Tag: financial institutions

The Silicon Valley Bank Failure: Implications on Commercial Leasing

This past Friday, March 10, 2023, the Federal Deposit Insurance Corp. (FDIC) announced its takeover of the failed Silicon Valley Bank (“SVB”) after a run on the bank late last week caused the largest-scale U.S. bank failure since Washington Mutual in the 2008 financial crisis. Two days later, New York regulators shuttered Signature Bank (“Signature”). The federal government has made it clear that, while FDIC will guaranty all deposits, including uninsured ones, bailouts of these banks will not occur. The failures of SVB and Signature are likely to have widespread ramifications across many industry sectors, including commercial leasing.

How will the bank failures impact landlords in the commercial leasing sector?

  • SVB was a very common issuer of tenant letter of credit security deposits. A letter of credit security deposit is the issuing bank’s contractual obligation to pay the landlord beneficiary the amount that such landlord’s tenant is in default.
  • Landlords holding tenant letters of credit issued by SVB or Signature as security deposits will be directly impacted by the bank failures. Any undrawn standby letters of credit issued by SVB, Signature or any other bank under FDIC receivership may be repudiated by the FDIC, making any such letter of credit worthless. Any affected landlord will want to act promptly to provide proper protection of their interests under any applicable lease.

How can landlords protect their interests under such leases?

  • Any landlord holding a letter of credit security deposit should identify the issuing bank.
  • In any lease where the security deposit is a letter of credit issued by SVB or Signature, the landlord should carefully review the terms of the lease regarding the security deposit and the landlord’s approval rights over the issuing bank, but in any event require the tenant to provide it with a letter of credit issued by a different financial institution.
  • All landlords should review the terms their lease agreements relating to landlord approval rights over issuing banks, draw procedures and requirements and the process for replacing a letter of credit.
  • In the event the lease agreement in question does not provide landlord with adequate approval rights over the issuing bank, clear draw procedures and stringent replacement requirements, the landlord should consider amending the lease agreement to so require.

Article By Jeff Bates and Blake Young of Winstead

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

© 2023 Winstead PC.

Are Loans Securities?

We have been following a case that has been winding its way through New York federal courts for some time that players in the syndicated loan market have described as everything from “a potential game changer” to an “existential threat” to the syndicated loan market.

The case in question is Kirschner v. JPMorgan Chase Bank, N.A., which is before the United States Court of Appeals for the Second Circuit. In this case, the Court will consider an appeal of a 2020 decision by the United States District Court for the Southern District of New York which held that the syndicated term loan in question was not a security. Significantly, this ruling indicated that because syndicated term loans are not securities, they are therefore not subject to securities laws and regulations.

The consequence of a determination that syndicated loans are securities would be significant. It would mean, among other things, that the syndicated loan market would have to comply with various state and federal securities laws. This would significantly change the cost of these transactions as well as the means by which syndication and loan trading take place. The Loan Syndications and Trading Association (LSTA) filed an amicus brief in this case in May of this year, which we covered here. The LSTA argued in its brief, among other things, that beyond the increased cost, regulating syndicated loans as securities would fundamentally change other aspects of the syndicated loan market. Specifically, the LSTA pointed to the importance of a borrower’s ability to have veto rights and other control in determining which entities will hold its debt. The LSTA also noted the importance of quick access to funding on flexible terms specific to the borrower in question – something we know is at the heart of so many fund finance transactions – which would be greatly compromised within a securities regulatory regime. The LSTA brief also discusses potential negative impacts on the CLO market.

Those in favor of a change in regulation point to features such as nonbank lender participation in the market, the fact that the test to determine whether a loan is a security may be outdated, and the overall size of the syndicated loan market – at $1.4 trillion – which could be a risk to the larger global financial system potentially warranting more stringent regulation.

Most experts believe that the Second Circuit will not overturn the decision issued in the lower court, but the issue in question is significant enough that market players should keep an eye on this one. Oral arguments will take place early next year. We will continue to watch as this case develops and update you here.

Article By Leah Edelboim of Cadwalader, Wickersham & Taft LLP

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

© Copyright 2022 Cadwalader, Wickersham & Taft LLP

Quantifying Cryptocurrency Claims in Bankruptcy: Does the Dollar Still Reign Supreme?

In the past six months, four major players in the crypto space have filed for chapter 11 bankruptcy protection: Celsius Network, Voyager Digital, FTX, and BlockFi, and more may be forthcoming.  Together, the debtors in these four bankruptcy cases are beholden to hundreds of thousands of creditors.  The bulk of the claims in these cases are customer claims related to cryptocurrency held on the debtors’ respective platforms.  These customer claimants deposited or “stored” fiat currency and cryptocurrencies on the debtors’ platforms.  Some of these funds allegedly were commingled or rehypothecated, leaving customer accounts severely underfunded when liquidity crunches arose at the various entities.  The total amount of such claims is estimated to be in the billions — that is, if these claims ultimately are measured in United States Dollars (“USD”).

Crypto-watchers and bankruptcy lawyers alike have speculated how customer claims based on digital assets such as cryptocurrencies should be valued and measured under bankruptcy law.  Given the volatility of cryptocurrency prices, this determination may have a significant effect on recoveries, as well as the viability of the “payment-in-kind” distribution mechanics proposed in Voyager, Celsius, and BlockFi.  A number of creditors appearing pro se in these proceedings have expressed a desire to keep their mix of cryptocurrencies through these proposed “in-kind” distributions.

However, a crypto-centric approach to valuing claims and making distributions raises a number of issues for consideration.  For example, measuring customer claims in cryptocurrency and making “in-kind” distributions of these assets could lead to creditors within the same class receiving recoveries of disparate USD value as the result of the fluctuation in cryptocurrency prices. Moreover, as has been discussed in the Celsius proceedings, the administrative burden associated with maintaining, accounting for, and distributing a wide variety of cryptocurrencies as part of a recovery scheme would likely prove complex.  Equity holders also might challenge the confirmability of a plan where valuations and recoveries are based on cryptocurrency rather than USD, as a dramatic rise in cryptocurrency values could return some value to equity.

Like most issues at the intersection of insolvency and cryptocurrency, there is little precedent to guide creditors through the uncertainties, but a recent dispute in the Celsius bankruptcy proceedings as to whether a debtor is required to schedule claims in USD, or whether cryptocurrency claims can be scheduled “in-kind,” may serve as a preview of things to come.

I.          General Background

Celsius Network (“Celsius” and, together with its affiliated debtors and debtors in possession, the “Debtors”), self-described as one of the “largest and most sophisticated” cryptocurrency-based finance platforms and lenders that claimed over 1.7 million users worldwide,1 filed petitions under Chapter 11 of the Bankruptcy Code on July 13, 2022.2  On October 5, 2022, the Debtors filed their schedules of assets and liabilities (“Schedules”).  Each Debtor’s schedule of unsecured creditors’ claims (Schedule E/F) lists the claims of the Debtors’ customers by the number of various forms of cryptocurrency coins and account types, rather than in USD.3

On October 25, 2022, a group of beneficial holders, investment advisors, and managers of beneficial holders (collectively, the “Series B Preferred Holders”) of the Series B Preferred Shares issued by debtor Celsius Network Limited filed a motion seeking entry of an order directing the Debtors to amend their Schedules to reflect customer claims valued in USD, in addition to cryptocurrency coin counts.4

