Source: https://jenner.com/library/blogs/25
Timestamp: 2019-04-18 14:58:48+00:00

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On March 6, 2019, Facebook CEO Mark Zuckerberg announced via an interview and a Facebook blog post a planned shift to “building a privacy-focused messaging and social networking platform.” Characterizing this shift as a “privacy-focused vision,” Zuckerberg said that this change in focus meant that Facebook and Instagram would not only function as “the digital equivalent of a town square” but also “the digital equivalent of the living room.” This shift was billed in part as a response to user demand: according to the post, the “fastest growing areas of online communication” were private messaging, “ephemeral stories,” and small group communication.
The blog post acknowledged Facebook’s reputation for not building “privacy protective services.” In 2011, Facebook entered into a consent decree with the Federal Trade Commission (FTC) related to its privacy practices and has continued to face criticism for its privacy and data protection practices. Indeed, just a few days prior to the announcement, news reports circulated regarding the ability to look up individuals on Facebook based on their telephone numbers, despite Facebook’s statements to users when they provided their telephone numbers that the number would be used for two-factor authentication. Reports last year led to Facebook’s confirmation that the telephone numbers are also used for advertising.
Some legislators and regulators have expressed concerns about information sharing between Facebook’s services. Last month, the German antitrust regulator issued a decision restricting Facebook from sharing information between services in the absence of users’ voluntary consent. Facebook announced that it planned to appeal the decision.
Automobile Loan Servicing. The CFPB has recently conducted examinations of captive automotive finance companies for unfair and deceptive acts and practices (UDAAPs) involving rebates for extended automobile warranties. Typically, when a lessee purchases an extended warranty for a leased car and the car is a total loss, the lessee is entitled to a pro-rated rebate of the premium amount for the un-used portion of the warranty; the rebate is applied first to any deficiency balance on the lease, and the balance is returned to the lessee. The CFPB found that some automotive finance companies had engaged in UDAAPs by (1) failing to apply the rebate to the deficiency balance or artificially deflating the value of the rebate (for instance, by overstating the number of miles on the car) and then (2) attempting to collect on the inflated deficiency balance.
Bank Debiting Practices. The CFPB found that some banks had inaccurately represented that debits made through an online bill-pay service would occur on a given date, even though they might occur earlier than the stated date (for instance, if a payee only accepted a paper check). In some instances, this caused consumers to suffer overdraft fees because there was insufficient money to cover the debit on the earlier date.
Mortgage Servicing. The CFPB found that some mortgage servicers had unlawfully charged consumers fees that were not authorized by their mortgage loans, failed to cancel private mortgage insurance when the loan-to-value ratio dipped below 80%, failing to exercise “reasonable diligence” in processing loss mitigation applications, and failed to provide necessary documentation to the successors-in-interest to borrowers who obtained a home equity conversion mortgage (a type of HUD-insured reverse mortgage).
The CFPB also noted that it had brought five public enforcement actions against payday lenders and other financial institutions relating to a variety of unlawful practices, including debiting consumers’ bank accounts without authorization, furnishing inaccurate information to credit reporting agencies, failing to make required disclosures to consumers, and improperly threatening to initiate debt collection actions.
On February 12, the Conference of State Bank Supervisors (CSBS) released its Fintech Industry Advisory Panel Recommendations. CSBS is a national organization of financial regulators from around the United States, Guam, Puerto Rico, American Samoa, and the US Virgin Islands. The recommendations are designed to improve the use of regulatory technology and harmonize regulatory standards throughout the United States. The recommendations include a plan to develop a model state law for MSBs and to standardize licensing requirements. The panel also recommended a pilot program for building a uniform state licensing examination. Overall, the recommendations seek to create uniformity in state FinTech licensing and regulation. To aid in the harmonizing process, the panel recommends creating repositories of the different state laws and licensing requirements so that financial companies can access all necessary regulations at once. CSBS includes these recommendations as part of a broader effort to streamline state FinTech regulation called Vision 2020. Read the full list of recommendations here.
In a recent Corporate Counsel article, Jenner & Block Partner Jeffrey A. Atteberry examines the current federal privacy legislative proposals and the impact potential data privacy and cybersecurity legislation could have on businesses. Mr. Atteberry explains that several recent high-profile data breaches and questions about how social media platforms share consumers’ personal data are contributing to increasing demand for passage of federal data privacy legislation. He explains that the bills and proposals that have circulated in the last year are the best indicator of what lies ahead in terms of any potential federal privacy regime. To help corporate counsel anticipate changes that may arise, Mr. Atteberry breaks down the current congressional proposals and provides key takeaways for in-house counsel.
