Texas Attorney General Investigating “Healthy” Claims in Cereal
On April 5, 2025, Texas Attorney General Ken Paxton announced an investigation of W.K. Kellogg Co. (Kellogg) for potential violation of Texas consumer protection laws, alleging that Kellogg’s marketing of its cereals as “healthy” is deceptive marketing because they include artificial food dyes and butylated hydroxytoluene (BHT).
As we previously reported, the Texas Senate recently passed SB 25, which if passed into law would require food labels to warn Texas consumers if a food product contains ingredients banned in other countries. The bill is now under review with the Texas House Committee on Public Health. AG Paxton’s announcement signals the Texas government’s continued focus on food additives and “healthy” claims by food manufacturers.
AG Paxton alleges that Kellogg’s “healthy” claim is deceptive because the artificial dyes “have been linked to hyperactivity, obesity, autoimmune disease, endocrine-related health problems, and cancer in those who consume them.” However, not all food scientists agree with this link to health issues, and many of the food dyes and additives are currently approved for use by the U.S. Food and Drug Administration (FDA).
Keller and Heckman will continue to monitor this investigation and relay any developments.
Avocado Oil Company Moves to Dismiss False Labeling Suit
Sovena USA Inc. has filed a motion to dismiss a proposed class action alleging that the company falsely labeled its avocado oil as “100% pure” despite diluting it with “cheaper” seed oils. According to Sovena, “the suit lacks evidence and is part of a ‘baseless’ litigation campaign meant to undermine the industry.”
The class action stems from a study by UC Davis researchers that showed fatty acid profiles beyond the types of fatty acids that would be expected to be in pure avocado oil, suggesting that there are other oils mixed into Sovena’s Olivari avocado oil. However, Sovena says that rather than testing for inferior oils, the researchers used a “theoretical ‘purity standard’” that they applied to a single bottle of Olivari oil. Thus, the study did not demonstrate that other oils are present in the Olivari oil or any of the other samples tested, but instead that the samples contained an “indicator” of other oils, “could have” other oils, or that the samples otherwise failed the researchers “ad hoc purity standards.”
According to Sovena, because the study does not definitively identify adulteration in the avocado oil, it cannot provide a plausible basis for the plaintiffs’ claims. Therefore, Sovena says the case should be dismissed with prejudice as “just one of multiple no-injury, no-deception class action suits aimed at avocado industry members.” The motion references other suits against Kroger and Walmart, which were both dismissed at the pleading stage.
Keller and Heckman will continue to monitor this and other food labeling litigation.
DOJ Sets New Focus and Priorities in Digital Assets Enforcement
On April 7, 2025, U.S. Deputy Attorney General Todd Blanche issued a memorandum titled “Ending Regulation by Prosecution” (the “Memorandum”), which set out clear and direct enforcement priorities for the U.S. Department of Justice (“DOJ”) relating to digital assets. The Memorandum clarifies that DOJ is not a digital assets regulator and that it will not continue with what it characterizes as the prior Administration’s “regulation by prosecution” strategy. Rather, DOJ will now prioritize enforcement actions that target individual bad actors that use digital assets to perpetuate scams or are engaged in other criminal activity involving digital assets such as organized crime, narcotics, and terrorism. Importantly, the Memorandum scales back the scenarios in which DOJ will pursue enforcement actions against digital asset exchanges or other platforms (e.g., mixers or tumblers) that bad actors may use to conduct illegal activity.
In setting out the DOJ’s new enforcement priorities, the Memorandum adheres to the principles contained in Executive Order 14178 (“Strengthening American Leadership in Digital Financial Technology,” January 23, 2025), which outlines the Trump Administration’s policy of promoting “responsible growth and use of digital assets.” The Memorandum also cites Executive Order 14157 (“Designating Cartels and Other Organizations as Foreign Terrorist Organizations and Specially Designated Global Terrorists,” January 20, 2025), which reflects the U.S. government’s decision to seek the “total elimination” of certain international cartels, criminal organizations, and terrorists.
The Memorandum directs prosecutors to refrain from charging regulatory violations involving digital assets, including unlicensed money transmission, registration requirement failures, and Bank Secrecy Act (“BSA”) violations, unless the defendant “willfully” did not comply with the licensing or registration requirement. Additionally, prosecutors are instructed not to pursue charges in situations where DOJ would be required to litigate whether a digital asset is a “security” or a “commodity,” as long as there is a “an adequate alternative criminal charge available, such as mail or wire fraud.”
To carry out these new priorities, DOJ will shift its enforcement resources related to digital assets. Specifically, DOJ will disband the National Cryptocurrency Enforcement Team (“NCET”), which was established in February 2022 and has supported several recent high-profile digital assets investigations and prosecutions. Additionally, the DOJ’s Market Integrity and Major Frauds Unit will no longer enforce cryptocurrency actions and instead will focus on Trump Administration priorities such as immigration and procurement fraud. The DOJ’s Computer Crime and Intellectual Property Section will continue to liaise with the digital asset industry as needed.
Finally, the Memorandum addresses an issue relating to the way in which victims of digital asset fraud are compensated. Currently, regulations only allow victims to recover the value of their investment at the time of the fraud, rather than at the current fair market value. To rectify this issue, the Memorandum directs the Office of Legal Policy and the Office of Legislative Affairs to propose new legislation and regulations that would allow victims to recover a greater amount of their digital asset losses in situations involving fraud or theft.
Key Takeaways:
The Memorandum neither creates nor eliminates any current laws. Rather, it presents new enforcement and staffing priorities for DOJ, which are tied closely to recent Executive Orders and statements from the Trump Administration.
The DOJ is focused on prosecuting digital asset scams and the illicit, underground use of digital assets by terrorists, narcotics traffickers, and other organized crime elements. It will prioritize those cases by “seeking accountability from individuals” who perpetuate these crimes, as opposed to pursuing “regulatory violations” at digital asset companies.
Regulatory failures can still pose a legal risk for companies, however, particularly if the DOJ finds them to be “willful.” Additionally, it remains to be seen how U.S. states will react to the potential “enforcement vacuum” in the digital assets industry, and whether they will seek to fill the void with a more aggressive enforcement approach.
Regulatory Update and Recent SEC Actions: April 2025
Recent SEC Administration Changes
Senate Confirms Paul Atkins as SEC Chairman
The Senate, on April 9, 2025, confirmed Paul Atkins as the Chairman of the Securities and Exchange Commission (“SEC”). Atkins takes over the Chairman role from the current Acting Chair, Mark T. Uyeda, who was appointed in January 2025 to serve in the interim until Atkins was confirmed. Atkins previously served as a Commissioner from 2002 to 2008, and most recently served as CEO and founder of risk-management firm Patomak Global Partners. He also served as co-chairman of the Digital Chamber’s Token Alliance, where he led industry efforts to develop best practices for digital asset issuances and trading platforms.
Recent SEC Staff Departures
In addition to the departures of SEC Chairman Gary Gensler and Commissioner Jaime Lizarriga on January 20 and January 17, respectively:
Paul Munter, Chief Accountant;
Jessica Wachter, Chief Economist and Director of the Division of Economic and Risk Analysis;
Sanjay Wadhwa, Acting Director of the Division of Enforcement;
Scott Schneider, Director of the Office of Public Affairs;
Amanda Fischer, Chief of Staff;
YJ Fischer, Director of the Office of International Affairs; and
Megan Barbero, General Counsel.
SEC Restructuring and Hiring Freeze
The Trump administration, on January 20, 2025, issued a memorandum that implemented a federal hiring freeze across the executive branch, including the SEC. Further, the SEC plans to restructure the Enforcement and Exams divisions by removing the top leaders at its 10 regional offices across the country and replace them with deputy directors, Katherine Zoladz, Nekia Jones, and Antonia Apps, who will oversee one of three regions–West, Southeast, and Northeast. There will also be a deputy director for specialized units. Additionally, the SEC announced the closures of Los Angeles and Philadelphia offices and a review of the lease for the SEC’s Chicago Regional Office.
SEC Rulemaking
SEC Issues Temporary Exemption from Exchange Act Rule 13f-2 and Related Form SHO
The SEC announced on February 7, 2025, it was providing a temporary exemption from compliance with Rule 13f-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and from reporting on Form SHO, which generally requires certain institutional investment managers to report short positions and daily trading activity for equity securities exceeding certain thresholds. The effective date for Rule 13f-2 and Form SHO was January 2, 2024, and the compliance date for such rule and form was January 2, 2025, with initial Form SHO filings originally due by February 14, 2025. The exemption, for certain institutional investment managers that meet or exceed certain specified thresholds, pushes the due date for the initial Form SHO reports to February 17, 2026.