II.         Arguments

a.         Series B Preferred Holders

Broadly, pursuant to Bankruptcy Rule 1009(a),5 the Series B Preferred Holders sought to have the Debtors amend their Schedule E/F to “dollarize” creditors’ claims, i.e., value customer claims in their dollar value as of the petition date.  As filed, the Series B Preferred Holders asserted that the Debtors’ schedules were “improper, misleading, and fail[ed] to comply” with the Bankruptcy Rules “because they schedule[d] customer claims in cryptocurrency coin counts, rather than in lawful currency of the United States as of the Petition Date.”6  The Series B Preferred Holders asserted that such amended schedules are essential to the Debtors’ ability to structure, solicit, and confirm a plan of reorganization under the requirements of Section 1129, including whether “(i) claims are impaired or unimpaired, (ii) holders of similarly situated claims are receiving the same treatment, and (iii) the plan meets the requirements of the ‘absolute priority rule.’”7  In support of their arguments that USD valuation of a customer’s claim should be required, the Series B Preferred Holders relied on provisions of the Bankruptcy Rules, Bankruptcy Code, and Official Forms.  The Series B Preferred Holders stressed that the motion “takes no position regarding the form of distribution customers” should receive under the Debtors’ plan, but rather that the Debtors must “add the [USD] amount of each customer claim in Schedules E/F to the cryptocurrency coin counts.”8

The Series B Preferred Holders also asserted that the requirement to denominate claims in USD is consistent with Section 502(b) of the Bankruptcy Code, which provides that when a debtor or party-in-interest objects to a claim, the court determines the amount of the claim in USD as of the debtor’s petition date.

b.         Debtors’ Response

The Debtors had previously indicated that they were not seeking to dollarize its customers’ claims; rather, the Debtors represented that they intend to return cryptocurrency assets to its customers “in kind.”9  The Debtors stated that they interpreted Bankruptcy Rule 9009(a)(1)-(2) and General Order M-386, dated November 24, 2009 (the “General Order M-386”) to allow the Debtors to remove the dollar symbol when scheduling claims regarding cryptocurrency coin counts.10  This approach, the Debtors argue, lessens confusion for its customer case and decreases administrative expense for the estate.11

Further, the Debtors argued that the Series B Preferred Holders’ reliance on Section 502(b) was misplaced because the application of such section is inapplicable at this stage of the proceedings where no claims objection has taken place.12

The Committee of Unsecured Creditors (“UCC”) agreed with the Debtors’ approach, stating that it “makes sense” for account holders to validate their scheduled claims by cryptocurrency type and that it wished to be consulted on the petition date prices used by the Debtors if they filed an amendment to the schedules.13

III.        Analysis

a.         Bankruptcy Code & Rules & Forms

Bankruptcy Rule 1007(b)(1) requires that a debtor’s schedules of assets and liabilities must be “prepared as prescribed by the appropriate Official Forms.”14  The relevant official form that a debtor must use to prepare its schedule of assets and liabilities is Official Form 206, which contains a USD symbol to denote the amount of liabilities that a debtor must list.15  Specifically, Official Form 206 provides:

As seen above, Official Form 206 does “hardwire” a dollar sign (“$”) into the boxes provided for claim amounts.  Bankruptcy Rule 9009 states that the official forms are to “be used without alteration, except as otherwise provided in the rules, [or] in a particular Official Form.”16  Bankruptcy Rule 9009 permits “certain minor changes not affecting wording or the order of presenting information,” including “expand[ing] the prescribed areas for responses in order to permit complete responses” and “delet[ing] space not needed for responses.”17  Lastly, General Order M-386 permits “such revisions as are necessary under the circumstances of the individual case or cases.”18 The introduction to General Order M-386 states that standard forms were adopted to “expedite court review and entry of such orders” and that courts will expect use of the standard forms “with only such revisions as are necessary under the circumstances of the individual case or cases.”19

b.         Section 502(b)

Bankruptcy Code Section 502(b) provides that if there is an objection to a claim, the court “shall determine the amount of such claim in lawful currency of the United States as of the [petition] date . . . .”20  This “prevents the value of a claim from fluctuating by setting the claim as of the petition date and converting it to the United States dollars.”21  Acknowledging the “novel phenomenon” of dollarizing claims in cryptocurrency, the Series B Preferred Holders analogize this to cases where courts have required claims asserted in or based on in foreign currency or amounts of gold should be valued in USD.  However, these cases were decided in the context of a claims objection. The Celsius Debtors argued that these cases have limited utility in the context of a motion for an order directing the Debtors to amend their schedules pursuant to Bankruptcy Rule 1009(a).22

IV.        The Court’s Order

Ahead of the hearing regarding the motion for an order directing the Debtors to amend their schedules, the Debtors and the Series B Preferred Holders were able to consensually resolve the motion and filed a revised proposed order prior to the hearing on the motions on November 15.23  The Debtors agreed to amend their schedules by filing a conversion table within three days of the entry of the order, in consultation with the UCC and Series B Preferred Holders, that reflects the Debtors’ view of the rate of conversion of all cryptocurrencies listed in the Debtors’ schedules to USD as of the petition date.  The idea is that the conversion table could be used by customers as a reference for calculating the USD value of their claim, to the extent needed for filing a proof of claim.  The conversion table is not binding – the order preserves the rights of all parties to contest the conversion rates and does not require a party-in-interest to file an objection that is not stated in USD “solely on the basis that such claims should be reflected in [USD].”24  The order also requires the Debtors to file updated schedules “dollarizing” its account holders’ cryptocurrency holdings to the extent required by any future court order or judicial determination.

On November 17, 2022, the court entered the revised proposed order.25

V.         Cash Is Still King?

Other bankruptcy courts have taken similar approaches as the Celsius court in this issue.  An earlier cryptocurrency case, In re Cred Inc., the debtors did not schedule cryptocurrency claims in USD, but included a conversion table in their filed schedules, which set forth a conversion rate to USD as of the petition date.26  Debtors in other cases, such as Voyager Digital, scheduled the amounts of their customer claims as “undetermined” and listed them in Schedule F in cryptocurrency.27  BlockFi, which filed for bankruptcy on November 28, 2022, already has filed a proposed plan that would distribute its cryptocurrencies to its customers in–kind in exchange for their claims against the BlockFi debtors.28  To date, neither BlockFi nor FTX have filed their schedules, and it remains to be seen whether they will follow the pattern established in Celsius and Voyager.

For creditors and equity holders, whether claims are measured in USD or the applicable cryptocurrency is only the beginning of what will likely be a long and contentious road to recovery.  It remains to be seen whether any of these debtors will be able to confirm a viable restructuring plan that relies on any sort of “in-kind” distribution of cryptocurrencies.  Further issues are likely to arise in the claims resolution process even further down the road as claimants and liquidation trustees (or plan administrators) wrestle with how to value claims based on such a volatile asset, subject to ever-increasing regulatory scrutiny.  However, for the time being, the bankruptcy process continues to run on USD.

FOOTNOTES

1 Declaration of Alex Mashinsky, CEO of the Debtors ¶¶ 1, 9, 20, In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 23].

2 Id. at ¶ 131.

3 Debtors’ Schedules of Assets and Liabilities and Statements of Financial Affairs, In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 974]; see also Schedule E/F, Case No. 22-10967 [Docket No. 5]; Case No. 22-10970 [Docket No. 5]; Case No. 22-10968 [Docket No. 5]; Case No. 22-10965 [Docket No. 6]; Case No. 22-10966 [Docket No. 7]; Case No. 22-10964 [Docket No. 974]; Case No. 22-10969 [Docket No. 5]; Case No. 22- 10971 [Docket No. 5].

4 Series B Preferred Holders Motion to Direct Debtors to Amend Schedules, In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1183].

5 “On motion of a party in interest, after notice and a hearing, the court may order any . . . schedule . . . to be amended and the clerk shall give notice of the amendment to entities designated by the court.” Fed. R. Bankr. P. 1009(a).

