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 email@example.com.
Marie F. Hogan is Of Counsel in the firm’s San Francisco office. She has practiced law in California for more than thirty years with a core emphasis on representing commercial banks, other depository institutions and financial service companies in connection with mortgage lending, bank operations, loan workouts, consumer law and compliance, credit and debit cards, bankruptcy and insolvency and similar matters.
Ms. Hogan has been active in the State Bar of California for many years, having served as chair of the Executive Committee of the Business Law Section in 1998 and as a member or advisor to the Executive Committee from 1994 to the present. Marie Hogan is currently also a member of the Consumer Financial Services Committee of the State Bar’s Business Law Section. Ms. Hogan was previously a member of the Uniform Commercial Code Committee where she contributed her extensive skills related to, among other areas, deposits, letters of credit and personal property leasing.
Prior to joining Joseph Law, she has held senior legal positions in some of the largest banking organizations in California including Bank of America NT & SA, The Bank of California NA, World Savings Bank and Charles Schwab Bank.
Ms. Hogan has been a member of the Board of Directors of American Bach Soloists since 2000. She also served two terms as President of the organization. American Bach Soloists perform music of the Baroque era and are known around the world for the quality of their performances and interpretation
Ms. Hogan was awarded her Juris Doctor degree from Hastings College of the Law in San Francisco. Ms. Hogan received her undergraduate degree from the School of Foreign Service at Georgetown University in Washington D.C.
Ms. Hogan is a member of the State Bar of California.
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.
SAN FRANCISCO, CA – November 13, 2012. Joseph & Cohen, Professional Corporation, located in San Francisco, California, announced today that it successfully structured a settlement for its clients, five former officers of County Bank, Merced, California, in connection with a lawsuit brought by the Federal Deposit Insurance Corporation, in its capacity as receiver for County Bank. County Bank, which collapsed in February 2009, had been the wholly-owned banking subsidiary of Capital Corp of the West (Nasdaq: CCOW).
The case, which was filed by the FDIC in the Federal Court in Fresno, California in January 2012, was titled FDIC, as receiver for County Bank v. Hawker, et al., (Case No. 1:12-CV-000127-LJO) (“FDIC v. Hawker”). The settlement completely settles and satisfies all claims brought by the FDIC against the five former officers of the Bank: Thomas Hawker, Edward Rocha, John Incandela, David Kraechan and Jay Lee (the “officers”).
A companion case that the officers filed against BancInsure, Inc. and the FDIC in July 2012, in the same Fresno based Court, remains outstanding. In that case, Hawker et al v. BancInsure (Case No. 1:12-cv-01261-LJO-GSA), Tom Hawker and the other officers asserted claims against BancInsure for declaratory relief, breach of contract, bad faith, punitive damages and reformation. The officers were forced to sue BancInsure, the professional liability insurer for County Bank, after it abandoned them and refused to defend the claims in the FDIC Action.
Jonathan Joseph, counsel for the officers stated “We believed that we had strong legal and factual defenses to the FDIC’s claims. In our view, County Bank collapsed as a result of the greatest recession in our lifetime. So, we vigorously defended Tom Hawker and the other four officers of County Bank against all of the government’s allegations. But, after the D&O Insurer abandoned our clients and refused to defend them or settle the FDIC lawsuit, we are pleased to have successfully structured this deal with the FDIC as the settlement eliminates all claims, further uncertainty and the trouble, risk and expense associated with the litigation.”
An essential element of the settlement involved an assignment to the FDIC by the officers of their lawsuit against BancInsure including claims for bad faith and breach of contract. The officers retained the right to recover their defense expenses incurred prior to the FDIC settlement from BancInsure. The officers maintained the right to continue to control and prosecute this retained claim against BancInsure.
Tom Hawker, former CEO of County Bank and President and CEO of CCOW, said “I am relieved to put this case behind me as it eliminates further uncertainty, cost or risk to me and my family. I am outraged that the Bank’s D&O insurer abandoned me as I would have been financially ruined if I continued to defend myself against the FDIC’s allegations despite having excellent legal and factual defenses to their claims.”
