By Julia Sardiñas*

PDF Available

It seems that the culture warriors have chosen the sustainable investment movement as their latest battleground. In recent years, corporate interest in environmental, social, and governance (“ESG”) criteria has exploded. In 2021, ninety-two percent of the S&P 500 and seventy-one percent of the Russell 1000 published sustainability disclosures.[1] The number of Environmental & Social (“E&S”) shareholder proposals receiving majority support almost tripled between 2019 and 2021.[2] These proposals advocated for setting greenhouse gas emission reduction targets, increasing board diversity, and disclosing political contributions.[3] While supporters argue that reallocating capital into sustainability will improve long-term returns for investors,[4] opponents argue that ESG activists are forcing companies to support unpopular, unprofitable progressive causes.[5]

Last week, thirteen state treasurers published a letter opposing recent legislation aiming to curb ESG investment.[6] So far, seventeen states have proposed or passed “anti-ESG bills.”[7] These bills fall into two camps: some ban state entities from contracting with companies that discriminate against fossil fuel businesses or gun manufacturers, while others ban state entities from investing in funds that consider ESG criteria.[8] Legal commentators supporting anti-ESG bills argue that sustainability-focused investors are violating the sole interest rule, which requires that a trustee only consider the interests of the beneficiary, by promoting social goals.[9] Other commenters have observed that ESG investing does not violate fiduciary duties if the trustee’s exclusive motives are to improve risk-adjusted returns.[10]

Thus far, anti-ESG bills have exchanged symbolic political victories for increased costs. For instance, Texas passed the first “Energy Discrimination Elimination” law last summer.[11] The statute requires that the Texas Comptroller maintain a list of financial companies that boycott energy companies.[12] “Boycott” is defined broadly, encompassing any action intended to “penalize, inflict economic harm on, or limit commercial relations” with fossil fuel companies.[13] State entities are then prohibited from investing in any company on this list.[14] However, the statute exempts state entities if the entity determines that the requirement interferes with its fiduciary duties.[15] If ESG disclosures yield material information, these broad exceptions would allow trustees to continue investing in blacklisted companies. Texas has also passed a similar bill aimed at companies that boycott firearm manufactures.[16] Since both statutes went into effect, five of the largest underwriters in the world have exited the municipal market in Texas.[17] As a result, a recent study found that Texas municipalities will pay an additional $300-500 million in interest in bonds.[18]

Although the financial consequences of ESG bills may be up for debate, it is indisputable that these bills have created ample fodder for political conflict. In August, the Texas Comptroller blacklisted nine financial institutions, including BlackRock, the world’s largest asset manager.[19] In response, many of the institutions shied away from the ESG label, pointing instead to longstanding ties to the energy sector.[20] For example, BlackRock has hotly denied boycotting the energy sector, noting that the institution is the largest investor in Texas’ oil and gas industry. [21] The Texas Comptroller’s statements suggest that states intend to name and shame large financial institutions with the hopes of spooking smaller investors from joining the ESG movement. Responses from companies like BlackRock may signal that funds are weary of political retaliation and are not ready to fully plunge into sustainable investing.

Given the rise of anti-ESG backlash and a bear market in the S&P 500, shareholder support for ESG activism has cooled this year.[22] As ESG investing becomes more politically controversial, anti-ESG rhetoric and legislation will likely gain steam in anticipation of the midterm elections. Regardless of which side wins the culture war, anti-ESG legislation will increase regulatory complexity and uncertainty for financial companies seeking to invest in state entities.

* J.D. Candidate, Class of 2023, Sandra Day O’Connor College of Law at Arizona State University.

[1] 92% of the S&P 500® and 70% of the Russell 1000® Published Sustainability Reports in 2020, G&A Research Shows, GOVERNANCE & ACCOUNTABILITY INST., INC. (Nov. 30, 2021), https://www.ga-institute.com/research/ga-research-collection/sustainability-reporting-trends/2021-sustainability-reporting-in-focus.html#:~:text=The%202021%20research%20report%20features ,CDP%2C%20CSA%2FDJSI.

[2] Marc S. Gerber & Raquel Fox, Investors Press for Progress on ESG Matters, and SEC Prepares to Join the Fray, SKADDEN (Jan. 19, 2022), https://www.skadden.com/insights /publications/2022/01/2022-insights/corporate/investors-press-for-progress.

[3] Id.

[4] Pursuing Long-Term Value for Our Clients: A Look Into the 2020-2021 Proxy Voting Year, BLACKROCK INV. STEWARDSHIP (June 30, 2021), https://www.blackrock.com/corporate /literature/publication/2021-voting-spotlight-full-report.pdf.

[5] The ESG Pushback, HERITAGE FOUND. (May 15, 2022), https://www.heritage.org /environment/heritage-explains/the-esg-pushback.

[6] Press Release, Brad Lander, Comptroller, New York City, Comptroller Lander Joins State Treasurers’ Letter Opposing Anti-ESG Legislation (Sept.14, 2022), https://comptroller.nyc.gov /newsroom/statement-from-comptroller-lander-on-recent-anti-esg-legislation/.

