PRACTICAL TIPS AND TOOLS FOR IDENTIFYING, INVESTIGATING AND BRINGING SUIT AGAINST FINANCIAL SCAMS

Transcription

1 PRACTICAL TIPS AND TOOLS FOR IDENTIFYING, INVESTIGATING AND BRINGING SUIT AGAINST FINANCIAL SCAMS Presented by the American Bar Association Section of Civil Rights and Social Justice, Division for Public Services, Senior Lawyers Division, Criminal Justice Section, Commission on Disability Rights, Commission on Law and Aging and Center for Professional Development

2 American Bar Association Center for Professional Development 321 North Clark Street, Suite 1900 Chicago, IL Submit a Question Visit to submit a question on the content of this course to program faculty. We ll route your question to a faculty member or qualified commentator in 2 business days. The materials contained herein represent the opinions of the authors and editors and should not be construed to be the action of the American Bar Association Section of Civil Rights and Social Justice, Division for Public Services, Senior Lawyers Division, Criminal Justice Section, Commission on Disability Rights, Commission on Law and Aging or Center for Professional Development unless adopted pursuant to the bylaws of the Association. Nothing contained in this book is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This book and any forms and agreements herein are intended for educational and informational purposes only American Bar Association. All rights reserved. This publication accompanies the audio program entitled Practical Tips and Tools for Identifying, Investigating and Bringing Suit against Financial Scams broadcast on September 20, 2016 (event code: CE1609PTT).

3 TABLE OF CONTENTS 1. Presentation Slides 2. A Practical Guide for Identifying, Investigating, and Bringing Suit against Consumer Financial Scams: Lessons Learned and Tips Developed From Combatting Loan Modification Scams Linda Mullenbach

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5 A Practical Guide for Identifying, Investigating, and Bringing Suit against Consumer Financial Scams: Lessons Learned and Tips Developed From Combatting Loan Modification Scams Presented by Linda H. Mullenbach, Esq. Consultant - Senior Special Counsel Fair Housing and Community Development Project Rebecca Martin, Esq. Bryan McArdle, Esq. Davis Polk & Wardwell LLP September 20, 2016 DISCLAIMER: The information contained herein is not intended to provide legal advice. INTRODUCTION Scammers are very adept at identifying and then profiting from consumer financial crises taking advantage of vulnerable consumers Those on the front lines of working with consumers in financial distress are in the best position to learn about such scamming activities Starting in 2007, fraudsters took advantage of the foreclosure crisis as foreclosures were rapidly increasing By 2009, foreclosure rescue and loan modification schemes increased significantly; consumer complaints also rose about such schemes The creation of a coalition to combat such schemes and the development of a database to track consumer complaints proved invaluable in the effort to fight such scams ABA Resolution 111C also has played an important role in combatting attorney involvement in deceptive or fraudulent loan foreclosure rescue practices Those who work with consumers facing financial distress must initially answer two questions when assessing consumer complaint information - To what type of scam, if any, has the consumer fallen victim - Whether the victim experienced misleading and false statements that may be actionable The Guide and this session are intended to assist those on the front lines dedicated to identifying, investigating and bringing suit against scammers and their operations 1

