Tag: Finance

A Fool in Idaho; SEC Sues Idahoans for Insider Trading Scheme

In July 1993 two brothers, David and Tom Gardner, and a friend, Erik Rydholm, founded a private investment advisory firm in Alexandria, Virginia. They named that firm Motley Fool after the court jester in “As You Like It,” a play written by William Shakespeare (it is believed in 1599). The Motley Fool, or Touchstone as he is known in the play, was the only character who could speak the truth to Duke Frederick without having his head cut off. Similarly, Motley Fool, the advisory firm, sought to give investors accurate advice, even if it flew in the face of received wisdom. For example, in advance of April Fool’s Day 1994, Motley Fool issued a series of online messages promoting a non-existent sewage-disposal company. The April Fool’s Day prank was intended to teach investors a lesson about penny stock companies. The messages gained widespread attention including an article in The Wall Street Journal.

Over time Motley Fool grew into a worldwide subscription stock recommendation service. It now releases new recommendations every Thursday, and subscribers receive them through computer interfaces provided by Motley Fool. The terms of service in a Motley Fool subscription agreement (in the words of the May 3, 2022 Complaint brought by the U.S. Securities and Exchange Commission [“SEC”] in the Federal Court for the Southern District of New York) “expressly prohibit unauthorized access to its systems.”  David Lee Stone of Nampa, Idaho (southwest of Boise), is a 36-year-old computer design and repair person with a degree in computer science.  Since June 2021, he and his wife have lived periodically in Romania, a fact cited in the Complaint, suggesting, perhaps, some involvement with Romania-based computer hackers. In any event, Stone is alleged in the Complaint to have used deceptive means beginning in November 2020 to obtain pre-release access to upcoming Motley Fool stock picks. Using that information, Stone and a co-defendant made aggressive investments, typically in options, which generated more than $12 million in gains. Stone, his codefendant, and his family and friends all benefited financially from knowing in advance the Motley Fool picks.

The SEC seeks injunctions against Stone and his co-defendant, as well as disgorgement with interest and civil penalties, for violating the antifraud provisions of federal law. The Commission also seeks disgorgement with interest from the family and friends. In addition, the U.S. Attorney for the Southern District of New York has filed criminal charges against Stone.

This case is in many ways reminiscent of the 1985 federal prosecution by the U.S. Attorney for the Southern District of New York (who happened to be Rudolph Giuliani at the time) of R. Foster Winans. Winans was, from 1982 to 1984, the co-author of “Heard on the Street,” a column in The Wall Street Journal. Winans leaked advance word of what would be in his column to a stockbroker who then invested with the benefit of that information, sharing some of the profits with Winans. Winans argued that his actions were unethical, but not criminal. He was found guilty of insider trading and wire fraud and was sentenced to 18 months in prison. He appealed his conviction all the way to the U.S. Supreme Court, which upheld the lower court rulings.

Attempting to profit on market sensitive information can be both a civil and a criminal offense. The SEC Enforcement Division and the relevant U.S. Attorney are prepared to introduce a perpetrator to those consequences.

Article By Peter D. Hutcheon of Norris McLaughlin P.A.

For more securities and SEC legal news, click here to visit the National Law Review.

©2022 Norris McLaughlin P.A., All Rights Reserved

CFTC Wades Into Climate Regulation

On June 2, 2022, the Commodities Futures Trading Commission (CFTC) issued a Request for Information (“RFI”) for “public comment on climate-related financial risk to better inform its understanding and oversight of climate-related financial risk as pertinent to the derivatives markets and underlying commodities markets.”  According to the RFI, the CFTC is contemplating “potential future actions including, but not limited to, issuing new or amended guidance, interpretations, policy statements, regulations, or other potential Commission action within its authority under the Commodity Exchange Act as well as its participation in any domestic or international fora.”

Specifically, the RFI issued by the CFTC is quite wide-ranging, and engages with numerous aspects of the CFTC’s authority, focusing on both systemic and narrow issues.  For example, the CFTC has, among other things, issued a broad request for comment on how “its existing regulatory framework and market oversight . . . may be affected by climate-related financial risk” and “how climate-related financial risk may affect any of its registered entities, registrants, or other market participants, and the soundness of the derivatives markets.”  It is hard to imagine a broader request by the CFTC–it is effectively asking for input on how “climate-related financial risk” may impact any portion of its regulatory purview.  Conversely, the CFTC has also posed very specific questions, including as to how the CFTC “could enhance the integrity of voluntary carbon markets and foster transparency, fairness, and liquidity in those markets,” and how it could “adapt its oversight of the derivatives markets, including any new or amended derivative products created to hedge-climate-related financial risk.”  In short, based upon the RFI, the CFTC could conceivably adopt a narrow or broad view of how it should adjust its regulations to account for climate-related financial risk.  Notably, however, the CFTC also asked if there were “ways in which updated disclosure requirements could aid market participants in better assessing climate-related risks,” which suggests that the CFTC may echo the SEC’s recent proposed rule for mandatory climate disclosures.