To read Law360’s profile, please click here.
In an article published by the Daily Journal, Jenner & Block Partner Jeffrey A. Atteberry discusses the recent public forum that was hosted by the California attorney general’s office regarding the California Consumer Privacy Act of 2018 (CCPA). The forum was held in order to seek public comment on the CCPA as the attorney general moves forward with the initial phase of the rulemaking process. Mr. Atteberry summarizes the concerns that businesses expressed at the forum, including a request to clarify the scope and meaning of the word “sell” as it relates to the sale of personal information, the need for guidance relating to the calculation of the revenue threshold in the CCPA, and the data security risks associated with the CCPA’s verification requirements, among others.
Last week, New York Governor Andrew Cuomo announced the Consumer Right to Know Act (“Act”) as part of his proposed executive budget. The Act would authorize the New York Department of Environmental Conservation, along with the New York Department of Health and the New York Department of State, to promulgate regulations requiring product manufacturers to disclose the presence of potentially hazardous substances on their product labeling. Among other things, the Act would require these agencies to assess the feasibility of on-package labeling; develop regulations establishing a labeling requirement for designated products; develop a list of more than 1,000 substances that must be labeled; and identify the types of consumer products that will be subject to these new labeling requirements. The Act would also extend the Department of Environmental Conservation’s disclosure requirements for household cleaning products to encompass all cleaning products sold in New York, and it would empower the Department of Health to require similar disclosures for personal care products like shampoo, deodorant, or baby powder. Needless to say, these disclosure requirements would be among the most stringent—if not the most stringent—in the United States.
Governor Cuomo’s announcement is available here. We will keep our readers updated on the progress of Governor Cuomo’s proposal.
2018 was another busy year for the Consumer Law Round-Up. Launched by the firm’s Consumer Law Practice, the blog updates readers on key developments within consumer law and provides insights that are relevant to companies and individuals that may be affected by the ever-increasing patchwork of federal and state consumer protection statutes. In 2018, the Consumer Law Round-Up featured posts by approximately 20 different authors on a wide array of topics.
Below is a list of the Top 10 most popular posts of 2018.
Several recent “first of kind” enforcement proceedings continue the flurry of enforcement activity by regulators. In two settled proceedings, the Securities and Exchange Commission (SEC) brought two cases for failure to register digital tokens as securities in connection with initial coin offerings (ICOs), without allegations of fraud. With such enforcement actions now commonplace, a “crypto winter” has clearly set in. In another development, a federal court recently issued the first opinion concluding that the SEC had failed to establish that a digital asset issued in connection with an ICO was a “security” under the federal securities laws, underscoring that digital assets will not be subject to a one-size-fits-all analysis.
As for the two settled charges, according to the SEC’s orders, Paragon Coin, Inc. and AirFox launched their ICOs in 2017. Paragon is an online company that was established to implement blockchain technology in the cannabis industry, as well as to work towards legalization of cannabis. Through its ICO, Paragon raised approximately $12 million in digital assets to develop and expand its business. As for AirFox, it sells mobile technology intended to allow customers to earn free or discounted data by watching advertisements on their phones. AirFox raised approximately $15 million in its ICO to help expand its business overseas. Neither Paragon nor AirFox registered their ICOs.
In charging the two companies with registration violations, the SEC’s legal analysis in both cases was very similar (in some places identical). As an initial matter, the orders pointed out that the ICOs occurred after the SEC issued the DAO Report, which said that digital assets may qualify as “securities” under the securities law, and thus may require registration. The clear message from the SEC is that the companies should have been on notice. Moreover, applying the Supreme Court’s Howey test, the SEC determined that the digital tokens at issue were securities because (1) the tokens were offered in general solicitations to US investors, (2) purchasers had a reasonable expectation of profits from their investment, (3) the investors’ profits would be driven by the managerial efforts of others (i.e., Paragon and AirFox), and (4) investors’ expectations were primed by Paragon and AirFox through marketing and promotional materials that touted the ICOs.
To settle the charges, Paragon and Airfox each agreed to pay a $250,000 civil money penalty, register their tokens as securities with the SEC, and reimburse investors who purchased tokens in the offerings.
