Subject to Inquiry

Subject to Inquiry


Government Investigations and White Collar Litigation Group
Compliance, Immigration and Worksite Enforcement

Buyer Beware: Noncompliant Electronic I-9 Software Risks Customer Company Fines

ImmigrationElectronic I-9 software can be very attractive to companies looking for efficiency and ensuring compliance. Not to mention the elimination of file drawers that once housed these voluminous paper I-9 files. However, buyers beware, not all electronic I-9 software meets the federal regulations’ requirements. And the problem for well-meaning companies: ICE will still hold the company liable for the faults of the software vendor if its technology fails to comply.

Electronic I-9 usage is a growing practice among companies both large and small. The products offered in this area come in many different forms, from stand-alone Form I-9 and E-Verify platforms, to add-ons for existing HRIS software. But not all products are created equal. While some have been developed with great care to attempt compliance with the Department of Homeland Security’s (“DHS”) regulations and guidance for electronic I-9s, others appear to have been created by software engineers with no awareness of the compliance pitfalls inherent to the Form I-9.

For example, some programs insert into the electronic I-9 additional fields requesting information that is not on the approved Form I-9. This violates the regulations, because electronic I-9s must have the same data elements and content as the paper Form I-9, and no additional elements or language may be inserted. Others require an employee to input his or her social security number, which is generally only required if a company uses E-Verify. And a review of the audit trails produced by various systems reveals a broad disparity in the volume of information captured, despite the regulations’ requirement for a record of the identity and actions of anyone who has accessed the system during a given period of time.

U.S. Immigration and Customs Enforcement (“ICE”) scrutinizes these systems to ensure the integrity of the I-9 process. One item ICE frequently inspects in an audit is the employee signature process. The electronic signature regulations have strict requirements on this issue. If the electronic I-9 platform fails to meet these requirements, even if the I-9 is otherwise fully completed, the company “is deemed to have not properly completed the Form I-9.” See 8 C.F.R. § 274a.2(i)(2). This means ICE will find a company to have committed a substantive violation for any employee whose I-9 was completed in the noncompliant system, which can result in significant penalties of $935 per violation under ICE’s penalty matrix. By way of example, for a relatively small company with 200 employees, this would total a $187,000 fine.

ICE has made clear that it is an employer’s responsibility to ensure its electronic I-9 system is compliant with the law. While it may not be fair, even if the error is the vendor’s fault, the employer is the party subject to the regulations and any fines for noncompliance. Therefore, companies paying for an electronic I-9 system should employ the following measures to protect their financial and reputational interests:

  • Involve experienced immigration counsel in evaluating and selecting a compliant electronic I-9 system;
  • Beware of inexpensive software add-ons, and closely scrutinize these systems for compliance;
  • Ensure your company’s contract with an electronic I-9 vendor has a favorable indemnification clause for any fines or litigation that result from the product’s failure to conform to the electronic I-9 regulations;
  • Obtain information regarding the vendor’s financial health to ensure the indemnification clause can be enforced and collected on if it becomes necessary; and
  • Periodically review your electronic I-9 system for compliance with the regulations and developing agency guidance in this area.

Electronic I-9s can be an excellent tool to streamline the process and potentially save costs. However, companies must invest the time and resources to ensure the product they use complies with the electronic I-9 regulations, or face paying for a product that may lead to fines in the future.

Compliance, Financial Institution Regulation

Oral Arguments in PHH Case Signal Trouble for CFPB

87790287.jpgThe D.C. Circuit held oral arguments on April 12, 2016 in the case PHH Corp v. Consumer Financial Protection Bureau (CFPB), a case challenging the CFPB’s constitutionality as well as its interpretations of the Real Estate Procedures Settlement Act (RESPA), including its view that no statute of limitations applies to RESPA violations challenged by the Bureau in an administrative proceeding.   As we noted previously, CFPB Director Richard Cordray, in the Bureau’s first appellate decision, imposed a $109 million penalty on PHH for alleged RESPA violations involving improper kickbacks related to mortgage reinsurance where agreements were in place with lenders, a dramatic increase over the $6 million penalty that had been imposed by the administrative law judge at the trial level.