Most significantly, the fact that yet another financial regulatory agency is focused on “climate-related financial risk” suggests that the Biden Administration is willing to expend significant resources and energy in engaging in this type of regulation to advance its climate agenda.  When considered in tandem with the SEC’s recent proposed rules for mandatory climate disclosures and to combat greenwashing, it is apparent that there is a significant regulatory focus on climate issues and the financial markets.  This move by the CFTC also suggests that the Biden Administration will fully support the SEC’s proposed rules against the inevitable legal challenge.  (And, based upon the concurrences of the Republican CFTC commissioners to this RFI, it is likely that any climate-related regulation proposed by the CFTC will also be subject to legal challenge, likely on the grounds that such a regulation exceeded the CFTC’s authority.)  Most importantly, this move by the CFTC–that seeks to “understand how market participants use the derivative markets to hedge and speculate on various aspects of physical and transition [climate] risk”–demonstrates that the regulatory focus on climate and the financial markets will remain a top priority for the foreseeable future.

The Commodity Futures Trading Commission today unanimously voted to release a Request for Information (RFI) to seek public comment on climate-related financial risk to better inform its understanding and oversight of climate-related financial risk as pertinent to the derivatives markets and underlying commodities markets.

Article By Jacob H. Hupart of Mintz

For more environmental legal news, click here to visit the National Law Review.

©1994-2022 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

The Unredeemable Debtor

The law is the witness and external deposit of our moral life. Its history is the history of the moral development of the race.

– Oliver Wendell Holmes

Bankruptcy law decisions are replete with references to the “worthy debtor.”  In re Carp, 340 F.3d 15, 25 (1st Cir. 2003); In re BankVest Capital Corp., 360 F.3d 291 (1st Cir.2004); In re Institute of Business and Professional Educ., Inc., 79 B.R. 948 (Bankr. S.D. Fla. 1987); In re Nickerson, 40 B.R. 693 (Bankr. N.D. Tex. 1984); In re Marble, (Bankr. W.D. Tex. 1984); In re Doherty, 219 B.R. 665 (Bankr. W.D. N.Y. 1998).

These decisions typically employ the “worthy debtor” nomenclature in the context of the entitlements that are afforded by the provisions of the Bankruptcy Code.  It is always the “worthy debtor” that is entitled to a discharge of debts, a “fresh start”,  or to reject cumbersome contracts. This usage bespeaks a universe that also contains the “unworthy debtor,” a party whose behavior does not merit the statutory benedictions of the Bankruptcy Code. The identity of these parties is most often examined in the context of the discharge of debts and the behavior or actions that merit a denial of discharge or the finding that a particular debt is non-dischargeable.

There is a larger and more amorphous question though that also merits consideration, namely are their industries, companies, enterprises whose function and purpose is so odious and inconsistent with the precepts of good citizenship and the “moral development of the race”, to quote Justice Holmes, that they should be denied the benefits of reorganization afforded by the Bankruptcy Code.

If there is an argument to be made to prevent such enterprises from receiving the benefits of the Bankruptcy Code, to deny them the colloquial label of “worthy debtor”, that recourse likely lies within the provisions of the Bankruptcy Code that require that a plan of reorganization be “proposed in good faith and not by any means forbidden by law.”  11 U.S.C. § 1129(a)(3).  The “not forbidden by law” requirement is of limited utility in situations where the behavior is recognizable as immoral or intrinsically evil to most but has not yet been sanctioned by any legislative authority. Notably, and perhaps inversely, enterprises engaged in the sale and growing of cannabis are without access to the Bankruptcy Code because they act in contravention of the federal Controlled Substances Act, 21 U.S.C. §§ 801 et seq., which has been found to take precedence over state laws allowing the sale of cannabis. See, Gonzales v. Raich, 545 U.S. 1, 12 (2005).  As a result, bankruptcy being a creature of federal law, cannabis cases are generally being dismissed at the outset for cause in accordance with 11 U.S.C. § 1112(b) and not making it as far as the confirmation standard. See, In re Way To Grow, Inc., 597 B.R. 111 (Bankr. D. Colo. 2018).

If “forbidden by law” is unavailable as a source of relief, the last best hope to prevent the sanctioned reorganization of the unworthy debtor lies within the requirement that a plan be proposed in “good faith.”

“Good faith” is not defined by the Bankruptcy Code, a fact that makes it more likely that our  understanding of good faith may be transitory and that as the ‘moral development of the race’ proceeds, so might our understanding of ‘good faith.’  In other words, what was good faith yesterday might not, in light of our communal experience and growth as citizens, be good faith today.