[7] Elizabeth S. Goldberg et al., The State of Anti-ESG Legislation, MORGAN LEWIS: ML BENEBITS (Aug. 25, 2022), https://www.morganlewis.com/blogs/mlbenebits/2022/08/the-state-of-anti-esg-state-legislation?p=1.

[8] Id.

[9] Jed Rubenfeld & William P. Barr, ESG Can’t Square With Fiduciary Duty, WALL STREET J.: OPINION (Sept. 6, 2022), https://www.wsj.com/articles/esg-cant-square-with-fiduciary-duty- blackrock-vanguard-state-stree-the-big-three-violations-china-conflict-of-interest-investors- 11662496552.

[10] Max M. Schanzenbach & Robert H. Sitkoff, Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee, 72 STANFORD L. REV. 381, 385-86 (Feb. 2020), https://review.law.stanford.edu/wp-content/uploads/sites/3/2020/02 /Schanzenbach-Sitkoff-72-Stan.-L.-Rev.-381.pdf.

[11] See generally Prohibition on Investment in Financial Companies that Boycott Certain Energy Companies, TEX. GOV’T. CODE. ANN. §809 (West 2022).

[12] TEX. GOV’T. CODE. ANN. §809.051(a) (West 2022).

[13] TEX. GOV’T. CODE. ANN. §809.001(1) (West 2022).

[14] TEX. GOV’T. CODE. ANN. §809.053(d)(1) (West 2022).

[15] TEX. GOV’T. CODE. ANN. §809.005(d)(1) (West 2022).

[16] See generally Prohibition on Contracts with Companies that Discriminate Against Firearm and Ammunition Industries, TEX. GOV’T. CODE. ANN. §2274 (West 2022).

[17] Daniel Garrett & Ivan T. Ivanov, Gas, Guns, and Governments: Financial Costs of Anti- ESG Policies 1 (July 11, 2022) (unpublished), https://papers.ssrn.com/sol3/papers.cfm?abstract_id =4123366.

[18] Id.

[19] Brooke Masters & Patrick Temple-West, Companies Attack Texas Over ‘Politicised’ ESG Blacklist, FIN. TIMES (Aug. 29, 2022), https://www.ft.com/content/8031aaad-efc6-4829-ac02- bd9c151974f4.

[20] Id.

[21] Brooke Masters & Patrick Temple-West, BlackRock Labels Texas ‘Anti-Competitive’ Over ESG Blacklisting, FIN. TIMES (Aug. 25, 2022), https://www.ft.com/content/9bbb250f-2995-4035-914c-b42b1f3397ee.

[22] Greg Andrews, Is the ESG Locomotive Suddenly Losing Steam?, ALM (June 9, 2022), https://www.law.com/2022/06/09/inside-track-is-the-esg-locomotive-suddenly-losing-steam/.

By Anton Sorkin*

PDF Available

In today’s society, “it’s like the more money we come across, the more problems we see.”[1] The world is interconnected like never before, and U.S. regulators have taken the position that the free flow of money presents risks to financial systems and public safety.[2] Congress first attempted to regulate the flow of money through anti-money laundering (“AML”) regulation in 1970, beginning with the Bank Secrecy Act (“BSA”).[3] Since the BSA, Congress has enacted seven additional major regulations to enhance AML controls.[4] Despite this, global AML systems are viewed by many industry experts as a failure.[5] Congress is back at it again with a new AML progeny in its sights: the ENABLERS Act.[6]

The regulation boasts itself as modernizing the list of parties with diligence obligations in order to close loopholes that render existing AML tools largely ineffective.[7] The current scope of BSA-regulated parties is narrow: any foreign or domestic financial institution or individual, so long as it facilitates a banking transaction through the United States.[8] The Act, as written, expands BSA obligations to nearly every type of business imaginable, including accountants, payment service providers, trust companies, and in some instances, lawyers.[9] The goal in doing so is to entangle all possible “gatekeepers” to financial activities—categories of businesses that have had an increased spotlight in the wake of various financial document leaks.[10] Even the world art market finds itself in the crosshairs of the Act,[11] despite the government’s own study that failed to find a nexus between art markets and terrorism financing risk.[12] This represents a drastic expansion of government oversight, namely because of AML’s enforcement through audit power given to the Department of the Treasury.[13]

For most Americans, the most prominent aspect of the Act is the expansion of regulated payment processors. Previously, the payment-processing industry was largely unaffected by the BSA.[14] Non-bank entities that fell under BSA did so for obvious reasons. Western Union, for example, was a tool for sending money to persons abroad and was therefore classified as a regulated Money Service Business (“MSB”).[15] Now, ordinary transactions through services such as PayPal, Venmo, and Cash App will fall within the realm of the BSA.[16]

From a business perspective, much of the Act’s weight falls on the real estate industry. Due to the size and volume of real estate transactions involving foreign funding, they are often scrutinized as a potential store of wealth for proceeds of global corruption or a means to avoid sanctions.[17] The Act erodes the discreet nature of many real estate transactions, imposing BSA requirements upon anybody involved in the financing or legal entity arrangement of a transaction.[18]

On its face, the ENABLERS Act stands to become the most modern and agile tool in the fight again money laundering. Time will tell whether it accomplishes this goal, or, like its predecessors, falls short of preventing the illicit flow of funds and creates administrative burdens in many industries.

