Shariah’s Black Box

State securities laws, usually referred to as blue sky laws, essentially track the development of securities disclosure law and securities fraud liability in federal securities law. As noted above, as a result of Congress’ efforts to curb private securities fraud litigation and recent Supreme Court rulings regarding the new pleadings requirements, the state securities laws will take on ever greater importance in the securities plaintiff’s arsenal of litigation weapons.[139]

Further important weapons in the arsenal for fraud now available in most states are the consumer protection statutes. While the Federal Trace Commission Act (“FTC Act”)[140] does not apply to securities, it might well be implicated where businesses market consumer products and represent that their business is run according to Shariah. Further, modeled in part after the FTC Act, the “little FTC Acts” enacted by most states are often more broadly interpreted than the FTC Act and many have an explicit or implied private right of action allowing the consumers themselves to battle fraud in the marketplace.[141]

In California, for example, a private plaintiff sued Nike, Inc., an Oregoncorporation, on behalf of all Californiaresidents under the California Unfair Competition Law[142] for fraud and failure to disclose. The suit was filed after Nike had made false and misleading public statements in the wake of media reports suggesting abuse at its foreign factories. Nike claimed its speech was protected under the First Amendment. The case went to the U.S. Supreme Court after Nike’s arguments to get the case dismissed on First Amendment grounds did not persuade the California Supreme Court. But the U.S. Supreme Court sent it back down to the California courts after it determined that certiorari had been improvidently granted.[143] Nike settled the case.[144] The implications of this type of state action for the SCF industry will be addressed below. Also, at least three states allow their respective consumer protection statutes to be used for securities fraud, which would bring the entire SCF industry under consumer fraud scrutiny.[145]

Additional statutes implicated are the federal Lanham Act, which regulates inter alia fraud in the description of goods, services, or commercial activities,[146] and laws governing consumer finance. Consumer finance in the U.S. falls within the ambit of the federal Truth-in-Lending Act (“TILA”)[147] and the myriad of regulations promulgated thereunder referred to collectively as Regulation Z.[148] Banks and other lenders advertising “zero interest loans” or “riba free loans” might in fact run afoul of the TILA disclosure requirements and the restrictions on deceptive advertising. The Home Ownership and Equity Protection Act (“HOEPA”)[149], which is part of TILA, or the state versions of HOEPA might also apply to what amounts to predatory lending to Shariah-adherent Muslims to the extent that the fees and costs are almost always higher than conventional loans.

5.       Due diligence and compliance statutes

The federal securities laws in several instances incorporate due diligence as defenses to the anti-fraud provisions and as such are an integral part of any legal analysis for civil or criminal exposure.[150] In addition, due diligence is incorporated into several compliance regimes such as the Bank Secrecy Act[151] and the anti-money laundering statutes[152], many of which were modified by the Patriot Act. Insofar as SCF incorporates the Shariah obligation to tithe and also requires the “purification” of profits earned in violation of Shariah, the question for the legal practitioner is who decides what happens to the monies gifted to charities and which charities are selected. Given the historical connection between some of the largest and well-known Muslim charities and the funding of terrorist groups[153], these questions take on added focus in the context of material support of terrorism. Finally, the structure of the Shariah authority boards and their professional membership organizations also raise antitrust issues which must be addressed.