Photo of Keith J. Barnett

Keith Barnett is a litigation, investigations (internal and regulatory), and enforcement attorney with more than 15 years of experience representing clients in the financial services and professional liability industries.

On April 30th – May 1st, ACI will host its FinTech and Emerging Payment Systems conference at the Park Lane Hotel in New York City.

We are pleased to announce that Troutman Sanders Partner Keith Barnett will be speaking at a panel titled ” Examining the Evolving State Regulatory and Enforcement Paradigm Governing FinTech and Payments” at ACI’s Legal Regulatory and Compliance Forum on FinTech and Emerging Payment Systems conference on April 30th, 2018 at 11:15am.

FinTech and payment systems startups are burdened with a fractured and struggling regulatory system among the various states. As more and more FinTech startups and other “nonbanks” are entering into the market and aiming to provide financial services to consumers and businesses, they are faced with the reality that it can take several months and thousands of dollars in compliance fees to obtain regulatory approval to operate in just one state. Now, imagine the frustration that companies navigating our 50-state licensing regime are experiencing, as they are facing years and millions of dollars to launch a product nationwide, thus hindering their ability to get to market. During this session, a panel of state regulators will provide key insights on:

  • How states are reacting to new and emerging federal initiatives, including the OCC Fintech Charter to license FinTechs as special purpose banks
  • State-level initiatives aimed at modernizing and harmonizing financial regulation of non-banks and FinTech companies operating nationwide – The CSBS’ Vision 2020
  • State views on the Industrial Loan Charter option
  • Developments in state regulation of money transmitters, consumer lenders, bit licenses, payment processing, and beyond
  • Actions being taken to better align multi-state licensing, examination and supervision
  • Assessments and audits of state regulatory practices to better foster innovation without sacrificing safety, soundness or consumer protection

To register or obtain additional information, visit the ACI conference website.

For a 10% off speaker referral rate ($1,795), contact Nicole L. Pitti, Esq. directly and mention speaker Keith Barnett. Nicole can be reached via phone at 212.352.3220 ext 5534 or via email at n.pitti@americanconference.com.

As many expected with the change of administrations, U.S. Attorney General Jeff Sessions has reversed Obama-era Department of Justice policies respecting marijuana.  The reversal came in a January 4 memorandum to all United States Attorneys within the DOJ’s 94 federal districts (the “Memorandum”).  This development is of particular concern to financial institutions and other entities that might have seen certain – especially medical-related – marijuana businesses as attractive account holders.

The DOJ’s back-and-forth ultimately traces to the overlay of federal and state law respecting the regulation of marijuana.  As stated in Gonzales v. Raich, 545 U.S. 1 (2005), Congress has broad power to regulate marijuana under the U.S. Constitution’s Commerce Clause.  As many questions linger whether, or to what extent, federal regulation of marijuana may preempt differing state approaches, decriminalization and legalization efforts are being implemented in an increasing number of states.

State-level efforts toward decriminalization and legalization have, however, left certain marijuana-related businesses in a predicament as to federal law.  As summarized in Sessions’ Memorandum, federal statutes “reflect Congress’s determination that marijuana is a dangerous drug and that marijuana activity is a serious crime.”  The Memorandum specifically cites the Controlled Substances Act, as well as “the money laundering statutes, the unlicensed money transmitter statute, and the Bank Secrecy Act.”

The Department of Justice under the Obama Administration had sought to accommodate differing state-level approaches to marijuana by shifting enforcement priorities.  Pertinent guidance provided that, under a variety of factors, otherwise-lawful operations would be unlikely targets of DOJ enforcement.  Practical uncertainties and risks remained, but Sessions’ recent reversal removes a degree of ambiguity.

Pursuant to Sessions’ Memorandum, prosecution of any marijuana-related crime is to be weighed using the same factors as any other federal prosecution, to wit: according to the “Principles of Federal Prosecution” found in the U.S. Attorneys’ Manual.  As summarized in the Memorandum, “[t]hese principles require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.”  As characterized by the DOJ’s accompanying press release, this is “a return of trust and local control to federal prosecutors who know where and how to deploy Justice Department resources most effectively to reduce violent crime, stem the tide of the drug crisis, and dismantle criminal gangs.”