SEC Announces Exemption from Reporting of Certain Personally Identifiable Information to Consolidation Audit Trail
The SEC, on February 10, 2025, announced it was providing an exemption from the requirement to report certain personally identifiable information (“PII”) – names, addresses, and years of birth – to the Consolidated Audit Trail (“CAT”) for natural persons. CAT was established by the SEC to track trading activity for National Market System securities including stocks and options, allowing regulators to monitor trading activity. The SEC has justified the exemption because the inclusion of this information may allow bad actors to impersonate a customer or broker-dealer and gain access to a customer’s account.
SEC Extends Compliance Dates for Funds Name Rule Amendment and Updates FAQ
The SEC announced, on March 14, 2025, a six-month extension of the compliance dates for amendments adopted in September 2023 to the “Names Rule” (Rule 35d-1) under the Investment Company Act of 1940, as amended (the “Investment Company Act”). The compliance date for larger fund groups is extended from December 11, 2025 to June 11, 2026, and the compliance date for smaller fund groups is extended from June 11, 2026 to December 11, 2026. The SEC indicated that the extension is designed to balance the investor benefit of the amended Names Rule framework with funds’ needs for additional time to implement the amendments properly, develop and finalize their compliance systems, and test their compliance plans. The Commission further indicated that the compliance dates have been aligned with the timing of certain annual disclosure and reporting obligations that are tied to the end of a fund’s fiscal year in order to help funds avoid additional costs when coming into operational compliance with the Names Rule amendments.
Additionally, the SEC has updated the Names Rule FAQ, releasing a new 2025 Names Rule FAQ on January 8, 2025. Key clarifications include:
Shareholder approval is not required for a fund to add or revise a fundamental 80 percent investment policy unless the change would permit a “deviation from the existing policy or some other existing fundamental policy;”
The 2025 FAQ expanded the SEC staff’s note that the term “tax-sensitivity” indicates a fund’s strategy instead of a focus on particular types of investments to terms “similar” to tax-sensitive (such as “tax-advantaged” or “tax-efficient”); and
The use of the term “income” in a fund’s name does not refer to “fixed-income” securities, and instead is used to emphasize an investment goal of generating current income. As such, the use of the term “income” in a fund’s name would not alone require the adoption of an 80 percent investment policy.
SEC Votes to End Defense of Climate Disclosure Rules
The SEC, on March 27, 2025, voted to end its defense of the rules requiring disclosure of climate-related risks and greenhouse gas emissions. The rules, adopted by the SEC on March 6, 2024, required registrants to provide certain climate-related information in their registration statements and annual reports. Following the SEC’s vote, the SEC staff sent a letter to the Eighth Circuit (who was hearing Iowa v. SEC, No 24-1522 (8th Cir.) evaluating the legality of the rules) stating that the SEC withdraws its defense of the rules and that the SEC counsel are no longer to authorized to advance the arguments in the brief filed on behalf of the SEC. SEC Acting Chairman Mark T. Uyeda stated that “[t]he goal of today’s Commission action and notification to the court is to cease the Commission’s involvement in the defense of the costly and unnecessarily intrusive climate change disclosure rules.”
The SEC did not, however, withdraw the actual climate disclosure rules. Commissioner Caroline Crenshaw issued a statement challenging the decision, that if the SEC chose not to defend the rules, then it should ask the court to stay the litigation while the agency comes up with a rule that it is prepared to defend and that if not, the court should hire counsel to defend the rules. Although the SEC is no longer defending the rules, 20 democratic attorney generals (the “AGs”) have intervened in the lawsuit to defend them. In April 2025, the court ruled that the AGs, led by those from Massachusetts and the District of Columbia, can themselves defend the rules.
SEC Enforcement Actions and Other Cases
Airline Faulted for ESG Focus in 401(k) Plan
A Texas judge issued a 70-page finding of fact and conclusion of law that an international airline company (the “Defendant”) violated federal benefits law by emphasizing environmental, social, and governance factors (“ESG”) in its 401(k) plan decisions. The judge found that the Defendant’s corporate commitment to ESG, the influence and conflicts of interests with the investment manager, and the lack of separation between the corporate and fiduciary roles all attributed to the fiduciary lapse. Despite finding the Defendant breached the Employee Retirement Income Security Act’s (“ERISA”) duty of loyalty, the judge determined the Defendant had not breached ERISA’s fiduciary duty of prudence because the practices fell within the prevailing industry standards.
12 Firms to Pay More Than $63 Million Combined to Settle SEC’s Charges in Connection with Off-Channel Communications
In its continued focus on off-channel communications, the SEC announced charges against nine investment advisers and three broker-dealers (each a “Firm” and collectively, the “Firms”) on January 13, 2025. The charges are for failures by the Firms and their personnel to maintain and preserve electronic communications, in violation of recordkeeping provisions of the federal securities laws. The Firms admitted to the facts set out in their respective SEC orders and have begun implementing improvements to their compliance policies and procedures to address these violations. One Firm self-reported and, as a result, paid significantly lower civil penalties.
“In order to effectively carry out their oversight responsibilities, the Commission’s Examinations and Enforcement Divisions must, and indeed do, rely heavily on registrants complying with the books and records requirements of the federal securities laws. When firms fall short of those obligations, the consequences go far beyond deficient document productions; such failures implicate the transparency and the integrity of the markets and their participants, like the firms at issue here,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “In today’s actions, while holding firms responsible for their recordkeeping failures, the Commission once more recognized and credited a registrant’s self-report, demonstrating yet again that there are tangible benefits to be gained from proactive cooperation.”
SEC Charges Advisory Firm with Misrepresenting its Anti-Money Laundering Procedures to Investors
The SEC charged a Connecticut-based investment adviser (the “Adviser”) with making misrepresentations about its anti-money laundering (“AML”) procedures and related compliance failures. The SEC’s order finds that the Adviser’s offering documents stated that the Adviser was voluntarily complying with AML due diligence laws despite those laws not applying to investment advisers. However, according to the order, the Adviser did not always conduct due diligence with respect to an entity owned by an individual who was publicly reported to have suspected connections to money laundering activities. The order further found that the Adviser failed to adopt and implement written policies and procedures reasonably designed to ensure the accuracy of offering and other documents provided to prospective and existing investors.
“This case reinforces the fundamental duty of investment advisers to say what they do and do what they say,” said Tejal D. Shah, Associate Regional Director of the SEC’s New York Regional Office. “Here, [the Adviser] failed to follow the AML due diligence procedures that it said it would, thus misleading investors about the level of risk they were undertaking.”
SEC Charges Two Affiliated Investment Advisers for Failing to Address Known Vulnerabilities in its Investment Models
The SEC announced, on January 16, 2025, that it had settled charges against two affiliated New York-based investment advisers (the “Advisers”) for breaching their fiduciary duties by failing to reasonably address known vulnerabilities in their investment models and for related compliance and supervisory failures, as well as violating the SEC’s whistleblower protection rule. According to the SEC’s order, around March 2019, the Advisers’ employees identified and recognized vulnerabilities in certain investment models that could negatively impact clients’ investment returns, but did not take any action to remedy the situation until August 2023. The Advisers failed to adopt and implement written policies and procedures to address these vulnerabilities and failed to supervise an employee who made unauthorized changes to more than a dozen models. Further, the Advisers required departing individuals to state as a fact—in separate written agreements—that they had not filed a complaint with any governmental agency. The SEC’s order finds that the Advisers willfully violated the antifraud provisions of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), the Advisers Act’s compliance rule, as well as Rule 21F-17(a) under the Exchange Act.
SEC Charges Advisory Firms with Compliance Failures Relating to Cash Sweep Programs
The SEC, on January 17, 2025, settled charges against two affiliated registered investment advisers and a third unaffiliated investment adviser (collectively, the “Advisers”) for failing to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder relating to the Advisers’ cash sweep programs. According to the SEC’s order, the Advisers offered their own bank deposit sweep programs as the only cash sweep options for most advisory clients and received a significant financial benefit from advisory client cash in the bank deposit program. The order finds that the Advisers failed to adopt and implement reasonably designed policies and procedures (1) to consider the best interest of clients when evaluating and selecting which cash sweep program options to make available to clients and (2) concerning the duties of financial advisors in managing client cash in advisory accounts.
