News Archives

News

Jun

23

2014

Jonathan Cohen Quoted in ACAMS moneylaundering.com Article on Directors and Officers Liability Insurance Issues

Joseph & Cohen, Professional Corporation, was featured in a recent ACAMS moneylaundering.com article by Kira Zalan and Colby Adams titled “With Regulators’ Talk of Individual Fines Comes Bankers’ Queries on Insurance.”

Published on June 17, 2014, the article explores why more and more bank compliance officers are exploring the scope of insurance coverage under Directors and Officers (D&O) liability insurance policies to address the rise of regulatory penalties against individual bankers.

The article notes an important and often overlooked reality that many financial institutions and their officers are unaware of the exclusions in their D&O policies, to which Jonathan Cohen, the firm’s head of litigation, was quoted:

“More often than not an officer or director will be surprised by the lack of coverage that they have.”

Joseph & Cohen’s core corporate and regulatory practice includes the representation of federally insured depository institutions and the defense of Officers and Directors of financial institutions in civil damage actions instituted by the FDIC or shareholders and administrative proceedings brought by the FDIC for civil money penalties or other sanctions.   Joseph & Cohen also has extensive experience in advising institutions and their Offices and Directors in connection with insurance coverage and related litigation.

For additional information about Joseph & Cohen, Professional Corporation, please visit our website at  www.josephandcohen.com or Facebook at www.facebook.com/josephandcohen.

Litigators Nicole Dogwill and Robyn Callahan Join Joseph & Cohen

SAN FRANCISCO, CA – April 08, 2014.  Joseph & Cohen, Professional Corporation, announced today that the firm has added two skilled litigation attorneys to its expanding boutique litigation practice. Nicole P. Dogwill joined the firm as a Partner, and Robyn C. Callahan as Of Counsel.

Nicole Dogwill is an experienced litigator with core expertise advising and defending mature and emerging companies, as well as their directors and officers, on matters involving fiduciary duty, corporate governance, securities, fraud, antitrust/unfair business practices, and related business claims. Ms. Dogwill also advises and litigates fiduciary duty and related claims arising in trust and estate matters.

Ms. Dogwill was named a “future star” in both the 2012 and 2013 editions of Benchmark Litigation. The National LGBT Bar Association selected Ms. Dogwill as one of the Top 40 under 40 LGBT Attorneys for 2010. She is currently the President of the National LGBT Bar Association’s Board of Directors.

Jonathan Joseph, Joseph & Cohen’s Managing Partner, stated “Nicole Dogwill shares our passion to deliver world class legal services to business and financial institution clients via a boutique law firm model that embraces long term client relationships, diversity, collegiality and quality in everything we do.”

Nicole Dogwill added “I am honored to be joining this esteemed group of lawyers, many of whom I’ve had the privilege of working with before to provide exceptional services to my clients in California and across the United States.”

Prior to joining Joseph & Cohen, Ms. Dogwill was a partner at Shartsis Friese LLP.  She was also a partner at Winston & Strawn LLP in San Francisco for seven years.

Also an accomplished litigator, Robyn C. Callahan brings her expertise in business litigation, employment law and commercial disputes, including complex class actions. With over a decade of experience working for both boutique and global Am Law 100 ranked firms, Ms. Callahan has successfully represented clients across a broad range of industries in federal, state and appellate courts.   She previously worked at Winston & Strawn’s San Francisco office alongside Jonathan Cohen, Jeffrey Lederman and Nicole Dogwill.

Jonathan Cohen, the Head of Litigation, said “We could not be happier to have Robyn join us.  She is a truly skilled lawyer and adds significant depth to our team, with extensive trial experience in both commercial and employment litigation.”

Ms. Callahan noted, “I am thrilled to reunite with Jon, Jeff and Nicole and to be working with such a talented team of attorneys who value the importance of integrity in the practice of law and in fostering long-term client relationships.

Joseph & Cohen, Professional Corporation, is a Financial Services and Litigation Boutique headquartered in San Francisco that emphasizes complex banking, corporate and financial services matters, regulatory and bank enforcement defense, private equity, bankruptcy and insolvency, employment and complex commercial litigation services.  Joseph & Cohen is known for sophisticated expertise, extraordinary commitment to clients, relationship-based services, and a range of specialized skills typically found only in the largest American law firms.

For additional information about the Joseph & Cohen, Professional Corporation, please visit our website at http://www.josephandcohen.com or Facebook at www.facebook.com/josephandcohen.

