United States: State AGs In The News - August 6th, 2015

Breaking News

AGs Find Themselves on the Other Side of an Investigation

• A Texas grand jury has indicted Texas AG Ken Paxton for securities fraud, alleging that Paxton misled investors prior to assuming his position as AG. According to the special prosecutors involved, Paxton is accused of encouraging investors to put more than $600,000 into tech startup company Servergy, Inc. while failing to disclose that he was making commissions, and misrepresenting himself as an investor.
• Similarly, a Pennsylvania district attorney has charged Pennsylvania AG Kathleen Kane with perjury and obstruction of law based on Kane's alleged leaks of confidential investigative information and subsequent related false statements and denials.
• Both AGs deny the charges and have indicated that they will fight the charges. Neither has indicated that they will resign.

Consumer Financial Protection Bureau

CFPB Goes Trolling Offshore for Payday Lenders

• The Consumer Financial Protection Bureau (CFPB) filed a lawsuit in the Southern District of New York against a network of 11 interconnected companies registered in Canada and Malta ("NDG Enterprise"), that originated, serviced, and collected on consumer payday loans over the Internet.
• In the complaint, the CFPB alleges that NDG violated the Consumer Financial Protection Act's prohibition on unfair, deceptive, and abusive practices by attempting to collect loan amounts and fees that were illegal under state lending laws, void, or for which consumers had no obligation to repay. It also alleged that NDG used illegal wage assignment clauses—through which a lender collects payments and fees directly from the borrower's employer—and falsely threatened consumers with lawsuits, arrests, and imprisonment for failure to pay back the loans and fees.
• According to the complaint, NDG's operation was highly customized, with separate and specialized entities for lead generating, funding, and collection activities. NDG used this separation, and foreign locations of its entities, to avoid responding to consumer complaints and to argue that it was not subject to U.S. or state law. The CFPB is seeking a permanent injunction against NDG's operation, plus damages, consumer redress, disgorgement, and costs.

Citibank Discloses Investigation Into Student Lending Practices

• In a recent SEC filing, Citibank, N.A. indicated that it was undergoing a "regulatory investigation concerning certain student loan servicing practices." It further stated that "[s]imilar servicing practices have been the subject of an enforcement action against at least one other institution," and that "regulators may order that Citibank, N.A. remediate customers and/or impose penalties or other relief."
• According to reports, the CFPB is the entity conducting the investigation, with the focus being whether Citibank overstated the minimum amounts due on billing statements or failed to provide information to its customers necessary to obtain income-tax benefits associated with their loans.
• The CFPB brought and recently settled similar claims against Discover, based on loan activity associated with Student Loan Corp., an entity purchased by Discover but previously owned in part by Citibank. In that case, Discover resolved the allegations by agreeing to pay $16 million for consumer refunds and a $2.5 million civil penalty.

Consumer Protection

California Changes the Rules for Sweepstakes Gaming

• California AG Kamala Harris, along with federal regulators, closed down the operation of Capital Sweepstakes Systems, Inc. for allegedly violating state laws governing gambling and unfair competition. In addition to the $1.6 million Capital agreed to forfeit to the federal government, the game maker agreed to pay $700,000 in civil penalties and costs to the state.
• Sweepstakes game providers offer software-based games that mimic traditional casino games like slot machines and video poker, but are played at terminals in internet cafes, gas stations, and convenience stores. In the states where sweepstakes games are legal, the key distinction between sweepstakes gaming and gambling is whether the consumer pays to play the game, or simply receives a chance to play incident to a separate purchase.
• AG Harris's enforcement action follows a recent California Supreme Court ruling holding sweepstakes games to be illegal, as well as a state law passed in 2014.

FTC Investigates For-Profit College's Business Practices

• The Apollo Education Group, Inc. has disclosed in a recent filing with the SEC that the Federal Trade Commission (FTC) is investigating the company in regards to the business practices of its wholly-owned subsidiary, the University of Phoenix.
• Apollo indicated that the FTC issued a civil investigative demand seeking documents and information regarding the University of Phoenix's "marketing, recruiting, enrollment, financial aid, tuition and fees, academic programs, academic advising, student retention, billing and debt collection, complaints, accreditation, training, military recruitment, and other compliance matters, for the time period of January 1, 2011 to the present."
• The investigation into Apollo is likely part of a broader FTC effort to crack down on for-profit colleges, particularly in connection to military recruitment and the G.I. Bill. Last year, the FTC served a similar demand on DeVry Education Group. In May, the FTC reached an agreement with the Professional Career Development Institute, doing business as Ashworth College, to resolve claims that the for-profit college misrepresented to potential students that it would provide proper training and credentials for the careers advertised, and that the course credits earned by the students would be eligible to transfer to other schools.