In the first instance, we can understand from the ordering of the words within section 1129(a)(3) that the good faith standard exists independently of the ‘forbidden by law’ standard.  A plan of reorganization may describe a course of action not forbidden by law, but may still not meet the ‘good faith’ standard.

The good faith standard as used within section 1129(a)(3) is most commonly described as proposing a plan that fulfills the purposes and objectives of the Bankruptcy Code.  Those purposes and objectives within the context of Chapter 11 are most commonly understood as being “to prevent a debtor from going into liquidation, with an attendant loss of jobs and possible misuse of economic resources.”  NLRB v. Bildisco & Bildisco, 465 U.S. 513, 528 (1983);  see also, Bank of Am. Nat. Trust & Sav. Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S. 434, 452 (1999) (“[T]he two recognized policies underlying Chapter 11 [are] preserving going concerns and maximizing property available to satisfy creditors”)

This case law, which is by far the most consistent usage of the term, emphasizes paying back creditors and preserving an ongoing enterprise. It does not suggest the existence of anything more amorphous beyond those standards and it supports the idea that the ‘good faith’ standard is not meant to be an existential inquiry into the moral worth of a particular industry.

Bankruptcy courts have, however, recognized that the absence of a definition of good faith leaves courts without “any precise formulae or measurements to be deployed in a mechanical good faith equation.”  Metro Emps. Credit Union v. Okoreeh–Baah (In re Okoreeh–Baah), 836 F.2d 1030, 1033–34 (6th Cir.1988) (interpreting good faith in context of Chapter 13).

Any successful collateral attack under section 1129(a)(3) on the ‘good faith’ of the immoral enterprise must likely follow the path of connecting the good faith standard to the “public good.”  Bankruptcy Courts have invoked the ‘public good’ in refusing to enforce certain contracts and have followed the dictates of some courts that “while violations of public policy must be determined through “definite indications in the law of the sovereignty,” courts must not be timid in voiding agreements which tend to injure the public good or contravene some established interest of society. Stamford Bd. of Educ. v. Stamford Educ. Ass’n., 697 F.2d 70, 73 (2d Cir.1982).

The concept of the ‘public good’ is not a foreign one in bankruptcy courts.  Seeking relief for debtors that are the only providers of a service within their geographic area is an immensely easier task, no court, and no bankruptcy judge, likes to see a business fail and when the business is important to the community, support for reorganization from the bench often works to make reorganization easier.  Bankruptcy courts, although restrained by a statutory scheme, are as a matter of practice courts of equity.  Employing those equitable arguments to support a reorganization is both achievable and a reality of present practice.

Whether equitable arguments can be inversely employed to graft a sense of the ‘public good’ onto the good faith requirement within section 1129(a)(3) is decidedly uncertain and is not directly supported by the case law as it exists.

Somewhere out there though in one of those small border towns between the places of unelected legislators and the judicious and novel application of historical precedent lies the “moral development of the race” and the bankruptcy court that finds that incumbent within the concept of good faith is fair consideration of the public good.

Article By Peter J. Haley of Nelson Mullins

For more bankruptcy and restructuring news, click here to visit the National Law Review.

Copyright ©2022 Nelson Mullins Riley & Scarborough LLP

“My Lawyer Made Me Do It” is Not an Absolute Defense to Bankruptcy Court Sanctions

Last year, we offered a lesson and a moral from a North Carolina district court decision reversing a $115,000 sanctions order by a North Carolina bankruptcy court.

The lesson from the case was that the bankruptcy court cannot sanction a creditor if there is an objectively reasonable basis for concluding that the creditor’s conduct is lawful.

The moral was that a creditor can avoid the time, expense, and risk associated with litigating contempt and sanctions issues by taking basic steps to ensure that confirmed Chapter 11 plans are clear and precise.  The moral is even more glaring now because a recent decision from the Fourth Circuit Court of Appeals reveals that the parties continue to fight in court over the easily-avoidable sanctions order.  The decision also clarifies when and why a bankruptcy court can sanction a creditor.

Factual Background

In 2009, the Beckharts filed Chapter 11.  At the time, they were almost a year behind on a loan secured by the property at Kure Beach.  The loan servicer objected to planning confirmation because it did not specify how post-petition mortgage payments would be applied to principal and interest.  The bankruptcy court confirmed the plan without clarifying the issue, but the servicer did not ask the court to reconsider its order, nor did it appeal.

The Beckharts paid for five years.  Shellpoint acquired the loan from the original servicer and treated it as in default based on unpaid accrued arrearages.  Periodically, Shellpoint sent default letters to the Beckharts, who disputed the default.  Counsel for Shellpoint advised that the confirmation order had not changed the loan contract terms and that the loan remained in default.  The matter escalated with the Beckharts filing complaints with the Consumer Financial Protection Bureau.  Shellpoint commenced foreclosure, then represented to the Beckharts that it was ceasing foreclosure, but then posted a foreclosure hearing notice on the Beckharts’ door (allegedly due to error).