6 Series B Preferred Holders Motion to Direct Debtors to Amend Schedules ¶ 1.

7 Id. ¶ 3 (citing 11 U.S.C. §§ 1123(a)(2)-(4), 1129(a)(1), 1129(b)).

8 Series B Preferred Holders’ Reply ¶ 10, In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1334].

9 See 8/16/22 Hr’g Tr. at 35:5-7 (“The company is not seeking to dollarize claims on the petition date and give people back a recovery in fiat.”); id. at 42:11-16 (“[The UCC is] pleased that the company is not focused on dollarization of claims . . . an in-kind recovery is absolutely critical.”).

10 General Order M-386 is a resolution of the Board of Judges for the Southern District of New York, which provides for “a standard form for orders to establish deadlines for the filing of proofs of claim . . . in chapter 11 cases” to “thereby expedite court review and entry of such orders.”

11 Debtors’ Objection to Series B Preferred Holders’ Motion ¶ 9, In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1304].

12 Id. ¶ 12 (citing In re Mohr, 425 B.R. 457, 464 (Bankr. S.D. Ohio)).

13 Id. at 42:12-16 (“We are pleased to hear that the company is not focused on dollarization of claims . . . receiving an in-kind recover is 16 absolutely critical.”); UCC Statement and Reservation of Rights ¶ 6, In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1303].

14 Fed. R. Bankr. P. 1007(b)(1).

15 See Official Form 206, Part 2, Line 4 (using the USD sign into Form 206 for scheduling the debtor’s liabilities).

16 Fed. R. Bankr. P. 9009(a).

17 Id.

18 General Order M-386 ¶ 9.

19 General Order M-386 ¶ 2 (unnumbered, preliminary statement).

20 11 U.S.C. § 502(b).

21 In re Aaura, Inc., No. 06 B 01853, 2006 WL 2568048, at *4, n.5 (Bankr. N.D. Ill. Sept. 1, 2006).

22 In re USGen New Eng., Inc., 429 B.R. 437, 492 (Bankr. D. Md. 2010) (using the exchange rate in effect on the petition date, in the context of a claims objection, to convert the claim to USD), aff’d sub nom. TransCanada Pipelines Ltd. v. USGen New Eng., Inc., 458 B.R. 195 (D. Md. 2011); Aaura, 2006 WL 2568048, at *5 (“Section 502(b) converts Aaura’s obligation to repay the obligation in gold into a claim against the estate in dollars, but it makes this transformation only as of the petition date, not retroactive to the date on which Aaura first became liable.”); Matter of Axona Intern. Credit & Com. Ltd., 88 B.R. 597, 608 n.19 (Bankr. S.D.N.Y. 1988) (noting Section 502(b) refers to the petition date as “the appropriate date for conversion of foreign currency claims”), aff’d sub nom. In re Axona Intern. Credit & Com. Ltd., 115 B.R. 442 (S.D.N.Y. 1990); ABC Dev. Learning Ctrs. (USA), Inc. v. RCS Capital Dev., LLC (In re RCS Capital Dev., LLC), No. AZ-12-1381-JuTaAh, 2013 Bankr. LEXIS 4666, at *38-39 (B.A.P. 9th Cir. July 16, 2013) (same).

23 Notice of Proposed Order, In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1342].

24 Id. at ¶¶ 7, 8.

25 Order Pursuant to Bankruptcy Rule 1099 Directing the Debtors to Amend Their Schedules in Certain Circumstances, In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1387].

26 Schedules at 12, In re Cred Inc., Case No. 20-128336 (JTD) (Bankr. D. Del. 2021) [ECF No. 443].

27 Schedules, In re Voyager Digital Holdings, Inc., Case No. 22-10943 (MEW) (Bankr. S.D.N.Y. Aug. 18, 2022) [ECF No. 311].

28 Joint Plan of Reorganization § IV.B.1.a, In re BlockFi Inc., Case No. 19361 (MBK) (Bankr. D.N.J. 2022) [ECF No. 22].

Article By Cadwalader, Wickersham & Taft LLP

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© Copyright 2022 Cadwalader, Wickersham & Taft LLP

IRS and Treasury Department Release Initial Guidance for Labor Requirements under Inflation Reduction Act

On November 30, 2022, the IRS and the Treasury Department published Notice 2022-61 (the Notice) in the Federal Register. The Notice provides guidance regarding the prevailing wage requirements (the Prevailing Wage Requirements) and the apprenticeship requirements (the Apprenticeship Requirements and, together with the Prevailing Wage Requirements, the Labor Requirements), which a taxpayer must satisfy to be eligible for increased amounts of the following clean energy tax credits under the Internal Revenue Code of 1986 (the Code), as amended by the Inflation Reduction Act of 2022 (the “IRA”):

  • the alternative fuel vehicle refueling property credit under Section 30C of the Code (the Vehicle Refueling PC);
  • the production tax credit under section 45 of the Code (the PTC);
  • the energy efficiency home credit under section 45L of the Code;
  • the carbon sequestration tax credit under section 45Q of the Code (the Section 45Q Credit);
  • the nuclear power production tax credit under section 45U of the Code;
  • the hydrogen production tax credit under section 45V of the Code (the Hydrogen PTC);
  • the clean electricity production tax credit under section 45Y of the Code (the Clean Electricity PTC);
  • the clean fuel production tax credit under section 45Z of the Code;
  • the investment tax credit under section 48 of the Code (the ITC);
  • the advanced energy project tax credit under section 48C of the Code; and
  • the clean electricity production tax credit under section 48E of the Code (the Clean Electricity ITC).[1]

We discussed the IRA, including the Labor Requirements, in a previous update.

Start of Sixty-Day Period

The IRA provides an exemption from the Labor Requirements (the Exemption) for projects and facilities otherwise eligible for the Vehicle Refueling PC, the PTC, the Section 45Q Credit, the Hydrogen PTC, the Clean Electricity PTC, the ITC, and the Clean Electricity ITC, in each case, that begin construction before the sixtieth (60th) day after guidance is released with respect to the Labor Requirements.[2] The Notice provides that it serves as the published guidance that begins such sixty (60)-day period for purposes of the Exemption.

The version of the Notice that was published in the Federal Register on November 30, 2022, provides that the sixtieth (60th) day after the date of publication is January 30, 2023. January 30, 2023, however, is the sixty-first (61st) day after November 30, 2023; January 29, 2023 is the sixtieth (60th) day. Currently, it is unclear whether the Notice erroneously designated January 30, 2023 as the sixtieth (60th) day or whether the additional day to begin construction and qualify for the Exemption was intended, possibly because January 29, 2023 falls on a Sunday. In any event, unless and until clarification is provided, we expect conservative taxpayers planning to rely on the Exemption to start construction on creditable projects and facilities before January 29, 2023, rather than before January 30, 2023.[3]

Beginning Construction for Purposes of the Exemption

The Notice describes the requirements for a project or facility to be deemed to begin construction for purposes of the Exemption. As was widely expected, for purposes of the PTC, the ITC, and the Section 45Q Credit, the Notice adopts the requirements for beginning of construction contained in previous IRS notices (the Prior Notices).[4] Under the Prior Notices, construction of a project or facility is deemed to begin when physical work of a significant nature begins (the Physical Work Test) or, under a safe harbor, when five percent or more of the total cost of the project or facility is incurred under the principles of section 461 of the Code (the Five Percent Safe Harbor). In addition, in order for a project or facility to be deemed to begin construction in a particular year, the taxpayer must demonstrate either continuous construction or continuous efforts until the project or facility is completed (the Continuity Requirement). Under a safe harbor contained in the Prior Notices, projects and facilities that are placed in service no more than four calendar years after the calendar year during which construction of the project or facility began generally are deemed to satisfy the continuous construction or continuous efforts requirement (the Continuity Safe Harbor).[5]

In the case of a project or facility otherwise eligible for the newly-created Vehicle Refueling PC, Hydrogen PTC, Clean Electricity PTC, or Clean Electricity ITC, the Notice provides that:

  • “principles similar to those under Notice 2013-29” will apply for purposes of determining whether the project or facility satisfies the Physical Work Test or the Five Percent Safe Harbor, and a taxpayer satisfying either test will be deemed to have begun construction on the project or facility;
  • “principles similar to those under” the Prior Notices will apply for purposes of determining whether the project or facility satisfies the Continuity Requirement; and
  • “principles similar to those provided under section 3 Notice 2016-31” will apply for purposes of determining whether the project or facility satisfies the Continuity Safe Harbor, with the Notice specifying that the safe harbor period is four (4) years.