SEC Charges Dually Registered Broker-Dealer/Investment Adviser with Anti-Money Laundering Violations
The SEC announced charges against a firm that is registered as both a broker-dealer and investment adviser (the “Firm”) with multiple failures related to its AML program. According to the SEC’s order, from at least May 2019 through December 2023, the Firm experienced longstanding failures in its customer identification program, including a failure to timely close accounts for which it had not properly verified the customer’s identity. Furthermore, the Firm failed to close or restrict thousands of high-risk accounts that were prohibited under the Firm’s AML policies.
Financial Institution to Pay More than $100 Million to Resolve Violations Related to Target Date Funds
The SEC announced on January 17, 2025, that an institutional investment management company (the “Company”) has agreed to settle charges for misleading statements related to capital gains distributions and tax consequences for retail investors who held the Company’s Investor Target Retirement Funds (“Investor TRFs”) in taxable accounts. The SEC’s order finds that in December 2020, the Company announced that the minimum initial investment amount of the Company’s Institutional Target Retirement Funds (“Institutional TRFs”) would be lowered from $100 million to $5 million. A substantial number of plan investors redeemed their Investor TRFs and switched to Institutional TRFs due to the latter having lower expenses. The retail investors of the Investor TRFs who did not switch and continued to hold their fund shares in taxable accounts, faced historically large capital gains distributions and tax liabilities due to the large number of redemptions. The order also finds that the Investor TRFs’ prospectuses, effective and distributed in 2020 and 2021, were materially misleading because they failed to disclose the potential for increased capital gains distributions resulting from redemptions of fund shares by newly eligible investors switching from the Investor TRFs to the Institutional TRFs.
“Materially accurate information about capital gains and tax implications is critical to investors saving for their retirements,” said Corey Schuster, Chief of the Division of Enforcement’s Asset Management Unit. “Firms must ensure that they are accurately describing to investors the potential risks and consequences associated with their investments.”
SEC Charges Investment Adviser and Two Officers for Misuse of Fund and Portfolio Company Assets
The SEC filed settled charges on March 7, 2025, against a registered investment adviser (the “Adviser”), former managing partner (the “Managing Partner”) and its former chief operating officer and partner (the “COO”) for breaches of the fiduciary duties for their misuse of fund and portfolio company assets. According to the SEC’s orders, from at least August 2021 through February 2024, the COO misappropriated approximately $223,000 from portfolio companies of a private fund managed by the Adviser. This included transactions for vacations, personal expenses, and the payment of compensation in excess of the COO’s salary. The SEC order states that the Managing Partner failed to reasonably supervise the COO despite red flags of misappropriation and that they caused the fund to pay a business debt that should have been paid by an entity the Managing Partner and COO controlled, resulting in an unearned benefit to the entity of nearly $350,000. Additionally, the order finds the Adviser failed to adopt and implement adequate policies and procedures and to have the fund audited as required.
SEC Charges New Jersey Investment Adviser and His Firm with Fraud and Other Violations
The SEC, on March 17, 2025, announced it filed charges against an individual investment adviser and his advisory firm (collectively, the “Adviser”) for misconduct and for investing more than 25 percent of a mutual fund’s assets in a single company over multiple years, causing losses of $1.6 million. In November 2021, the Adviser settled charges that the Adviser violated its policy by investing more than 25 percent of a fund’s assets in one industry between July 2017 and June 2020, committing fraud and breaching its fiduciary duties. Despite being ordered to stop the conduct, the Adviser continued violating its 25 percent industry concentration limit and making associated misrepresentations about it between November 2021 and June 2024. The SEC’s complaint alleges the defendant Adviser engaged in further misconduct during this same period by operating the fund’s board without the required number of independent trustees and misrepresenting the independence of one board member in filings. The complaint also alleges that the Adviser failed to provide or withheld key information from the board and hired an accountant for the fund without the required vote by the board.
“As alleged, the defendants not only ran the fund contrary to its fundamental investment policies, but they actively misled investors and the fund’s board about their conduct,” said Corey Schuster, Chief of the Division of Enforcement’s Asset Management Unit. “Undeterred by their prior SEC settlement involving these very same issues, we allege that the defendants repeatedly violated fundamental rules designed to protect investors in mutual funds.”
Business Development Company and Directors Sued for Causing Fund’s Value to Decline
Directors of a business development company (the “BDC”) have been sued for allegedly approving fraudulent valuations, and the BDC’s investment adviser (the “Adviser”) is accused of extracting millions of dollars in fees from the BDC while its assets dipped. According to the complaint, the Adviser caused the BDC’s $200 million portfolio to decline while extracting nearly $30 million in fees and concealed the decline from shareholders through fraudulent, inflated asset valuations that the directors repeatedly approved before the fund went into liquidation in 2023. When shareholders proposed ways for the shareholders to realize value (such as a tender offer or merger), the complaint alleges that the Directors amended the BDC’s bylaws to illegally restrict shareholder voting powers. The lawsuit seeks a trial and alleges violations of Section 10(b) and Section 20 of the Exchange Act, breach of fiduciary duty by the directors, aiding and abetting a breach of fiduciary duty, and breach of contract.
Revenue Sharing Ruling Struck Down by First Circuit Court of Appeals
In 2019, the SEC initiated an enforcement action against a dually registered broker-dealer and investment adviser (the “Adviser”). The SEC alleged that, from July 2014 through December 2018, the Adviser failed to adequately disclose that its revenue sharing agreement with a national brokerage and custody service provider (the “Provider”) created a conflict of interest by incentivizing the Adviser to direct its clients’ investments (through client representatives) to mutual fund share classes that produced revenue-sharing income for the Adviser. At the close of evidence, the district court granted partial summary judgment for the SEC which included an order for the firm to pay $93.3 million (including disgorgement of nearly $65.6 million in revenue-sharing related profits), which the Adviser appealed. On April 1, 2025, the United States Court of Appeals for the First Circuit, finding that there was a material issue of fact to be decided by a jury, reversed the order and remanded it back to district court to be heard by a jury. Applying the “total mix” test from Basic Inc. v. Levinson, the Court of Appeals concluded that a “reasonable jury could find” that the additional disclosure about the Adviser’s conflict of interest would not have “so significantly altered the ‘total mix’ of information made available, that summary judgment was appropriate.” Importantly, the Court of Appeals noted that the district court relied on cases predating the U.S. Supreme Court’s decision in SEC v. Jarkesy, decision which held that the Seventh Amendment right to a jury trial applies to SEC enforcement actions of its administrative orders. Additionally, the Court of Appeals found that the SEC failed to adequately show a reasonable approximation or casual connection sufficient to support the district court’s disgorgement award.
Other Industry Highlights
SEC Announces Record Enforcement Actions Brought in First Quarter of Fiscal Year 2025
The SEC announced on January 17, 2025, that, based on preliminary results, it filed 200 total enforcement actions in the first quarter of fiscal year 2025, which ran from October through December 2024, including 118 standalone enforcement actions. This is the most actions filed in the respective period since at least 2000. The SEC filed more than 40 enforcement actions from January 1, 2025, through January 17, 2025, indicating that the Division’s high level of enforcement activity continues into the second quarter of fiscal year 2025.
DRAO Issues Observations Relating to Website Posting Requirements
The Division of Investment Management’s Disclosure Review and Accounting Office (“DRAO”) is responsible for reviewing fund disclosures. As part of this effort, the staff recently observed several issues relating to the website posting requirements under various Commission rules and certain exemptive orders, including those related to the use of summary prospectuses, exchange-traded funds (“ETFs”), and money market funds (“MMFs”). Some of the DRAO’s observations include:
Summary Prospectuses
Some summary prospectuses did not include a website address that investors could use to obtain the required online documents, while other addresses were generic links to the registrant’s homepage.
A number of registrants did not include any links from the summary prospectus to the statutory prospectus and the Statement of Additional Information, or only partially satisfied the linking requirement.
ETFs
Some ETFs failed to include their daily holdings information, expressed their premiums and discounts as a dollar figure rather than as a percentage, or used alternative terminology when referring to premiums and discounts that have potential to confuse investors.
