International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Tuesday, August 14, 2018

Royal Bank of Scotland Agrees to Pay $4.9 Billion for Financial Crisis-Era Misconduct

Settlement Is Largest Penalty Imposed On A Single Entity By The Justice Department For Financial Crisis-Era Misconduct

The Justice Department announced today a $4.9 billion settlement with The Royal Bank of Scotland Group plc (RBS) resolving federal civil claims that RBS misled investors in the underwriting and issuing of residential mortgage-backed securities (RMBS) between 2005 and 2008. The penalty is the largest imposed by the Justice Department for financial crisis-era misconduct at a single entity under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which authorizes the federal government to seek civil penalties against financial institutions that violate various predicate criminal offenses, including wire and mail fraud.

“Many Americans suffered lasting economic harm as a result of the 2008 financial crisis,” said Acting Associate Attorney General Jesse Panuccio.  “This settlement holds RBS accountable for serious misconduct that contributed to that financial crisis, and it sends an important message that the Department of Justice will pursue financial institutions that illicitly harm the American economy and our consumers.”

"This resolution – the largest of its kind – holds RBS accountable for defrauding the people and institutions that form the backbone of our investing community,” said Andrew E. Lelling, U.S. Attorney for the District of Massachusetts. “Despite assurances by RBS to its investors, RBS’s deals were backed by mortgage loans with a high risk of default. Our settlement today makes clear that institutions like RBS cannot evade responsibility for the damage caused by their illicit conduct, and it serves as a reminder that the Justice Department, and this Office, will hold those who engage in fraudulent conduct accountable.”

“The actions of RBS resulted in significant losses to investors, including Fannie Mae and Freddie Mac, which purchased the Residential Mortgage-Backed Securities backed by defective loans,” said Associate Inspector General Jennifer Byrne of the Federal Housing Finance Agency-Office of Inspector General’s (FHFA-OIG). “We are proud to have partnered with the U.S Attorney’s Office for the District of Massachusetts on this matter.”

The settlement includes a statement of facts that details – using contemporaneous calls and emails of RBS executives – how RBS routinely made misrepresentations to investors about significant risks it failed to disclose about its RMBS. For example:
 

  • RBS failed to disclose systemic problems with originators’ loan underwriting. RBS’s reviews of loans backing its RMBS (known as “due diligence”) confirmed that loan originators had failed to follow their own underwriting procedures, and that their procedures were ineffective at preventing risky loans from being made. As a result, RBS routinely found that borrowers for the loans in its RMBS did not have the ability to repay and that appraisals for the properties guaranteeing the loans had materially inflated the property values. RBS never disclosed that these material risks both existed and increased the likelihood that loans in its RMBS would default. 
  • RBS changed due diligence findings without justification. RBS’s due diligence practices did not remove fraudulent and high-risk loans from its RMBS. For example, when RBS’s due diligence vendors graded loans materially defective, RBS frequently directed the vendors to “waive” the defects without justification. One due diligence vendor, which tracked waivers by most major participants in the RMBS industry, concluded that RBS waived material defects 30% more frequently than the industry average. RBS’s waiver of material defects routinely resulted in the securitization of loans with excessive risk. When it engaged in such waivers, RBS never included enhanced “scratch-and-dent” disclosures that would have alerted investors that loans with excessive risks were included in the RMBS.
  • RBS provided investors with inaccurate loan data. RBS’s due diligence frequently found that loan data – which RBS passed on to investors, who used the data to analyze the risks associated with its RMBS – were riddled with errors. Many inaccuracies made the loans look less risky than they actually were. RBS, however, did not require originators to correct the data errors. In one deal, where RBS identified over 600 data errors associated with 563 loans (including debt-to-income ratios understated by as much as 2700%), RBS failed to disclose these errors even to the originator; instead, RBS reassured the originator that RBS had not required originators to correct data errors in the past and did not anticipate doing so for that deal.
  • RBS failed to disclose due diligence and kick-out caps. To develop and maintain business relations with originators, RBS agreed to limit the number of loans it could review (due diligence caps) and/or limit the number of materially defective loans it could remove from a RMBS (kick-out caps). RBS’s scheme reached its height in two deals issued in October 2007. In both of these RMBS, RBS identified hundreds of underlying loans that carried a particularly high risk of default and would cause losses to the RMBS investors. RBS kept these materially risky loans in the RMBS, without disclosing their inclusion to investors, because RBS had agreed to a kick-out cap limiting the number of defective loans that RBS could exclude from the securities in exchange for receiving a lower price for the loan pool. As a result, over the entirety of its scheme, RBS securitized tens of thousands of loans that it determined or suspected were fraudulent or had material problems without disclosing the nature of the loans to investors. 

Through its scheme, RBS earned hundreds of millions of dollars, while simultaneously ensuring that it received repayment of billions of dollars it had lent to originators to fund the faulty loans underlying the RMBS. RBS used RMBS to push the risk of the loans, and tens of billions of dollars in subsequent losses, onto unsuspecting investors across the world, including non-profits, retirement funds, and federally-insured financial institutions. As losses mounted, and after many mortgage lenders who originated those loans had gone out of business, RBS executives showed little regard for this misconduct and made light of it. 

These are allegations only, which RBS disputes and does not admit, and there has been no trial or adjudication or judicial finding of any issue of fact or law. 

The settlement was the result of a multi-year investigation by the U.S. Attorney’s Office of the District of Massachusetts.  Assistant U.S. Attorneys Justin D. O’Connell, Brian M. LaMacchia, Elianna J. Nuzum, Steven T. Sharobem, and Sara M. Bloom of Lelling’s Office investigated RBS’s conduct in connection with RMBS, with the support of the Federal Housing Finance Agency’s Office of the Inspector General.

August 14, 2018 in AML, Financial Regulation | Permalink | Comments (0)

Friday, August 3, 2018

Wells Fargo Agrees to Pay $2.09 Billion Penalty for Allegedly Misrepresenting Quality of Loans Used in Residential Mortgage-Backed Securities

The Justice Department announced that Wells Fargo Bank, N.A. and several of its affiliates (Wells Fargo) will pay a civil penalty of $2.09 billion under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) based on the bank’s alleged origination and sale of residential mortgage loans that it knew contained misstated income information and did not meet the quality that Wells Fargo represented. Investors, including federally insured financial institutions, suffered billions of dollars in losses from investing in residential mortgage-backed securities (RMBS) containing loans originated by Wells Fargo.  Download Settlement Agreement

“This settlement holds Wells Fargo accountable for actions that contributed to the financial crisis,” said Acting Associate Attorney General Jesse Panuccio. “It sends a strong message that the Department is committed to protecting the nation’s economy and financial markets against fraud.”  

“Abuses in the mortgage-backed securities industry led to a financial crisis that devastated millions of Americans,” said Acting U.S. Attorney for the Northern District of California, Alex G. Tse. “Today’s agreement holds Wells Fargo responsible for originating and selling tens of thousands of loans that were packaged into securities and subsequently defaulted. Our office is steadfast in pursuing those who engage in wrongful conduct that hurts the public.” 

FIRREA authorizes the federal government to seek civil penalties against financial institutions that violate various predicate criminal offenses, including wire and mail fraud. The United States alleged that, in 2005, Wells Fargo began an initiative to double its production of subprime and Alt-A loans. As part of that initiative, Wells Fargo loosened its requirements for originating stated income loans – loans where a borrower simply states his or her income without providing any supporting income documentation.  

To evaluate the integrity of its increasing volume of stated income loans, Wells Fargo subjected a sample of these loans to “4506-T testing.” A 4506-T form is a government document signed by the borrower during the loan approval process that allows the lender to obtain the borrower’s tax transcripts from the Internal Revenue Service (IRS). 4506-T testing involves comparing the tax transcripts of the borrower with the income stated on the loan application. Wells Fargo implemented 4506-T testing on two of its programs. This testing revealed that more than 70% of the loans that Wells Fargo sampled had an “unacceptable” variance (greater than 20% discrepancy between the borrower’s stated income and the income information reflected in the borrower’s most recent tax returns filed with the IRS), and the average variance was approximately 65%. After receiving these results, Wells Fargo conducted further internal testing. This additional testing, performed by quality assurance analysts, was designed to determine if “plausible” explanations existed for the “unacceptable” variances over 20%. This additional step revealed that nearly half of the stated income loans that Wells Fargo tested had both an unacceptable variance and the absence of a plausible explanation for that variance.  

The results of Wells Fargo’s 4506-T testing were disclosed in internal monthly reports, which were widely distributed among Wells Fargo employees. One Wells Fargo employee in risk management observed that the “4506-T results are astounding” yet “instead of reacting in a way consistent with what is being reported WF [Wells Fargo] is expanding stated [income loan] programs in all business lines.” 

The United States alleged that, despite its knowledge that a substantial portion of its stated income loans contained misstated income, Wells Fargo failed to disclose this information, and instead reported to investors false debt-to-income ratios in connection with the loans it sold. Wells Fargo also allegedly heralded its fraud controls while failing to disclose the income discrepancies its controls had identified. The United States further alleged that Wells Fargo took steps to insulate itself from the risks of its stated income loans, by screening out many of these loans from its own loan portfolio held for investment and by limiting its liability to third parties for the accuracy of its stated income loans. Wells Fargo sold at least 73,539 stated income loans that were included in RMBS between 2005 to 2007, and nearly half of those loans have defaulted, resulting in billions of dollars in losses to investors.  

