The Federal Trade Commission (FTC) announced1 that it had prevailed on summary judgment in the U.S. District Court for the Southern District of New York against Jonathan Braun, an individual defendant who controlled the merchant cash advance company Richmond Capital Group.

RICHMOND CAPITAL GROUP

In its complaint,2 the FTC alleged that Richmond Capital and its principals and affiliates provided short-term cash advances to small businesses but misrepresented the terms of financing contracts. The companies also allegedly used deception and threats of physical violence to seize personal assets when companies could not pay. The court's order3 against Mr. Braun includes a lifetime ban from the merchant cash advance and debt collection industries, as well as various prohibitions related to unauthorized charges and misrepresentations. (The company4 and other affiliated entities and individuals5 had previously settled with the FTC.)

While at first glance, this may appear to be an unremarkable win for the Commission (after all, the court did note6 that the case involved "extensive" and "egregious" misconduct), the decision appears to be the first time a federal court has opined on the FTC's expansion of the pretexting provision in the Gramm-Leach-Bliley Act (GLB Act).

While acknowledging that "no other court has addressed the scope of this statutory provision," Judge Rakoff accepted the FTC's novel interpretation, appearing to agree with the agency that any time a company misrepresents its products and services and collects customer financial information to pay for those products or services (such as by accepting a personal check or receiving bank account or credit card information), this may constitute a violation of the GLB Act's prohibition on pretexting.

In the wake of AMG Capital, The FTC has been quietly expanding its use of the GLB Act's pretexting provision in order to obtain monetary relief for consumers. This decision likely will embolden the agency, and companies should expect to see an increase in allegations of pretexting violations. More background and context below.

THE GLB ACT'S PRETEXTING PROVISION

The GLB Act7 requires financial institutions to explain their informationsharing practices to their customers and to safeguard sensitive data.

Section 521 of the Act (titled "Privacy Protection for Customer Information of Financial Institutions") makes it unlawful "for any person to obtain or attempt to obtain . . . customer information of a financial institution relating to another person . . . by making a false, fictitious, or fraudulent statement or representation to a customer of a financial institution."8 Under this provision, the FTC may seek both monetary redress and civil penalties for first-time violations.

The Provision's Legislative History Indicates Congress Was Focused on False Statements Affecting Consumers' Financial Privacy

The pretexting provision's legislative history suggests that Congress intended to protect consumers from misrepresentations affecting their financial privacy by members of the information broker industry. The House Report accompanying H.R. 4321 (a bill from the 105th Congress upon which the pretexting provision of the GLB Act appears to be based) specifically states:

The legislation attempts to address the significant threat to financial privacy posed by an emerging industry of so-called "information brokers," who use deception and false pretenses to collect personal financial information for their clients.9

Noting that these information brokers "tout their ability to gain access to a wide array of confidential information maintained by financial institutions," the House Report acknowledges that the:

primary method used to collect this information involves a form of what is known in the private investigative trade as "pretexting," in which an information broker impersonates the individual whose account information is sought or engages in other ruses designed to trick a financial institution into disclosing the information.10

To address these practices, the House Report states that the legislation "specifically and directly" targets the practices of the information brokering industry "to send a signal to information brokers and those who retain their services that they are no longer operating in a 'gray area' of the law, but are instead engaged in conduct that is explicitly proscribed. . ."11

The language in H.R. 4321 was subsequently included in the GLB Act, where it was incorporated at Section 521. The conference report appears to adopt the prior bill's general statement of intent, noting that the provisions prohibit fraudulent or deceptive access to financial information, "such as by misrepresenting the identity of the person requesting the information or otherwise misleading an institution or customer into making unwitting disclosures."12

FTC Enforcement of GLB Act Pretexting pre-AMG Capital

In the past, the FTC has generally brought pretexting claims in cases where the facts aligned with Congressional intent. For example, in a 2001 pretexting sweep,13 the FTC filed lawsuits against three information brokers who used false pretenses, fraudulent statements, or impersonation to illegally obtain consumers' confidential financial information in order to sell it. The complaints' GLB Act pretexting counts specifically allege14 that defendants:

contacted financial institutions and falsely represented to representatives of the financial institutions . . . that defendant is a customer of the financial institutions . . . Defendant makes these false representations to induce the persons to disclose customer information belonging to third parties. Defendant's false representations . . . violate Section 521(b) of the GLB Act. . . ."

Indeed, in a Consumer Alert15 published in 2001, "Pretexting: Your Personal Information Revealed," the FTC acknowledges that "[p]retexting is the practice of getting your personal information under false pretenses" and that "[p]retexters sell your information to people who may use it to get credit in your name, steal your assets, or to investigate or sue you." The FTC recommends that consumers enhance their privacy by, for example, not giving out information over the phone or through the internet, safeguarding documents with personal information, adding passwords to accounts, and ordering copies of credit reports to ensure they include only authorized information.

In short, pre-AMG, the FTC agreed that the GLB Act's pretexting provision was intended to safeguard consumer privacy by stopping bad actors from obtaining confidential information through false pretenses.

FTC Enforcement of GLB Act Pretexting post-AMG Capital

Following the Supreme Court's 2021 decision in AMG Capital, which found that the FTC couldn't rely on Section 5 of the FTC Act to seek monetary relief for consumers, the agency has explored numerous creative avenues to obtain monetary relief. These have included an ambitious rulemaking agenda (or, as former Commissioner Wilson described it, a "rule-a-palooza"), increased reliance on Section 19, a renewed focus on "penalty offense" authority under Section 5(m)(1)(B), and partnerships with states and the Department of Justice.