Press Contact:  Jonathan Joseph at Joseph & Cohen, 415-817-9200, ext. 104 or jon@josephandcohen.com.

Feds Bite Largest Bitcoin Exchange: Lessons for Virtual Currency Entrepreneurs

By Jonathan D. Joseph

When the US Treasury’s Financial Crimes Enforcement Network, a/k/a FinCEN, published an interpretative ruling on March 18, 2013 discussing how its regulations applied to users, exchangers and administrators of virtual currencies, Mt. Gox, the world’s largest exchange for Bitcoin transactions, should have taken note.   Mt. Gox and other early pioneers in the virtual currency space have anarchist roots and generally eschew governmental regulation; however, it is now clear that the survivors in the Bitcoin and cryptocurrency ecosystem will be those that successfully navigate the complex web of federal and state money transmission laws and regulations.

Earlier this week, Homeland Security Investigations (“HSI”) obtained a warrant, issued by the U.S. District Court of Maryland, authorizing U.S. government seizure of assets of Mt. Gox held at Iowa based payment processing start-up Dwolla and Wells Fargo Bank.   HSI acted after it discovered that Mt. Gox, based in Tokyo, Japan, was operating as an unlicensed money transmission service through its American affiliate, Mutum Sigillum LLC, and it may have lied to Wells Fargo when it opened its initial US bank account.

FinCEN is the bureau of the Treasury Department that seeks to prevent money laundering and terrorism financing through its regulation of Money Service Businesses (“MSBs”).  Its March 2013 guidance states that those dealing in or administering virtual currencies such as exchanges like Mt. Gox, but not users or “miners”, need to register as MSBs and comply with anti-money laundering regulations. While Bitcoin is the best-known cryptocurrency or digital currency, others have sprung up recently, including Opencoin, Litecoin, Terracoin, Feathercoin and Novacoin, among others.   While concepts underlying virtual or cryptocurrencies can be mind- numbingly complex, the FinCEN guidance is reasonably clear as to who is regulated:

“A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter. By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter.  In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.”  FIN-2013-G001, March 18, 2013.

FinCEN categorizes participants in the virtual currency market into three generic categories: “user,” “exchanger,” and “administrator.” A user is a person that obtains virtual currency to purchase goods and services. An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds or other virtual currency.   An administrator is a person engaged as a business in issuing (circulating) a virtual currency and who has the authority to redeem or withdraw from circulation that virtual currency.

A person may engage in “obtaining” a virtual currency in a number of different manners such as “earning,” “mining,” “harvesting,” “manufacturing,” “creating,” and “purchasing,” depending on the details of the specific virtual currency model involved.   FinCEN concluded that how a person obtains a virtual currency is immaterial to the legal characterization under the Bank Secrecy Act of the process or of the person engaging in the process.   This means that a user who obtains convertible virtual currency and uses it to purchase real or virtual goods or services is not a Money Service Business under FinCEN’s regulations.   Users must still be cautious, as an activity which is exempt from FinCEN’s rules, may still violate other federal or state statutes, rules and regulations.  Additionally, almost all states have money transmission laws that may apply even if FinCEN rules do not.

An administrator or exchanger that (1) accepts and transmits a convertible currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations, unless a limitation or exemption from the definition applies to the person.  As one illustration, a federally-insured commercial bank is exempt from the definition.  However, in most cases, whether a person is a money transmitter is a matter of facts and circumstances.  Under FinCEN’s interpretations and the law of many states there is no differentiation between real currencies and convertible virtual currencies.  Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter under BSA regulations.  31 CFR section 1010.100(ff)(5)(i)(A).

An exchange’s activities most often involve acting as a seller of Bitcoins or other virtual currency where it accepts real currency or its equivalent from a user/purchaser and transmits the value of the real currency to fund the purchaser’s virtual currency account held by an administrator.  In the Dwolla/Mt. Gox case described above, users were transferring U.S. Dollars to Mt. Gox’s American affiliate via Dwolla.  Prior to the HSI seizure, the American affiliate had been transferring U.S Dollars received from Dwolla to Mt. Gox in Japan and Mt. Gox allegedly used the Wells Fargo account to route funds from Japan to and from accounts at Dwolla at the direction of users. Dwolla, headquartered in Des Moines, offered an easier way for people to buy or sell Bitcoins through Mt. Gox, rather than attempting international wires to and from the company’s Japanese bank.