* J.D. Candidate, Class of 2024, Sandra Day O’Connor College of Law at Arizona State University.

[1] The Notorious B.I.G., Mo’ Money Mo’ Problems (Bad Boy Records 1997).

[2] History of Anti-Money Laundering Laws, FIN. CRIMES ENFORCEMENT NETWORK, https://www.fincen.gov/history-anti-money-laundering-laws (last visited Sept. 14, 2022).

[3] Id.

[4] Id.

[5] The War Against Money-Laundering Is Being Lost, ECONOMIST (Apr. 12, 2021), https://www.economist.com/finance-and-economics/2021/04/12/the-war-against-money- laundering-is-being-lost. See also Ronald. F. Pol, The Global War on Money Laundering is a Failed Experiment, CONVERSATION (OCT. 20, 2019), https://theconversation.com/the-global-war-on-money-laundering-is-a-failed-experiment-125143.

[6] ENABLERS Act, H.R.5525, 117th Cong. (2021); later included as an amendment within National Defense Authorization Act for Fiscal Year 2023, H.R. 7900, 117th Cong. (2022).

[7] Rep. Malinowski & Rep. Salazar, ENABLERS ACT: Confronting the “Enablers” of International Money Laundering & Putin’s Kleptocrats, https://malinowski.house.gov/sites/evo- subsites/malinowski.house.gov/files/evo-media-document/ENABLERS%20Summary%20Docs %20%20RUSSIA%20Update2.pdf (last visited Sept. 14, 2022).

[8] Who Is Subject to US AML Laws?, WILLKIE COMPLIANCE, https://complianceconcourse.willkie.com/resources/anti-money-laundering-us-who-is-subject-to-us-aml-laws (last visited Sept. 14, 2022).

[9] Sam Skolnik, Lawyers Fight Bill Forcing Them to Report Suspicious Client Acts, BLOOMBERG LAW (Aug. 29, 2022), https://news.bloomberglaw.com/business-and- practice/lawyers-fight-bill-forcing-them-to-report-suspicious-client-acts.

[10] Will Fitzgibbon, House Committee Advances ‘Once in a Generation’ Crackdown on Enablers of Financial Crime, INT’L CONSORTIUM INVESTIGATIVE JOURNALISTS (June 23, 2022), https://www.icij.org/investigations/pandora-papers/congress-advances-once-in-a-generation-crackdown-on-enablers-of-financial-crime/.

[11] Nicholas O’Donnell, “ENABLERS Act” Pursues Art Market but Threatens Longstanding Protections Against Government Intrusion, JD SUPRA (July 21, 2022), https://www.jdsupra.com/legalnews/enablers-act-pursues-art-market-but-3546971/.

[12] Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art, U.S. DEP’T TREASURY (Feb. 2022), https://home.treasury.gov/system/files/136 /Treasury_Study_WoA.pdf.

[13] Id.

[14] Peter D. Hardy & James Mangiaracina, Closing the Gate: House Adopts ENABLERS Act Amendment to 2023 NDAA, ONPRACTICE (July 21, 2022), https://onpractice.law.com/4053650/closing-gate-house-adopts-enablers-act-amendment-2023-ndaa.

[15] Money Services Business Definition, FIN. CRIMES ENFORCEMENT NETWORK, https://www.fincen.gov/money-services-business-definition (last visited Sept. 14, 2022).

[16] ENABLERS Act, supra note 6.

[17] Malinowski & Salazar, supra note 7.

[18] AML Takeaways From Watchdog’s Real Estate Guidance, LAW360 (Aug. 29, 2022), https://plus.lexis.com/api/permalink/c392566f-1527-4dfd-a29b-a71ed01597d6/?context=1530671.

By Daniel Factor*

PDF Available

The allure of digital assets is largely based on their decentralized and unregulated design. The summer of 2022, however, could mark the beginning of a new era of cryptocurrency and non-fungible token (“NFT”) regulation.[1] Although the prospect of government oversight makes many digital asset investors quiver, the Securities and Exchange Commission (“SEC”) and Department of Justice (“DOJ”)’s recent actions offer a glimpse into the new ways in which federal law can prevent fraud and secure cryptocurrency and NFT traders’ confidence in the digital market.

Since its founding in 1933, the SEC has aimed to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital information.[2] The SEC enforces federal securities laws through investigations, administrative proceedings, civil lawsuits seeking injunctive relief and monetary penalties, and criminal referrals to the DOJ.[3] In addition to pursuing both formal and informal referrals from the SEC, the DOJ independently pursues criminal violations of federal securities law.[4]

On June 1, 2022, the DOJ announced its first criminal indictment related to an NFT insider trading scheme.[5] The now-unsealed indictment charged Nathaniel Chastain, a former product manager at OpenSea, with wire fraud and money laundering for using confidential information for personal financial gain.[6] OpenSea is a platform for users to buy, sell, and create NFTs.[7] As is pertinent to these allegations, the platform lists “featured NFTs” on its homepage.[8] The DOJ alleges that Chastain selected the featured NFTs, purchased the featured items before publishing the list, and sold the NFTs for a profit due to the tokens’ “featured” status, which drove up their publicity, demand, and price.[9]

The DOJ’s novel allegations avoided the question of whether NFTs are securities and thus subject to insider trading and securities laws within the SEC’s ambit.[10] By alleging wire fraud and money laundering, the DOJ likely increased its chances of success in court[11] and signaled its “commitment . . . to stamping out insider trading – whether it occurs on the stock market or the blockchain.”[12] Moving forward, some experts speculate that, if the charges are successful, “the DOJ could theoretically use it as a model to police market manipulation for other assets, regardless of whether they are considered securities.”[13] Chastain’s case also raises questions about the scope of liability for companies that list and issue NFTs.[14] As for NFT collectors and traders, the charges against Chastain should provide a degree of confidence that employees of exchange platforms are not abusing confidential information and harming the market’s integrity.