6 Topics Covered in This Session ABA Resolution 111C in Support of Combatting Attorney Involvement in Such Scams Marketing Avenues Used by Scammers to Lure Financially Distressed Consumers Sales Tactics Often Used and False Claims and Promises Made to Lure Consumers Fact Gathering During the Investigation Process - Locating Victims and Tips for Interviewing - Investigating Scammers and Scamming Entities Filing Suit - Shaping the Complaint Drafting Considerations - Potential Causes of Action State Law Considerations and Common Claims - Joint and Several Liability Litigating the Case - Seeking Preliminary Relief - Proceeding Against a Pro Se Defendant - Discovery - Settlement Strategy and Negotiation - Default Judgment and Orders Post-Judgment Procedures Post-Judgment Discovery and Collecting on a Judgment Lessons Learned 2 ABA Support in Combatting Attorney Involvement in Deceptive or Fraudulent Loan Foreclosure Rescue Practices The ABA passed Resolution 111C on February 9, 2015 at its Mid-year meeting. That Resolution urged federal, state, local, territorial and tribal governments to continue to enforce and enact rules or legislation to strengthen consumer protections regarding deceptive or fraudulent loan foreclosure rescue practices. The Resolution also expressed its support of ongoing efforts of state courts and lawyer disciplinary agencies to investigate allegations of misconduct and to prosecute those who commit such crimes. The Resolution also encouraged education of consumers and lawyers on such deceptive practices. The report accompanying the Resolution noted that complaints about rescue scams involving attorneys showed a steady increase since 2010 and that complaints about attorney-involved scams were 59% of all of the complaints received in 2013 by the Loan Modification Scam Prevention Network. In commending the ABA effort, the Consumer Financial Protection Bureau (CFPB) announced that in July 2015, the CFPB, the Federal Trade Commission (FTC) and 15 states announced a sweep against foreclosure-rescue scammers by filing three lawsuits against companies and individuals that collected more than $25 million in illegal advance fees for services that falsely promised to prevent foreclosures or renegotiate troubled mortgages. Those suits sought civil fines, compensation for the consumer victims and injunctions against the scammers. During that same period, the FTC filed six lawsuits and state regulators filed 32 actions. These joint efforts by the federal and state regulators and state bar ethics agencies, together with private enforcement actions, played and continue to play a key role in eliminating attorney involvement in mortgage-relief scams and eradicating the scourge of such scams from victimizing consumers. 3

7 Marketing Avenues Used by Scammers to Lure Financially Distressed Consumers Scam operators are very adept at using multi-media resources to locate consumers trying to resolve their financial need It is very important to gather these marketing materials from scammed consumers or through searches for these marketing materials Avenues often used by scammers: Advertisements using TV, radio, newspapers, street flyers, billboards, and direct mail solicitation In the loan scam experience, scammers: Often targeted the neighborhoods hardest hit by the foreclosure crisis, with flyers and direct mailings Solicited the victims in their first language -- Spanish and other languages Advertised on radio and television stations targeting Spanish speakers Engaged Spanish radio personalities and African American church members, who were respected in their communities Purchasing the ability to appear in internet search results for key words In the loan scam experience, homeowners who were researching foreclosure (using e.g., Google AdWords) would be led to scam companies, instead of government, non-profit, or other legitimate sources of information Use of the name of actual government programs or resources or logos In the loan scam experience, homeowners searching governmental programs would be lured to sites where scammers were falsely using governmental names and logos Cold Calls 4 Sales Tactics Used and False Claims and Promises Made to Lure Consumers into the Scheme High Pressure Sales Tactics Consumer told that he or she must act quickly to take advantage of scammer s skills and access; contacting frequently Scammer describes the terms/conditions of the contract for the services to be provided orally, but then requires the consumer to sign an agreement that contains different or less favorable promises not giving the consumer time to read the contract before signing Scammer explains terms in consumer s first language, but then only provides contract in English False Claims and Promises Frequently Made by Scammers Guarantees of Success; Claim of Success or Resolution in a Short Period of Time Assurance of Paying Less Monthly or Overall; Getting an Overall Rate Reduction; Getting an Overall Debt Reduction Guarantee That Consumer Qualifies for Program or Relief Needed Claims Insider Relationships the Consumer Does Not Have with Party to Whom Debt is Owed Promise of a Refund If Not Successful Claim of Government or Other Legitimate Affiliation; Using Logos and Governmental Program Names on Materials Claim of an Attorney or other Expert Being Involved in Work for Consumer Must Pay Upfront to Get the Work Started; or Pay Monthly If the Consumer Cannot Pay the Upfront in Full Consumer Contacting the Holder of the Consumer s Debt or Obligation Will Interfere with Getting Resolution Stopping Making Payments to the Debt Holder Will Increase Chances of Success in Getting the Relief Needed 5

