Tag: Banking

Don’t Use “Build Back Better” to Sabotage the False Claims Act

Congress is on the verge of setting a dangerous precedent.  As part of the Build Back Better Act, it has added two provisions equivalent to a “get out of jail free card” for Big Banks that violate federal law when they hand out billions in federal mortgage-related benefits.   The two provisions create exemptions to False Claims Act liability by creating blanket immunity from liability when banks fail to exercise due diligence, violate FHA housing regulations, or even directly violate federal laws such as the Truth in Lending Act.

It is obvious why banks want to have their federally sponsored mortgage practices immunized from exposure to the False Claims Act (“FCA”).  The FCA works remarkably well and is widely recognized as “the most powerful tool the American people have to protect the government from fraud.”   The law has directly recovered over $64.450 billion in sanctions from fraudsters since Congress modernized it in 1986.  During the debates on the massive trillion-dollar infrastructure laws enacted or debated this year, corporate lobbyists have been extremely active in successfully preventing Congress from adding any new anti-fraud measures to protect taxpayers from fraud.  As part of these efforts, they targeted the False Claims Act as enemy #1 and already have blocked one key amendment needed to close some weaknesses in that law.

With the Build Back Better Act, these corporate lobbyists have taken their opposition to effective anti-fraud laws to a higher level.  Instead of trying to repeal the FCA, they are simply exempting Big Banks from liability under that law in two new programs.  It is obvious why the Big Banks want the exemption from FCA liability.  As a result of illegal or irresponsible lending and foreclosure practices, such as those that fueled the 2008 financial collapse, banks have had to pay billions in sanctions to the United States.

Two words explain why the FCA is “the most powerful tool” protecting taxpayers from fraud:  Whistleblowers and sanctions.  If you accept federal taxpayer monies, you are required to spend that money according to your contractual agreement or the law.  The FCA’s first secret weapon is whistleblowers.  The law encourages whistleblowers, known as qui tam “relators,” to report violations of the FCA.  Whistleblowers disclosures trigger the overwhelming majority of FCA cases, and the law incentivizes employees to risk their careers to serve the public interest. The second secret weapon is how you prove liability.  Second, when an institution accepts federal monies (such as banks that operate various federally sponsored loan programs), liability can attach if the institution acts in “deliberate ignorance of the truth” when spending federal dollars.  Similarly, if payments are made with “reckless disregard of the truth,” liability can attach.  In other words, corporations (including banks) that accept federal money must ensure that these monies are spent as required by law, regulation, or contract.  Safeguards must be in place to prevent fraud.  If a bank does not have adequate compliance programs to protect against fraud, it cannot plead ignorance when the law is broken and taxpayers are ripped off.

These two key elements of the False Claims Act are precisely what the banking lobby is attempting to undermine through the Build Back Better Act.  The tactics employed by the Big Banks are somewhat devious.  They are doing an end-run around the False Claims Act by exempting themselves from having to engage in any due diligence when spending billions in federal dollars.  The banks are seeking to add language to the Build Back Better Act that will immunize themselves from liability under the False Claims Act when they make payments in “reckless disregard” to the legality of those payments.  The immunities they are seeking legalize “deliberate ignorance” in the use of taxpayer money, in complete defiance of the False Claims Act. Thus, whistleblowers who report these frauds will be stripped of protections they have under the False Claims Act, and the federal government will have no effective way to recover damages from these frauds.

What language in the Build Back Better Act creates an exemption to False Claims Act liability?

Two highly technical provisions are deeply buried within the 2135 pages of the Build Back Better Act’s legislative text. The provisions are sections 40201 and 40202 of the Build Back Better Act.  These two sections establish helpful programs that will provide needed financial support to first-generation homebuyers.  Section 40201(d)(5) would provide $10 billion in down payment assistance. Section 40202(f) would give an interest rate reduction on new FHA 20-year mortgage products to first-time homeowners with a potential value of $60 billion.  But the banking lobby has corrupted these otherwise well-meaning programs. The exemptions obtained by the banks are incubators for massive fraud.  It permits the Big Banks to escape any liability when they abuse the generosity of taxpayers and dole out billions to unqualified individuals.

How do the exemptions work?  To qualify for these taxpayer-financed benefits, an applicant simply has to “attest” that they are first-time/first-generation homebuyers.  That would be the end of the inquiry a bank would need to approve making a payment from the billions allocated in these two programs. Anyone could simply stroll into a bank and “attest” to being such a first-time homebuyer and would thereafter qualify for the federal benefits.  The banks would not be required to do any diligence of their own to confirm the borrower’s eligibility.  Willful ignorance would be legalized.  Reckless disregard in the handling of taxpayer monies would be permitted under this law.  Safeguards, such as requiring banks to adhere to the Truth in Lending Act, which requires verification of a borrower’s statements, would not apply.

Under Sections 40201(d)(5) and 40202(f), banks will not be held liable once they are lied to, even if the bank has reason to know that the borrower is not eligible for the federal payout.  Banks can spend taxpayer money even if the information on an applicant’s loan application directly contradicts the borrower’s attestation that they are a first-time homeowner.  Given the lack of any compliance standards, the temptation to engage in fraud in these programs will be overwhelming.

