State attorneys general (AGs) have long played a significant role in consumer protection enforcement, often acting as frontline regulators alongside federal agencies. For consumer financial services companies, an AG investigation can present both operational disruption and reputational risk. Understanding the process, potential pitfalls, and effective defense strategies can help make a significant difference in the outcome.
1. Understanding the Scope and Triggers of an AG Investigation
AG investigations can be triggered by consumer complaints, whistleblower reports, media coverage, or coordination with other state or federal agencies. In the consumer financial services space, common areas of focus include:
- Alleged unfair, deceptive, or abusive acts or practices (UDAAP), including advertising and marketing of financial products and payment methods (e.g., preauthorized and subscription billing)
- Consumer lending / financing
- Debt collection practices
- Mortgage servicing and lending
- Payment services, including rental and utility payments
- Service, convenience, processing, and other "add-on" fees
- Student loans and auto finance
- Privacy and data security
Investigations often begin with a civil investigative demand (CID) or subpoena, requiring companies to produce documents, provide written responses, or submit to testimony. Some AGs, such as those in California, Colorado, the District of Columbia, Illinois, Minnesota, New York, North Carolina, Maryland, Pennsylvania, and Massachusetts, are particularly active in this space and often collaborate with multistate coalitions.
2. Responding to a Civil Investigative Demand (CID)
Upon receiving a CID (or other inquiry), prompt and organized action is crucial. Best practices include:
- Review and Assess: Carefully analyze the CID to understand the scope of the investigation and identify potential risks. This includes assessing the focus of the CID, the specific facts at issue, and how those facts intersect with applicable law. This evaluation is essential not only for initial strategic decisions but also for continually adjusting defense strategy and tactics as the investigation evolves
- Engage Counsel: Experienced outside counsel with deep knowledge of the business and familiarity with the relevant legal landscape can provide invaluable guidance. While relationships with investigators may be perceived as beneficial, true value comes from counsel who understand the nuances of the type of products and services at issue and relevant consumer protection and financial services laws, allowing for a more informed and effective defense strategy
- Negotiate Scope: In some cases, the breadth of a CID can be narrowed through dialogue with the AG's office
- Preserve Documents: Ensure all potentially relevant documents and communications are preserved to avoid spoliation claims
Continual reassessment throughout the investigation allows companies to adapt their approach as new information emerges, ensuring a dynamic and effective defense strategy.
3. Managing Multistate Investigations
When multiple AGs coordinate an investigation, complexity increases. A multistate inquiry often involves a lead state coordinating the effort, but each AG maintains independent authority. Key considerations include the following:
- Unified Strategy: Coordinate responses to ensure consistency across jurisdictions
- Negotiating with the Executive Committee: Engage with the executive committee overseeing the investigation to negotiate production timelines, scope of documents, and confidentiality agreements regarding information sharing and state freedom of information act / sunshine / open records laws
- Information Sharing: Be mindful that information shared with one AG may be shared with others, including federal regulators
- Settlement Dynamics: Multistate settlements can involve significant monetary relief, injunctive terms, and ongoing compliance obligations
Companies also must remain vigilant for simultaneous inquiries from state AGs and financial services regulators, whose oversight – whether through licensing or registration requirements -- adds another layer to the company's response and investigation strategy.
4. Preparing for Potential Litigation with State Attorneys General
While many AG investigations conclude with a voluntary resolution or settlement, some escalate into formal litigation. This typically occurs when the AG believes there is sufficient evidence of statutory violations or if the company disputes the findings and refuses to settle. Understanding how to prepare for potential litigation is critical:
- Evaluating the Risk: Early and ongoing assessment of potential litigation risk, based on the facts of the investigation and applicable law, can inform defense strategies and settlement considerations
- Preserving Privileges: Throughout the investigation, it's crucial to maintain attorney-client privilege and work-product protections, especially when internal investigations are conducted in parallel
- Pre-Litigation Dialogue: Proactively engaging with the AG's office, including the executive committee in multistate matters, can sometimes avert litigation through negotiated resolutions
- Defensive Strategy: If litigation becomes unavoidable, ensuring outside counsel is well versed in both the relevant consumer protection laws and the client's business operations will provide a stronger defense
- Jurisdictional Complexities: Multistate litigation can result in proceedings in multiple jurisdictions, requiring a coordinated defense strategy to avoid inconsistent rulings or duplicative penalties
Even if litigation is unlikely, positioning the company for success in court strengthens its hand during settlement negotiations and ensures better outcomes.
5. Avoiding Common Pitfalls
Common missteps can complicate an investigation and increase exposure:
- Delays in Response: Failing to meet deadlines can result in enforcement action
- Incomplete Productions: Providing incomplete or inconsistent information can undermine credibility
- Failure to Address Underlying Issues: If an investigation reveals operational weaknesses, proactive remediation can demonstrate good faith
6. Resolution and Post-Investigation Compliance
Resolutions often take the form of an assurance of voluntary compliance (AVC), consent judgment, or settlement agreement. These agreements typically include:
- Monetary Relief: Civil penalties, restitution, or disgorgement
- Injunctive Relief: Requirements for operational changes and future compliance
- Monitoring and Reporting: Periodic reporting to the AG's office
Post-investigation, companies should conduct internal reviews to identify root causes, implement corrective measures, and strengthen compliance programs to avoid future scrutiny.
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State AG investigations pose significant risks but can be navigated effectively with a proactive, organized, and strategic approach. For consumer financial services companies, the key lies in early engagement with experienced counsel on the issues being investigated, transparent communication with regulators, and a commitment to compliance. In an environment of heightened state-level enforcement, preparation and vigilance remain the best defenses.