The settlement was the result of a coordinated effort between the Civil Division’s Commercial Litigation Branch and the U.S. Attorney’s Office for the Northern District of California, with investigative support from the Federal Housing Finance Agency, Office of Inspector General. 

The claims resolved by this settlement are allegations only, and there has been no admission of liability.  

August 3, 2018 in Financial Regulation | Permalink | Comments (0)

Wednesday, July 18, 2018

FINRA Encourages Firms to Notify FINRA if They Engage in Activities Related to Digital Assets

Download FinCEN Digital Currency Regulatory-Notice-18-20

The market for digital assets, such as cryptocurrencies and other virtual coins and tokens, has grown significantly and has increasingly been of interest to retail investors. At the same
time, investor protection concerns exist, including incidences of fraud and other securities law violations involving digital assets and the platforms on which they trade. As such,
FINRA has a keen interest in remaining abreast of the extent of member involvement in this space. Firms that engage or begin to engage in such activities are reminded to consider all
applicable federal and state laws, rules and regulations, including FINRA and SEC rules and regulations.

FINRA is monitoring developments in the digital asset marketplace and is undertaking efforts to ascertain the extent of FINRA member involvement related to digital assets.

To supplement FINRA’s efforts to date, FINRA is issuing this Notice to encourage each firm to promptly notify FINRA if it, or its associated persons or affiliates, currently engages, or intends to engage, in any activities related to digital assets, such as cryptocurrencies and other virtual coins and tokens. In addition, until July 31, 2019, FINRA encourages each firm to keep its Regulatory Coordinator abreast of changes in the event the firm, or its associated persons or affiliates, determines to engage in activities relating to digital assets not previously disclosed.

If a firm recently has provided notice to its Regulatory Coordinator in response to a direct request, has provided this information by way of the 2018 Risk Control Assessment (RCA) Survey, or has submitted a continuing membership application (CMA) regarding its involvement in activities related to digital assets, FINRA does not request additional notification pursuant to this Notice unless a change has occurred.

 

July 18, 2018 in Financial Regulation | Permalink | Comments (0)

Friday, June 29, 2018

Hong Kong Starts Enforcement of Licensure of Trust and Company

Expiry of the transitional period for existing practitioners to apply for a trust or company service provider licence

The 120-day transitional period for existing practitioners to apply for a trust or company service provider ("TCSP") licence ended on 28 June 2018.

If any practitioner is currently carrying on a trust or company service business in Hong Kong and has not yet applied for a TCSP licence from the Registrar of Companies, he/she should have applied for the licence on or before 28 June 2018, the end of the transitional period.

In the absence of such an application in respect of an existing business, any person who, after 28 June 2018, carries on the TCSP business in Hong Kong without a licence commits an offence under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, Cap. 615, and, once convicted, is liable to a maximum fine of $100,000 and imprisonment up to six months.

For detailed information, please visit www.tcsp.cr.gov.hk or call our hotline at 3142 2822.

June 29, 2018 in Financial Regulation | Permalink | Comments (0)

Thursday, June 28, 2018

Real Estate Investor Pleads Guilty to Rigging Bids at Online Foreclosure Auctions

First Guilty Plea Involving Foreclosure Auctions in Florida

Real estate investor Stuart Hankin pleaded guilty today for his role in a conspiracy to rig bids, in violation of antitrust law, at online public foreclosure auctions in Florida, the Department of Justice announced.  He is the first defendant to plead guilty in this conspiracy.  

“Those who corrupt the foreclosure auction process through illegal bid rigging must expect to face the consequences,” said Assistant Attorney General Makan Delrahim of the Department of Justice’s Antitrust Division.  “The Division remains committed to rooting out antitrust violations at foreclosure auctions, whether the auction is online or in person, and whether the conspiracy is carried out in person, in text messages, or through other electronic means.”

Felony charges of bid rigging were filed against Stuart Hankin on November 2, 2017, in the U.S. District Court for the Southern District of Florida.  According to court documents, from around January 2012 through around June 2015, Hankin conspired with others to rig bids during online foreclosure auctions in Palm Beach County, Florida.  

The Department said that the primary purpose of the conspiracy was to suppress and restrain competition in order to obtain selected real estate offered at online foreclosure auctions at noncompetitive prices.  When real estate properties are sold at these auctions, the proceeds are used to pay off the mortgage and other debt attached to the property, with any remaining proceeds available to the homeowner.  According to court documents, the conspiracy artificially lowered the price paid at auction for such homes.  In the past several years, the Division and its law enforcement partners have secured convictions of over 100 individuals for rigging public mortgage foreclosure auctions in six different states, now including Florida.

“Stuart Hankin and his co-conspirators used bid rigging to successfully undermine the legitimate, competitive foreclosure auction process for certain properties in Palm Beach County, Florida,” said Special Agent in Charge Robert F. Lasky for FBI Miami.  “Their greed left victims – including homeowners and other valid stakeholders – shortchanged.  The FBI and our law enforcement partners will vigorously investigate such schemes.”

A violation of the Sherman Act carries a maximum penalty of 10 years in prison and a $1 million fine for individuals. The maximum fine for a Sherman Act charge may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime if either amount is greater than the statutory maximum fine.

The investigation is being conducted by the Antitrust Division’s Washington Criminal I Section and the FBI’s Miami Division – West Palm Beach Resident Agency.  

June 28, 2018 in Financial Regulation | Permalink | Comments (0)

Sunday, June 24, 2018

Sixth Mississippi Real Estate Investor Pleads Guilty to Conspiring to Rig Bids at Public Foreclosure Auctions

Mississippi real estate investor Ivan Spinner became the sixth real estate investor to plead guilty in connection with the ongoing investigation into bid rigging at public real estate foreclosure auctions in Mississippi, the Department of Justice announced. 

Felony charges against Spinner were filed on June 8, 2018, in the U.S. District Court for the Southern District of Mississippi. According to those charges, from at least as early as April 20, 2010, through at least as late as August 21, 2015, Ivan Spinner conspired with others not to bid against one another for selected public real estate foreclosure auctions in the Southern District of Mississippi. Co-conspirators made and received payoffs in exchange for their agreement not to bid.  

“With today’s guilty plea, the Antitrust Division continues to hold those individuals accountable who corrupt the competitive process for their own financial gain,” said Makan Delrahim, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. “The Division and its law enforcement partners remain committed to prosecuting bid rigging and restoring competition at these auctions in Mississippi and across the United States.”

“Individuals who defraud our home foreclosure process harm us all,” said United States Attorney Mike Hurst for the Southern District of Mississippi.  “Our prosecutors and investigators should be commended for continuing to pursue those who violate our antitrust laws simply to enrich themselves.”

“Today’s guilty plea is another example that those who participate in bid rigging in Mississippi will be brought to justice,” said Special Agent in Charge Christopher Freeze of the FBI in Mississippi. “Bid rigging is a serious offense which undermines the integrity of the public systems designed to protect our citizens. The FBI continues to participate with the Antitrust Division investigating allegations of fraudulent bidding during public auctions in our state."

The Department stated that the primary purpose of the conspiracy was to suppress and restrain competition in order to obtain selected real estate offered at public foreclosure auctions at non-competitive prices. When real estate properties are sold at these auctions, the proceeds are used to pay off the mortgage and other debt attached to the property, with any remaining proceeds paid to the homeowner. According to court documents, these conspirators paid and received money in connection with their agreement to suppress competition, which artificially lowered the price paid at auction for such homes.

A violation of the Sherman Act carries a maximum penalty of 10 years in prison and a $1 million fine for individuals.  The maximum fine for a Sherman Act charge may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime if either amount is greater than the statutory maximum fine.  

The investigation is being conducted by Antitrust Division attorneys in the Washington Criminal II Section and the FBI’s Gulfport Resident Agency, with the assistance of the U.S. Attorney’s Office for the Southern District of Mississippi.  Anyone with information concerning bid rigging or fraud related to public real estate foreclosure auctions should contact Antitrust Division prosecutors in the Washington Criminal II Section at 202-598-4000, or visit https://www.justice.gov/atr/report-violations.  

June 24, 2018 in Financial Regulation | Permalink | Comments (0)

Friday, June 22, 2018

CFTC Orders JPMorgan Chase Bank, N.A. to Pay $65 Million Penalty for Attempted Manipulation of U.S. Dollar ISDAFIX Benchmark Swap Rates

The Commodity Futures Trading Commission (CFTC or Commission) issued an Order filing and settling charges against JPMorgan Chase Bank, N.A. (JPMC) for attempted manipulation of the ISDAFIX benchmark and requiring JPMC to pay a $65 million civil monetary penalty.

The CFTC Order finds that over a five-year period, beginning in at least January 2007 and continuing through January 2012 (the Relevant Period), JPMC made false reports and attempted to manipulate the U.S. Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX), a leading global benchmark referenced in a range of interest rate products, to benefit its derivatives positions, including positions involving cash-settled options on interest rate swaps.