Litigation

In January 2020, the Beckharts moved the bankruptcy court to find Shellpoint in contempt and award them monetary sanctions.  The court held a hearing in June and, in September 2020, found Shellpoint in contempt.  The court tagged Shellpoint with $115,000 in sanctions for lost wages, “loss of a fresh start,” attorney’s fees, and travel expenses.

Bankruptcy courts have the power to hold a party in civil contempt and to impose sanctions for violation of a confirmed plan.  The test for liability is based on a recent United States Supreme Court decision — Taggart v. Lorenzen.  The Taggart test prohibits sanctions if there was an “objectively reasonable basis for concluding that the creditor’s conduct might be lawful.” There can be contempt for violating the discharge injunction only “if there is no fair ground of doubt as to whether the order barred the creditor’s conduct.”

In reversing the bankruptcy court, the district court noted that the plan and confirmation order did not state how much the debtors would owe on confirmation, did not say how the $23,000 in arrears would be paid, and did not set the amount of the first payment.  Confusingly, the confirmation order also said that the original loan terms would remain in effect, except as modified.  Finally, the district court pointed out that Shellpoint was repeatedly advised by counsel that their behavior was authorized, and reliance on the advice of outside counsel is a sufficient defense to civil sanctions.  Based on all these facts, the district court found that Shellpoint acted in good faith and interpreted the confirmation order in a manner consistent with the contractual terms of the loan, and that was objectively reasonable.

Taggart was a Chapter 7 case involving a discharge violation, but the Fourth Circuit held that the “no fair ground of doubt” test applied broadly in bankruptcy – including in Chapter 11 cases.

But the Fourth Circuit disagreed with the district court’s decision to reverse the bankruptcy court because the creditor had requested and received legal advice from outside counsel.  The Fourth Circuit held that advice of counsel is not an absolute defense in civil contempt.   The Court suggested that, under the Taggart test, advice of counsel “may still be considered in appropriate circumstances as a relevant factor” and “a party’s reliance on guidance from outside counsel may be instructive, at least in part, when determining whether that party’s belief that she was complying with the order was objectively unreasonable.”

The Fourth Circuit held that both lower courts had made mistakes and sent the case back to the bankruptcy court to “reconsider the contempt motion under the correct legal standard, including any additional fact-finding that may be necessary.”

Creditors can take some comfort in the “no fair ground of doubt” test, which is more forgiving than a strict liability standard.  But creditors can’t blame their lawyer for perilous conduct and expect the court to exonerate them.

But the most important takeaway hasn’t changed:  Creditors should insist on clear and specific plan terms.  After over two years of litigation, Shellpoint remains in peril of sanctions.  All of this could have been avoided had the loan servicer insisted the plan specify how the Beckharts’ payments would be applied to satisfy the arrearage.

Article By Lance P. Martin of Ward and Smith, P.A.

For more bankruptcy legal news, click here to visit the National Law Review.

© 2022 Ward and Smith, P.A.. All Rights Reserved.

Beware OFAC in a Time of Sanctions

On Monday, April 25, 2022, the U.S. Treasury Department’s Office of Foreign Asset Control (“OFAC”) announced a settlement with Toll Holdings Limited (“Toll”), an Australian freight forwarding and logistics company, with respect to Toll’s originations and/or receipt “of payments through the U.S. financial system involving sanctioned jurisdictions and persons.” Toll, which is not an American entity, and is neither owned by Americans nor located in the U.S. or any of its territories, was involved in almost 3000 transactions where payments were made in connection with sea, air, and rail shipments to, from, or through North Korea, Iran, or Syria, AND/OR involving the property of a person on OFAC’s Specially Designated Nationals and Blocked Persons List. OFAC did not have direct jurisdiction over Toll, BUT because the payments for Toll’s freight forwarding and logistics services flowed through U.S. financial institutions, Toll “caused the U.S. financial institutions to be engaged in prohibited activities with … sanctioned persons or jurisdictions.”

Each OFAC violation can be the basis of civil sanctions. Here the 2853 violation would have supported the imposition of civil sanctions totaling over $826 million. Toll was “happy” to settle OFAC’s enforcement action for $6 million. OFAC found that the Toll violations were “non-egregious,” in part due to the rapid growth of Toll after 2007 through acquisitions of smaller freight forwarding companies. OFAC noted that by 2017 Toll had almost 600 invoicing, data, payment, and other systems spread across its various units. OFAC also noted that Toll did not have adequate compliance procedures and procedures in place and did not attend to those issues until an unnamed bank threatened to cease doing business with Toll because Toll was using its U.S. dollar account to transact business with sanctioned jurisdictions and/or persons. OFAC took note of Toll’s voluntary self-disclosure, well-organized internal investigation, and extensive remedial measures.

