and a Watch List Filtering Program. Institutions will also be required to provide annual certification of compliance by the institution’s chief compliance officer.
  • The programs are required to be customized based on a risk assessment of the institution’s businesses, products, services, customers, counterparties, and geographic scope. The programs must be accompanied by protocols explaining who will investigate alerts generated by the programs, the process for deciding whether to file an investigation or enforcement action, and how the decision-making and fact-finding process will be documented. Institutions not in compliance would be subject to penalties under the Banking Law and Financial Services Law. An officer who files a false annual certification, however, could be subject to criminal penalties. The rule is planned to go into effect in 2017.

Securities

SEC Fines Political Intelligence Firm

  • The Securities and Exchange Commission (SEC) accepted an offer of settlement from Marwood Group Research LLC to resolve cease-and-desist proceedings involving claims that the political intelligence firm violated the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 by failing to follow procedures to prevent material nonpublic information from being passed to its clients.
  • The SEC order indicated that on two separate occasions Marwood analysts received information from federal employees regarding potential regulatory changes in the health care field, and failed to follow the firm’s compliance procedures to ensure that the information was not material nonpublic information before providing research notes incorporating the information and related advice to the firm’s clients.
  • Both instances involved Marwood employees who previously worked for the government seeking information from their former colleagues: in the first case a Marwood consultant obtained information about whether the Centers for Medicare & Medicaid Services would deem a certain drug “reasonable and necessary” for treatment; in the other the consultant sought information as to whether the Food and Drug Administration would approve a new drug application.
  • Marwood admitted that its actions were violations and agreed to pay a $375,000 penalty. It also agreed to hire an independent compliance consultant to assess and make recommendations regarding Marwood’s future compliance procedures.

State AGs in the News

Posted in Antitrust, Consumer Financial Protection Bureau, Consumer Protection, Elections, State AGs in the News

2015 Elections

Louisiana Runoff Elections Produce Surprise

  • In what many commentators are calling an upset, Democrat John Bel Edwards defeated Republican David Vitter, 56 to 44 percent, in the Louisiana runoff election for the governor’s office. Mirroring other states’ recent elections, the Louisiana race was one of the costliest in state history, with at least $30 million claimed to have been spent by campaigns and outside groups.
  • In the runoff for the AG position, incumbent Buddy Caldwell lost his attempt to secure a third term to Republican Jeff Landry. Landry had made Caldwell’s use of outside law firms to litigate alleged Medicaid fraud cases by pharmaceutical companies a key target for criticism in his campaign.

Antitrust

FCC Chairman Finds No Fault in “Binge[ing]-On” Video

  • In a recent statement, Federal Communications Commission (FCC) Chairman Tom Wheeler stated that he believed T-Mobile’s new “Binge-On” service—which allows customers to watch unlimited videos, in a downgraded quality, from 24 listed streaming services without such usage counting against their data plan (also known as “zero-rating”)—does not run afoul of the FCC’s Open Internet Order.
  • T-Mobile indicated that if consumers want higher definition video, they can opt out of the Binge-On service and have the associated data count against their monthly data limits. It also claimed that the service is “open to any legit streaming service… at absolutely no cost to them.”
  • Yet some open Internet advocates view this type of arrangement as restrictive on competition, arguing that consumers are less likely to use video services that count against data caps. For example, Public Knowledge argued that rather than allowing T-Mobile to select which services can stream their videos with a zero-rating, consumers should be allowed to choose the service providers they want to be exempted.
  • Although Chairman Wheeler’s statement that Binge-On is “pro-competitive” and “innovative” might alleviate some concerns that Internet service providers (ISPs) have regarding zero-rating, it is not dispositive of the issue: The Binge-On service might not facially run afoul of the specific rule against paid prioritization—which prohibits ISPs from favoring certain data in exchange for consideration of any kind, or from prioritizing the content and services of their affiliates—but the application of zero-rated services does fall under the FCC’s General Conduct Standard, which looks to whether a service “unreasonably interferes with or disadvantages” other service providers’ access to consumers, or consumers’ access to the Internet.

Consumer Financial Protection Bureau

CFPB Sees Integrity Lacking

  • The Consumer Financial Protection Bureau (CFPB) filed a Notice of Charges against Integrity Advance, LLC and CEO James Carnes, alleging that the online lender violated the Truth in Lending Act, Electronic Fund Transfer (EFT) Act, and Consumer Financial Protection Act.
  • The CFPB alleged that Integrity entered into contracts with consumers that contained default terms permitting a loan to be rolled over multiple times, accruing additional finance charges each time, even though the disclosures were based upon that loan being repaid in a single payment with no rollovers. For example, if the loan was rolled over four times, a consumer borrowing $300 would ultimately pay $765 in finance charges—$675 more than the $90 finance charge disclosed in Integrity’s contract. In addition, Integrity allegedly conditioned the loans on consumers’ agreement to repay the loans through pre-authorized electronic fund transfers in violation of the EFT Act.
  • The CFPB is not the first regulator to raise issues with Integrity’s online lending practices. In 2013, Minnesota AG Lori Swanson was awarded over $7.7 million in restitution and statutory damages in her case against Integrity. Integrity, a Delaware-based company, challenged the application of Minnesota state law to its practices as inconsistent with the Interstate Commerce Clause of the U.S. Constitution, but lost on appeal at the Supreme Court of Minnesota.

Consumer Protection

Massachusetts Enters Fantasy Sports Regulation Derby

  • Massachusetts AG Maura Healey is proposing a set of regulations to create greater consumer protection for participants in daily fantasy sports (DFS):
    • The regulations prohibit persons under the age of 21 from participating in DFS, and ban advertisements or marketing promotions at schools or colleges campuses. In addition, DFS operators are restricted from offering contests based on college or high school sports.
    • The regulations would also seek to provide greater transparency regarding who is playing against consumers, limiting participation by professional athletes, DFS operators’ employees, and, in some cases, professional and expert DFS players.
    • Finally, the regulations would ensure truthful advertisements, and would establish limits on the amount of money that players can keep on deposit with DFS operators.
  • The proposed regulations were filed with the Secretary of State’s Office, and members of the public can submit comments until January 22, 2016.