Employment

Connecticut Law Encourages Discussion to Bridge Pay Gap Between Genders

• Connecticut recently enacted "An Act Concerning Pay Equity and Fairness," a law designed to narrow the wage gap between men and women by preventing employer policies that require "pay secrecy."
• The new law generally prohibits employers from taking measures to prevent employees from disclosing, inquiring about, or discussing wages with other employees. It is part of a broader movement that includes 12 other states and the federal government.
• The Connecticut law specifically precludes employers from forcing employees to sign waivers regarding their right to discuss wages, and from discharging, disciplining, or retaliating against employees who seek to discuss wages. The law, however, does not require employers to disclose the amount of wages paid to any employee; and if asked, employees have no obligation to disclose their own wages to a peer.

SEC Mandates Disclosure of CEO Pay Ratio

• In a three to two decision, the Securities and Exchange Commission (SEC) approved a proposed rule that would require approximately 3,800 companies to disclose the ratio of the CEO's salary to that of the median worker. The rule takes effect in 2017.
• The rule, which was mandated by the 2010 Dodd-Frank Act, was first proposed by the SEC in 2013. In its final form, the rule provides greater flexibility in calculating the ratio of pay, by allowing companies to use statistical sampling to define the median employee salary, and by allowing companies to omit up to 5 percent of employees outside the U.S. from the calculation. In addition, emerging growth, registered investment companies, small businesses, and foreign private issuers will be exempt from the rule's reporting requirement, and the data for the calculations only need to be gathered every three years.
• The rule has numerous critics, including SEC Commissioner Daniel Gallagher who indicated that it might be "the most useless of our Dodd-Frank mandates." Other critics, including the U.S. Chamber of Commerce, have pointed to the difficulty in comparing ratios from one industry to the next, and highlighted the additional compliance costs associated with making the necessary calculations. And yet supporters of the rule, like the AFL-CIO, note that it will give better information to shareholders when making investment decisions, and to the general public when assessing income inequality and raising wages.

False Claims Act

Federal Court Defines Key Term in ACA's 60-Day Rule

• In a recent ruling in United States v. Continuum Health Partners Inc., the Southern District of New York provided insight into a key provision of False Claims Act liability added by the Affordable Care Act—namely, when the 60-day period during which a healthcare provider can refund overpayments made by the federal government without facing liability begins. In denying Continuum Health Partners Inc.'s motion to dismiss, Judge Edgardo Ramos ruled that an overpayment is "identified," and thus starts the 60-day clock, when the hospital or healthcare provider is "put on notice" that a possible overpayment exists.
• Continuum, which admittedly overbilled Medicaid in multiple accounts, due to a computer glitch, had argued the 60-day period only begins to run once the healthcare provider identifies the specific amounts and instances for each and every overcharge. Judge Ramos indicated that such an interpretation would be "absurd" as it would seemingly allow companies to employ "willful ignorance" to delay the obligation to repay the government, and would create a perverse incentive to under-invest in resources that serve to verify and account for overpayments.
• The Centers for Medicare and Medicaid Services had issued a proposed rule in 2012 that defined "identified" to require "actual knowledge of the existence of the overpayment or acts in reckless disregard or deliberate ignorance of the overpayment." However, publication of the final rule was delayed earlier this year, and is now set for February 2016.

DOJ Taps Spinal Company for $13.5 Million

• The U.S. Department of Justice (DOJ) reached a settlement agreement with NuVasive Inc., under which the maker of spine-related medical devices will pay $13.5 million to resolve claims that it violated the False Claims Act and the Anti-Kickback Statute.
• The DOJ alleged that NuVasive promoted its products for surgical uses that were not approved or cleared by the FDA, resulting in false claims to federal health care programs for spine surgeries that were not eligible for reimbursement. In addition, Nuvasive allegedly paid kickbacks to doctors in the form of speakers' fees and expenses related to attendance at events sponsored by the Society for Lateral Access Surgery, an organization created, funded, and operated solely by NuVasive.
• The lawsuit against NuVasive was originally filed by a former sales representative turned whistleblower, who under the terms of the settlement, will receive approximately $2.2 million. For its part, NuVasive did not admit liability or wrongdoing, and was not required by the DOJ to enter a corporate integrity agreement as part of the settlement.

Financial Services

Financial Consultant Has Access Pulled by New York DFS Investigation

• The New York Division of Financial Services (DFS) has indicated that it will deny Promontory Financial Group LLC access to confidential supervisory information under New York State Banking Law, based on DFS's findings that the banking consultant "exhibited a lack of independent judgment in the preparation and submission of certain reports to the Department in 2010-2011." The DFS, however, did not accuse Promontory of a legal violation.
• The DFS report, which was issued in response to an investigation into Promontory's actions to resolve allegations that Standard Charter Bank violated federal banking laws and sanctions imposed by the U.S. Treasury, outlines material changes and omissions that Promontory made to its report in response to requests from the bank. It also identifies testimony given by Promontory during the DFS investigation that indicates a lack of credibility.
• The DFS ruling to suspend access to Promontory will effectively prevent it from serving as a regulatory compliance consultant to big banks and foreign governments. In response, Promontory has stated that it "stand[s] behind the integrity of [its] professionals and the quality of [its] work." It also indicated that it "will litigate the matter and defend [the] firm against this regulatory overreach."

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