Bank’s Mishandling of Lending Program Might Have Violated Minnesota Consumer Fraud Act

This posting was written by Jody Coultas, Editor of CCH State Unfair Trade Practices Law.

Institutional investors stated Minnesota consumer protection claims against Wells Fargo Bank, N.A. for allegedly misrepresenting its securities lending program, according to the federal district court in St. Paul, Minnesota.

Wells Fargo held participants’ securities in custodial accounts and made temporary loans of those securities to brokers, and marketed that the program would return a profit for participants. The investors alleged that Wells Fargo failed to properly monitor and manage the program, failed to disclose material information about the status of the program, and failed to put the interests of investors ahead of the interests of the bank.

To state a Minnesota Consumer Fraud Act (CFA) claim, the investors needed to show they were consumers and that the suit benefitted the public.

The investors stated CFA claims against Wells Fargo, according to the court. Any person injured by a violation of the CFA may bring a civil action and recover damages. That the investors were sophisticated investors did not preclude them from bringing the claims. More than 100 investors were harmed by Wells Fargo’s marketing. Failure to seek injunctive relief does not preclude a plaintiff from satisfying the public benefit requirement.

The investors also sufficiently stated Minnesota Unfair Trade Practices Act (UTPA) and Deceptive Trade Practices Act (DTPA) against Wells Fargo, according to the court. The investors sufficiently alleged that Wells Fargo misrepresented the true quality of the program, the representations were ongoing, and that the misrepresentations occurred in connection with the sale of merchandise under the UTPA. The investors also showed a continuing wrong under the DTPA.

The decision is Blue Cross and Blue Shield of Minnesota v. Wells Fargo Bank, N.A., CCH State Unfair Trade Practices Law ¶32,462.

Further information regarding CCH State Unfair Trade Practices Law appears here.

California Class Certified in Suit Over Dell Price Advertising

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

In a suit against Dell Inc. under California consumer protection laws, a class was certified consisting of all citizens of the State of California who on or after March 23, 2003 purchased Dell-branded products advertised with a “Slash-Thru” price—a discount from a former sales price—via the Home & Home Office segment of Dell's website, the federal district court in San Jose has ruled.

Reliance

A key question was whether class members' reliance on Dell's allegedly false representations was susceptible to common proof.

In California, “a presumption, or at least an inference, of reliance arises wherever there is a showing that a misrepresentation was material,” under the California Supreme Court's 2009 decision In re: Tobacco II Cases (CCH Advertising Law Guide ¶63,423).

There was no dispute that the alleged misrepresentations were communicated to all class members, because the representations were made at the point of sale as part of a standardized online purchasing process, the court observed.

Dell's marketing expert contended that while some purchasers might attach importance to a discount off Dell's list price, others would base their decision on wholly unrelated factors. But, under California law, the purchasers did not need to establish that each and every class member based his or her decision on the represented discounts.

The purchasers' common evidence that the representations were material satisfied California's reliance presumption, as well as the federal class action requirement that issues of law and fact common to class members predominate over individual issues, the court determined.

Exclusions from Class

The court excluded from the class purchasers exposed only to Dell's starting “Starting Price” promotions and purchasers through the Small and Medium Business (SMB) segment of Dell's website.

The two named plaintiffs' exposure to alleged misrepresentations regarding a former sales price were not typical of the purchases made after Dell changed to “Starting Price” promotions in mid-2007, the court found. The named plaintiffs failed to satisfy the class action typicality requirement with respect to the later purchases.

As to purchases made through Dell's SMB segment, a purchaser of a large number of computers for a business, or even the purchaser of a single $20,000 commercial server, was unlikely to have a substantially similar purchasing experience as the purchaser of a single laptop for personal use.

It would be difficult to make the same inference of reliance regarding the relevant offers and alleged falsity in the context of Dell's SMB segment, the court said.

The opinion in Brazil v. Dell Inc. will be reported at CCH Advertising Law Guide ¶64,130.

Mortgage Relief Scheme Violated New Jersey Consumer Fraud Act

This posting was written by Jody Coultas, Editor of CCH State Unfair Trade Practices Law.

A real estate lawyer and his client engaged in a fraudulent mortgage relief scheme that violated the New Jersey Consumer Fraud Act (CFA) by misleading mortgage holders, according to the U.S. Bankruptcy Court in Trenton, New Jersey.