The Memorandum provides some clarity as to the enforcement of marijuana-related crimes, but questions linger.  For financial institutions, it remains important to monitor how others – such as the Financial Crimes Enforcement Network of the U.S. Department of the Treasury (FinCEN), or even the Federal Reserve, Federal Deposit Insurance Corporation, National Credit Union Association, or Office of the Comptroller of Currency – may further approach the marijuana issue under the Trump administration.

On December 13, the U.S. Court of Appeals for the Eleventh Circuit affirmed the imposition of joint and several liability on a payment processor that had provided “substantial assistance” to another entity that violated a federal ban on improper telemarketing practices. The decision leaves the payment processor responsible for paying the $1.7 million judgment with its co-defendants.

Background

In 2011 and 2012, a group of individuals known as Treasure Your Success (“TYS”) allegedly operated a fraudulent scheme under which TYS promised to reduce consumer credit card interest rates in exchange for the consumer authorizing a charge to his or her credit card. TYS, however, never had the ability to honor its promises to lower interest rates. Using this approach, TYS amassed more than $2.5 million from the victims of its scheme.

To carry out this scheme, TYS relied on Universal Processing Services of Wisconsin, LLC, a payment processing company, to charge customers’ credit cards. After receiving an internal referral, Derek DePuydt, Universal’s president, personally reviewed TYS’s merchant application and, despite several red flags indicating TYS might constitute a fraud risk, approved two accounts for TYS.

The FTC Complaint and First District Court Decision

In October 2012, the FTC filed a complaint in the U.S. District Court for the Middle District of Florida, naming members of the TYS scheme as defendants and alleging violations of the Federal Trade Commission Act (“FTCA”), 15 U.S.C. § 41 et seq., the Telemarketing and Consumer Fraud and Abuse Prevention Act, 15 U.S.C. § 6101 et seq., and the Telemarketing Sales Rule (“TSR”), 16 C.F.R. § 310.1 et seq. The FTC later added other defendants, including Universal and DePuydt, and brought an additional count that alleged Universal and DePuydt provided substantial assistance to TYS and “knew, or consciously avoided knowing,” that TYS was violating the TSR.

After various settlements, only Universal and two other defendants remained. The FTC moved for summary judgment against the three defendants. The district court granted the motion and found Universal substantially assisted TYS in perpetrating the scheme by establishing the merchant accounts and knew, or consciously avoided knowing, about TYS’s fraud. The court ordered disgorgement in the amount of $1,734,972 and held that the three defendants were jointly and severally liable for the entire amount of restitution.

First Appeal and District Court Clarification

Universal appealed, and the Eleventh Circuit directed the district court to further explain why it subjected Universal to joint and several liability. In a new opinion, the district court reasoned that although Universal did not participate in the scheme, the language of the TSR, in conjunction with how such situations are treated in tort and securities law, allowed for joint and several liability where an entity provides substantial assistance to another that it knows, or consciously avoids knowing, is violating the TSR.

The Second Appeal and Affirmation of District Court’s Decision on Joint and Several Liability

The decision was appealed again and the Eleventh Circuit affirmed. In so doing, the Eleventh Circuit first rejected Universal’s claim that joint and several liability cannot exist absent a common enterprise, explaining no authority supported that conclusion.

Next, the court looked to the history behind the TSR’s adoption and noted that the FTC expressly relied on tort and securities concepts when it formulated the rule. Specifically, the FTC invoked § 876(b) of the Restatement (Second) of Torts, which contemplates imposing liability on a person who gives substantial assistance to another person whose conduct breaches a duty, resulting in harm to a third party, where the offeror of the assistance knows the other party’s conduct is a breach. According to the court, § 876(b) shares three elements with the TSR—a primary violation, substantial assistance and knowledge. As a result, the court found borrowing from tort law appropriate. The court also found noteworthy that the Second Restatement expressly allows for imposing joint and several liability on an aider-abettor.

The Eleventh Circuit additionally focused on the FTC’s reference to securities law in its explanation of the final TSR. Securities law also provides for joint and several liability in the same situation as tort law, but it expands the requisite mental culpability from “knowing” to reckless. Recklessness, the court believed, even more closely tracked the “consciously avoid[ing] knowing” language adopted by the FTC in the TSR.