Under FinCEN regulations, sending “value that substitutes for currency” to another person or to another location constitutes money transmission, unless a limitation to or exemption from the definition applies.  Consequently, based on the HSI warrant, Mt. Gox was transmitting funds to another location, namely from the user’s real currency account at a bank to the user’s virtual currency account with the administrator.   The government alleges this is illegal since the only services being provided are unlicensed money transmission services.

Once a person or entity is engaging in the business of money transmission (both real or virtual currencies), doing so without registering with FinCEN as a Money Service Business and obtaining licenses under State money transmitter laws is mandatory unless certain enumerated exemptions apply. Most States including California, New York, Florida, Texas and Illinois and the District of Columbia require money transmitting businesses to obtain a license and comply with the other regulatory requirements (unless certain exemptions apply).  Failure to be registered and licensed can constitute a felony.

The fervor of the cyrptocurrency movement is starting to resemble the California Gold Rush after gold was discovered in 1849.  Millions of dollars are being invested in starts-up companies mainly in the Silicon Valley as Bitcoin entrepreneurs and venture capitalists race after what some believe could ultimately be worth billions.  In fact, Opencoin recently announced it had completed an angel round which included Silicon Valley heavy hitters Andreessen Horowitz, Lightspeed Venture Partners and Barry Silbert’s Bitcoin Opportunity Fund.

Importantly, it doesn’t appear that Homeland Security or FinCEN is cracking down on Bitcoin itself, just on how it’s being exchanged by Mt. Gox. This is good news for Mt. Gox’s US-based competitors, such as Seattle-based CoinLab and San Francisco-based Coinbase, Bitcoin exchanges that have registered with the Treasury Department as money transmitters.

An important lesson for entrepreneurs and VCs entering the virtual currency space is that virtual currency business models must be analyzed by lawyers with corporate and venture capital expertise, as well as deep familiarity with state and federal currency and money transmission laws.  For those that would turn a blind-eye to the necessity of robust legal compliance at an early stage based on libertarian or anarchist beliefs, naivety or an extraterritorial structure, failure is almost certainly guaranteed.

Smart entrepreneurs understand this.  Success stories include PayPal, Square and presently Google Payment Corp., and Facebook Payments are muscling into the space.  Staying lean until proof of concept has been achieved is important,  but when it comes to federal and state money transmitter regulation,  early angel and VC investment rounds must include funds for legal compliance.  Joseph & Cohen has the expertise and experience to successfully establish and plan innovative legal compliance programs for VCs, virtual currency and Bitcoin start-ups.

Jonathan Joseph is the Managing Partner of Joseph & Cohen, Professional Corporation, a Financial Services and Litigation Boutique headquartered in San Francisco that emphasizes complex banking, corporate and venture capital transactions, regulatory and money transmission activities, securities, M & A, bankruptcy and insolvency, employment law and commercial and executive employment litigation services.

For additional information about Joseph & Cohen, Professional Corporation, please visit our website at www.josephandcohen.com or contact Jonathan Joseph at 415-817-9250 or jon@josephandcohen.com.

Joseph & Cohen Elevates Ken Sayre-Peterson to Partner

SAN FRANCISCO, CA – May 1, 2013. Joseph & Cohen, a Professional Corporation headquartered in San Francisco, announced today that Kenneth Sayre-Peterson has been elected a partner following his successful stint as Of Counsel with the firm that began in February 2012.

Managing Partner, Jonathan Joseph stated, “Joseph & Cohen’s clients have benefited from Ken Sayre-Peterson’s enormous expertise in bank regulation, credit union matters, financial services, corporate transactions, money transmitter compliance and bank enforcement work.  He has helped to secure the firm’s position as one of the leading bank and depository institution regulatory practices in California. Elevating Ken to partner was an incredibly easy decision.”

Sayre-Peterson adds, “It is a delight to work with this team of distinguished attorneys in a collegial boutique setting. I am honored to be invited in as a partner, and look forward to continuing to deliver superlative regulatory and transactional legal services to our valued clients.”

Prior to joining Joseph & Cohen, Ken Sayre-Peterson held increasingly senior positions as an attorney with the California Department of Financial Institutions. During his distinguished twenty-two year career, he practiced general financial institutions law and garnered an intimate knowledge of the banking, credit union, money transmitters, securities, and trust laws of California, as well as the pertinent and corresponding federal laws.