The mortgage holders filed for Chapter 13 bankruptcy in an attempt to save their home from foreclosure. They then entered into an agreement with the real estate lawyer’s client, Frederick Cleveland, to sell the house for $555,000. Cleveland was to pay off $510,000 on the two existing mortgages on the house and another $46,000 to the mortgage holders to pay for the Chapter 13 plan.

Instead, Cleveland borrowed $646,400 and took $100,000 for himself. The mortgage holders were unaware that the monthly payments they made to Cleveland were not being used to service the financing and did not understand that if Cleveland failed to pay the new lender, they could lose their home.

Misrepresentations

In preparing the closing documents, the real estate lawyer misrepresented the sale price and falsely told the mortgage holders that Cleveland was investing his own cash.

Although the mortgage holders were not going to receive any money, the real estate lawyer told them they would receive payments from a trust account. Cleveland eventually defaulted on the new loan and the lender initiated foreclosure proceedings.

The real estate lawyer and Cleveland violated the CFA by making false and misleading statements regarding a mortgage relief plan, according to the court. The CFA prohibits the use of any unconscionable commercial practice, deception, or fraud.

Sophisticated Consumer Exception

Although Cleveland argued that the mortgage holders could not avail themselves of the CFA because they were sophisticated parties and could not be misled, the court found that there was no statutory exception for sophisticated consumers.

Even if a business practice was not fraudulent or deceptive, that practice could nevertheless violate the CFA if it was unconscionable. Here, Cleveland found the mortgage holders in a very vulnerable position and took advantage of them for personal gain.

Damages, Attorney’s Fees

An award of actual damages, attorneys’ fees, and other appropriate equitable relief was available to the mortgage holders. The mortgage holders suffered an ascertainable loss because the new mortgage was $646,400, even though they had owed only $529,608. Thus, the damage award was over $350,000, treble the difference between the loss and what the mortgage holders actually received.

The court noted that the mortgage holders could submit proof of their attorneys’ fees and costs, as well as seek other equitable remedies. The real estate lawyer was held jointly liable for the damages, costs, and fees because he conspired with his client to violate the CFA.

The mortgage holders' lawyer stated that this was the first reported case in New Jersey concerning mortgage foreclosure rescue schemes.

The decision is In re O'Brien, CCH State Unfair Trade Practices Law ¶32,012.

LifeLock Agrees to Settle FTC, State Suits Challenging Identity Theft Protection Claims

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Identity theft service LifeLock, Inc. has agreed to pay $12 million and to refrain from making deceptive claims to settle FTC and state charges that it misrepresented its services. The company also is required to take more stringent measures to safeguard the personal information collected from customers.

In addition to LifeLock, the FTC complaint named co-founders Richard Todd Davis and Robert Maynard, Jr., who will be barred from making the same misrepresentations as LifeLock.

Since 2006, LifeLock’s ads have claimed that it could prevent identity theft for consumers willing to sign up for its $10-a-month service, according to the FTC.

“While LifeLock promised consumers complete protection against all types of identity theft, in truth, the protection it actually provided left enough holes that you could drive a truck through it,” said FTC Chairman Jon Leibowitz. Lifelock's services are widely advertised by displaying the CEO’s Social Security number on the side of a truck.

The FTC challenged claims that LifeLock would prevent unauthorized changes to customers’ address information, that it constantly monitored activity on customer credit reports, and that it would ensure that a customer always would receive a telephone call from a potential creditor before a new account was opened.

LifeLock allegedly misrepresented its own data security. The FTC contended that LifeLock’s data was not encrypted, and sensitive consumer information was not shared only on a “need to know” basis.

According to the agency, the company’s data system was vulnerable and could have been exploited by those seeking access to customer information.

The FTC and state settlements with LifeLock bar deceptive claims and prohibit the company from misrepresenting the “means, methods, procedures, effects, effectiveness, coverage, or scope of any identity theft protection service.” They also bar misrepresentations about the risk of identity theft and the manner and extent to which LifeLock protects consumers’ personal information.

The settlements further require LifeLock to establish a comprehensive data security program and obtain biennial independent third-party assessments of that program for twenty years.

A press release concerning FTC v. LifeLock, Inc., FTC File No. 072 306, announced March 9, 2010, appears here on the FTC website. Text of the complaint and proposed final judgment appear here.

Further details will appear in the CCH Trade Regulation Reporter.