FTC Gives Nod to Parental Selfies for COPPA Compliance

  • The Federal Trade Commission (FTC) recently approved an application submitted by Jest8 Ltd. (now Riyo, Inc.) to use a “face match to verified photo identification” method for providing verifiable parental consent for a child to use an online service covered by the Children’s Online Privacy Protection Act (COPPA).
  • The FTC approved Riyo’s application in a letter, following publication in the Federal Register and a comment period. The approved method is a two-step process. First, a parent provides a digital image of her government-issued driver’s license or passport, which is analyzed to ensure it is authentic. The parent is then prompted to take and submit a photo of her face with a phone camera or webcam, which is compared to the image on the identification using facial recognition technology.
  • In responding to public comments on Riyo’s proposed method, the FTC specified that it was not determining whether other forms of facial recognition, such as comparing one image against a database of images, would be permissible. The FTC also indicated that its approval was conditioned on the fact that both images are deleted shortly after confirmation, negating security concerns stemming from a service provider unnecessarily storing the personally identifiable information contained on government-issued identification cards.
  • In addition to this new parental selfie method, COPPA verification rules continue to allow parents to provide verified consent through forms submitted via mail, fax, or electronic scans. It also allows parents to call specified numbers, or to provide credit cards for payments.

State AGs in the News

Posted in Consumer Protection, Data Privacy, Financial Industry, For-Profit Colleges, State AGs in the News

Consumer Protection

Federal Agencies Bulk-Up Investigation Into Dietary Supplements

  • The U.S. Department of Justice (DOJ), as lead agency in a multi-agency federal enforcement action, has filed criminal charges against USPlabs LLC, and commenced civil lawsuits against more than 100 other makers or marketers of dietary supplements. As we indicated in prior posts, it was only a matter of time before the investigation into dietary supplements spread from State AGs to federal regulators.
  • In the criminal indictment, the DOJ charges USPlabs with using false certificates of analysis and false labeling to sell products, including Jack3d and OxyElite Pro, that contained potentially harmful synthetic stimulants. USPlabs represented to consumers that the products were made from naturally occurring plant extracts. The indictment also alleges that the defendants committed wire fraud by transmitting false documents by means of wire and radio communications, obstructed a Food and Drug Administration (FDA) investigation by selling products verbally to avoid creating a paper trail, and conspired to commit money laundering.
  • In addition, the DOJ teamed with the U.S. Postal Inspection Service and the FDA to bring multiple civil cases against supplement companies for selling or marketing unapproved or misbranded drugs in violation of the Food, Drug, and Cosmetic Act. In these cases, the government used the claims made on the defendants’ labels and relevant websites to argue that defendants intended the products to be used for the diagnosis, cure, mitigation, treatment, or prevention of disease, and thus alleged the products were “drugs” under the Act. For example, the DOJ sued Lehan Enterprises for insinuating that its DMSO Cream could treat or cure, among other things, arthritis, herpes, gallstones, and toenail fungus.
  • The Federal Trade Commission (FTC) also joined the enforcement effort, filing civil cases alleging that supplement makers violated Section 5 of the FTC Act by engaging in false and misleading advertising and marketing practices. For example, the FTC filed a complaint against Sunrise Nutraceuticals, LLC, claiming that the supplement maker made false or unsubstantiated efficacy claims through marketing that indicated its supplement Elimidrol would help users complete opiate withdrawal successfully and overcome opiate addiction.

New York AG Takes Daily Fantasy Sports Fight Into Round Three

  • New York AG Eric Schneiderman filed an enforcement action seeking to enjoin daily fantasy sports websites DraftKings, Inc. and FanDuel, Inc. from accepting wagers and operating in New York for alleged violations of the State Constitution and Penal Code.
  • As we outlined in a prior post, AG Schneiderman issued cease-and-desist letters to the websites last week for what the AG believes are violations of New York’s gambling laws. The websites responded by filing separate lawsuits in New York Supreme Court, asking the court to rule that the AG’s letters were unconstitutional and an abuse of discretion, and to grant a temporary restraining order. The websites argued that their business model is legal under an exception for fantasy sports contained in the 2006 Unlawful Internet Gambling Enforcement Act. The court denied those requests.
  • On Monday, the AG filed complaints against DraftKings and FanDuel, highlighting other states that have banned daily fantasy sports wagering, and providing detailed arguments as to how the websites’ business operations are “knowingly advancing or profiting from unlawful gambling activity” as well as “engaging in bookmaking.”

FTC Amends Telemarketing Sales Rule

  • The FTC published final amendments to the Telemarketing Sales Rule to prohibit certain types of payment methods frequently used by scammers. Most of the amendments will become effective 60 days after publication.
  • The amendments will prohibit remotely-created checks or payment orders, as those mechanisms allow for direct debit from a consumer’s checking account, making it difficult to effectuate a reversal. They will also prohibit the use of “cash-to-cash” money transfers, which are often anonymous and difficult to trace after the fact. Finally the amendments will prevent payment through “cash reload” mechanisms, where a consumer loads money onto the caller’s prepaid card.
  • The amendments also alter aspects of the Do Not Call Registry, including requirements that a telemarketer: demonstrate an existing business relationship in order to call a person on the Registry; acquire the information needed to place the consumer on the entity-specific do-not-call list or be disqualified from the safe harbor for isolated or accidental violations; and not share the cost with other sellers for accessing the Registry.