Some ETFs did not disclose timely historic premium and discount information on their websites, or the information was not easily accessible on the website.
Some ETFs used alternative terminology when referring to the 30-day median bid-ask spread, by omitting the term “30-day,” such that the nature of the figure presented may be unclear to investors.
MMFs
Several MMFs did not post on their websites the required link to the Commission’s website where a user may obtain the most recent 12 months of publicly available information filed by the MMF on Form N-MFP.
Acting Chairman Uyeda Announces Formation of New Crypto Task Force
SEC Acting Chairman Mark Uyeda, on January 21, 2025, launched a crypto task force dedicated to developing a comprehensive and clear regulatory framework for crypto assets. The SEC announced that Commissioner Hester Peirce will lead the task force with a focus on drawing clear regulatory lines, providing realistic paths to registration, crafting disclosure frameworks, and deploying enforcement resources. With the disbandment of the Crypto Asset and Cyber Unit, the task force will be the Commissioners’ primary adviser on matters related to Crypto. On March 3, 2025, Commissioner Peirce announced the members of the Crypto Task Force staff.
Executive Order Halts All Pending Regulations
The Trump administration issued an executive order on January 20, 2025, freezing all pending regulations. The order also suggests that agencies should postpone the effective date for any regulations that have been published in the Federal Register for 60 days. Additionally, the order states that federal agencies should withdraw any regulations that have been sent to the Office of the Federal Register but have not yet been published. Finally, the order recommends that agencies should consider reopening comment periods for pending regulations and should not propose or issue any new regulations until a department or agency head appointed by President Trump has reviewed and approve such regulations.
New Executive Order Imposes Increased Presidential Oversight and Control of Independent Regulatory Agencies
The Trump administration, on February 18, 2025, issued a new Executive Order, “Ensuring Accountability for All Agencies,” (the “Executive Order”) that seeks to increase presidential oversight of independent regulatory agencies. The Executive Order imposes new constraints on independent regulatory agencies, like the SEC, including:
The independent regulatory agencies must submit “significant regulatory actions” to the White House’s Office of Information and Regulatory Affairs before publication in the Federal Register;
The Director of the White House’s Office of Management and Budget (“OMB”) will establish performance standards and management objectives of independent agency heads, like the Commissioners of the SEC, and for OMB to report to the President on the agencies’ performance and efficiency;
The Director of OMB will review the agencies’ obligations for “consistency with the President’s policies and priorities” and will change an agencies’ activity or objective, as necessary, to advance the “President’s policies and priorities;”
Chairs of independent regulatory agencies must now meet with and coordinate policies and priorities with the White House, including establishing a position of White House Liaison and submitting strategic plans to OMB for clearance; and
Members of independent regulatory agencies cannot “advance an interpretation of the law” that vary from the president and the attorney general’s authoritative interpretation of the law including, but not limited to, interpretations of regulations, guidance, and positions advanced in litigation (which may include enforcement actions).
SEC Announces Cyber and Emerging Technologies Unit
The SEC announced, on February 20, 2025, the creation of the Cyber and Emerging Technologies Unit (“CETU”) to focus on combatting cyber-related misconduct and to protect retail investors from bad actors in the emerging technologies space. Specifically, the CETU will focus on the following priority areas:
Fraud committed using emerging technologies, such as artificial intelligence and machine learning;
Use of social media, the dark web, or false websites to perpetrate fraud;
Hacking to obtain material nonpublic information;
Takeovers of retail brokerage accounts;
Fraud involving blockchain technology and crypto assets;
Regulated entities’ compliance with cybersecurity rules and regulations; and
Public issuer fraudulent disclosure relating to cybersecurity.
CETU replaces the SEC Enforcement Division’s Crypto Asset and Cyber Unit, which brought more than 100 enforcement actions. CETU’s establishment is a part of a series of initiatives highlighting the SEC’s new, more positive, approach to crypto products. See Acting Chairman Uyeda Announces Formation of New Crypto Task Force above.
ICI Issues Recommendations for Reform and Modernization of the 1940 Act
The Investment Company Institute (“ICI”), on March 17, 2025, issued key recommendations for the reform and modernization of the 1940 Act, titled Reimagining the 1940 Act: Key Recommendations for Innovation and Investor Protection. The ICI worked closely with its members and Independent Directors Council members over three years to develop their “blueprint” to reform the 1940 Act. The 19 recommendations focus on fostering ETF innovation, expanding retail investors’ access to private markets, eliminating unnecessary regulatory costs and burdens, and leveraging the expertise and independence of Fund directors. The ICI has called for the SEC to address these recommendations, including to:
Enable a new or existing fund to offer both mutual fund and ETF share classes;
Allow closed-end funds to more flexibly invest in private funds;
Create more flexibility for closed-end funds to provide repurchase opportunities to their investors;
Adopt electronic delivery of information as the default delivery option;
Update requirements for in-person voting by directors;
Permit streamlined board approval of new sub-advisory contracts and annual renewals;
Revise the “interested person” standard;
Permit fund boards to appoint a greater number of new independent directors; and
Update fund board responsibility with respect to auditor approval.
Potential Unlawful Conduct + Employment Decisions: Wisconsin Court Redefines Arrest Record Discrimination
The Wisconsin Supreme Court has clarified that non-criminal, municipal citations are covered by the prohibition on arrest record discrimination under the Wisconsin Fair Employment Act (WFEA). Oconomowoc Area School District v. Cota, et al., 2025 WI 11 (Apr. 10, 2025). The decision reversed a 2024 court of appeals opinion.
The court also narrowed the scope of an exception to the law that allows employers to make employment decisions based on independent investigations.
This decision is the latest in the ever-changing jurisprudence on the WFEA’s prohibition against discrimination based on employees’ arrest and conviction records.
Factual Background
The Oconomowoc Area School District previously employed the plaintiffs as members of its grounds crew. Another employee accused the plaintiffs of stealing from the District, and the District investigated the allegations internally. Its investigation led the District to believe the plaintiffs did indeed steal. Despite the District’s initial belief, it turned the matter over to the Oconomowoc Police Department to continue the investigation instead of immediately firing the plaintiffs.
Law enforcement continued investigating and issued the plaintiffs citations for municipal theft, a non-criminal offense. In communications with the District, the assistant city attorney said he believed the plaintiffs were guilty and he could obtain convictions.
The District terminated the plaintiffs’ employment only after the city attorney’s statements and based on its independent belief the plaintiffs stole, as well as the plaintiffs’ municipal citations.
The plaintiffs filed a complaint against the District with the Wisconsin Department of Workforce Development, Equal Rights Division alleging their terminations constituted unlawful arrest record discrimination under the WFEA. An agency administrative law judge, the Labor and Industry Review Commission, and the county circuit court all agreed, finding the District violated the WFEA because the plaintiffs’ municipal citations fell within the WFEA’s definition of “arrest record.” The Wisconsin Court of Appeals disagreed, reversing the prior decisions and finding the non-criminal, municipal citations were not an “arrest record” under the WFEA and employers were free to utilize such citations in making employment decisions. An appeal to the Wisconsin Supreme Court followed.
Wisconsin Supreme Court Decision
The Wisconsin Supreme Court reversed the court of appeals, finding that even non-criminal, municipal citations were an “arrest record” under the WFEA. The court found that the phrase “any … other offense” in Wis. Stat. § 111.32(1) includes violations of both criminal and non-criminal laws.
The court then turned to whether the plaintiffs’ terminations were based on their arrest records. The District argued the terminations were lawful under the “Onalaska defense” because the District’s decision was based on its internal investigation in addition to the plaintiffs’ arrest record. The District argued its belief that the plaintiffs were guilty after the internal investigation demonstrated its decision was not based on the plaintiffs’ arrest records. The court’s majority disagreed.
The court said that Onalaska holds “simply that an employer who does not rely on arrest-record information when making a discharge decision does not discriminate against an employee because of their arrest record.” Because the court agreed with the Labor and Industry Review Commission’s finding that the District did not act until after the law enforcement investigation and citations, the court found the District relied on the plaintiffs’ arrest records and concluded the District violated the WFEA.
The court’s holding means that arrest record discrimination can occur even when the arrest record played only a small part in an employer’s motivation for its decision.
Implications
Employers should be mindful of the Wisconsin Supreme Court decision before making an employment decision based on an employee’s potentially unlawful activity. Relying on a complete and thorough internal investigation to the extent possible in making an adverse employment decision will help minimize the risk of running afoul of the WFEA.