Additionally, on July 21, the DOJ announced its first insider trading case involving cryptocurrency markets.[15] The allegations against Ishan Wahi, a former manager at Coinbase, are similar to those against Chastain insofar as both employees leveraged confidential information regarding an upcoming announcement to trade digital assets for profit.[16] Like OpenSea, Coinbase is a digital asset trading platform that periodically features certain assets on its website.

Wahi’s case will likely have a greater impact on the future of digital asset regulation because of the SEC’s parallel action. While the DOJ avoided the question of cryptocurrencies and NFTs as securities, the SEC alleges that nine of the twenty-five assets at issue in the case are securities.[17] Coinbase’s Chief Legal Officer, Paul Grewal, promptly responded on the same day of the SEC’s complaint’s filing with a blog post entitled Coinbase Does Not List Securities. End of Story.[18]

If the court finds that certain digital assets, as the SEC alleges, qualify as securities, a myriad of potential implications arises. For starters, the Howey test[19] would cover a wider range of assets, and other cryptocurrencies would likely be subject to SEC regulation. Additionally, such assets would have to be offered and sold pursuant to federal securities laws, and individual brokers would have to comply with registration and licensing requirements.[20] From a macro perspective, the SEC’s ability to oversee, investigate, and regulate digital assets would grow while the decentralized attraction of cryptocurrencies would shrink.

Overall, digital asset investors face a compelling dilemma. On one hand, investors should consider the DOJ and SEC’s role in preventing fraud by maintaining fair digital asset trading platforms. Common sense protections against insider trading can be essential to a market’s integrity. On the other hand, such investors may see these recent government actions as a threat to the basic decentralized nature of digital assets. Cryptocurrency enthusiasts tout the digital asset market’s ability to self-regulate, in part through the blockchain’s anonymity and complexity. Either way, the results of the Chastain and Wahi cases will weigh heavily on the future of digital asset regulation.

* J.D. Candidate, Class of 2024, Sandra Day O’Connor College of Law at Arizona State University.

[1] See United States v. Chastain, No. 22-CR-305 (S.D.N.Y. filed May 31, 2022); United States v. Wahi, No. 22-CR-392 (S.D.N.Y. filed July 21, 2022).

[2] What We Do, SEC, https://www.sec.gov/about/what-we-do (last modified Nov. 22, 2021).

[3] About the Division of Enforcement, SEC, https://www.sec.gov/enforce/Article/enforce-about (last modified Aug. 2, 2007).

[4] Michael D. Ricciuti et al., THE SECURITIES ENFORCEMENT MANUAL 394 (Michael J. Missal & Richard M. Phillips, eds., 2nd ed. n.d.).

[5] Press Release, U.S. Attorney’s Office, Southern District of New York, Former Employee of NFT Marketplace Charged in First Ever Digital Asset Insider Trading Scheme (June 1, 2022), https://www.justice.gov/usao-sdny/pr/former-employee-nft-marketplace-charged-first-ever-digital-asset-insider-trading-scheme.

[6] United States v. Chastain, No. 22-CR-305 (S.D.N.Y. filed May 31, 2022).

[7] Id.

[8] Id.

[9] Andrew N. D’Aversa & David Axelrod, How the Feds Are Prosecuting NFT Insider Trading Scheme as Wire Fraud – and Why That Matters, COINDESK, https://www.coindesk.com/layer2/2022/06/10/how-the-feds-are-prosecuting-nft-insider-trading-scheme-as-wire-fraud-and-why-that-matters/ (last updated June 11, 2022, 8:35 AM).

[10] Stuart D. Levi et al., ‘Insider Trading’ and NFTs: What Should Companies Be Doing?, SKADDEN ARPS, SLATE, MEAGHER & FLOM LLP (June 16, 2022), https://www.skadden.com/insights/publications/2022/06/insider-trading-and-nfts.

[11] Id.

[12] U.S. Attorney’s Office, Southern District of New York, supra note 5.

[13] D’Aversa & Axelrod, supra note 9.

[14] Levi et al., supra note 10.

[15] Press Release, U.S. Attorney’s Office, Southern District of New York, Three Charged In First Ever Cryptocurrency Insider Trading Tipping Scheme (July 21, 2022), https://www.justice.gov/usao-sdny/pr/three-charged-first-ever-cryptocurrency-insider-trading-tipping-scheme.

[16] Wahi, supra note 1.

[17] Id.

