United States: State AGs In The News - August 27th, 2015

Consumer Financial Protection Bureau

CFPB Joins With New York Department of Financial Services to Sue Pension Advance Companies

  • The Consumer Financial Protection Bureau (CFPB) and the New York Department of Financial Services (DFS) filed a lawsuit against Pension Funding LLC, Pension Income LLC, and managers Stephen Covey, Edwin Lichtig, and Rex Hofelter ("defendants"), for violating the Consumer Financial Protection Act and various New York state laws.
  • The complaint alleges that defendants used deceptive practices to steer military veterans and civil servants to defendants' website, and then offered lump sum cash advances to the consumers in exchange for their agreement to redirect all or part of their pension payments to defendants over a period of eight years. The complaint alleged that defendants falsely advertised their product was a pension buyout (not a loan), and that it had low or no applicable interest rate and no associated costs or fees. In addition, defendants allegedly misrepresented that their product would not appear on credit reports, was not taxable, and was better than a home equity loan.
  • The CFPB and DFS, however, claim that the effective interest rate was usually greater than 28 percent—a full 12 percent higher than what is allowed by New York state usury laws, and significantly higher than comparable products such as credit cards and home equity lines. Plaintiffs seek a permanent injunction, as well as damages, disgorgement, civil penalties, and costs and fees.

Consumer Protection

AGs Seek Clarity and Procedures for Cancelation of Student Debt

  • AGs from 11 states sent a letter to the U.S. Department of Education (DOE), requesting enhanced procedures and policies to govern the process of discharging student debt associated with attendance at Corinthian and other for-profit schools.
  • The AGs' letter specifically asks that the DOE address four main concerns:
    • the creation of a simplified process for student borrowers to apply for discharge of their loans;
    • greater participation of AGs in the process of determining whether a for-profit school has committed a deceptive practice;
    • loan discharges based on groups or cohorts of students, based on the AGs' investigative results (not individual applications); and
    • clear guidance as to the types of loans that are eligible, the extent to which students can recover amounts already paid, and the ability to discharge loans that have already been consolidated.
  • The DOE announced that it is undertaking a rulemaking process that will clarify how certain borrowers can seek debt relief, and will strengthen provisions to hold colleges accountable for wrongdoing that results in loan discharges. The DOE plans to hold public hearings in September to establish a negotiated rulemaking committee.

FTC Shines Light on UV Disinfectors

  • The Federal Trade Commission (FTC) reached settlements with Angel Sales, Inc. and Zadro Health Solutions, Inc., resolving claims that the companies violated the FTC Act by engaging in unfair and deceptive practices and false advertising in connection with the marketing of devices that use ultraviolet light to disinfect shoes, water, and surfaces.
  • The FTC alleged ( Angel Sales, Zadro) that the companies made unsubstantiated claims about their devices' efficacy in killing certain levels of bacteria and fungi. For example, Angel Sales claimed its device "kills over 95% of germs, bacteria, even the fungus responsible for the highly contagious MRSA bacteria – in less than one hour" and Zadro claimed its products "safely kill 99.99% of targeted bacteria." The FTC also alleged that the companies falsely implied that scientific studies supported their claims.
  • The stipulated orders ( Angel Sales, Zadro) prohibit the companies from making unsubstantiated claims, expressly or by implication, and require 10 years of compliance and record-keeping. Although the FTC issued monetary judgments against both companies ($656,423 and $629,359, respectively), Angel Sales' judgment is suspended entirely, and Zadro's judgment partially based on their inability to pay. Zadro must provide $222,029 for consumer refunds.

Data Privacy

Court of Appeals Confirms FTC Authority Over Cybersecurity Practices

  • The Third Circuit Court of Appeals affirmed that the Federal Trade Commission (FTC) has authority to regulate companies' cybersecurity protections for consumer data under Section 5 of the FTC Act, prohibiting "unfair or deceptive acts or practices in or affecting commerce."
  • As we already reported, in FTC v. Wyndham Worldwide Corporation, the district court found that the FTC's enforcement authority included data breaches. Wyndham appealed that decision, arguing that the FTC did not have authority to punish private businesses for maintaining a different level of data security than that advised by the FTC.
  • In response, the Third Circuit indicated that Wyndham's liability was not based on the standard of data security it employed, but rather on the fact that it published a privacy policy "to attract customers who are concerned about data privacy" but failed to deliver by "investing inadequate resources in cybersecurity" and instead exposed its customers to substantial financial injury, while retaining the profits of their business.

Health Care

New York AG Pursues Hospitals With Alcohol Problems

  • New York AG Eric Schneiderman, together with the U.S. Attorney for the Eastern District of New York, reached settlements with multiple hospitals to resolve a joint investigation into alleged Medicare fraud and violations of the False Claims Act.
  • The AG alleged that SpecialCare Hospital Management Corporation, a for-profit hospital management company based in Missouri, referred patients to Columbia Memorial Hospital, St. Joseph's Medical Center, and Benedictine Hospital ("treatment hospitals") to receive medically unnecessary inpatient drug and alcohol treatment services, from unlicensed providers, in exchange for kickbacks in the form of an administrative services agreement.
  • SpecialCare and its former Chief Executive Officer agreed to pay $6 million to resolve the claims against it. SpecialCare also entered into a corporate integrity agreement with the U.S. Inspector General's Office, and agreed to a five-year injunction on doing business with any health care provider in New York that submits claims to Medicaid or Medicare. For their part in the alleged scheme, Benedictine agreed to pay $880,000; St. Joseph's $600,000; and Columbia Memorial $650,000.

Florida Looks to Crack Down on Rising Health Care Costs

  • Florida Governor Rick Scott has increased the number of planned audits of state hospitals from 31 to at least 129 in an effort to determine whether they have been overcharging Medicaid in violation of Florida law.
  • The audit follows an inquiry by the state Agency for Health Care Administration, in which the agency sought confirmation from various hospitals that they were in compliance with Florida Statute 409.975, which caps the rate that hospitals can charge the Medicaid program at 120 percent of the rate determined by the Agency.
  • Governor Scott's concerns over Medicaid overcharges likely stems from the state's budgetary problem, in which the state is looking to cut spending on Medicaid at a time when health care costs in the state are rising. By some accounts, Florida will be short $579 million in meeting its health care funding needs for 2016-17.


Federal Judge Looks Into Dark Pools, Doesn't See Viable Claims

  • A federal judge for the Southern District of New York has dismissed claims against major U.S. stock exchanges and Barclays Plc in connection with allegations that they created "dark pool" alternative trading platforms and allowed high-frequency traders to front-run regular investors' trades.
  • The court conceded that the dark pools might lack a "productive purpose" and "merely allow[ed] certain traders to exploit technological inefficiencies." Yet it found that the exchanges, as self-regulated organizations, enjoyed "absolute immunity" against plaintiffs' claims that they created complex orders for, and provided nonpublic information to, high-frequency traders, allowing the traders to exploit the infrastructure of the data feeds and networking of the exchanges. The judge indicated that such immunity even applies when the exchanges "act in a capricious, even tartuffian manner which causes enormous damage."
  • In February, a New York state court denied Barclays' motion to dismiss claims brought by AG Eric Schneiderman, alleging that Barclays violated the New York Martin Act when it made material misrepresentations to investors regarding how its dark pool trading platforms operated. That case is ongoing.

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