Data Privacy

FTC Loses Data Security Suit in Its Own Court

  • Chief Administrative Law Judge Michael Chappell dismissed the FTC’s complaint, originally filed in 2009, alleging that LabMD, Inc. violated the FTC Act by failing “to employ reasonable and appropriate measures to prevent unauthorized access to consumers’ “personal data.”
  • The dispute also highlighted the role played by private security firms in detecting data breaches. In this case, a private firm named Tiversa contacted LabMD to discuss consumer information that it had found while searching public networks. Tiversa allegedly used that information in an attempt to sell data protection services to LabMD. When LabMD did not buy the services, Tiversa provided the information to the FTC. The FTC found that Tiversa had “a financial interest in intentionally exposing and capturing sensitive files on computer networks, and a business model of offering its services to help organizations protect against similar infiltrations.” In October, 2014, Tiversa filed a defamation case against LabMD, which is still pending in Pennsylvania trial court.
  • The FTC alleged that LabMD committed an unfair practice in violation of Section 5 of the FTC Act, when it stored the names, dates of birth, Social Security numbers, and personal health insurance information for over 9,000 consumers on publicly accessible, peer-to-peer networks. The FTC argued that “injury” was likely for any consumer whose information was disclosed, as they would be subject to increased risk of identity theft. This is a key element under Section 5(n), which requires the FTC to demonstrate that the indicated practice “causes or is likely to cause substantial injury to consumers.”
  • Ultimately, Judge Chappell did not accept the FTC’s theory of injury, finding that “Complaint Counsel has failed to meet its burden of proving that Respondent’s alleged unreasonable data security caused substantial consumer injury.” Whether the logic of this decision—i.e., the FTC must show more than just an increased risk of identity theft in order to meet consumer injury element—will be isolated to the complicated factual background, or whether it marks a shift in assessing data breach enforcement by the FTC overall will be a development to watch for in future cases, including the Wyndham case currently pending in federal court in New Jersey.

Financial Industry

NY DFS Plans to Issue Detailed Cybersecurity Rules

  • The New York Department of Financial Services (DFS) recently sent a letter to a group of federal and state regulators, outlining the DFS’s plans to create a new cybersecurity regulation for entities in the financial industry, and calling for coordination and collaboration among regulators.
  • The letter indicates the financial industry’s use of third-party service providers remains one of the main concerns regarding cybersecurity for banks and insurers, and suggests that covered entities be required to create and disclose third-party management procedures. The DFS issued a report in April describing concerns with third-party service providers in greater detail.
  • The letter also enumerates a number of additional policies and procedures the DFS expects cybersecurity regulations to require regulated entities to implement, including: to maintain written cybersecurity policies and procedures (identifying twelve specific areas to be addressed); to utilize multifactor authentication, to employ a chief information security officer; to establish annual audit procedures to test vulnerabilities; and to provide notice of cybersecurity incidents to the DFS.
  • A cybersecurity regulation of this detailed scope would be a first for a state-level regulator. Although State AGs have been increasingly active in data breach investigations, they have usually done so under broader laws to prevent unfair and deceptive practices. Moreover, as we have seen with trends in data breach notification requirements, what starts in one state often spreads to others.

For-Profit Colleges

DOJ and 39 AGs Settle With For-Profit College Consortium

  • The U.S. DOJ and AGs from 39 states and the District of Columbia reached agreements with Education Management Corp. (EDMC) to resolve multiple qui tam lawsuits alleging that the consortium of over 100 online and bricks-and-mortar, for-profit colleges violated federal and state false claims acts when it participated in federal student aid programs.
  • The cases centered on the claim that EDMC based administrative compensation on the number of students recruited by each admissions employee—an allegation, that if true would violate the Incentive Compensation Ban contained in Title IV of the Higher Education Act of 1965 (HEA). When EDMC certified that it was in compliance with the HEA and similar state laws in order to receive funding through student aid programs, it allegedly violated the False Claims Act.
  • Although EDMC indicated that the claims were without merit, it cooperated with the investigation and agreed to pay $95.5 million to the DOJ, and to provide $102.8 million in loan forgiveness to more than 80,000 former students in response to the suit. It agreed to make certain disclosures during the recruiting process, including potential student debt upon graduation, the graduation rate, and numbers of students who get jobs. Finally, EDMC agreed to limit enrollment in unaccredited programs and to implement an extended period during which new students can withdraw with no financial obligation.

State AGs in the News

Posted in Antitrust, Charities, Consumer Financial Protection Bureau, Consumer Protection, Securities, State AGs in the News, States v. Federal Government

Antitrust

FTC Finds Breeders Association’s Code of Ethics to Be Anticompetitive

  • The Federal Trade Commission (FTC) approved a final order resolving allegations that certain membership rules and practices implemented through the National Association of Animal Breeders, Inc.’s (NAAB) Code of Ethics violated Section 5 of the FTC Act.
  • The FTC alleged that the NAAB, a nonprofit trade association of animal breeders active in the dairy and beef industries, required its members to abide by a Code of Ethics that restricted how members could advertise their artificial insemination products and services. The Code of Ethics limited members’ ability to provide truthful, nondeceptive information about their bull stock and bovine semen products, and restricted comparisons of price and quality with other members’ bulls. The NAAB even allegedly provided a mechanism to implement sanctions when a member violated the Code.
  • Although there is no monetary sanction imposed, the final order requires the NAAB to cease imposing the restrictions and to implement an antitrust compliance program. NAAB must also publish an announcement explaining the FTC order and the resulting changes to the Code of Ethics, and must remove any references to the restrictions from its website and official documents.

Charities

Cert Denial Paves Way for State AGs to Get Donor Lists

  • The U.S. Supreme Court denied the Center for Competitive Politics’ (CCP) petition for certiorari to review the Ninth Circuit’s decision denying its motion for a preliminary injunction. The CCP had sought to enjoin a new California law that requires nonprofit groups soliciting contributions in the state to provide a list of significant donor names as part of an annual registration process with California’s Registry of Charitable Trusts.
  • The CCP along with numerous amici curiae, including the states of Arizona, Michigan, and South Carolina, argued that the law violates members’ rights to anonymous speech and free association under the First Amendment. Supporters of CCP also argued that donor names, once under control of the state AG’s office, will not be safe from disclosure, and might even be accessible to the public under state freedom of information laws.
  • The CCP alleged irreparable harm due to diminished enthusiasm among donors to contribute to controversial nonprofits if there was a risk of having their association made public. The Ninth Circuit found that plaintiffs had not demonstrated that such irreparable harm was “likely,” as is required to meet the standard for a preliminary injunction. This issue will be interesting to watch in the coming years to see if organizations like the CCP can demonstrate actual harm once the law has gone into effect.