OFAC traces its origins to the War of 1812, when the then Secretary of the Treasury imposed sanctions on the United Kingdom in retaliation for the impressment of American sailors. The Treasury Department has had a special office dealing with foreign assets since 1940 (and the outbreak of World War II), with statutory authority found in the Trading With The Enemy Act of 1917 (as World War I raged), and a series of federal laws involving embargoes and economic sanctions. OFAC received its current name as part of a Treasury Department order on October 15, 1962 (contemporaneous with the Cuban missile crisis).

The Toll settlement reflects the growing use by OFAC of public enforcement against foreign businesses for “causing” violations by involving U.S. payment systems. The use of U.S. dollars in any part of a transaction will typically involve the U.S. financial system, directly or indirectly – that subjects the entirety of the transaction to U.S regulatory jurisdiction, including that of OFAC. The Toll settlement evidences OFAC’s increasing willingness to exercise its expansive jurisdiction over foreign businesses, even those involving primarily extraterritorial transactions — for example, the increase in OFAC sanctions of foreign businesses seen as facilitating the Russian invasion of Ukraine.

Foreign businesses must give serious and continuing attention to having substantial policies and procedures in place to insure compliance with U.S. sanctions and, thereby, to avoid OFAC enforcement actions. Companies can start by reviewing OFAC’s Framework for Compliance Commitments and implementing the recommendations there. In addition, all parties to a transaction should be screened against sanction lists (OFAC’s, and also those of the U.K. and E.U.). Companies should consider adopting preventive measures, not only to deter violations, but also to demonstrate a vigorous compliance program.  Similarly, these issues MUST be considered as part of any merger or acquisition (as the Toll experience suggests).Finally, all counterparties, including financial intermediaries, should be evaluated for potential sanction list issues. Otherwise, a foreign business may have to “pay the Toll” for its shortcomings.

Experienced American business lawyers may prove helpful in designing and/or evaluating the compliance programs of non-U.S. companies.

Article By Peter D. Hutcheon of Norris McLaughlin P.A.

For more financial legal news, click here to visit the National Law Review.

©2022 Norris McLaughlin P.A., All Rights Reserved

SEC Targets Companies Conducting Cryptomining

The SEC recently doubled the size of its Crypto Assets and Cyber Unit.  Since its inception in 2017, the SEC’s Crypto Assets and Cyber Unit has launched more than 80 investigations resulting in over $2 billion in monetary penalties.  With more dedicated investigative attorneys, trial counsel, and fraud analysts, the SEC’s cryptocurrency-related investigations are expected to substantially rise in the months and years ahead.

The tip of the spear will include the areas that the SEC said would be its focus moving forward:

  • crypto asset offerings
  • crypto asset exchanges
  • crypto asset lending and staking products
  • decentralized finance (DeFi) platforms
  • non-fungible tokens (NFTs); and
  • stablecoins

View SEC press release here.

Given the heightened scrutiny, however, even companies outside of the traditional cryptocurrency industry may find themselves subject to enforcement actions and penalties.  For example, the SEC recently announced that it reached a $5.5 million settlement with technology company NVIDIA Corporation for the company’s alleged failure to disclose on its Form 10-Q for fiscal year 2018 that cryptomining was a significant element of its revenue growth. View release here.

NVIDIA is not a cryptocurrency-related company, but rather is a technology company that markets and sells accelerated computing technologies, including graphics processing units (GPUs) for PC gaming, the company’s largest specialized market.  The SEC alleged that, as interest in cryptocurrencies began to increase in 2017, NVIDIA customers increasingly began using gaming GPUs for cryptomining of Ether (ETH), which rose in price from under $10 to nearly $800 between 2017 and 2018.

In its Form 10-Q for fiscal year 2018, despite knowledge (discerned by the SEC from internal company documents and communications) of cryptomining as a significant driver of its GPU sales growth in its gaming division, the SEC alleged that NVIDIA failed to disclose that this growth was largely driven by demand for gaming GPUs to use in cryptomining.  The SEC further alleged that this failure to disclose misled investors about the growth of NVIDIA’s gaming business in violation of Section 17(a)(2) and (3) of the Securities Act of 1933 and the disclosure provisions of the Securities Exchange Act of 1934.

As the SEC steps up its cryptocurrency related investigation and enforcement actions, publicly traded companies must exercise increased diligence in disclosure of activities that touch cryptocurrency assets.   Even internal dialogue about revenues or other disclosable material that touches cryptocurrencies, as happened to NVIDIA, could subject companies to increased scrutiny and significant monetary penalties.

Copyright ©2022 Nelson Mullins Riley & Scarborough LLP
For more articles about cryptomining, visit the NLR Financial Institutions & Banking section.