These two cases are important for a variety of reasons. For one thing, unlike many previous crypto-enforcements, they did not involve any allegations of fraud or misrepresentation. Instead, they were pure failure-to-register cases. Moreover, for companies that have not yet launched an ICO, the SEC’s press release warned that “[t]hese cases tell those who are considering taking similar actions that [the SEC] continue[s] to be on the lookout for violations of the federal securities laws with respect to digital assets.” In other words, future ICO issuers should carefully consider whether their tokens are “securities” under the Howey factors and, if so, make sure they are complying with all the attendant securities laws, including registration requirements. Finally, although we expect the SEC to bring similar actions in the near future against issuers who have already raised capital through ICOs, the SEC’s press release explains that these cases contain a forward-looking compliance roadmap of sorts: “By providing investors who purchased securities in these ICOs with the opportunity to be reimbursed and having the issuers register their tokens with the SEC, these orders provide a model for companies that have issued tokens in ICOs and seek to comply with the federal securities laws.” Thus, issuers should consider taking proactive steps—including registering their tokens and reimbursing their investors—to minimize the likelihood or extent of an enforcement proceeding.
Although the SEC obtained favorable settlements against Paragon and AirFox, the SEC recently suffered a setback in its case against a company called Blockvest. According to the SEC, Blockvest materially misled investors by falsely claiming that its ICO had been registered with a “fictitious regulatory agency” similar to the SEC to “create legitimacy and an impression that [its] investment is safe.” After the SEC filed a federal complaint and a motion for preliminary injunction, the court considered whether the digital asset at issue was a security under the Howey test. The Southern District of California ultimately denied the SEC’s motion for a preliminary injunction because there were “disputed issues of fact” as to what the “investors relied on, in terms of promotional materials, information, economic inducements or oral representations . . . before they purchased” the tokens.
Although the Blockvest ruling shows that courts will not rubberstamp SEC arguments in the cryptocurrency context, the value of this opinion is limited because the court did not reject the SEC’s arguments on the merits; rather, it held that the case should proceed to full discovery in light of the material facts in dispute. And, just two months earlier, in September 2018 Judge Raymond Dearie of the Eastern District of New York denied a motion to dismiss the criminal prosecution of Maksim Zaslavskiy, who was charged with allegedly defrauding investors by falsely representing that two cryptocurrencies (REcoin and Diamond) were backed by real estate and diamonds, respectively. Judge Dearie ruled that the prosecution of Zaslavskiy could continue.
In all, at this time last year, the value of Bitcoin was seeing record highs of nearly $20,000 while enforcement activity remained relatively low and courts had not yet seriously begun to grapple with how to categorize digital assets. In the ensuing months, numerous regulators have gotten into the act, with SEC and others bringing enforcement actions to halt fraudulent schemes, and more recently, to push back on projects that failed to register with the SEC. Courts have also begun to put contours around the Howey analysis. With all those developments, the price of Bitcoin is hovering in the $4,000 range, leading commentators to claim a crypto winter. As we head into 2019, time will tell whether the increased clarity from enforcement authorities resulting from a year of enforcement activity will lead to a springtime thaw.
 U.S. Securities and Exchange Comm’n, In the Matter of Paragon Coin, Inc., Order Instituting Cease-and-Desits Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings, and Imposing Penalties and a Cease-and-Desist Order, Release No. 10574, Nov. 16, 2018, https://www.sec.gov/litigation/admin/2018/33-10574.pdf.
 U.S. Securities and Exchange Comm’n, In the Matter of CarrierEQ, Inc., d/b/a/ Airfox, Order Insituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings, and Imposing Penalties and a Cease-and-Desist Order, Release No. 10575, Nov. 16, 2018, https://www.sec.gov/litigation/admin/2018/33-10575.pdf.
 U.S. Securities and Exchange Comm’n, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Release No. 81207, July 25, 2017, https://www.sec.gov/litigation/investreport/34-81207.pdf.
 U.S. Securities and Exchange Comm’n, Press Release, “Two ICO Issuers Settle SEC Registration Charges, Agree to Register Tokens as Securities,” https://www.sec.gov/news/press-release/2018-264.
 Securities and Exchange Comm’n v. Blockvest, LLC and Reginald Buddy Ringgold, III a/k/a Rasool Abdul Rahim El, Case No.: 18CV2287-GPB(BLM), Order Denying Plaintiff’s Motion for Preliminary Injunction (S.D. Cal. Nov. 27, 2018).
 U.S. v. Zaslavskiy, Memorandum & Order, 1:17-cr-00647 (E.D.N.Y. Sept. 11, 2018).