Based on the court’s decision, employers should be cautious when considering an employee’s arrest record or other potentially unlawful conduct. Employers should take action only after determining whether the offense substantially relates to the employee’s employment and consulting with legal counsel.
Jackson Lewis attorneys are constantly monitoring developments of Wisconsin’s arrest and conviction record discrimination laws. If you have any questions about this or any other employment law, please contact a Jackson Lewis attorney to discuss.
Old North State Report – April 14, 2025
UPCOMING EVENTS
April 14, 2025
Raleigh Chamber Business After Hours – Raleigh
April 16, 2025
Federalist Society Housing Policy and Regulation in NC – Raleigh
April 17, 2025
NC Chamber Building NC – Durham
April 22, 2025
NC Chamber Spring Member Roundtable – Asheville
April 24, 2025
Raleigh Chamber Young Professionals Network Social – Raleigh
RTAC – Association of Corporate Counsel Spring Reception – (Raleigh)
April 28, 2025
Thinkers Lunch: Rob Christensen
LEGISLATIVE NEWS
SENATE BUDGET TO BE RELEASED NEXT WEEK
The Senate is set to release its budget bill Monday afternoon, according to Republican Senate leader Phil Berger (R-Rockingham), who spoke to reporters after the Senate session on Tuesday evening.
This budget is a two-year spending plan that will likely exceed $30 billion, funding raises for state employees and teachers, and replenish the rainy-day fund to get back to the $4.75 billion it contained before Hurricane Helene.
Leadership in the House and the Senate have agreed the budget can grow by 2.75% in fiscal 2025-2026 and 2.25% above that in fiscal 2026-2027. The current budget appropriated $29.7 billion for general fund spending in fiscal 2023-2024 and $30.8 billion in fiscal 2024-2025.
The process begins with the Senate version going through committees on Tuesday, with floor votes on Wednesday and Thursday. The House is expected to pass its version in May, followed by negotiations among Republican leaders for a final budget.
Read more by Under the Dome/The News & Observer
LAST-MINUTE HOUSE PROPOSALS FILED AHEAD OF BILL FILING DEADLINE
Offering on-site childcare for state employees, allowing private school students to take classes at local public schools, addressing issues with loose dogs, and dealing with slow drivers in the left lane are among the last-minute proposals filed by House members before the Thursday deadline. House lawmakers had a deadline to file bills by 3 p.m., resulting in more than 100 new proposals. This brings the total number of bills introduced this session to nearly 2,000, reflecting emerging policy goals.
Education and public safety were key themes among the last-minute bills, with many aimed at attracting and keeping teachers. There were also efforts to increase penalties for loose dogs and new rules for domestic violence cases. A unique proposal allows tax payments in cryptocurrencies, amid fluctuations in the market. Some proposals from Democrats, like those focusing on environmental issues, may not succeed in the Republican-majority legislature, though a few may have potential.
Bipartisan sponsors back some bills, including Jesse’s Law, which would provide training for judges and mediators on recognizing signs of domestic violence and child abuse. This initiative is inspired by the tragic murder of a 3-year-old boy.
Other important bills include reforms to liquor laws to allow Sunday openings for ABC stores, legalizing video poker, creating a disaster response fund, and increasing penalties for various public safety violations. Additional initiatives aim to expand childcare options, support social conservative causes like restrictions on gender-reassignment lawsuits and abortion, and enhance educational transparency and teaching standards. There are also bills addressing drug arrests, protecting teenagers’ social media data, exploring cryptocurrency and AI research, directing the Legislative Research Commission to study the abolition of contributory negligence, and proposing the removal of barriers to employment due to court debt.
The crossover deadline, the date set by the legislature for a bill to be approved in its originating chamber to continue being reviewed by the opposite chamber, is May 8. Lawmakers are anticipated to increase their activity in the weeks ahead to make certain that any important legislation stays eligible for consideration during this session.
Read more WRAL News
PROPOSED HOUSE BILL TO EXPAND AUDITOR’S INVESTIGATIVE POWERS
A North Carolina House panel approved a bill on Tuesday that expands the investigative powers of the state auditor’s office, despite some concerns about which agencies and individuals could be investigated. The Judiciary 1 Committee voted for House Bill 549 after hearing from its sponsor, Representative Brenden Jones (R-Columbus), and Kirk O’Steen, the Director of Government Affairs for the auditor’s office. The bill will next go to the Committee on State and Local Government for further consideration.
If passed, the bill would allow the auditor to investigate any entity receiving state or federal funds for reports of improper activities, including fraud and misappropriation. It would also grant the auditor unrestricted access to necessary databases and exempt the office from certain regulations. Additionally, the Senate approved Senate Bill 474 to create a new team to oversee state spending and job openings.
Read more by NC Newsline (Kingdollar)
Read more by NC Newsline (Bacharier)
SENATE’S PBM BILL APPROVED BY HEALTH CARE COMMITTEE
The Senate is entering the debate over pharmacy benefits managers (PBMs) with the approval of Senate Bill 479 by the Health Care Committee. This bill provides an alternative to the House’s approach regarding PBMs, which act as intermediaries between drug manufacturers and insurers or drugstores. Unlike the House’s proposal, Senate Bill 479 does not include a provision that would require PBMs to pay drugstores a $10.24 dispensing fee. Senator Benton Sawrey (R-Johnston), a lead sponsor of the bill known as the SCRIPT Act, prefers to avoid any cost increases for consumers.
The bill is supported by key Senate leaders, and it will undergo further revisions as it progresses through additional committees. Key aspects of the Senate bill include allowing insurers to offer higher reimbursements to drugstores in areas without pharmacies, licensing pharmacy services administrative organizations, and requiring PBMs to provide more data to state officials. It also prohibits PBMs from paying pharmacies less than their acquisition costs for medications and from treating independent pharmacies unfairly compared to their owned drugstores. Independent pharmacies could refer patients to other drugstores if necessary.
The bill does not currently impact the State Health Plan, a point of concern for some senators. Meanwhile, the House’s PBM legislation remains under discussion in committee, with its previous iteration receiving unanimous approval before being stalled in the Senate without a counterproposal.
Business North Carolina (Ray Gronberg – [email protected])
LOWER LEGAL ALCOHOL LIMIT FOR DRIVERS PROPOSED
North Carolina lawmakers are collaborating to support a bill introduced this year to reduce the legal blood alcohol concentration limit for driving from 0.08 to 0.05.
House Bill 108 will also increase penalties for adults who help minors buy alcohol, particularly in cases of serious injury, and will allow repeat offenders to regain limited driving privileges by proving sobriety. Additionally, the measure mandates the recording of district court proceedings and public reporting on impaired-driving cases.
Representative Eric Ager (D-Buncombe) will hold a press conference on Tuesday at noon regarding the bill, joined by Ellen Pitt from the WNC Regional DWI Task Force, law enforcement, and families impacted by drunk driving.
Ager and Representative Mike Clampitt (R-Jackson) are the primary sponsors, along with Representatives Keith Kidwell (R-Beaufort) and Brian Echevarria (R-Cabarrus). The bill is currently in the House Alcoholic Beverage Control Committee.
Read more by Under the Dome/The News & Observer
TRAUMATIC BRAIN INJURIES TREATMENT FOR VETERANS
A bill that would enable treatment of traumatic brain injuries in veterans was introduced on March 27. House Bill 572 allows the Department of Military and Veterans Affairs to create a pilot program for veterans, first responders, and their immediate families to treat traumatic brain injuries as well as sleep disorders and substance abuse.
Representative David Willis (R-Union), mentioned that the treatment called eTMS, or electroencephalogram combined transcranial magnetic stimulation, was suggested by veterans seeking similar programs in other states. Willis noted that the program aims to support both first responders and veterans, citing successful outcomes in other states.
Representative Grant Campbell (R-Cabarrus), a former Army Lieutenant Colonel, also endorsed the bill. “There is significant data to show that there are high rates of these patients being able to discontinue current chronic therapy once they undergo this. This is an incredibly promising intervention,” Campbell said.
On Tuesday, the bill received a favorable report and has been referred to the Health Committee.
