The Dodd-Frank Wall Street Reform and Consumer Protection Act created the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) to watch out for consumers’ interests in the financial marketplace and, in so doing, to oversee a number of financial products and services. The creation of the CFPB marked the first time in decades that Congress had formed a new federal agency.

Because the Bureau became operational in 2011, there was a focus last year on building the Bureau.  However, the Bureau managed to undertake numerous efforts, including the issuance of interim final rules on the Alternative Mortgage Transaction Parity Act, the TILA—RESPA single integrated disclosure project, issuance of a notice and request for comment regarding the definition of “larger participants in certain markets,” and publication of interim final rules restating (and renumbering) the regulations inherited from other agencies.   In addition, CFPB was very active in initiating its “Know Before You Owe” campaign with respect to mortgage loans, credit cards and student loans.

On January 4, 2012, Richard Cordray began serving as the Bureau’s first Director.  Director Cordray previously held the role of enforcement chief for the CFPB, and he is known for vigorously pursuing enforcement actions against banks, insurers, and brokers.  In the past few months, the Bureau has been very active in pursuing its mission.

On January 20, 2012, the Bureau entered into a Memorandum of Understanding with the Federal Trade Commission (“FTC”) “to prevent duplication of efforts, provide consistency and ensure a vibrant marketplace for consumer financial products and services.”

On January 25, 2012, the CFPB announced that it would join efforts with the state Attorneys General and the Department of Defense to track companies and individuals who repeatedly target the military community and to crack down on financial scams directed at military service members, veterans and their families. This joint endeavor has been named the Repeat Offenders Military Database.

On February 17, 2012, the CFPB proposed a rule that would bring the nation’s debt collection and consumer reporting industries under the Bureau’s supervision.  The Bureau is also looking into possible abuses with respect to checking account overdraft fees charged to consumers.  In addition, the CFPB announced on March 14 that it has begun sharing consumer complaints with the FTC’s Consumer Sentinel database.

Other items on the Bureau’s agenda for 2012 include: 1) the issuance of a final “ability to repay” mortgage rule (including protection from liability for “qualified mortgages”); 2) issuance of proposed rules to implement changes to laws governing the mortgage industry (including origination and servicing practices, loan originator compensation, high-cost loan restrictions and escrow account maintenance); and 3) issuance of proposed rules to expand the Bureau’s capacity to handle consumer complaints with respect to all products and services within its authority.  In fact, the Bureau reports that since it began fielding consumer complaints related to credit card accounts and mortgages, it received over 13,000 complaints through December 31, 2011 and had facilitated company responses to over 88 percent of the submitted complaints.

In the enforcement arena, the Bureau has created a joint task force to target scams aimed at consumers seeking mortgage modifications through the Home Affordable Modification Program and has also set up a whistleblower hotline for the public to submit tips regarding potential violations of federal consumer protection laws.  Look for more news from this very active agency throughout 2012.

This securities litigation arises from allegations that the price of Defendants’ stock was artificially inflated as a direct result of Defendants’ material representations, omissions, and concealment regarding the unintended acceleration condition in Toyota vehicles.  Defendants filed a Motion for Partial Judgment on the Pleadings (“Motion”), arguing that Plaintiffs had not adequately alleged loss causation for several of the statements made by Toyota’s corporate spokesperson, Bill Kwong.  The statements at issue, which appeared in several newspaper articles, generally pertained to representations by Defendants that the unattended acceleration issue was caused by driver error and media-induced publicity, including the following:

•    “[w]e don’t feel it’s an issue with the vehicle;”

•    “a misapplication of the pedals by the driver” could account for complaints;

•    there are “no flaws in the trucks and that many reports [of unintended acceleration] were ‘inspired by publicity;’”

•    “it is clear that the majority of complaints are related to minor drivability issues and are not indicative of a safety-related defect;” and

•    “tests by the automaker and the NHTSA revealed no problems that would explain the complaints.”

The Lead Plaintiff, Maryland State Retirement and Pension System, opposed the Motion, arguing that, in previously denying Defendants’ Motion to Dismiss, the Court had already determined that the loss causation element was satisfied and, in any event, the Complaint adequately alleged facts demonstrating loss causation.  Specifically, Plaintiff argued that under Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005), the Complaint was only required to provide Defendants with notice of its loss causation theory — that is, “some indication of the loss and the causal connection.”  In an effort to satisfy this requirement, Plaintiff pointed to, among other things, specific allegations in the Complaint that Defendants made a series of partially corrective disclosures between September 14, 2009 and February 3, 2010, during which time the price of Toyota stock fell following the disclosure of information revealing the true nature, scope and severity of Toyota’s unintended acceleration problems.  Plaintiff also argued that, because loss causation was a fact-intensive question, it was particularly inappropriate for resolution on the pleadings alone and, as such, there were no Ninth Circuit cases granting judgment on the pleadings on the issue of loss causation.