Taxpayers and commentators have observed that the existing guidance in the Prior Notices is not, in all cases, a good fit for the newly-created clean energy tax credits. Additional guidance will likely be required to ensure that the principles of the Prior Notices may be applied efficiently and seamlessly to the newly-created tax credits.

Prevailing Wage Determinations

The Notice provides that, for purposes of the Prevailing Wage Requirements, prevailing wages will vary by the geographic area of the project or facility, the type of construction to be performed, and the classifications of the labor to be performed with respect to the construction, alteration, or repair work. Taxpayers may rely on wage determinations published by the Secretary of Labor on www.sam.gov to establish the relevant prevailing wages for a project or facility. If, however, the Secretary of Labor has not published a prevailing wage determination for a particular geographic area or type of project or facility on www.sam.gov, or one or more types of labor classifications that will be performed on the project or facility is not listed, the Notice provides that the taxpayer must contact the Department of Labor (the “DOL”) Wage and Hour Division via email requesting a wage determination based on various facts and circumstances, including the location of and the type of construction and labor to be performed on the project or facility in question. After review, the DOL will notify the taxpayer as to the labor classifications and wage rates to be used for the geographic area in which the facility is located and the relevant types of work.

Taxpayers and commentators have observed that the Notice provides no insight as to the DOL’s decision-making process. For instance, the Notice does not describe the criteria that the DOL will use to make a prevailing wage determination; it does not offer any type of appeal process; and, it does not indicate the DOL’s anticipated response time to taxpayers. The lack of guidance on these topics has created significant uncertainty around the Prevailing Wage Requirements, particularly given that published wage determinations are lacking for many geographical areas.

Certain Defined Terms under the Prevailing Wage Requirements

The Notice provides definitions for certain key terms that are relevant to the Prevailing Wage Requirements, including:

  • Employ. A taxpayer, contractor, or subcontractor is considered to “employ” an individual if the individual performs services for the taxpayer, contractor, or subcontractor in exchange for remuneration. Individuals otherwise classified as independent contractors for federal income tax purposes are deemed to be employed for this purpose and therefore their compensation generally would be subject to the Prevailing Wage Requirements.
  • Wages. The term “wages” includes both hourly wages and bona fide fringe benefits.
  • Construction, Alteration, or Repair. The term “construction, alteration, or repair” means all types of work (including altering, remodeling, installing, painting, decorating, and manufacturing) done on a particular project or facility. Based on this definition, it appears that off-site work, including off-site work used to satisfy the Physical Work Test or the Five Percent Safe Harbor, should not constitute “construction, alteration, or repair” and therefore should not be subject to the Prevailing Wage Requirements. It is not clear, however, whether “construction, alteration, or repair” should be read to include routine operation and maintenance (“O&M”) work on a project or facility.

The Good Faith Exception to the Apprenticeship Requirements

The IRA provides an exception to the Apprenticeship Requirements for taxpayers that make good faith attempts to satisfy the Apprenticeship Requirements but fail to do so due to certain circumstances outside of their control (the Good Faith Exception). The Notice provides that, for purposes of the Good Faith Exception, a taxpayer will be considered to have made a good faith effort to request qualified apprentices if the taxpayer (1) requests qualified apprentices from a registered apprenticeship program in accordance with usual and customary business practices for registered apprenticeship programs in a particular industry and (2) maintains sufficient books and records establishing the taxpayer’s request of qualified apprentices from a registered apprenticeship program and the program’s denial of the request or lack of response to the request, as applicable.

Certain Defined Terms under the Apprenticeship Requirements

The Notice provides definitions for certain key terms that are relevant to the Apprenticeship Requirements, including:

  • Employ. The Notice provides the same definition for “employ” as under the Prevailing Wage Requirements.
  • Journeyworker. The term “journeyworker” means a worker who has attained a level of skill, abilities, and competencies recognized within an industry as having mastered the skills and competencies required for the relevant occupation.
  • Apprentice-to-Journeyworker Ratio. The term “apprentice-to-journeyworker ratio” means a numeric ratio of apprentices to journeyworkers consistent with proper supervision, training, safety, and continuity of employment, and applicable provisions in collective bargaining agreements, except where the ratios are expressly prohibited by the collective bargaining agreements.
  • Construction, Alteration, or Repair. The Notice provides the same definition for “construction, alteration, or repair” as under the Apprenticeship Requirements. This suggests that, like the Prevailing Wage Requirements, off-site work is not subject to the Apprenticeship Requirements. In addition, the same open question regarding O&M work under the Prevailing Wage Requirements applies for purposes of the Apprenticeship Requirements as well.

Record-Keeping Requirements

The Notice requires that taxpayers maintain and preserve sufficient records in accordance with the general recordkeeping requirements under section 6001 of the Code and the accompanying Treasury Regulations to establish that the Prevailing Wage Requirements and Apprenticeship Requirements have been satisfied. This includes books of account or records for work performed by contractors or subcontractors of the taxpayer.

Other Relevant Resources

The DOL has published a series of Frequently Asked Questions with respect to the Labor Requirements on its website. In addition, the DOL has published additional resources with respect to the Apprenticeship Requirements, including Frequently Asked Questions, on its Apprenticeship USA platform. It is generally understood that, in the case of any conflict between the information on these websites and the information in the Notice, the Notice should control.

[1] The Labor Requirements also are applicable to the energy-efficient commercial buildings deduction under section 179D of the Code.

[2] The IRA provides a separate exemption from the Labor Requirements projects or facilities otherwise eligible for the ITC or the PTC with a maximum net output of less than one megawatt.

[3] Interestingly, the DOL online resources described below observe that projects and facilities that begin construction on or after January 29, 2023 are not eligible for the Exemption, which appears to recognize that January 29, 2023, and not January 30, 2023, is the sixtieth (60th) after publication of the Notice.

[4] Notice 2013-29, 2013-20 I.R.B. 1085; Notice 2013-60, 2013-44 I.R.B. 431; Notice 2014-46, 2014-36 I.R.B. 541; Notice 2015-25, 2015-13 I.R.B. 814; Notice 2016-31, 2016-23 I.R.B. 1025; Notice 2017-04, 2017-4 I.R.B. 541; Notice 2018-59, 2018-28 I.R.B. 196; Notice 2019-43, 2019-31 I.R.B. 487; Notice 2020-41, 2020-25 I.R.B. 954; Notice 2021-5, 2021-3 I.R.B. 479; and Notice 2021-41, 2021-29 I.R.B. 17.

[5] In response to procurement, construction, and similar delays attributable to the COVID-19 pandemic, the length of the safe harbor period was extended beyond four (4) years for projects or facilities for which construction began in 2016, 2017, 2018, 2019, or 2020, which we discussed in a previous update.

Article By Elizabeth L. McGinley, Steven J. Lorch, Don J. Lonczak, and Michael A. Recchia of Bracewell LLP

For more labor and employment legal news, click here to visit the National Law Review.

© 2022 Bracewell LLP

SEC Ramps Up Enforcement against Public Companies and Subsidiaries in FY 2022

The SEC imposed $2.8 billion in monetary settlements, the largest total in any fiscal year recorded in the Securities Enforcement Empirical Database.

