Category: finance

Government Brings First Cryptocurrency Insider Trading Charges

In a series of parallel actions announced on July 21, 2022, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) initiated criminal and civil charges against three defendants in the first cryptocurrency insider trading case.

According to the criminal indictment, DOJ alleges that a former employee of a prominent cryptocurrency exchange used his position at the exchange to obtain confidential information about at least 25 future cryptocurrency listings, then tipped his brother and a friend who traded the digital assets in advance of the listing announcements, realizing gains of approximately $1.5 million. The indictment further alleges that the trio used various means to conceal their trading, and that one defendant attempted to flee the United States when their trading was discovered. The Government charged the three with wire fraud and wire fraud conspiracy. Notably, and like the Government’s recently announced case involving insider trading in nonfungible tokens, criminal prosecutors did not charge the defendants with securities or commodities fraud.

In its press release announcing the charges, US Attorney for the Southern District of New York Damian Williams said: “Today’s charges are a further reminder that Web3 is not a law-free zone. Just last month, I announced the first ever insider trading case involving NFTs, and today I announce the first ever insider trading case involving cryptocurrency markets. Our message with these charges is clear: fraud is fraud is fraud, whether it occurs on the blockchain or on Wall Street. And the Southern District of New York will continue to be relentless in bringing fraudsters to justice, wherever we may find them.”

Based on these facts, the SEC also announced charges against the three men in a civil complaint alleging securities fraud. In order to assert jurisdiction over the matter, the SEC alleges that at least nine of the cryptocurrencies involved in the alleged insider trading were securities, and the compliant traces through the Howey analysis for each. The SEC has not announced charges against the exchange itself, though in the past it has charged at least one cryptocurrency exchange that listed securities tokens for failure to register as a securities exchange. Perhaps coincidentally, on July 21 the exchange involved in the latest DOJ and SEC cases filed a rulemaking petition with the SEC urging it to “propose and adopt rules to govern the regulation of securities that are offered and traded via digitally native methods, including potential rules to identify which digital assets are securities.”

In an unusual move, Commissioner Caroline Pham of the Commodity Futures Trading Commission (CFTC) released a public statement criticizing the charges. Citing the Federalist Papers, Commissioner Pham described the cases as “a striking example of ‘regulation by enforcement.’” She noted that “the SEC’s allegations could have broad implications beyond this single case, underscoring how critical and urgent it is that regulators work together.” Commissioner Pham continued, “Major questions are best addressed through a transparent process that engages the public to develop appropriate policy with expert input—through notice-and-comment rulemaking pursuant to the Administrative Procedure Act.” She concluded by stating that, “Regulatory clarity comes from being out in the open, not in the dark.” The CFTC is not directly involved in either case, and it is atypical for a regulator to chide a sister agency on an enforcement matter in this fashion. On the same day, another CFTC Commissioner, Kristin Johnson, issued her own carefully-worded statement that seemed to support the Government’s actions.

Article By Scott H. Kimpel of Hunton Andrews Kurth

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

Copyright © 2022, Hunton Andrews Kurth LLP. All Rights Reserved.

What Public Comments on the SEC’s Proposed Climate-Related Rules Reveal—and the Impact They May Have on the Proposed Rules

On March 21, 2022, the Securities and Exchange Commission (“SEC”) published for comment its much-anticipated proposed rules on climate disclosures, entitled “The Enhancement and Standardization of Climate-Related Disclosures for Investors.”[1]  The SEC invited public comments on these rules, and the response was overwhelming—nearly 15,000 comments were published on the SEC’s website over the course of three months, from individuals and organizations representing all aspects of modern American society.  Few, if any, of the SEC’s rule proposals have ever received such voluminous, significant, and diverse comments.  And the comments themselves range from brief statements to complex legal arguments either in support or in opposition, as well as detailed proposals for further changes to the proposed climate disclosures.  The comment period closed on June 17, 2022, and further action by the SEC to finalize the proposed rule is anticipated this fall.

This article provides a brief summary of the comments, and analyzes and summaries the key points the comments conveyed.

Statistical Analysis of Form and Individualized Submissions

Since the beginning of the public comment period, the SEC has received 14,645 comments on the proposed climate disclosure rules.[2]  To provide some context for how massive that figure is, the SEC has only received 144 comments on its proposed cybersecurity risk management rules, which were announced two weeks before the proposed climate disclosures and have also been the subject of extensive commentary in the press.  Yet despite the prominence of the SEC’s cybersecurity proposal, it has received fewer than 1% of the comments offered on the climate disclosure rule.

Of the 14,645 comments, approximately 12,304, or 84% of the total, are form letters.  This includes 10,589 comments that the SEC itself identified as form letters, and another 1,715 apparently individualized comments that were actually form letters.  However, even when removing these form letters from consideration, fully 2,341 individualized comment letters remain—a substantial number, and a significant percentage (16%) of the volume.[3]

The form letters are worth exploring in more detail.  Of the 12,304 comments, fully 10,861 (88%) broadly express support for the proposed climate disclosure rule, and only 1,443 (12%) are in opposition.  This disparity in the level of support for the two positions is best conveyed by the chart below.

Positions for and against the new SEC Disclosures

Notably, it has been possible to identify some, although not all, of the organizations that sponsored the form letter writing campaign.  In particular, form letters proposed by the Union of Concerned Scientists in support of the proposed climate disclosures were submitted 6886 times—more than 55% of the total volume of form letters.  Additionally, the form letters proposed by the Climate Action Campaign and the National Wildlife Federation in support of the SEC’s proposed disclosures were also quite voluminous among the submissions—1208 and 956 comment letters, respectively.  The most frequent form letters submitted in opposition to the proposed climate disclosure rules—e.g., those proposed by FreedomWorks (348 letters) and the Club for Growth (172 letters)—did not achieve nearly the same volume of submissions.

But the apparent overwhelming majority in favor of the proposed SEC climate disclosure rules, as conveyed by the form letters, is belied by the individualized submissions, which were far more closely divided.  Of the 2341 individualized comment letters submitted, approximately 53% (1238 comment letters) expressed support, about 43% (1015 comment letters) were opposed, and a handful—around 4% (88 comment letters)[4]—did not express a position.  The below chart demonstrates the levels of support expressed by the individualized submissions:

Individual submissions supporting, opposing, and neutral to the new SEC Disclosures

Besides the mere volume of submissions, however, the most noteworthy aspect of the individualized submissions are the substantive arguments—both factual and legal—that these comment letters articulate, whether in support or opposition to the proposed rules, as well as the identity of those making these submissions.