Permitting banks to escape liability under the False Claims Act opens the door to paying billions of dollars in benefits to unqualified persons.  Such payments rip off the taxpayers and severely hurt all honest first-generation homebuyers denied benefits.  For every fraudster who benefits from this program, an honest homebuyer will be left in the cold due to the reckless disregard of the banks.

Congress should never use a back-door procedure to undermine the False Claim Act, as it sets a dangerous precedent.  It is a devious way to undermine America’s “most effective” anti-fraud law.  Instead of undermining the False Claims Act by granting immunities to Big Banks, Congress should be strengthening anti-fraud laws to protect the taxpayers and ensure that the trillions of dollars spent on COVID-19 relief programs and infrastructure improvement are lawfully spent in the public interest.

Copyright Kohn, Kohn & Colapinto, LLP 2021. All Rights Reserved.
For more articles about banking and finance, visit the NLR Financial, Securities & Banking section.

A Flurry of CFTC Actions Shock the Cryptocurrency Industry

The Commodity Futures Trading Commission (CFTC) sent shockwaves across the cryptocurrency industry when it issued a $1.25 million settlement order with Kraken, one of the industry’s largest market participants. The next day, the CFTC announced that it had charged each of 14 entities for offering cryptocurrency derivatives and margin trading without registering as a futures commission merchant (FCM). While the CFTC has issued regulatory guidance in the past and engaged in some regulatory enforcement activities, it has now established itself as a key regulator of the industry along with the US Securities and Exchange Commission (SEC), the US Department of Justice (DOJ) and the US Department of the Treasury (Treasury). Market participants should be aware that the CFTC will continue to take a more active role in regulation and enforcement of commodities and derivatives transactions moving forward.

The CFTC alleged that each of the defendants were acting as an unregistered FCM. Under Section 1a(28)(a) of the Commodity Exchange Act (the Act), 7 U.S.C. § 1(a)(28)(A), an FCM is any “individual, association, partnership, or trust that is engaged in soliciting or accepting orders for the purchase or sale of a commodity for future delivery; a security futures product; a swap . . . any commodity option authorized under section 6c of this title; or any leverage transaction authorized under section 23 of this title.” In order to be considered an FCM, that entity must also “accept[] money, securities, or property (or extends credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom.” (See: 7 U.S.C. § 1(a)(28)(A)(II).) 7 U.S.C. § 6d(1), requires FCMs to be registered with the CFTC.

IN DEPTH

THE KRAKEN SETTLEMENT

On September 28, 2021, the CFTC issued an order, filing and settling charges against respondent Payward Ventures, Inc. d/b/a Kraken for offering margined retail commodity transactions in cryptocurrency—including Bitcoin—and failing to register as an FCM. Kraken is required to pay a $1.25 million civil monetary penalty and to cease and desist from further violations of the Act. The CFTC stated that, “This action is part of the CFTC’s broader effort to protect U.S. customers.”

The CFTC’s order finds that from approximately June 2020 to July 2021, Kraken violated Section 4(a) of the Act, 7 U.S.C. § 6(a)(2018) by offering to enter into, entering into, executing and/or confirming the execution of off-exchange retail commodity transactions with US customers who were not eligible contract participants or eligible commercial entities. The CFTC also found that Kraken operated as an unregistered FCM in violation of Section 4d(a)(1) of the Act, 7 U.S.C. § 6d(a)(1) (2018). According to the order, Kraken served as the sole margin provider and maintained physical and/or constructive custody of all assets purchased using margins for the duration of a customer’s open margined position.

Margined transactions worked as follows: The customer opened an individual account at Kraken and deposited cryptocurrency or fiat currency into the account. The customer then initiated a trade by selecting (1) the trading pair they wished to trade, (2) a purchase or sale transaction and (3) a margin option. All trades were placed on Kraken’s central limit order book and executed individually for each customer. If a customer purchased an asset using margin, Kraken supplied the cryptocurrency or national currency to pay the seller for the asset. If a customer sold an asset using margin, Kraken supplied the cryptocurrency or national currency due to the buyer. Trading on margin allowed the customer to establish a position but also created an obligation for the customer to repay Kraken at the time the margined position was closed. The customer’s position remained open until they submitted a closing trade, they repaid the margin or Kraken initiated a forced liquidation based on the occurrence of certain triggering events, including limitations on the duration of an open margin position and pre-set margin thresholds. Kraken required customers to exit their positions and repay the assets received to trade on margin within 28 days, however, customers could not transfer assets away from Kraken until satisfying their repayment obligation. If repayment was not made within 28 days, Kraken could unilaterally force the margin position to be liquidated or could also initiate a forced liquidation if the value of the collateral dipped below a certain threshold percentage of the total outstanding margin. As a result, actual delivery of the purchased assets failed to occur.

The CFTC asserted that these transactions were unlawful because they were required to take place on a designated contract market. Additionally, by soliciting and accepting orders for, and entering into, retail commodity transactions with customers and accepting money or property (or extending credit in lieu thereof) to margin these transactions, Kraken was operating as an unregistered FCM.

