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February 24, 2022

Actions in the Federal Courts – February 2022 Update

Spotlight on the Supreme Court

Every term, the U.S. Supreme Court decides cases addressing not just major social policies such as abortion and gun control but also financial and economic issues that can profoundly affect the lives of virtually all Americans—anyone with a bank account, credit card, mortgage loan, or retirement fund. We regularly issue reports highlighting these critically important economic and financial cases. Read our preview of the current term here, and our recap of the last term here. 

This term, the Court’s docket includes a number of cases addressing financial regulation, the rights of investors to seek relief in court, and administrative law—a seemingly technical legal topic that can nevertheless profoundly affect the ability of regulatory agencies to carry out their mission of protecting the public from financial frauds and other threats to public health, safety, and welfare. 

Below are the two other cases of particular interest that we’re watching that the Court may decide any day:  

  • American Hospital Assoc. v. Becerra, 967 F.3d 818 (2020) (S. Ct. Docket No. 20-1114) (oral argument held November 30, 2021) – How much deference will the Court afford to an agency’s interpretation of the law? 
  • Badgerow v. Walters, 975 F.3d 469 (5th Cir. 2020) (S. Ct. Docket No. 20-1143) (oral argument held November 2, 2021) – Which courts (state or f

Other Cases of Interest in the Federal Courts

CLEARING THE WAY FOR PREDATORY RENT-A-BANK SCHEMES – Two related decisions issued on February 8, 2022, by the federal district court in the Northern District of California, upholding an OCC rule and a similar FDIC rule that clear the way for rent-a-bank schemes insulating nonbanks from state consumer protection laws (California v. FDIC, 2022 WL 377403 (N.D. Cal. Feb. 8, 2022); see also California v. OCC, No. 4:20cv5200, Order Resolving Cross Motions for Summary Judgment (N.D. Cal. Feb. 8, 2022)).

  • Why it matters: For years, national banks and federally insured state-chartered banks have been able to override state consumer protection laws that prohibit outrageously high interest rates on consumer loans. Under the doctrine of preemption, as long as a federally regulated bank’s interest rates comply with the laws in their home state, they can charge those same rates to borrowers in every other state regardless of the interest rate limits applicable in those other states.  However, in 2015 the Second Circuit ruled that this preemption of state law does not apply to an independent, nonbank debt collector that buys loans from federally regulated banks. Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015). The OCC and the FDIC adopted rules supposedly aimed at eliminating the uncertainty created by the Madden case.  Those rules essentially override the Madden decision by flatly providing that interest on a loan that is permissible under federal law shall not be affected by the sale, assignment, or other transfer of the loan.  
  • In two separate actions, various states challenged the rules in federal court, driven by the well-founded concern that non-bank lenders can form sham ‘rent-a-bank’ partnerships with national banks designed to evade state law. Under the rent-a-bank schemes, a third-party nonbank teams up with a federally regulated bank; the bank originates the loan in question but subsequently transfers the loan to the third-party; and the third-party continues to charge the bank’s interest rate, even if that rate exceeds an interest rate cap in the state where the third-party is located. 
  • What we did: Better Markets filed a comment letter arguing that this regulatory approach would help expose millions of consumers to gouging, sky-high interest rates. 
  • Status: Unfortunately, the district court rejected the states’ challenges in both cases.  The court held that the rules were not manifestly contrary to the applicable federal statutesthe National Bank Act and the Federal Deposit Insurance Actand that they were not arbitrary and capricious.  The upshot is that nonbank financial firms—ranging from online lenders to payday loan sharks and debt collectors—have a clear path to follow as they pursue their “rent-a-bank” schemes, piggybacking on the charters of federally regulated banks to evade state laws.  

SEEKING TO HOLD MARKET MANIPULATORS ACCOUNTABLEA class-action lawsuit on appeal in the 10th Circuit (In re: Overstock Securities, et al.) in which investors seek to recover damages for a brazen market manipulation scheme allegedly perpetrated by Overstock’s CEO, Patrick Byrne, and others.  The plaintiffs have alleged, among other frauds, that Byrne artificially inflated the stock price of Overstock by orchestrating what’s known as a “short squeeze,” a series of actions that forced short sellers to buy stock to cover their positions, thus driving up the price of the stock.  They allege that Byrne succeeded; cashed in his own shares at inflated prices, reaping tens of millions of dollars; and essentially admitted the manipulation.  But the district court in Utah rejected the claims as a matter of law, relying in part on the argument that an essential element of market manipulation is deception, something the court deemed was absent in this case given the overt nature of the defendants’ conduct. 