Arguments in Support of the Proposed SEC Climate Disclosure Rules

The organizations and individuals that chose to offer support for the SEC’s proposed climate disclosures represent a wide swathe of society.  Broadly speaking, these proposed climate disclosures attracted support from, among others: Democratic politicians, civil society organizations (such as environmental NGOs), individual corporations, professional services organizations, and academics. While the rationales offered by these different groups varied considerably, in part due to their varying perspectives (e.g., environmental NGOs were more concerned with the impact on the transition to a clean-energy environment, while corporations often focused on the consequences of particular aspects of the rules), the individualized comments in support of the proposed disclosures nonetheless shared some common features.

Specifically, there are a number of common arguments that are frequently featured among the 1239 individualized submissions in support of the SEC’s proposed climate disclosures.  Six arguments appear in over 10% of the submissions.  In order of prevalence, these are:

  1. Environmental Protection (347 submissions, 28%): that the proposed rules will help protect the environment
  2. Investor Choice (280 submissions, 23%): that the proposed rules will enable investors to make more informed choices
  3. Investor Protection (263 submissions, 21%): that the proposed rules will enable investors to protect themselves and their investments from climate-related risk
  4. Standardization of Climate Disclosures (259 submissions, 21%): that the proposed rules will enable the standardization of climate disclosures, making data comparable
  5. Increased Transparency (171 submissions, 14%): that the proposed rules will increase transparency and hold companies accountable for their emissions
  6. Alignment with International and Foreign Regulatory Frameworks (169 submissions, 14%): that the proposed rules will bring the United States into alignment with both international frameworks and other countries (e.g., the EU)

No other argument appeared in more than 6% of the individualized submissions in support of the SEC’s proposed climate disclosures.

Notably, the most common arguments in favor of the proposed climate disclosures share a common feature: these are all policy arguments, focusing on the benefits to investors and the broader economy from the adoption of the SEC’s proposed disclosures.  Only a single argument among the top ten most frequent arguments in support was a legal argument—namely that the proposed rules fall within the SEC’s statutory authority—and that argument appeared in only around 3% of the submissions (41 submissions).[5]  This focus on policy benefits among supporters of the SEC’s proposed climate disclosures is unsurprising, as these public policy rationales were a key factor in encouraging the Biden Administration to pursue this regulatory agenda.  However, the reluctance to engage with critics of the proposed climate disclosures on a legal basis may signal the difficulties that the SEC’s proposed climate disclosures may encounter in future court challenges.

Arguments in Opposition to the Proposed SEC Climate Disclosure Rules

Those entities and individuals that submitted individualized comment letters opposing the SEC’s proposed climate disclosures also represent a broad range of American society, albeit with a somewhat different focus.  Generally, individualized letters in opposition to the SEC’s proposed climate disclosures tended to be submitted by, among others: Republican politicians, individual corporations, trade industry groups, and NGOs. (Unsurprisingly, the fossil fuel industry and extractive industries were particularly well-represented among the commenters.)  These individualized submissions—frequently lengthy and extensively analyzing the SEC’s regulatory practices and authority—shared a number of common themes.

In particular, there are a number of common arguments that featured frequently among the 1014 individualized submissions to the SEC in opposition to these proposed climate disclosures.  Three (3) arguments appeared in more than ten (10) percent of these submissions:

  1. Ultra vires (322 submissions, 32% ): that the SEC lacks the ability to issue these disclosures as the proposed rule is beyond the scope of the SEC’s legal authority
  2. Compliance Costs (218 submissions, 21% ): that compliance with the proposed rule will impose unreasonable and extensive costs on businesses
  3. Climate Science Skepticism (123 submissions, 12%): that the science concerning climate change is unsettled and therefore the proposed rule is inappropriate

Although no other common argument appeared in more than 7% of the individualized letters in opposition, it should still be noted that there were a large number of letters that objected to the increased burdens placed on particular types of businesses, whether farmers (53 submissions, 5%), fossil fuel companies (49 submissions, 5%), or small businesses (36 submissions, 4%).

Overall, it is striking that around a third of the comments submitted in opposition stated that the SEC had acted beyond its authority (ultra vires) in proposing this new rule.  While this critique is hardly novel—it has been a frequent refrain of the Republican SEC Commissioners ever since this topic was first broached—the prevalence of this argument among the individualized comments suggests that both the public and sophisticated market actors perceive this issue as a key vulnerability in the SEC’s proposal, and that this legal argument will likely be emphasized in the inevitable legal challenge to this SEC rule.  And, based on recent decisions by the Supreme Court, it is altogether likely that this line of attack may find a sympathetic audience in the courts.

Potential Changes to the SEC Climate Disclosure Rules Resulting from Public Comments

Despite the differences between the advocates and opponents of the SEC’s proposed climate disclosures, both sides submitted proposals to the SEC to change or adjust the proposed rules.  Although there was often substantial disagreement about the content of these proposed changes, there were also significant areas of convergence.

Some of the changes to the SEC’s proposed climate disclosures frequently submitted by supporters of the rule included:

  1. ISSB: that the SEC should further align its proposal with the ISSB and help create a global standard (76 comments);
  2. Extended Phase-In Period: to extend the phase-in period for these new disclosure requirements (72 comments);
  3. Alignment with International and Foreign Standards: that the SEC should further align its proposal with international and foreign standards, such as the EU or TCFD (66 comments);
  4. Enhance Scope 3 GHG Emissions: to eliminate exemptions so that all companies must disclose Scope 3 GHG emissions (55 comments);
  5. Principles-Based Approach to Materiality: to adopt a principles-based approach to materiality rather than bright-line rules (53) comments;
  6. Remove Scope 3 GHG Emissions: to remove the requirement that Scope 3 GHG emissions be disclosed (36 comments);
  7. Furnish, Not File: that the disclosures be provided in a document that is “furnished” to the SEC, rather than filed (which impacts potential liability) (26 comments).