Coinciding with the release of the enforcement action against Kraken, CFTC Commissioner Dawn D. Sump issued a “concurring statement.” In it, she appeared to be calling upon the CFTC to adopt more specific rules governing the products that are the subject of the enforcement action. Commissioner Sump seemed to indicate that it would be helpful to cryptocurrency market participants if the CFTC clarified its position on the applicability of the Act, as well as registration requirements. The CFTC will likely issue guidance or rules to clarify its position on which cryptocurrency-related products trigger registration requirements.

CFTC CHARGES 14 CRYPTOCURRENCY ENTITIES

On September 29, 2021, the CFTC issued a press release and 14 complaints against cryptocurrency trading platforms. The CFTC is seeking a sanction “directing [the cryptocurrency platforms] to cease and desist from violating the provisions of the Act set forth herein.” Each of the platforms have 20 days to respond.

All of the complaints are somewhat similar in that the CFTC alleges that each of the cryptocurrency platforms “from at least May 2021 and through the present” have offered services to the public “including soliciting or accepting orders for binary options that are based off the value of a variety of assets including commodities such as foreign currencies and cryptocurrencies including Bitcoin, and accepting and holding customer money in connection with those purchases of binary options.”

The CFTC has taken the position that “binary options that are based on the price of an underlying commodity like forex or cryptocurrency are swaps and commodity options as used in the definition of an FCM.” (The CFTC has previously taken the position that Bitcoin and Ethereum constitute “commodities,” doing so in public statements and enforcement actions.) In a prominent enforcement action previously filed by the CFTC in the United States District Court for the Eastern District of New York, the court held that “virtual currency may be regulated by the CFTC as a commodity” and that it “falls well-within the common definition of ‘commodity’ as well as the CEA’s definition of commodities.” (See: CFTC v. McDonnell, et al., 287 F. Supp. 3d 213, 228 (E.D.N.Y. Mar. 6, 2018); CFTC v. McDonnell, et al., No. 18-cv-461, ECF No. 172 (E.D.N.Y. Aug. 23, 2018).) In the action the CFTC filed against BitMEX in October of 2020, it alleged that “digital assets, such as bitcoin, ether, and litecoin are ‘commodities’ as defined under Section 1a(9) of the Act, 7 U.S.C. § 1a(9). (See: CFTC v. HDR Global Trading Limited, et al., No. 20-cv-8132, ECF 1, ¶ 23 (S.D.N.Y. Oct. 1, 2020).)

The CFTC has previously taken the position that Bitcoin, Ethereum and Litecoin are considered commodities. However, in these recently filed complaints, the CFTC did not appear to limit the cryptocurrencies that would be considered “commodities” to just Bitcoin, Ethereum and Litecoin. Instead, the CFTC broadly referred to “commodities such as foreign currencies and cryptocurrencies including Bitcoin.” It remains to be seen which of the hundreds of cryptocurrencies on the market will be considered “commodities,” but it appears that the CFTC is not limiting its jurisdiction to just three. It is also an open question as to whether there are certain cryptocurrencies or cryptocurrency referencing financial products that the SEC and CFTC will determine are subject to the overlapping jurisdiction of both regulators, similar to mixed swaps under the derivatives rules.

The CFTC also singled out two of these cryptocurrency platforms, alleging that they issued false statements to the effect that it “is a registered FCM and RFED with the CFTC and member of the NFA.” The CFTC noted that neither of these entities were ever registered with the National Futures Association (NFA) and one of the NFA ID numbers listed “identifies an individual who was once registered with the CFTC but has been deceased since 2009.”

WHAT’S NEXT

While the SEC, Treasury and DOJ are often considered the most prominent federal regulators in the cryptocurrency space, this recent sweep by the CFTC is not the first time it has flexed its muscles. The CFTC went to trial and won in 2018, accusing an individual of operating a boiler room. In October 2020, the CFTC filed a case against popular cryptocurrency exchange BitMEX for failing to register as an FCM, among other counts. However, unlike those one-off enforcement actions, the recent actions targeting multiple market participants within two days is a big step forward for the CFTC. Cryptocurrency derivative trading has been rising in popularity over the last few years and it is unsurprising that the CFTC is taking a more active enforcement role.

It is expected that regulatory activity within the cryptocurrency space will increase from all US regulators, including the CFTC, SEC, Treasury and the Office of the Comptroller of the Currency, especially as cryptocurrency products are increasingly classified as financial products subject to regulation. While the CFTC and other regulators have issued some regulatory guidance, regulators appear to be taking a “regulatory guidance by enforcement action” strategy. Market participants will need to thoughtfully consider all relevant regulatory regimes in order to determine what compliance activities are necessary. As we describe, multiple classifications are possible.

© 2021 McDermott Will & Emery
For more on cryptocurrency litigation, visit the NLR Cybersecurity, Media & FCC section.

