United States: State AGs In The News - September 24th, 2015

Practice Insights

Its Only "Natural"

  • In a recent post, Dickstein Shapiro Counsel Doreen Manchester discusses issues surrounding the use of the term "natural" in connection with consumer products.


California Gives AG Greater Oversight of Charities

  • California Governor Jerry Brown signed into law a bill that seeks to increase transparency and accountability in charitable fundraising.
  • The new law, which goes into effect in January 2016, will bring some significant changes, particularly for those companies that raise money for charities. For-profit companies acting as fundraisers will be required to disclose to potential donors that a portion of their contributions will be retained by the company. In addition, fundraising counsel will be precluded from compensation that is based on a percentage of donations received.
  • The law will also expand AG enforcement authority, by: including for-profit fundraising firms and other third parties in the 10-year statute of limitations applicable to charitable enforcement cases; and allowing the AG to bring enforcement cases against fundraising firms and other third parties who aid and abet a violation of the laws on charities.

Consumer Protection

FTC Looks Closely at Vision Improvement App

  • The Federal Trade Commission (FTC) settled with software developer Carrot Neurotechnology, Inc. and owners Adam Goldberg and Aaron Seitz (together, "respondents"), resolving claims that respondents falsely represented that their Ultimeyes app, which it sold for between $5.99 and $9.99, would restore and improve users' vision.
  • The FTC alleged that Carrot made deceptive efficacy claims (e.g., "improves vision on average by 31%") and false establishment claims (e.g., "scientifically shown to improve vision "). The FTC indicated that respondents did not have proper scientific evidence to support these claims and failed to disclose that the research it cited in support of its claims came from an affiliated source.
  • The proposed consent order requires the respondents to pay $150,000 to the FTC for a consumer redress fund, and to provide customer information to the FTC so it can efficiently satisfy claims. It also calls for respondents to conduct adequate human clinical testing before making health benefit or performance-based representations on future products. The proposed order will be open for comments for 30 days before the FTC decides whether to make it final.

Missouri AG Conducts Price Check on Walgreens

  • Missouri AG Chris Koster is headed back to court with Walgreens over allegations that the drugstore chain has failed to implement a 2013 consent judgment that required the drugstore chain to prevent consumer deception resulting from expired or inaccurate price tags. The 2013 order requires, among other things, that Walgreens replace expired sale tags within 12 hours after the price has changed.
  • AG Koster's investigation found that during a five-week period this summer, 49 of 50 Walgreens stores had expired or otherwise incorrect price tags. It also revealed that many consumers were overcharged at the register as a result of expired tags.
  • AG Koster filed a motion to hold Walgreens in contempt, and is seeking to fine the company up to $5,000 for every violation discovered, as well as additional fines for every day that an expired tag is found.


Investigative Engines Rev in Response to Findings on Volkswagen "Clean" Diesels

  • The U.S. Environmental Protection Agency (EPA) issued a Notice of Violation of the Clean Air Act to Volkswagen AG, Audi AG, and Volkswagen Group of America, Inc. (Volkswagen) effectively recalling nearly 500,000 cars equipped with "clean diesel" engines.
  • The EPA and the California Air Resources Board (CARB) concluded that Volkswagen rigged its software so that its U.S. emissions test results would show that its vehicles had a cleaner exhaust profile than they actually did. Testing conducted by the EPA and CARB indicated that the affected vehicles emit up to 40 times more pollution than emission standards allow. The results from this joint investigation triggered governments in Europe and elsewhere to look deeper into Volkswagen's emissions compliance.
  • In the U.S. the issue is far from resolved. Members of Congress are calling for the FTC to investigate whether Volkswagen's advertising of clean diesel violates the FTC Act's prohibition on deceptive practices. In addition, New York AG Schneiderman is undertaking an investigation that could be joined by other State AGs, into whether Volkswagen's actions violated state unfair and deceptive practices and environmental protection laws. Volkswagen has set aside $7.3 billion to address the approximately 11 million vehicles affected worldwide, but warned that future costs remain undetermined.