James McDonald, CFTC Director of Enforcement, commented: “This matter is one in a series of CFTC actions that clearly demonstrates the Commission’s unrelenting commitment to root out manipulation from our markets and to protect those who rely on the integrity of critical financial benchmarks.” 

During the Relevant Period, USD ISDAFIX was set each day in a process that began at 11:00 a.m. Eastern Time with the capture and recording of swap rates and spreads from a U.S. based unit of a leading interest rate swaps brokering firm (Swaps Broker).  ISDAFIX rates and spreads are published daily and are meant to indicate the prevailing mid-market rate, at a specific time of day, for the fixed leg of a standard fixed-for-floating interest rate swap.  They are issued in several currencies and are published for various maturities of U.S. Dollar-denominated swaps.  The most widely used USD ISDAFIX rates and spreads, and the ones at issue in this Order, are those that are intended to indicate the prevailing market rate as of 11:00 a.m. Eastern Time.  The 11:00 a.m. USD ISDAFIX rate is used for the cash settlement of options on interest rate swaps, or swaptions, and as a valuation tool for certain other interest rate products.

The Order finds that certain JPMC traders understood and employed two primary means in their attempts to manipulate USD ISDAFIX rates: trading attempted manipulation and submission attempted manipulation. 

Trading Attempted Manipulation

According to the Order, JPMC attempted to manipulate the USD ISDAFIX by bidding, offering, and executing transactions in targeted interest rate products, including swap spreads and U.S. Treasuries at or near the critical 11:00 a.m. fixing time to affect rates on the electronic interest rate swap screen known as the “19901 screen” and thereby increase or decrease the Swaps Broker’s reference rates and influence the final published USD ISDAFIX.  As one JPMC employee acknowledged in an electronic communication with one of the Swaps Broker’s employees, it was possible to “muscle the fix at 11” through trading at 11:00 a.m.  Another member of the JPMC Swaps Desk (JPMC Swaps Trading Assistant) provided the following description to a colleague at JPMC regarding the efforts by a JPMC Swaps Desk trader to “muscle” the USD ISDAFIX:  

[Y]ou know how there is an 11am screen print for ISDA of where rates are . . . well— sometimes clients put orders in to do trades at the 11 o’clock screen shot—so they get positioned for that and then there’s often a big push to move the screen a ¼ [basis point] in their favor but sometimes there are other dealers trying to go the opposite way so it ends up being a screaming match to try and figure out which way it’s going to go so today, [an identified  JPMC swaps trader] didn’t win the battle and he was pissed.

The description of a “battle” at 11:00 a.m. to control the 11:00 a.m. reference point snapshot is consistent with both trading records during the Relevant Period, as well as recorded audio instructions at least one JPMC Swaps Trader gave to the Swaps Broker regarding executing his trades just prior to 11:00 a.m.  For example, the trader gave the following instructions to the Swaps Broker just before 11:00 a.m. regarding his intentions for trading the 10-year and 30-year tenors at 11:00 a.m.:

“At 11:00, I want to hit, lift 10s.  Okay . . . I’ll lift them up.  I’ll play the game for up to 400 . . . I’d like to keep it up at ¼ if I can.  I don’t want bonds to go over fifty so if they go up to fifty bid, I’m a ¼ offer.  If they lift me, they go down immediately.  I’ll, I’ll sell whatever he wants to sell, okay.”

JPMC’s efforts to manipulate or “muscle” the USD ISDAFIX and prices on the 19901 screen were common knowledge and openly joked about by certain JPMC traders.  When transferring a position between desks, a JPMC trader jokingly commented, “ha, don’t let the rates go up.”  In another electronic communication, a senior trader on the JPMC Swaps Desk openly mocked another senior trader on the desk for bragging about his ability to manipulate the 11:00 a.m. ISDAFIX setting in a group chat, writing “remember when i moved the screen in 2y[year] spreads at the 11am setting? [F]vcking [sic] awesome…noone [sic] was paying attention and i [sic] lifted it up and then it went down.”

Submission Attempted Manipulation

The Order also finds that on certain days in which JPMC had a trading position settling or resetting against the USD ISDAFIX, JPMC  attempted to manipulate the final published USD ISDAFIX rates by submitting rates that were false, misleading, or knowingly inaccurate because they purported to reflect JPMC’s honest view of the true costs of entering into an interest rate swap in particular tenors, but in fact reflected traders’ desire to move USD ISDAFIX higher or lower in order to benefit JPMC’s positions.  

Electronic communications captured examples of discussions between the JPMC submitters and other JPMC trading desk employees.  As evidenced in one electronic communication, a JPMC trader requested that the JPMC submitter “give the lowest 3[year] possible (and the highest 2 [year] and 5 [year]” because his desk had “an exercise with the options desk on the 2s/3s/5s.”  The request to raise and lower the particular tenors in question was made the day before the reference point snapshot was even taken, indicative of the manipulative intent of the author.

 

*  *  *  *  *  *

JPMC has taken specified steps to implement and strengthen its internal controls and procedures relating to the fixing of interest-rate swaps benchmarks, including measures to detect and deter trading or other conduct potentially intended to manipulate directly or indirectly swap rates, including benchmarks based on interest-rate swaps and to ensure the integrity of the fixing of any interest-rate swap benchmark.

In accepting the Bank’s offer, the Commission recognizes that JPMC provided substantial cooperation in the investigation in this matter, and commenced significant remedial action to strengthen the internal controls and policies relating to all benchmarks, including ISDAFIX. 

The following staff members assisted in this case: Candice Aloisi, Jason Fairbanks, Jordon Grimm, David MacGregor, David C. Newman, K. Brent Tomer, and James Wheaton.

CFTC Division of Enforcement staff members responsible for this case are Patrick Daly, Mark A. Picard, Trevor Kokal, David Acevedo, Lenel Hickson, Jr., and Manal M. Sultan.

June 22, 2018 in Financial Regulation | Permalink | Comments (0)

Tuesday, June 19, 2018

Former Executives at Publicly Traded Transportation Company Charged with $245 Million Accounting and Securities Fraud Scheme

Two former executives of Roadrunner Transportation Systems Inc., a publicly traded transportation and trucking company formerly headquartered in Cudahy, Wisconsin, were charged in an indictment unsealed today for their alleged participation in a complex accounting and securities fraud scheme that resulted in a loss of more than $245 million in shareholder value.  Download Naggs and Wogsland Indictment

Acting Assistant Attorney General John P. Cronan of the Justice Department’s Criminal Division, U.S. Attorney Matthew D. Krueger of the Eastern District of Wisconsin, Regional Special Agent in Charge Thomas J. Ullom of the U.S. Department of Transportation Office of Inspector General (DOT-OIG) and Special Agent in Charge R. Justin Tolomeo of the FBI’s Milwaukee Field Office made the announcement.

Mark R. Wogsland, 53, and Bret S. Naggs, 52, both of Cedarburg, Wisconsin, were charged in an indictment filed in the Eastern District of Wisconsin with one count of conspiracy to make false statements to a public company’s accountants and to falsify a public company’s books, records and accounts; one count of conspiracy to commit securities fraud and wire fraud; three counts of securities fraud; and four counts of wire fraud.  Naggs, the former  controller for Roadrunner’s Truckload operating segment, and Wogsland, the former controller and director of accounting for Roadrunner’s Truckload operating segment, both worked out of Roadrunner’s corporate headquarters in Cudahy. Roadrunner Transportation Systems Inc. is currently headquartered in Downers Grove, Illinois. 

“According to the allegations in the indictment, Mark Wogsland and Bret Naggs engaged in a massive securities and accounting fraud scheme that misled shareholders, regulators, and the investing public, and ultimately caused a loss of more than $245 million in shareholder value,” said Acting Assistant Attorney General Cronan.   “The Criminal Division is committed to protecting investors and the integrity of U.S. securities exchanges, and we will vigorously pursue corporate executives who engage in deceptive and fraudulent accounting practices.”

“The stability our financial markets depends upon public companies issuing accurate financial statements,” said U.S. Attorney Matthew D. Krueger.  “We commend the FBI and the Department of Transportation Office of Inspector General for its excellent efforts in investigating this case.”

“Working with our law enforcement and prosecutorial partners, the U.S. Department of Transportation Office of Inspector General is committed to preventing and detecting corporate fraud and corruption schemes within transportation-related companies intent on providing false or misleading information to the federal government,” said DOT-OIG Regional Special Agent Ullom.  “Today’s indictment helps reinforce the message that executives involved in all modes of transportation must uphold the public’s trust and maintain the highest levels of integrity.”

“Corporate fraud remains a high priority for the FBI,” said Special Agent in Charge Tolomeo. “Perpetrators who mislead investors and manipulate financial data to falsely inflate business performance will face justice for their crimes.”

“This indictment makes it clear that the FBI, its fellow field offices, and federal partners are committed to working together to hold those accountable who would attempt to manipulate the market,” said J.C. Hacker, Acting Special Agent in Charge of FBI Atlanta. “This alleged fraud caused significant harm to Roadrunner and its shareholders for personal profit.” 