On February 21, 2012, the Honorable Dale S. Fischer, after considering the submissions of all parties, denied Defendants’ Motion, agreeing with Plaintiff that the Court had previously considered and rejected the arguments in issuing a decision denying the Motion to Dismiss.  Noting the similar standards applicable to the two Motions, the Court stated that “[j]udicial economy would be undermined by allowing parties an unlimited right to revised issues raised in Rule 12(b)(6) motions via Rule 12(c) motions.”  The litigation is currently proceeding and discovery is ongoing.

In Lawson v. FMR LLC, 670 F.3d 61 (1st Cir. 2012), a divided panel of the U.S. Court of Appeals for the First Circuit held on February 3, 2012 that employees of private companies that contract with public companies cannot take advantage of the whistleblower protections of the Sarbanes-Oxley Act (“SOX”).

SOX includes protection for whistleblowers who provide evidence of violations of either federal securities law, U.S. Securities and Exchange Commission (“SEC”) rules and regulations, or any “federal law relating to fraud against shareholders.” Relying on SOX, plaintiffs, Lawson and Zang, each separately sued their corporate employers for unlawful retaliation.

Plaintiffs, Lawson and Zang, worked for “private companies that provide advising or management services by contract to the Fidelity family of mutual funds.” The Fidelity mutual funds are public companies that are required to file reports under the Securities Exchange Act of 1934.  The mutual funds, which have no employees of their own, were not named in the lawsuits.  Perhaps importantly, neither Lawson nor Zang were employed by companies that normally would be deemed unrelated to Fidelity.  Plaintiff, Zang, was employed by Fidelity Management & Research Co. (later renamed FMR Co., Inc.), a subsidiary of Fidelity Management & Research Co.  Meanwhile, plaintiff, Lawson, was employed by Fidelity Brokerage Services, LLC, a private subsidiary of FMR Corp., which was succeeded by FMR, LLC.  FMR Co., Inc. and FMR, LLC, which also were known as the Fidelity Management companies, entered into contracts with certain of the Fidelity mutual funds to serve as investment advisers or sub-advisers. As investment advisers to the funds, the Fidelity Management companies were subject to the provisions of the Investment Advisers Act of 1940, 15 U.S.C. § 80b–1, et seq.

The defendants moved to dismiss the cases, arguing that SOX’s whistleblower provision, 18 U.S.C. § 1514A, did not cover Lawson and Zang. The defendants specifically argued that SOX only protects employees of public companies and not the employees of private companies that contract (or subcontract) with public companies. The plaintiffs countered that “Congress meant to cover all whistleblowers” in SOX.

The United States District Court for the District of Massachusetts rejected the defendants’ theory and held that SOX protects “employees of private agents, contractors, and subcontractors to public companies.”  The First Circuit reversed the district court, finding that the “protected employee” within § 1514A(a) “refers only to employees of the public companies.”  Focusing on the text of the statute, the Court noted that SOX’s whistleblower provision specifically references “employees of publicly traded companies.”  The First Circuit also held that where Congress “wished to enact broader whistleblower protection elsewhere, it explicitly did so” and the “choice by Congress to provide limited coverage in § 1514A(a) was not inadvertent.” The First Circuit contrasted § 1514A(a) with other broader whistleblower statutes that clearly protected “employees of contractors to the entities regulated by those statutes.”

Both the SEC and the U.S. Department of Labor (“DOL”) supported the plaintiffs’ broader interpretation of the statute. The First Circuit, however, gave no deference to the views of the federal agencies.  In so holding, the First Circuit noted that “Congress chose not to give authority to the SEC or the DOL to interpret the term “employee” in § 1514A(a)….”  The First Circuit also explained that it was “bound by what Congress has written” and if “Congress intended the term “employee” in § 1514A(a) to have a broader meaning …, it can amend the statute.”

The Honorable O. Rogeriee Thompson did not join the majority in this opinion.  In a dissenting opinion, Judge Thompson argued that the statute “plainly protects whistleblower employees of contractors of public companies.”  Judge Thompson reasoned that the ruling improperly bars “a significant class of potential securities-fraud whistleblowers from any legal protection.” In so arguing, Judge Thompson stated that the majority is wrong to “impose an unwarranted restriction on the intentionally broad language” of the statute and ignore the views of the SEC and DOL.

After the First Circuit’s ruling, the plaintiffs, Lawson and Zang, filed petitions seeking rehearing and rehearing en banc.  On its face, the decision appears somewhat perverse, especially since the Fidelity mutual funds do not have employees of their own and, to serve the purposes of SOX, it would seem appropriate to extend the protection to subsidiary/contractor companies, especially where, as here, the public companies engaged in alleged wrongdoing have been structured in a manner so that they do not have any employees of their own and, thus, could be deemed immunized from the whistleblower protections of SOX.  SFMS will monitor this important decision under SOX and whether the First Circuit chooses to hear the case en banc.  Ultimately, it may be necessary for the Supreme Court to resolve this important and obviously close issue.