Although certain proposed changes by proponents of the SEC’s proposed climate disclosure rule are undeniably expected (e.g., removing exemptions for disclosure of Scope 3 GHG emissions), there are others that seem somewhat surprising on initial review (e.g., extending the phase-in period or removing Scope 3 GHG emissions entirely).  This can most easily be explained by the fact that supporters of the SEC’s proposed rule include corporations and other business interests, which will resist certain burdensome regulations even if generally offering support for the overall thrust of the proposal.  There are also academics and others who continue to express skepticism concerning the utility of disclosing Scope 3 emissions, or even whether it can be adequately measured.

It should be emphasized that these changes proffered by supporters of the SEC’s proposed rule, many of which are designed to render the proposed rule less onerous, may indicate that the support for the proposed rule—or at least the most stringent aspects of it—is relatively weak (or at least among the corporate interests nominally aligned with the SEC).

The most frequent changes suggested by opponents of the rule included:

  1. Remove Scope 3 GHG Emissions: to remove the requirement that Scope 3 GHG emissions be disclosed (69 comments);
  2. Principles-Based Approach to Materiality: to adopt a principles-based approach to materiality rather than bright-line rules (35 comments);
  3. Extended Phase-In Period: to extend the phase-in period for these new disclosure requirements (25 comments);
  4. Furnish, Not File: that the disclosures be provided in a document that is “furnished” to the SEC, rather than filed (which impacts potential liability) (18 comments).

These proposed changes (and others) advanced by opponents of the SEC’s proposed rule are generally designed to make the rules less stringent and also to reduce costs and potential legal liability.

As can be seen by comparing the above lists, there are certain areas where suggested changes to the proposed rule converged.  In particular, there are issues where both opponents of the SEC’s proposed rule and some of its supporters would try to render it less intrusive or impactful, particularly with respect to the elimination of the requirement to report Scope 3 GHG emissions and to extend the phase-in period further.  (Although, as noted, this apparent convergence between opponents and supporters of the SEC’s proposed rule may be due to divergent interests among the supporters of the SEC’s proposed rule with respect to its implementation.)

But, regardless of the specific content of the particular proposed changes, what is undoubtedly significant is that these proposed changes have highlighted the aspects of the SEC’s proposed climate disclosure rule that are likely most sensitive to regulated corporations.  Such an insight reveals not only the areas where active lobbying is most likely to take place, but also previews probable priorities for corporate compliance departments.  In effect, focusing on the aspects of the proposed rule where changes were proposed is a means to identify the key issues from the perspective of the regulated entities and the public at large.

Conclusion

The level of engagement with the SEC’s proposed climate disclosures, as demonstrated by the number and detail of the public comments offered, is extraordinary. This degree of attention indicates the significant impact that is expect to result from the ultimate promulgation of these rules (or a revised version thereof).

Of course, the key question here is what changes, if any, are likely to be made to the SEC’s proposed rule based upon the public comments submitted to the SEC.  In this context, it is noteworthy that a handful of key issues have been identified by both proponents and opponents of the proposed disclosures as especially ripe for potential revision.  As noted above, these include, among others, the length of the phase-in period and the disclosure of Scope 3 GHG emissions.  If any changes are to be made to the SEC’s proposed climate disclosure rule, it is likely that such changes will be related to these issues.

However, given the relative lack of forward momentum with respect to other aspects of the Biden Administration’s climate agenda, there may well be political pressure not to weaken or otherwise rollback the SEC’s proposed rule, as this is one of the few areas where significant—and publicly-recognized—progress has been made with regulations designed to address the issue of climate change.  Further, the Biden Administration’s SEC has certainly recognized the inevitability of a legal challenge to these proposed climate disclosures, and, since no degree of alteration would suffice to preempt such a lawsuit, the SEC may conclude that it is better to seek to implement all aspects of the proposed regulation for the political benefit that can be achieved in the short term, since the substantive aspects of the proposed disclosure may not ultimately survive judicial scrutiny.  The SEC may also prefer to send a strong signal to the market by maintaining its original proposed rule.  Recognizing these pressures, it seems unlikely that the public comments submitted to the SEC will have a significant impact on the final rule promulgated in the coming months—and improbable that the SEC will make the proposed disclosures less robust.

FOO​TNOTES

[1] These proposed rules are discussed more fully in our prior publication:  https://www.mintz.com/insights-center/viewpoints/2451/2022-03-30-brief-summary-secs-proposed-climate-related-rules

[2] Although the total number of comments, when including both form letters and individualized letters, is 14,739, there are 94 comment letters on the SEC website that are duplicates, and have thus been removed from the calculation.

[3] For comparison, the proposed SEC rule on disclosing compensation ratios drew about 300,000 form letters and around 1500 individualized comment letters.  In this case, the individualized comment letters represented only about 0.5% of the total volume.  https://www.sec.gov/comments/s7-07-13/s70713.shtml

[4] The eighty-eight comment letters that did not adopt an express position on the proposed climate disclosure rules instead conveyed a number of different points, including proposing narrow changes to the proposed rule without taking a stance on the rule as a whole, or offering further context for the SEC’s actions (e.g., comparing the SEC to other regulators, whether domestic or international).  This category also includes a number of early comments that simply requested that the SEC extend the deadline for submitting comments.

[5] There are public comments in support of the proposed rule that focus on the legal issues.  In particular, the submission of Prof. John Coates of Harvard Law School, a former SEC official, is devoted exclusively to defending the legal authority of the SEC to issue the proposed climate disclosure rule. https://www.sec.gov/comments/s7-10-22/s71022-20130026-296547.pdf

Article By Jacob H. Hupart, Megan N. Gates, William F. Weld, Douglas P. Baumstein, Jennifer B. Rubin, and Courtney O. Taylor of Mintz. Luke Haubenstock also contributed to this article.

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

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

Could the Crypto Downturn Lead to a Spike in M&A?

In 2021, we saw a cryptocurrency boom with record highs and a flurry of activity. However, this year, the cryptocurrency downturn has been significant.  We have seen drops in various cryptocurrencies ranging from 20 to 70 percent, with an estimated $2 trillion in losses in the past few months.

Industry watchers had already predicted a spike in crypto M&A from the beginning of 2022, and in a recent interview with Barron’s, John Todaro, a senior crypto and blockchain researcher at Needham & Company, said he believes this downturn could lead to a wave of mergers and acquisitions in the crypto space for the second half of this year and even into 2023.

Valuations have dropped across the board this year as the market has faced incredible volatility, and Todaro told Barron’s, “The valuations for public crypto companies have fallen by about 70% this year.”  These lower valuations could make these companies increasingly attractive targets for acquisition, and this activity has already started to pick up.