  • What we did: On February 2, 2022, Better Markets, joined by the Consumer Federal of America, filed an amicus brief explaining not only the legal errors in the district court’s decision but also the more far-reaching harm that the decision threatens unless it is reversed.  
  • In our brief, we showed that the securities laws and rules were written broadly to cover fraud and manipulation as two separate forms of illegal conduct, driving home the point that manipulation schemes distort share prices and inflict harm on investors regardless of whether they were carried out using lies or traditional forms of deceit. We also highlight the damaging impact that the district court’s decision will have unless it is reversed. The plaintiffs will almost certainly be left without any remedy for their losses, and over the long-term, market manipulators will be able to fashion schemes that skirt the law but nevertheless wreak havoc in the markets and inflict untold harm among investors.  
  • Why it matters: Our securities markets are already viewed as unfair and rigged in many ways, and a ruling that immunizes a broad swath of market manipulation schemes is the last thing that investors or the markets really need.  That’s why we urged the Tenth Circuit to reverse the district court and allow the claims to be heard. 

ATTEMPTING TO FORCE ARBITRATION ON SHAREHOLDERS – A lawsuit in New Jersey federal district court (The Doris Behr Irrevocable Trust v. Johnson & Johnson) attempting to force public company shareholders into mandatory arbitration, a biased, secretive, and anti-consumer forum.

  • Why it matters: Mandatory or forced arbitration takes away the rights of consumers and investors to seek relief in open court before unbiased judges when they are ripped off by banks and corporations. These typically fine-print clauses force defrauded investors and other victims into secret, unfair, and biased arbitrations. Those proceedings are generally run by an industry self-regulatory organization that, no surprise, consistently favors the industry. Investors and consumers rarely obtain meaningful recovery. 
  • In this case, a federal court will decide if a public company can be forced to impose mandatory arbitration not just on its customers but also on any shareholders with claims against the company for fraud, mismanagement, or other breaches of duty. If the court gets this wrong and allows this dramatic—and dramatically bad—legal development, then the toxic effects of mandatory arbitration will be further broadened, incentivizing corporate lawbreaking by limiting the legal rights of shareholders to enjoin it and hold those responsible accountable. Given that shareholders are the owners of public companies, who rely on legal actions as one important way to protect their investments and police management, such a decision could have a significant and adverse impact on capital formation and allocation. 
  • Status: In a positive development this summer, the court granted defendant Johnson & Johnson’s motion to dismiss. However, it also granted the plaintiff “one final opportunity to file an amended complaint.” The third amended complaint and Johnson & Johnson’s motion to dismiss it are now before the court, and we hope to see a decision from the court soon. 

TRYING TO MAKE THE MARKETS LESS RIGGED – An industry challenge in the D.C. Circuit (Citadel Securities LLC v. SEC) to the SEC’s approval of a new type of trading order that helps protect investors from predatory trading activity by sophisticated high-frequency trading firms.

  • What we did: In our brief, we explained the advantages HFTs enjoy and the harm they inflict on investors. We also showed how the D-Limit Order, which automatically resets its price when HFTs are about to strike, helps neutralize the HFTs’ unfair advantage. Fortunately for investors, the SEC’s mission is to protect investors and the integrity of the markets, not Citadel’s coveted business model, so it approved the IEX order type in accordance with the securities laws and all the requirements surrounding rulemaking. We urged the Court to affirm the SEC’s decision.  
  • Why it matters: The outcome of this case will have a huge impact on the ability of everyday investors to protect their money from being siphoned away by high frequency trading (HFT) firms like Citadel. That’s why we weighed in to help defend a new order type developed by IEX, an investor-friendly exchange that has earned our praise since it was founded in 2016. The SEC rightly approved that order type late last year, but Citadel is fighting to protect its ability to generate near-certain profits—to print money in effect—through privileged data access and sophisticated trading technology. It has asked the D.C. Circuit to invalidate the SEC’s approval of the IEX order. 
  • Status: The case was argued before the D.C. Circuit on October 25, 2021, and we’re watching for the Court’s decision on the merits. 

