A recent lawsuit filed against the SEC’s flawed whistleblower rule enacted by the Trump administration, which threatens to reduce incentives for whistleblowers to come forward with critical evidence of securities law violations.
February 25, 2021
Cases We’re Watching
Actions in the Federal Courts: Cases We’re Watching
Better Markets continues to monitor decisions in a number of important pending cases, including Roderick Ford v. TD Ameritrade, as well as track key issues in the courts.
Roderick Ford v. TD Ameritrade. In 2019, Better Markets filed an amicus brief in support of a class-action lawsuit alleging that brokers routinely violate their duty to seek the best execution of client trades because they route orders not to serve their clients’ best interest but instead to maximize incentive payments from exchanges, which are essentially a form of bribery. (This is a PFOF issue that was raised in the recent GameStop trading frenzy and addressed in the materials discussed above.) The case is on appeal to the Eighth Circuit, and the defendants are claiming that class certification is inappropriate because the damages must be calculated on an individual basis and not class wide. The case was argued last September and we expect the court’s decision at any time.
Other important issues that we are tracking in the federal courts include:
Why this matters. The Dodd-Frank Act set up a strong whistleblower program at the SEC 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, helping the SEC 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 under the Trump administration 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 as we have pointed out here. That’s why we applauded a whistleblower advocate lawsuit to overturn the deeply flawed and legally baseless rule.
Attempts to force public company shareholders into mandatory arbitration, a biased, secretive, and anti-consumer forum.
Why this matters: Mandatory or forced arbitration takes away the rights of consumers and investors to seek relief in court when they are ripped off by banks and corporations. It forces them instead into secret, unfair and biased arbitrations. Those industry-run proceedings consistently favor the banks and corporations and rarely if ever result in meaningful recovery for consumers and investors. 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 legal development, then the toxic effects of mandatory arbitration will be further broadened, likely incentivizing lawbreaking while at the same time taking away the legal rights of shareholders to stop it. Given that shareholders are supposed to be the owners of public companies and part of the way they protect that ownership investment is through these legal rights, such a decision could have a significant impact on capital formation and allocation.
Challenges to banking rules that will facilitate improper use of the national bank charter to insulate nonbank financial firms, including payday lenders, from important consumer protections under state law.
Why this matters: Under the doctrine of preemption, certain state laws do not apply to national banks. But recent OCC and FDIC rules seek to stretch preemption beyond its intended scope and kill important state investor and consumer protection laws. If left intact, these rules will help promote “rent-a-bank” schemes that allow all sorts of nonbank lenders to partner with national banks for the purpose of avoiding important consumer protections under state law. Chief among those protections are state usury laws, which—unless preempted—prohibit lenders from gouging consumers with sky-high interest rates and fees. If the rules are struck down in court, it will be a huge and critically important win for tens of millions of consumers who need and deserve credit on fair terms.
Challenges to 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 that a loan they are going to provide could be repaid at the time the loan was granted – pretty basic and minimal stuff that shouldn’t require a rule, unless the financial firm (i.e., predator) didn’t want to make a loan that was repaid, but wanted to trap the often mislead borrower into a never-ending cycle of debt with more and bigger fees and higher interest rates, what we call a “debtor’s prison without walls.”
Why this matters: Under the Obama administration, 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 irrational 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 rescind the Trump rule and restore the underwriting requirements for the benefit of millions of vulnerable borrowers living on the economic edge.