U.S. Senate Subcommittee on Investigations Recommends Regulation of the Art Market & Other Headlines

U.S. Senate Subcommittee’s Report Recommends Art Market Regulations

As part of its investigation into the effectiveness of sanctions against foreign persons and entities, the Permanent Subcommittee on Investigations of the United States Senate issued a report focused on lack of regulation and pervasive secrecy in the art market. Specifically, the report notes that the art industry is considered the largest legal industry in the United States that is not subject to the requirements of the Bank Secrecy Act, which mandates detailed procedures aimed at preventing money laundering and requires businesses to know their customers’ identity. The report further observes that under the unwritten rules of the art market, a large number of art sales happen through intermediaries, with purchasers and sellers frequently not inquiring into each other’s identities and sellers not asking about the origin of the purchase money. Art advisers are frequently reluctant to reveal the identity of their clients for fear of losing the business.

The 147-page report sets forth a case study of how the art market was used to evade sanctions imposed on Russia. Brothers Arkady and Boris Rotenberg, billionaire business tycoons and long-time friends of Vladimir Putin, were among a number of Russians placed under U.S. sanctions in 2014 as part of an effort to punish Putin and his associates for the annexation of Crimea. It is illegal for U.S. companies to do business with sanctioned persons, but there are no specific laws in place obliging a buyer or seller in a transaction for the sale of art to identify themselves. The Subcommittee’s report concludes that the Rotenbergs took advantage of the lack of transparency required in art transactions, successfully evading the sanctions imposed on them. It is alleged that through the use of shell companies and a Moscow-based art adviser and dealer, they hid their identities and purchased more than $18 million in art from U.S. dealers and auction houses while under sanction.

Of significance to all art market participants, the Senate Subcommittee’s report recommends, among other things, that Congress should amend the Bank Secrecy Act to add businesses handling transactions involving high-value art. While the term “high-value” is not defined, the report cites the recent European Anti–Money Laundering (AML) legislation, which requires businesses handling art transactions valued at €10,000 to comply with AML laws, including the Know Your Customer rule. The report further recommends that the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury issue a comprehensive guide on the steps auction houses and art dealers should take to ensure that they are not doing business with sanctioned individuals or entities.

Legislation will be necessary to amend the Bank Secrecy Act to apply to the art market. In fact, a bill proposing to do exactly that was previously introduced and is presently pending, proposing to regulate antiques dealers only in connection with transactions over $10,000.

White Supremacist Scientist’s Skull Collection to Be Reexamined by University

Last year, a group of students at the University of Pennsylvania presented findings that a collection of skulls kept by the university include crania from at least 55 enslaved individuals. The collection was the work of Samuel George Morton, a now-discredited physician, who used the skulls to come up with pseudoscientific justifications for slavery. Discovery Magazine has touted him as the “founding father of scientific racism.” After facing calls for the skulls to be repatriated or buried, the university moved the collection to storage. Repatriation may be difficult since little is known about the skulls’ origin other than that Morton obtained them from Cuba.

Outdoor Art Serves the Public until New York’s Museums Reopen

New York Governor Andrew Cuomo announced that New York City’s museums can reopen beginning August 24. In the meanwhile, New York City’s tourism and marketing division has put together a list of outdoor and open-air art available for viewing by the public throughout all five boroughs.

Two Museums Fear Their Gauguins May Be Fakes

Fabrice Fourmanoir, a Gauguin enthusiast, investigator and collector who exposed the J. Paul Getty Museum’s Gauguin sculpture as a fake has now set his astute gaze on paintings at the National Gallery of Art in Washington D.C. and the Museum of Fine Arts in Boston. Fourmanoir has alleged that both paintings are not Gauguins and were instead commissioned and sold by a Parisian art dealer. The museums are considering a scientific examination of the paintings to confirm their origin and authenticity.

EUROPE

Raphael’s True Cause of Death Revealed

Scientists have dispelled the myth that Renaissance painter Raphael, noted by historians as having had many trysts, died of the sexually transmitted disease syphilis. A new study conducted at the University of Milan Bicocca has concluded that the artist likely died instead from a pulmonary disease similar to pneumonia. Raphael’s physicians subjected him to bloodletting, a process wherein blood is drawn from a patient to rid the body of disease. As physicians of that period did not typically practice bloodletting for lung ailments, it is suspected that Raphael’s doctors failed to properly diagnose his symptoms. Moreover, it has been determined that rather than aiding in his recovery, the bloodletting likely contributed to and quickened his death. Raphael died in 1520 in Rome at the age of 37.

Selfie Menace Continues

Security camera footage has confirmed that an Austrian tourist broke two toes off of a sculpture by famed neoclassical sculptor Antonio Canova. The damage occurred at the Gipsoteca Museum in Possagno, when the tourist sat on a sculpture of Paolina (Pauline) Bonaparte, Napoleon’s sister, to take a selfie. The perpetrator surrendered to authorities. The work damaged was an original plaster cast model dating back to 1804, the marble version of which is kept at the Galleria Borghese in Rome. Artnet previously assembled a round-up of tragic cases of art being damaged by tourists angling for better selfies.