Banking Regulators Publish Proposed Rule to Update Community Reinvestment Act Regulations

On May 5, 2022, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (collectively the agencies) issued a joint notice of proposed rulemaking (the Proposed CRA Rule) that proposes changes to the way the agencies evaluate a bank’s performance under the Community Reinvestment Act (CRA). The team at Bradley is conducting an in-depth review of the Proposed CRA Rule and expects to release a detailed blog post on the significant number of proposed changes to the CRA regulations in the coming days. Below are highlights of a few of the changes the agencies seek to make through the Proposed CRA Rule.

If implemented as written, the Proposed CRA Rule would:

  • Update the CRA evaluation framework, with performance standards tailored to a bank’s size and business model
  • Create four new performance tests to evaluate large bank CRA performance: the Retail Lending Test, Retail Services and Products Test, Community Development Financing Test, and Community Development Services Test
  • Establish specific performance tests for small and intermediate-sized banks
  • Update the requirements for the delineation of assessment areas
  • Create updated record-keeping, data collection, reporting, and disclosure requirements for large banks

These highlights are only a partial selection of the changes proposed by the agencies. Stay tuned for a more expansive description of the details of the Proposed CRA Rule.

The agencies are accepting comments on the Proposed CRA Rule through August 5, 2022. If your organization is considering submitting a public comment on the proposed changes to the CRA regulations, we suggest that you begin reviewing the Proposed CRA Rule soon.

© 2022 Bradley Arant Boult Cummings LLP
For more articles about banking regulations, visit the NLR Financial, Securities & Banking section.

Community Banks and Overdrafts — Time for Reconsideration?

Bank consumer overdraft fees (together with nonsufficient funds (NSF) fees and returned check fees) have long been a target of attacks by consumer advocacy groups and progressive politicians who claim that such fees are disproportionately levied on the most vulnerable consumers. The Obama-era Consumer Financial Protection Bureau (CFPB) initiated efforts to regulate overdraft programs, which were shelved during the Trump administration, and legislation to restrict overdraft fees has regularly been proposed and considered by Congress, but not enacted.

2022, however, may be the year that the US financial regulatory agencies finally move to impose formal restrictions on banks’ overdraft fee programs. In particular, the CFPB, increasingly assertive in President Biden’s second year in office, has clearly signaled its intent to take action in this area:

  • Rohit Chopra, the director of the CFPB, has spoken out on numerous occasions — in public appearances, opinion pieces, and blog posts — regarding the imperative of reining in so-called junk fees charged by banks and other financial companies.
  • On January 26, 2022, the CFPB published a request for public comment targeting “exploitative junk fees,” including overdraft and NSF fees. The CFPB stated that the goal of its information request was to assist the agency’s plan to “craft rules, issue industry guidance, and focus supervision and enforcement resources,” with the goals of reducing excessive fees and eliminating illegal practices.

The attack on overdraft fee programs has been echoed by other administration officials as well as by allied politicians. Acting Comptroller of the Currency Michael Hsu has called traditional bank overdraft programs “a significant part” of a “regressive system” that penalizes the poor and has stated that “banks that hesitate to adopt pro-consumer overdraft programs will soon be negative outliers.” On March 31, 2022, the House Financial Services Subcommittee held a hearing on possible government intervention to restrict overdraft programs, clearly showing coordination by the committee majority with the Biden administration’s initiatives. In March 2022, a group of US Senate Democrats (including Banking Committee Chairman Sherrod Brown) sent letters to seven large banks urging them to abolish or significantly reduce overdraft and other fees, and in early April, New York Attorney General Letitia James, in recent letters signed by numerous other state attorneys general, asked the country’s four largest banks to eliminate consumer overdraft fees altogether by summer 2022.

Adding to the chorus of Biden administration and other political voices critical of overdraft fees has been a steady stream of announcements over the past year by many large banks regarding plans to eliminate or greatly restrict their overdraft and related fees. In January 2022 alone, five of the country’s largest banks announced the planned elimination of NSF fees and certain overdraft charges. These announcements add weight to the CFPB’s attacks on overdraft fee programs and will inevitably result in additional pressure on other large banks to follow suit.

The bottom line is that federal regulation of this area may finally be on the horizon, if not imminent, although it is anyone’s guess what form regulatory action will take. The initial targets of any action taken by the CFPB — whether formal rulemaking, statements of policy, or increased enforcement activity — are likely to be banking companies that have total assets in excess of $10 billion and that are thus subject to direct supervision by the CFPB. However, whatever new policy is implemented by the CFPB in this area will inevitably be applied by the three principal federal banking agencies to financial institutions of all sizes, and community banks should prepare themselves for increased examination scrutiny of their overdraft fee programs and the potential for enforcement actions.