Vexingly, Defendants do not address the NYAG’s independent authority to bring claims in federal district court under the CFPA, without regard to the constitutionality of the CFPB’s structure. . . . The Government has alleged adequately claims for deceptive and abusive acts or practices under the CFPA, and therefore federal question subject matter jurisdiction over the CFPA claims exists regardless of the constitutionality of the CFPB’s structure.
Amending its June 21 Order, the Court clarified that because “the appropriate remedy for Title X’s unconstitutional for-cause removal provision is invalidating Title X in its entirety, it follows that there is no statute for the NYAG to proceed under and no grant of authority to proceed.” Accordingly, the Court dismissed the NYAG’s federal law claims.
The Court also dismissed the NYAG’s state law claims. The NYAG argued that the Court should hear the remaining state law claims on the basis of federal question jurisdiction because the claims implicate the question of whether the purported assignments of VCF payouts violate the federal Anti-Assignment Act, but the Court rejected this argument, finding that the question does not “implicate broad consequences to the federal system or the nation as a whole” and can be competently addressed by state courts. Additionally, citing “judicial economy, convenience, fairness, and comity[,]” the Court rejected the NYAG’s argument that the Court should use its discretion to exercise supplemental jurisdiction over the remaining state law claims.
The debate over the constitutionality of the CFPB is certainly not over. In fact, given that the CFPB filed a Notice of Appeal on September 14, the issue of the CFPB’s constitutionality is now on appeal before several circuit courts. The NYAG could also appeal Judge Preska’s ruling, and/or it may attempt to pursue its CFPA and state law claims against the RD Entities in state court, likely depending at least in part on its assessment of the probability a state court would stay the case pending the CFPB’s appeal.
 The NYAG and the CFPB also allege that the founder and owner of the RD Entities, Roni Dersovitz, is liable for providing substantial assistance to the RD Entities in carrying out the violations. Consumer Fin. Prot. Bureau v. RD Legal Funding, LLC, No. 17-CV-890 (LAP), 2018 WL 3094916, at *4 (S.D.N.Y. June 21, 2018), appeal docketed, No. 18-2743 (2d Cir. Sept. 17, 2018).
 Order at 6-7, Consumer Fin. Prot. Bureau v. RD Legal Funding, LLC, No. 17-CV-890 (LAP) (S.D.N.Y. Sept. 12, 2018), Doc. No. 105, appeal docketed, No. 18-2743 (2d Cir. Sept. 17, 2018); see RD Legal Funding, LLC, 2018 WL 3094916, at *2.
 RD Legal Funding, LLC, 2018 WL 3094916, at *2.
 Id. at *36 (“Because Plaintiff Consumer Financial Protection Bureau is unconstitutionally structured and lacks authority to bring claims under the CFPA, the Clerk of Court shall terminate Plaintiff Consumer Financial Protection Bureau as a party to this action.”).
 Order at 1, RD Legal Funding, LLC, No. 17-CV-890 (LAP) (S.D.N.Y. Sept. 12, 2018), Doc. No. 105.
 Notice of Appeal, RD Legal Funding, LLC, No. 17-CV-890 (LAP) (S.D.N.Y. Sept. 14, 2018), Doc. No. 108. The RD Entities filed a Notice of Cross-Appeal on September 25. Notice of Cross-Appeal, RD Legal Funding, LLC, No. 17-CV-890 (LAP) (S.D.N.Y. Sept. 25, 2018), Doc. No. 111.
 See, e.g., Order, Consumer Fin. Prot. Bureau v. All Am. Check Cashing, Inc., No. 16-CV-356 (S.D. Miss. Mar. 27, 2018), Doc. No. 236, interlocutory appeal docketed, No. 18-60302 (5th Cir. Apr. 24, 2018); Consumer Fin. Prot. Bureau v. Seila Law, LLC, No. 17-CV-01081-JLS-JEM, 2017 WL 6536586 (C.D. Cal. Aug. 25, 2017), appeal docketed, No. 17-56324 (9th Cir. Sept. 1, 2017); Consumer Fin. Prot. Bureau v. Future Income Payments, LLC, 252 F.Supp.3d 961 (C.D. Cal. 2017), appeal docketed, No. 17-55721 (9th Cir. May 19, 2017); Consumer Fin. Prot. Bureau v. D & D Mktg., Inc., No. CV 15-9692 PSG (EX), 2016 WL 8849698 (C.D. Cal. Nov. 17, 2016), interlocutory appeal docketed, No. 17-55709 (9th Cir. May 18, 2017); CFPB v. CashCall, Inc., No. CV-15-7522-JFW-RAOx, 2016 WL 4820635 (C.D. Cal. Aug. 31, 2016), appeal docketed, No. 18-55479 (9th Cir. Apr. 12, 2018); cf. Order, State Nat. Bank of Big Spring v. Lew, No. 12-1032 (ESH) (D.D.C. Feb. 16, 2018), Doc. No. 78, aff’d sub nom. Order, State National Bank of Big Spring v. Mnuchin, No. 18-5062 (D.C. Cir. June 8, 2018), Doc. No. 1734973, cert. filed (Sept. 6, 2018).