Finally, the court rejected Universal’s various arguments that the unjust gains could be fairly apportioned between the three remaining defendants, which Universal argued precluded joint and several liability. The court’s decision left Universal (with its potentially deeper pockets) on the hook for the $1.7 million judgment.

The case is Federal Trade Commission v. WV Universal Management, LLC, et al., No. 16-17727 (11th Cir. Dec. 13, 2017), and the opinion can be located here.

Troutman Sanders will monitor whether other federal courts follow the Eleventh Circuit and adopt this expansion of liability. Updates will be provided as they become available.

Recently, a Manhattan federal jury convicted Richard Moseley Sr., the head of an online network of payday lenders and loan servicers, on charges of wire fraud, aggravated identity theft, and violating the Racketeer Influenced and Corrupt Organizations Act and Truth in Lending Act, among other counts.

Moseley was convicted due to his leadership role over a vast and complicated system of interrelated companies that collected over $220 million from more than  600,000 borrowers and deceived regulators in the process.  Convincing state and federal regulators and even his own lawyers that his companies were based offshore and not bound by U.S. law, Moseley coordinated a network of lenders and loan servicers that routinely misled both consumers and regulators.  At the time of his indictment, then-United States Attorney Preet Bharara stated, “As alleged, Richard Moseley, Sr., extended predatory loans to over six hundred thousand of the most financially vulnerable Americans, charging illegally high interest rates to people struggling just to meet their basic living expenses.”

The indictment alleges that Moseley-related lenders went so far as to autodebit accounts in ways unanticipated by borrowers and lend money to borrowers who did not request it after their personal information was sent to various Moseley companies.  Moreover, important terms were hidden in small print, interest rates were charged that violated the laws of the states in which the businesses were operating, and lenders and loan servicers made “deceptive and misleading” fee disclosures to borrowers.  The case was originally referred to prosecutors by the Consumer Financial Protection Bureau.

Although Mosely claimed to incorporate his companies in the Caribbean and New Zealand beginning in 2006, the indictment states that Moseley’s companies operated out of Kansas City, Missouri instead.  Based on these incorporation claims, Moseley’s attorneys told state regulators that loans from Moseley’s network of lenders and loan servicers originated exclusively from overseas offices.  In reliance on this materially false and misleading correspondence, many state attorneys general and regulators closed their investigations on the mistaken belief that they lacked jurisdiction over Moseley’s companies as they supposedly had no presence or operations in the United States.

Moseley, 73, is not scheduled to be sentenced until April 2018, and his RICO and wire fraud convictions carry 20-year maximum sentences.  Following news of the jury’s conviction, Acting United States Attorney Joon H. Kim stated, “Moseley can no longer take advantage of those already on the brink, and he now faces significant time in prison for his predatory ways.”

We are pleased to announce that Troutman Sanders attorneys David Anthony, Keith Barnett, Ashley Taylor and Melanie Witte will be featured speakers at the upcoming Third Party Payment Processors Association (TPPPA) Executive Summit in Scottsdale, Arizona on November 8-9, 2017.

Troutman Sanders attorneys will participate in panels on topics including:

  • The Supposed End to Operation Chokepoint – Why Payment Processors Should Not Let Their Guard Down
  • Third-Party Risk – Managing Third-Party Risk in Third-Party Payment Processing: ISOs, Nested TPPPs and Vendors
  • Data Breach! – The Impact of High Profile Data Breaches
  • Opportunity is Knocking: How to be Strategic Rather than Reckless in Higher-Risk Industries and Products

For additional information or to register, click here.

On August 18, following a bench trial, the United States District Court for the District of Nevada found defendants Terrason Spinks and his company, Jet Processing, Inc., jointly and severally liable for $280,911,870 in consumer injury caused by violations of the Federal Trade Commission Act (“FTC Act”) and Electronic Fund Transfer Act (“EFTA”).  This case should serve as a reminder to all payment processors, independent sales organizations, service providers, or any other entity involved in processing payments from consumers, to ensure that due diligence on merchant accounts is performed and chargebacks are monitored.