Accordingly, community banks — especially those heavily reliant on overdraft fee income — should review their overdraft programs, ensure that they are compliant with existing regulations and best practices, and consider changes to respond to possible regulatory concerns. While it is impossible to react effectively to a regulatory regime that has not been proposed, much less implemented, reports and statements by the CFPB and other banking agencies provide some guidance. First, the CFPB has indicated that it will demand transparent and fully disclosed pricing of overdraft solutions that allow consumers to make an informed choice. In addition, Acting Comptroller Hsu stated in a December 2021 speech — in which he notably did not call for banks to eliminate overdraft fees — that the OCC had identified several features of bank overdraft programs that could be modified or recalibrated to help achieve the goal of improving the financial health of vulnerable consumers. He stated that these changes included:

  • Requiring consumer opt-in to the overdraft program.
  • Providing a grace period before charging an overdraft fee.
  • Allowing negative balances without triggering an overdraft fee.
  • Offering consumers balance-related alerts.
  • Providing consumers with access to real-time balance information.
  • Linking a consumer’s checking account to another account for overdraft protection.
  • Collecting overdraft or NSF fees from a consumer’s next deposit only after other items have been posted or cleared.
  • Not charging separate and multiple overdraft fees for multiple items in a single day and not charging additional fees when an item is re-presented.

Finally, community banks should closely monitor CFPB and other bank regulators’ overdraft fee initiatives, through state and national bankers associations and otherwise, and continue to explore potential methods of managing their overdraft programs in line with stated and possible future regulatory concerns.

© 2022 Jones Walker LLP
For more about banking institutions, visit the NLR Financial, Securities & Banking section.

Russia’s Invasion of Ukraine: Maximizing Insurance Coverage to Mitigate Financial Losses

Russia’s invasion of Ukraine has led not only to severe humanitarian consequences, but also to severe economic consequences for Ukrainians, Russians, and others who conduct business within the region.  From the destruction of physical property in Ukraine, to forced abandonment of Ukrainian assets, to trade interruptions stemming from global sanctions on Russia, economic fallout from the invasion has been, and will continue to be, vast and wide-ranging.

Fortunately, political risk insurance policies may cover some of the economic distress that stems from precisely this type of situation.  While each is different, political risk policies often cover losses arising from forced divestiture or forced abandonment of assets, as well as political violence, currency inconvertibility, business interruption, and expropriation.  Such policies could come into play in a variety of ways with respect to Russia’s invasion of Ukraine:

  • Forced divestiture and forced abandonment of assets coverage protects a policyholder from losses arising from the necessary abandonment of a company’s operations.  This type of coverage often requires that a government agency (such as the U.S. Department of State) advise evacuation, either of all citizens or government personnel.  The United States issued such an advisory to citizens to leave Ukraine prior to the Russian invasion.  Thus, losses stemming from a U.S. company’s inability to conduct its business due to the evacuation of U.S. personnel may be covered.
  • Political violence coverage protects policyholders from losses arising from property damage due to riots, protests, other civil commotion, and sometimes war and politically-motivated terrorism.  Therefore, losses stemming from property damage due to Russia’s invasion of Ukraine may be covered.
  • Currency inconvertibility coverage protects policyholders from losses arising from their inability to convert local currency into foreign exchange due to exchange restrictions posed by a foreign government.  Technically, the U.S. dollar is still tradeable in Russia, although the Russian ruble has sunk to record low levels.  Ukraine has suspended all currency trading; whether this type of coverage applies will depend heavily on policy language.
  • Business interruption coverage may offer protection when any of these events results in loss of business income.  Companies that have been required to cease operations due to the disruption that sanctions have had on supply chains may potentially seek coverage for losses stemming from such interruption.
  • Expropriation coverage protects against losses caused by government actions that deprive the insured of all or part of its interest in a foreign investment or enterprise.  This may include reducing the control or rights of the insured’s investment, such as depriving the insured of its tangible property or control over its funds.  Russian President Vladimir Putin has expressed support for a law to nationalize assets of foreign companies that leave Russia over its invasion of Ukraine.  To the extent such nationalization comes to pass, expropriation coverage may apply.

Understandably, insurance may not be a company’s first concern when seeking to protect the health and safety of its employees during violent conflict.  But it is important for companies to act quickly to ensure that they maintain their coverage rights.  Actions taken now may have a significant impact on potential insurance recovery later.

First, policyholders should examine all “notice” requirements under their policies.  These requirements prescribe when and how a policyholder must provide notice to the insurer that the policyholder intends to file a claim.  Particularly because these requirements may be subjective (such as requiring notice to be provided “as soon as reasonably practicable”), it is important to provide notice promptly and to keep clear records of all actions taken.  In addition, certain policies may have rigid documentation requirements; keeping good records now will make securing coverage an easier task later.

Second, policyholders should review any deductible (or self-insured retention) requirements, which typically are listed near the beginning of a policy.  Understanding the deductible amount and weighing it against the policyholder’s losses or potential losses will help the policyholder in evaluating the merits of pursuing coverage from an insurer.

