In the wake of the 9/11 terrorist attacks, Congress enacted or expanded a
number of laws regarding the global financial system in order to combat money
laundering and promote national security. As I have noted in prior post (most
recently here), regulatory
enforcement activity under these laws represents a potentially significant new
area of potential D&O exposure. In addition, as a recently filed securities
class action lawsuit shows, alleged violations of these financial controls not
only can lead to regulatory action by federal regulators but may also lead to
private civil litigation.
Background
The recently filed securities class action lawsuit involves BofI
Holdings, Inc., the holding
company of Bank
of the Internet USA. The bank was
the subject of an August 22, 2015 New York Times article
entitled “An Internet Mortgage Provider Reaps the Rewards of Lending Boldly” (here). The Times article reports that the bank has enjoyed
great business success and rapid growth in recent years by “issuing big
mortgages to high earners whom other lenders might not necessarily welcome with
open arms.”
While the bank has enjoyed substantial success, it apparently has its
critics. Among other things, the news article reports, the bank “has lent some
money to some unsavory characters,” including individuals convicted of Medicare
fraud and of securities fraud. The news article also reports that “there are questions”
about the bank’s “marketing of itself as a lender to ‘foreign nationals.’” The
article noted that this kind of lending activity can attract increased scrutiny
from banking regulators under bank secrecy and anti-money-laundering laws, and
noted further that in recent months there had been “unrest” with its regulatory
compliance division, including the departure, among others, of an internal
audit division employee named Matt Erhart.
An October 13, 2015 New York Times article
(here) reported that
Erhart had filed a lawsuit against the bank alleging that he had been fired
after revealing what he believed to be wrongdoing at the bank to federal regulators
and management at Bank of Internet. Erhart alleged that the bank had violated
federal laws protecting whistleblowers from retaliation. Among other things,
Erhart’s complaint alleges that Bank of Internet’s borrowers may have included
foreign nationals who might have been off-limits under federal
anti-money-laundering laws.
On October 15, 2015, BofI Holding issued a press release disputing the allegations, which had been repeated in media reports.
The press release quotes the company’s CEO as saying “The complaint recycles
old, baseless and factually inaccurate allegations from a junior audit team
member no longer employed at the Bank. Having shopped his allegations to a variety
of regulatory agencies who have taken no action, Mr. Erhart decided to file
this meritless lawsuit.”
The Lawsuit
On October 15, 2015, a plaintiff shareholder filed a securities class
action lawsuit in the Southern District of California against BofI Holding, its
CEO, and its CFO. Plaintiff’s counsel’s October 15, 2015 press release about
the lawsuit can be found here. The
plaintiff’s complaint, which can be found here, quotes at
length from the August New York Times article
and from Erhart’s lawsuit. The complaint alleges that:
defendants made false and/or misleading statements and/or failed to
disclose that: (i) the Company’s internal controls were frequently disregarded;
(ii) Bank of Internet’s borrowers included foreign nationals who should have
been off-limits under federal anti-money-laundering laws; (iii) many Bank of
Internet accounts lacked required tax identification numbers; (iv) Bank of
Internet fired an internal auditor who raised the foregoing issues to management
and to federal regulators; and (v) as a result of the above, the Company’s
statements regarding its internal controls and other financial statements were
materially false and misleading at all relevant times.
Among other things, the complaint also alleges that following the news of
the lawsuit, the holding company’s share price declined 30%. The complaint,
which purports to be filed on behalf of a class of shareholders who purchased
their shares between September 4, 2013 and October 13, 2015, alleges that the
defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934.
Discussion
The case presents an interesting example of an instance where an alleged
violation of the federal anti-money-laundering laws has given rise to a D&O
claim. The case also involves the unusual circumstance where money-laundering
violations have been raised but apparently are not in fact actually being
pursued by the banking authorities.
As I noted in a prior post, the costs of responding to and defending against allegations of alleged
violations of federal financial controls could fall within the coverage of the
target company’s D&O insurance policy. And as I noted in a separate prior post, there have been cases where private civil litigation, in the form of a
shareholder derivative lawsuit, has arisen in connection with a company’s
payment of fines U.S. Department of Treasury’s Office of Foreign Assets Control
(OFAC) for alleged trade sanction violations.
The securities class action lawsuit filed recently filed against BofI
Holding represents another example where alleged violations of federal laws
relating to money laundering and national security have led to claims
potentially covered under a D&O insurance policy. While the kinds of regulatory
fines and penalties that violations of these laws might trigger typically would
not be covered under D&O insurance policy, the type of D&O lawsuit
filed against BofI Holding typically would be covered, which highlights the way
in which these kinds of allegations can lead both to D&O claims and to
potentially covered losses.
The lawsuit raises the possibility of a potentially significant new
liability exposure for directors and officers of companies allegedly engaging
in transactions subject to federal money laundering and national security laws.
The lawsuit also raises the prospect of further follow-on civil litigation
arising in the wake of whistleblower allegations of federal regulatory
violations.
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