New York—The U.S. Securities and Exchange Commission (SEC) filed 68 enforcement actions against public companies and subsidiaries in the first full fiscal year of Chair Gary Gensler’s tenure. Monetary settlements imposed in public company or subsidiary actions reached $2.8 billion, according to a report released today by the NYU Pollack Center for Law & Business and Cornerstone Research.

The report, SEC Enforcement Activity: Public Companies and Subsidiaries—Fiscal Year 2022 Update, analyzes information from the Securities Enforcement Empirical Database (SEED). The 68 enforcement actions in FY 2022, which ended September 30, reflected a 28% increase from the previous fiscal year.

The SEC imposed monetary settlements on 97% of the 75 public company and subsidiary defendants that settled in FY 2022. Both the dollar amount and the percentage were the largest of any fiscal year recorded in SEED, which covers actions beginning in FY 2010.

“The number of defendants that settled in FY 2022 with admissions of guilt increased substantially from the previous fiscal year. This was driven by actions involving Broker Dealer allegations brought by the SEC in September,” said Stephen Choi, the Bernard Petrie Professor of Law and Business at New York University School of Law and director of the Pollack Center for Law & Business. “The 16 defendants admitting guilt was double the largest number in any previous fiscal year in SEED.”

The $2.8 billion in monetary settlements imposed in public company or subsidiary enforcement actions in FY 2022 was $921 million more than in FY 2021 and $321 million more than in any other fiscal year in SEED. The median monetary settlement in FY 2022 was $9 million, the largest in SEED. The average settlement was $42 million.

“The increase in monetary settlements is consistent with the SEC’s public statements that ‘robust remedies’ are an enforcement priority,” said report coauthor Sara Gilley, a Cornerstone Research vice president. “The $1.2 billion in monetary settlements with 16 public broker-dealer subsidiaries for recordkeeping failures represents 44% of total monetary settlements in the fiscal year.”

Issuer Reporting and Disclosure continued to be the most common allegation type in FY 2022, accounting for 38% of actions. Allegations in the SEC’s Broker Dealer classification were the second most common for the first time since FY 2018. Nearly 70% of the 16 Broker Dealer actions were filed against financial institutions for recordkeeping failures.

Click here to read the full report from Cornerstone Research.

Article By Sara E. Gilley, Lindsay Schick, and Heather B. Lazur of Cornerstone Research

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

Copyright ©2022 Cornerstone Research

Federal Reserve Issues Latest Financial Stability Report

At the end of last week, the Federal Reserve Board (“FRB”) issued its semi-annual Financial Stability Report.

In a statement issued with the report, FRB Vice Chair Lael Brainard stated that over the past six months, “household and business indebtedness has remained generally stable, and on aggregate households and businesses have maintained the ability to cover debt servicing, despite rising interest rates.” She also noted that “[t]oday’s environment of rapid synchronous global monetary policy tightening, elevated inflation, and high uncertainty associated with the pandemic and the war raises the risk that a shock could lead to the amplification of vulnerabilities, for instance due to strained liquidity in core financial markets or hidden leverage.”

The Report notes that the FRB’s monitoring framework “distinguishes between shocks to, and vulnerabilities of, the financial system,” and “focuses primarily on assessing vulnerabilities, with an emphasis on four broad categories and how those categories might interact to amplify stress in the financial system.” The four categories of vulnerabilities are (1) valuation pressures, (2) borrowing by businesses and households, (3) leverage within the financial sector, and (4) funding risks. The overview of the Report notes that since the May report was released, “the economic outlook has weakened and uncertainty about the outlook has remained elevated, noting that “[i]nflation remains unacceptably high in the United States and is also elevated in many other countries.”

Related to the funding risk vulnerability (and perhaps showing some prescience to our lead story on FTX this week), the Report noted that stable coins remained vulnerable to runs. The Report included a highlighted discussion of digital assets and financial stability noting trouble and volatility in the crypto market in the spring of this year. That discussion noted that the “[t]he turmoil in the digital asset ecosystem did not have notable effects on the traditional financial system because the digital assets ecosystem does not provide significant financial services and its interconnections with the broader financial system are limited.” However, the report noted that as digital assets grow, so too will the risks to financial stability, and cited the October FSOC Report on Digital Asset Financial Stability Risks and Regulation in addressing those risks and regulatory gaps.

The Report identified several near-term risks that “could be amplified” through the four financial vulnerabilities, including high inflation, geopolitical risks (noting Russia’s invasion of Ukraine), market fragilities, and possible shocks caused by a cyber event.

Article By Daniel Meade of Cadwalader, Wickersham & Taft LLP

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

© Copyright 2022 Cadwalader, Wickersham & Taft LLP

FRB and FDIC Issue Joint ANPR on Possible Resolution Requirements for Large Banking Organizations While FRB and OCC Approve U.S. Bank MUFG Union Bank Merger

The Federal Reserve Board (“FRB”) and Federal Deposit Insurance Corporation (“FDIC”) Board issued an Advanced Notice of Proposed Rulemaking (“ANPR”) titled “Resolution-Related Resource Requirements for Large Banking Organizations.” Separately, but relatedly (if for no other reason than the FRB put it in the same press release as the ANPR), the Office of the Comptroller of the Currency (“OCC”) and the FRB approved their respective applications for the merger of MUFG Union Bank into U.S. Bank.

The ANPR is seeking comment on possible changes to the resolution-related standards applicable to large banking organizations (“LBOs”) that are not global systemically important banks (“GSIBs”). Those possible changes that the FRB and FDIC are contemplating would bring some of what is required for GSIB resolution planning down to LBOs, particularly focusing on “Category III” firms with $250 billion to $700 billion in total assets. The main focus of the ANPR is on whether LBOs ought to be required to issue long-term debt similar to the total loss-absorbing capacity (“TLAC”) requirements for GSIBs. The ANPR notes that the Fed and FDIC are considering “whether an extra layer of loss-absorbing capacity could increase the FDIC’s optionality in resolving the insured depository institution,” but also costs associated with such a requirement.

The ANPR flows logically from remarks made by Acting Comptroller Hsu at the Wharton Conference on Financial Regulation in April (and which we discussed in a previous issue), and that Acting Comptroller Hsu noted in his statement when he voted in favor of the ANPR at the FDIC Board meeting.

As noted above, in the same press release announcing the ANPR, the FRB announced the approval of the application by U.S. Bancorp to acquire MUFG Union Bank. The FRB’s order noted that upon consummation, U.S. Bancorp’s consolidated assets would total approximately $698.7 billion, and noting the close proximity to becoming a “Category II” firm over $700 billion in assets imposed a unique commitment to give quarterly implementation plans for complying with Category II requirements. The commitment by U.S. Bancorp also could trigger a need for U.S. Bancorp to comply with Category II requirements by December 31, 2024, even if its asset size has not gone above the $700 billion threshold. FRB Governor Michelle Bowman issued a statement supporting both the issuance of the ANPR and the approval of U.S. Bancorp’s application, but questioned the appropriateness of imposing Category II requirements on a one-off basis. The OCC’s approval was conditioned, among other things, on U.S. Bank making plans for its possible operability in the event of a resolution in order to facilitate its sale to more than one acquiring institution.

Article By Daniel Meade of Cadwalader, Wickersham & Taft LLP

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

© Copyright 2022 Cadwalader, Wickersham & Taft LLP

FinCEN Issues Final Rule on the Corporate Transparency Act Requiring Businesses to Report Beneficial Ownership Information

On September 30, 2022, the U.S. Financial Crimes Enforcement Network (“FinCEN”) published its final rule implementing Section 6403 of the Corporate Transparency Act (“CTA”). The final rule, which will take effect on January 1, 2024, will require “tens of millions” of companies doing business in the U.S. to report certain information about their beneficial owners. The reporting companies created or registered before January 1, 2024, will have until January 1, 2025, to file their initial beneficial ownership reports with FinCEN. Reporting companies created or registered on or after January 1, 2024, will be required to file initial beneficial ownership reports within 30 days of formation.