[18] Paul Grewal, Coinbase Does Not List Securities. End of Story., COINBASE (July 21, 2022), https://blog.coinbase.com/coinbase-does-not-list-securities-end-of-story-e58dc873be79.

[19] Nathan Reiff, Howey Test, INVESTOPEDIA, https://www.investopedia.com/terms/h/howey-test.asp#:~:text=The%20Howey%20Test%20refers%20to,Securities%20Exchange%20Act%20of%201934 (last updated Aug. 11, 2022).

[20] John Carney, et al., SEC and DOJ Bring Parallel Crypto Insider Trading Cases; SEC Alleges Nine Tokens Are Securities, BAKER & HOSTETLER LLP (July 22, 2022), https://www.bakerlaw.com/SEC-and-DOJ-Bring-Parallel-Crypto-Insider-Trading-Cases.

By Christian Parkinson*

PDF Available

Small business owners are struggling to keep their businesses afloat as the United States faces its highest month-over-month inflation rates since 1982.[1] Will a well-intended “relief package” for student loan borrowers further stoke the country’s inflationary inferno?

As inflation has increased across the country, so have the costs of running small businesses.[2] Owners are having to spend more on the supplies and services they need to run their businesses, forcing them to raise their own prices to offset these additional costs. Such a hike in prices has led to a loss of customers and subsequent revenue. In fact, 75% of small businesses participating in Goldman Sachs’s coaching program reported financial struggle due to these increased costs. As supply costs run higher, any revenue gained is siphoned faster than owners could have predicted. The small business industry is known for its optimistic entrepreneurial spirit, but recent surveys from the National Federation of Independent Businesses measured its lowest reading ever on economic expectations.[3] Given this background, of course small business owners are fearful of the possibility of a hike in inflation, no matter if it is a byproduct of a well-intended “relief plan.”

On August 24th, 2022, Joe Biden’s administration announced that the Department of Education will “provide up to $20,000 in debt cancellation to Pell Grant recipients…and up to $10,000 in debt cancellation to non-Pell Grant recipients” to individuals whose income is less than $125,000.[4] As cheers were heard among the millions burdening student debt, there seemed to be a silence of uncertainty among small business owners. Will this “relief plan” only trigger a heavier inflationary toll on these already struggling owners, or will inflation not be affected?

Wall Street economists argue that a rise in inflation would be minimal or possibly would not be felt at all.[5] They explain that there will be a tempering effect when student loan repayments restart in January 2023. Experts from Goldman Sachs explain that the total outstanding student debt is about $1.7 trillion, and the relief plan will reduce that balance by about $400 billion.[6] Therefore, only about a quarter of outstanding balances will be completely forgiven or “erased,” leaving most borrowers to resume repayment schedules come 2023. The experts predict the resumption of monthly payments will likely lead borrowers to maintain or lower their current personal spending behaviors, which may dampen any stoking effects on inflation.[7]

However, economic officials for previous Democratic presidencies have warned that the student relief plan will increase inflation.[8] These Harvard-trained economists reason that consumers will have more money to spend because their monthly loan payments will be reduced or completely eliminated.[9] In other words, money that would be going towards these loans is now “freed” for discretionary spending. Although no checks are being sent to borrowers from the government, experts calculate that the amount of money that may be freed up by this relief plan reaches into the trillions of dollars.[10] This will, in turn, increase consumer spending in an already strangled supply chain market and truly stoke inflation into an inferno.

Will the cries of small businesses closing their doors be drowned out by those celebrating the reduction of student debt? Or is the predicted inflationary monster merely a shadow casted by presidential opponents? As experts continue to disagree on the future effects of the student loan relief plan, an already burdened group of small business owners anxiously brace for its effects.

* J.D. Candidate, Class of 2024, Sandra Day O’Connor College of Law at Arizona State University.

[1] Trevor Wheelwright, The Effects of Inflation on US Small Businesses, BUSINESS, https://www.business.org/finance/accounting/effects-of-inflation-on-small-businesses/ (last visited Aug. 31, 2022).

[2] Joe Camberato, The Impact of Inflation on Small Businesses and How to Manage It, FORBES, https://www.forbes.com/sites/forbesfinancecouncil/2022/05/25/the-impact-of-inflation-on-small- businesses-and-how-to-manage-it/?sh=5544ff7eae41(last visited Aug. 31, 2022).

[3] Lydia DePillis, After Enduring a Pandemic, Small Businesses Face New Worries, N.Y. TIMES, https://www.nytimes.com/2022/07/26/business/economy/small-business-recession.html (last visited Aug. 31, 2022).

[4] FACT SHEET: President Biden Announces Student Loan Relief for Borrowers Who Need It Most, WHITE HOUSE, https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/24/fact-sheet- president-biden-announces-student-loan-relief-for-borrowers-who-need-it-most/ (last visited Aug. 31, 2022).

[5] Aimee Picchi, Biden’s Student Loan Relief Won’t Fuel Inflation, Wall Street Says, CBS NEWS, https://www.cbsnews.com/news/student-loan-forgiveness-biden-inflation/ (last visited Aug. 31, 2022).

[6] Id.

[7] Id.

[8] Jim Tankersley, Biden’s Student Loan Plan Sets Off Fierce Debate Among Economists, N.Y. TIMES, https://www.nytimes.com/2022/08/30/business/economy/biden-student-loans-economists.html (last visited Aug. 31, 2022).