Building Decorated by Picasso Demolished, Triggering Protests

Despite ongoing protests, the Norwegian government has begun tearing down the Y-block office building in Oslo, part of its governmental headquarters in the city damaged in the 2011 terrorist attack by Anders Breivik, who detonated a car bomb. Prior to any demolition of the Y-block building, Picasso’s The Fishermen, a sand-blasted 250-ton section of the building’s facade, and The Seagull, a 60-ton floor-to-ceiling drawing in the building’s lobby, were removed and relocated. Opponents of the demolition argue that the Y-block building’s brutalist architecture should be preserved, and that Picasso’s works and the building “belong together.” They also argue that the demolition is, in essence, a symbolic completion of what Breivik wanted, to erase the symbols of democracy. Construction of the new governmental headquarters is expected to be completed in 2025.

Ancient Greek Architecture Likely Catered to the Handicapped

New research conducted at California State University suggests that the stone ramps featured on many ancient Greek temples were primarily built to accommodate the disabled and mobility impaired. While these ramps may have served other purposes, such as enabling transportation of materials, they were featured most prominently in quantity and size at temples dedicated to Asclepius, the Greek god of healing. As these sites drew in many visitors with disabilities, illnesses and ailments, who would have had difficulty navigating stairs, it is now thought that the ramps were specifically crafted to assist these guests.

Croatian Museums and Historic Sites Can’t Catch a Break

After the coronavirus forced churches, galleries and museums throughout Croatia to close, in March 2020, a 5.3 magnitude earthquake rocked the country, damaging its largest Gothic-style cathedral and many other landmarks, including the Archaeological Museum in Zagreb. The strongest earthquake recorded in the country in almost 150 years made many buildings structurally unsound, and museum owners began storing works in their facility basements. On July 24, 2020, that was no longer an option when a severe storm hit Zagreb, leading to massive flooding. As water surged into their basements, The Archaeological Museum and Museum of Decorative Arts, among others, struggled to protect their collections. The full extent of the damage from the storm is not yet known, but expected to be significant.

Restoration Plans for Notre Dame by Traditional Methods Finalized

After discussing the issue for more than a year, the decision was made to reconstruct the roof and spires of the renowned Notre-Dame de Paris cathedral to resemble their appearance prior to the April 2019 fire. Despite calls from French President Emmanuel Macron to rebuild these features in a contemporary style, they will be constructed using the original material and traditional methods to the extent possible. In addition to the roof and spires, the vault will need to be repaired and three of the cathedral’s gables will have to be dismantled and rebuilt. After this work is completed, the building’s statues, which fortunately were removed just days prior to the fire, will be returned. The reconstruction of Notre Dame is scheduled to be completed in 2024.

© 2020 Wilson Elser

For more art world news, see the National Law Review Entertainment, Art & Sports law section.

Guide to Federal Reserve Main Street Loan Facilities and Primary Market Corporate Credit Facility

The Federal Reserve has created a number of programs to provide loans and other credit facilities to support the economy in response to COVID-19.  Several of these programs provide for new extensions of credit for small, medium and large businesses, including the Main Street Lending Program and the Primary Market Corporate Credit Facility.  The Main Street Lending Program creates three separate facilities (“MSLFs”):  (1) the Main Street New Loan Facility, (2) the Main Street Expanded Loan Facility and (3) the Main Street Priority Loan Facility.  Each of these facilities contemplates banks and other financial institutions making “new money” loans to eligible borrowers, and in turn selling participation interests in the loans to a Fed / Treasury special purpose vehicle.  The Primary Market Corporate Credit Facility (“PMCCF”) i contemplates a Fed / Treasury special purpose vehicle that will make new money extensions of credit to eligible borrowers by directly purchasing bonds issued by them, or by making loans to such eligible borrowers, whether as a direct lender or by purchasing loans to such borrowers under syndicated loan facilities.

The Federal Reserve released and then updated term sheets for the MSLFs and PMCCF in March and April 2020 and circulated an FAQ for the MSLFs in April 2020, and the Federal Reserve Bank of New York released and circulated FAQs for the PMCCF in April and May 2020.  The term sheets and FAQs provide a number of material terms and conditions for the facilities, but many questions and issues remain in terms of structuring and implementing these facilities generally and for agents, lenders, trustees, borrowers, issuers and other parties satisfying eligibility requirements for and participating in transactions under these facilities.

The MSLFs and PMCCF, which collectively represent hundreds of billions of dollars of new money financing for borrowers and issuers, are expected to launch by the end of May 2020.

A comprehensive summary of the MSLFs and PMCCF based on the term sheets and FAQs issued to date, market reconnaissance and strategic planning and considerations around these facilities can be accessed here.  We will periodically update and supplement the MSLF/PMCCF summary and separately provide additional alerts and guidance regarding these facilities generally and the parties qualifying for and participating in transactions under these facilities.

© 2020 Bracewell LLP

For more on Federal Reserve Main Street Loans, see the National Law Review Financial Institutions and Banking law section.