We will update the blog with updates on the outcome of these cases, as well as more information on additional class action or consumer law cases the Court adds to its docket.
September saw a flurry of activity that will help further define the cryptocurrency regulatory landscape. The Financial Industry Regulatory Authority (“FINRA”) brought its first-ever crypto-fraud case and a court ruling by the U.S. District Court for the Eastern District of New York gave backing to the view that digital assets will be viewed as securities. And, in two enforcements actions, the U.S. Securities and Exchange Commission (“SEC”) branched out beyond actions against fraudulent crypto-schemes and went after crypto companies for failing to register with the SEC. The latter two cases signal that the SEC is committed to enforcing applicable securities law requirements beyond those accused of fraud, and therefore SEC enforcement activity remains an area for legitimate businesses to watch.
Last October, the U.S. Attorney’s Office in Brooklyn brought charges against Maksim Zaslavskiy alleging that Zaslavskiy made false representations in connection with two cryptocurrencies and their related initial coin offerings (“ICOs”) in violation of U.S. securities law. According to the indictment, Zaslavskiy induced investors to purchase tokens in an ICO for “REcoin” by falsely claiming that REcoin was backed by real estate investments. Similarly, the government alleged, Zaslavskiy falsely claimed that a second cryptocurrency, “Diamond,” was backed by actual diamonds when it was not.
Zaslavskiy moved to dismiss the indictment arguing that the REcoin and Diamond offerings did not involve securities under the Supreme Court’s Howey test. In a seminal ruling on the issue, the court rejected Zaslavskiy’s argument and found that a reasonable jury could conclude that the cryptocurrency transactions were “investment contracts.” Applying the federal securities laws “flexibly,” the court held that a reasonable jury could conclude that: (1) defrauded individuals invested money (2) in a common enterprise and (3) were led to expect that profits from the REcoin and Diamond enterprise would be derived solely from the managerial efforts of Zaslavaskiy. The decision was consistent with recent remarks by William Hinman, the SEC’s Director of the Division of Corporate Finance, with regard to determining whether digital assets are securities.
On September 11, 2018, FINRA filed an action against Timothy Tilton Ayre in its “first disciplinary action involving cryptocurrencies.” In its complaint, FINRA alleged that Ayre purchased the rights to a cryptocurrency called HempCoin and repackaged it into a security backed by the stock of Rocky Mountain Ayre, a worthless company Ayre owned. Ayre then marketed HempCoin as “the world’s first currency to represent equity ownership” in a publicly-traded company. FINRA alleges that Ayre defrauded investors by making false statements about Rocky Mountain’s business and failing to register HempCoin as a security.
This month also witnessed the expansion of the types of enforcement actions by the SEC, with two actions against crypto companies for failing to register. In one case—In re TokenLot—the SEC brought its first case charging that a company selling digital tokens was an unregistered broker-dealer. According to the SEC’s settlement order, TokenLot, which was a self-described “ICO Superstore,” was promoted as a way to purchase digital tokens during ICOs and also to engage in secondary trading. By soliciting investors and facilitating the sales of digital tokens, TokenLot and its two founders were required to register with the SEC as broker-dealers, but they failed to do so.
In the other case—In re Crypto Asset Management—the SEC brought an enforcement action claiming that a hedge fund manager that invested in digital assets failed to register as an investment company. According to the SEC’s order, the fund raised $3.6 million by marketing itself as the “first regulated crypto asset fund in the United States.” But it had failed to file a registration statement and therefore was operating as an unregistered investment company.
These cases further cement the view that regulators, and now courts, will continue to treat certain digital assets as securities, with all the attendant securities law requirements. As the SEC actions show, that will mean more than just enforcement actions against those using the new technology to defraud the unwitting. It will also mean that other players in the space—such as those acting as brokers and asset managers—will need to take steps to assure themselves that they are abiding by relevant securities law provisions, lest they invite an enforcement action.

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