[9] Id.

[10] Id.

By Jaclyn Perkins*

PDF Available

Aearo Technologies, a subsidiary of 3M, filed for Chapter 11 bankruptcy on July 26, 2022.[1] More than 230,000 veterans are bringing lawsuits against Aearo Technologies alleging that the company’s combat earplugs were defective and caused hearing loss and tinnitus.[2] After being considered one of the largest product liability civil cases in the United States, 3M decided to put Aearo into Chapter 11 bankruptcy because doing so would allow a fair, equitable, and fast process to resolve the veterans’ claims.[3]

Chapter 11 bankruptcy allows a company to reorganize their financial affairs during a time of financial distress. Through Chapter 11, 3M and Aearo Technologies are seeking bankruptcy protection and a stay of proceedings.[4] Both companies explained that filing for Chapter 11 bankruptcy was a move made due to their unhappiness with the multidistrict litigation proceedings and not because of “changed financial circumstances.”[5] Additionally, the companies stated in their brief to the bankruptcy court that the multidistrict litigation was “broken beyond repair.”[6]

3M plans to create a trust with $1 billion for the victims.[7] This amount of money is inadequate for the victims, especially comparing the amount to the large judgments rendered in federal court. Shortly after learning about 3M’s trust, plaintiff Joseph Sigmon stated that “3M believes each veteran’s hearing damage is worth less than $5,000.”[8] Sigmon continued by saying, “Would [the] 3M CEO Mike Roman want to lose his hearing in exchange for $5,000?”[9] The veterans suing 3M risked their lives to be on the front line protecting the United States, only to be harmed by allegedly defective earplugs.

3M’s strategy to put Aearo Technologies in bankruptcy is similar to those implemented by Johnson & Johnson and Purdue Pharma LP.[10] Bryan Alstock, an attorney representing the veterans, said that “3M’s bankruptcy maneuver is further proof that they value their profits and stock price more than the well-being of the veterans.”[11] The move from federal court to bankruptcy court is viewed as an escape from the civil litigation system because cases were not being ruled in 3M’s favor.[12] U.S. District Court Judge M. Casey Rodgers thought that 3M is running away to another forum because it does not like the rulings she is giving.[13] Although Judge Rodgers allowed the move to bankruptcy court, she also ruled that 3M could not relitigate claims in bankruptcy court that were settled in her court.[14]

3M’s tactic of trying to avoid responsibility may soon backfire. Chief U.S. Bankruptcy Judge Jeffrey Graham will rule in the near future whether to halt litigation and force 3M to settle with the veterans.[15] This ruling may change the way large corporations decide to handle mass tort litigation in the future. There has been a history of large corporations filing for Chapter 11 bankruptcy to move litigation to the bankruptcy court so they can keep their companies intact while paying significantly less in judgments. Plaintiffs are still able to receive money from judgments in the bankruptcy court, but only a small fraction of what they could get in civil court. Here, some of the victims have already received multimillion-dollar judgments. To date, 3M has lost 10 out of 16 trials, awarding nearly $265 million to 13 plaintiffs.[16] Having to pay such large judgments is most likely the driving force behind 3M’s tactic to switch to bankruptcy court. Although 3M is trying to avoid paying these large judgments by having Aearo Technologies file for Chapter 11 bankruptcy and moving to bankruptcy court, hopefully Judge Graham’s ruling will thwart their tactics and prevent other large corporations from participating in this very popular strategy.

* J.D. Candidate, Class of 2024, Sandra Day O’Connor College of Law at Arizona State University.

[1] Brendan Pierson, Florida Judge Sharply Questions 3M Bankruptcy Strategy, REUTERS (Aug. 16, 2022, 3:21 PM), https://www.reuters.com/legal/litigation/florida-judge-sharply- questions-3m-bankruptcy-strategy-2022-08-11/.

[2] Steven Church & Jeremy Hill, 3M Unit Goes Bankrupt in Bid to Resolve Lawsuits Over Military Earplugs, BLOOMBERG (July 26, 2022, 8:06 AM), https://www.bloomberg.com/news /articles/2022-07-26/3m-unit-goes-bankrupt-in-bid-to-corral-earplug-lawsuits#xj4y7vzkg.

[3] Bob Tita, Veterans Suing 3M Over Earplugs Oppose Shifting Cases to Bankruptcy Court, WALL ST. J. (Aug. 11, 2022, 7:00 AM), https://www.wsj.com/articles/veterans-suing-3m-over- earplugs-oppose-shifting-cases-to-bankruptcy-court-11660175831.

[4] Robert Klonoff, 3M’s Bankruptcy Maneuver Raises Issues for Justice System, LAW360 (Aug. 11, 2022, 6:46 PM), https://www.law360.com/articles/1518112/3m-s-bankruptcy-maneuver- raises-issues-for-justice-system.

[5] Id.

[6] Id.

[7] Id.

[8] Gretchen Morgenson, 3M Is Creating a $1 Billion Trust for Service Members Who Say Its Earplugs Didn’t Protect Them From Hearing Loss, NBC NEWS (July 26, 2022, 9:23 AM), https://www.nbcnews.com/business/corporations/3m-creating-1-billion-trust-service-members- say-earplugs-didnt-protect-rcna40032.

