Dodd-Frank Two Years Later

The signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act promised sweeping changes and more protection for consumers.  Almost two years later has consumer litigation boomed as was expected?

After the signing of Dodd-Frank into law, many financial companies feared that the sweeping changes it promised would alter the way they did business forever.  Their worst fear was an upswing in private litigation.  This fear is warranted as corporations should be wary; Dodd-Frank paves the way for a potential increase in litigation.

First, new whistleblower incentives and protection provide a new avenue for litigation for consumers that corporations need to be prepared for.  Corporations are limited in their ability to punish or terminate employees who provide original information to either the SEC or the newly formed Bureau of Consumer Financial Protection.[1]  In addition, incentives dramatically increased, giving whistleblowers anywhere between 10 and 30% of the monetary sanctions collected against a corporation.[2]  As a result of these changed financial incentives, over three hundred new whistleblower tips were filed in the first month and a half following the effective date of the new rules.  As the tips continue to pour in, the SEC expects an increase in resulting litigation.

Second, the SEC’s authority to prosecute aiding and abetting increased, and the standard of proof has decreased in such cases.  This allows the SEC to bring more successful cases under both the Securities Exchange Act and the Investment Advisors Act.  The SEC is already seeing increased filings based on misrepresentations to customers and misappropriation of funds by financial services firms under Dodd-Frank, but settles the majority of these cases.  A recent decision, however, aims to decrease the number of such settlements and force more of these cases into litigation.

Late in 2011 a federal judge in the Southern District of New York refused to uphold a settlement agreement between the SEC and Citigroup because the agreement did not force Citigroup to admit any wrongdoing.[3]  Essentially, there were no facts that Citigroup stipulated to that were the cause of the proposed settlement.  The judge found that it was a hollow victory for the SEC because while the settlement amount was substantial, it was essentially nominal to Citigroup and the SEC did not walk away with any hard ruling that it could benefit from in later cases.  Currently, the settlement decision is on appeal while the trial begins against the former Citigroup employee charged with negligently misleading investors. If the rejection of the settlement is not overturned, the SEC anticipates an increase in litigation in the coming months and years as companies will no longer have the option to settle without admitting fault.

In addition to new whistleblower incentives and the SEC’s increased authority, Dodd-Frank allows the newly formed Bureau of Consumer Financial Protection (the “Bureau”) to enforce new consumer financial protections. For example, the Bureau has authority to examine entities that provide consumer financial products. In the end, the enforcement of consumer protections and the creation of the Bureau pave the way for more litigation by increasing the avenues available for consumers.

The coming months and years will tell how much these reforms actually affect litigation numbers.  Still, companies need to be on guard and understand the impact Dodd-Frank and the broader financial reforms continue to have.  We at Rock Fusco & Connelly have the necessary experience counseling and litigating to help clients stay prepared for the changes brought about by Dodd-Frank.

 


[1] Donna M. Goelz & Timothy J. Howard, The Dodd-Frank Act’s Impact on Consumer Litigation, 100 IL Bar Journal 100, 102 (2012).

[2] H.R. 4173 – 366, 111th Congress (2010).

[3] SEC v. Citigroup Global Markets Inc., F. Supp. 2d. 2011 WL 5903733 (SDNY Nov. 28, 2007).

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