According recent coverage from CNBC, some larger crypto companies are already looking for acquisition targets in order to drive industry growth and to help them acquire more users. Todaro feels most of the M&A activity we will see will be this kind of crypto to crypto acquisition as opposed to traditional buyers, although there is still opportunity for non-crypto companies to capitalize on these lower valuations and some are already doing so.

With more government regulation coming for the crypto sector this year, it could also impact the activity level as well.  Achieving some legal and regulatory clarity could have implications for this uptick in M&A for crypto companies. Our analysis of the SEC’s recent proposed regulations, other government activity in this area, and their potential implications can be found here.

We could of course see a growing number of acquisitions across industries as valuations remain lower than a year ago, but as the crypto sector continues to see this kind of a downturn, the level of activity in this area could be much greater than it has previously seen.  With that said, both the target company and the acquirer should be looking at any transactions with the same level of due diligence instead of rushing into any deal fueled by panic or haste.

Article By Louis Lehot of Foley & Lardner LLP

For more mergers and acquisitions legal news, click here to visit the National Law Review.

© 2022 Foley & Lardner LLP

U.S. Supreme Court Agrees with HHS Payment Methodology for Disproportionate Share Hospitals

The fight about how Medicare compensates disproportionate share hospitals (“DSH”) is one of the longest-running reimbursement disputes of recent years, and it has generated copious work for judges around the country.  In a 5-4 decision, the U.S. Supreme Court settled one piece of the conflict:  the counting of “Medicare-entitled” patients in the Medicare fraction of the “disproportionate-patient percentage.”  Becerra v. Empire Health Found., 597 U.S. ___ (2022) (slip op.).  The Supreme Court concluded that the proper calculation, under the statute, counts “individuals ‘entitled to [Medicare] benefits[,]’ . . . regardless of whether they are receiving Medicare payments” for certain services.  Id. (slip op., at 18) (emphasis added).

DSH payments are made to hospitals with a large low-income patient mix.  “The mark-up reflects that low-income individuals are often more expensive to treat than higher income ones, even for the same medical conditions.”  Id. (slip op., at 3).  The federal government thus gives hospitals a financial boost for treating a “disproportionate share” of the indigent population.

The DHS payment depends on a hospital’s “disproportionate-patient percentage,” which is basically the sum of two fractions: the Medicare fraction, which reflects what portion of the Medicare patients were low-income; and the Medicaid fraction, which reflects what portion of the non-Medicare patients were on Medicaid.  Historically, HHS calculated the Medicare fraction by including only patients actually receiving certain Medicare benefits for their care.  In 2004, however, HHS changed course and issued a new rule.  It counted, in the Medicare fraction, all patients who were eligible for Medicare benefits generally (essentially, over 65 or disabled), even if particular benefits were not actually being paid.  For most providers, that change resulted in a pay cut.

The new rule sparked several lawsuits.  Hospitals challenged HHS’s policy based on the authorizing statutory language.  These hospitals essentially argued in favor of the old methodology.  Appeals led to a circuit split, with the Sixth and D.C. Circuits agreeing with HHS, and the Ninth Circuit ruling that HHS had misread the statute.

The Supreme Court has now resolved the issue.  The majority opinion, authored by Justice Kagan, sided with HHS.  The majority concluded that, based on the statutory language, “individuals ‘entitled to [Medicare] benefits’ are all those qualifying for the program, regardless of whether they are receiving Medicare payments for part or all of a hospital stay.”  Id. (slip op., at 18).  The majority also explained that if “entitlement to benefits” bore the meaning suggested by the hospital, “Medicare beneficiaries would lose important rights and protections . . . [and a] patient could lose his ability to enroll in other Medicare programs whenever he lacked a right to [certain] payments for hospital care.”  Id. (slip op., at 11).

Justice Kavanaugh dissented, joined by Chief Justice Roberts and Justices Gorsuch and Alito.  The dissent argued that those lacking certain Medicare coverage should be excluded from HHS’s formula, based on “the most fundamental principle of statutory interpretation: Read the statute.”  Id. (Kavanaugh, J., dissenting) (slip op., at 2).  According to the dissent, the majority’s ruling will also restrict hospitals’ ability to provide care to underprivileged communities.  “HHS’s misreading of the statute has significant real-world effects: It financially harms hospitals that serve low-income patients, thereby hamstringing those hospitals’ ability to provide needed care to low-income communities.”  Id. (slip op., at 4).

There was one point of agreement among the majority and dissenting justices: the complexity of the statutory language for DSH payments.  Echoing the thoughts often held by healthcare advisors, Justice Kagan found the statutory formula to be “a mouthful” and “a lot to digest.”  Id. (majority opinion) (slip op., at 4).  And in his dissent, Justice Kavanaugh called the statute “mind-numbingly complex,” and resorted to an interpretation that he found “straightforward and commonsensical”: that patients cannot be “simultaneously entitled and disentitled” to Medicare benefits.  Id. (Kavanaugh, J., dissenting) (slip op., at 1, 3).

Article By Jeffrey DeBeer and Keith Bradley of Squire Patton Boggs (US) LLP

For more Supreme Court and litigation legal news, click here to visit the National Law Review.

© Copyright 2022 Squire Patton Boggs (US) LLP

Are You Being Served? Court Authorizes Service of Process Via Airdrop

In what may be the first of its kind, a New York state court has authorized service via token airdrop in a case regarding allegedly stolen cryptocurrency assets. This form of alternative service is novel but could become a more routine practice in an industry where the identities of potential parties to litigation may be difficult to ascertain using blockchain data alone.

Background on the Dispute

According to the Complaint in the case, the plaintiff LCX AG (“LCX”) is a Liechtenstein based virtual currency exchange. As alleged in the Complaint, on or about January 8, 2022, the unknown defendants (named in the Complaint as John Does 1-25) illegitimately gained access to LCX’s cryptocurrency wallet and transferred $7.94 million worth of digital assets out of LCX’s control. Cryptocurrency wallets are similar in many ways to bank accounts, in that they can be used to hold and transfer assets. In the same way a thief can transfer funds from a bank account if they gain access to that account, thieves can also transfer cryptocurrency assets if they gain access to the keys to the wallet holding digital assets.