Read more by State Affairs Pro
Circuit Split on Anti-Kickback Causation Poses Complications for Whistleblowers, But First Circuit Ruling Also Provides a Path Forward
In February, a panel of three judges in the U.S. Court of Appeals for the First Circuit issued a decision in United States v. Regeneron Pharmaceuticals, Inc. ruling that “but-for” causation is the proper standard for False Claims Act (FCA) cases alleging improper kickbacks and referrals in violation of a 2010 amendment to the Anti-Kickback Statute (AKS). This decision deepens a circuit split on the issue, as the Sixth Circuit and Eighth Circuit have adopted a but-for causation standard, while the Third Circuit ruled that the kickback only needs to be a contributing factor.
The circuit split is likely to be resolved by the Supreme Court, but in the meantime, its impact on FCA enforcement poses complications for whistleblowers looking to report kickbacks under the FCA’s qui tam provisions.
However, the First Circuit panel in Regeneron also clarified that there still exists a key route for whistleblowers and the government to pursue AKS-based FCA cases under the implied false certification theory. The court held that there still remains FCA liability when compliance with the AKS is a recognized precondition of payment under a federal healthcare program and a provider falsely certifies compliance with those requirements to get a claim paid by Medicare or Medicaid. Notably, the court held that there is no but for causation required when such an implied false certification claim is pursued under the FCA.
The Anti-Kickback Statute, False Claims Act and Whistleblowers
Dating back to the Civil War, the False Claims Act targets fraud among government contractors. It holds that any person who knowingly submits, or causes to submit, false claims to the government is liable for three times the government’s damages plus a penalty.
A key element of the FCA is its qui tam provisions, which empower whistleblowers with knowledge of FCA violations to come forward and file lawsuits on behalf of the government, which then has the option to intervene and take over the lawsuit. Regardless of whether the government intervenes, whistleblowers whose qui tam suits result in successful cases are eligible to receive between 15-30% of the funds collected in the case.
The Anti-Kickback Statute prohibits the exchange (or the offer to exchange) of any form of remuneration to induce or reward referrals for services or items reimbursable by federal healthcare programs. In violating the AKS, a company or individual can also be liable under the FCA. While the AKS imposes criminal liability on violations, the FCA adds civil liability.
Over the years, the government and whistleblowers have aggressively enforced violations of the AKS and FCA in tandem. For example, in July 2024, the Department of Justice announced that DaVita Inc., a healthcare company providing kidney dialysis services, agreed to pay $34 million to settle allegations that it violated the FCA through the illegal payments of kickbacks to induce referrals to DaVita’s dialysis centers and DaVita Rx, a former subsidiary that provided pharmacy services for dialysis patients. The settlement resolved a qui tam whistleblower suit filed by Dennis Kogod, a former Chief Operating Officer of DaVita Kidney Care, who received a $6,370,000 whistleblower award from the settlement proceeds. Over the years, many of the largest False Claims Act whistleblower recoveries have been based on alleged AKS violations in the health care industry.
First Circuit Ruling and Circuit Split
The First Circuit’s ruling in Regeneron centered around a provision in the 2010 amendments to the AKS which states that “a claim that includes items or services resulting from a violation of [the AKS] constitutes a false or fraudulent claim for purposes of [the FCA].” (Emphasis added)
In Regeneron, the government alleged that drug manufacturer Regeneron Pharmaceuticals paid tens of millions of dollars in kickbacks for its macular degeneration drug Eylea by using a foundation as a conduit to cover Medicare co-pays for Eylea.
The issue before the First Circuit in Regeneron was the level of causation required to satisfy the “resulting from” language. The First Circuit ruled that that “but-for” causation is the proper standard, meaning that there is no FCA liability if the claim would have been submitted regardless of the illegal kickback.
In Regeneron therefore, the Court ruled that Regeneron Pharma was not liable under the FCA because the government could not prove that doctors prescribing Eylea would not have done so “but for” the alleged kickbacks covering the co-pay cost.
According to the First Circuit, “The Supreme Court has held that a phrase like ‘resulting from’ ‘imposes… a requirement of actual causality,’” and “Accordingly, ‘it is one of the traditional background principles ‘against which Congress legislate[s]’ that a phrase such as ‘result[ing] from’ imposes a requirement of but-for causation.” While the Court notes that textual or contextual indications may suggest a different standard of causation, it ruled that none were present in the 2010 AKS amendment.
The First Circuit ruling deepens a circuit split on the issue. The Sixth and Eighth Circuits had also previously adopted the more stringent “but-for” causation standard for AKS-based FCA claims. The Third Circuit on the other hand has rejected the “but-for” causation standard and instead adopted a broader standard allowing for FCA liability if the kickback was merely a contributing factor to the submission of the claim.
Implications and Routes Forward for Whistleblowers
The circuit split on the causation standard for AKS-based FCA claims poses some complications for whistleblowers looking to hold fraudsters accountable through qui tam lawsuits. Firstly, the split will cause confusion about what standard applies for which justifications. But even more importantly, the “but-for” causation standard will make it much harder for whistleblowers and the government to prove False Claims Act liability in kickback cases.
There still remains a key route for whistleblowers and the government to pursue AKS-based FCA cases: the false certification theory. Under the false certification theory, a violation of the AKS can give rise to FCA liability when compliance with the AKS is a recognized precondition of payment under a federal healthcare program and a provider falsely certifies compliance with the law when it submits a claim, or causes the submission of a false claim.
The false certification theory predates the 2010 amendments at issue and is considered a distinct pathway towards proving FCA liability. In Regeneron, the First Circuit clearly states that “claims under the 2010 amendment run on a separate track than do claims under a false-certification theory” and that “there is nothing in the 2010 amendment that requires proof of but-for causation in a false certification FCA case.”
Barring a Supreme Court decision striking down “but-for” causation or a Congressional amendment clarifying a different standard of causation, FCA whistleblower claims can still survive if they can file qui tam suits based upon the false certification theory. Additionally, many whistleblower qui tam FCA cases alleging illegal kickbacks and violations of the AKS can meet the but for causation test. Consequently, whistleblowers and their counsel will need to evaluate the possible routes available when there are allegations of illegal kickbacks being paid in the context of providing health care that is reimbursed by Medicare, Medicaid or other government healthcare programs.
The government has made AKS enforcement a major FCA priority in recent years and the Deputy Assistant Attorney General Michael Granston recently promised that under the Trump administration the Department of Justice “plans to continue to aggressively enforce the False Claims Act.”
Individuals looking to blow the whistle on illegal kickbacks should contact an experienced False Claims Act whistleblower attorney.
Geoff Schweller also contributed to this article.
False Claims Act Settlements in Q1 Shows Scope of Frauds Targeted by Government as DOJ Official Promises “Aggressive” Enforcement
During the first quarter of 2025, the U.S. Department of Justice (DOJ) announced a number of False Claims Act (FCA) settlements and judgements, many of which resolved qui tam lawsuits filed by whistleblowers. The settlements and judgements showcase the variety of frauds which the government is pursuing and which False Claims Act whistleblowers can report.
Under the False Claims Act’s qui tam provisions, whistleblowers can file a qui tam lawsuit alleging violations of the FCA on behalf of the government, which then has the option to intervene and take over the lawsuit. Regardless of whether the government intervenes, whistleblowers whose qui tam suits result in successful cases are eligible to receive between 15-30% of the funds collected in the case.
The types of fraud targeted in settlements and judgments announced in the first quarter of 2025 include Medicare Part C fraud, cybersecurity fraud, illegal kickbacks and defense contract fraud.
In a keynote address at the Federal Bar Association’s annual qui tam conference in February, Deputy Assistant Attorney General Michael Granston promised that moving forward the Department of Justice “plans to continue to aggressively enforce the False Claims Act.”
$62 Million Settlement Over Medicare Part C Fraud Allegations
On March 26, the DOJ announced that Seoul Medical Group Inc., its subsidiary and majority owner, and Renaissance Imaging Medical Associates Inc., a radiology group that worked with Seoul Medical, agreed to pay a total of $62 million to resolve False Claims Act allegations relating to the submission of false diagnosis codes for two spinal conditions to increase payments from the Medicare Advantage program (Medicare Part C).
According to the DOJ, Seoul Medical and its owner “submitted diagnoses for two severe spinal conditions, spinal enthesopathy and sacroiliitis, for patients who did not suffer from either of these conditions” and “enlisted the assistance of Renaissance Imaging Medical Associates to create radiology reports that appeared to support the spinal enthesopathy diagnosis.”