Several aspects of yesterday’s oral arguments signal trouble for the CFPB:

  • First, the D.C. Circuit seemed deeply concerned by the CFPB’s single-director structure.  Unlike other federal agencies governed by nonpartisan or bipartisan commissions or by a director who serves at the pleasure of the President, the CFPB is headed by a single director who is removable only “for cause.”  Moreover, the Bureau receives funding outside of Congressional appropriations, further insulating it from any effective executive or legislative supervisions.  As Judge Brett Kavanaugh pointedly observed, this arrangement concentrates huge amounts of power in one person with little oversight.  Signaling that an unconstitutional finding could be on the horizon, Judge Kavanaugh questioned to what the remedy should be if the court determined that this structure was unconstitutional.  The Bureau argued that any defect could be remedied simply by invalidating Dodd-Frank’s “for cause” requirement, such that the director would serve at the pleasure of the President.  Counsel for PHH urged the court not only to find the Bureau’s structure unconstitutional, but also to rule upon the merits of the challenge and vacate Director Cordray’s decision in the case.
  • Second, the court also seemed troubled by the Bureau’s interpretations of RESPA.  PHH has argued that it, as well as the mortgage industry as a whole, had relied upon pre-CFPB interpretations of RESPA section 8(c) by the Department of Housing and Urban Development (HUD), which it contends permitted the arrangements challenged by the Bureau in this case.  According to PHH, the CFPB turned the tables on it after the Bureau began enforcing RESPA in 2011 – and in particular with the Director’s decision in the PHH case – in a way that was unfair and violated due process.  Appearing sympathetic to this argument, Judge Kavanaugh questioned whether the CFPB gave fair notice of its interpretation, and alluded to the widespread understanding in the industry that such arrangements were legal under the prior HUD guidance.  In a colorful comment, Judge Kavanaugh analogized the CFPB’s sanction of PHH to a police officer saying “you may cross the street here,” but then giving you a $1000 ticket when you get to the other side.
  • Third, the court seemed skeptical of the Bureau’s position that no statute of limitations applies to RESPA violations challenged by the Bureau in administrative proceedings.  According to the CFPB, the statute of limitations related to RESPA does not apply to agency actions or decisions, but only applies to court or judicial proceedings.  Judge Randolph expressed skepticism with this argument, observing that in cases dating back to the 1800s, the court has said it would be an “abomination to have a federal official not bound by a statute be allowed to bring an action decades after the event.”

Although a written decision by the panel is expected this summer, it is highly likely that the disappointed party will seek review by the full D.C. Circuit, and perhaps eventually by the Supreme Court.

Financial Institution Regulation

Split Supreme Court Affirms Eighth Circuit Equal Credit Opportunity Act Ruling

780536984“The judgment is affirmed by an equally divided Court.”  One sentence, published by the United State Supreme Court on March 22, 2016 sealed the fate of two plaintiffs seeking to expand protections under the Equal Credit Opportunity Act (ECOA), 15 U.S.C. 1691 et seq., to allow spousal guarantors to bring claims against creditors for marital discrimination.  A 4-4 ruling by the Supreme Court (the first even-split Court since the death of Justice Antonin Scalia) did not set precedent, but limited the definition of “applicant” under the ECOA within the boundaries of the Eighth Circuit.

Hawkins v. Community Bank of Raymore involved two Missouri plaintiffs, Valerie Hawkins and Janice Patterson, acting as personal guarantors on loans provided to their respective husbands for a business endeavor.  The endeavor was unsuccessful, the husbands defaulted on their loans, and the bank pursued payments totaling more than $2 million.  After the bank sued the guarantors for moneys owed, including the spousal guarantors, Hawkins and Patterson filed an action against the bank.  Plaintiffs Hawkins and Patterson alleged that the bank requirement for the wives to serve as loan guarantors strictly because of their marital status violated the ECOA. The Bank argued that the term “applicant” did not extend to a spousal guarantor, but merely to the individual requesting the credit; in this instance, the husbands.  The Missouri district court ruled in favor of the bank on summary judgment and the U.S. Court of Appeals for the Eight Circuit agreed.