Following the alleged theft, LCX and its third-party consulting firm determined that the suspected thieves used “Tornado Cash,” which is a “mixing” service designed to hide transactions on an otherwise publicly available blockchain ledger by using complicated transfers between unrelated wallets. While Tornado Cash and other mixing services have legal purposes such as preserving the anonymity of parties to legitimate transactions, they are also utilized by criminals to launder digital funds in an illicit manner.

Even the use of these mixing services, however, can often also be unwound. This is especially true in transactions of large amounts of cryptocurrency, similar to how transactions utilizing complex money laundering schemes in the international banking system can be unwound. According to the blockchain data platform Chainalysis, although Illicit crypto transactions reached an all-time high of $14 billion in 2021, these suspected nefarious transactions accounted for 0.15% of crypto volume last year, down from 0.62% in 2020.

While the Complaint alleges the suspected thieves used Tornado Cash, LCX believes its hired consultants were able to unwind those mixing services to identify a wallet which is alleged to still hold $1.274 million of the allegedly stolen assets.

Unlike bank accounts which have associated identifying information, there are often no registered addresses or other identifying information connected to digital wallets. This makes it difficult to provide the actual proof of service required to institute an action or obtain a judgement against an individual where the only known information is their digital wallet addresses. Service via token airdrop into those wallet addresses solves that issue.

Service Via Airdrop

Service of lawsuits is traditionally made on the defendant personally at a home or business address via special process servers. In cases where service on the individual is not possible for some reason, many states authorize alternative means of service if the plaintiff can show that the alternative means of service likely to provide actual notice of the litigation to the defendant. For example, courts have historically allowed notice via newspaper publication as an alternative means of service where the defendant cannot be serviced personally.

Here, the Court permitted service via “airdrop” in which a digital token is placed in a specific cryptocurrency wallet, similar to how a direct deposit can place funds in a traditional bank account. This particular token contained a hyperlink to the associated court filings in the case, and a mechanism which allowed the data of any individual who clicked on the hyperlink to be tracked. While this is a novel way to serve notice of a lawsuit, similar airdrops have been used to communicate with the owners of otherwise anonymous cryptocurrency wallet owners. Such was the case recently when actor Seth Green had his Bored Ape non-fungible token (“NFT”) stolen and the unknowing buyer of the stolen NFT was otherwise difficult to locate.

While this type of digital service is new, it could be implemented in many disputes in the future regarding digital assets. Similar to the authorization of service that was seen recently in the Facebook Biometric Information Privacy Act litigation (where notice was served on potential class members via email and directly on the Facebook platform), service via airdrop may be the most efficient way to inform potential lawsuit participants of the pending dispute and how they can protect their rights in that dispute.

This type of airdropped service is not without issues, though. First, transactions on the blockchain are largely publicly available, meaning any individual with the wallet address would also be able to see service of the lawsuit notice. Additionally, many users are hesitant to click on unknown links (such as the one in the airdropped LCX) due to legitimate cybersecurity concerns.

While service via airdropped token is unlikely to replace traditional methods of service, it may be a useful means of serving process on unknown persons where there is a digital wallet linked to the acts which the applicable lawsuit relates.

Article By Bryan M. Westhoff, Daniel L. McAvoy, and Jonathan E. Schmalfeld of Polsinelli PC

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

© Polsinelli PC, Polsinelli LLP in California

What the C-Suite and Board Should Know About the New CCO Certification Requirement from DOJ

U.S. Department of Justice (DOJ) Deputy Attorney General Lisa Monaco presented a new policy at a Securities Industry and Financial Markets Association event that requires chief compliance officers (CCO) to certify that compliance programs have been “reasonably designed to prevent anti-corruption violations.”1 The policy is an outgrowth of a settlement involving US$1 billion in criminal and civil penalties imposed on mining giant, Glencore International AG (Glencore), after it pleaded guilty to bribery and market manipulation charges.2 According to Monaco, this new policy is meant to ensure that CCOs stay in the loop on potential company violations and have the necessary resources to prevent financial crime.3 While the expressed intention of this new policy is to empower CCOs, it has raised concerns about potential liability for CCOs.

GLENCORE SETTLEMENT

Glencore is among the largest companies that dominate global trading of oil, fuel, metals, minerals, and food.4 In 2018, Glencore was subject to a multi-year investigation by the DOJ for violations of the Foreign Corrupt Practices Act (FCPA) and a commodity price manipulation scheme.5 According to admissions and court documents filed in the Southern District of New York, Glencore, acting through its employees and agents, engaged in a scheme for over a decade to pay more than US$100 million to third-party intermediaries in order to secure improper advantages to obtain and retain business with state-owned and state-controlled entities. A significant portion of these payments were used to pay bribes to officials in Nigeria, Cameroon, Ivory Coast, Equatorial Guinea, Brazil, Venezuela, and the Democratic Republic of the Congo.6 Glencore resolved the government’s investigations by entering into a plea agreement (Plea Agreement)7According to the Plea Agreement, Glencore admitted to one count of conspiracy to violate the FCPA.8 Shaun Teichner, the general counsel for the company, told a federal judge in New York that Glencore “knowingly and willingly entered into a conspiracy to violate the Foreign Corrupt Practices Act by making payments to corrupt government officials.”9

Glencore expects to pay about US$1 billion to U.S. authorities, after accounting for credits and offsets payable to other jurisdictions and agencies, and about US$40 million to Brazil.10 A related payment by Glencore to the United Kingdom will be finalized after a hearing next month.11

The Plea Agreement requires that Glencore, among other things: (1) implement two independent compliance monitors, one in the United States and one abroad, to prevent the reoccurrence of crimes; (2) retain a compliance monitor for three years; and (3) have its chief executive officer (CEO) and CCO submit a document certifying to the DOJ’s fraud section that the company has met its compliance obligations (the CCO Certification Requirement or the Certification).12

WHY THE CCO CERTIFICATION REQUIREMENT HAS RAISED CONCERNS

The CCO Certification Requirement has raised concerns in the compliance space over potential increases in CCO liability.13 Specifically, compliance officials worry that this policy transfers corporate liability into potential individual liability for the CCO. The Certification form asks the CEO and CCO to certify that the compliance program has been “reasonably designed” to prevent future anti-corruption violations.14 Critics worry that these new certifications may discourage CCOs from taking jobs at companies that are or may be parties to agreements with the DOJ.15

