United States: State AGs In The News - September 10th, 2015

Consumer Financial Protection Bureau

CFPB Lowers the Curtain on Debt Buyers

  • The Consumer Financial Protection Bureau (CFPB) secured consent orders with Encore Capital Group, Inc. (including subsidiaries Midland Funding, LLC, and Midland Credit Management, Inc.) and Portfolio Recovery Associates, LLC, resolving allegations that the two debt purchasers and collectors violated the Fair Debt Collection Practices Act and the Consumer Financial Protection Act by engaging in unfair and deceptive collection practices.
  • The CFPB alleged that Encore and Portfolio (including their subsidiaries) purchased delinquent and charged-off consumer debt accounts for "pennies on the dollar," and then used high-pressure practices (which included making false statements, harassing consumers, and threatening lawsuits) to collect on the debt. In some cases, the CFPB found that the debt was unsubstantiated, indicated an inaccurate amount, or was legally unenforceable; in others, it argued that the collectors filed lawsuits with no intent of proving the debt, but rather they sought to obtain default judgments against unknowing consumers.
  • The consent orders require Encore and Portfolio to stop collecting on over $128 million in debt, and to take action to remedy their actions alleged to be in violation of the law, including providing refunds of over $61 million for debt that was time-barred, or otherwise invalid when collected. The collectors must also move to vacate all judgments and dismiss all lawsuits where they misrepresented that a debt would be assumed valid. Finally, the collectors must pay civil penalties to the CFPB: $10 million for Encore, and $8 million for Portfolio.

Consumer Protection

New Jersey AG Settles With App Dealer

  • Acting New Jersey AG John Hoffman settled with DealerApp Vantage, LLC, resolving allegations that the mobile app developer violated the New Jersey Consumer Fraud Act by providing customized apps and accompanying marketing strategies services to automobile dealerships.
  • DealerApp's mobile app allegedly collected and transmitted consumer information, which it then passed on to third-party data analytics companies without providing notice to or securing approval from the consumers involved. The information transmitted included consumers' names, email addresses, telephone numbers, unique device identifiers, location information, and information about the vehicles purchased. The AG determined that neither DealerApp's nor the dealerships' customer privacy policies adequately disclosed the scope of this use of consumer information.
  • DealerApp did not admit to violating the law, but agreed to enter into a consent order to resolve the investigation, under which it will pay $38,000 in civil penalties, and $10,724 in attorneys' fees and investigative costs. Provided DealerApp modifies its practices to be in line with New Jersey law and otherwise complies with the terms of the order, $26,224 of the total amount will be suspended.

Data Privacy

At Federal Appeals Court, Microsoft Argues to Protect Consumer Data Stored Abroad

  • Microsoft Corp. argued before the U.S. Court of Appeals for the Second Circuit that consumer data stored on servers located in Ireland cannot be seized by the U.S. government through a domestic search warrant. The District Court—which based its decision on the question of control, not the location of the servers—had ruled against Microsoft, and ordered it to produce the requested email. Microsoft refused and was held in contempt.
  • In its appellate brief, Microsoft argued that consumers owned their email (as opposed to Microsoft corporate documents), and thus when email is stored on foreign servers, it is akin to documents in a safe deposit box. Microsoft highlighted that the Electronic Communications Privacy Act of 1986 (ECPA) does not authorize extraterritorial application, and that the government must instead use procedures set out in mutual legal assistance treaties (there is one between the U.S. and Ireland), or other diplomatic means, to involve the government of the country where the servers are located.
  • The government, which was seeking emails in aid of a drug trafficking investigation, argued that because Microsoft was a U.S. company, controlled the servers in Ireland, and maintained access to the data stored thereon through computers located in the U.S., the data was properly recoverable through a provision in the ECPA that allows federal agents to command email providers to seize and turn over customers' private emails.