The indictment alleges that between 2014 and 2017, Naggs, Wogsland and their co-conspirators carried out a complex scheme to mislead Roadrunner’s shareholders, independent auditors, regulators and the investing public about Roadrunner’s true financial condition. According to the indictment, beginning in 2014, Naggs, Wogsland and their co-conspirators identified at least $7 million in overstated accounts on the balance sheet of one of Roadrunner’s largest operating companies, Roadrunner Intermodal Services Inc. (RRIS), which included old, uncollectable customer debts with static balances; understated and increasing liabilities for historic debt owed by terminated drivers; and overstated accounts for licenses and other “prepaid assets” that no longer had any actual value.   Instead of addressing the misstated accounts by writing them off, the indictment alleges, Naggs, Wogsland and their co-conspirators purposefully left the vast majority of the misstated accounts on Roadrunner’s books in order to fraudulently boost Roadrunner’s financial performance and mislead Roadrunner’s shareholders, independent auditors, regulators and the investing public about Roadrunner’s true financial condition.

According to the indictment, by late 2014, Naggs, Wogsland and their co-conspirators developed a plan to write off a portion of the misstated accounts.  However, instead of immediately writing off the full amount, Naggs, Wogsland and their co-conspirators directed RRIS finance employees to adjust the balance sheet by a small amount each month, in order to conceal from Roadrunner’s shareholders, independent auditors, regulators and the investing public the true nature and extent of the misstated accounts.  However, after learning that Roadrunner’s performance at other operating companies had deteriorated, the indictment alleges, Naggs, Wogsland and their co-conspirators abandoned the plan and, in some cases, reversed write-offs that had already been booked.  The indictment further alleges that beginning in May 2015, Naggs and other Roadrunner employees received monthly financial reports from RRIS, which included profit and loss figures both with and without the planned monthly write-off.  

The indictment alleges that as a result of the scheme, nearly all of the misstated accounts remained on RRIS’s balance sheet from 2014 until early 2017, when Roadrunner announced for the first time that it would be restating its previously reported financial results.  Three trading days following the announcement, the price of Roadrunner’s shares dropped from $11.74 to $7.54 per share, causing a loss in shareholder value of more than $160 million.  In early 2018, Roadrunner issued restated financial results for 2014 through the third quarter of 2016, acknowledging that it had identified material accounting errors resulting from material weaknesses and management override of internal controls.  Three trading days after announcing the restated financial results, Roadrunner’s share price further dropped from $7.14 to $4.90, causing an additional loss in shareholder value of more than $85 million.

An indictment is merely an allegation and the defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law. 

June 19, 2018 in Financial Regulation | Permalink | Comments (0)

Wednesday, May 2, 2018

FTC: Lending Club misled people about hidden fees

If you need to borrow money to consolidate credit card debt, make home or auto repairs, or move across country, a personal loan can help cover your expenses.  Most personal loans are unsecured, meaning they don’t require collateral like a house or car, and typically have higher interest rates than secured loans.

The FTC recently filed a lawsuit against Lending Club, a company offering personal loans online. According to the FTC, Lending Club has deceptively marketed loans by promising consumers “no hidden fees” but nevertheless charges a hidden up-front fee. Lending Club has told consumers they will get a loan of a certain amount – say $10,000, for example. But when the loan shows up in the consumer’s bank account, it’s for just $9,500. That’s because Lending Club deducted a $500 up-front fee, even though it promised not to charge hidden fees. The complaint also alleges that Lending Club has told consumers they have been approved for loans when they have not, makes unauthorized withdrawals from consumers’ bank accounts, and failed to properly provide customers with required privacy notices.  See FTC compliant filed here:  Download Lending_club_complaint

If you’re thinking about applying for a personal loan, take the following steps:

  • Shop around. Different lenders may quote you different rates and terms, so you should contact several lenders to make sure you’re getting the best price.
  • Get a list of all fees, including any origination fees. Your loan agreement also could include prepayment penalty fees, late payment fees, bounced check fees, and check processing fees.
  • Check your credit report. Regardless of what some lenders say, your credit rating plays a big role in how much you’ll pay to borrow money. Mistakes could lower your credit scores.

FTC Charges Lending Club with Deceiving Consumers

Defendant promises “no hidden fees” but charges them anyway

The Federal Trade Commission has charged the LendingClub Corporation with falsely promising consumers they would receive a loan with “no hidden fees,” when, in actuality, the company deducted hundreds or even thousands of dollars in hidden up-front fees from the loans.

“This case demonstrates the importance to consumers of having truthful information from lenders, including online marketplace lenders,” said Reilly Dolan, acting director of the FTC’s Bureau of Consumer Protection. “Stopping this kind of conduct will help consumers make informed choices about loan offers.”

As stated in the FTC’s complaint, Lending Club recognized that its hidden fee was a significant problem for consumers, and an internal review noted that its claims about the fee and the amount consumers would receive “could be perceived as deceptive as it is likely to mislead the consumer.” An attorney for one of the company’s largest investors also warned the company that the “relative obscurity” of the up-front fee in light of the company’s prominent “no hidden fees” representation could make the company a target for a law enforcement action.

According to the FTC, Lending Club ignored these and other warnings and, over time, made its deceptive “no hidden fees” claim even more prominent.

The FTC also alleges that Lending Club falsely told loan applicants that “Investors Have Backed Your Loan” while knowing that many of them would never get a loan, a practice that delayed applicants from seeking loans elsewhere. In addition, in numerous instances, Lending Club has withdrawn double payments from consumers’ accounts and has continued to charge those who cancelled automatic payments or paid off their loans, which costs consumers overdraft fees and prevents them from making other payments. In addition, Lending Club failed to get consumers’ acknowledgment of its information-sharing policy as required by law.

The company is charged with violating the FTC Act and the Gramm-Leach-Bliley Act.

May 2, 2018 in Financial Regulation | Permalink | Comments (0)

Monday, April 30, 2018

FTC Charges Lending Club with Deceiving Consumers

Defendant promises “no hidden fees” but charges them anyway

The Federal Trade Commission has charged the LendingClub Corporation with falsely promising consumers they would receive a loan with “no hidden fees,” when, in actuality, the company deducted hundreds or even thousands of dollars in hidden up-front fees from the loans.

“This case demonstrates the importance to consumers of having truthful information from lenders, including online marketplace lenders,” said Reilly Dolan, acting director of the FTC’s Bureau of Consumer Protection. “Stopping this kind of conduct will help consumers make informed choices about loan offers.”

 As stated in the FTC’s complaint, Lending Club recognized that its hidden fee was a significant problem for consumers, and an internal review noted that its claims about the fee and the amount consumers would receive “could be perceived as deceptive as it is likely to mislead the consumer.” An attorney for one of the company’s largest investors also warned the company that the “relative obscurity” of the up-front fee in light of the company’s prominent “no hidden fees” representation could make the company a target for a law enforcement action.

According to the FTC, Lending Club ignored these and other warnings and, over time, made its deceptive “no hidden fees” claim even more prominent.

The FTC also alleges that Lending Club falsely told loan applicants that “Investors Have Backed Your Loan” while knowing that many of them would never get a loan, a practice that delayed applicants from seeking loans elsewhere. In addition, in numerous instances, Lending Club has withdrawn double payments from consumers’ accounts and has continued to charge those who cancelled automatic payments or paid off their loans, which costs consumers overdraft fees and prevents them from making other payments. In addition, Lending Club failed to get consumers’ acknowledgment of its information-sharing policy as required by law.

The company is charged with violating the FTC Act and the Gramm-Leach-Bliley Act.

April 30, 2018 in Financial Regulation | Permalink | Comments (0)

Monday, April 16, 2018

UBER failed to disclose another data breach during FTC investigation

Uber Technologies, Inc. has agreed to expand the proposed settlement it reached with the Federal Trade Commission last year over charges that the ride-sharing company deceived consumers about its privacy and data security practices.

After the announcement of last year’s proposed settlement, the Commission learned that Uber had failed to disclose a significant breach of consumer data that occurred in 2016 -- in the midst of the FTC’s investigation that led to the August 2017 settlement announcement. Due to Uber’s misconduct related to the 2016 breach, Uber will be subject to additional requirements. Among other things, the revised settlement could subject Uber to civil penalties if it fails to notify the FTC of certain future incidents involving unauthorized access of consumer information.

“After misleading consumers about its privacy and security practices, Uber compounded its misconduct by failing to inform the Commission that it suffered another data breach in 2016 while the Commission was investigating the company’s strikingly similar 2014 breach,” said Acting FTC Chairman Maureen K. Ohlhausen. “The strengthened provisions of the expanded settlement are designed to ensure that Uber does not engage in similar misconduct in the future.”

In announcing the original proposed settlement with Uber in August 2017, the FTC charged that the company had failed to live up to its claims that it closely monitored employee access to rider and driver data and that it deployed reasonable measures to secure personal information stored on a third-party cloud provider’s servers.

In the revised complaint issued today, the FTC alleges that Uber learned in November 2016 that intruders had again accessed consumer data the company stored on its third-party cloud provider’s servers by using an access key an Uber engineer had posted on a code-sharing website. This time, the intruders used the access key to download from Uber’s cloud storage unencrypted files that contained more than 25 million names and email addresses, 22 million names and mobile phone numbers, and 600,000 names and driver’s license numbers of U.S. Uber drivers and riders.

