Better Markets continues to watch for decisions in several important pending cases as well as track key issues in the courts. These are the important cases involving financial regulation:
A lawsuit (Thomas v. SEC) challenging the SEC’s flawed whistleblower rule changes adopted by the Trump administration, which threaten to reduce incentives for whistleblowers to come forward with critical evidence of securities law violations.
- Why it matters? The Dodd-Frank Act required the SEC to establish a strong whistleblower program to encourage people, particularly insiders at financial firms, to come forward with often difficult to obtain evidence of illegal conduct. The program entitles whistleblowers to an award of between 10% and 30% of the monetary sanctions collected in actions brought by the SEC and related actions brought by certain other regulatory and law enforcement authorities.
- This program has proven to be an enormous success, enabling the SEC to recover billions of dollars in penalties and hundreds of millions of dollars in disgorgement for the benefit of injured investors. In fact, we called it “A $2 Billion Success Story” in a White Paper. Unfortunately, last year, the SEC weakened the program by issuing a rule that gave the agency broad discretion to limit the size of awards. It also created new hurdles for whistleblowers seeking awards where their evidence helped another agency bring a successful enforcement action, in violation of the law.
- That’s why we applauded a whistleblower advocate’s lawsuit to overturn the deeply flawed and legally baseless rule.
- Status. Fortunately, the SEC recently announced that it plans to fix the rule. It also issued a policy statement explaining that until the rule is amended, it would rely on its discretion and its exemptive authority not to apply or enforce the offending provisions. On that basis, and at the joint request of Thomas and the SEC, the court stayed the case pending issuance of a final remedial rule.
A lawsuit (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. Mandatory arbitration takes all that away and forces defrauded investors and other victims into secret, unfair, and biased arbitrations. Those proceedings are generally run by an industry self-regulatory organization (SRO) which, no surprise, is often biased and consistently favors the industry. Investors and consumers are typically forced to take their complaints to those forced arbitrations, but they rarely obtain meaningful recovery.
- A 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 lawbreaking by limiting the legal rights of investors to stop it.
- Given that shareholders are the owners of public companies and they 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 on June 30, 2021, 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 amended complaint and Johnson & Johnson’s motion to dismiss it are now before the court, which is expected to address the matter in September and issue a decision finally disposing of the case.
A lawsuit (National Association for Latino Community Builders v. CFPB) challenging the CFPB’s harmful rule that rescinded the underwriting requirements for payday lenders, a commonsense provision that required those lenders to determine whether borrowers could afford to repay their short-term loans. That’s right: the rule merely required lenders to determine at the time a loan was issued that the borrower could afford to repay it. It’s a basic, commonsense, and relatively simple process—unless, of course, the predatory financial firm doesn’t want to make loans that are repaid but instead seeks the legal right to trap desperate borrowers in a never-ending cycle of debt with more and bigger fees and higher interest rates, what we call a “debtor’s prison without walls.” Dennis wrote an op-ed on this issue for The Hill.
- Why it matters? Under the Obama administration, after years of substantive and robust analysis, the CFPB crafted important protections for consumers who need short-term or “payday” loans. Among them was the requirement that payday lenders determine a borrower’s ability to repay a loan before extending credit. The purpose was to prevent those lenders from deliberately trapping desperate borrowers in endless cycles of unaffordable debt that saddle them with huge interest payments and fees.
- Under the Trump administration, the CFPB nullified those underwriting requirements in a deplorable example of baseless rulemaking plainly designed to accommodate the payday lending industry and in response to relentless industry lobbying (and, reportedly, campaign contributions). Now a court will have the opportunity to nullify the Trump rule and restore the underwriting requirements for the benefit of millions of vulnerable borrowers living on the economic edge.
- Status. Earlier this year, the CFPB moved to dismiss the action based on the claim that the plaintiff, a nonprofit membership association of organizations that serve Latino communities, has no “standing.” The agency is arguing that neither the plaintiff nor its member organizations face the type of concrete injury from the rule that would entitle them to bring their case in federal court. The doctrine of standing once again figures prominently in an important case, potentially preventing the plaintiff’s claims from being heard on the merits. Briefing is complete and we await the court’s decision on the threshold standing issue.