Joseph & Cohen, Professional Corporation, is a Financial Services and Litigation Boutique headquartered in San Francisco that emphasizes complex banking, corporate and transactional matters, regulatory and bank enforcement defense, securities, M & A, bankruptcy and insolvency, employment and commercial and executive employment litigation services.  Joseph & Cohen is known for sophisticated expertise, extraordinary commitment to clients, relationship-based services, and a range of specialized skills typically found only in the largest American law firms.

For additional information about the Joseph & Cohen, Professional Corporation, please visit our website at www.josephandcohen.com or Facebook at www.facebook.com/josephandcohen.

Press Contact:  Jonathan Joseph at Joseph & Cohen, 415-817-9200, ext. 9 or jon@josephandcohen.com.

Joseph & Cohen Rolls Out New Marketing Campaign

SAN FRANCISCO, CA – March 22, 2013. Joseph & Cohen, headquartered in San Francisco, rolled out a new marketing campaign today as part of its sponsorship of the Western Independent Bankers’ (WIB) Annual Conference for Bank Presidents, Senior Officers & Directors being held in Kauai, HI from March 23 – 27, 2013. Managing Partner Jonathan Joseph notes, “Joseph & Cohen is proud to be a major sponsor of WIB for the fourth consecutive year. WIB’s commitment to assist bankers and directors in navigating the complex changes in the industry mirrors our own.”

For this year’s marketing sponsorship, Joseph & Cohen, which specializes in representing independent and regional banks, chose the image below of a well-dressed attorney riding a skateboard. The concept emphasizes the firm’s ability to solve complex legal matters with skill and agility in a laid-back but professional and cutting edge manner. Joseph & Cohen believes its fresh vision provides a competitive edge in connecting with the next generation of banking leaders.

To learn more, call 415.817.9200 to speak to either of the firm’s name partners: Jonathan Joseph or Jon Cohen.

Department of Financial Institutions Attorney Ken Sayre-Peterson Joins Joseph & Cohen – Expands Firm’s Core Regulatory Practice

SAN FRANCISCO, CA February 21, 2012.   Joseph & Cohen, Professional Corporation, announced today it has expanded the depth and scope of its bank regulatory, financial services and legislative practice with the addition of Kenneth Sayre-Peterson as Of Counsel.  Sayre-Peterson elected to join Joseph & Cohen following his retirement from the California Department of Financial Institutions (DFI), where he served in various legal capacities during a lengthy career, most recently having acted as the DFI’s General Counsel.

Kenneth Sayre-Peterson acted as the General Counsel for the California Department of Financial Institutions from June 2007 until his retirement in November 2011.  His final position with the DFI was the culmination of 22 years of service that began in 1988.  Prior to joining the legal staff of the California DFI, Mr. Sayre-Peterson practiced tax law for four years as a staff counsel with the California State Board of Equalization. Before entering state service, he spent two years in private practice, specializing in appellate work and lobbying.

“We are extremely pleased that Ken Sayre-Peterson is teaming up with Joseph & Cohen. Ken is one of the preeminent financial institutions lawyers in California.  His many years of bank and credit union regulatory expertise and financial services legislative skills  coupled with the firm’s well regarded financial services practice, deepens and expands Joseph & Cohen’s ability to offer complete legal solutions to banks, thrifts, money transmitters and other financial institutions,” said Jonathan D. Joseph, Joseph & Cohen’s Managing Partner.

Joseph added “Ken’s insider perspective from more than two decades with the Department of Financial Institutions allows the firm to provide an unprecedented level of legal Joseph added “Ken’s insider perspective from more than two decades with the California services  to money center, regional and community banks in connection with their most complex acquisitions, transactional and regulatory imperatives while also lending unparalleled strength to our existing team that advises troubled banks and defends officers and directors of failed banks in all types of enforcement proceedings.”

Ken Sayre-Peterson stated “I’ve known Jonathan Joseph since my early days with the CA DFI. From my vantage point in the Department I’ve admired the quality, integrity and tenacity of his lawyering in matters before the DFI.  Consequently, I am delighted to step back into private practice with Joseph & Cohen and believe that we will achieve significant synergies through our respective talents.”

Throughout his career at the California Department of Financial Institutions, Mr. Sayre-Peterson practiced general financial institutions law which resulted in an intimate knowledge of the banking, credit union, money transmitters, securities, and trust laws of California, as well as the pertinent and corresponding federal laws.  Additionally, Mr. Sayre-Peterson was the attorney responsible for assisting the DFI’s Legislative Section.  In that position, Ken spearheaded the recent revision and restatement of California’s Banking Law as newly codified in the California Financial Code, and drafted all legislation necessary to complete that four year project. While serving as the DFI’s General Counsel, Ken also played a major role in the policy making process, influencing both the direction and scope of the DFI’s examination and enforcement program.

