SEC v. Liu supports FTC's pursuit of restitution in federal court

Federal Trade Comm’n v. Elegant Solutions, Inc., Case No. SACV 19-1333 JVS (KESx), 2020 WL 4390381 (C.D. Cal. Jul. 6, 2020) 

I mostly try to find interesting legal issues, but sometimes it’s good to point out the importance of the FTC going after ordinary fraudsters--and as a bonus we get a holding on the effect of SEC v. Liu on the FTC's restitution authority.  Defendants falsely represented, among other things, that they would take over servicing student loans, but instead collected victims’ money and decided on a case by case basis how much to pay the actual holder of the debt. The FTC asserted violations of the FTCA and the Telemarketing Sales rule. 

The court found that a permanent injunction with monitoring provisions was appropriate, given a pattern of defendants’ “corporate repackaging and rebranding of the same fraudulent scheme” despite investigations in multiple states. The court also awarded nearly $27.6 million in equitable recovery for consumers—a remedy now under threat, but necessary to make consumers whole. 

Defendants argued that they “modified and improved their sales policies and procedures in November 2017,” making injunctive relief unavailable. But the FTC showed ongoing violations of the law beyond that time. Telemarketing scripts continued to include deceptive , such as “I’m calling regarding your federal student loans to inform you that you qualify for a lower payment, reduced rate, and possible loan forgiveness”  and  “Your monthly payments are going to be ________, which we can start as soon as tomorrow ....” And defendants continued to collect advance fees—not allowed under the Telemarketing Sales Rule for debt relief services—after November 2017. 

Defendants challenged the availability of equitable restitution pursuant to Section 13(b) of the FTCA, which states “[t]hat in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction.” In F.T.C. v. Credit Bureau Center, LLC, 937 F.3d 764 (7th Cir. 2019), the Seventh Circuit held that Section 13(b) does not authorize restitutionary monetary relief. And Owner-Operator Indep. Drivers Ass’n, Inc. v. Swift Transp. Co. (AZ), 632 F.3d 1111 (9th Cir. 2011), found that ancillary remedies including restitution and disgorgement were not appropriate as to Truth-in-Lending regulations because the statute confined the court’s equitable powers to injunctive relief. However, the Ninth Circuit has “repeatedly held that § 13 ‘empowers district courts to grant any ancillary relief necessary to accomplish complete justice, including restitution.’ ” F.T.C. v. AMG Capital Mgmt., LLC, 910 F.3d 417 (9th Cir. 2018). 

The Supreme Court’s recent decision Liu v. SEC, 2020 WL 3405845 (June 22, 2020), further supported this conclusion. There, the Court noted that when equity jurisdiction has been invoked, the district court may exercise its “inherent equitable powers ... for the proper and complete exercise of that jurisdiction,” including ordering monetary remedies. The Court reasoned that “[t]he equitable nature of the profits remedy generally requires the SEC to return a defendant’s gains to wronged investors for their benefit.” 

The court also imposed individual liability. The individual defendants’ status as officers of the various corporate defendants, and their authority to sign documents on the companies’ behalf, gave rise to a presumption that they had the authority to control the businesses. Given their degree of participation and control, the individual defendants were or should have been aware of consumer complaints regarding misrepresentations and consumer cancellations, and there was evidence that each knew about earlier state enforcement actions based upon violations of state consumer protection statutes.