Court Rules That Whistleblower Must Face Trial On Former Employer’s Claims

Life is not necessarily all skittles and beer for whistleblowers.  Sometimes, they are sued by the very companies on which they blew the whistle.  Such is the case in the ongoing case of Erhart v. Bofi Holding, Inc., 2020 U.S. Dist. LEXIS 57137.  Judge Cynthia Bashant limns the background facts as follows:

“Charles Erhart was an internal auditor for BofI Federal Bank. After Erhart discovered conduct he believed to be wrongful, he reported it to BofI’s principal regulator. BofI responded by allegedly defaming and terminating him. Erhart then filed this lawsuit for whistleblower retaliation under state and federal law. The next morning, The New York Times published an article summarizing the lawsuit’s allegations—causing BofI’s stock price to plummet. The Bank quickly commenced a countersuit against Erhart claiming he committed fraud, breached his duty of loyalty, and violated state and federal anti-hacking statutes. The Court consolidated BofI’s countersuit with Erhart’s whistleblower-retaliation action.”

In the cited decision, Judge Bashant grants in parts and denies in part Erhart’s and Bofi’s motions for summary adjudication.  The ruling is lengthy and tackles a variety of issues, some of which I hope to address in future posts.  Nonetheless, a key point for whistleblowers is that Judge Bashant is allowing Bofi’s claims against Erhart to proceed to trial, albeit on a limited basis.

When “Whistleblower” First Became Figurative

Recently, I endeavored to identify the first figurative use of the term “whistleblower” in a reported California opinion.  I was surprised that earliest case dates to the presidency of Ronald Reagan.  Interestingly, the Court addresses the very tension at the heart of Erhart:

“There is a great public interest in the truthful revelation of wrongdoing, and in protecting the ‘whistleblower’ from retaliation; there is very little public interest in protecting the source of false accusations of wrongdoing.”

Mitchell v. Superior Court, 37 Cal. 3d 268, 283, 690 P.2d 625, 634, 208 Cal. Rptr. 152, 161 (1984).  Many cases dating back to the mid 19th Century mention the blowing of whistles, but the references are to actual, not figurative, whistles.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP

For more on whistleblowers, see the National Law Review Litigation & Trial Practice Section.

Bank Strategy Briefing: Moving Away From Common Bank Names

It is difficult to overstate the importance of a bank’s name. After all, it’s the centerpiece of a bank’s long-term branding strategy. Before reaching the teller line or setting up a meeting with a banker, seeing a bank’s name on a branch sign, billboard or website is likely the first interaction a customer has with the institution.  With many Midwest institutions approaching or surpassing 100-year anniversaries, a bank’s name may reflect generations of service to a community or the ownership family’s legacy.

Many banks share common names

A surprisingly large number of banks in the U.S. share common naming elements, as detailed below:

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While many reasons for this degree of commonality exist, community pride and company history among them, similar names can result in market confusion, or worse, trademark disputes.

To differentiate themselves, a number of banks have begun changing names. In some instances, it’s a legal name change as specified in the institution’s articles, while in others it’s adopting a trade name.

How to change a bank’s legal name

The process for changing a legal name is relatively simple. First, a thorough search must be conducted to ensure the new name is available. This search would identify existing bank trademarks for the name as well as other potential uses that could cause marketplace confusion. Then comes amending the bank’s articles of incorporation. This requires board and shareholder approval. Once the amendment is effective, customer-facing marketing materials and legal documentation will need to reflect the new legal name.

How to adopt a trade name

Trade names are more nuanced and compliance-sensitive. In addition to validating that a name is available for use, various banking agencies require disclosures about the trade name to appear in signage, advertising and account-opening documentation. This helps customers understand that accounts under each name will be aggregated when calculating FDIC insurance coverage. For example, the Wisconsin Department of Financial Institution’s (WDFI’s) guidance requires disclosure that trade names be identified as a “branch” of the bank. WDFI does not permit other descriptors like “division” or “unit.”

Name changes create new marketing opportunities

Beyond the legal and logistical aspects of a name change, it’s important to develop a robust marketing plan to maximize the opportunity a name change creates. Consider ways to reintroduce the bank to the marketplace and retell its story to the community.

Copyright © 2020 Godfrey & Kahn S.C.

US Banking Agencies Issue Statement on Alternative Date in Credit Underwriting

On December 3, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Consumer Financial Protection Bureau (CFPB) and the National Credit Union Administration (the Banking Agencies) released interagency guidance related to the use of alternative data for purposes of underwriting credit (the Guidance).

The Guidance acknowledges that alternative data may “improve the speed and accuracy of credit decisions,” especially in cases where consumer credit applicants have “thin files” because they are generally outside the mainstream credit system. In order to comply with applicable federal laws and regulations when using such alterative data, including those related to unfair, deceptive, or abusive acts or practices, the Banking Agencies advise that lenders should responsibly use such information. Furthermore, the Guidance reminds lenders of the importance of an appropriate compliance management program that comports with the requirements of applicable consumer protection laws and regulations.

As a final recommendation, the Banking Agencies suggest that lenders consult with appropriate regulators when planning to use alternative data to underwrite credit.

The Guidance is available here.

