United States: State AGs In The News - December 3rd, 2015


California AG Questions the "Charity" Behind Car Donation Organizations

  • California AG Kamala Harris, together with district attorneys for Los Angeles and Ventura counties, filed lawsuits against People's Choice Charities and Cars 4 Causes, including relevant officers and directors, for alleged violations of state laws on deceptive practices, unfair competition, fiduciary duties, and charitable trusts. The two charities solicit donations in the form of used cars, which they sell and then allegedly donate the proceeds to charities selected by the donors.
  • The AG's complaints allege that the organizations (and related persons) spent proceeds from the sale of donated cars disproportionately on administrative and operational costs —97 percent for People's Choice; 87 percent for Cars 4 Causes—while indicating to donors that the majority of the proceeds would go toward the designated charity. In addition, the complaints allege that both organizations falsely reported to state and federal tax authorities greater levels of donations to charities than they actually made. For example, the AG alleges that Cars 4 Causes reported $15.9 million was donated, but in reality gave $5.4 million.
  • The complaints seek damages from both organizations, including punitive damages. In addition, the AG is seeking civil penalties under the California Business and Professions Code of $2,500 per violation, and is asking that both organizations be involuntarily dissolved.

Consumer Financial Protection Bureau

Congress Pushes Back on CFPB Methodology

  • The Consumer Financial Protection Bureau (CFPB) has found itself under increased scrutiny by the U.S. House of Representatives' Financial Services Committee in the CFPB's attempts to assess racial discrimination in auto lending practices.
  • The Committee issued a Report that faults the CFPB's decision to use disparate impact analysis—a statistical estimation methodology that does not account for certain race-neutral factors—to determine whether auto lenders engaged in racial discrimination. The Report further alleges, through references and quotes from internal CFPB emails, that the CFPB was aware of the flaws in its method, but still went forward with enforcement actions against major auto lenders.
  • The practice at the core of this issue is whether auto dealers (a group that is statutorily exempted from regulation by the CFPB) should be allowed to give discounts, or put markups on the rates offered by their network of auto lenders. The CFPB has argued ( and brought enforcement actions) that giving auto dealers discretion over the final interest rate charged to the buyer leads to African-American, Hispanic, and Asian and Pacific Islander borrowers paying higher interest rates than white borrowers. The House Report argues that the CFPB doesn't even know which borrowers fall under which category, and is instead relying on statistical correlations between last names and zip codes to "guess" a borrower's race or ethnicity.
  • In response, the House has passed a bill to limit the CFPB's authority to regulate auto lending. Although it will likely face challenges in the Senate, the " Reforming CFPB Indirect Auto Financing Guidance Act," passed the House with the support of 88 Democrats and 244 Republicans. It seeks to revoke 2013 CFPB guidance that asks auto lenders to impose limits on, or eliminate, dealership discretion to adjust the rates offered by lenders when arranging a consumer auto loan.

Consumer Protection

FTC Questions the Healing Power of Copper

  • The Federal Trade Commission (FTC) entered into a settlement agreement with Tommie Copper, Inc., resolving allegations that the sportswear clothing maker violated the FTC Act by claiming that its products infused with copper relieved severe and chronic pain caused by arthritis and other diseases.
  • The FTC alleged that the company made false or unsubstantiated efficacy claims, through advertisements and testimonials, that its compression products provided "pain relief without a pill" while alluding to copper's "anti-inflammatory properties" and power to "stimulate blood flow."
  • The stipulated judgment entered liability against Tommie Copper for $86.8 million, but the FTC reduced the amount defendants must pay to $1.35 million based on a determination of the company's finances. The stipulated judgment also prohibits the company from making further claims that its products provide pain relief, can be used to treat chronic or severe pain, or making any other health-related claims unless the company can substantiate them through results based on appropriate testing procedures.