Ken Sayre Peterson became a member of the State Bar of California in1983 after graduating from the McGeorge School of Law in Sacramento, with distinction.  He earned a Bachelor of Arts degree in History from California Polytechnic State University, San Luis Obispo, in 1977.

Joseph & Cohen, Professional Corporation, is an AV® rated law firm headquartered in San Francisco, California.  The firm emphasizes complex banking, corporate, regulatory, securities, employment, litigation and transactional matters for financial institutions, small businesses, investors and venture capital firms.  Joseph & Cohen is known for sophisticated expertise, extraordinary commitment to clients, relationship-based services, and a range of specialized capabilities typically found only in the largest American law firms. The Firm’s core areas include advice related to banking and financial services law; directors and executives; regulatory and legislative matters; mergers & acquisitions; securities offerings; SEC disclosure matters; employment litigation; D & O insurance coverage; money transmitters; bank operations; and regulatory agency enforcement proceedings.

For additional information, visit the firm’s website at www.josephandcohen.com and Facebook at www.facebook.com/josephandcohen.

Contact: Jonathan D. Joseph:   jon@josephandcohen.com or 415.817.9200,  ext. 9; and Kenneth Sayre-Peterson:   ken@josephandcohen.com or 916.204.2053.

Claims Against Failed Bank D&O’s Will Spike in 2012

By Jonathan Joseph*

The total number of bank failures since the banking crisis began in 2008 is now dangerously close to 400. To date, the FDIC has only filed 14 lawsuits against failed bank directors and officers from thirteen different failed banks.  A total of 103 former bank directors and officers have been named in these suits.

Based on published statistics and our own analysis of U.S. bank failures from 2008 to September 16, 2011, we believe that approximately 80 additional suits will be brought by the FDIC, as receiver, in the next two years. While the FDIC’s investigation and claim process has moved slowly, the number of damage suits authorized and filed is quickening and, we expect, will spike in 2012.

In August 2011, 5 new suits were filed, more than double any previous month. Currently, the FDIC’s website states it has authorized suits in connection with 32 failed institutions against 294 individuals for D&O liability with damage claims of at least $7.2 billion.  All but one of these suits involved banks that failed prior to July 2009. Consequently, while 14 lawsuits have been filed and the FDIC has approved claims against an additional 191 directors and officers who served 18 different failed banks, this significantly understates the number of new suits to be filed and D&O’s to be named.

The current round of bank failures began somewhat slowly in 2008. The closing of IndyMac Bank in July 2008 marked the beginning of a huge acceleration of failures with 140 failures in 2009 and 157 in 2010.  The pace has slowed in 2011 with 71 failures year to date.  Some of the 18 authorized FDIC lawsuits not yet filed may settle; however, the FDIC will approve additional lawsuits against bank directors and officers at an increased pace in the ensuing months because 252 or 64 percent of the current round of bank failures occurred between July 9, 2009 and December 31, 2010.  The FDIC is now approaching the decision point in many of these pre-2011 failures including the retention of outside law firms to prosecute damage claims on its behalf, as receiver.

D&O liability suits are generally only pursued if the FDIC concludes they are both meritorious and cost-effective.  Before seeking recoveries from individual directors and officers, the FDIC conducts an investigation into the causes of the failure. The FDIC states on its website that investigations are usually completed within 18 months from the time the institution is closed, but lawsuits typically aren’t filed for another few months to a year.  Investigations can extend longer and lawsuits are sometimes filed just before the third anniversary of a bank’s failure.

Here are some illustrations: Georgia’s Silverton Bank failed on May 1, 2009 and suit was filed on August 22, 2011 (27 months).  Haven Trust Bank in Georgia failed on December 12, 2008 and suit wasn’t filed until July 14, 2011 (32 months).  Cooperative Bank in North Carolina was closed in June 2009 and suit was filed August 10, 2011 (26 months). On the other hand, Wheatland Bank in Illinois failed on April 23, 2010 and suit was filed on May 5, 2011 (13 months).  With $11.2 billion in assets, San Francisco based United Commercial Bank was closed and most of its assets were assumed by East West Bank on November 6, 2009.  Yet after almost two years, no public announcement of FDIC damage claims against any of UCB’s executive officers and directors have surfaced.  United Commercial Bank was California’s largest ever commercial bank failure.