[9] Id.

[10] Church & Hill, supra note 2.

[11] Id.

[12] Steven Church, 3M Awaits Bankruptcy Ruling That May Sink Litigation Tactic, BLOOMBERG (Aug. 22, 2022, 2:28 PM), https://www.bloomberg.com/news/articles/2022-08- 22/3m-awaits-bankruptcy-ruling-that-could-sink-litigation-tactic.

[13] Pierson, supra note 1.

[14] Id.

[15] Church, supra note 12.

[16] Brian Bushard, 3M Commits $1 Billion for Military Members Who Claim Earplugs Were Faulty, FORBES (July 26, 2022, 3:51 PM), https://www.forbes.com/sites/brianbushard/2022/07/26 /3m-commits-1-billion-for-military-members-who-claim-earplugs-were- faulty/?sh=73c6b87b548d.

PDF Available

By R. Arden Seavers*

Cryptocurrencies’ wild west era may be drawing to a close as governments are finally taking notice of digital assets’ many woes. On March 9, 2022, President Biden signed an Executive Order on “Ensuring Responsible Development of Digital Assets.”[1] The Executive Order tasked various agencies with submitting comprehensive reports to the president on the status of cryptocurrencies and digital assets within 180 days.[2] As that deadline quickly approaches against the backdrop of Bitcoin’s recent and still-smoldering crash,[3] the need for regulation and oversight seems to be illuminated.

While regulation and oversight of digital assets appear to have widespread support,[4] it is worth noting that the ethos of cryptocurrencies was and is to remain independent of established, national banking systems.[5] Investors have been forced to take the bitter with the sweet when investing in cryptocurrency—whatever benefit a person may receive from gaining assets that are untethered to any particular bank, boardroom, or state could be quickly dashed by the fickle market.[6] Or you could end up hilariously rich.[7] Regardless of cryptocurrency’s defiant origins, it has now become too big to thwart government oversight. The Biden Administration has set out to address the myriad of issues presented by the likes of Bitcoin, Ethereum, and Dogecoin, including consumer protection and the potential for a U.S. Central Bank Digital Currency.[8]

Consumer protection in the crypto market, or lack thereof, is one of the central issues the Executive Order calls attention to.[9] The development of digital assets and cryptocurrency has raced forward, relegating agencies and financial institutions to play the role of the tortoise and leaving consumers with virtually no protection.[10] Current laws and regulations pertaining to cryptocurrency are sparse and inconsistent. Several states have adopted crypto laws while federal agencies claw out of the analog age and reckon with the digital era.[11] While there are certain issues and public policy matters that must be left to the states, it would be unwise to count regulation of cryptocurrency among them. Digital assets are personas non grata and any regulatory scheme to establish consumer protections would better serve investors if established and administered at the federal level. The Executive Order’s directive that various federal agencies formulate a plan for implementing robust consumer protections could unify the nation’s approach to digital assets if carried out in an efficient manner that does not stifle the innovative and beneficial characteristics of cryptocurrency.

Exploration of a U.S. Central Bank Digital Currency (CBDC) requires federal agencies to consider the technological infrastructure necessary for a CBDC in order to further the administration’s goal of promoting and ensuring U.S. leadership in global finance and technology.[12] The U.S. dollar currently dominates the global financial market, but the growth of cryptocurrencies has prompted other major players in the financial sphere to adapt to new technologies.[13] Treasury officials have contemplated development of a U.S. stablecoin[14] and the Federal Reserve conducted a multi-year research initiative in conjunction with MIT to explore the development and implementation of a CBDC for the United States.[15] The Executive Order does not provide specifics on how a CBDC would actually be created or implemented, and doing so is easier said than done. Doing so would only be effective if the U.S could establish an efficient system for implementation while maintaining a leadership position in the global financial market.[16]

Biden’s Executive Order is merely a first step towards development of a comprehensive U.S. approach to digital assets. There is much work to be done to bring U.S. financial and consumer protection agencies into the crypto age. The reports issued after the 180-day deadline will be very telling of the U.S.’s trajectory within the crypto sphere. With the correct approach, the U.S. can make meaningful strides towards bringing cryptocurrency into the fold of the U.S. financial market, establishing a new American frontier in digital assets.

* J.D. Candidate, Class of 2023, Sandra Day O’Connor College of Law at Arizona State University.

[1] Exec. Order No. 14067, 87 Fed. Reg. 14,143 (Mar. 14, 2022).

[2] Id.

[3] David Yaffe-Bellany et al., Cryptocurrencies Melt Down in a ‘Perfect Storm’ of Fear and Panic, N.Y. Times (May 12, 2022), https://www.nytimes.com/2022/05/12/technology/crypto currencies-crash-bitcoin.html.

[4] Cheyenne Ligon, Biden’s Executive Order on Crypto Met With Relief From Key Industry Players, CoinDesk (Mar., 9, 2022), https://www.coindesk.com/policy/2022/03/09/bidens-executive-order-on-crypto-met-with-relief-from-key-industry-players/; Nikhilesh De, Biden’s Executive Order on Crypto Receives Bipartisan Praise, CoinDesk (Mar. 11, 2022), https://www.coindesk.com/policy/2022/03/11/bidens-executive-order-on-crypto-receives-bipartisan-praise/.