8 Fact Gathering During the Investigation Process LOCATING AND INTERVIEWING VICTIMS Locating Victims: A database like the Loan Modification Scam Prevention Network database is extremely valuable in locating victims and identifying scam organizations. Once a scam organization has been identified, using internet searches for consumer complaints may yield additional leads. Tips for Interviewing Victims: Conduct a detailed interview as early as possible, since memories quickly fade and are affected by emotions Collect s, letters, handwritten notes of conversations, voic s and text messages from cell phones, cancelled checks, receipts or withdrawal/wire transfer confirmations, contracts, all modification paperwork, and any written advertising material. Gather the names, titles, and any contact information for employees of scam organizations for purposes of identifying witnesses and defendants. Ask the victim about his or her objectives does the person need immediate foreclosure assistance? Want his or her money back? Want to see the scam company put out of business? Carefully consider the strength of the victims claims, the quality of the documents and other information that support their claims, and the victims willingness and ability to serve as plaintiffs in what may be a long, drawnout civil litigation process requiring discovery. 6 Fact Gathering During the Investigation Process(cont.) INVESTIGATING SCAMMERS Identifying and Tracking Individual Scammers and Scamming Entities: Scam operations are often fly by night in nature and may disappear or morph into new entities overnight. One goal of the investigation is to identify potential defendants, most often individuals involved in the scam, that are not judgment-proof. For the entities involved, locate incorporation documents, public records related to assets and bankruptcies, and other public documents. Scam companies often use social media (like Facebook) or are the subject of online complaints use internet searching broadly for information about both companies and employees. Techniques to find addresses for scam companies that have moved (also may work for former employees): U.S. mail forwarding services, social media profile searching, LexisNexis Find a Person search tool, and hiring a private investigator. It is important to preserve websites, flyers, business cards, job postings, LinkedIn profiles, Better Business Bureau complaints and any other sources that link potential defendants to scam operations. 7

9 Filing Suit SHAPING THE COMPLAINT Identifying Defendants: Enjoining individuals will often be more effective than entities (which can shut down and open up under a new name). Individuals may have more access to funds than entities, which may be judgment-proof. Salespeople may have made actionable misrepresentations and be subject to fraud claims; the job titles and responsibilities of individual employees will determine what claims may be brought against them. Consider Whether to Bring Suit by Individuals or As a Class Action: In all but one case, the lawyers proceeded without seeking to represent a class. Instead, the suits were brought on behalf of a number of plaintiffs (between 7 and 25) in their individual capacities. Considerations include the time it would take to certify a class, the anticipated limited resources of defendants, and whether applicable legal standards will permit obtaining an injunction. Benefits of Memorializing Plaintiffs Facts, Damages, and Evidence in an Affidavit or Declaration Include: Signing under oath encourages plaintiffs careful attention to detail and completeness. Comprehensive interviews at the outset of case improve clarity on facts and timeline. May be able to use in support of preliminary relief, default judgment, or inquest. We have found that setting out each plaintiff s facts in considerable detail in the complaint is a compelling way to convey the seriousness of the wrongdoing and to ensure that each cause of action is supported by ample factual allegations. 8 Potential Causes of Action STATE LAW CONSIDERATIONS Every state s laws are different; research carefully potential claims unique to your state or limitations on claims you may want to pursue. We are not providing legal advice, and cannot, because the state laws vary as do the facts in each case, but our experience in a number of jurisdictions may provide helpful guidance on claims to evaluate and to consider pursuing in your jurisdiction. In New York, demanding up-front fees for mortgage modification assistance is, in most cases, illegal. There is a narrow exception for attorneys when the attorney is directly providing consulting services to a homeowner in the course of his or her regular legal practice. In addition, a private attorney general statute in New York allows victims to seek injunctive relief to prevent injury to consumers without showing that they will suffer irreparable harm. Consumer protection and other statutes provide for treble, and potentially quadruple, damages. N.Y. Gen. Bus. L. 349(h), 350-E; N.Y. Real Prop. L. 265-b; N.Y. Banking L. 598(5). New York case law also provides for joint and several liability, which can increase the liability for individual defendants significantly. In California, 2006 amendments to the Unfair Competition Law call into question the ability of plaintiffs to seek injunctive relief that would prevent harm to others; two Superior Courts in different counties reached different conclusions with respect to whether plaintiffs could seek injunctions without the usual showing of irreparable harm. 9

