Individual and Executive Liability and Regulatory Reach May 9, 2017 - - PowerPoint PPT Presentation

Moderator:

Philip H. Franklin , Partner , Maurice Wutscher LLP

Panelists:

Allyson B. Baker , Partner , Venable LLP Lucy E. Morris , Partner , Hudson Cook, LLP/CounselorLibrary Andrew Smith , Partner , Covington & Burling LLP

Individual and Executive Liability and Regulatory Reach

May 9, 2017

Regulatory Reach -- CFPB

Regulatory Reach – CFPB

May 9, 2017

Presented by Lucy E. Morris Hudson Cook, LLP lmorris@hudco.com

CFPB Jurisdiction and Enforcement Reach

Generally, authority over providers of consumer financial products or services

• Covered persons
• Service providers
• Related persons

Enforcement authority extends further

• UDAAP
• Also any “person” who knowingly provides substantial assistance for UDAAP
• Enumerated laws
• FCRA and background screening companies
• ECOA and small business lending

CFPB Investigation Reach

Investigation authority extends even further

• Civil Investigative Demands to any person with relevant information
• First-party (target) and third-party (witness) CIDs
• CFPB using CIDs to reach beyond jurisdiction?
• CID recipients pushing back
• Tribal Lenders
• Contracts for Deed
• John Doe
• Accrediting Council – For-Profit Schools
• Takeaways
• CID challenges slow investigation, but make investigation public
• Courts enforce CIDs if jurisdiction not “plainly lacking”
• CID Notification of Purpose – some specificity required

CFPB Enforcement Actions and Reach

• Recent follow-on enforcement action against large non-bank mortgage servicer
• Second action in three years
• Individual officers identified in complaint even though not named as defendants
• Broad use of “related person” jurisdiction to reach parent companies as controlling shareholders
• Recent enforcement action against tribal lenders
• Threshold jurisdictional issue
• Individual investors and service providers identified but not named as defendants
• Reach of individual and executive liability

FTC Individual Liability

FTC Individual Liability

May 9, 2017

Presented by Andrew Smith Covington & Burling, LLP andrewsmith@cov.com

The FTC Standard

• Personally participated in the alleged misconduct; or
• Knowledge + Control
• Knowledge includes recklessness and conscious avoidance of knowledge
• Cannot bury your head in the sand

Where Does the FTC Standard Come from?

FTC Act § 5: prohibits unfair and deceptive acts or practices

• No aiding and abetting
• No “related party” or “institution affiliated party” liability
• Piercing the corporate veil

Earliest cases:

• Alter ego
• The individual “owned, dominated and managed” the company
• The corporation was not really a corporation; didn’t observe corporate niceties; etc.
• Cannot get complete relief without naming the individual
• Conduct relief: the individual will just move to the other side of the street and set up shop again
• Money relief: the individual profited from the wrongdoing, and there is not enough $$$ in the

corporation to make consumers whole

• Also could name relief defendants
• Individual actually participated in the misconduct
• Important to note that there is no intent requirement under § 5

How Does the FTC Standard Operate in Practice?

Not often used for large, public or heavily regulated companies

• More likely to be fly-by-night
• But see Fairbanks/Basmajian
• Allegation was that CEO participated in misconduct

Used as a negotiating tactic by the FTC staff? Arguments in response: no basis to name individual, can get complete relief from the corporation

• Did not participate in misconduct
• Corporation is adequately capitalized and can pay any relief
• Corporation is in it for the long haul
• A real and substantial company
• Valuable marks and customer and vendor relationships
• Substantial investment in property, plant, equipment, employees
• State or federal licenses and registrations

The CFPB Standard

Application of the FTC Standard By The CFPB

May 9, 2017

Presented by Allyson B. Baker Venable, LLP ABBaker@Venable.com

Application of the FTC Standard by the CFPB

“Related Person:



“any director, officer or employee charged with managerial responsibility for, or controlling shareholder of, or agent for,”



“shareholder, consultant, joint venture partner, or other person as determined by the Bureau (by rule or on a case-by-case basis) who materially participates in the conduct of the affairs”



“any independent contractor (including any attorney, appraiser, or accountant) who knowingly or recklessly participates in any violation of any” law, regulation or breach

• f fiduciary duty

Application of the FTC Standard by the CFPB

CFPB v. Gordon, 819 F.3d 1179 (9th Cir. 2016):

Gordon test for individual liability: (1) An individual participated directly in the deceptive or unfair or abusive acts

• r had the authority to control them

AND (2) The individual knew or should have known of the alleged conduct, i.e. misrepresentations.

Examples of Bureau cases involving alleged individual liability

CFPB v. Wells Fargo, et al. (direct individual liability)

 Alleged RESPA Violations (and Maryland state law): Kickbacks  Individual alleged to have “participated in the Marketing Scheme”  Individual alleged to have received cash payments from title company in exchange for services in violation of RESPA

Examples of Bureau cases involving alleged individual liability

CFPB v. CashCall, Inc., et al. (related person, individual liability)

 CEO, President, Director and Owner of defendant companies; with “managerial responsibility” – related person  Alleged: He “knew or should have known about the practices” described in the Complaint and allegedly engaged in by the defendant companies.  Alleged: Deceptive, unfair and abusive practices; grouped together with co- defendant companies; no specific allegations in the complaint of individual conduct.