These diagnoses allegedly led to the increased payment to Seoul Medical under Medicare Part C.
“Medicare Advantage is a vital program for our seniors and the government expects healthcare providers who participate in the program to provide truthful and accurate information,” said Acting Assistant Attorney General Yaakov M. Roth of the Justice Department’s Civil Division. “Today’s result sends a clear message to the Medicare Advantage community that the United States will zealously pursue appropriate action against those who knowingly submit false claims for taxpayer funds.”
The settlement resolved a qui tam whistleblower suit filed by Paul Pew, the former Vice President and Chief Financial Officer of Advanced Medical Management. Pew’s share of the recovery had not been determined at the time of the settlement.
$4.6 Million Settlement Over Cybersecurity Fraud Allegations
On March 26, the DOJ also announced a $4.6 million settlement MORSECORP Inc. resolving allegations that MORES violated the FCA by failing to comply with cybersecurity requirements in its contracts with the Departments of the Army and Air Force.
According to the DOJ, MORSE “submitted false or fraudulent claims for payment on contracts with the Departments of the Army and Air Force” and “those claims were false or fraudulent because Morse knew it had not complied with those contracts’ cybersecurity requirements.”
Among other things, the DOJ accused MORSE of “use[ing] a third-party company to host MORSE’s emails without requiring and ensuring that the third party met security requirements equivalent to the Federal Risk and Authorization Management Program Moderate baseline and complied with the Department of Defense’s requirements for cyber incident reporting, malicious software, media preservation and protection, access to additional information and equipment necessary for forensic analysis and cyber incident damage assessment.”
“Federal contractors must fulfill their obligations to protect sensitive government information from cyber threats,” said U.S. Attorney Leah B. Foley for the District of Massachusetts. “We will continue to hold contractors to their commitments to follow cybersecurity standards to ensure that federal agencies and taxpayers get what they paid for, and make sure that contractors who follow the rules are not at a competitive disadvantage.”
The settlement stemmed from a qui tam lawsuit filed by a whistleblower who is set to receive an $851,000 share of the settlement amount.
$15 Million Settlement Over Defense Contract Fraud Allegations
On April 1, the DOJ announced that DRI Relays Inc. agreed to pay $15.7 million to resolve allegations that it violated the FCA by supplying military parts that did not meet military specifications.
According to the DOJ, “between 2015 and 2021, under various Department of Defense (DoD) contracts and subcontracts, DRI invoiced for military grade electrical relays and sockets when it knew those parts had not met the testing requirements to be deemed military grade.”
“It is essential to the safety and operational readiness of our military that contractors comply with applicable military specifications,” said Acting Assistant Attorney General Yaakov M. Roth of the Justice Department’s Civil Division. “We will continue to hold accountable those who knowingly supply equipment to the U.S. military that fails to meet their contract obligations.”
$1.9 Million Settlement Over Kickback Allegations
On March 6, the DOJ announced that a group of health care providers and laboratory marketers agreed to pay a total of $1.9 million to resolve FCA allegations arising from their involvement in laboratory kickback schemes.
According to the DOJ, “health care providers received kickbacks in return for their referrals to a laboratory in Anderson, South Carolina” and “a marketer and his marketing company received kickbacks from that South Carolina laboratory to arrange for laboratory testing referrals.”
For example, according to the DOJ, one doctor and his medical practices “agreed to pay $400,000 to resolve allegations that from May 2016 to November 2021, they received thousands of dollars in remuneration disguised as purported office space rental and phlebotomy payments from the South Carolina laboratory in return for ordering testing.”
These alleged kickbacks were in violation of the Anti-Kickback Statute.
“Integrity must be the standard in our health care system,” said Acting U.S. Attorney Brook B. Andrews for the District of South Carolina. “Kickback schemes divert funds and focus away from patients and their medical needs.”
Conclusion
As these settlements show, the False Claims Act remains America’s number one anti-fraud law, covering a wide range of fraud affecting the federal government. Since 1986, the FCA has allowed the government to recover over $78 billion, with more than $55 billion stemming from qui tam whistleblower lawsuits.
Individuals looking to file a qui tam lawsuit alleging False Claims Act violations should consult an experienced whistleblower attorney.
Geoff Schweller also contributed to this article.
DOJ Narrows Crypto Enforcement to Individuals
On April 7, in a significant policy shift, the U.S. Department of Justice (DOJ) announced via the release of a memorandum that it will no longer pursue criminal enforcement actions that effectively impose regulatory frameworks on digital asset companies.
The memorandum criticizes efforts under the previous administration to pursue a “reckless strategy of regulation by prosecution” and formalizes the DOJ’s support for President Trump’s Executive Order 14178, which directs federal agencies to promote open access to blockchain networks and banking services for lawful crypto users.
The memorandum directs prosecutors to prioritize crypto cases that hold accountable individuals who (i) cause financial harm to digital asset investors and consumers, and/or (ii) use digital assets in furtherance of other criminal conduct, such as funding terrorism. Specifically, the memorandum sets the following prosecutorial priorities:
Federal prosecutors are now discouraged from charging crypto-related regulatory violations unless they can prove the defendant acted willfully, with knowledge of the legal obligation they violated.
Prosecutors are further advised not to bring cases that hinge on whether a digital asset qualifies as a “security” or “commodity,” unless absolutely necessary and with prior approval from the Deputy Attorney General.
The DOJ will no longer pursue enforcement actions against platforms, custodians, or infrastructure providers solely for the activities of their users, unless those activities involve knowingly aiding or committing underlying criminal offenses.
Putting It Into Practice: This policy marks a decisive shift in the federal government’s posture toward digital assets, with criminal prosecution now reserved for intentional fraud and serious crimes. This development coincides with a broader shift among federal regulators in how they approach digital assets (previously discussed here, here, and here). For crypto platforms, developers, and financial institutions, the guidance offers greater certainty that good-faith compliance missteps will not be prosecuted as criminal conduct.
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Yahoo ConnectID Faces Class Action Over Email Address Tracking as Alleged Wiretap Violation
Yahoo’s ConnectID is a cookieless identity solution that allows advertisers and publishers to personalize, measure, and perform ad campaigns by leveraging first-party data and 1-to-1 consumer relationships. ConnectID uses consumer email addresses (instead of third-party tracking cookies) to produce and monetize consumer data. A lawsuit filed in the U.S. District Court for the Southern District of New York says that this use and monetization is occurring without consumer consent. The complaint alleges that ConnectID allows user-level tracking across websites by utilizing the individual’s email address—i.e., ConnectID tracks the users via their email addresses without consent. The complaint further alleges that this tracking allows Yahoo to create consumer profiles with its “existing analytics, advertising, and AI products” and to collect user information even if a user isn’t a subscriber to a Yahoo product.
The complaint states, “Yahoo openly tells publishers that they need not concern themselves with obtaining user consent because it already provides ‘multiple mechanisms’ for users to manage their privacy choices. This is misleading at best.” Further, the complaint alleges that Yahoo’s Privacy Policy “makes no mention of sharing directly identifiable email addresses and, in fact, represents that email addresses will not be shared.”
The named plaintiff seeks to certify a nationwide class of all individuals with a ConnectID and whose web communications have been intercepted by Yahoo. The plaintiff asserts this class will be “well over a million individuals.” The complaint seeks relief under the New York unfair and deceptive business practices law, the California Invasion of Privacy Act, and the Federal Computer Data Access and Fraud Act.
These “wiretap” violation lawsuits are popping up all across the country. The lawsuits allege violations of state and federal wiretap statutes, often focusing on website technologies like session replay, chatbots, and pixel tracking, arguing that these trackers (and here, the tracking of email addresses) allow for unauthorized interception of communications. For more information on these predatory lawsuits, check out our recent blog post, here.
The lawsuit seeks statutory, actual, compensatory, punitive, nominal, and other damages, as well as restitution, disgorgement, injunctive relief, and attorneys’ fees. Now is the time to assess your website and the tracking technologies it uses to avoid these types of claims.
Court Relies on Contractual Terms to Dismiss Dealership Suit Against Auto Manufacturer
Decozen Chrysler Jeep Corp. (“Decozen”), a New Jersey-based automobile dealership, filed a lawsuit against Fiat Chrysler Automobiles, LLC (“FCA”), in U.S. District Court for the District of New Jersey alleging that FCA engaged in unfair business practices that disadvantaged Decozen compared to other dealerships. Decozen claimed that FCA’s incentive and allocation programs created an uneven playing field, favoring larger dealerships and those in different geographic regions. FCA moved to dismiss the complaint, arguing that the claims failed to state a legally actionable cause of action. On March 13, 2025, the court issued its ruling on FCA’s motion.