The revised proposed complaint further notes that Uber paid the intruders $100,000 through its third-party “bug bounty” program and failed to disclose the breach to consumers or the Commission until November 2017. The bug bounty program was created to provide financial rewards to parties who responsibly disclose security vulnerabilities rather than those who maliciously exploit vulnerabilities to access consumers’ personal information.

In addition to compelling Uber to disclose certain future incidents involving consumer data, the new provisions in the revised proposed order include requirements for Uber to submit to the Commission all the reports from the required third-party audits of Uber’s privacy program rather than only the initial such report. It also must retain certain records related to bug bounty reports regarding vulnerabilities that relate to potential or actual unauthorized access to consumer data.

The Commission vote to withdraw the original administrative complaint and proposed consent agreement and to issue the revised administrative complaint and to accept the revised proposed consent agreement was 2-0. The FTC will publish a description of the consent agreement package in the Federal Register shortly. The agreement will be subject to public comment for 30 days, beginning today and continuing through May 14, 2018, after which the Commission will decide whether to make the proposed consent order final.

April 16, 2018 in Financial Regulation | Permalink | Comments (0)

Sunday, April 15, 2018

The Long Run: Maximizing Innovation Incentives Through Advocacy and Enforcement

Good afternoon. It is great to be here at the Leadership IP conference. This conference for many years now has brought together a broad network of experts and policymakers with diverse viewpoints to discuss what I view as some of the most important issues of our day. Thanks to the organizers, and especially to my friend, the Honorable Jim Rill, for inviting me to speak.

As I look out from this lectern, I am humbled to be in the company of the most sophisticated and knowledgeable people in the world in the areas of antitrust and intellectual property. I know that all of you follow developments in this area closely, and that you are likely already aware of the views I have shared in my recent speeches on antitrust and IP, first at the University of Southern California last November, and more recently, at the University of Pennsylvania in March. Having provided much detail on my policy views already, today I thought it would be most useful to expand on the Division’s role—or roles—when it comes to issues at the intersection of antitrust and IP. 

As I see it, the Division wears two hats in this space. One is the hat of the competition advocate; the other is the hat of the competition enforcer. Both important, but distinct, roles.

As an agency with more than 125 years of experience observing and analyzing markets in this country, more than 300 lawyers who spend countless hours poring over business documents and interviewing executives in various industries, and another 50 PhD economists who are thought leaders in the field of competition, we are well-positioned to consider what effect a given policy is likely to have on the U.S. market. Naturally, given our mission of protecting and promoting competition, we aim to bring our resources and experience to bear in encouraging, or advocating for, policies that will incentivize innovation for the benefit of American consumers.  

In our role as competition enforcer, we take action when we have sufficient evidence to suspect the existence of an anticompetitive restraint of trade that undermines our free market, or when we determine that a proposed merger may substantially lessen competition in violation of the Clayton Act. In our enforcement role, we bring cases against conduct that has been outlawed by Congress, and we prove those cases in U.S. courts.

Both of these roles are important to the Division’s core mission of protecting and promoting competition, but they are distinct, to be sure. So in the interest of transparency, let me elaborate on how we carry out our dual roles in the area of antitrust and IP; and then I will highlight a few risks associated with conflating the Division’s advocacy and enforcement work in this area, with the goal of avoiding such risks.
Competition Advocacy

There is a great deal of work that we do in our role as an advocate for competition. A primary method of advocacy is giving speeches. Conferences like today’s allow us to share with the public—in person and on our website, where many of the Division leadership’s speeches are published—the Division’s views about what conditions will make the market most dynamic, innovative and competitive. Although we speak often about the application of the antitrust laws, our advocacy extends more broadly. For example, when I spoke at USC, I addressed remedies in patent infringement litigation, and described my concern that by denying injunctive relief to standard essential patent holders except in the rarest circumstances, courts in the U.S. run the risk of turning a FRAND commitment into a compulsory license. As a defender of competitive markets, I am concerned that these patent law developments could have an unintended and harmful effect on dynamic competition by undermining important incentives to innovate, and ultimately, have a detrimental effect on U.S. consumers.

Another advocacy position we have taken relates to how patent holders are held to their commitments to license on FRAND terms. At Penn last month, I noted that so-called unilateral patent hold-up is not an antitrust problem. Where a patent holder has made commitments to license on particular terms, a contract theory is adequate and more appropriate to address disputes that may arise regarding whether the patent holder has honored those commitments. The Division will not hesitate to bring a sound antitrust case, but as competition advocates, we must strive to ensure that we use the antitrust laws for their intended purpose, which is to address practices that harm competition. Using the antitrust laws to impugn a patent holder’s efforts to enforce valid IP rights risks undermining the dynamic competition we are charged with fostering. So when it comes to disputes that arise between intellectual property holders and implementers regarding the scope of FRAND commitments, we advocate for the application of more appropriate theories, other than the blunt instrument of antitrust.

A third topic I have addressed recently is the need for balanced patent policies in standard setting organizations. As I and others at the Division have said on many occasions, by allowing products designed and manufactured by many different firms to function together, interoperability standards create enormous value for consumers. But standard setting only works—and consumers only reap the benefits of innovative and interoperable products—when both patent holders and patent implementers have the incentives to participate in the process. To that end, I have encouraged standard setting organizations to think carefully about the patent policies they adopt, so that incentives are not skewed towards one group or the other.

While I have focused so far today on speech-related advocacy work, the Division has many other mechanisms for promoting the discussion of pro-competitive policies. 

Our business review letter process might, in one sense, be viewed as a mechanism to share our policies on competition. While a business review letter is, of course, a statement of our enforcement intentions with respect to the particular arrangement described in the request, others in the antitrust community look to these letters for insight about our prospective enforcement views. It is in that context that I include our business review letters as a facet of our advocacy function. And as many of you know, the Antitrust Division has had a number of occasions to opine on issues of antitrust and IP through the business review process over the years. 

The Division also represents the Department of Justice on the administration’s trade policy staff committee. And, in that context, we engage with other executive branch agencies to discuss issues at the intersection of antitrust and IP in an effort to ensure that the promotion of competition and innovation are key considerations in trade-related actions taken by the U.S. government. 

A fourth facet of our competition advocacy, which I am excited to mention, is our recent effort to expand our amicus program to increase our participation in private litigation not only in the Supreme Court, but at the district and appellate courts as well. While this effort is certainly not limited to issues involving the interface between antitrust and IP, I can envision these issues attracting our interest as an amicus, given their relevance to our mission of promoting competition.

Having described in more detail our competition advocacy role, let me turn to the Division’s role as an enforcer. As I have said previously, in the context of antitrust and IP, we will be inclined to investigate and enforce when we see evidence of collusive conduct undertaken for the purpose of fixing prices, or excluding particular competitors or products. So what type of conduct in particular might attract enforcement scrutiny? 

In the context of standard setting, cases like Radiant Burners, Hydrolevel, and Allied Tube provide helpful guidance regarding the kinds of collusive conduct that, naturally, would garner our attention. They are particularly helpful in illuminating our concern about situations in which competitors either corrupt the standard setting process so that decisions are not made by a balanced group of IP holders and implementers, or where competitors reach anticompetitive agreements outside of the scope of a legitimate standard setting exercise, with a detrimental effect on competition. 

Let me describe two related situations that would raise concerns in the context of voluntary consensus standards development. First, if a group of patent implementers were to engage in concerted efforts to exclude a patent holder from meaningful participation in standard setting unless the patent holder agreed to offer particular licensing terms dictated by the group of implementers, those facts would raise red flags. Similarly, if patent holders A, B and C were to agree to exclude from consideration for inclusion substitute technology owned by their competitor patent holder D—for the purpose of harming patent holder D, rather than as a result of good-faith efforts to incorporate the most effective technology—that would also raise concerns. 

While I believe in a very restrained approach to antitrust enforcement when it comes to the legitimate exploitation of valid IP rights, the Division will not hesitate to enforce against anticompetitive collusive conduct, particularly in an area as high-stakes for the American consumer as this one.

Over the years, the Division has made efforts to ensure that the advocacy positions we take are not misconstrued by the public. For example, when the Division issued the 2007 IP Report, we, and the Federal Trade Commission, included in the chapter on patent pools—arrangements through which multiple patent owners collaborate to offer a single license to a package of their patents—a description of certain safeguards that patent pool participants had put into place in various arrangements submitted to the Division for business review to ensure that efficiency would be enhanced, and that potential competitive harm would be mitigated. We were careful to note, however, that although the safeguards we described were a basis upon which we articulated our intention not to bring enforcement actions, “in an enforcement investigation examining a patent pool . . . failure to incorporate all the safeguards set forth in the pooling business review letters [would] not automatically lead to the conclusion that a pool is anticompetitive.” We stated that we would instead “evaluate the particular facts and circumstances to determine whether the actual conduct has an anticompetitive effect.”  

I point out the distinction between advocacy and enforcement, and the Division’s efforts to highlight it, because I believe there are some risks associated with conflating the two. First, it can be the case that advocacy positions lead to unsupportable or even detrimental legal theories when taken out of context. As I explained at Penn, as a result of past speeches and position statements about hold-up that may have been intended to be limited to the context of competition advocacy, I worry that putative licensees have been emboldened to stretch antitrust theories beyond their rightful application, and that courts have indulged these theories at the risk of undermining patent holders’ incentives to participate in standard setting at all.