Examples of Bureau cases involving alleged individual liability

CFPB v. Intercept Corporation, et al. (individual liability, substantial assistance)

 CEO: related person; President: related person  Alleged: Unfair acts or practices (direct and substantial assistance)  Alleged: Substantial assistance -- manages client and banking relationships, and “exercis[es] substantial control over Intercept’s operations on a day-to- day basis.”

The DOJ’s Sept. 2015 “Yates Memo”: Individual Liability

“One of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing.” Memo sent to U.S. Attorneys’ Offices and Trial Attorneys in Main Justice Civil Enforcement Conduct (and Criminal Conduct) About accountability:  Deterrence  Incentivizing changes in corporate behavior  Ensuring “proper parties” are “held responsible”  Public confidence

“Yates Memo” (cont.)

Six Steps To Effect This Change And To Ensure Pursuit Of Individuals:

1. Cooperation credit only when corporations provide DOJ with information about individuals involved in alleged conduct 2. Focus on individuals at outset of any civil (or criminal) investigation 3. Enhanced communication between civil and criminal prosecutors 4. DOJ will no longer – except in extraordinary circumstances – release individuals from civil

• r criminal liability as part of settlement with company

5. Resolution of cases against corporations only done in sync with plan for resolving individual cases 6. Civil trial attorneys should focus on individuals and companies when deciding whether to bring suit, regardless of an individual’s ability to pay

Current DOJ: Sessions has made public statements affirming the spirit of the “Yates Memo”

State Enforcement of Individual Liability

State Enforcement of Individual Liability Under Dodd-Frank

May 9, 2017

Presented by Philip H. Franklin Maurice Wutscher, LLP pfranklin@mauricewutscher.com

State AG’s and/or Regulators Have Authority to Enforce State and Federal Consumer Protection Laws

• State Laws and Regulations

–Financial Practices

• Licensing
• Predatory Lending

–UDAP –Other Consumer Protection Laws

• Federal Laws and Regulations

–State AG’s and/or regulators are expressly authorized by Congress to enforce many federal laws and regulations

Consumer Financial Protection Act – Section 1042(a)(1) -- Authorizes State AG’s and Regulators to Enforce Its Provisions

• State AG’s and regulators can enforce against covered persons the CFPA Unfair, Deceptive, Abusive

Acts and Practices (UDAAP) rules.

• UDAAP rules provide additional relief against covered persons that may not otherwise be available

under state law.

• The “Unfair” and “Deceptive” terms appear follow the FTC definitions and/or interpretations
• The “Abusive” term is new and is defined as an act or practice that:

(1) materially interferes with a consumer’s ability to understand a term or condition of a consumer financial product or service; or (2) takes unreasonable advantage of : (A) a consumer’s lack of understanding of the material risks, costs or conditions of the product or service; or (B) a consumer’s inability to protect his or her own interests when selecting or using a product or service; or (C) the consumer’s reliance on a covered person.

Examples of State Enforcement Actions Under Dodd-Frank

Some examples of enforcement actions against individuals that have been brought by state AG’s and regulators under Section 1042 of the CFPA:

• NY Dept. of Financial Services filed a lawsuit and obtained a Final Consent Judgment in 2014 against

subprime auto lender Condor Capital Corporation and its sole shareholder, Stephen Baron (Lawsky v. Condor Capital Corporation, et al.). Condor admitted to violations of the CFPA, TILA, the NY Banking Law and the NY Financial Services Law. Baron admitted to providing substantial assistance to Condor in the furtherance of the alleged violations. The terms of the judgment provide, among other things, that Condor and Baron pay a $3 million dollar penalty.

• AG’s for Florida and Connecticut obtained consent judgments (2014-2015) against five individuals and

a law firm for activities related to an alleged mortgage rescue scam (State of Florida, et al. v. Berger Law Group, P.A., et al.). The lawsuit asserts claims under sections 1042 and 1097 of the CFPA. The consent judgments provided for, among other things, fines totaling over $3 million.

Examples of State Enforcement Actions Under Dodd-Frank, cont’d

• Pennsylvania AG filed suit (Commonwealth of Pennsylvania v. Think Finance, Inc., et al.) in 2016

against a lender and its principal, Kenneth Rees, among other defendants, for essentially making high-interest rate loans in violation of state and federal laws. Mr. Rees also is alleged to have knowingly or recklessly provided substantial assistance to a covered person in violation of the CFPA. The court denied defendants’ motion to dismiss claims that defendants, among other things, had engaged in abusive acts under the CFPA UDAAP rules. The lawsuit is still pending.

• CFPB and the New York AG filed an action (CFPB, et al. v. RD Legal Funding, LLC, et al.) on

February 2, 2017 against RD Legal Funding, LLC, two related entities, and the entities’ owner and founder, Roni Dersovitz, for allegedly offering to advance funds and extend credit to consumers who were entitled to receive compensation under a settlement fund or judgment in violation of the CFPA UDAAP and NY laws. The complaint alleges that, among other things, Dersovitz has significant responsibility for establishing RD’s policies and practices, he has substantial control over RD’s

• perations, and he knowingly or recklessly provided substantial assistance to RD, a covered person

engaged in deceptive acts and practices. The lawsuit is still pending.

Planning Ahead

Planning Ahead

• Tone at the top
• Strong Compliance Management Systems (CMS)
• Don’t bury your head in the sand
• Stop misconduct when you see it
• Don’t engage in misconduct personally
• Take lots of notes and keep records
• Do what you can to maintain standards and compliance
• Don’t plan on the change in Administration

Thank You!