According to a Reuters report on February 21, 2012, exchange-traded funds (“ETFs”) are receiving more attention from the Securities and Exchange Commission (“SEC”) after the delay of a big trade of an unnamed but popular ETF.  ETFs, which are intended to provide investors access to highly liquid pools of securities, have been around since the mid-1990s.  They also allow investors to take magnified short positions on indexes or industry sectors, which are known as “leveraged” ETFs.  There is currently about $1 trillion invested in all ETFs, of which leveraged and inverse (or “short” and “ultrashort”) ETFs make up 5%, according to one estimate.  ETFs also account for almost 30% of the equities traded daily in the American markets, according to a Credit Suisse report.

ETFs are securities, so they are also subject to the same regulations that cover a standard equity share.  Still, despite the fact that ETFs have been around for almost two decades, the SEC has largely left ETFs alone until fairly recently.  This changed after the May 6, 2010 “Flash Crash,” when the Dow Jones Industrial Average experienced a 1,000-point swing in less than half an hour.  The SEC and the Commodity Futures Trading Commission issued a joint report later that September, explaining that the volatility was caused by a large fundamental trader’s sell program.  The sell program created a massive sell-off ripple effect after high-speed traders using algorithms reacted to that trade, which, in turn, caused other high-speed algorithms to react to those reactions, and so on.  In September 2011, the Wall Street Journal reported that the SEC began investigating whether ETFs added to market volatility after the market’s wide swings that August as part of its larger investigation into high-speed trading.  Specifically, the SEC inquired into whether the extent of high-speed leverage ETF trading could amplify market swings as traders sought to unload their holdings during a particularly volatile day.  But while industry insiders acknowledge that possibility, they largely dismiss the connection because of the relatively minimal trading volume of leverage ETFs.

The recent trading shortfall has now caused the SEC to widen its investigation to determine whether high-speed trading was a contributor to that failure and to explore the links between the ETF prices and the value of securities that make up the ETF.  Though the impact of failed trade settlements is currently unknown, the potential to manipulate the market using leveraged and inverse ETFs is becoming more and more apparent–nimble short-sellers may be able to use the leveraged and inverse ETFs to either quickly drive up or drive down equity or futures prices in response to an expected large or institutional investor trade.

Two years after the U.S. Supreme Court decided Morrison v. National Australia Bank Ltd., 130 S.Ct. 2869 (2010), the reverberations of this landmark decision continue to be felt.  Indeed, in a recent decision by the U.S. District Court for the Southern District of New York, In re Vivendi Universal, S.A. Securities Litigation, No. 02 Civ. 5571 (RJH), et al., 2012 WL 280252 (S.D.N.Y. Jan. 27, 2012), the District Court not only reaffirmed the application of Morrison to the Securities Exchange Act of 1934 (the “Exchange Act”), it broadened Morrison’s reach to also include claims brought under the Securities Act of 1933 (the “Securities Act”).

With Morrison, the U.S. Supreme Court weighed in on the issue of whether the Exchange Act applies extraterritorially; that is, to the purchase or sale of securities made on a foreign exchange or in a foreign country.  The U.S. Supreme Court declared in Morrison that it does not:  “Section 10(b) [of the Exchange Act] reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.”

In re Vivendi has now gone one step further than Morrison.  Following the lead of two Southern District of New York decisions from last year, In re Royal Bank of Scotland Group PLC Securities Litigation, 765 F.Supp.2d 327 (S.D.N.Y. 2011) and SEC v. Goldman Sachs & Co., 790 F.Supp.2d 147 (S.D.N.Y. 2011), the District Court held that the Securities Act – not just the Exchange Act – lacks extraterritorial application.  In In re Vivendi, the plaintiffs were individual shareholders who purchased Vivendi shares on the EuroNext, S.A. (also known as the “Paris Bourse”).  They alleged that defendants made materially false and misleading statements about Vivendi’s financial health, which then caused the share prices to be overvalued and artificially inflated.  On this basis, the shareholder plaintiffs asserted claims for violations of Sections 10(b) and 20(a) of the Exchange Act, as well as violations of Sections 11, 12(a)(2), and 15 of the Securities Act.  Relying on Morrison, the District Court dismissed all of these claims and, in so doing, concluded that while Morrison indeed involved an Exchange Act claim only, nonetheless, the decision’s “underlying logic counsels extending its holding to cover the Securities Act.”  Thus, by virtue of purchasing their shares on the Paris Bourse, the shareholder plaintiffs were barred from bringing any claims against defendants both under the Exchange Act and the Securities Act.

Undoubtedly, we have not heard the last of the Morrison decision, and as its implications continue to unfold, Shepherd, Finkelman, Miller & Shah, LLP will continue to monitor and advise you of new developments.