The defendants are among dozens of individuals and shell corporations that took part in an online scheme dubbed the “IWorks scheme.”  Specifically, the company unlawfully enrolled consumers in membership programs without clearly disclosing that it would charge their accounts on a recurring basis until the consumer canceled their membership.  In addition to the monetary judgment, the Court’s order bans Spinks and Jet Processing from selling grants or similar governmental financial assistance, online memberships that must be affirmatively canceled or rejected by a consumer, and online memberships as an automatic upcharge to another product.

In 2010 the Federal Trade Commission charged ten individuals and dozens of companies for involvement in the IWorks scheme, which lured consumers into signing up for trial memberships for fake government grant and money-making opportunities.  The websites offered “free” information to consumers, but asked them to provide credit or debit card numbers for a small shipping and handling fee.  Once the consumers entered the information, IWorks charged a large one-time fee of up to $129.95 and a recurring monthly subscription fee of up to $59.95 for access to the programs, and various other monthly fees that consumers did not agree to pay.  In this case, the Court found that Spinks and Jet Processing participated in creating the IWorks’ money-making product.  Specifically, Spinks and Jet Processing obtained merchant accounts in 51 shell company names that allowed IWorks to continue charging consumers when payment processors were closing IWorks accounts due to high chargeback rates.  These shell company merchant accounts allowed Spinks and Jet Processing to circumvent the closure of other IWorks merchant accounts and continue charging consumers.  The practices resulted in millions of dollars in fines for excessive chargebacks and prevented consumers from being able to access their credit card banking information.

Spinks and Jet Processing were the only defendants to go to trial.  The remaining nine individual defendants and over fifty shell corporations settled with the FTC.

On September 21, the Department of Justice cleared the way for a group of the twenty-four largest U.S. banks to create a real-time payment system that will permit immediate transfer of funds between financial institutions.  The system was proposed by The Clearing House Payments Co., LLC (“TCH”), a joint venture between the twenty-four banks that hold approximately sixty percent of all U.S. deposits.

In a letter from the Antitrust Division, the DOJ acknowledged that collaboration between competitors can harm competition, but it expressed optimism that the venture could have a pro-competitive impact.  “None of TCH’s currently-proposed rules seem to limit rivals’ ability to access [real-time payments] in a way that appears to be anticompetitive, although we note that TCH retains the right to change its rules at any time, and it has complete discretion over enforcement and implementation decisions,” wrote Andrew C. Finch, Acting Assistant Attorney General.  “The department has no current reason to believe, however, that TCH will use RTP to harm the rivals of the TCH owner banks.”

The TCH proposal is largely in response to a 2015 call from the Federal Reserve, which sought a “ubiquitous, convenient and cost-effective way for U.S. consumers and businesses to make (near) real-time payments from any bank account to any other bank account,” a target the Fed outlined in its paper “Strategies for Improving the U.S. Payment System.”  As we covered here, the Fed recently released an update to the paper, outlining its “Next Steps” to achieve the goals set forth in its 2015 missive.

According to its proposal, TCH intends to create and maintain a Real Time Payment (“RTP”) system that will provide real-time fund transfers between depository institutions for the first time in American history.  The RTP system will permit depository institutions to engage in faster fund transfers for their customers and, according to TCH, will not interfere with existing payment systems.  While TCH plans for end users with a bank account to make payments through the RTP system, those end users will not have a direct relationship with the system.

The DOJ noted in its approval letter that many countries already have similar systems, and “[t]he need for a faster payment rail is predicated on the value that end users get from real-time funds-transfer services, and the risks currently undertaken by banks and payment service providers that provide these services using existing payment rails.”  With the advent of the new system, “RTP may also increase the variety of payment rails available to banks, payment service providers, and ultimately their end user customers.”  The DOJ concluded its letter by giving TCH its blessing, writing that it currently has no plans to institute antitrust actions against the RTP proposal.

The U.S. Department of Justice announced the end of Operation Choke Point in an August 16 letter to the Chairman of the House Judiciary Committee.  Operation Choke Point, which began under the Obama Administration, sought to prohibit banks and other financial firms from giving so-called “bad actors” access to bank accounts and payment processing systems.  The program was meant to combat money laundering and to prevent such businesses and individuals from having access to U.S. banking institutions.

Although Operation Choke Point has faced significant criticism since its inception in 2013 and has now been discontinued, the DOJ said that the initiative had uncovered criminal activities by individuals and non-banking institutions during its existence.