Consumer Protection

SCOTUS to Decide on Standing to Seek Statutory Damages Without Concrete Harm

  • The U.S. Supreme Court heard oral arguments in Spokeo, Inc. v. Robins, an appeal of the Ninth Circuit’s decision that a plaintiff who alleges a violation of a federal statute on behalf of himself and a class has standing to sue in federal court for statutory damages without otherwise alleging that he or other class members suffered a concrete harm as a result of the alleged violation.
  • The plaintiff, Thomas Robins, claimed that Spokeo, an Internet database that gathers information from publicly available online sources, violated the Fair Credit Reporting Act (FCRA) by collecting and publishing inaccurate information about him and other consumers online. Robins’ claims center on Spokeo’s alleged failure to implement reasonable procedures to assure the accuracy of the information it gathers and publishes. The FCRA provides statutory damages of $1000 per violation, and what Robins is alleging would amount to one violation. However, given the scope of Spokeo’s actions across the Internet, the potential class of equally “injured” consumers could be in the millions.
  • The Consumer Financial Protection Bureau and the DOJ filed an amici brief in support of Robins, arguing that the willful invasion of a legally protected interest is a sufficient injury-in-fact to give a plaintiff standing in federal court. The brief further argues that Robins’ allegations that Spokeo failed to exercise due care in collecting and publishing information, and that such failure resulted in the dissemination of false information, could, if true, demonstrate a willful failure to comply with the FCRA as required by 15 U.S.C. 1681n(a).
  • In contrast, eight State AGs filed their amici brief in support of Spokeo, arguing that class actions based on statutory damages, but unrestrained by proof of a concrete harm, “endanger the judicial process by creating immense pressure to settle.” The AGs argued that Congress has the power to create a new cause of action and a statutory remedy, but “it cannot confer standing on a plaintiff who is not actually harmed.”

Securities

SEC Files Fraud Charges Over Transatlantic Tweets

  • The Securities and Exchange Commission (SEC) filed securities fraud charges against a trader who allegedly used Twitter accounts, designed to mimic those of well-known securities research firms, to post false tweets to manipulate stock prices.
  • The complaint claims that James Alan Craig, a resident of Dumfries, Scotland, issued false and misleading tweets, and traded on the market reaction. In the first instance, Craig allegedly tweeted that noise suppression company Audience Inc., was being investigated by the U.S. Department of Justice for fraud. Audience’s stock price fell 28 percent in the hours that followed. In the second instance, Craig allegedly tweeted that Sarepta Therapeutics Inc. was facing U.S. Food and Drug Administration scrutiny for doctoring the trial results of one of its drugs. Sarepta’s stock price dropped 16 percent in subsequent trading.
  • The SEC alleges that Craig’s conduct amounts to fraud in violation of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. The SEC seeks a permanent injunction, disgorgement of Craig’s profits, and monetary penalties.

States v. Federal Government

Court of Appeals Affirms Injunction Over President’s Executive Action on Immigration

  • The Court of Appeals for the Fifth Circuit, by a 2-1 decision, upheld the preliminary injunction against President Obama’s executive orders on immigration that would have offered deferred immigration action for parents of American citizens (DAPA) and for immigrants who arrived as children (DACA).
  • The court’s majority sided with Texas AG Ken Paxton, joined by AGs from 25 additional states as plaintiffs, and ruled that the district court did not abuse its discretion in finding that the injunction was proper because Texas and the other challengers were likely to succeed on the merits, which in this case were based on the argument that the President’s orders failed to comply with the Administrative Procedure Act’s requirements for creating agency regulations.
  • In the dissent, Judge Carolyn King indicated that the challenged orders contain only guidelines for the exercise of prosecutorial discretion and do not confer any benefits to DAPA recipients without further action, indicating that she would deem the issue to be nonjusticiable. In addition, Judge King noted the political nature of the case, which was brought by 24 states under Republican governorship, along with Republican AGs from Montana and West Virginia.
  • The DOJ has indicated that it will seek review by the Supreme Court, but will be under a tight deadline to do so in the upcoming term. If the Supreme Court does not grant cert, then the injunction will stand and the President will be unable to implement the immigration programs until after the substantive case has been decided on the merits, likely under a new President.

New York AG Doubles Down on Investigation Into Daily Fantasy Sports Websites

Posted in Consumer Protection, Investigations

With the debate over fantasy sports wagering heating up among regulators in various jurisdictions, it should come as no surprise that New York AG Eric Schneiderman upped the ante on Tuesday, issuing cease-and-desist letters to the largest daily fantasy sports wagering sites, DraftKings and FanDuel. AG Schneiderman indicated that his investigation—which was initiated on allegations of employee misconduct and the unfair use of proprietary information—had determined that the two sites violated New York law by supporting illegal gambling. The letters demand that the sites stop accepting wagers in New York. Moreover, for FanDuel, which keeps its headquarters in New York, the AG’s determination might have an even greater effect on business.

The core of the AG’s claims is that DraftKings’ and FanDuel’s business models and operations constitute illegal gambling under both the New York Constitution and New York Penal Law, which generally prohibit a person from staking or risking “something of value upon the outcome of a contest of chance or future contingent event not under his or her control or influence.” The AG stressed that the sites are in full and active control of the wagering and derive most of their revenue from fees associated with placing bets. In addition, the AG argues that the sites even promote their services like a lottery.

However, there are also hints of a deceptive practices claim in the AG’s allegations; namely that the sites market their product as something anyone can win, but according to the AG’s investigation, only a few professional, highly sophisticated players appear to take home “the vast majority of the winnings.” With this, Schneiderman may face a bit of a conundrum: if the same people win most of the time, how can the AG argue that there is not at least some aspect that is not under the control or influence of the people making the wagers?