©2019 Katten Muchin Rosenman LLP

House Vote on Cannabis Industry-Related SAFE Banking Act Scheduled for September 2019

As early as September 23, 2019, the United States House of Representatives is expected to vote on the widely anticipated Secure and Fair Enforcement (SAFE) Banking Act. First introduced in both chambers of Congress in 2017, re-introduced in the House in March of 2019, and amended this past June, the SAFE Banking Act has garnered bipartisan support as a necessary solution to the dilemma created by conflicting federal and state cannabis law regimes, particularly as it relates to financial service providers.

According to a press release issued by the House Committee on Financial Services on March 26, 2019, committee chairwoman, Representative Maxine Waters (D-CA), remarked, the SAFE Banking Act “addresses an urgent public safety concern for legitimate businesses that currently have no recourse but to operate with just cash.” The Act joins the ranks of congressional efforts such as the Rohrabacher-Farr amendment to omnibus spending bills, Section 728 of the Consolidated Appropriations Act of 2019, the pending Blumenauer amendment, and proposed Strengthening the Tenth Amendment Through Entrusting States (STATES) Act—all of which seek to reconcile the federal government’s failure to enact comprehensive marijuana and, until recently, hemp policy despite widespread support on the state and local level. Status in the Senate is uncertain, as the chair of the Banking Committee has indicated an intent to poll those in Idaho, a state that has failed to legalize any form of cannabis, regarding the issue.

Today’s cannabis industry encompasses the growth, processing, distribution, and other ancillary services related to both hemp and marijuana. While hemp and marijuana are both derived from the plant Cannabis sativa L, they are legally distinguished on both a federal and state level by their THC content. As a result, marijuana remains a controlled substance under federal law, while hemp, boasting lower THC levels, is classified as an agricultural product within the purview of the United States Department of Agriculture (USDA). This federal distinction, however, has not prevented more than 40 states from legalizing marijuana for medical and/or recreational adult use. Unfortunately, the businesses that choose to take advantage of such progressive state marijuana laws must do so without the support of traditional financial institutions that businesses, particularly minority and women-owned, rely on to fund and protect their financial growth.

According to §4(a) of the bill’s text, the SAFE Banking Act will shield depository institutions that serve cannabis-related businesses from federal penalties in states and Indian country where “cultivation, production, manufacture, sale, transportation, display, dispensing, distribution, or purchase” of cannabis is legal. In particular, the Act will prohibit regulators from terminating or limiting deposit or share insurance of financial instruments because an institution’s client participates directly or indirectly in the cannabis industry. Regulators will also be prohibited from penalizing institutions for authorizing, processing, clearing, settling, billing, transferring, reconciling, or collecting payments for a legitimate cannabis-related business for payments made by any means, including a credit, debit, or other payment card, an account, check, or electronic funds transfer. Perhaps, most importantly, the Act will also require the Federal Financial Institutions Examination Council (FFIEC) to develop uniform guidance and examination procedures for depository institutions serving cannabis-related businesses.

For financial institutions and insurance providers operating in states where cannabis is legal, this creates an immense opportunity and incentive to assist industry participants as they strive to protect and invest their monetary assets without putting the institutions they rely on at risk of federal prosecution. However, because protections under the SAFE Banking Act only apply when legitimate cannabis-related businesses are involved, monitoring clients’ compliance with relevant state laws will be particularly important. In the absence of clear federal marijuana policy and official hemp regulations under the 2018 Farm Bill, in addition to constantly evolving state laws and regulations, this may prove especially challenging. As such, in anticipation of the Act’s passage, financial institutions should enlist the support of experienced legal counsel to ensure the necessary processes for monitoring clients’ compliance are in place. In addition, those seeking to benefit under the Act should still pay close attention to due diligence requirements promulgated by the Financial Crimes Enforcement Network (FinCEN), although many concerns should be alleviated by the Act’s prohibition on civil or criminal prosecution solely based on the provision of financial services or investing income derived from such services.

NOTE: Cannabis as defined under the Act only references marijuana. However, in practice, the bill’s passage should alleviate apprehension surrounding hemp, as many financial institutions and their affiliates have refrained from offering services to hemp businesses under the current financial legal framework, even in the wake of the 2018 Farm Bill and pending USDA regulations.

Read the bill’s text here.

© 2019 Dinsmore & Shohl LLP. All rights reserved.

This article was written by Jennifer K. Mason, Michael G. Dailey and Ambur C. Smith of Dinsmore & Shohl LLP.
For more marijuana & cannabis legislation, see the National Law Review Biotech, Food & Drug law page.

Cardholders Seek to Capital-ize on Madden

Last week, three Capital One cardholders filed a putative class action in the Eastern District of New York, Cohen v. Capital One Funding, LLC,1 alleging that the rates of interest they paid to a securitization trust unlawfully exceed the sixteen percent threshold in New York’s usury statutes.  The Plaintiffs seek to recoup the allegedly excessive interest payments and an injunction to cap the interest rates going forward.