As a result of the settlement, the FDIC will control and prosecute the officers’ assigned claims against BancInsure at its cost and expense. Jon Cohen, litigation partner at Joseph & Cohen, explained “We look forward to litigating alongside the FDIC on behalf of our clients to prove that BancInsure improperly applied the so-called “insured versus insured” exclusion to deny the coverage our clients had expected and relied upon.”
The parties exchanged other valuable covenants including an agreement not to bring any other civil claims against each other and a promise by the FDIC not to take any further action or assert any claims against any of the property or assets of the officers.
Joseph & Cohen, Professional Corporation, is an AV® rated law firm based in San Francisco, California, that emphasizes the representation of community and regional banks and bank holding companies and their officers and directors. The firm also specializes in representing financial service companies, credit unions and private equity firms in connection with corporate, securities, regulatory, litigation, executive employment and merger matters. 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.
By Marie Hogan and Jonathan Joseph
The President of the United States sent a wake-up call to the payday lending industry in his 2012 State of the Union speech that they are a target of federal enforcement action by the new Consumer Protection Financial Bureau or CFPB. President Obama exclaimed:
“If you’re a mortgage lender or payday lender or a credit card company, the days of signing people up for products they can’t afford with confusing forms and deceptive practices—those days are over.”
Almost a week before the speech, the Consumer Financial Protection Bureau, the newest federal agency whose name describes its mission, published its guidelines for examinations of short-term, small-dollar lenders (aka “payday lenders”). See www.consumerfinance.gov/guidance. Payday lenders and other non-bank financial service providers that have never been subject to direct federal regulation will now be under the jurisdiction of the CFPB.
The CFPB’s guidelines and the President’s call out indicate the payday lending industry has clearly been targeted due to perceived abuses. The initial guidelines for the payday lending industry consist of 17 pages and are a supplement to the CFBB’s 802 page examination handbook. The management and boards of directors of payday lenders that desire to comply with the CFPB’s regulations should familiarize themselves with the guidelines and implement expanded compliance systems.
WHAT is the CFPB’s purpose?
The CFPB will implement and enforce Federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that the market for consumer financial products and services are fair, transparent, and competitive. They will especially target lenders engaging in unfair, deceptive or abusive acts or practices.
WHY payday lending?
Payday loans are supposed to be short term: 14 days. As the name implies, they’re supposed to provide emergency cash to enable consumers to cover short term necessities until the next pay day, when they theoretically should be able to repay the loan. Critics say this is typically not the case. Customers often roll-over their debt when they can’t repay it. They wind up living off that borrowed money at an annual interest rate of 400 to 600 percent or more.
Here’s how it works. Let’s say an individual needs $100 and the interest rate for that two week period is 15 percent. The customer writes a postdated check made out to the lender for $115. If the customer can’t pay that amount when the two weeks is up, the lender keeps $15, the loan is extended and another $15 fee is added on.
The CFPB is still in the fact gathering mode regarding the payday industry, holding hearings earlier this year in Birmingham, Alabama. However, the industry is number two in its list of priorities (see www.consumerfinance.gov/regulations/fall-2011-statement-of-regulatory-priorities). Richard Cordray, the CFPB’s executive director, said the agency will examine bank and non-bank institutions offering these short-term, small-dollar loans. At the Birmingham hearing, Cordray expressed this sentiment:
“We recognize that there is a need and a demand in the country for emergency credit. At the same time, it’s important that these products actually help consumers and not harm them. We know that some payday lenders are engaged in practices that present immediate risks to consumers and are illegal. Where we find these practices, we will take immediate steps to eliminate them.”
WHAT is the scope of CFPB’s responsibility?