Another risk of conflating advocacy positions with enforcement intentions is that industry leadership in standard setting could be stifled or undermined if business leaders are concerned that each decision they make will be called into question by antitrust enforcers in the context of an investigation. That is why our statements regarding antitrust and IP aim to clarify what conditions are ideal, and at the opposite end of the spectrum, what conduct might attract enforcement scrutiny. As a prior Division official said, 

“The great strength of the competitive marketplace is its ability to experiment, recover from false starts, and seek an efficient equilibrium through an organic development process. We should not expect to be able to predict where the best ideas will come from, but with all respect to my colleagues in the enforcement community, I doubt they will be developed entirely from the top down by antitrust enforcers in the U.S. or elsewhere.”  

While the Division will not hesitate to advocate for the conditions that are most likely to attract robust participation in standard setting, we want standard setting bodies to be industry-led, and we encourage them to experiment, to compete with one another, and to be creative. This is a point we have supported making to foreign governments in the trade context—something I will be talking more about in the coming months.

With respect to the difference between advocacy and enforcement, a final point I want to make is how important it is that foreign enforcers are aware of our two distinct roles. Recently, I have noticed that some of the Division’s work, including business review letters, has been cited to support foreign enforcement actions that we would not bring under U.S. antitrust law. For example, while the Division decided that it would not challenge as unlawful the IEEE’s patent policy update in 2015—including the portion of the policy that limits the availability of injunctions to holders of FRAND-encumbered patents—for the reasons I have just explained, this letter should never be cited for the proposition that what IEEE did is required, or that a patent holder who seeks an injunction is somehow in violation of the antitrust laws. 

On the topic of international enforcement in the antitrust and IP context, let me make a few additional points. As I highlighted when I spoke at Penn, as enforcers, we have an obligation to ensure that antitrust policy remains sound, so that consumers enjoy the benefits of dynamic competition, and also so that we do not export unsound theories of antitrust liability abroad, where dubious enforcement actions would have harmful effects here in the U.S. 

In pursuit of that ideal, we strive to be disciplined in our own analysis and enforcement procedures, not only because it is the right thing to do, but also because we want to lead the way as enforcers around the world grapple with the issues presented by today’s high-tech markets. For example, when we look at IP-related conduct, we do not simply assume that a patent confers market power. Even where market power may exist, we focus our analysis on the actual competitive effects of the conduct at issue. This was not always our approach. In the 1970s, U.S. antitrust law took a skeptical view of patent licensing, out of concern that the exclusive rights of a patent might be leveraged into monopolies over unpatented products, causing harm to consumers. As former Assistant Attorney General Rick Rule has written, “Fear that the patentee would exercise market power and harm consumers of the product overwhelmed recognition of the benefits that dynamism spurred by patents could create for all consumers.” Over time, we came to understand the importance of dynamic competition, and that is a principle we want to share with our foreign enforcer colleagues.

We also strive to impose remedies that are carefully tailored to the harm we identify, whether in the context of a conduct or a merger investigation. Requiring remedies that go beyond that scope—particularly when those remedies relate to the exploitation of IP rights—risks unnecessarily undermining innovation incentives. With respect to remedies, we also give careful consideration to territorial scope, and we urge our enforcer colleagues to do the same. As Deputy AAG Roger Alford explained earlier this year in Korea, “In a world of concurrent authority, it behooves us to recognize that conduct we condemn abroad may affect international commerce and impact the power of other nations to grant rights to their subjects and regulate conduct within the scope of their authority.”

Finally, we adhere to sound and transparent enforcement procedures, because doing so is a fundamental part of operating according to the rule of law, and also because providing parties with opportunities to test our evidence and to push back on our legal theories helps us refine our thinking. This ultimately allows us to reach the right substantive conclusions. As we engage with our foreign counterparts on this topic, we are considering some innovations of our own regarding how we and other jurisdictions might increase our mutual commitments to these principles.

Ultimately, it is the people in this room—who work for some of the most innovative companies in our country and the world—who will enable the next great technological leap. My responsibility is first, to ensure we don’t implement policies that unduly limit your incentives; and second, to leverage actively all of the tools at the Division’s disposal to ensure that you are motivated and able to thrive in a market-based system. As part of that responsibility, I want to ensure that our policies and enforcement intentions are clear and well-understood, so that you can proceed with the business of developing the next generation of technology for the benefit of all of us. I also want to ensure that our enforcement intentions are clear to our enforcer colleagues outside the U.S., given the interconnectedness of the world when it comes to high technology. 

Thank you very much for inviting me to speak today. 

Assistant Attorney General Makan Delrahim Delivers Keynote Address at the LeadershIP Conference on IP, Antitrust, and Innovation Policy

April 15, 2018 in Financial Regulation | Permalink | Comments (0)

Friday, April 13, 2018

Cyber Insurance and Its Potential Role in Risk Management Programs

Cyber Insurance and Its Potential Role in Risk Management Programs

The Federal Financial Institutions Examination Council (FFIEC) members1 developed this statement to provide awareness of the potential role of cyber insurance in financial institutions’ risk management programs. This statement does not contain any new regulatory expectations. Use of cyber insurance may offset financial losses resulting from cyber incidents; however, it is not required by the agencies. Financial institutions should refer to the FFIEC Information Technology (IT) Examination Handbook booklets referenced in this statement for information on regulatory expectations regarding IT risk management.

RISKS

Financial institutions face a variety of risks from cyber incidents. These can include financial, operational, legal, compliance, strategic, and reputation risks resulting from fraud, data loss, or disruption of service.

RISK MITIGATION

While cyber insurance may be an effective tool for mitigating financial risk associated with cyber incidents, it is not required by the agencies. Purchasing cyber insurance does not remove the need for a sound control environment. Rather, cyber insurance may be a component of a broader risk management strategy that includes identifying, measuring, mitigating, and monitoring cyber risk exposure. An effective system of controls remains the primary defense against cyber threats.

If institution management is considering cyber insurance, the assessment of cyber insurance benefits should include an analysis of the institution’s existing cybersecurity and IT risk management programs to evaluate the potential financial impact of residual risk. As institutions weigh the benefits and costs of cyber insurance, considerations may include:

  • Involving multiple stakeholders in the cyber insurance decision

- Include appropriate departments across the institution such as legal, enterprise risk management, operational risk management, finance, information technology, and information security management.

- Assess the sufficiency of existing control environments to address the potential impact of cyber risk exposures and attestation requirements for the insurance policy.

- Communicate the cyber insurance decision-making process, including the assessment of cyber insurance options, to the appropriate level of management.

  • Performing proper due diligence to understand available cyber insurance coverage

- Review the scope of existing or proposed insurance coverage to identify gaps.

- Understand insurance policy terms, coverage, exclusions, and costs for cyber events.

- Consider the potential benefits and costs to assess the insurance coverage appropriateness.

- Avoid overreliance on insurance coverage as a substitute for sound operational risk management practices.

- Recognize that policy terms and language may not be standardized. Coverage may be different among insurance providers and tailored for institutions.

- Consider how the coverage is triggered, if certain types of cyber incidents (e.g., cyber terrorism) are excluded from coverage, and the impact that sub-limits may have in the total coverage and claims process.

- Assess the financial strength (ratings) and claims paying history of insurance companies providing coverage and their ability to fulfill obligations under the policy if multiple institutions file claims.

- Assess how the proposed policies fit within the business strategies, insurance programs, and risk management programs.

- Understand risk management and control requirements outlined in the policy and ensure the institution would be able to comply.

- As appropriate, engage outside advisors, such as attorneys and brokers, to assist in the due diligence process to assess the benefits of cyber insurance relative to the cost.

  • Evaluating cyber insurance in the annual insurance review and budgeting process - Assessing the benefits of cyber insurance relative to the cost.

- Determining the sufficiency of existing insurance coverage as cyber risk exposures, insurance products, and the threat landscape evolve.

- Confirming that any cyber insurance includes coverage expected by the institutions.

- Engaging the board to assess these factors in insurance program reviews.

April 13, 2018 in Financial Regulation | Permalink | Comments (0)

Friday, March 30, 2018

IMF Hiring Counsel/Senior Counsel for Financial Regulatory Advice

Counsel/Senior Counsel (Job Number: 1800197)

  • This vacancy shall be filled by a 3-year Term appointment in accordance with the Fund’s new employment rules taking effect on May 1, 2015.

Description 

The International Monetary Fund (IMF) is seeking to fill a Term staff Counsel/Senior Counsel position in the Financial and Fiscal Law Unit (FFL Unit) of its Legal Department.

The primary objective of the FFL Unit is to provide high-quality legal advice in the context of IMF surveillance, financial assistance programs, technical assistance, and Financial Sector Assessment Programs (FSAPs). The FFL Unit provides advice to member countries on laws and regulations respecting central banks, financial institutions and markets (e.g., the regulation and resolution of financial institutions, financial markets infrastructures, Fintech) as well as fiscal laws (taxation and public financial management (PFM)). It contributes to the formulation of legal policies in its areas of expertise, within the Fund and with other international organizations (Financial Stability Board (FSB), Organization for Economic Cooperation and Development (OECD), and the United Nations (UN)), and advises on the design and implementation of legal reforms under Fund-supported programs. The FFL Unit also provides legal advice regarding the intersection of fiscal law with financial law (e.g. banking sector taxation, public debt instruments, temporary public funding to distressed financial institutions). The successful candidate will be appointed on a three-year Term appointment.