The Plaintiffs seek to leverage the Second Circuit’s decision in Madden v. Midland Funding, LLC.2  There are factual differences between the current lawsuit and Madden.  In Madden, the loan in question was a nonperforming credit card account that Bank of America’s Delaware-based credit card bank had assigned to Midland Funding, which sought to enforce the past-due loan.  In Cohen, the loans involve credit card receivables from otherwise performing loans that have been deposited into securitization trusts.  Another distinction is that Cohen, unlike Madden, is a putative class action.  The legal theory in both cases, however, is the same:  the Plaintiffs argue that the holders—here, securitization vehicles—do not have the originating national bank’s right to collect interest at rates above the limits of New York’s usury laws.  And any usurious interest collected, the Plaintiffs argue, must be disgorged.

As we discussed in our prior C&F Memorandum, “It’s a Mad, Mad, Madden World” (June 29, 2016), the Second Circuit’s Madden ruling is unsound.  Under the Second Circuit’s Madden theory, the usury rate applicable to a given loan—and thus its enforceability—turns on the identity of the loan’s holder.  The notion that the enforceability of a loan originated by a national bank turns on who holds the loan from time-to-time conflicts with the well-settled valid-when-made doctrine—a doctrine that provides that whether a loan is usurious is determined at the loan’s inception.   This approach was abandoned in Madden.  As a result, under Madden, bank-originated consumer loans can be less valuable if sold, thus devaluing the loans on the books of the originating bank.  Banks, then, are discouraged from originating such loans or, once originated, from selling them.  The net result is—at least in theory—a tightened consumer credit market.

In many corners, Madden is viewed to be “bad law.”  Even so, the Office of the Comptroller of the Currency recommended against petitioning the Supreme Court for a writ of certiorari in Madden.  Nor did Congress produce a legislative fix, despite such a bill being introduced in 2018.  Both the OCC and Congress faced political headwinds over the practice by some marketplace and payday lenders that originate high-rate consumer loans through banks under the so-called bank origination model; the concern was that reversing Madden could enshrine such practices and could be potentially harmful to consumers.  (For a discussion of the bank origination model, see our prior C&F Memorandum, “Marketplace Lending Update:  Who’s My Lender?” (Mar. 14, 2018).)  But that concern is not present in Cohen, where the Plaintiffs rely on Madden to attack traditional, currently performing credit card receivables that were originated by a national bank—a structure unrelated to the bank-origination model used by some marketplace lenders.

Cohen is the second Madden-related lawsuit brought against securitization trusts; the first is proceeding in Colorado against marketplace-lending receivables originated by Avant and Marlette.  See “Marketplace Lending #5:  The Very Long Arm of Colorado Law” (Apr. 24, 2019).  Until Madden is reversed, we continue to recommend that clients exercise caution when acquiring, securitizing, or accepting as collateral consumer loans (or asset-backed securities backed by such loans), when the loans were originated to residents of a state in the Second Circuit (New York, Connecticut, and Vermont) and carry a rate above the applicable general usury rate (generally, sixteen percent in New York, twelve percent in Connecticut, and eighteen percent in Vermont).

1   No. 1:19-cv-03479-KAM-RLM (E.D.N.Y. filed June 12, 2019), https://www.cadwalader.com/uploads/media/CapitalOneCase.pdf.

2   786 F.3d 246 (2d Cir. 2015), cert. denied, __ U.S. __, 136 S. Ct. 2505, 195 L. Ed. 2d 839 (2016).

 

© Copyright 2019 Cadwalader, Wickersham & Taft LLP
More on financial issues on the National Law Review Financial Institutions & Banking page.

MAS Releases “A Guide to Digital Token Offerings”

On 14 November 2017, the Monetary Authority of Singapore (the “MAS”) released  “A Guide to Digital Token Offerings” providing general guidance on the application of the securities laws administered by the MAS in relation to offers or issues of digital tokens in Singapore.

The main consideration is whether the digital token is designed in a way that would make it a product regulated under Singapore’s securities laws i.e. if it behaves like a share, debenture or some other form of security. If a token does not function like a security, then technically, neither will the security laws apply.

In the first case study in the guide, Company A plans to set up a platform to enable sharing and rental of computing power amongst the users of the platform. In order to raise funds to develop this platform, Company A intends to offer and sell digital tokens wherein the token will have utility upon completion. The MAS states that the digital token in this case study would not constitute a security under the Securities and Futures Act (Cap. 289). It appears that this is because other than the right to access the issuer’s platform to rent computing power, the digital token in question did not appear to have any other “rights” or “features” that made it look like a security.

Therefore, if a digital token is structured in a similar way as set out in this case study, then it would presumably not trigger the relevant Singapore securities laws, notwithstanding the fact that the sale of the token may have been used to fund the building of the platform.

The practical issue to consider then is this:- How will a company convince its investors to purchase such digital tokens in the first place, given that they do not appear to offer any type of rights or features that would give potential purchasers of those digital tokens a return on their investment?

Singapore is devoting huge resources to building the FinTech industry and offering many incentives to new entrants in the jurisdiction. Initial Coin Offerings (“ICOs”) structured like the example herein would seem to be acceptable.

This post was written by Nicholas M. Hanna & Samantha See of  K& L Gates., Copyright 2017