False Claims Act

DOJ Piles on For-Profit College

  • ITT Educational Services, Inc. disclosed that it is under investigation by the U.S. Department of Justice (DOJ) to determine whether it violated the False Claims Act.
  • In a recently filed 8-K, ITT indicated that the DOJ had issued a Civil Investigative Demand asking for documents and answers to interrogatories regarding whether ITT "knowingly submitted false statements in violation of the Department of Education's Program Participation Agreement regulations." ITT indicated that it believes its practices were in compliance, and that it is cooperating with the DOJ.
  • ITT is currently defending two other government lawsuits. The Consumer Financial Protection Bureau filed suit last fall, alleging that ITT engaged in predatory lending practices, and the Securities and Exchange Commission filed suit in May 2015, alleging that ITT committed fraud in concealing the size of nonperforming student loan portfolios from investors.

Financial Industry

Regulators Grab for Bitcoins—New York DFS Issues First-of-Kind "BitLicense"

  • The New York Department of Financial Services (DFS) issued the first "BitLicense" to Circle Internet Financial Ltd., allowing the mobile payments firm to transfer and exchange virtual currencies, including bitcoin.
  • DFS finalized its rules for virtual currencies in June, and gave existing virtual currency firms until August 10 to apply for a license. DFS reported receiving 25 applications. At that point, former DFS superintendent Benjamin Lawsky provided a variety of clarifications regarding how DFS will exercise its new authority:

    • Only firms that are financial intermediaries (i.e., those that hold customer funds) will be required to apply for a BitLicense.
    • Companies will need prior DFS approval for material changes to their products or business models, such as offering exchange services.
    • DFS will not require duplication of compliance efforts—companies that already report to federal regulators, such as Treasury's Financial Crimes Enforcement Network (FinCEN), can forgo duplicative DFS requirements.
    • Large investors (>10 percent) must demonstrate that they will not be a control person.
  • At the same time, the U.S. Commodity Futures Trading Commission (CFTC) is asserting authority over virtual currencies. The CFTC recently accepted an Offer of Settlement from Coinflip, Inc., resolving allegations that it violated the Commodity Exchange Act by operating as a clearing platform for bitcoin futures and options trading. According to the Order, the CFTC declared that virtual currencies are commodities.

Another California City Sues Bank for Housing Discrimination

  • The City of Oakland, California filed a lawsuit against Wells Fargo Bank, N.A., alleging predatory lending and discrimination in violation of the U.S. Fair Housing Act and the California Fair Employment and Housing Act.
  • Oakland's complaint centers on the claim that Wells Fargo gave more expensive and higher-risk loans to Oakland's black and Hispanic residents, despite the City's claim that many qualified for favorable loan terms like those given to white borrowers. The lawsuit mirrors similar claims from the City of Los Angeles, and from Cook County, Illinois. Those suits were dismissed in July.
  • Wells Fargo replied that "[Oakland's] accusations against Wells Fargo do not reflect how we operate in the communities where we do business." The bank emphasized that it will vigorously defend its record as a fair and responsible lender.


SEC Wields Cybersecurity Authority

  • The Securities and Exchange Commission (SEC) settled with R.T. Jones Capital Equities Management, Inc., resolving claims that the investment advisor failed to implement cybersecurity protections required by Rule 30(a) of Regulation S-P ("Safeguards Rule"). The SEC censured R.T. Jones, and ordered it to pay a civil penalty of $75,000.
  • The Safeguards Rule, adopted by the SEC in 2000, requires registered investment advisers to implement policies and procedures reasonably designed, a) to insure the security of customer records and information, b) to protect against anticipated threats, and c) to protect against unauthorized access to customer information.
  • This action was initiated following a data breach in which a hacker gained access rights to unencrypted data stored on a third-party web server, including dates of birth and social security numbers, for more than 100,000 individuals. Although there has not been evidence of any clients being harmed by the breach, the SEC found multiple deficiencies in R.T Jones' cybersecurity policies, the SEC has indicated that it will emphasize cybersecurity in light of the increasing number of cyberattacks on financial firms.

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