The ECOA, passed in 1974, strictly prohibits creditors from discriminating against a credit “applicant” on the basis of sex or marital status (the statute would be amended two years later to include prohibitions against discriminating on the basis of race, color, religion, national origin, age, receipt of public assistance, and the good faith exercise of rights under the Consumer Credit Protection Act).  One of the goals of the statute was to extend protections against credit discrimination for married woman. In 1985, under Regulation B, the Federal Reserve Board (Fed) expanded the definition of applicant to include spousal guarantors.  Under the authority of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), the Consumer Financial Protection Bureau (CFPB) was provided with rule-making authority, as well as the supervision for and enforcement of compliance under the EOCA.  Similarly to the Fed position, the CFPB extended the definition of “applicant” to include spousal guarantors.

Despite the expansion of the term applicant by the Fed and the CFPB, the Eighth Circuit agreed with the district court that the term applicant refers only to the plain language text found in the ECOA:  “the term ‘applicant’ means any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.”  Using the two-pronged approach utilized in the Supreme Court’s decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc. (1984), an agency interpretation of a statue should:  1) ask if Congress directly spoke to the issue and 2) ask whether the agency answer is based on a permissible construction of the statute.  Here, the Eighth Circuit reviewed the plain language of the ECOA, ruling that the term applicant solely related to a person requesting credit and did not extend to a spousal guarantor.

The 4-4 split, however, means that the term applicant as interpreted by the Eighth Circuit is limited to that jurisdiction.  Other courts have ruled in favor of allowing claims for marital discrimination against creditors under the ECOA in situations of spousal guarantors.  For example, the United States Court of Appeals for the Sixth Circuit found that the Regulation B definition of applicant was an allowable interpretation under the ECOA statute.  Furthermore, the United States Court of Appeals for the Third Circuit also ruled that a spousal guarantor was not barred from bringing an ECOA claim under the Regulation B amendment.

For now, the ability for spousal guarantors to bring claims under the ECOA will depend on the jurisdiction of the court involved.  We must wait until the Supreme Court is back at full-strength for this issue to be fully resolved.

Anti-Money Laundering

Casino AML: FinCEN Fines Former Sparks Nugget Management $1 Million

MoneyAttributing observed deficiencies to a lack of a culture of compliance, FinCEN has again targeted a casino for willful violations of the anti-money laundering (“AML”) provisions of the Bank Secrecy Act (“BSA”).  This time the casino in FinCEN’s sights is the Sparks Nugget, Inc. d/b/a John Ascuaga’s Nugget (“Sparks Nugget”), located in Sparks, Nevada.  In resolving this matter with FinCEN, Sparks Nugget entered into a consent agreement that, among other things, provided for a civil penalty of $1 million.

Sparks Nugget admitted to a number of flaws in its AML compliance program, including:

  • “Routine” disregard of the employee responsible for compliance by gaming personnel;
  • Failure to file SARs, including those completed and deemed worthy of reporting by a former BSA compliance officer – in fact between September 2007 and May 2011 Sparks Nugget filed no SARs;
  • Inadequate collection of patron information as required by the BSA;
  • Employment of data systems to improve customer service and minimize business risk but not to assess and minimize AML compliance risk; and
  • Exhibition of a “blatant disregard” for AML compliance, with Sparks Nugget employees describing to IRS auditors during its 2010 examination that “they did not need to monitor for suspicious activity because nothing suspicious ever happened at the Casino” – a sentiment FinCEN found remarkable given that a county official had been convicted of embezzling over $2 million and “gambling half of that at the Casino.”