CFPB has responsibility for specified federal consumer financial laws, such as Truth in Lending and the Fair Credit Reporting Act and certain Federal Trade Commission rules, such as the Credit Practices rule. The CFPB may also issue rules, and even without a rule, it may examine for unfair, deceptive or abusive acts or practices that cause significant financial injury to consumers, erode consumer confidence, and undermine the financial marketplace.
WHICH payday lenders can the CFPB examine?
Any payday lender, in any state, whether regulated or not, can be examined. The CFPB has the power to take enforcement actions against any payday lender. The first step for the CFPB is an examination of the company for compliance with federal consumer financial laws and unfair, deceptive or abusive acts or practices. An important point is that the examination guidelines merely provide a roadmap for what a company needs to do. The CFBP’s guidelines don’t provide detailed direction to a payday lender but the CFBP will provide notice through the examination process regarding the company’s demerits and legal violations. The CFPB has a scale of 1-5 (one being the best) that will be awarded in an examination. In general, all payday lenders should strive to earn 1 or 2 ratings in all sub-categories that are reviewed.
The CFPB may investigate and bring administrative enforcement proceedings or civil actions in Federal district court for violations of federal consumer financial laws. The CFPB additionally may obtain “any appropriate legal or equitable relief with respect to a violation of Federal consumer financial law” including: 1) rescission or reformation of contracts; 2) refund of money or return of real property; 3) restitution, disgorgement or compensation for unjust enrichment; 4) payment of damages or other monetary relief; 5) public notification regarding the violation; 6) limits on the activities or functions of the person against whom the action is brought; and 7) civil money penalties (which can go either to victims or to financial education).
The CFPB has no criminal enforcement authority; however, it may refer matters it believes may constitute criminal activity to the Department of Justice.
Payday Lender Examinations: What should management know?
The examination procedures are very much based on bank/financial institution formats. Here is our list of how this system works based on years of experience and working with the regulatory agencies:
First, policies and procedures must be in writing. That means the payday lender’s Board of Directors should establish detailed written procedures covering all significant compliance risks and processes.
Second, procedures must address compliance with federal consumer financial laws, as well as addressing other risks.
Third, the Board must be intimately involved in establishing policy, overseeing management and insisting that management comply with its policies.
Fourth, companies must train and monitor their employees.
Fifth, monitor audit procedures and processes and address all criticisms from internal and external auditors, state regulators and the CFPB.
Sixth, compliance must cover “soup to nuts”, meaning from product development to end of customer relationship and every significant step in between.
Seventh, appoint a compliance officer with real authority and responsibility. For smaller companies, this may be an employee who has other responsibilities, but take steps to assure that the compliance officer is qualified.
Eighth, the company must monitor any third party service providers for compliance with the above.
The CFBP examination objectives are:
1. To assess the quality of compliance risk management systems, including internal controls and policies;
2. To identify acts or practices that materially increases the risk of violations of federal consumer financial laws;
3. To gather facts that help determine whether the lender is engaged in acts or practices that violate the requirements of federal consumer financial laws;
4. To determine if a violation of a federal consumer financial law has occurred and whether enforcement actions are appropriate.
Which Federal Laws Are Applicable to Payday Lenders?
- TILA and Regulation Z—TILA is the Truth in Lending Act and Regulation Z require lenders to disclose loan terms and annual percentage rates. Regulation Z also covers advertising disclosures, proper crediting of payment, proper crediting of credit balances and periodic disclosures.
- EFTA and Regulation E—EFTA is the Electronic Funds Transfer Act which protects consumers engaging in electronic transfers, including that lenders may not require, as a condition of loan approval, the customer’s authorization for loan repayment through recurring electronic funds transfers.
- FDCPA—This is the Fair Debt Collection Practices Act which governs collection activities conducted by (a) third party collection agencies and (b) lenders collecting their own debt under an assumed name.
- FCRA— This is the Fair Credit Reporting Act which, with its regulations, governs furnishing information to credit agencies and the use of credit reports.