SEEKING TRANSPARENCY ABOUT DIVERSITY ON CORPORATE BOARDS – A challenge in the 5th Circuit (Alliance for Fair Board Recruitment v. SEC) to the SEC’s approval of a new rule issued by the NASDAQ that would help advance the cause of racial justice.

  • Why it matters: The NASDAQ, a major national stock exchange that lists over 3,000 company stocks, recently took a major step forward on the racial injustice front by issuing a new rule that would require each company listed on the exchange to publicly disclose the self-identified gender, racial, and LGBTQ+ status of each member of the company’s board of directors. The rule also requires each listed company to have, or explain why it does not have, at least two members of its board who are diverse, including at least one director who self-identifies as female and at least one director who self-identifies as an underrepresented minority or LGBTQ+. 
  • The SEC approved the rule in August and the petitioner, the “Alliance for Fair Board Recruitment,” promptly challenged it in the U.S. Court of Appeals for the Fifth Circuit. The Alliance is based in Texas and its website simply declares that its mission is to “promote the recruitment of corporate board members without regard to race, ethnicity, sex and sexual identity” and further that “The identities of our members are confidential.” Their decision to seek review of the NASDAQ diversity disclosure rule in the Fifth Circuit was clearly a strategic choice because that federal appellate court is widely regarded as ideologically conservative and pro-business. A victory in the case by the Alliance will invalidate an important measure that provides key insights into the composition of thousands of boards of directors, information that would undoubtedly and ultimately lead to greater diversity in America’s board rooms and progress toward bringing minorities into the economic mainstream.  
  • Status: Briefing in the case is underway. The Alliance is arguing that the rule violates the petitioners’ right to equal protection under the Fifth Amendment to the U.S. Constitution, that it also violates the First Amendment by requiring disclosure of controversial information, and that the SEC lacked authority under the securities laws to approve the rule. Briefing is underway. 

ATTEMPTING TO TEAR DOWN EVEN MODEST PROTECTIONS FOR RETIREMENT SAVERS – Two new challenges to the Department of Labor’s December 2020 best interest rule, Federation of Americans for Consumer Choice v. DOL (N.D. Tex. filed Feb. 2, 2022) and American Securities Ass’n v. DOL (M.D. Fla. filed Feb. 9, 2022).

  • Why it matters: For decades, many financial advisers subject to powerful conflicts of interest have been enriching themselves at the expense of their clients by recommending overpriced, poor-performing, and overly risky investment products.  The damage has amounted to tens of billions of dollars a year, a cost that is especially harmful to everyday Americans struggling to save and invest for a decent and dignified retirement.  Much of the damage has been done because old Department of Labor rules have long provided that the law protecting investors from conflicted advice doesn’t apply when an adviser tells a client they should roll their entire nest egg out of a 401(k) account and into other investments, such as annuities that reward advisers with huge commissions.  For over a decade, the DOL has been trying to develop new rules to close those gaps and provide better protections for retirement savers. In 2016, it issued a set of strong rules but they were struck down by the U.S. Court of Appeals for the Fifth Circuit—the only court, among half a dozen federal courts to hear challenges to the rules, that accepted industry’s arguments.  
  • Under the Trump Administration, in December 2020, the DOL came up with a watered-down set of protections that left major gaps intact.  However, those rules at least made clear that “rollovers” could be covered under the law, potentially requiring an adviser to make such recommendations only if they were in the client’s best interest. 
  • Status: Members of the financial services industry, and insurance agents, in particular, have challenged those provisions in federal courts in Texas and Florida.  They are fighting desperately to protect an enormous revenue stream by arguing that the DOL lacks the authority to subject rollover recommendations to the “best interest” standard. The cases are just getting underway.  Meanwhile, Better Markets and others advocate for strong investor protection hope and expect that this Spring, the DOL will issue new rules that finally close huge loopholes in the fiduciary standard that should apply to all advisers providing advice to retirement savers, as Congress intended under ERISA. 


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