Under Operation Choke Point, the DOJ issued subpoenas to certain financial institutions to investigate their relationships with companies that purportedly had a higher risk of fraud and money laundering.  Some of the subpoenas included a guidance document from the Federal Deposit Insurance Corporation that identified categories of businesses that could pose a “reputational risk,” supposedly warranting heightened scrutiny by bank personnel.  Some of the “high-risk” businesses included payday lenders, telemarketing companies, pawn shops, credit repair services, and businesses offering “get rich” products.  The list also included businesses selling ammunition, firearms, and drug paraphernalia, and those engaged in the dissemination of allegedly racist materials.

Critics of the program complained that Operation Choke Point unfairly targeted legitimate businesses like payday lenders and firearms dealers that were out of favor with the Obama Administration.  Operation Choke Point also received significant backlash from Congressional Republicans.

In 2015, the FDIC rescinded the list of high-risk merchants and advised banks to analyze their relationships with businesses on a case-by-case basis.

The DOJ’s August 16 letter comes in response to an August 10 letter from the Chairs of the House Judiciary and Financial Services Committees and several related subcommittees.  The August 10 letter, addressed to the Attorney General, Chair of the Federal Reserve Board of Governors, and Office of the Comptroller of the Currency (“OCC”) Acting Comptroller, asked for “immediate corrective action” regarding Operation Choke Point, which, according to the letter, “destroyed legitimate businesses to which [the Obama] Administration was ideologically opposed (e.g., firearms dealers) by intimidating financial institutions into denying banking services to those businesses.”  The DOJ’s response to the August 10 letter, signed by Assistant Attorney General Stephen E. Boyd, confirms the end of Operation Choke Point and “reiterate[s] that the Department will not discourage the provision of financial services to lawful industries, including businesses engaged in short-term lending and firearms-related activities.”

On August 21, OCC’s Acting Comptroller responded to the August 10 House Letter, claiming that the “OCC is not now, nor has it ever been part of Operation Chokepoint.”  The OCC stated that it “rejects the targeting of any business operating within state and federal law as well as any intimidation of regulated financial institutions into banking or denying banking services to particular businesses.”

The Federal Reserve said it also plans to respond to the House’s August 10 Letter.

Some of the payday lenders affected by Operation Chokepoint filed suit in 2014 in the U.S. District Court for the District of Columbia against the Federal Reserve and the OCC.  These payday lenders alleged that the Federal Reserve and the OCC unduly pressured banks to breach their relationship with the lenders.  This suit is still ongoing.

The DOJ has closed all cases initiated under Operation Choke Point.  According to the August 16 letter, the “initiative is no longer in effect, and it will not be undertaken again.”

On July 28, the Federal Trade Commission filed a lawsuit in the United States District Court for the District of Arizona against several merchants, an Independent Sales Organization (“ISO”), and their affiliated companies (a total of twelve defendants) alleging that they had engaged in credit card laundering in violation of Sec. 13(b) of the FTC Act, the Telemarketing Sales Rule, and the Telemarketing and Consumer Fraud and Abuse Prevention Act.  The complaint alleges that the merchant created 23 fictitious companies that charged “thousands of consumers more than $7 million for worthless business opportunities and related upsells” in order to avoid triggering the card networks’ chargeback monitoring programs and attracting the scrutiny of the acquirer.  The merchant opened 23 accounts at Chase under the name “Dynasty Merchants, LLC.”  The merchant filled out 23 merchant applications with the ISO and attached phony checks that made it appear that the companies each had their own account at Chase.

The FTC alleged that the ISO, which appears to have been affiliated with the merchant defendants, engaged in the underwriting and approval of the fictitious companies and helped set up merchant accounts with its acquirer for the fictitious companies.  The complaint alleges that the ISO used the services of two payment processors to process almost $6 million in credit card charges through merchant accounts established in the names of the fictitious companies.  According to the complaint, the ISO: (1) knew that one of the principals of the merchant had a criminal record; (2) knowingly opened merchant accounts in the names of numerous fictitious companies for the same underlying merchant, and thereby falsely represented the true identity of the fictitious companies to the bank; (3) received notification from the bank that one of the merchants’ companies had a high chargeback ratio, but the ISO did nothing but try to further conceal the identity of the merchant and otherwise help the merchant; (4) approved new applications using different names from the merchant although the bank instructed the ISO to terminate the merchant’s accounts and the ISO knew that the merchant was submitting applications with fictitious names; (5) failed to inform the bank that the merchants were telemarketers although the bank’s rules required the ISO to inform the bank when a merchant was a telemarketer; and (6) falsely told the Oregon Department of Justice that it was not doing business with the merchant although it was doing business with the merchant.