The conduct cited in the consent agreement was largely detected during the 2010 IRS audit.  As FinCEN has described in other consent agreements, the state of casino compliance prior to that time was deficient industry-wide and uncovering conduct of the sort described in the consent agreement likely contributed to FinCEN’s stepped-up enforcement activity.  However, recidivism has also played a part.  As the Sparks Nugget consent agreement notes, even though the 2010 IRS examination cited deficiencies, as “recently as 2013, the Casino had failed to make changes to its operations to address many of the AML program and reporting failures identified.”  While casinos cannot change the past culture of compliance and AML deficiencies, they must invest the time and resources to address known gaps lest they be the next target of an enforcement action.


You Can Pay Your Lawyer: Supreme Court Recognizes Limits on Pretrial Asset Restraints

780536984Before the U.S. Supreme Court’s ruling last week in Luis v. United States, the government could freeze a criminal defendant’s assets before trial even if they bore no connection to the alleged crimes. With the ruling, if the restraint prevents the defendant from paying for counsel, it violates the Sixth Amendment.

Sila Luis faced federal charges for health care fraud.  The government sought a pretrial restraining order to freeze assets of hers that were not connected to the fraud. It relied upon 18 U.S.C. § 1345, a civil statute permitting the restraint of assets obtained as a result of, or traceable to, federal health care (or banking) crimes. Of relevance here, the statute also permits the restraint of assets of equivalent value. § 1345(a)(2).

The government argued that freezing Luis’ untainted assets before trial was constitutional under Supreme Court precedent. The restraint would preserve funds forfeitable upon conviction and for restitution when the fraudulently obtained funds had been transferred or spent (as allegedly happened here). The lower court ordered a restraint of up to $45 million, the equivalent of the fraud’s alleged proceeds, and the Eleventh Circuit affirmed.

Luis challenged the order because it prevented her from paying her lawyer. She said it violated her Sixth Amendment right to counsel. A majority of the Court agreed but on different rationales.  In a plurality opinion, Justice Breyer (joined by Chief Justice Roberts and Justices Sotomayor and Ginsburg) wrote that the Amendment protects Luis’ right to “use her own ‘innocent’ property to pay a reasonable fee for the assistance of counsel.” As a matter of property law, Luis owned the assets outright, and the government had no interest in the assets before conviction. This was in contrast to the government’s interests in tainted assets and distinguished this case from prior precedent (in the plurality’s view). Given that the assets were untainted and Luis owned them fully, the government’s interest in securing forfeiture at conviction and the victims’ interest in restitution “lie somewhat further from the heart of a fair, effective criminal justice system” than the right to counsel of choice.

Justice Thomas, writing separately, agreed with the conclusion – the Sixth Amendment prevents freezing a criminal defendant’s untainted assets pretrial – but on the basis of the Amendment’s text and common law alone. He found the balancing test unwarranted. Writing in dissent, Justice Kennedy, joined by Justice Alito, would have upheld the restraint under prior precedent and warned of the incentives the decision created for criminals “to spend, conceal or launder” tainted funds, because untainted funds would remain available.  Justice Kagan also dissented but wrote separately, agreeing that precedent controlled and compelled a finding against Luis but describing that precedent as “troubling.”

What implications does Luis have on asset forfeiture in the criminal context?

  • First, it allows for defendants to fight pretrial orders under this statute and others like it. The future battle lines may be over the traceability of assets and the reasonableness of attorneys’ fees.  (See also this Dealbook piece, although it is not apparent five Justices would require an analysis into the reasonableness of fees.)  The prospect of litigating these points may even deter the government from using these restraints in borderline cases.
  • Second, it protects the Sixth Amendment in the face of future legislation. As Justice Breyer’s opinion notes, this limitation prevents a greater erosion of the right to counsel in the event Congress passes more statutes authorizing pretrial asset restraints for other offenses.
  • Third, it could affect interpretations of other existing statutes. For example, the Racketeer Influenced and Corrupt Organizations Act (RICO) allows for the forfeiture of untainted assets upon conviction.  The Fourth Circuit has interpreted RICO to allow for the pretrial freezing of such assets. See In re Billman, 915 F.2d 916 (4th Cir. 1990).  (See Amici Curiae brief of NACDL et al. in Luis.)
  • Fourth, the ruling may impact state forfeiture regimes, as Justice Kennedy’s dissent notes, frustrating states’ attempts to collect untainted assets when tainted assets are moved out of reach. His dissent portends other “far-reaching implications,” like jeopardizing the constitutionality of pretrial asset restraints if they impact other rights (e.g., free speech) or in other contexts (e.g., tax).