- GLBA – This is the Gramm-Leach-Bliley Act which, together with implementing regulations, requires that furnishers of information to consumer reporting agencies ensure the accuracy of data furnished to the consumer reporting system.
- ECOA—This is the Equal Credit Opportunity Act which, together with implementing Regulation B, sets requirements for accepting credit applications and providing notice of any adverse action. Discrimination against a borrower is prohibited, plus discrimination based on public assistance income or because the applicant has exercised any right under the Consumer Credit Protection Act is prohibited.
Some payday lenders do attempt to comply with applicable law. However, bad actors in the industry have contributed to the perception that widespread abuses exist. Companies in the “short term small dollar” lending business that desire to avoid potential CFPB enforcement sanctions should implement compliance systems and procedures modeled after those used in the banking industry designed specifically to comply with the laws listed above. This may entail adding risk and compliance officers to existing management teams, robust internal controls and better policies and procedures.
For additional information contact:
Jonathan Joseph at firstname.lastname@example.org; or
Marie Hogan at email@example.com.
SAN FRANCISCO, CA – March 28, 2011. Joseph & Cohen, Professional Corporation, announced today that its co-founders, Jonathan D. Joseph and Jonathan M. Cohen, joined the Ad Hoc Committee of Bank Counsel (“Amici” or “Committee”) in support of the law firm, Bryan Cave LLP (“Bryan Cave”), in a case brought against them by the FDIC (FDIC v. Bryan Cave LLP, 10-cv-03666). The FDIC sued Bryan Cave in November 2010 in the U.S. District Court in Atlanta, charging Bryan Cave with failing to hand over bank records related to the October 2010 collapse of Kansas-based Hillcrest Bank.
The Committee, comprised of some of the top banking lawyers in the country, was formed last week to file an Amicus Brief supporting Bryan Cave’s motion for a summary judgment. The controversy relates to Bryan Cave’s representation of the directors of Hillcrest Bank in the brief period before and after that Bank failed. The issue in the case is of vital importance to bank directors and executive officers as the FDIC has asserted that bank directors and officers have no right to retain bank documents after the FDIC is appointed receiver of a failed bank.
The Committee’s “friend of the court” brief points out that the FDIC’s complaint, if sustained, would be an unprecedented deprivation of long accepted rights of bank officers and directors to mount and conduct an adequate and timely defense against claims by the FDIC and others. The Committee’s Amicus Brief was filed before Judge Timothy Batten, Sr. in the Northern District of Georgia on March 24, 2011. As Amici, their court filing fulfills the classic role of amicus curiae by assisting in a case of general public interest and supplements the efforts of counsel to a party in the case.
The Committee is a group of twenty-eight experienced and recognized bank attorneys and one major national law firm all of whom are currently active in the representation of FDIC insured financial institutions, as well as their officers and directors. Members of the Committee are frequently called upon to provide advice and counsel to officers and directors regarding their rights and obligations when they are subject to or threatened with a claim by the FDIC, by shareholders or other third parties, for claims incident to a failure or risk of failure of the bank for which they serve.
Jonathan Joseph, CEO of Joseph & Cohen, stated “We joined the Amicus Committee to advocate for a fair and just resolution of the matters in dispute consistent with the statutory and constitutional rights of bank directors and officers of failed and failing banks to defend, with the aid of counsel, against suits and claims, as well as the interest of the FDIC in maintaining the confidentiality of protected records.”
The central question in the case is whether directors and officers of federally insured banks may access and obtain copies of bank documents in anticipation of the bank’s failure, so that they may later use the copies, with the assistance of counsel to explain and defend their conduct. Bryan Cave has filed a motion asking the Court to dismiss the case arguing that as a matter of law the FDIC has no valid claims.
Bryan Cave’s motion points out that no federal statute or regulation prohibits a bank director or officer from accessing bank documents to assist in explaining or defending his or her conduct. Consequently, they assert that under Kansas law, as in Delaware, New York and many other states, bank directors have a well-recognized right to review and copy corporate documents, and to share those copies with their own counsel, for the entirely legitimate purpose of explaining and defending their own conduct.