10 Potential Causes of Action (cont.) COMMON CLAIMS TO CONSIDER Most of our cases have included the following claims: Fraud Include claims for punitive damages. Courts have granted $1 million and $300,000 punitive damages in two different cases. Fraud claims are not dischargeable in bankruptcy; to protect this advantage, promptly proceed against possible discharge after notice of a bankruptcy. Breach of contract Breach of fiduciary duty Breach of duty of good faith and fair dealing False advertising Illegal collection of upfront payment for distressed property consulting Failure to register as a mortgage broker Where attorneys are involved in the scam operations, consider attorney malpractice claims and research whether laws regarding the unlicensed practice of law may apply if the attorney is not properly licensed in the jurisdiction. 10 Potential Causes of Action (cont.) JOINT AND SEVERAL LIABILITY The doctrine of joint and several liability, if applicable in a given jurisdiction, can be an effective tool in successfully recovering monetary damages in cases with multiple defendants. Joint and several liability allows plaintiffs to recover the full amount of their damages from any one of the defendants, regardless of that defendant s individual share of the liability. Joint and several liability maximizes the chances of recovery and reduces the problems posed by insolvent defendants. The risk of non-recovery from a judgment-proof defendant is placed on other defendants and not the plaintiffs. Financially solvent defendants may be motivated to settle in cases asserting joint and several liability because, otherwise, they could be responsible for the full amount of the damages. Consider the law of the relevant jurisdiction, as joint and several liability may not apply or there may be relevant exceptions. 11

11 Litigating the Case SEEKING PRELIMINARY RELIEF Litigants can stop scamming companies early on in the litigation process by seeking a preliminary injunction or temporary restraining order. For example, in New York, injunctive relief may be sought against loan modification scammers under both New York Real Property Law 265-b and New York General Business Law 349. Special care should be taken to ensure that the proposed injunction addresses the specific type of scam targeted. Evidence to support an injunction can include: Affidavits from plaintiffs, other victims, and informants False representations on websites Evidence that a company is changing names, affiliation or locations Injunction can be tailored to: Stop collection of upfront payments for loan modification services Ban individual scammers from owning, managing, operating or assisting with loan modification services Prohibit false representations and advertisements in connection with loan modification services Prevent companies from changing names to evade detection It is important to limit the injunction to just mortgage modification scams and not other lines of work 12 Litigating the Case PROCEEDING AGAINST A PRO SE DEFENDANT Attorneys should consult their jurisdiction s professional conduct rules and guidelines for information on ethical duties to a pro se adversary. Potential issues: An unrepresented party may turn to counsel for plaintiffs for legal advice or guidance on how to respond to the lawsuit, discovery, or even motion practice. It is necessary to ensure that unrepresented defendants understand that counsel for plaintiffs is their adversary and cannot give them legal advice, or otherwise advise them. Encourage pro se litigants to seek counsel if possible. Avoid taking advantage of a pro se litigant s ignorance; it is good practice to inform them of upcoming deadlines. A pro se defendant may not understand his/her obligations in a lawsuit or the obligations involved in the discovery process and in responding to motion practice. Extend common courtesies by agreeing to reasonable extensions of time for a defendant to find counsel or otherwise respond. Unrepresented defendants may be motivated to settle instead of incurring costs for legal representation. 13