But the ruling is a victory for those in the defense world and a reminder that government power has limits.  It reaffirms the right to counsel and the principle of innocent until proven guilty – and what those mean in practice (the freedom to use innocent funds to pay for counsel before conviction).

Financial Institution Regulation, Uncategorized

CFPB Accused of Discriminating Against Its Own Employees

iStock_000004688619Medium1Some of the recent items on the Consumer Financial Protection Bureau’s (CFPB) agenda have involved efforts to eliminate alleged discriminatory disparities amongst auto lenders and in connection with other private companies as well. However, the CFPB itself has been accused of discrimination under its own roof.  Specifically, the CFPB is accused of discriminatory pay between minority and non-minority employees.

During a hearing of the House Financial Services Committee at which CFPB Director Richard Cordray testified, Representative Jeb Hensarling of Texas, the chair of the committee, presented a study commissioned by the committee showing that the CFPB pays African-American employees approximately $16,000 less than their white counterparts.  Director Cordray responded to the question by explaining that he did not know how the committee conducted its analysis, which Representative Hensarling had explained followed the same disparate-impact framework that the CFPB uses when determining whether private businesses discriminate in their lending practices.

This is not the first time employment discrimination within the CFPB has been raised. The issue first drew the attention of Congress in April 2014.  Congress held its fourth hearing on the subject in June 2015.  At that hearing, two witnesses testified that the situation had actually grown worse since it had first been brought to Congress’s attention.  That hearing involved contentious accusations from Democrats, who accused the Republican majority of simply using the accusations against the CFPB to attack an agency that Republicans dislike.  Republicans rejected those accusations, explaining that the committee would be derelict if it did not look into the reports of discrimination and retaliation within a government agency.  Republicans pointed out that the CFPB had a higher per capita number of EEOC complaints than other federal agencies but that it did not appear that the CFPB leadership was taking the allegations seriously.

Congress has been investigating this issue for more than two years. It appears that Congress and Chairman Hensarling continue to view the CFPB’s alleged internal discrimination in its employment practices as a significant issue.  It is unclear whether there will be a lawsuit filed regarding the alleged discrepancy in pay or whether any specific legislative action is forthcoming.  But at the very least, these allegations cast the CFPB in an unflattering light, in which the CFPB is accused of playing by a different set of rules than those it seeks to impose on private entities subject to its jurisdiction around the country.

Anti-Bribery and Corruption

The SFO’s “ongoing” investigation into Alstom – Further Charges

We originally wrote in 2014 about charges that had been brought in September of that year by the UK’s Serious Fraud Office against the French Multinational’s UK subsidiary, Alstom Network UK Ltd, and two former employees and British nationals for corruption offences (under pre-Bribery Act era legislation) relating to transport projects in India, Poland, and Tunisia.