Duties and Responsibilities

Under the overall direction of the General Counsel and Director of the Legal Department (LEG), and the supervision of the Deputy General Counsel responsible for the FFL Unit, the successful candidate will work as Counsel/Senior Counsel and carry out a number of duties and responsibilities, in particular in the areas of regulation and resolution of financial institutions and PFM.

The primary duties and responsibilities will include:

  1. In the context of IMF surveillance, FSAPs, financial assistance programs, and TA, providing legal advice in the area of financial sector and PFM legislation to the Fund’s Executive Board, Fund management, other departments, and to other units within the Legal Department as required;
  2. Drafting of, and advising on, financial sector and PFM legislation in IMF member countries;
  3. Participating in Fund missions and engaging in pre- and post-mission research and reviews;
  4. Engaging in research and reviews in the field of financial sector legislation and PFM law;
  5. Contributing to, commenting on, Fund policy and analytical papers as well as other publications of the Fund in the area of financial sector and PFM, and on areas at the intersection between fiscal law and financial law;
  6. Organizing and delivering presentations and seminars at the premises of the Fund and in member countries; and
  7. Carrying out other assignments as instructed by the General Counsel or the Deputy General Counsel in charge of the FFL Unit.

Qualifications 

The successful candidate will have an advanced university degree in law. The successful candidate will have at least five years of significant, relevant professional legal experience. In particular, the successful candidate will have advised on the legal and regulatory issues related to the regulation and resolution of financial institutions (such as supervisory regimes and financial regulatory issues, financial safety nets, resolution regime and deposit guarantee agency schemes) or to PFM (such as budget laws, public debt frameworks, fiscal responsibility frameworks, fiscal oversight of state-owned enterprises, sovereign wealth funds, public investment management, and public-private partnerships). The successful candidate will have reviewed and drafted legislation or regulation in at least some of these fields. This working experience, acquired in the public or private sectors, should include advising on these matters from a public policy perspective.

Previous experience in both areas – regulation and resolution of financial institutions and PFM - would be an asset. However, it is recognized that the candidate may not have expertise on both PFM and financial sector. It is expected that the successful candidate will be willing to gain expertise on both areas and to advise on issues at the intersection between financial and fiscal law.

The successful candidate will have excellent analytical skills, written and oral communication skills, sound judgment, and a strong drive for results. He/she will have strong interpersonal skills and a demonstrated ability to build effective working relations within and outside the Fund. Knowledge of languages other than English with professional-level fluency would be an asset.

March 30, 2018 in Financial Regulation | Permalink | Comments (0)

Thursday, March 29, 2018

Barclays Agrees to Pay $2 Billion in Civil Penalties to Resolve Claims for Fraud in the Sale of Residential Mortgage-Backed Securities

Two Former Barclays Executives Agree to Pay $2 Million to Resolve Claims Brought Against Them Individually

The United States has reached agreement with Barclays Capital, Inc. and several of its affiliates (together, Barclays) to settle a civil action filed in December 2016 in which the United States sought civil penalties for alleged conduct related to Barclays’ underwriting and issuance of residential mortgage-backed securities (RMBS) between 2005 and 2007.  Barclays will pay the United States two billion dollars ($2,000,000,000) in civil penalties in exchange for dismissal of the Amended Complaint.

Following a three-year investigation, the complaint in the action, United States v. Barclays Capital, Inc., alleged that Barclays caused billions of dollars in losses to investors by engaging in a fraudulent scheme to sell 36 RMBS deals, and that it misled investors about the quality of the mortgage loans backing those deals.  It alleged violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), based on mail fraud, wire fraud, bank fraud, and other misconduct. 

Agreement has also been reached with the two former Barclays executives who were named as defendants in the suit:  Paul K. Menefee, of Austin, Texas, who served as Barclays’ head banker on its subprime RMBS securitizations, and John T. Carroll, of Port Washington, New York, who served as Barclays’ head trader for subprime loan acquisitions.  In exchange for dismissal of the claims against them, Menefee and Carroll agree to pay the United States the combined sum of two million dollars ($2,000,000) in civil penalties.

The settlement was announced by Richard P. Donoghue, United States Attorney for the Eastern District of New York, and Laura S. Wertheimer, Inspector General, of the Federal Housing Finance Agency Office of the Inspector General (FHFA-OIG).

“This settlement reflects the ongoing commitment of the Department of Justice, and this Office, to hold banks and other entities and individuals accountable for their fraudulent conduct,” stated United States Attorney Donoghue. “The substantial penalty Barclays and its executives have agreed to pay is an important step in recognizing the harm that was caused to the national economy and to investors in RMBS.”

“The actions of Barclays and the two individual defendants resulted in enormous losses to the investors who purchased the Residential Mortgage-Backed Securities backed by defective loans,” stated FHFA-OIG Inspector General Wertheimer.  “Today’s settlement holds accountable those who waste, steal or abuse funds in connection with FHFA or any of the entities it regulates.  We are proud to have partnered with the U.S. Department of Justice and the U.S Attorney’s Office for the Eastern District of New York on this matter.”

The scheme alleged in the complaint involved 36 RMBS deals in which over $31 billion worth of subprime and Alt-A mortgage loans were securitized, more than half of which loans defaulted.  The complaint alleged that in publicly filed offering documents and in direct communications with investors and rating agencies, Barclays systematically and intentionally misrepresented key characteristics of the loans it included in these RMBS deals.  In general, the borrowers whose loans backed these deals were significantly less creditworthy than Barclays represented, and these loans defaulted at exceptionally high rates early in the life of the deals.  In addition, as alleged in the complaint, the mortgaged properties were systematically worth less than what Barclays represented to investors.  These are allegations only, which the Defendants dispute, and there has been no trial or adjudication or judicial finding of any issue of fact or law. 

March 29, 2018 in Financial Regulation | Permalink | Comments (0)

Tuesday, March 13, 2018

Correspondent Banking Due Diligence Questionnaire

The Wolfsberg Group is pleased to announce the publication of the updated Correspondent Banking Due Diligence Questionnaire (CBDDQ) and related guidance material (Completion Guidance, Frequently Asked Questions (FAQs) and Glossary).

The CBDDQ aims to set an enhanced and reasonable standard for cross-border and/or other higher risk Correspondent Banking Due Diligence, reducing to a minimum any additional data requirements, as per the Wolfsberg definition and current FATF Guidance. It is also the Group’s expectation that the Group members will begin to use the CBDDQ, in a phased approach, with all of their respondents.

In the long term, it is the Group’s view that the adoption of a standardised, reasonable CBDDQ should engender a less arduous, and thereby inherently less costly, due diligence process for Correspondent Banks, which, as it beds down, should also allow for a standard which all Financial Institutions, and their supervisors, can work towards achieving. This should, in the end, support the objectives of the G20 and other supranational organisations towards a well supervised and more harmonised regulatory standard in the correspondent banking space, with longer term positive effects on de-risking, access to finance, the development of trade and financial inclusion.

The Group is also conscious that its original questionnaire has been used in multiple other customer type due diligence scenarios and, therefore, while not seeking to prescribe how, or for which customer types, the questionnaire should be used, the Group has nonetheless issued the Wolfsberg Group Financial Crime Questionnaire (FCCQ) which is a shorter version of the CBDDQ and contains a basic set of questions to address Industry demand.

The Wolfsberg Group Secretariat has created a dedicated address for any CBDDQ related questions: ddq@wolfsberg-principles.com.

March 13, 2018 in AML, Financial Regulation | Permalink | Comments (0)

Thursday, March 8, 2018

FDIC Announces Settlement with The Bancorp Bank, Wilmington, Delaware, for Unfair and Deceptive Practices

Harmed consumers to receive approximately $1.3 million in restitution

The Federal Deposit Insurance Corporation (FDIC) announced a settlement with The Bancorp Bank, Wilmington, Delaware, relating to unfair and deceptive practices in violation of Section 5 of the Federal Trade Commission Act (Section 5). In addition, the FDIC found that the bank violated the Electronic Funds Transfer Act, the Truth in Savings Act, and the Electronic Signatures in Global and National Commerce Act.

As part of the settlement, the bank stipulated to the issuance of an Order for Restitution and Order to Pay Civil Money Penalty. The Order for Restitution requires the bank to prepare a comprehensive restitution plan, and to pay restitution of nearly $1.3 million to approximately 243,000 harmed consumers who were assessed transaction fees exceeding what the bank disclosed. The Order for Restitution also requires The Bancorp Bank, its institution-affiliated parties, and its successors and assigns to fully comply with Section 5. The Order to Pay requires the bank to pay a civil money penalty of $2.0 million. Consumers who are eligible for relief under the settlement are not required to take any action to receive compensation.

The Bancorp Bank issues prepaid cards on behalf of numerous non-bank entities. The FDIC determined that the bank violated Section 5 by overcharging transaction fees for certain point-of-sale, signature-based transactions (i.e., transactions not requiring a personal identification number or PIN) on certain stored-value cards, including the bank's Excella Visa Prepaid Debit Card.