The FTC also alleged that the ISO ignored several red flags, including the following:

  • Almost all of the merchants were located in the same area and the business descriptions were vague, almost always identical (i.e. “marketing and advertising”), and provided no specific description of the product or service being sold.
  • The 23 supposedly separate merchants attached facially suspect checks that appeared almost identical in form.
  • The ISO obtained credit reports for each of the 23 fictitious companies.  The credit reports indicated that the principals or owners of the businesses had low credit scores, poor credit ratings, and owed substantial outstanding debts.
  • The 23 merchant applications failed to include copies of the merchants’ marketing materials although the bank required a review of the materials as a part of the due diligence process.
  • Although the bank’s policy required the ISO to obtain screen shots of the relevant web pages of the merchant’s website for “high risk” merchants, some of the merchants did not have a valid website.
  • The address listed on some merchant applications did not match the address listed on the credit report.
  • Many of the merchant applications listed the same owner.
  • The checks attached to the applications often did not correspond with the bank account listed in the applications.
  • Although many of the merchant applications contained clear indications that the merchants were engaged in telemarketing, and Visa rules require telemarketers to be classified and coded as “High Brand Risk Merchants,” the ISO failed to assign to these entities the correct MCC number required for telemarketers.
  • In some cases, the chargeback requests sent by customers indicated the name of a merchant that was a different name than the merchant with the account, “obvious evidence of credit card laundering.”

This case demonstrates that the FTC will not only sue merchants that engage in alleged unlawful conduct, but also payment processors and ISOs who allegedly aid and abet the conduct.  The case is FTC v. Electronic Payment Solutions of America, Inc. et al., 2:17-cv-02535 (U.S.D.C., D. Ariz.).

In its fifth annual fair lending report, the Consumer Financial Protection Bureau highlighted redlining, mortgage and student loan servicing, and small business lending as areas of focus for 2017.  CFPB Director Richard Cordray specifically noted these areas for enhanced enforcement actions, describing them as “significant or emerging fair lending risk to consumers.”

“In 2017 we will increase our focus in the areas of redlining and mortgage and student loan servicing to ensure that creditworthy consumers have access to mortgage loans and to the full array of appropriate options when they have trouble paying their mortgages or student loans, regardless of their race or ethnicity,” wrote Patrice Alexander Ficklin, Director of the Office of Fair Lending and Equal Opportunity.  “In addition, we will focus more fully on pursuing our statutory mandate to promote fair credit access for minority- and women-owned businesses.”

According to the Bureau, agency priorities are determined through a risk-based model, incorporating the quality of an institution’s compliance management system, market intelligence, consumer complaints, tips from advocacy groups and government agencies, supervisory and enforcement history, and results from Home and Mortgage Disclosure Act analysis.  After reevaluating these indices of consumer risk, the CFPB has outlined specific points to address in the coming year:

  • Redlining.  The Bureau will continue to evaluate whether lenders have intentionally discouraged prospective applicants in minority neighborhoods from applying for credit.
  • Mortgage and Student Loan Servicing.  The CFPB indicates that it will evaluate whether certain borrowers who are behind on loan payments have greater difficulty reaching a resolution with servicers due to their race, ethnicity, gender, or age.
  • Small Business Lending.  With a Congressional mandate to ensure fair access to credit for women- and minority-owned businesses, the Bureau will take action in the area of small business lending.  The CFPB maintains that action in this area will also enhance the Bureau’s institutional knowledge of credit processes and existing data collection processes, as well as the nature, extent, and management of fair lending risks.

As we have reported, state regulators are also active in these areas.  Over the last 15 years, state attorneys general have grown adept at collectively utilizing their resources to bring major multistate investigations.  We anticipate increased state enforcement actions aimed at industries such as debt buying and collecting, auto finance, service-member lending, payment processing, credit reporting, cybersecurity, information governance, and privacy.