Not all bank failures result in Director and Officer (D&O) lawsuits. The FDIC brought claims against directors and officers in 24 percent of the bank failures between 1985 and 1992. Since July 2009, the FDIC was named receiver at 323 failed banks.  Bank failures have been most heavily focused in Georgia (70), Florida (56), Illinois (45), California (37), Washington (17) and Minnesota (16). If one assumes the same 24 percent ratio of suits from the 1985 – 1992 era will be repeated in connection with failures since June 2009, former directors and officers of about 80 additional banks could be targets of FDIC damage suits in the next two years in addition to the 14 suits already underway.  The actual number could be somewhat higher but we doubt it will be much lower.

Prior to filing a lawsuit against a director or officer of a failed bank, staff for the FDIC, in its capacity as the receiver (or outside counsel representing the FDIC as receiver), will mail a demand letter to the bank’s officers and directors asserting the FDIC’s claims for monetary damages arising out of the bank’s failure.  These demand letters typically do not distinguish between the different roles that officers and directors may have played under the circumstances nor is much effort made (at this point in the process) to determine which officers and directors in a particular organization may have been negligent, grossly negligent, breached fiduciary duties or wasted assets.

In a number of recent suits, the FDIC has focused on outside directors that had more banking industry expertise than other directors (i.e., directors of Silverton Bank) who were not themselves professional bankers.  Directors with lending, accounting and CPA expertise may potentially be held by FDIC to higher standards, which could make them more visible targets.  Often the FDIC’s demand letter is sent to trigger a claim under the bank’s director and officer liability policy and as part of an attempt to settle with the responsible parties.  If a settlement cannot be reached, however, a complaint will be filed, typically in federal court. Thus, in many of the upcoming lawsuits, the FDIC may pursue claims against individuals but will also focus on the insurance proceeds that could be available in connection with many failures especially those that occurred prior to 2011 (when regulatory exclusions were not as widespread).

It is crucial that officers and directors of a troubled or failed bank retain knowledgeable insurance coverage and bank regulatory counsel to assert rights to coverage under the bank’s liability policies and to determine whether the facts and circumstances raise unique or special legal defenses.   Officers and directors of all distressed banks should attempt to retain experienced outside counsel prior to a bank’s failure as the bank’s existing counsel will usually be conflicted out upon failure.  Notice of circumstances that could give rise to coverage under a policy should be filed with insurers on a timely basis (usually pre-failure) and written follow-up by coverage counsel with insurers post-failure  is often be necessary. If a director or bank officer hasn’t done so prior to failure, they should always retain experienced counsel at the first hint of an investigation or demand arising out of the bank failure.

In many of cases, the FDIC’s ultimate objective will be the recovery of D&O insurance proceeds.  For this reason, it is often advisable to retain a combined legal team that has the capability to address insurance issues, liability and damage claims, regulatory enforcement actions (such as banking industry bans and civil money penalties) and, in rarer cases, criminal probes and indictments.

*About the Author: For over thirty-two years, Jonathan Joseph has focused on the representation of community and regional banks and officers and directors of distressed and failed banking organizations in connection with regulatory, transactional and corporate matters.  He is a member of the Financial Institutions Committee of the California State Bar and a leading banking industry lawyer in California.  Mr. Joseph founded the firm of Joseph & Cohen, Professional Corporation, in 2006 and is its Chief Executive Officer.  Joseph & Cohen currently represents financial institutions and officers and directors of troubled and failed banks from its office in San Francisco, CA.

For additional information, please email the author: Jon@JosephandCohen.com.

© Joseph & Cohen, Professional Corporation. 2011. All Rights Reserved.

California’s New Money Transmission Law Sweeps Up

By Marie Hogan*

Effective as of January 1, 2011, California’s sweeping new Money Transmission Act (the “MTAct”) became applicable to the money transmission business. The MTAct expanded the state’s regulation and license requirements for money transmitters by covering domestic money transmitters, including stored value device issuers and other businesses that offer new types of alternative payment and mobile applications.  The new law assigns regulation and licensing authority to the California Department of Financial Institutions

Background

The regulation of money transmission varies from state to state, but most states regulate domestic money transmission involving their residents. The MTAct now covers domestic money transmission by adding similar requirements and consolidates the regulatory and licensing mandates previously found in other California statutes. California’s regulation of money transmission had previously been of persons who help consumers transmit money overseas through the Transmission of Money Abroad Law, the issuance of traveler’s checks through the Travelers Checks Act and the issuance of payment instruments through the Payment Instruments Law.