Joseph & Cohen, Professional Corporation, is an AV® rated law firm based in San Francisco, California that emphasizes the representation of community and regional banks and bank holding companies and their officers and directors. The firm also handles complex corporate, securities, regulatory, employment and merger transactions as well as commercial and executive employment litigation. 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.
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.
© Joseph & Cohen, Professional Corporation. All Rights Reserved.
SAN FRANCISCO, CA – September 30, 2010. Joseph Law Corporation announced today that it has expanded its banking law expertise through the addition of Marie F. Hogan as Of Counsel to the firm. Ms. Hogan brings more than thirty years of high level banking experience to the firm with a core emphasis on representing commercial banks and financial service companies in connection with mortgage lending, bank operations, loan workouts, consumer law and compliance, credit and debit cards as well as bankruptcy and insolvency matters.
“We are extremely pleased that Marie Hogan is teaming up with Joseph Law. Her depth of industry knowledge as well as her hands-on experience in consumer compliance, loan workouts, regulatory and mortgage lending will benefit our clients in this post Dodd-Frank era. Marie really rounds out our ability to offer complete legal solutions to financial institutions,” said Jonathan Joseph, the firm’s chief executive officer.
Marie Hogan brings to Joseph Law Corporation many years of working hand in hand with the business people who develop necessary and useful financial products for their customers. In a regulated industry, Marie Hogan has the skills to navigate the many new regulations that will be enacted pursuant to the Dodd-Frank Act. The firm will now offer Ms. Hogan’s services to our banking clients to enable them to bring cutting edge products to the market and to help them comply with numerous new consumer, lending and other regulatory requirements.
Marie Hogan’s experience has included senior positions at Bank of America, World Savings and Schwab Bank. Ms. Hogan also served as chair of the Executive Committee of the Business Law Section of the California State Bar in 1998 and as a member or advisor to the Executive Committee from 1994 to the present. Marie Hogan is currently also a member of the Consumer Financial Services Committee of the State Bar’s Business Law Section.
Joseph Law Corporation is an AV® rated firm based in California that emphasizes complex banking, corporate, regulatory, securities and transactional 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.
For additional information, please visit the firm’s website at www.josephlawcorp.com or call Jon Joseph at 415.817.9200.
This press release is provided as a general informational service to clients and friends of Joseph Law Corporation. It should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message create an attorney-client relationship. These materials may be considered Attorney Advertising in some states. Please note that prior results discussed in the material do not guarantee similar outcomes.
Kenneth Sayre-Peterson is a Partner of Joseph & Cohen with a focus on banking regulation, credit unions, money transmitters, securities, trust and bank enforcement matters. He joined Joseph & Cohen in 2012 following his retirement from the California Department of Financial Institutions (DFI), where he served in various legal capacities during a twenty-two year career.
Mr. Sayre-Peterson acted as the General Counsel for the California Department of Financial Institutions from June 2007 until his retirement in November 2011. He was responsible for assisting the DFI’s Legislative Section and spearheaded a four year project culminating in the restatement of California’s Banking Law which was codified as part of the California Financial Code in January 2012. As part of this project, he drafted substantially all of relevant the enabling legislation.
Throughout his DFI career, Mr. Sayre-Peterson practiced general financial institutions law which resulted in an intimate knowledge of state and federal banking law, credit unions, regulatory and enforcement issues, money transmitter matters, securities and trust laws, as well as the corresponding federal laws. In this capacity, He played a significant role in many troubled bank resolutions and worked closely with senior regulatory staff at the Federal Deposit Insurance Corporation and the Federal Reserve Bank. While serving as the DFI’s General Counsel, he influenced the Department’s policy making process including the direction and scope of its examination and enforcement programs.