Data Privacy

Plaintiff Banks Find Revised Settlement Offer to Be on Target

  • After rejecting an earlier offer for $19 million, a group of lenders suing Target Corp for losses suffered as a result of the 2013 data breach agreed to settle their class action claims for $39.4 million.
  • The plaintiffs, which included banks, credit unions, and other MasterCard issuers, sued Target for damages associated with the costs to reimburse customers for fraudulent charges and to issue new credit and debit cards in the wake of Target's point of sale data breach that compromised over 40 million credit card accounts.
  • In its most recent filing with the SEC, Target indicated that it has spent $290 million in costs related to the breach, including a previous settlement with Visa card issuers for $67 million. Still looming are investigations by the FTC, State AGs, and potential shareholder lawsuits.

False Claims Act

DOJ Settles With Labs Over Food-Sensitivity Testing

  • The U.S. Department of Justice (DOJ) reached a settlement agreement with Pharmasan Labs, Inc.; NeuroScience, Inc.; and their respective owners, (together, "defendants") to resolve allegations that the testing labs violated the False Claims Act by seeking Medicare reimbursement for unnecessary or experimental tests.
  • The lawsuit specifically alleged that Pharmasan altered its billing codes to conceal information that would have indicated that the tests were for food sensitivity testing (not covered by Medicare), and instead used a code for general allergic reactions. In addition, Pharmasan sought reimbursement for tests ordered by nonphysicians, which is prohibited by Medicare.
  • Under the settlement, defendants agreed to forfeit $2.8 million already seized, and to pay an additional $5.7 million in civil penalties. They also entered into a corporate integrity agreement that mandates a compliance program complete with annual claims review, risk assessment for erroneous Medicare and Medicaid reimbursement claims, and senior executive certification. The whistleblower, a former billing manager at Pharmasan, will receive $1.13 million from the proceeds.

Financial Industry

New York DFS Seeks Increased Counterterrorism and Anti-Money Laundering Protections

  • The New York Department of Financial Services (DFS) has proposed a new rule to require regulated financial institutions to increase and document their efforts to monitor transactions and clients for risks of terrorist financing, sanctions violations, and money laundering.
  • The proposed rule, which has a 45-day period for public comments, outlines a series of new obligations for regulated institutions to create and maintain a Transaction Monitoring Program and a Watch List Filtering Program. Institutions will also be required to provide annual certification of compliance by the institution's chief compliance officer.
  • The programs are required to be customized based on a risk assessment of the institution's businesses, products, services, customers, counterparties, and geographic scope. The programs must be accompanied by protocols explaining who will investigate alerts generated by the programs, the process for deciding whether to file an investigation or enforcement action, and how the decision-making and fact-finding process will be documented. Institutions not in compliance would be subject to penalties under the Banking Law and Financial Services Law. An officer who files a false annual certification, however, could be subject to criminal penalties. The rule is planned to go into effect in 2017.


SEC Fines Political Intelligence Firm

  • The Securities and Exchange Commission (SEC) accepted an offer of settlement from Marwood Group Research LLC to resolve cease-and-desist proceedings involving claims that the political intelligence firm violated the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 by failing to follow procedures to prevent material nonpublic information from being passed to its clients.
  • The SEC order indicated that on two separate occasions Marwood analysts received information from federal employees regarding potential regulatory changes in the health care field, and failed to follow the firm's compliance procedures to ensure that the information was not material nonpublic information before providing research notes incorporating the information and related advice to the firm's clients.
  • Both instances involved Marwood employees who previously worked for the government seeking information from their former colleagues: in the first case a Marwood consultant obtained information about whether the Centers for Medicare & Medicaid Services would deem a certain drug "reasonable and necessary" for treatment; in the other the consultant sought information as to whether the Food and Drug Administration would approve a new drug application.
  • Marwood admitted that its actions were violations and agreed to pay a $375,000 penalty. It also agreed to hire an independent compliance consultant to assess and make recommendations regarding Marwood's future compliance procedures.

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