The CTA was passed by Congress on January 1, 2021, as part of the Anti-Money Laundering Act of 2020 in the National Defense Authorization Act for Fiscal Year 2021. After publishing a Notice of Proposed Rulemaking and receiving public comments, FinCEN adopted the proposed rule largely as proposed, with certain modifications intended to minimize unnecessary burdens on reporting companies.

What Entities are Reporting Companies? The final rule describes two types of reporting companies: domestic and foreign.

  • A domestic reporting company is any entity that is a corporation, a limited liability company, or other entity (such as limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships and business trusts) created by the filing of a document with a secretary of state or any similar office under the law of a state or American Indian tribe.

  • A foreign reporting company is any corporation, limited liability company, or other entity formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a state or American Indian tribe.

What Entities are Exempt? The final rule exempts twenty-three separate categories of entities from the definition of the reporting company. Many of the exempted entities are already subject to federal or state regulations requiring disclosure of beneficial ownership information, such as banks, credit unions, depositary institutions, investment advisors, securities brokers and dealers, accounting firms, governmental entities, tax-exempt entities, and entities registered with the SEC under the Exchange Act of 1934. Additionally, the rules set forth an exemption for “large operating companies” that can demonstrate each of the following factors:

  • Employ more than 20 full-time employees in the U.S.

  • Have an operating presence at a physical office within the U.S.

  • Filed a federal income tax or information return in the U.S. for the previous year demonstrating more than $5 million in gross receipts or sales (excluding gross receipts or sales from sources outside the U.S.)

Finally, under the so-called “subsidiary exemption,” entities whose ownership interests are controlled or wholly owned by one or more exempt entities may also qualify for exemption. If a reporting company was formerly exempt but loses its exemption, it must file an updated report that announces the change and includes all the information required in a reporting company’s initial report.

Who are Beneficial Owners? The final rule requires reporting companies to report each individual who is a beneficial owner of such reporting company. A “beneficial owner” is any individual who, directly or indirectly, either exercises substantial control over the reporting company or owns or controls at least 25 percent of the ownership interests of the reporting company. An individual exercises “substantial control” if such individual:

  • Serves as a senior officer (except for corporate secretary or treasurer)

  • Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body)

  • Directs, determines, or has substantial influence over important decisions made by the reporting company

  • Has any other form of substantial control over the reporting company

Additionally, an individual may exercise substantial control over a reporting company, directly or indirectly, including as a trustee of a trust or similar arrangement, through:

  • Board representation

  • Ownership or control of a majority of the voting power or voting rights of the reporting company

  • Rights associated with any financing arrangement or interest in a company

  • Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company

  • Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees

  • Any other contract, arrangement, understanding, relationship, or otherwise

The final rule exempts five categories of individuals from the definition of beneficial owner: (i) minors, (ii) nominees, intermediaries, custodians, and agents, (iii) certain employees who are not senior officers, (iv) heirs with a future interest in the company, and (v) certain creditors.

Who are Company Applicants? In addition to the beneficial owner information, the final rule requires reporting companies created or registered on or after January 1, 2024, to report identifying information about each “company applicant.” A “company applicant” is:

  • Any individual who directly files the document to create a domestic reporting company or register a foreign reporting company with a secretary of state or similar office in the U.S.

  • Any individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing

The final rule provides further clarification as to certain individuals who, by virtue of their formation roles, fall under the definition of “company applicants.” For example:

  • If an attorney oversees the preparation and filing of incorporation documents and a paralegal files them, the reporting company would report both the attorney and paralegal as company applicants.

  • If an individual prepares and self-files documents to create the individual’s own reporting company, the reporting company would report the individual as the only company applicant.

The final rule removes the requirements that i) entities created before the effective date report company applicant information and ii) reporting companies update their company applicant information (except to correct inaccuracies), each of which were set forth in the proposed rules.

When are Initial Reports Due? When an initial report must be filed depends on the status of the reporting company as of January 1, 2024:

  • If Created or Registered on or after January 1, 2024 – It must file a report within 30 calendar days from the earlier of: i) the date on which the company receives actual notice that its creation or registration has become effective, or ii) the date a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the company has been created or registered.

  • If Created or Registered Prior to January 1, 2024 – It must file a report not later than January 1, 2025.

What Information Must be Reported? An initial report must include the following information with respect to the reporting company:

  • The full legal name of the reporting company

  • Any trade name or “doing business as” name of the reporting company

  • The street address of the principal place of business of the reporting company (if outside the U.S., the street address of the primary location in the U.S. where it conducts business)

  • The state, tribal, or foreign jurisdiction of formation of the reporting company (a foreign reporting company must also report the state or tribal jurisdiction where it first registers)

  • The IRS Taxpayer Identification Number (“TIN”) of the reporting company (including the EIN of the reporting company, or if a foreign reporting company without a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction)

For each company applicant (of a reporting company registered or created on or after January 1, 2024) and each beneficial owner of a reporting company, the following information must be reported:

  • The full legal name of the individual

  • The date of birth of the individual

  • The current business street address (for a company applicant who forms or registers an entity in the course of such company applicant’s business) or residential street address (for all other individuals including beneficial owners)

  • A unique identifying number from, and image of, an acceptable identification document (e.g., a passport)

If a reporting company is directly or indirectly owned by one or more exempt entities and an individual is a beneficial owner of the reporting company exclusively by virtue of such individual’s ownership interest in the exempt entity, the reporting company’s report may list the name of the exempt entity in lieu of the beneficial ownership information set forth above.

When do Companies have to Report Changes? If there is any change with respect to required information previously submitted to FinCEN concerning a reporting company or its beneficial owners, including any change with respect to who is a beneficial owner or information reported for any particular beneficial owner, the reporting company is required to file an updated report within 30 calendar days of when the change occurred.

What are the Penalties for Violations? The final rule provides for a fine of up to $10,000.00 and/or imprisonment of up to two years for any person who willfully: (i) provides or attempts to provide false or fraudulent beneficial ownership information, or (ii) fails to report complete or updated beneficial ownership information to FinCEN. The penalties may also extend to individuals causing a reporting company’s failure to report or update information and senior officials of a reporting company at the time such failure occurs.

What is Coming Next from FinCEN? FinCEN is expected to publish the forms and instructions to be used for reporting beneficial ownership information well in advance of the effective date. FinCEN will further establish a secure nonpublic database for storage of the beneficial ownership information. Finally, FinCEN will issue rules on who may access the information (a limited group of governmental authorities and financial institutions), under what circumstances, and how the parties would generally be required to handle and safeguard the information.

What Should Reporting Companies be Doing Now? Existing companies should begin evaluating whether they are a “reporting company” and if so, determining who are their beneficial owners. Such reporting companies, including any other reporting companies that may be created or registered before the effective date, will have until January 1, 2025, to file an initial report. As noted, reporting companies created or registered on or after the effective date will have 30 calendar days after the date of creation or registration to file an initial report.

Article By Thomas G. Appleman, Arthur L. Griem, and Vera S. Hansen of Miller Canfield

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© 2022 Miller, Canfield, Paddock and Stone PLC

SEC Awards $825,000 to Whistleblower

On October 11, the U.S. Securities and Exchange Commission (SEC) announced a $825,000 whistleblower award issued to an individual who voluntarily provided the agency with original information about securities fraud.

The SEC Whistleblower Program offers monetary awards to qualified whistleblowers whose disclosures contribute to the success of enforcement actions. SEC whistleblower awards are for 10-30% of the funds collected by the government in the relevant enforcement action.