The DOJ stated that liability will depend on the facts and circumstances of the case but that the new policy is not aimed at going after CEOs or CCOs.16 Assistant Attorney General Kenneth A. Polite Jr. stated, “if there is a knowing misrepresentation on the part of the CEO or CCO, then that could certainly result in some form of personal liability.”17  Depending on the circumstances, the DOJ may consider it a breach of the corporation’s obligations under the Plea Agreement if there is either a misrepresentation in one of these certifications or a failure to provide the same.18 Polite added that “the certification memorializes the company’s commitment to take its compliance obligations seriously.”19

Critics question how realistic the CCO Certification Requirement is for large, multinational companies.20 They also question the due diligence required to actually ensure that compliance programs are “reasonably designed,” especially for companies operating in over 50 countries. Would it be realistic to expect a CCO or CEO to keep tabs on compliance across their company with that level of specificity?21

WHAT THE C SUITE AND BOARD SHOULD CONSIDER MOVING FORWARD

The questions to consider are: (1) where will the expressed policy lead? And (2) how do we best prepare for the Certification?

The DOJ has specifically stated its intention to “prosecute the individuals who commit and profit from corporate malfeasance.”22 Regardless of Monaco’s comments, the Certification appears to create potential for an extension of that policy.

The fact of the policy gives rise to a number of subsidiary questions. Is the Certification, which targets foreign corrupt practices, a harbinger for other such certifications in areas such as health care fraud, defense contractor fraud, money laundering, etc.? And is DOJ gearing toward providing its prosecutors with more tools for individual culpability at the highest corporate levels consistent with its expressed policy?

Moving forward, in-house counsel should work with the CEO and CCO to consider areas of corporate business practices that are specifically subject to compliance programs. They should develop practices including auditing, tracking, training, and reviewing to ensure the programs are “reasonably designed” to prevent future wrongdoing. Further, they should be sure to document their corporate business practices. Obviously, these programs become much more complex when operations include foreign jurisdictions and foreign laws with respect to matters such as privacy and employee rights.

Although this process may not be new to protect corporations from criminal charges, the newly-announced policy will certainly focus the spotlight on CEOs and CCOs in the FCPA context and arguably beyond.

FOOTNOTES

1 Al Barbarino, DOJ Defends New CCO Certifications Amid Industry Worry, LAW360 (May 26, 2022), https://www.law360.com/whitecollar/articles/1496108/doj-defends-new-cco-….

2 Id.

3 Id.

4 Chris Strohm, Chris Dolmetsch & Jack Farchy, Glencore Pleads Guilty to Decade of Bribery and Manipulation, BLOOMBERG (May 24, 2022), https://www.bloomberg.com/news/articles/2022-05-24/glencore-to-appear-in-us-uk-courts-over-resolutions-of-probes.

5 Id.

6 News Release, U.S. Dep’t of Just., Office of Pub. Affs., Glencore Entered Guilty Pleas to Foreign Bribery and Market Manipulation Schemes, (May 24, 2022), https://www.justice.gov/opa/pr/glencore-entered-guilty-pleas-foreign-bribery-and-market-manipulation-schemes.

7 Id.

8 Id.

9 Strohm, supra note 4.

10 Id.

11 Id.

12 Id.

13 Barbarino, supra note 1.

14 Id.

15 Id.

16 Id.

17 Id.

18 Id.

19 Id.

20 Id.

21 Id.

22 News Release, U.S. Dep’t of Just., Attorney General Merrick B. Garland Delivers Remarks Announcing Glencore Guilty Pleas in Connection with Foreign Bribery and Market Manipulation Schemes (May 24, 2022), https://www.justice.gov/opa/speech/attorney-general-merrick-b-garland-delivers-remarks-announcing-glencore-guilty-pleas.

Article By Mark A. Rush and Nadia J. Brooks of K&L Gates

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

Copyright 2022 K & L Gates

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.

Inflation Woes: Four Key Ways for Companies to Address Inflation in the Supply Chain

The U.S. economy is grappling with the highest inflation in decades, with extensive inflation in the supply chain affecting companies worldwide. Supply chain disruptions undoubtedly have contributed to rising inflation, as extensive delays and skyrocketing costs continue to plague the industry.

In March 2022, the consumer-price index (or CPI) — a measure of the prices consumers pay for products — rose at an annual rate of 8.5%, which is the highest increase in 47 years.1 Meanwhile, the producer-price index (or PPI) — a measure of inflation meant to gauge the impact on suppliers — similarly rose significantly at an annual rate of 11.2%.2 Finally, the employer cost index (or ECI) demonstrates that, from March 2021 to March 2022, total compensation rose 4.5%, wages and salaries rose 4.7%, and benefit costs rose 4.1%.3

Because inflation increases the prices of goods or services, negotiations about who bears that risk in business partner relationships and the consequences of that risk allocation will have significantly greater financial impacts than we have seen in recent memory. As a result, ensuring your business teams are well versed on the impacts of and means of mitigating inflation in new contracts has a direct impact on your bottom line.

In this article, we provide ways for companies in the supply chain to address high inflation and alleviate associated pressures, including (1) how to revisit and use existing agreement provisions to address inflation risk, (2) approaches to negotiating new agreements and amendments to existing agreements, (3) approaches to limit inflationary exposure, and (4) strategies for cost reduction.

Figure 1:

Percent Change in CPI March 2021 versus March 2022

CPI March Chart

Bureau of Labor Statistics, U.S. Department of Labor, Consumer Price Index – March 2022, issued April 12, 2022

Four Key Ways to Mitigate the Effects of Increasing Inflation in the Supply Chain

1. Revisit and Use Provisions in Existing Agreements

Companies faced with rising costs must review their supply agreements to determine if they already contain mechanisms the company can use to address inflation. On the buy side, companies should look in their agreements for terms relating to fixed prices. On the sell side, companies should investigate ways to pass increased costs on to customers. Most supply contracts contain a variety of provisions that may assist in combatting inflationary pressures.

(a) Pricing Provisions

From a seller’s perspective, a contract may include index-based price escalation provisions, which tie contract prices to one or more indices. The underlying indices may be (i) broad economic indices such as the PPI or “market basket” indices tied to all items and all urban consumers, (ii) targeted indices such as ECI for a specific location, or (iii) tied to the cost of a specific commodity used in the underlying product. Contracts will sometimes incorporate several commodity indices based on the percentage those commodities are used in the product that is the subject of the agreement, in order to accurately reflect the costs associated with producing the good.