The New York law requires that “chance” play a material role in the outcome in order for a game to be deemed illegal. If there is some element of skill involved, and chance plays only a minor role determining who wins through daily fantasy sports, it will be harder to argue that the business model constitutes illegal gambling. Proponents of Texas Hold ‘Em and other poker games have made a similar argument, with some success, seeking to avoid culpability under federal law. See United States v. Dicristina, 886 F. Supp. 2d 164, 225 (E.D.N.Y. 2012) (reversed on other grounds at 726 F.3d 92 (2d Cir. 2013)).

The New York definition of illegal gambling is similar to that of many other states, and thus the outcome of this action will resonate outside of the state (Congressmen from New Jersey are asking the FTC to look into the issue). In addition, a violation of state gambling laws can bring forth federal indictments under the Illegal Gambling Business Act of 1970 (the U.S. Attorney for the S.D.N.Y., Preet Bharara, is allegedly already investigating FanDuel and DraftKings), and could also raise concerns of money laundering and other violations that are tangentially related to criminal activity.

Airline Antitrust Investigation: Are the Skies Too Friendly?

Posted in Antitrust

By: Daniel Schaefer[1]

This past summer the Department of Justice opened up an investigation into the domestic airline market to determine if there had been collusion in the decisions to limit the expansion of seat capacity (ergo, to raise ticket prices). In the months that followed, airline passengers around the country filed at least 23 separate class action suits accusing the airlines of conspiring to fix airline ticket prices. After a jurisdictional battle broke out among leading cases, the U.S. Judicial Panel on Multidistrict Litigation consolidated the class actions to the District of the District of Columbia. Unfortunately for the airlines, regardless of the outcome of the DOJ investigation, the multidistrict lawsuit will likely continue.

At this point, it is not exactly clear what prompted the investigation, nor has a cogent theory of collusion emerged. The New York Times initially reported that multiple airline executives may have signaled each other in public addresses and trade association meetings to remain “disciplined” about capacity—industry jargon for limiting flights. Shortly thereafter, Senator Richard Blumenthal of Connecticut called on the DOJ to take more aggressive action, pointing to surging airline profits and perceived higher fares for passengers in spite of falling fuel costs. Senator Chuck Schumer followed, alleging that the airlines were withholding flight information from discount websites in an attempt to control ticket sales. And in recent months, the DOJ has indicated that it is looking into communications between the airlines and their significant investors, presumably under the theory that investors with common ownership served as a conduit through which a collusive outcome was sought.

Whatever the alleged vector, regulators may have a hard time overlooking prior antitrust investigations in this industry. From 2005 to 2011, the DOJ obtained guilty pleas from many airlines and secured nearly $2 billion in fines for an alleged conspiracy to fix cargo fuel surcharges. The current claims fall against that backdrop, and in spite of plummeting fuel costs—savings you’d expect airlines to pass on to customers—inflation-adjusted fares have risen (slightly). In addition, the airlines are now reporting large profits; a remarkable recovery for an industry that lost billions for many years and had several participants file for bankruptcy.

Of course, the fact that the airlines are finally all making profits does not prove anything on its own. In many competitive industries, business decisions on pricing and capacity may be “interdependent.” Competitors may have parallel responses when presented with similar market forces. The airlines could be engaging in substantially similar business conduct, whether in terms of setting prices or limiting passenger carrying capacity, simply because they have all decided independently that it is the best strategy. If common investors are involved, it opens up a new-ish theory of antitrust liability that asks whether investors, acting in self-interest to reap higher profits and in response to similar market forces, violate the Sherman Act by influencing their airline investments in similar ways.

Still another twist that might play out is the role of confirmation bias. The DOJ has, for the most part, approved the series of mergers over the past few years that reduced the number of major airlines from eight to four. The most recent of these mergers between American and US Air in late 2013 consolidated more than 80% of the domestic airline seats into only four carriers. The DOJ initially sued to block it, but American and US Air ultimately persuaded the DOJ that the merger would benefit consumers by allowing the joined airlines to create more options for travelers through a comprehensive network of global alliances. Can the DOJ now be tasked with impartially determining whether this market is supporting collusion without calling into question the prudence of its prior decisions?

In addition, some research suggests that the industry is not predisposed to price-fixing. This is the position of Harvard professor Michael Porter, famous for his Five-Forces Analysis assessing the “attractiveness” of a market through five external forces: (1) threat of new entrants; (2) threat of substitute products; (3) buyers with bargaining power; (4) suppliers with bargaining power; and (5) rivalry among existing firms.[2] Collusion acts on the fifth force by suppressing inter-firm rivalry.[3] As such, price-fixing should be more profitable in industries where forces 1-4 have a relatively benign effect on prices, and factor 5 exerts greater influence.

The Five Forces analysis implies that the airline industry is notoriously unattractive for price-fixing because airline profitability and growth are most heavily influenced by Forces 1-4: there are low barriers to entry, with new startups continually threatening incumbent airlines (force #1); other means to travel are improving (force #2); customers are becoming better informed and can easily discover competitors’ prices through online sources (force #3); the two main suppliers of commercial jets are responding to increased international demand, and flying is dependent on fuel, labor, and infrastructure costs, and subject to government control and political influence (force #4). Even meteorological forces, from Icelandic volcanoes to polar vortices, can wreak havoc on airlines profits.[4]

Porter’s work emphasizes an important reality underpinning the potential for collusion in the airline industry; namely, inter-firm rivalry, historically, has not been the main threat to airline profitability. On the other hand, we might be witnessing a new dynamic in the post-merger environment. Although mergers eliminate competition between the firms that merge, they also increase the incentives—and therefore the likelihood—for the remaining firms to collude. If the mergers create an oligopolistic market, it also becomes easier for the remaining participants to consciously monitor, and parallel, their competitors’ actions without ever having forged an agreement, a phenomenon known as tacit collusion. The ultimate question for the DOJ is whether the airlines made an agreement. Although the Sherman Act is broad enough to encompass a purely tacit agreement to fix prices, the DOJ usually proves collusion through communications.