As the issuing bank for these various prepaid cards, The Bancorp Bank was responsible for ensuring that these programs were operating in compliance with all applicable laws.

Read the Order

March 8, 2018 in Financial Regulation | Permalink | Comments (0)

Thursday, March 1, 2018

Global insurance market trends

The insurance industry is a major component of the economy by virtue of the amount of premiums it collects, the scale of its investment and, more fundamentally, the essential social and economic role it plays by covering personal and business risks. This annual report monitors global insurance market trends to support a better understanding of the insurance industry's overall performance and health.   Download Global-Insurance-Market-Trends-2017

Global Insurance Market Trends 2017

 Accompanying statistics (xls)

This monitoring  report  is compiled using data from the OECD Global Insurance Statistics (GIS) database. The geographical reach of the GIS database is constantly expanding and now covers 62 countries. In addition to OECD countries, this includes: a number of non-OECD Latin American countries, achieved through cooperation with the Association of Latin American Insurance Supervisors (ASSAL); several non-OECD countries in Asia; as well as Lithuania, South Africa and, for the first time, Tunisia.

This monitoring report and the GIS database provide an increasingly valuable cross-country source of data and information on insurance sector developments for use by governmental and supervisory authorities, central banks, the insurance sector and broader financial industry, consumers and the research community.  

 

See also

Key statistics on insurance

Global Insurance Statistics (GIS) database

OECD insurance statistics publication

March 1, 2018 in Financial Regulation | Permalink | Comments (0)

Sunday, February 18, 2018

CFTC Issues First Pump-and-Dump Virtual Currency Customer Protection Advisory

The Commodity Futures Trading Commission (CFTC) issued a Customer Protection Advisory that warns customers to beware of and avoid pump-and-dump schemes that can occur in thinly traded or new “alternative” virtual currencies, digital coins or tokens.

"As with many online frauds, this type of scam is not new - it simply deploys an emerging technology to capitalize on public interest in digital assets," said CFTC Director of Public Affairs Erica Elliott Richardson. "Pump-and-dump schemes long pre-date the invention of virtual currencies, and typically conjure the image of penny stock boiler rooms, but customers should know that these frauds have evolved and are prevalent online. Even experienced investors can become targets of professional fraudsters who are experts at deploying seemingly credible information in an attempt to deceive. The CFTC encourages all customers to thoroughly research potential investments, stay informed about tactics commonly used in investment fraud, and avoid investment opportunities they don't fully understand."

Pump-and-dump schemes are mostly anonymous and are organized in public chat rooms or via mobile messaging apps. They are coordinated efforts to create phony demand (the pump) and then sell quickly (the dump) to profit by taking advantage of traders who are unaware of the scheme. This type of market manipulation occurs in the largely unregulated cash market for virtual currencies and digital tokens, and typically on platforms that offer a wide array of coin pairings for traders to buy and sell.

Customers should avoid purchasing virtual currency or tokens based on tips shared over social media. The organizers of the scheme will commonly spread rumors and urge immediate buying. Victims will commonly react to the currency’s or token’s rising prices, and not verify the rumors. Then the dump begins. The price falls and victims are left with currency or tokens that are worth much less than what they expected. From beginning to end, these scams can be over in just a few minutes.

CFTC Has Received Complaints

The CFTC has received complaints from customers who have lost money to pump-and-dump schemes, and the CFTC maintains general anti-fraud and manipulation enforcement authority over virtual currency cash markets as a commodity in interstate commerce.

Customers Can Protect Themselves

Customers can best protect themselves by purchasing only alternative virtual currencies, digital coins, or tokens that have been thoroughly researched – to separate hype from facts. The bottom line: Customers should not purchase virtual currencies, digital coins, or tokens based on social media tips or sudden price spikes. For more virtual currency resources, visit the CFTC’s dedicated virtual currency web page, cftc.gov/bitcoin.

February 18, 2018 in Financial Regulation | Permalink | Comments (0)

Saturday, February 17, 2018

CFTC Files Eight Anti-Spoofing Enforcement Actions against Three Banks (Deutsche Bank, HSBC & UBS) & Six Individuals

 The Commodity Futures Trading Commission today announced, in conjunction with the Department of Justice and Federal Bureau of Investigation’s Criminal Investigative Division, criminal and civil enforcement actions against three banks and six individuals involved in commodities fraud and spoofing schemes.

Division of Enforcement Director James McDonald said, “Spoofing is a particularly pernicious example of bad actors seeking to manipulate the market through the abuse of technology.  The technological developments that enabled electronic and algorithmic trading have created new opportunities in our markets.  At the CFTC, we are committed to facilitating these market-enhancing developments.  But at the same time, we recognize that these new developments also present new opportunities for bad actors.  We are equally committed to identifying and punishing these bad actors.  The CFTC’s enforcement program is built around the twin goals of holding wrongdoers accountable and deterring future misconduct.  We believe these goals are best achieved when we hold accountable not just companies, but also the individuals involved.  As these cases show, we will work hard to identify and prosecute the individual traders who engage in spoofing, but we will also seek to find and hold accountable those who teach others how to spoof, who build the tools designed to spoof, or who otherwise aid and abet the wrongdoing.  These cases should send a strong signal that we at the CFTC are committed to identifying individuals responsible for unlawful activity and holding them accountable.”

See summary of actions below. Full press releases, including charging documents and specific comments on each case from McDonald at cftc.gov.

Deutsche Bank

The CFTC today issued an Order filing and settling charges against Deutsche Bank AG (DB AG) and Deutsche Bank Securities Inc. (DBSI) (collectively, DB), requiring DB to pay a $30 million civil monetary penalty and to undertake remedial relief. The Order finds that from at least February 2008 and continuing through at least September 2014, DB AG, by and through certain precious metals traders (Traders), engaged in a scheme to manipulate the price of precious metals futures contracts by utilizing a variety of manual spoofing techniques with respect to precious metals futures contracts traded on the Commodity Exchange, Inc. (COMEX), and by trading in a manner to trigger customer stop-loss orders.

UBS

The CFTC today issued an Order filing and settling charges against UBS AG(UBS), requiring UBS to pay a $15 million civil monetary penalty and to undertake remedial relief.  The Order finds that from January 2008 through at least December 2013, UBS, by and through the acts of certain precious metals traders on the spot desk (Traders), attempted to manipulate the price of precious metals futures contracts by utilizing a variety of manual spoofing techniques with respect to precious metals futures contracts traded on the Commodity Exchange, Inc. (COMEX), including gold and silver, and by trading in a manner to trigger customer stop-loss orders.

HSBC

The CFTC today issued an Order filing and settling charges against HSBC Securities (USA) Inc. (HSBC) for engaging in numerous acts of spoofing with respect to certain futures products in gold and other precious metals traded on the Commodity Exchange, Inc. (COMEX). The Order finds that HSBC engaged in this activity through one of its traders based in HSBC’s New York office. The Order requires HSBC to pay a civil monetary penalty of $1.6 million, to cease and desist from violating the Commodity Exchange Act’s prohibition against spoofing, and to take specified steps to implement and strengthen their training, systems, and controls to detect and deter spoofing by HSBC personnel in the futures markets. In accepting HSBC’s offer of settlement, the CFTC recognizes the bank’s cooperation during the Division of Enforcement’s investigation of this matter.

Krishna Mohan

The CFTC today announced the filing of a federal court enforcement action in the U.S. District Court for the Southern District of Texas against Krishna Mohanof New York City, New York, charging him with spoofing (bidding or offering with the intent to cancel before execution) and engaging in a manipulative and deceptive scheme in the E-mini Dow ($5) futures contract market on the Chicago Board of Trade and the E-mini NASDAQ 100 futures contract market on the Chicago Mercantile Exchange.

Jitesh Thakkar & Edge Financial Technologies

The CFTC today announced the filing of a federal court enforcement action in the U.S. District Court for the Northern District of Illinois, charging Jitesh Thakkar of Naperville, Illinois, and his company, Edge Financial Technologies, Inc. (Edge), with aiding and abetting spoofing and a manipulative and deceptive scheme in the E-mini S&P futures contract market on the Chicago Mercantile Exchange (E-mini S&P).

Jiongsheng Zhao

The CFTC today announced the filing of a federal court enforcement action in the U.S. District Court for the Northern District of Illinois against Defendant Jiongsheng Zhao, of Australia, charging him with spoofing and engaging in a manipulative and deceptive scheme in the E-mini S&P 500 futures contract market on the Chicago Mercantile Exchange (CME).

James Vorley & Cedric Chanu

The CFTC announced the filing of a civil enforcement action in the U.S. District Court for the Northern District of Illinois against James Vorley, a U.K. resident, and Cedric Chanu, a United Arab Emirates resident, charging them with spoofing and engaging in a manipulative and deceptive scheme in the precious metals futures markets.

Andre Flotron

The CFTC announced the filing of a civil enforcement action in the U.S. District Court for the District of Connecticut against Andre Flotron, of Switzerland, charging him with engaging in a manipulative and deceptive scheme and spoofing in the precious metals futures markets on a registered entity.

February 17, 2018 in Financial Regulation | Permalink | Comments (0)