After taking these initial steps, there are several provisions policyholders should be aware of in moving forward with a claim.  Many political risk policies contain choice of law provisions.  These policies may require the use of the foreign state’s law, and potentially the use of the foreign state’s jurisdictional forum.  Of course, filing a claim in such a forum may prove difficult or even impossible given the rapidly evolving, complex situation on the ground.  And application of Russian law to a coverage dispute that may involve questions over whether the insured’s losses stemmed from unlawful actions by the Russian government may pose substantial complications.  Policyholders should read the policy carefully to determine the scope and applicability of such choice of law and forum provisions. Of course, every insurance policy is different, and the scope of potentially available coverage will be driven by specific policy language and specific law in various jurisdictions.  It is important to analyze policy language carefully to preserve and maximize potential recoveries.

© 2022 Gilbert LLP

Article By Emily P. Grim, Alison Gaske and Brandon Levey of Gilbert LLP

For more articles on Ukraine, visit the NLR Global section.

Cryptocurrency As Compensation: Beware Of The Risks

A small but growing number of employees are asking for cryptocurrency as a form of compensation.  Whether a substitute for wages or as part of an incentive package, offering cryptocurrency as compensation has become a way for some companies to differentiate themselves from others.  In a competitive labor market, this desire to provide innovative forms of compensation is understandable.  But any company thinking about cryptocurrency needs to be aware of the risks involved, including regulatory uncertainties and market volatility.

Form of Payment – Cash or Negotiable Instrument

The federal Fair Labor Standards Act requires employers to pay minimum and overtime wages in “cash or negotiable instrument payable at par.”  This has long been interpreted to include only fiat currencies—monies backed by a governmental authority.  As non-fiat currencies, cryptocurrencies therefore fall outside the FLSA’s definition of “cash or negotiable instrument.”  As a result, an employer who chooses to pay minimum and/or overtime wages in cryptocurrency may violate the FLSA by failing to pay workers with an accepted form of compensation.

In addition, various state laws make the form of wage payment question even more difficult.  For example, Maryland requires payment in United States currency or by check that “on demand is convertible at face value into United States currency.”  Pennsylvania requires that wages shall be made in “lawful money of the United States or check.”  And California prohibits compensation that is made through “coupon, cards or other thing[s] redeemable…otherwise than in money.”  It is largely unclear whether payment in cryptocurrency runs afoul of these state requirements.

Of note, the U.S. Department of Labor (“DOL”) allows employers to satisfy FLSA minimum wage and overtime regulations with foreign currencies as long as the conversion to U.S. dollars meets the required wage thresholds.  But neither the DOL nor courts have weighed in on whether certain cryptocurrencies (e.g., Bitcoin) are the equivalent, for FLSA purposes, of a foreign currency.

Volatility Concerns

When compared to the rather stable value of the U.S. dollar, the value of cryptocurrencies is subject to large fluctuations.  Bitcoin, for example, lost nearly 83% of its value in May 2013, approximately 50% of its value in March 2020, and recently lost and then gained 16% of its value in the span of approximately 15 minutes one day in February 2021.

Such volatility can give payroll vendors a nightmare and can, in some instances, lead to the under-payment of wages or violation of minimum wage or overtime requirements under the FLSA.

Tax and Benefits Considerations

Aside from wage and hour issues, the payment of cryptocurrency implicates a host of tax and benefits-related issues.  The IRS considers virtual currencies to be “property,” subject to capital gains tax rates.  It has also confirmed in guidance materials that any payment to employees in a virtual currency must be reported on a W-2 based upon the value of the currency in U.S. dollars at the time it was delivered to the employee.  This means that cryptocurrency wage payments are subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax.

For 401k plan fiduciaries, the Department of Labor recently issued guidance that should serve as a stern warning to any fiduciary looking to invest 401k funds into cryptocurrencies.  Specifically, the DOL wrote: “[a]t this early stage in the history of cryptocurrencies, the Department has serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies.”  Given the risks inherent in cryptocurrency speculation, the DOL stated that any fiduciary allowing such investment options “should expect to be questioned [by the DOL] about how they can square their actions with their duties of prudence and loyalty in light of the risks.”

Considerations for Employers

Given the combination of uncertain and untested legal risks, employers should consider limiting cryptocurrency compensation models to payments that do not implicate the FLSA or applicable state wage and hour laws.  For example, an employer might provide an exempt employee’s base salary in U.S. dollars and any annual discretionary bonus in cryptocurrency.

Whether investing in cryptocurrencies themselves to pay employees or utilizing a third-party to convert US dollars into cryptocurrency, employers should also stay abreast of the evolving tax and benefits guidance in this area.

Ultimately, the only thing that is clear about cryptocurrency compensation is that any decision to provide such compensation to employees should be made with a careful eye towards the unique wage, tax, and benefits-related issues implicated by these transactions.

Article By Daniel J. Butler and Kevin J. White of Hunton Andrews Kurth

For more cryptocurrency and finance legal news, click here to visit the National Law Review.

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