Allocations under these pricing provisions vary depending on negotiation power. They could put all of the risk on one party, share the risk equally, or share the risk according to particular percentages. The latter two options represent ways to avoid a “win/lose” approach.

Sellers will want to see whether their agreements allow for periodic negotiations for updated prices and take advantage of those opportunities. A buyer, meanwhile, may look for provisions that allow it the flexibility to limit the quantities ordered, enabling it to reduce costs as necessary or to seek a more cost efficient alternative. A buyer also will want to determine if the contract prohibits the seller from changing prices.

Regardless of the existing provisions, the real impact of inflation is likely to trigger commercial discussions to address rising costs; this is true both for hard goods supply agreements and indirect services agreements with longer terms such as outsourcing and managed services relationships.

(b) Force Majeure as a Mechanism to Adjust Price?

Outside of pricing provisions such as the above, however, a party may look to other contract provisions, such as force majeure, to see if its performance under the contract could be excused; increased costs alone are not enough to constitute a force majeure event. In order for a force majeure to arguably apply, the increase in costs must be caused by an event that itself is a qualifying force majeure event under the terms of the applicable contract (which may include events like a labor strike or pandemic).

Force majeure provisions are intended to excuse performance under a contract but not to act as a pricing adjustment mechanism. However, force majeure and its extra-contractual cousin, commercial impracticability, can be used as tools to bring the parties to the negotiating table where events beyond either party’s reasonable control are impacting the ability to produce and deliver products.

2. Negotiate Amendments to Existing Agreements

To the extent sellers have fixed-price contracts with their customers, sellers should consider negotiating with such customers to adjust these contracts in order to keep the prices they charge their customers in line with their input costs. When entering these discussions, companies that wish to implement a price adjustment, or eliminate fixed pricing entirely, should consider meaningful ways to incentivize their customers to agree to such changes. Would the customer be willing to agree to a price adjustment in order extend the agreement or adjust the quantity? Any items that maintain the relationship between the parties while also allocating cost increases in an equitable way should be considered.

Conversely, buyers faced with price-increase requests should carefully consider their options:

  • First, a customer receiving a price-adjustment request should confirm the request is actually tied to inflation and not just an attempt by a supplier to increase its bottom line. Seek detailed calculations supporting the price adjustments, and require suppliers to demonstrate how much their costs have increased above expectations.
  • Second, customers should consider what items they would like to request in return for accepting a given price-adjustment request, such as whether they would like to adjust their quantity or timing of delivery.
  • Third, a customer faced with a price increase request should consider whether the request should include the opportunity for the customer to obtain pricedowns in the future, in the event there are changes in the pricing environment.

3. Pricing Tied to Indexing and Other Ways to Limit Future Inflationary Exposure when Drafting New Agreements

When drafting new agreements, companies should consider how best to mitigate the effects of inflation.

For nearly 40 years, we have enjoyed relatively low and steady levels of inflation, which explains why existing agreements may not adequately address the allocation of significant and unexpected economic change.

Many of those at the upper echelons of leadership today have never dealt with a high inflationary environment. To put it in perspective, the CEO of Walmart, the No. 1 company on the Fortune 500 list for 2021, was 19 years old when inflation was last a newsworthy topic.

In the future, however, we expect far fewer agreements to have long-term fixed prices, as sellers negotiating agreements will want to incorporate a variety of strategies that allow for pricing flexibility and avoid longstanding, fixed prices. One such strategy is tying prices to an index. As discussed above, this could be a general index such as the CPI or PPI or be much more specific depending on the item sold. There are numerous indices for various products and commodities that parties may use to reflect accurately the costs of producing the goods that are the subject of their agreement. Parties may consider incorporating a mechanism for revisiting these provisions, especially in the event that inflation slows. Caps on inflation risk also may be incorporated as a backstop.

If not tying prices to an index, selling parties will want to shorten the term of their agreements or require the parties to renegotiate prices at set points throughout the duration of their agreements. Alternatively, parties may consider price increases of a certain percentage that are automatically implemented periodically. The seller may even want to leave the pricing open and establish pricing at the time the order is placed.

On the other hand, customers will want to incorporate provisions that cause the supplier to bear the inflationary risk. Principally, this means locking in prices for as long of a period as the seller will agree to and ensuring prices are fixed upon the issuance of purchase orders.

If and when sellers push back on extended fixed-pricing provisions, there are a variety of methods parties may use to meet in the middle:

  • Pricing arrangements that are tied to one or more indices may be capped to a certain percentage, ensuring the customer will know its upward exposure.
  • Include thresholds of index movement such that the price remains static unless and until the percentage threshold is exceeded.
  • Allocate increased cost exposure so a certain percentage range of index movement is allocated to one party and then the next percentage range is allocated to the other party. Parties then may share any exposure above those ranges.
  • Additionally, index-based pricing can be clarified to include both upward and downward movement, ensuring that customers, while risking inflationary costs, may also receive the benefits of deflationary environments.

4. Think Strategically to Reduce Costs

Aside from considering purely contractual methods to combat inflation, companies should think strategically about ways to reduce costs more efficiently.

  • Streamlining. In order to pursue this strategy, companies need to determine which areas are driving increased spending and consider ways those areas may be managed differently. For example, companies may consider whether there are different inputs that can be used to lower costs or processes that may be streamlined. Companies can review their inventory management, labor inputs, and other areas to determine where cost cutting may be an option without sacrificing product or service quality. This streamlining might include ending product lines with lower levels of profitability.
  • Technology & Innovation. In addition, with labor constituting such a high percentage of the cost increases companies are experiencing, a company may want to double down on technology and innovation that reduces headcount. Or, as prices rise, a company may pursue other pricing models. For example, a heavy equipment manufacturer may opt for a pay-per-use model in lieu of the traditional sale model.
  • Diversification of the Supply Chain. Another method companies may use is diversifying their supply chains, ensuring they provide the flexibility and sustainability needed to weather turbulent periods. Though adding links to supply chains will not lower costs in the near term, it can help ensure a business continues to function smoothly even in the event of price shocks, material shortages, or other disruptions.

The stressors driving inflation are unlikely to be relieved any time soon. Companies should use every resource available to leverage their current contracts and negotiate new terms to address inflation’s serious repercussions on their bottom line.