Holdings
Breach of Contract: The court examined whether FCA’s incentive programs violated any contractual obligations owed to Decozen. The court found that Decozen failed to identify a specific contractual provision that FCA breached leading to the dismissal of this claim.
Violation of Franchise Laws: Decozen alleged that FCA’s practices violated New Jersey’s Franchise Practices Act. The court determined that while franchise laws protect dealerships from unfair terminations and discriminatory practices, Decozen did not sufficiently demonstrate that FCA’s actions constituted an unlawful franchise violation.
Unfair Competition and Antitrust Claims: Decozen argued that FCA’s actions harmed competition. The court ruled that Decozen failed to establish antitrust injury and that the allegations were more aligned with competitive disadvantages rather than anti-competitive conduct. The court dismissed these claims as well.
Fraud and Misrepresentation: The court dismissed Decozen’s fraud claims, noting that the allegations lacked specificity regarding false statements made by FCA.
Lessons Learned for Manufacturers
Clarity in Incentive Programs: Manufacturers should ensure that incentive structures and allocation programs are transparent and consistently applied to avoid potential legal challenges.
Contractual Precision: Franchise agreements should explicitly outline obligations and rights to minimize ambiguity in disputes.
Compliance with Franchise Laws: While manufacturers retain discretion in business decisions, they must be cautious not to create the appearance of discrimination or unfair treatment that could trigger legal scrutiny under franchise laws.
Avoiding Antitrust Risks: Manufacturers should evaluate incentive programs to ensure they do not inadvertently create antitrust concerns by favoring certain dealers over others in a way that could be deemed anti-competitive.
This ruling underscores the importance of clear contractual terms and well-structured incentive programs to mitigate legal risks for manufacturers in franchise relationships.
What Every Multinational Company Should Know About … Customs Enforcement and False Claims Act Risks (Part I)
As detailed in our prior article on “What Every Multinational Company Should Know About … The Rising Risk of Customs False Claims Act Actions in the Trump Administration,” the Department of Justice (DOJ) is encouraging the use of False Claims Act (FCA) claims to address the underpayment of tariffs by importers. In addition, many of President Trump’s new tariff proclamations have directed Customs to prioritize enforcing the new tariffs while also stating that Customs should assess the maximum penalties for underpayments without considering any mitigating factors. This article is the first in a series that highlights the heightened risks of importing in a high-tariff, high-penalty environment based on a comprehensive review of all prior FCA enforcement actions based on underpayment of tariffs.
As detailed in other articles in this “What Every Multinational Company Should Know” series, Customs has full access to electronic data from every importer for every entry through the Automated Commercial Environment (ACE) portal. This gives Customs the ability to run sophisticated algorithms, to find anomalies and ferret out potential underpayments. This includes comparing importers’ import patterns and entry-specific information (valuation, country of origin, etc.) not only against their own prior entries but also those of competitors bringing in similar merchandise. Much of this data also is available publicly, and the FCA permits private relators to file qui tam suits in the government’s name. The end result is that Customs and relators have the unparalleled ability to find underpaid tariffs.
There are five elements working to create a sharply increased risk profile for importers:
Heightened tariff levels, which make it possible to run up tariff underpayments and associated penalties very quickly.
Customs’ increased attention to tariff underpayments, particularly for the new Trump tariffs.
The threatened use of alternative enforcement tools on top of normal Customs penalty procedures, including the FCA and potential criminal penalties.
The increasing incentives for employees, competitors, and other potential relators to become whistleblowers.
The enhanced ability of Customs and plaintiff law firms to target and identify tariff underpayments.
The Customs enforcement and FCA risks are especially high for declaring the correct country of origin. This risk is encapsulated by the March 25, 2025 settlement of a Customs FCA action for $8.1 million. According to the DOJ, the importer misrepresented the country of origin of certain wood flooring imports by declaring them to be a product of Malaysia instead of the proper country of China, thereby paying the far-lower tariff rates levied on products of Malaysia.
Several aspects of this settlement are especially notable in the current high-tariff environment:
The underlying qui tamcomplaint did not contain specific evidence of scienter beyond the allegedly inaccurate statements on customs documents, although the government’s investigation likely uncovered such evidence because the FCA requires that false statements be made “knowingly.”
The settlement amount was based on unpaid duties from three different types of tariffs: antidumping duties, countervailing duties, and section 301 tariffs, all of which simultaneously applied to imports of wood flooring manufactured in China. While this type of multiple-tariff importation used to be rare, many of the new tariffs announced by the Trump administration “stack,” which means it will be common for entered products to be subject to multiple tariff regimes. This increases the chances of errors quickly multiplying and creating a much higher risk exposure.
In its press release, the DOJ highlighted the role that CBP played in the case, including how it made factory visits, detained shipments, analyzed import records, and conducted witness interviews. We expect this type of cooperation will become a regular feature of Customs FCA actions, as Customs has long-established expertise in identifying tariff underpayments.
The settlement states that the relator was a competitor of the importer, which ended up receiving $1,215,000 of the settlement proceeds. This is a reminder that FCA risks can arise from employees, former employees, suppliers, competitors, or even customers who could file qui tam suits as relators. Further, because services exist that gather import-related data and sell it to the general public, all of these parties — or relator-side law firms — could data mine this information to look for opportunities to file qui tam actions in hopes of achieving a similar payday. This also serves as a reminder that it is important for importers to file manifest confidentiality requests every two years, to minimize the amount of such information released to the public.
The allegations of underpaid duties were all related to the alleged failure to declare the correct country of origin. With the announcement of the new “reciprocal tariffs,” the country of origin generally will be the primary determinant of the amount of tariffs due. We accordingly expect Customs to focus heavily on whether importers are correctly declaring the country of origin, particularly when importers declare the country of origin to be low-tariff countries like the United Kingdom or Singapore.
Indeed, we expect that this specific fact pattern of misrepresenting the country of origin on goods will lead to numerous FCA actions. That fact pattern was present in one of the largest FCA cases, which resulted in the importer of printer ink paying $45 million in 2012 to resolve allegations that it misrepresented the country of origin on goods to evade antidumping and countervailing duties. In that settlement, the DOJ stated that although the printer ink “underwent a finishing process in Japan and Mexico before it was imported into the United States, the government alleged that this process was insufficient to constitute a substantial transformation to render these countries as the countries of origin.”
Preventing and Remediating Customs and FCA Enforcement Risk
The combination of increasing Customs FCA activity and sharply increasing tariff levels leads to the following corollaries that every importer should know:
Corollary #1: In a high-tariff environment, errors in Customs compliance can lead to quickly mounting underpayments of tariffs, thereby sharply increasing the risk profile of acting as the importer of record.
Corollary #2: In a high-tariff environment, Customs compliance is thus more important than ever.
Corollary #3: In a high-penalty environment, the aggressive and consistent use of post-summary corrections to fix import-related errors before they become final is also more important than ever.
Corollary #4: In an environment where Customs assesses penalties without considering mitigating factors, making voluntary self-disclosures is an essential tool to minimize Customs penalty risks, because Customs does not assess penalties for voluntarily disclosed conduct without analyzing aggravating and mitigating factors.
Corollary #5: In an environment of enhanced FCA actions, taking steps to minimize the risk of qui tamrelators is essential for all tariff-related issues.
These realities and recent enforcement cases underscore the importance of importers carefully reviewing areas where Customs is focusing its enforcement attention, which undoubtedly will include any shipments from low-tariff countries in light of the global and reciprocal tariff announcement. If the third-country processing or manufacturing is not enough to support an argument that the inputs were substantially transformed into a product with a different name, character, or use, thereby essentially changing its identity, then the importer could be accused of making a false statement by declaring an improper country of origin.
In sum, the combination of the new high-tariff environment, the heightened ability of Customs (and the general public) to data mine, and the stated emphasis of the DOJ to focus on and encourage the use of the FCA substantially increases import-related risks. In subsequent articles, we will highlight additional areas where we see heightened enforcement risk so that importers can take proactive steps to avoid Customs and FCA penalties.