At some point, the antitrust regulators at the DOJ must have concluded that the airline mergers it approved were competitively beneficial or at the worst competitively neutral. Yet all merger analysis is predictive and imperfect. Perhaps the DOJ has had a change of heart, or perhaps it just believes an investigation is warranted as a first step. Either way, for companies operating in markets with only a few major participants, it might not be a bad idea to be just a bit less friendly.

 

[1] The ideas expressed herein are my own personal and independent views, and not those of Blank Rome or its clients.

[2] Michael E. Porter, “The Five Competitive Forces That Shape Strategy,” Harvard Business Review (Jan. 2008).

[3] Robert C. Marshall & Leslie M. Marx, The Economics of Collusion (2012).

[4] The Five Competitive Forces That Shape Strategy, An Interview with Michael E. Porter, (June 30, 2008) (here for video).

State AGs in the News

Posted in Consumer Financial Protection Bureau, Consumer Protection, False Claims Act, Financial Industry, State AGs in the News

2015 Elections

Kentucky and Mississippi Select AGs and Governors, Louisiana Waits for Runoff

Consumer Financial Protection Bureau

CFPB Finds Background Checking Companies Lacking

  • The Consumer Financial Protection Bureau (CFPB) reached an agreement with General Information Services and its affiliate, e-Background-checks.com, (together, “Defendants”) to resolve an investigation into whether the background screening service providers violated the Fair Credit Reporting Act through generating inaccurate pre-employment reports.
  • The CFPB alleged that Defendants failed to take reasonable measures to assure accuracy between the information reported and the consumer for which it was requested. Such alleged missteps included attaching criminal records to the wrong consumers, reporting dismissed and expunged records, and reporting misdemeanors as felony convictions. The CFPB also claimed that Defendants reported information on civil suits and judgments older than seven years.
  • The consent order requires Defendants to pay $10.5 million in relief to harmed consumers and $2.5 million in civil penalties. It also requires that Defendants significantly revise their procedures to assure accuracy by: retaining an independent consultant to assess the company’s procedures, conducting frequent audits, and implementing algorithmic safeguards that cross reference other consumer data when the requested report involves a person with a common name.

Consumer Protection

FTC and State AGs Unite to Avenge Unfair Debt Collection

  • The Federal Trade Commission (FTC) announced that it will partner with other federal, state, and local law enforcement agencies, including 48 State AGs, to target abusive debt collection practices in a nationwide enforcement effort dubbed “Operation Collection Protection.”
  • As indicated by Delaware AG Matt Denn, one of the major benefits to participating in this operation is that it will allow AGs and the FTC “to share information about investigation targets with other members, as well as share best practices for investigating and bringing actions against illegal debt collectors.”
  • In announcing the initiative, the FTC highlighted cases in which it has already worked successfully with State AGs—touting 115 of them. It also indicated the types of actions that it will pursue through this alliance, including: knowingly collecting on phony or “phantom” debts (i.e., debts that no longer exist, are beyond statute of limitations, or have already been settled), failure to provide legally required disclosures and notices, and failure to follow state and local licensing requirements.

NHTSA Issues Largest Ever Civil Penalty

  • The National Highway Traffic Safety Administration (NHTSA) ordered TK Holdings Inc. (better known as “Takata”) to pay civil penalties connected to the airbag maker’s alleged violations of the Motor Vehicle Safety Act.
  • NHTSA’s claims against Takata center on whether the airbag maker provided, in a timely manner, complete information as to the potential defect—first after it initially discovered the potential for consumer safety issues, and second in response to NHTSA’s special orders issued as it sought to investigate the problem.
  • Under the terms of the consent order, Takata must pay $200 million in civil penalties—the most ever ordered by the agency—but with $130 million being deferred and held in abeyance pending Takata’s adherence to the settlement terms and avoidance of any further violations of federal law. Notably, the consent order indicates that the NHTSA investigation will remain open, and payment of civil penalties does not preclude the potential for further claims based on safety issues with similar parts. The consent order also requires Takata to change internal quality control and risk assessment processes, and to retain an independent monitor to ensure compliance.

AGs Form Multistate Investigation Into Volkswagen

  • U.S. and European regulators have expanded their respective investigations into Volkswagen’s alleged use of “defeat device” software in its diesel engines to get around emissions laws; the new list of vehicles under investigation now includes Porsches and an increased number of Audi models.
  • State AGs are also investigating. According to reports, AGs from at least 45 states and the District of Columbia have joined in a multistate investigation, and have already begun forming an executive committee. Three State AGs, from California, Texas, and West Virginia, have filed lawsuits alleging violations of state consumer protection laws and state clean air standards.
  • Unlike the federal investigation, which will focus on the environmental and competition issues involved and have possible criminal implications, State AGs will likely focus on the claims made by the carmaker in its advertisements, including print and digital media, describing clean diesel cars as being good for the environment. State deceptive practices laws typically cover misleading advertisements and can carry fines of $5000 for each violation.

Massachusetts AG Pulls the Plug on Internet Lenders

  • Massachusetts AG Maura Healey, along with the state bank regulator, reached a settlement agreement with Western Sky Financial, LLC; WS Funding, LLC; CashCall, Inc.; Delbert Services Corporation; Martin Webb; and J. Paul Reddam (together, “Lenders”) resolving a number of issues arising out of the Lenders’ efforts to provide consumer loans over the internet.
  • The complaint alleged that the Lenders solicited consumer loans over the internet with annualized interest rates (APRs) ranging from 89 to 355 percent. In Massachusetts, the legal amount of interest on a consumer loan of less than $6000 is 12 percent. In addition, as addressed by the Division of Banks (DOB) in three separate Cease Orders in 2013, the Lenders were operating from outside the state and did not have the proper licenses or registrations to conduct business in Massachusetts. The Lenders sought judicial review of the DOB Orders, and those actions were consolidated with the AG’s consumer protection action filed on October 6, 2015.
  • The final judgment by consent requires the Lenders to provide refunds to the extent that a consumer’s total payments exceeded the principal plus the statutory maximum 12 percent rate of interest, and debt forgiveness for any remaining debt. The DOB estimates the consumer refunds and debt relief could approach $17 million. The Lenders must also pay $388,231 in civil penalties, half of which will be suspended after full compliance with the consent judgment. The companies also agreed to pay attorneys’ fees of $65,000.