FOOTNOTES

1 How High Is Inflation and What Causes It? What to Know, Wall Street Journal (April 12, 2022).

2 Supplier Prices Rose Sharply in March, Keeping Upward Pressure on U.S. Inflation, Wall Street Journal (April 13, 2022).

3  Employment Cost Index – March 2022, U.S. Department of Labor, Bureau of Labor Statistics (April 29, 2022).

Article By Vanessa L. Miller, Kathleen E. Wegrzyn, Leah R. Imbrogno, James R. Kalyvas, and Austin R. Kissinger of Foley & Lardner LLP

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

© 2022 Foley & Lardner LLP

Hackers Go Phishing in Beeple’s Deep Pool of Twitter Followers

“Stay safe out there, anything too good to be true is a … scam.” Beeple, a popular digital artist, tweeted to his followers, addressing the phishing scam that took place on May 23, 2022, targeting his Twitter account. The attack reportedly resulted in a loss of more than US$400,000 in cryptocurrency and NFTs, stolen from the artist’s followers on the social media website.

After hacking into Beeple’s Twitter account, perpetrators tweeted links from the artist’s page, promoting a fake raffle for unique art pieces. The links would reportedly take the user to a website that would drain the user’s cryptocurrency wallet of their digital assets.

Phishing scams for digital assets, including NFTs or non-fungible tokens, have steadily increased, with funds as large as $6 million being stolen. Various jurisdictions have adopted privacy and security laws that require companies to adopt reasonable security measures and follow required cyber incident response protocols. A significant part of these measures and protocols is training for employees in how to detect phishing scams and other hacking attempts by bad actors. This incident is a reminder to consumers to exercise vigilance, watch for red flags and not click on links without verifying the source.

The remaining summaries of news headlines are separated by region for your browsing convenience. 

UNITED STATES

Relaxed Deaccessioning COVID-19 Exemptions Expire

The global COVID-19 pandemic brought many changes, including dire financial consequences of the shutdowns for museums. In April 2020, the Association of Art Museum Directors (AAMD) made a decision to ease the rules that dictate how museums may use proceeds from art sales. Until April 2022, museums were permitted to use the funds for “direct care of collections” rather than to procure new artworks for their collections.

This relaxed policy and some of the museums that followed it met with backlash on more than one occasion; others, however, advocate for its continuation, citing considerations of diversity and inclusion. Some further argue that a policy born out of financial desperation should be continued to provide museums with the means to overcome any future financial issues that may arise.

Given that “direct care” is vague and open to interpretation, opponents of the relaxed rules counter giving museums such latitude to decide on the use of the proceeds, as it can lead to abuses and bad decisions. While AAMD has returned to its pre-pandemic regulations, and museums have followed suit, it appears that the public debate around deaccessioning is far from over.

Inigo Philbrick Sentenced to a Prison Term

Former contemporary art dealer Inigo Philbrick was sentenced by a federal court in New York to serve seven years in prison for a “Ponzi-like” art fraud, said to be one of the most significant in the history of the art market, with more than an estimated US$86 million in damages. Philbrick stood accused of a number of bad acts, including forging signatures, selling shares in artworks he did not own and inventing fictitious clients.

New York Abolishes Auction House Regulations

As the U.S. government is studying whether the art market requires further regulations to increase transparency and to combat money laundering, New York City repealed its local law that required auctioneers to be licensed and required disclosures to bidders, including whether an auction house had a financial stake in the item being auctioned. While the abolition of the regulation was ostensibly to improve the business climate after the pandemic, some commentators note that the regulations were outdated and not serving their purpose in any event. As an illustration, a newcomer to an auction will likely struggle to understand the garbled pre-action announcements or their significance. Whether the old regulations are to be replaced with new, clearer rules remains to be seen.

EUROPE

Greece and UK to Discuss Rehoming of Displaced Parthenon Marbles

The Parthenon marbles, also known as the Elgin marbles, have been on display in London’s British Museum for more than 200 years. These objects comprise 15 metopes, 17 pedimental figures and an approximately 250-foot section of a frieze depicting the birthday festivities of the Greek goddess Athena. What museum goers might not know is that these ancient sculptures were taken from the Acropolis in Greece in 1801 by Lord Elgin.

Previously, the British government, seeking to retain the sculptures, relied on the argument that the objects were legally acquired during the Ottoman Empire rule of Greece. However, for the first time, the UK has initiated formal talks with Greece to discuss repatriation of the Parthenon sculptures. These discussions are expected to influence future intergovernmental repatriation negotiations.

ASIA

Singapore High Court Asserts Jurisdiction over NFTs after Ruling Them a Digital Asset

The highest court in Singapore has granted an injunction to a non-fungible token (NFT) investor, Janesh Rajkumar, who sought to stop the sale of an NFT that once belonged to him and was used as collateral for a loan. The subject NFT from the Bored Ape Yacht Club Series is a rarity, as it depicts the only avatar that wears a beanie. Rajkumar now is seeking to repay the loan and have the NFT restored to his cryptocurrency wallet. The loan agreement specified that Rajkumar would not relinquish ownership of the NFT, and should he be unable to repay the loan in a timely manner, an extension would be granted. Instead of granting Rajkumar an extension, the lender, who goes by an alias “chefpierre,” moved to sell the NFT. The significance of the Singapore court’s decision is two-fold: the court has (1) recognized jurisdiction over assets cited in the decentralized blockchain, and (2) allowed for the freezing order to be issued via social media platforms.

THE MIDDLE EAST

Illegal Trading Leads to Raiding of Antique Dealer by the Israeli Authorities

A recent raid on an unauthorized antiquities dealer in the city of Modi’in by the Israel Antiquities Authority recovered hundreds of artifacts of significant historical value, including jewelry, a bronze statue and approximately 1,800 coins. One the coins is a nearly 2,000-year-old silver shekel of great historical significance. The coin is engraved with the name Shimon, leader of the 132–136 C.E. Bar Kokhba revolt.

Investigations are ongoing to determine where the antiquities were obtained. The Antiquities Robbery Prevention Unit intends to charge the dealer and their suppliers upon obtaining this information.

Article By Jana S. Farmer and Meenka Maharaj of Wilson Elser Moskowitz Edelman & Dicker LLP

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© 2022 Wilson Elser