This was to be the first of a number of charges that have resulted from the SFO’s investigation into Alstom (which started close to 7 years ago and is described by the SFO as “ongoing”), the most recent of which was announced just today:

  • In December 2014, corruption charges were brought against another of Alstom’s UK entities, Alstom Power Ltd and two former employees, in connection with the refurbishment of a Lithuanian power plant.  The trial in this matter is expected to start in January 2017.
  • Further and separate ‘corruption’ and ‘conspiracy to corrupt’ charges were announced in April and May of 2015, against Alstom Network UK Ltd, and two former employees – a British national who had been working as a business development director for Alstom in France, and a French National  who had been a Senior VP, Ethics and Compliance. These charges concern the supply of trains to the Budapest Metro between January 2006 and October 2007.
  • Today, the SFO confirmed that another British national, who had been the Alstom Country President for the UK and Managing Director of Alstom Transport UK & Ireland, has been charged with offences of ‘corruption’ and ‘conspiracy to corrupt’ in connection with the supply of trains to the Budapest Metro, and will face trial alongside Alstom Network UK Ltd, and the two other individuals previously charged. The last indication from the SFO, prior to today’s news, was that the trial in this matter was expected to start in May 2017.

With some trials only set to commence next year this is a lingering saga, which has its origin in an investigation commenced by the Swiss Attorney General’s Office in October 2007, that will see at least a decade past before reaching any finality.

Enforcement and Prosecution Policy and Trends

Seventh Circuit Eliminates “Consent Once Removed” Doctrine

Law-books-iStock_000002891011LargeIf a business invites an employee, customer, or business associate onto its premises, has it consented to a search by government agents?  Under the “consent once removed” doctrine, the answer may be yes if the invited individual is secretly working with the government and sees evidence of a crime.  Although the doctrine was first used by the United States Court of Appeals for the Seventh Circuit in a case involving an undercover agent identifying heroin in an apartment, it has subsequently been extended to also cover individuals cooperating with the government.  It has also been used in cases involving regulatory crimes such as possession of eagle feathers and breeding golden retrievers without a license.  Accordingly, all businesses may have reason to be concerned that anyone invited onto the premises could be working with the government to identify regulatory offenses and therefore allowing police to immediately conduct a search without a warrant.

In a recent opinion involving a search for drugs in a garage, however, the Seventh Circuit eliminated the consent once removed doctrine it had created.  The basis of the doctrine was the conceit that if a person working with the government had been given permission to enter a location, the government could be deemed to have received the same permission.  The doctrine had been criticized for, among other reasons, being contrary to the public understanding of consent.  After all, as Judge Posner noted in his opinion while calling the doctrine “at first glance . . . absurd,” inviting a friend to a party does not give that friend permission to bring along anyone else he chooses.  The Seventh Circuit ultimately determined that all of its previous applications of the doctrine were equally well supported by other exceptions to the general warrant requirement, and held that the doctrine did not exist.

In the three states within the Seventh Circuit, then, business and individuals have less cause to fear that inviting employees and customers onto their premises will effectively consent to a warrantless search, but the doctrine remains potentially good law in states within other federal circuits.  The Sixth Circuit, for example, has applied the doctrine in several cases and, as noted above, considered whether it might apply (before rejecting application on narrow factual grounds) when a sheriff’s deputy investigated the potential unlicensed breeding of dogs.  The Seventh Circuit’s decision creates a circuit split with at least two other federal courts of appeals, and with it, the potential for Supreme Court review.

Election and Political Law, Enforcement and Prosecution Policy and Trends, Fraud, Deception and False Claims, Securities and Commodities


As cGovernment-Regulatory-and-Criminal-Investigations.jpgitizens of a nation founded on the rule of law, we depend upon law enforcement and prosecutors to protect us from harm and from those who infringe our liberty.  In exchange for this protection, we permit these public servants to exercise authority and at times great power.  Thankfully, and it should go without saying, most law enforcement authorities honor the public’s trust by serving with integrity and by adhering to the highest of ethical standards.

But what is one to do on those rare occasions when prosecutors and law enforcement agents exceed and abuse their considerable power and authority?  Fortunately, victims of such overreaching have at least some opportunities for redress.  And a recent decision out of the Southern District of New York reflects one such attempt.