False Claims

States and Feds Move Forward With Settlement Over Reverse False Claim

  • A group of AGs from 49 States and the District of Columbia finalized a settlement with AstraZeneca LP and Cephalon, Inc. ending a joint state-federal investigation into charges that the drug makers violated state and federal false claims acts.
  • The complaint alleged that AstraZeneca and Cephalon had submitted “reverse” false claims by underpaying the rebates due to the states under the Medicaid Drug Rebate Program. The amount of the rebate that the drug makers owe depends in large part on the average price that drug wholesalers pay them for the drugs: the lower the average price, the lower the rebate that must be paid. In this case, the drug makers allegedly utilized an accounting practice through which they classified service fees paid to wholesalers as “discounts” in the price of the drug. The result being that the drug makers could report an artificially deflated average price and thus pay less to the states as rebates.
  • The U.S. Department of Justice (DOJ) intervened in July, after reaching a settlement in principle under which AstraZeneca will pay $46.5 million and Cephalon $7.5 million. Although the states did not participate, they will receive shares based on a variety of factors, including state false claims acts, sales, etc. The lawsuit was initiated by a whistleblower in the Eastern District of Pennsylvania and is ongoing with numerous other drug makers remaining as defendants.

Financial Industry

Settlement Requires Bank to Kill Off “Zombie” Debt and Pay $100 Million

  • California AG Kamala Harris has entered into a stipulated judgment with JPMorgan Chase & Co.; Chase Bank USA, N.A.; and Chase BankCard Services, Inc. (“Chase”) putting to rest the state’s claims that Chase violated California Business and Professions laws through consumer debt sales and enforcement actions.
  • The complaint, which was filed in 2013, alleged that Chase engaged in a variety of illegal consumer debt collection practices, including: selling “zombie” or “phantom” debts (debts that were inaccurate, settled, discharged in bankruptcy, not owed, or otherwise not collectable) to third-party debt collectors; filing more than 125,000 collection lawsuits based on “robo-signed” documents; making illegal threats of litigation; and obtaining default judgments against military servicemembers on active duty.
  • As part of the stipulated judgment, Chase agreed to pay $50 million to consumers nationwide ($10 million estimated for California consumers), $45 million to the California AG’s consumer protection enforcement efforts, and $5 million as a civil penalty. Chase also agreed to make significant changes to its practices, including internal controls for providing proper documentation to consumers both before and after debt sales, as well as restrictions on third-party debt buyers post purchase recovery actions.

2015 AG Elections

Posted in Elections

Although an off-year, the Attorney General (AG) positions in Mississippi, Kentucky, and Louisiana all were up for grabs this year.

In Mississippi, the election resulted in more of the same: Democrat Jim Hood won his fourth term as AG, defeating Republican Mike Hurst by a margin of 56 to 44 percent. Republican Phil Bryan secured his second term as governor over a challenge by Democrat Robert Gray by a margin of 66 to 32 percent.

In Kentucky, the election demonstrated a stronger Republican turnout than expected. Despite this, Democrat Andy Beshear emerged the victor over Whitney Westerfield in the AG race, but by a much narrower margin than was expected, 50.1 to 49.9 percent. Between the two AG campaigns, and significant contributions by the Republican Attorney General Association, almost $6 million was spent on the race. The race for governor saw the Bluegrass State go red as Republican Matt Bevin surprisingly surged past former AG Jack Conway, 53 to 44 percent. Conway had led in most significant polls leading up to the election.

Louisiana voters must wait for a November 21 runoff between incumbent AG Buddy Caldwell, the Democrat-turned-Republican, and former Congressman and Republican challenger Jeff Landry. Since the two candidates emerged with almost identical results from Louisiana’s “jungle” primary, but with neither gaining more than 50 percent, a runoff is required. There will also be a runoff for the governor’s chair between Democrat John Bel Edwards and Republican David Vitter.

 

State AGs in the News

Posted in Consumer Financial Protection Bureau, Consumer Protection, Data Privacy, Financial Industry, Securities

Consumer Financial Protection Bureau

CFPB Settles With Debt Collector Allegedly “Abusing” Servicemembers

  • The Consumer Financial Protection Bureau (CFPB) entered into a consent order with Security National Automotive Acceptance Company (SNAAC), LLC, resolving the CFPB’s allegations that the auto lender violated the Consumer Financial Protection Act (CFPA) through its actions to collect on debt held by U.S. servicemembers.
  • In addition to arguing that SNAAC’s false and misleading threats regarding legal action were “deceptive acts” under the CFPA, the CFPB also alleged that SNAAC committed “abusive acts” under Section 1031 when it threated to contact commanding officers and inform them that a servicemember was delinquent on payments. Although failing to pay certain debts might violate certain military regulations and subject the consumer to disciplinary action, the CFPB argued that SNAAC took “unreasonable advantage of consumers’ inability to protect their interests” by leveraging the debtors’ military status and making exaggerated claims regarding the potential impacts of a delinquency on their military careers.
  • The administrative consent order requires SNAAC to create a consumer redress plan and provide redress in the form of credits and refunds totaling $2.28 million, and to pay $1 million as a civil penalty to the CFPB. SNAAC must also keep relevant records and submit to compliance monitoring for a period of five years. A separate stipulated final judgment and order entered in federal court prevents SNAAC from including provisions in future debt contracts that purport to allow it to contact commanding officers or other employers in connection with debt collection efforts. SNAAC did not admit or deny the CFPB’s allegations.