According to the SEC award order, the whistleblower “expeditiously provided detailed information that prompted the opening of the investigation.” Furthermore, the whistleblower “thereafter met with Commission staff in person and provided additional information after submitting the initial TCR.”

In addition to monetary awards, the SEC Whistleblower Program offers anti-retaliation protections to whistleblowers, including confidentiality. Thus, the SEC does not disclose any information that could identify a whistleblower.

Since the whistleblower program was established in 2010, the SEC has awarded more than $1.3 billion to over 280 individual whistleblowers. In August 2021, SEC Chair Gary Gensler stated that the program “has greatly aided the Commission’s work to protect investors” and noted that “the SEC has used whistleblower information to obtain sanctions of over $5 billion from securities law violators” and “return over $1.3 billion to harmed investors.”

Article By Mary Jane Wilmoth of Kohn, Kohn & Colapinto. Geoff Schweller also contributed to this article.

For more criminal law and business crimes legal news, click here to visit the National Law Review.

Copyright Kohn, Kohn & Colapinto, LLP 2022. All Rights Reserved.

The “Iron Curtain” has Fallen: A Radical Shift in Lawyers Representing Whistleblowers

Whistleblower Network News (WNN) recently revealed, for the first time, that major corporate law firms specializing in representing defendants before the U.S. Securities and Exchange Commission (SEC) have, in some cases, switched sides and are now representing whistleblowers who are turning in corporate fraudsters.  All but one of the firms identified by the SEC did not call public attention to their new-found client base – most likely because they did not want to upset their bread-and-butter corporate clients.  It appears that major corporate law firms now understand that the Dodd-Frank Act’s whistleblower reward provisions are incredibly effective in incentivizing corporate insiders to report fraud, even when those insiders are executives usually on the other side of a whistleblower issue.  Lawyers who traditionally represent whistleblowers understand that Dodd-Frank is well designed and is being professionally implemented by the SEC.  Corporate lawyers and their firms have apparently caught on to this new reality and are now representing whistleblowers.

That defense firms are now actively engaged in representing whistleblowers cannot be denied.  Lists of law firms that have prevailed in Dodd-Frank whistleblower cases, disclosed in response to Freedom of Information Act (FOIA) requests filed with the SEC, document that 9.3% of firms that have obtained rewards on behalf of whistleblowers were traditional defense firms.  These firms include some of the largest defense firms in the United States that represent numerous corporations subjected to SEC enforcement actions for violating securities laws as well as firms that have defended corporations against whistleblowers in retaliation cases.

If that statistic holds, it is clear hundreds of corporate defense firms or their attorneys are representing whistleblowers in confidential investigations.  Why are these cases still under review?  Dodd-Frank is still a young law, and the vast majority of cases have not yet resulted in formal reward determinations.  Cases often take five years or more to be finalized, and as of the end of Fiscal Year 2021 over 51,000 whistleblower cases had been filed with the SEC.  Furthermore, under the FOIA requests the SEC only released the names of law firms that prevailed in a whistleblower case.  The names of firms that did not prevail in a claim, or firms that represent whistleblowers in ongoing investigations, were not disclosed.

Time will tell whether defense firms’ representation of whistleblowers who accuse their employers (or other corporate wrongdoers) of fraud is a good or bad development.  But unique issues will arise whenever a firm that primarily generates its profits from representing corporations accused of wrongdoing switches sides and represents a whistleblower who has accused an executive of engaging in fraud.  Although such representations may be permitted under the attorney’s rules of ethics, this does not mean that such representations are always in the best interest of a lawyer’s clients.  There are inherent potential conflicts whenever a defense firm switches sides and decides to represent a whistleblower reporting major corporate crimes.

Regardless of where you stand on this issue, one thing is clear: the ethical, policy and legal implications of defense firms representing whistleblowers is a dramatic shift in legal practice and must be carefully evaluated.  Defense firms must understand that whenever they represent a whistleblower, they must zealously advocate on their behalf, even when the precedents set by their cases may be used against their corporate clients.  Likewise, whistleblowers need to be aware of the implications of choosing a lawyer whose primary practice is representing corporate crooks.  Conflicts of interest may not initially be visible but can unfold as a case progresses.

The Revelation

In August of 2022, Bloomberg Law and a draft non-peer-reviewed article published by University of Kansas Professor Alexander Platt raised the issue of which law firms represent whistleblowers.  Bloomberg and Platt obtained lists of law firms that prevailed in Dodd-Frank whistleblower cases.  They used the lists to identify a small number of firms, all of which could be classified as pro-whistleblower firms.  These firms’ practices are centered on fighting corporate fraud and speculated whether these firms were being given preferential treatment by the SEC. Neither publication offered proof of any wrongdoing.  But Platt and Bloomberg did not list all the law firms that prevailed in Dodd-Frank cases.  Significantly, neither even mentioned the fact that major defense law firms had already filed and won Dodd-Frank cases on behalf of whistleblowers.  Additionally, the two authors did not explore the special issues that could arise when firms dedicated to defending white-collar criminals quietly switch sides.

In response to Platt and Bloomberg, WNN filed its own Freedom of Information Act (FOIA) request to obtain access to the documents relied upon in the two articles.  The SEC released over 1000 pages of documents to WNN, including all its correspondence with Platt and all the records provided to Platt (and Bloomberg) that identified law firms that successfully represented whistleblowers.

On September 27, 2022, WNN revealed, for the first time, that the SEC had identified 64 law firms that successfully obtained a reward on behalf of a whistleblower.  Among those firms were six that primarily represent corporations and individuals accused of corporate crimes.  These defense firms included industry giants such as Winston & Strawn and Akin Gump.  Together, the defense firms have already obtained over $56 million in rewards on behalf of whistleblowers.  In response to the Platt, Bloomberg, and WNN FOIA requests, the SEC only identified firms that had already prevailed and obtained a reward on behalf of their clients. Approximately 50,000 cases are pending within the SEC’s reward program, and there is a long delay in processing whistleblower cases.  Therefore, one can assume that numerous other pending cases where these or other defense firms are actively representing whistleblowers that were not disclosed by the SEC.

It is important to note that the Dodd-Frank provisions only apply to large fraud cases.  No reward is available unless the SEC issues sanctions against the entity being investigated in excess of $1 million.  Thus, the cases previously targeted by the defense firms and currently under investigation by the SEC would implicate major frauds.

The defense firms identified by WNN as being listed in the SEC-released materials were:

Winston & Strawn, LLP:  Winston advertises itself as defending “companies and individuals in SEC enforcement and regulatory matters related to allegations involving securities fraud.”  But not mentioned on its webpage is that it also represented a securities law whistleblower who obtained a $2.2 million reward.

Akin Gump Strauss Hauer & Feld LLP: Akin Gump also describes its practice as representing “companies and individuals” under investigation by various regulatory agencies, including the SEC.  Akin’s attorneys obtained a Dodd-Frank reward of $800,000 award.

Haynes and Boone, LLP: This 600-lawyer defense firm’s website explained that it has “represented employers” in “whistle blowing.”  However, the SEC documents revealed the firm also represented a whistleblower who obtained a “20%” award against a corporate fraudster.

Levine Lee LLP:  Although this firm markets itself as successfully representing clients accused of violating anti-fraud laws, like the other defense firms, it has apparently started a whistleblower practice and obtained a reward of $10 million on behalf of a whistleblower.

Leader Berkon Colao & Silverstein LLP:  This defense firm prevailed in cases filed on behalf of two separate whistleblowers and had considerable success.  Their whistleblower clients obtained $15 million and $27 million in awards.

Sallah Astarita & Cox, LLC: Although this firm “regularly represents financial institutions” in “fraud” cases, the firm also represented a whistleblower who obtained a $1.8 million award.  Sallah Astarita was the only firm that listed its Dodd-Frank Act whistleblower case on its website as among the victories achieved by one of its partners.