The backdrop of the case sounds like an episode of Billions: federal prosecutors in Manhattan target a hedge fund owner and allegedly rely on false statements to obtain a search warrant so they can—after tipping the media—conduct a highly-public raid that causes a hedge fund’s collapse.  But this actual legal drama continues to play out in New York, and as reported by Law360 and numerous others, the matter just took another interesting turn, as Judge William H. Pauley III allowed hedge fund owner David Ganek’s lawsuit against U.S. Attorney Preet Bharara and various federal prosecutors and FBI agents to continue.

Ganek’s lawsuit is known as a Bivens action.  In Bivens v. Six Unknown Named Agents of Federal Bureau of Narcotics, the Supreme Court held that a victim of a Fourth Amendment violation by federal agents had a right to pursue damages from those agents despite any statute expressly conferring such a right.  See 403 U.S. 388, 397 (1971).  In so holding, the Court spoke directly to the government’s power and the attendant harm that such power can cause when abused:

Respondents seek to treat the relationship between a citizen and a federal agent unconstitutionally exercising his authority as no different from the relationship between two private citizens. In so doing, they ignore the fact that power, once granted, does not disappear like a magic gift when it is wrongfully used. An agent acting—albeit unconstitutionally—in the name of the United States possesses a far greater capacity for harm than an individual trespasser exercising no authority other than his own.  Id. at 391-92.

As such, when government abuse results in a clear violation of constitutional rights, the victims of that overreach may attempt to avail themselves of the rare occasion where government agents, under certain circumstances, may be unable to shield themselves via sovereign immunity.

These cases are few and far between.  This is appropriately so considering that the overwhelming majority of prosecutors and agents exercise sound judgment and appropriate discretion.  But courts have permitted such actions in cases like Bivens involving unlawful searches and seizures, as well as in cases involving violations of other crucial constitutional rights.  See, e.g., Davis v. Passman, 442 U.S. 228, 230 (1979) (Fifth Amendment violation based on discrimination in public employment); Carlson v. Green, 446 U.S. 14, 18 (1980) (Eighth Amendment violation by prison officials); Engel v. Buchan, 710 F.3d 698, 710 (7th Cir. 2013) (permitting claim for violation of due process related to Brady obligations).

Although Bivens actions are outliers, their continued viability is perhaps more important than ever.  This is an era of increasing enforcement by the government, whether it is the Justice Department’s newfound emphasis on individual prosecutions or any of the myriad investigations and actions brought by the assorted agencies covered by this blog.  This could potentially lead to an increase in governmental abuse of power and a curtailment of individual liberty.  It is a risk worth monitoring and defending against.

From Theory to Practice

Judge Pauley’s decision in David Ganek’s lawsuit against U.S. Attorney Bharara and other prosecutors and agents in the Southern District of New York—albeit at a preliminary stage of litigation—proves that Bivens actions still have potential currency.  It is important to note that this decision is simply a denial of Mr. Bharara’s and the other defendants’ motions to dismiss the lawsuit.  And at this stage, the Court had to accept all of Ganek’s allegations as true.  Ganek has a long road to travel to prove these allegations before there can be any finding of liability, and it is likely that at least several defendants will eventually be dismissed.

But it is a significant hurdle to have overcome and it is an intriguing case.  According to Ganek’s complaint, and as summarized in Judge Pauley’s opinion, the FBI in late 2010 executed coordinated raids on numerous hedge funds, including Ganek’s Level Global Investors, a successful fund that employed 60 people and managed $4 billion in assets.  As noted by the Court, “[t]hese raids sent shockwaves through Wall Street: investment bankers and traders were indicted, and multi-billion businesses—including Level Global—were shuttered.”  Order at 1.  These apparent triumphs by the government, however, have been undermined by more recent events.  Judge Pauley explains: “five years later, a different picture has emerged.  The Second Circuit rejected the Government’s theory of insider trading.  Criminal convictions were vacated, and indictments dismissed.  And in a nearly unprecedented role reversal, the SEC agreed to disgorge monies it collected in connection with consent judgments against various hedge funds, including Level Global.”  Id.