Consumer Protection

Oregon AG Sues Nutrition Retailer Over Unapproved and Unlisted Ingredients

  • Oregon Attorney General Ellen Rosenblum filed a lawsuit claiming that General Nutrition Corporation (GNC) violated the state Unlawful Trade Practices Act (UTPA) when it allegedly sold a variety of third-party nutritional and dietary supplements containing drugs unapproved for sale in the U.S. In some cases the packages failed to list the drugs on the labels.
  • In the complaint, AG Rosenblum indicated that her investigation centered around two main substances: Picamilon, a drug used to treat neurological conditions in some countries that is not approved for sale in the U.S.; and BMPEA, a synthetic amphetamine-like stimulant, allegedly present in certain products sold by GNC, either listed outright on the label as BMPEA or coming from the ingredient Acacia rigidula (and not listed on the label).
  • AG Rosenblum argues that GNC violated the UTPA by representing that the products containing the substances were lawful dietary supplements; by indicating that the products were of a particular standard or quality; and by creating the implication that the Picamilon and BMPEA had been approved for use in the U.S., when the substances have not been approved as dietary ingredients. The lawsuit asks for $25,000 in civil penalties for each sale of BMPEA or Picamilon, as well as disgorgement, restitution, attorney fees, investigation costs, and permanent injunction.

Vermont AG Turns up Heat on Propane Supplier

  • Vermont AG William Sorrell reached an agreement with Suburban Propane, LP to resolve allegations that it violated state propane and consumer protection laws.
  • AG Sorrell claimed that Suburban’s actions violated various provisions of the state’s propane laws, including a failure to timely remove propane storage tanks from homeowners’ properties and issue refund checks to consumers once they had terminated service (the law requires both to be completed within 20 days), improperly billing and collecting for a fuel tax, charging an illegal regulatory fee, and terminating service for certain customers without providing 14-day notice, as required by law.
  • Under the Assurance of Discontinuance, Suburban will pay $283,000 to consumers to account for actual or potential delays in service, and refund $28,398 improperly charged in regulatory fees. It will also pay $200,000 to Vermont’s Low Income Home Energy Assistance Program and $200,000 in civil penalties to the State.

Data Privacy

Senate Passes Cybersecurity Bill, Various Groups Question Purpose and Efficacy

  • By a 74 to 21 vote, the U.S. Senate passed the Cybersecurity Information Sharing Act (CISA), a bill that will encourage U.S. businesses to share information relating to cyber threats with the federal government and with other potentially affected entities.
  • The main provisions of CISA, formerly Senate Bill 754, create a legal framework within which private entities can not only monitor and defend against cybersecurity threats on their own information systems, but can also coordinate defenses with other private and government entities. Under certain conditions, CISA would allow private companies to share consumers’ personal data otherwise protected by state privacy laws without legal liability. It also requires the creation of procedures through which the federal government can share classified cyber threat information with cleared representatives from relevant private entities.
  • Privacy rights groups, however, are not satisfied with the final bill. The Electronic Frontier Foundation, for example, has called the bill fundamentally flawed, contending it creates broad access and immunity for the government without sufficient privacy protections. Other groups have indicated that the bill does not properly address the core problem of hacking and cybercrime. From here, the bill must go to conference committee, where it will be reconciled with bills previously passed in the House of Representatives.

Financial Industry

Bank Agrees to Pay $50 Million for “Revolving Door” Hire

  • The New York Department of Financial Services (DFS) settled an enforcement action with Goldman, Sachs & Co. resolving allegations that Goldman violated New York Banking Law by hiring a departing bank examiner from the U.S. Federal Reserve Bank of New York (NY Fed), and whether Goldman profited from the use of confidential information gleaned from the former examiner’s contacts.
  • The DFS determined that former NY Fed examiner Rohit Bansal was recruited, in large part, due to his oversight of a particular regulated entity while he was working for the NY Fed. According to reports, Goldman insisted that Bansal get clearance from his former employer, and as a “revolving door” employee, the NY Fed provided Bansal with a Notice of Post-Employment Restriction that prohibited him from working directly on matters regarding the entities he oversaw for one year after his termination at the Fed.
  • Bansal, as outlined in the consent order, offered his own interpretation of the Restriction, asserting that he was only prohibited from personally interacting with the entity. Bansal proceeded to work directly on matters involving the particular entity, and obtained confidential information and documents regarding the entity from his former colleagues at the NY Fed and shared them with his management at Goldman.
  • In addition to firing Bansal and his manager upon learning of his actions, Goldman agreed to pay a civil monetary penalty of $50 million to the DFS, and agreed to a three-year period during which it would not accept any new business that would require the DFS to authorize the disclosure of confidential supervisory information.

Securities

SEC Looks to Finalize Crowdfunding Rules, Investors Rejoice for Now

  • The Securities and Exchange Commission (SEC) will vote to approve final rules for Title III retail crowdfunding on Friday, presumably easing the requirements for investors to participate in equity crowdfunding projects. This exception to federal securities laws that generally apply to all publicly sold equity shares stems from the 2012 Jumpstart Our Business Startups Act (JOBS Act).
  • Under the proposed rule, a company would be able to raise a maximum of $1 million in a 12-month period by selling equity shares directly to qualified retail investors. The SEC currently allows crowdfunding of this nature, but only if each investor has annual income of $200,000, or at least $1 million in assets excluding their house. If adopted, the final rules would allow anyone to participate, subject to a limit according to their income and net worth: 5 percent of the investor’s annual income or net worth (whichever is higher) if both numbers are less than $100,000; or 10 percent if income or net worth is greater than $100,000. The final rules would allow the income and net worth of spouses to be combined when calculating the cap.
  • Industry analysts believe the rule will provide an easier, less regulated path for a critical source of funding for companies. However, the rule still requires a company to make certain disclosures and undertake certain procedures in order to participate in retail crowdfunding. The final rule will also create requirements for broker-dealers or funding portals to operate as an SEC-registered crowdfunding platforms. Among other things, these platforms would be prohibited from:
    • Offering investment advice or making recommendations.
    • Soliciting purchases, sales, or offers to buy securities displayed on its website.
    • Imposing certain restrictions on compensating people for solicitations.
    • Holding, possessing, or handling investor funds or securities.