The SEC’s Dodd-Frank Whistleblower Program

Professor Platt and Bloomberg Law criticized the SEC’s Dodd-Frank program as having a bias in favor of a small number of whistleblower-rights law firms that had employed former SEC lawyers.  However, the information revealed by WNN completely refuted this negative implication raised by Platt and Bloomberg.  Instead, the FOIA documents support a finding that the SEC program is a paradigm of fairness and openness.  The extensive correspondence between Platt and the SEC demonstrates that the Commission freely disclosed the names of the firms that had won cases while carefully balancing the confidentiality needs of the whistleblower clients.  These numbers illustrate a program open to law firms regardless of their reputation or whether they employ former government lawyers.  They also reveal a program open to working directly with whistleblowers and rewarding them even if they had no lawyer.  Not one document produced provided any evidence whatsoever of wrongdoing, bias, or unprofessionalism.  The numbers speak for themselves:

  • Over 50 pro se whistleblowers won cases on their own behalf.  This high percentage of unrepresented applicants who successfully navigated the SEC’s program is remarkable.  In other legal programs, pro se whistleblowers (and other unrepresented persons) lose the vast majority of their cases.  Not so under Dodd-Frank. This demonstrates a high level of commitment by the SEC to helping individual whistleblowers who could not afford or obtain lawyers.
  • Of the 64 law firms that prevailed in a Dodd-Frank reward claim, only 12 had hired former SEC lawyers to assist in the cases.  Thus, the vast majority of successful law firms (52 of the 64) had no “insider” connection to the SEC.   This fact demonstrates the Commission’s staff’s willingness to work closely with attorneys who had no “friends” in the agency and whose information was solely merit-based. Moreover, a significant percentage of the firms that did employ former SEC or Justice Department lawyers were the very defense firms that Bloomberg Law and Platt did not discuss or analyze.
  • The Commission’s staff demonstrated no bias against firms based on their practice areas.  The Commission’s enforcement staff and Whistleblower Office worked with law firms that were defense-based (6) and law firms that traditionally represent whistleblowers or employees in lawsuits against companies (many of the remaining 58).

The FOIA documents support a finding that the Commission’s staff is open to whistleblowers, regardless of whether they represent themselves or whether or not the firms raising the concerns have any “insider” connections.   Organizations such as the National Whistleblower Center, which regularly works with whistleblowers, have widely praised the program, as have the last three Chairs of the SEC, appointed by Presidents Obama, Trump, and Biden.  The Commission itself confirmed that as of September 2021, it returned over $1.3 billion to harmed investors based on whistleblower cases.

The Future Role of Defense Firms in Dodd-Frank Cases

The SEC cannot implement special rules that would be prejudicial to traditional defense firms that file whistleblower cases.   Likewise, whistleblowers have the right to hire counsel of their choice and, in most cases, can knowingly waive potential conflicts of interest.  But the mere fact that traditional defense firms can lawfully represent whistleblowers without violating any SEC or local Bar rules does not address the special problems that may exist when a defense firm represents a whistleblower.  For example, such representations can result in significant conflicts of interest that may not be apparent at the commencement of a case. This may result in the whistleblower’s attorneys not advocating for legal precedents that could harm their other corporate clients.

Traditional defense firms should implement internal procedures to guard against potential problems based on the obvious conflicts that can arise when they represent clients on both sides of whistleblower-disclosure cases.  More significantly, it is absolutely crucial that whistleblowers fully understand the potential for conflicts of interest when deciding on the best attorneys to hire.  Attorneys working for defense firms must clearly spell out these issues and ensure that when representing a whistleblower, their prospective client is fully aware of all the risks and limitations.

Among the rules, procedures, and practices that defense firms should implement or carefully consider are:

  1. At the very least, defense firms representing whistleblowers should identify this on their websites.  Corporate clients should know that the firm also represents whistleblowers and should be able to question counsel on these matters so they feel comfortable that no conflicts would arise.
  2. Whistleblower clients need full disclosure of how the defense firm’s primary practice may impact the representation.  This is particularly true whenever a case would require advocacy on behalf of a whistleblower that could expand legal interpretations benefiting whistleblowers.  It is hard to reconcile how a law firm defending some clients against whistleblowers can effectively argue before administrative agencies or courts of law legal precedents that could expand the rights of whistleblowers.  These expanded rights could and would ultimately not be to the advantage of corporate clients accused of wrongdoing.
  3. Similarly, defense firms need to reconcile how they can advocate for a whistleblower who engaged in tactics, such as removing documents or one-party tape recording, that their corporate clients may find offensive.  This is particularly true when the zealous representation of a whistleblower requires expanding the ability of whistleblowers to obtain evidence of wrongdoing, and the precedent this advocacy establishes may be used against the firm’s current or future corporate clients.
  4. The potential for a conflict of interest needs to be fully explored in every case.  One issue that firms and clients may not be fully aware of is how the “related action” provisions of the laws impact potential conflicts.  Once the SEC obtains a sanction of over $1 million in any case, all “related actions” become eligible for a reward.  Sanctions issued by other law enforcement or regulatory agencies based on “related” claims can form the basis of a reward.   When examining whether a conflict exists, law firms need to look beyond the SEC action and determine witnesses, parties, and issues that may be implicated in a “related action.” This determination is critical even if the related action is not based on any securities law violation.
  5. Defense firms can also explore ways to refer potential whistleblower clients to attorneys whose practices are based solely on representing whistleblowers.  These referrals would help ensure that the defense firm is not conflicted (either as a matter of ethics or marketing) and that the client can obtain the best counsel.

Conclusion: The Iron Curtain has Fallen

Whistleblower representation is entering a new world.  The “iron curtain” that formerly separated law firms that represent corporate crooks from those that represent whistleblowers has fallen. This new reality is not without serious risks to whistleblowers (and corporate clients).  Whistleblowers must be fully aware of the dangers of having a corporate law firm represent them.  Corporate law firms must institute procedures to guard against conflicts of interest and to ensure they can zealously represent whistleblowers.  Zealous representation is needed even when the precedents established in these cases may create trouble for their other client base.

At the end of the day, the fact that defense law firms are now representing whistleblowers affirms the success of Dodd-Frank.  It is an affirmation of the critical nature of the information whistleblowers provide to the government and the role of this insider information in stopping otherwise hard to detect corporate crimes.  The “iron curtain” has fallen, but it has fallen in the direction that helps whistleblowers.  It has fallen in the direction that affirms the quality of their disclosures. It refutes the often-repeated slander that whistleblowers are somehow simply disgruntled employees.

Whistleblowers are essential to ensuring fairness in the markets, holding wrongdoers accountable, and deterring future wrongdoing.  The SEC has publicly recognized this, and now leading corporate defense attorneys have quietly recognized it. Defense firms like Akin Gump, Winston and Strawn, and Hayes and Boone got it right when they advocated for paying whistleblowers substantial rewards.  Whistleblowers whose information holds corporate criminals accountable deserve large rewards. These rewards are in the public interest, and the SEC Dodd-Frank whistleblower program must be protected, enhanced and expanded.

Sources:

  1. Whistleblower Network News, “WNN Exclusive: SEC FOIA Documents Reveal Big Law Defense Firms are Confidentially Representing Dodd-Frank Whistleblowers,” (September 27, 2022)
  2. List of Law Firms that Obtained Rewards in Whistleblower Cases as of 2021
  3. List of Awards Obtained by the Six Defense Law Firms
  4. List of pro se Cases where Whistleblowers Obtained a Reward
  5. FAQ on the SEC’s Dodd-Frank Act program
  6. FAQ on Confidentiality of Dodd-Frank Act claims

Article By Stephen M. Kohn of Kohn, Kohn & Colapinto

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