Within this shifting landscape, Ganek brought a civil action against government officials for violating his Fourth and Fifth Amendment constitutional rights.  “More specifically, Ganek alleges that the affidavit supporting the Government’s request for a search warrant of Level Global and his office contained deliberate misrepresentations that were later exposed by sworn trial testimony of an FBI agent and a government informant.” Id.

Ganek’s Complaint Adequately Pleaded a Violation of His Fourth Amendment Rights

In assessing Ganek’s complaint, the Court acknowledged that the defendants—all government officials—were entitled to qualified immunity if they could establish that Ganek failed to plausibly plead that the defendants personally violated his constitutional rights or that those rights were not clearly established at the time.

Although Judge Pauley dismissed certain claims, he found that Ganek adequately alleged that the defendants violated his Fourth Amendment rights because the warrant relied upon materially false statements and thus was not properly based on probable cause.  And while the Court seemed more skeptical of Ganek’s separate “failure to intercede” claim, which alleged that the defendants failed to intervene to prevent harm from occurring to him, the Court permitted it to proceed against all defendants, including supervisors like Mr. Bharara.  In that context, Judge Pauley observed that “[u]nquestionably, there are circumstances where government agents would be ethically and constitutionally obligated to correct misrepresentations in warrant applications,” and that “[c]ertainly, government attorneys are ethically obligated to limit the collateral damage resulting from government investigations.”  Order at 28.  These are important reminders of the heightened ethical standards we demand from agents and prosecutors.

The ruling of course only permits the litigation to continue to discovery, and the Court hinted at times that certain claims will face tougher obstacles at the summary judgment phase or beyond.  It may well be that the defendants will be vindicated, and so we caution against making too much of this case at present.  But the fact that such an action can survive dismissal at all proves that the theory of the Bivens suit is alive and that it continues to provide an important, even if rarely used, check on the abuse of government power.

Compliance, Enforcement and Prosecution Policy and Trends, Financial Institution Regulation

CFPB’s First-Ever Data Security Enforcement Action

Earli77006468.jpeger this month, the Consumer Financial Protection Bureau (CFPB) made headlines by bringing its first enforcement action in the data security space.  Dwolla, Inc., an Iowa-based online payment processor, was the CFPB’s target.  According to CFPB Director Richard Cordray, “With data breaches becoming commonplace and more consumers using these online payment systems, the risk to consumers is growing.  It is crucial that companies put systems in place to protect this information and accurately inform consumers about their data security practices.”

In order to set up an account and move money online, Dwolla customers provide Dwolla with sensitive personal information, including address, telephone number, social security number, and bank account and routing information. According to the consent order, Dwolla made a variety of misrepresentations about the manner in which it secured such information.  For instance, Dwolla falsely claimed that it encrypts all personal information and it also misrepresented that its data security procedures exceed industry standards.  To the contrary, the CFPB found that Dwolla did not encrypt all sensitive personal data and that it also “failed to employ reasonable and appropriate measures to protect data obtained from consumers.”  Pursuant to its authority to prohibit unfair, deceptive or abusive acts and practices, see 12 U.S.C. Code § 5536(a)(1), the CFPB consent order requires Dwolla to, among other things:

  • cease misrepresenting its data security practices;
  • adopt and implement reasonable and appropriate data security measures;
  • pay a $100,000 civil fine to the CFPB’s Civil Penalty Fund; and
  • meet various reporting and compliance monitoring requirements.

This enforcement action makes it clear that the CFPB is closely monitoring data security practices of companies that offer financial products and services.  It should also serve as a warning to any business that handles consumers’ personal and/or financial account information.  The following are some key takeaways:

  • Companies without strong written data security procedures should promptly review and implement appropriate data security protocols.
  • Companies should analyze their marketing materials to ensure that their data security representations align with their internal practices.
  • Even if a company hasn’t had a data security breach, it should still be mindful of the CFPB’s watchful eye.
  • Both the CFPB and the Federal Trade Commission (FTC) have authority and have now brought data security enforcement actions pursuant to their ability to prohibit unfair and deceptive acts.