Under the MTAct, it is a crime for a person to engage in the business of money transmission without a license or for a person to intentionally make a false statement, misrepresentation or false certification in a record filed or required to be maintained under the MTAct.  Consequently, it is important that individuals and businesses planning to engage in money transmission activities comply with the MTAct and its licensing requirements.  Due to rapid technological advances, many emerging, alternative or stored value payment businesses and their applications could be covered for the first time in California.

What is money transmission?

Money transmission is selling or issuing in California, or to or from persons located in California, payment instruments, stored value devices or receiving money or monetary value for transmission by electronic or other means.

“Payment instrument” means an instrument for the transmission or payment of money or monetary value, whether or not negotiable, such as, for example, a check, draft or money order.  Excluded are issuers who also redeem the instrument for goods or services provided by the issuer or its affiliate, for example, a “rain check”.

“Stored value” involves monetary value representing a claim against the issuer that is stored on a digital or electronic medium and accepted as a means of redemption for money or as payment for goods or services.  For example, Visa® gift cards.  Excluded are cards issued by businesses that also redeem the card for goods or services provided by the issuer or an affiliate (“closed loop”), for example, cards issued by leading coffee chains.

“Receiving money for transmission” includes any transaction where money or monetary value is received for transmission within or outside the United States by electronic or other means.  Thus, certain new mobile payment applications or emerging payment platforms not offered by banks or other regulated depository institutions could  be within this category and subject to regulation and licensing.

Who can be a licensed money transmitter?

Only a corporation or limited liability company may be a California licensed money transmitter.  Under limited circumstances, a licensee may have agents who are not licensed money transmitters.  An example of a permissible non-licensed agent could include a local convenience grocery or liquor store that sells money orders as the agent for a bank.

Who cares?

  1. Anyone who sells a stored value instrument or creates stored value via a digital or electronic medium.
  2. Anyone who receives money for transmission, including by electronic means.
  3. Anyone who issues a payment instrument, for example, money orders.

Only licensed money transmitters or their permissible agents may issue or sell stored value instruments or payment instruments.

What does this law do?

The law does four things:

  1. Combines three existing licensing regimes into one.  The three prior licenses were travelers check issuers, money order sellers and foreign money transmitters.
  2. Newly subjects domestic money transmission to licensing.
  3. Licenses certain stored value (i.e., open loop) issuers.
  4. Makes it a crime to engage in the money transmission business in California without a license.

What activities require a license?

Similar to most California licensing requirements, anyone who engages in, solicits, advertises or performs specified “money transmission” services in California or for California residents must be licensed.

License Transition

Travelers check issuers, money order sellers and foreign money transmitters licensed in California prior to January 1, 2011, continue to be validly licensed. Any newly covered entity or business must file an application for a license by July 1, 2011.

Who is exempt from licensing?

All FDIC insured depository institutions are exempt, as are trust companies, credit unions, licensed broker dealers and payment systems serving exempt entities, such as an automated clearing house.  Affiliates of a FDIC insured entity are not exempt, nor is any other entity holding another license from the California Department of Financial Institutions or the California Department of Corporations.

Due to rapid technological advances involving alternative payment platforms, mobile applications, smart phones and other communication devices, businesses planning to offer any type of service involving the electronic receipt and transmission of money (or other medium of exchange) or stored value devices or applications should carefully consider whether licensing is required in California pursuant to the MTAct.

For additional information related to the California Money Transmission Act or other financial services matters, please contact Marie Hogan or Jonathan Joseph at Joseph & Cohen, Professional Corporation.

___________________________

*Marie Hogan is Of Counsel to Joseph & Cohen, Professional Corporation, San Francisco, CA.

© Joseph & Cohen, Professional Corporation. 2011. All Rights Reserved.

California Supreme Court Zip Code Case Slaps Retailer

In a victory for consumer privacy rights, the California Supreme Court recently ruled that Jessica Pineda’s rights under the Song-Beverly Credit Card Act were violated when a clerk at specialty retailer Williams-Sonoma asked for and recorded her ZIP code in connection with an in-store purchase with her credit card. The unanimous opinion, written by Justice Moreno, concluded that an individual’s ZIP code is protected “personal identification information” that businesses in California cannot request for in-store purchases with a credit card, and then record that information for purposes unrelated to approving the credit transaction.  In the longer term, it is likely that information collected by retailers for authentication purposes will need to be separate and distinct from personal information collected for marketing purposes.