12 Litigating the Case DISCOVERY It can be useful to engage in pre-discovery investigation of the defendants using internet research and publicly available documents. The following can be particularly helpful in developing and litigating the case: Obtaining screen shots of all relevant websites and other advertisements Saving website registration information Gathering significant names, aliases and modes of operation Finding business/corporation registration information Reviewing pending lawsuits or claims against defendants Important documentary discovery Client files and contracts Communication logs or other documents tracking contact with plaintiffs, clients and lenders communications Depositions Determining who is in charge and the organizational structure Drawing connections between affiliated companies and individuals Confirming collection of upfront payment and extent of misrepresentations Assessing compliance with injunctions and cease and desist orders 14 Litigating the Case SETTLEMENT STRATEGY AND NEGOTIATION Lessons learned from successful settlements: Permanent injunction as nonnegotiable: Prevents defendants from believing they can pay off the lawsuit and continue scamming. All in approach: Encouraging defendants to work together and pool resources for an acceptable settlement amount: Emphasizes nature of joint and several liability, where appropriate. Makes settlement more accessible for defendants with limited funds available. Helps keep all defendants engaged. Depositions required: Taking the deposition of defendants who have settled provides useful information against remaining defendants Sets precedent for continuing cooperation in litigation against remaining defendants. 15

13 Litigating the Case DEFAULT JUDGMENT AND ORDERS Advantages of seeking default judgment in a timely fashion Motion for default judgment may force participation in settlement and encourage settlement involvement of previously evasive defendants. After monetary judgment is entered against a defaulted defendant, plaintiffs can use available tools to seek and collect available assets, including garnishment. Plaintiffs should include a permanent injunction in the default order and monitor future scamming. Issuing information subpoenas against defaulting defendants provides an effective avenue for continuing discovery against non-defaulting defendants. 16 Post-Judgment Procedure YOUR CLIENTS SECURED A JUDGMENT WHAT NOW? Act quickly to ensure that any known assets of the judgment debtor are not dissipated or transferred Consult local law for the appropriate notice that can be provided to the debtor and any holder of assets of the debtor. Under New York law (CPLR 5222), for example, a restraining notice can be served on the debtor and any holder of assets of the debtor. With limited exceptions, the notice precludes the recipient from selling, assigning, transferring, or otherwise disposing of any such property. The asset holder is also liable to the creditor for violation of the restraint. If the judgment debtor moved to another state or country, it might be necessary to explore domesticating the judgment in the debtor s new jurisdiction. 17

14 Post-Judgment Discovery TECHNIQUES FOR SEARCHING FOR A DEBTOR S ASSETS Many discovery devices can be used following a judgment to investigate a judgment debtor s assets. Consult local law and consider pursuing: Public records searches Third party services such as LexisNexis aggregate public property records by individual Information subpoenas Interrogatories Depositions Requests for production A debtor s exam 18 Collecting on a Judgment AVAILABLE TECHNIQUES VARY BY STATE The procedures for collection that are available to enforce judgments vary significantly by state. There can be significant repercussions for misusing (even unintentionally) such collection devices, so proceed with care. Common collection procedures include: Liens on real property Wage garnishment Garnishment/seizure of bank accounts Seizure/sale of personal property Installment payment orders Receivers Turnover order Potential misuse of collection devices includes: Failing to include the requisite statutory text in a restraining notice, which can give rise to a damages claim against the creditor. Siegel s New York Practice 509; see CPLR Refusing to unfreeze a debtor s bank account to the extent that it contains assets that are exempt from execution. See LR Credit 22, LLC v. Eggleston, 37 Misc. 3d 653, 655 (Jamestown City Ct. 2012) (awarding debtor costs, reasonable attorney's fees, and a penalty in the amount of $1, where creditor failed to instruct bank to release funds that debtor had demonstrated were exempt); CPLR 5222-a(g). 19

15 Lessons Learned Where the claims are brought by individuals, a recovery can be important for each plaintiff Scammers often target consumers on fixed incomes for whom the loss of a four-figure payment can have a devastating impact. Successful collection of monetary damages is a much-appreciated result. Learning of other victims and participating in the effort to stop these scams can have an empowering impact on plaintiffs. Representing vulnerable plaintiffs in consumer fraud actions can have significant benefits for large law firms Younger lawyers can learn to develop a case, draft a complaint, brief motions, argue in court, take and defend depositions, participate in settlement negotiations, and more. The resources that private firms can contribute to consumer protection actions can give new life to statutes that may be under-enforced by government agencies with limited resources. 20 This Guide, together with links to the Precedents, is located on the Lawyers Committee s Website at: REVISED FINAL.pdf 21

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