False Claims Act

Reverse Mortgage Company Moves Forward With Settlement

  • The Department of Justice (DOJ) reached an agreement with Walter Investment Management Corp. and its subsidiaries (Walter), to resolve allegations that Walter violated the False Claims Act in connection with reimbursements the lender sought under a program administered by the U.S. Department of Housing and Urban Development (HUD) that insured reverse mortgage loans.
  • HUD insures reverse mortgage loans by reimbursing lenders for the amount of the loan, including servicing costs and accrued interest, if the lender is unable to recoup the full amount when it becomes due and payable. The government alleged that Walter submitted claims for reimbursement for interest on unrecouped loans even though it had not fulfilled the necessary deadlines for notice and appraisal procedures.
  • HUD also reimburses lenders for commissions paid to real estate agents when the lender is forced to foreclose on the property in order to recover on the loan. Here, the government alleged that Walter sought reimbursement of liquidation referral fees (which are not allowed) by falsely representing that such fees were sales commissions. The government further alleged that Walter formed straw companies to handle the liquidation, then kicked a portion of the referral fees back to itself.
  • Walter must pay $29.6 million to resolve the charges against it. The case was originally filed by a whistleblower who was a former executive for one of Walter's subsidiaries.


SEC Calls Foul on Sports Nutrition Company

  • The Securities and Exchange Commission (SEC) entered into a cease and desist order with MusclePharm Corporation, a company that manufactures sports nutrition products, for its failure to make required disclosures under the 1933 Securities Act and the 1934 Securities Exchange Act.
  • Specifically, the SEC alleged that MusclePharm omitted or understated the value of numerous executive perquisites, including those related to automobiles, private jet use, apparel, meals, golf club memberships, and personal tax and legal services. It also allegedly failed to disclose related party transactions and executive bankruptcies. The SEC also claimed that MusclePharm issued stock without a registration statement, when it offered shares to third parties who then paid cash to settle outstanding debts to vendors.
  • The order requires MusclePharm to pay a civil penalty of $700,000 to the SEC and to hire an independent consultant to conduct a comprehensive review of its policies, procedures, controls, and training regarding financial disclosures. Chief Executive Brad Pyatt was required to pay a penalty of $150,000, and other executives were suspended from practicing as accountants for SEC-regulated entities.

States v. Federal Government

Parties Prepare for Oral Argument on Vermont's Genetically Engineered Labeling Law

  • In an important case for the food industry, Plaintiffs-Appellants Grocery Manufacturers Association, et al, have filed their reply brief in the Second Circuit Court of Appeals. Plaintiffs are seeking to overturn the district court decision denying their request for a preliminary injunction to prevent Vermont from enforcing a recently-enacted law, Act 120. that requires food producers to label products produced through genetic engineering (GE).
  • Plaintiffs contend that the law will ultimately not be upheld because it is unconstitutional, and argue that a preliminary injunction is needed because otherwise they will suffer harm as they are forced to conduct research into product supply chains to determine which products have GE components, and redesign thousands of products' labels to be in compliance with the Act's 2016 effective date. As the Act also precludes food companies from using the term "natural" in certain settings, Plaintiffs additionally argue it is a per se violation of the First Amendment. To this Vermont responds that Act 120 is rationally related to the State's legitimate interest of informing consumers and preventing deception. It also argues that the Act does not violate the First Amendment because inherently misleading speech is not protected.
  • This case has received significant amici interest on both sides of the issue: Eight states, as well as scientists, farmers, and environmental and consumer advocacy groups have filed briefs in support of Vermont's right to provide GE information to consumers. In contrast, industry groups, trade associations, and the Chamber of Commerce have filed briefs in support of plaintiffs, arguing that Act 120 would create an immense burden on businesses.
  • Meanwhile, Congress is considering whether to enter the debate. The "Safe and Accurate Food Labeling Act of 2015," contrary to its title, would make the Vermont law largely moot by prohibiting individual states from requiring food companies to provide GE information on labels.

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