The Court’s well-reasoned opinion slapped two California lower courts which had ruled squarely for Williams-Sonoma. Citing Webster’s New International Dictionary, among other sources, the Supreme Court held that a consumer’s ZIP code is certainly personal identification information (“PII”) protected by the Credit Card Act.   The rationale of the lower courts, including an analysis based on the obscure doctrine of ejusdem generis, was roundly rejected. The Appeals Court had argued a ZIP code is not protected PII because it pertains to a group of individuals compared to a home address and phone number, both of which are protected.  Justice Moreno wasn’t impressed, pointing out that a group of individuals may well live in the same household and a home phone number may be used by multiple persons.

The Court’s analysis was premised on a sounder grasp of how technological and search engine advances in recent years allow business enterprises to invade the privacy of consumers.  The Court noted that the purpose of the Song-Beverly Act was to prevent retailers’ misuse of a consumer’s personal information for their own business purposes such as in-house marketing efforts, or to sell to direct mail or telemarketers. The Court’s ruling blocks retailers from “end-running” the law since readily accessible technology allows a cardholder’s ZIP code to be combined with the cardholder’s name to locate his or her full address. This accumulated information is then used by the retailer for its own purposes without the consumer’s consent, as alleged in the Williams-Sonoma case.

Retail and other businesses have a legitimate right to safeguard against fraud in connection with purchases by consumers.  They still have the right to require positive identification as a condition to accepting a credit card such as a driver’s license or a state issued identification card.  The store may match the name on the ID to the name on the credit card and visually compare the photo image on the ID to the presenting cardholder, provided that none of the information may be written or recorded, including the ZIP code.

The decision, entitled Pineda v. Williams-Sonoma Stores, Inc., is limited to card present transactions where the cardholder physically presents his or her card to the retailer.  Some businesses may still legitimately request a ZIP code if the information is needed to complete the transaction. For instance, gas stations that require the customer to enter a zip code at the pump should still be able to do so assuming the oil company does not record the information and credit card processor requires the information to authorize the charge.  ZIP code or other address information may still be collected if it is needed to complete the delivery of merchandise purchased at a store or via online transactions.

The decision was delivered on February 10, 2011. Since then, more than 100 class action suits have been filed against other major retailers including Big 5 Sporting Goods, Bed Bath & Beyond, JC Penney, Kohl’s, Office Depot and WalMart. The circumstances related to some of these businesses may be different than the Williams-Sonoma decision.  Consequently, we expect that the outcomes in some of the new cases will vary.  Many of the suits were filed in San Francisco County Superior Court in early March including cases against Pier 1 Imports, Sephora, T.J. Maxx, Marshalls, Urban Outfitters, Coach, Pottery Barn, Sur La Table and West Elm.

Questions regarding the business implications of Pineda v. Williams-Sonoma should be directed to Jonathan D. Joseph at Joseph & Cohen, Professional Corporation.

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Joseph & Cohen Sponsors 2011 Bank President and Directors Conference in Maui

Joseph & Cohen is a sponsor of the Western Independent Banker’s 2011 Bank Presidents, Senior Officers and Directors Conference in Maui, Hawaii.  WIB’s annual conference, attended by leaders of the community banking industry, will focus on preparing for the opportunities and challenges of 2011 and beyond.   Joseph & Cohen is one of the few boutique law firms in California with a core banking law expertise that helps bank CEO’s and bank directors successfully adjust to the opportunities and challenges they face.  Jonathan M. Cohen, one of the firm’s founders, will be a featured speaker at WIB’s “hot topic” session entitled “D & O Insurance: What You Don’t Know Can Cost You,” addressing the highlights and pitfalls found in many, if not all policies and the steps banks should take to ensure that coverage is there, if and when it is needed. This annual event brings together leaders in the banking industry, federal banking regulators and community and independent bank executive officers and directors for four days of high level presentations, conversations and networking.

For additional information, please visit WIB’s website.

Joseph & Cohen, Professional Corporation, is an AV® rated firm based in California that emphasizes complex banking, corporate, regulatory, securities, executive employment and litigation matters for financial institutions, entrepreneurs, businesses, investors and venture capital firms.  Joseph Law is known for sophisticated expertise, extraordinary commitment to clients, relationship-based services, and a range of specialized capabilities typically found only in the largest American law firms.