Mr. Sayre-Peterson is a member of the Consumer Financial Services Committee of the State Bar of California’s Business Law Section. He has been a featured speaker and panelist at numerous legal and banking seminars throughout his career including the Western Independent Bankers Association, the Bankers Compliance Group, the California Bankers Association, the Conference of State Bank Supervisors and the California Credit Union League. As the lead DFI attorney, he was an advisory member of the Financial Institutions Committee of the State Bar of California’s Business Law Section. Prior to joining the DFI in 1988, he worked as staff tax counsel for four years with the California State Board of Equalization. Before entering state service, he specialized in appellate work and lobbying while in private practice in Sacramento.
Mr. Sayre Peterson has been a member of the State Bar of California since 1983 following graduation, with distinction, from McGeorge School of Law, Sacramento. He earned a Bachelor of Arts degree in History from California Polytechnic State University, San Luis Obispo, 1977.
Jonathan Joseph to Present “Dodd-Frank Executive Compensation and Corporate Governance” Webinar for CalBar
SAN FRANCISCO, CA – August 12, 2010. Joseph Law Corporation announced today that its Managing Partner, Jonathan D. Joseph, will present “Dodd-Frank’s Corporate Governance and Executive Compensation Requirements For Public Companies: Why Planning Now For 2011 is Essential” via a live 60 minute webinar on August 18, 2010. The Calbar’s description of Mr. Joseph’s webinar presentation states:
“The Dodd-Frank Wall Street Reform and Consumer Protection Act or “Dodd-Frank” was enacted on July 21, 2010. Commencing in 2011, a non-binding shareholder “Say on Pay” vote to approve executive compensation may be the most profound executive pay provision in Dodd-Frank. Each public company must also ask its shareholders whether future Say on Pay votes should take place every one, two or three years (Say When on Pay). When mergers or other acquisitions are submitted to shareholders, public companies will also be required to submit golden parachutes to shareholders for approval (Say on Golden Parachutes). Other notable provisions require enhanced independence for board compensation committees and their advisers and claw backs of erroneously awarded executive compensation as well as new descriptions of pay versus performance and internal pay equity metrics. Dodd-Frank also explicitly authorized the SEC to adopt “proxy access,” a procedure where shareholder submitted board nominees will be included in the company’s proxy solicitation materials. Say on Pay, Say When on Pay and Say on Golden Parachutes are far from meaningless. These new corporate governance requirements will impact as many as 10,000 companies. Learn What is Required, What Isn’t Clear and Pragmatic Steps to Consider Now from a corporate securities practitioner with more than three decades of experience. This webinar is appropriate for inside and outside corporate legal advisers, board members, Board and Compensation Committee Chairman, CEOs, CFOs and investor relations personnel.”
The 60 minute webinar will be presented by Jonathan Joseph live online at 1:00 pm on August 18, 2010 via the CalBar’s website and will be retained in the Calbar’s CLE online archives ensuring that the program will be available in the future to interested persons including California lawyers seeking participatory continuing legal education credit. The archived webinar will be available after August 18 at www.calbar.org/online-cle and then clicking on “Tele-Seminars and Webinars”.
Jonathan Joseph is the Managing Partner of Joseph Law Corporation. His practice is devoted largely to complex banking, corporate, mergers and acquisitions, venture capital and bank regulatory matters. Mr. Joseph is a current member of the Financial Institutions Committee of the State Bar of California’s Business Law Section. He has been a frequent lecturer and writer on subjects relating to banking, financial institutions, corporate and securities law, mergers and acquisitions and venture capital. Mr. Joseph is also a member of the New York and DC Bar.
For more information contact Jonathan Joseph at firstname.lastname@example.org or 415 817 9200.
This press release is provided as a general informational service to clients and friends of Joseph Law Corporation. It should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message create an attorney-client relationship. These materials may be considered Attorney Advertising in some states. Please note that prior results discussed in the material do not guarantee similar outcomes.