In addition, the agency has increasingly sought to expand the scope of existing statutes. One prime example is the Restore Online Shoppers' Confidence Act ("ROSCA"), a statute regulating automatically renewing subscriptions on the Internet. In the MoviePass16 matter, the Commission expanded ROSCA's reach to cover misrepresentations not only related to the autorenewal features of the subscription (which is the way the statute had been interpreted and enforced in the past), but also any misrepresentations regarding the underlying service. (The FTC's proposed expansion of the Negative Option Rule, if completed, would also incorporate this principle, thus greatly expanding the agency's monetary relief authority.)

The FTC has similarly expanded GLB pretexting. Post-AMG, the FTC began taking the position that pretexting was not limited to the practice of obtaining customer data under false pretenses, but covered any misrepresentations combined with the collection of customer financial data.

The Richmond Capital matter discussed above was filed pre-AMG and initially included only Section 5 counts. Following the AMG decision, the FTC amended its complaint17 to add a GLB Act pretexting count. The amendment was predicated on the fact that the defendants misrepresented the underlying service to consumers (namely, the specific amount defendants would withdraw from consumers' accounts) and thus obtained their financial information based on false pretenses. The case represented the FTC's pivot away from its original focus on financial privacy/pretexting/information broker practices to a much broader application of the provision.

NEW YORK DISTRICT COURT AGREES WITH THE FTC'S INTERPRETATION

The FTC's expanded interpretation of the statute was put to the test when Jonathan Braun opted to litigate against the FTC in the U.S. District Court for the Southern District of New York. In opposing the FTC's action, Mr. Braun relied on legislative history to argue that the statute was not intended to reach the types of misconduct alleged by the FTC.

Judge Rakoff disagreed, finding that "the plain text of the statutory provision controls, and legislative history cannot alter the meaning of the plain text."18 The court refused to read any limitation into the provision – "i.e. that the means of deception must be akin to impersonation" – and generally found that any time defendants use false statements to induce customers to sign up for a service and disclose their financial information, the FTC has established a violation of Section 521 of the GLB Act.19

While the court's final order does not include a monetary award, the court has scheduled a trial for January 2024 to determine the amount of monetary relief appropriate for Mr. Braun's GLB Act violations.

IMPLICATIONS FOR FUTURE FTC ACTIONS

The court's acceptance of the FTC's expanded interpretation of GLB Act pretexting will undoubtedly result in the agency's adding this count in a variety of Section 5 deception cases.

Indeed, we have already seen numerous recent (non-litigated) settlements alleging that companies' general misrepresentations about an underlying product or service, coupled with the collection of financial information, constituted pretexting: Celsius Network20 and Voyager Digital21 (misrepresentations about underlying cryptocurrency platform and service); SL Finance and BO Consulting22 (misrepresentations regarding loan repayment programs); Apex Processing Center23(misrepresentations about loan modification program).

The impact of this ruling is likely to be significant: after all, most consumer transactions involve obtaining financial information from customers in order to pay for the good or service advertised. In its expanded and now court-vetted interpretation of GLB Act pretexting, the FTC has gained an important avenue for monetary relief against first-time Section 5 violators, which would otherwise be prohibited in the wake of AMG

Footnotes

1 https://www.ftc.gov/news-events/news/press-releases/2023/10/ftc-case-leads-permanent-banagainst-merchant-cash-advance-owner-deceiving-small-businesses-seizing.

2 https://www.ftc.gov/system/files/documents/cases/x200045rcgamendedcomplaint.pdf.

3 https://www.ftc.gov/system/files/ftc_gov/pdf/rcg_permanent_injunction_jonathan_braun.

pdf.

4 https://www.ftc.gov/news-events/news/press-releases/2022/06/ftc-action-results-ban-richmondcapital-owner-merchant-cash-advance-debt-collection-industries.

5 https://www.ftc.gov/news-events/news/press-releases/2022/01/merchant-cash-advance-providersbanned-industry-ordered-redress-small-businesses.

6 https://www.ftc.gov/system/files/ftc_gov/pdf/rcg_opinion_order.pdf.

7 15 U.S.C. §§ 6801-6809, §§ 6821-6827.

8 15 U.S.C. § 6821(a) (2).

9 H. Rept. 105-701, Part 1.

10 Id.

11 Id.

12 H. Rept. 106-434.

13 https://www.ftc.gov/news-events/news/press-releases/2001/04/part-operation-detect-pretextftc-sues-halt-pretexting

14 https://www.ftc.gov/sites/default/files/documents/cases/2002/03/discreetdatacmplnt.pdf.

15 https://www.govinfo.gov/content/pkg/GOVPUB-FT-PURL-LPS51263/pdf/GOVPUB-FTPURL-LPS51263.pdf.

16 https://www.ftc.gov/legal-library/browse/cases-proceedings/192-3000-moviepass-incmatter.

17 https://www.ftc.gov/news-events/news/press-releases/2021/06/ftc-files-amended-complaintseeking-civil-penalties-against-small-business-financing-providers.

18 FTC v. RCG Advances, LLC et al., 1:20-cv-04432- JSR (Sept. 27, 2023).

19 Id.

20 https://www.ftc.gov/news-events/news/press-releases/2023/07/ftc-reaches-settlement-cryptoplatform-celsius-network-charges-former-executives-duping-consumers.

21 https://www.ftc.gov/news-events/news/press-releases/2023/10/ftc-reaches-settlement-cryptocompany-voyager-digital-charges-former-executive-falsely-claiming.

22 https://www.ftc.gov/news-events/news/press-releases/2023/10/student-loan-debt-reliefscammers-permanently-banned-industry-ordered-turn-over-assets-under.

23 https://www.ftc.gov/news-events/news/press-releases/2023/08/ftc-stops-scammers-chargedpreying-students-seeking-debt-relief.

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