[5] Ephrat Livni & Eric Lipton, Crypto Banking and Decentralized Finance, Explained, N.Y. Times (Sept. 5, 2021), https://www.nytimes.com/2021/09/05/us/politics/cryptocurrency-explainer.html; Daniel Cawrey, Bitcoin: A Means for Global Independence, CoinDesk (July 4, 2014), https://www.coindesk.com/markets/2014/07/04/bitcoin-a-means-for-global-independence/.

[6] Yaffe-Bellany, supra note 3.

[7] Nellie Bowles, Everyone Is Getting Hilariously Rich and You’re Not, N.Y. Times (Jan. 13, 2018), https://www.nytimes.com/2018/01/13/style/bitcoin-millionaires.html.

[8] Exec. Order No. 14067.

[9] Id.

[10] Madison Darbyshire, What Protections Do Consumers Have in Crypto Trading?, Financial Times (June 30, 2021), https://www.ft.com/content/f0f5e12d-729a-4c74-89cb-2ad96b5828e2.

[11] Scott D. Hughes, Cryptocurrency Regulation and Enforcement in the U.S., 45 Wash. St. U. L. Rev. 1 (2017); Sheelah Kolhatkar, The Challenges of Regulating Cryptocurrency, The New Yorker (Oct. 6, 2021), https://www.newyorker.com/business/currency/the-challenges-of-regulating-cryptocurrency (stating that the SEC has at times provided guidance that some cryptocurrencies are not securities while simultaneously suing other another cryptocurrencies for making an unregistered initial coin offering).

[12] Exec. Order No. 14068. Press Release, Fact sheet: President Biden to Sign Executive Order on Ensuring Responsible Development of Digital Assets (Mar. 9, 2022), https://www.whitehouse.gov/briefing-room/statements-releases/2022/03/09/fact-sheet-president-biden-to-sign-executive-order-on-ensuring-responsible-innovation-in-digital-assets/.

[13] Michael Sung & Christopher A. Thomas, The Innovator’s Dilemma and U.S. Adoption of a Digital Dollar, Brookings (Mar. 24, 2022),https://www.brookings.edu/techstream/the-innovators-dilemma-and-u-s-adoption-of-a-digital-dollar/.

[14] Eric Lipton & Ephrat Livni, Regulators Racing Towards First Major Rules on Cryptocurrency, N.Y. Times (Sept. 23, 2021) https://www.nytimes.com/2021/09/23/us/politics /cryptocurrency-regulators-rules.html.

[15] Federal Reserve Bank of Boston & Massachusetts Institute for Technology Digital Currency Initiative, Project Hamilton Phase 1 A High Performance Payment Processing System Designed for Central Bank Digital Currencies (2022).

[16] Sung, supra note 13.

PDF Available

By Alex Hartman*

Purdue Pharma, the maker of the opioid OxyContin, was a key player in the opioid epidemic that has cost the lives of tens of thousands of people.[1] A deluge of lawsuits pushed the company into Chapter 11 bankruptcy. A key component of Purdue’s reorganization plan is a non-debtor release that protects the Sackler family, who own and run the company, from civil liability in return for billions of dollars in contributions to the reorganization.[2] Non-debtor releases are a controversial topic in bankruptcy law and the broad protections in the Sackler’s release drew objections from dozens of states and municipalities. The Bankruptcy Court approved the reorganization plan over their objections only to have that ruling overturned by the District Court.[3] This set the stage for a showdown not just for this case but for non-debtor releases generally.

Non-debtor releases, as the name suggests, releases non-debtor parties in a bankruptcy from liability for certain claims. They are a tool used almost exclusively in mass-tort claim bankruptcies, usually for insurers who fund a trust to pay out claims to people injured by a company who filed for Chapter 11 protection. They can be a useful tool to prevent endless litigation and can drastically increase the funds available to pay out claims that otherwise wouldn’t receive a dime. They are also unusual because they, in a sense, extend bankruptcy protections to parties who never filed for bankruptcy. Additionally, the bankruptcy code does not explicitly allow for non-debtor releases outside of asbestos-related cases. Largely because of this lack of statutory support, a minority of the circuit courts of appeals, including the 9th Circuit, do not allow non-debtor releases at all.[4] However, the majority of the circuit courts do allow non-debtor releases by considering them as permissible under the reorganization plan confirmation sections of the code in 11 U.S.C. § 1123 and the equitable powers of the bankruptcy court in 11 U.S.C. § 105.[5]

 What makes the non-debtor release in the Purdue Pharma bankruptcy so controversial is who is protected and the extent of protection requested. Purdue is privately owned and largely run by the Sackler family and their proposed non-debtor release grants them virtually unlimited civil protection for any of their actions while running Purdue. There is copious evidence that the Sackler family aggressively marketed OxyContin as a safer and less addiction prone opioid product, which turned out to be false.[6] In return for the protection of the non-debtor release, the Sackler family originally agreed to contribute $4.3 billion to the reorganization plan to, among other things, pay claims and fund opioid abatement programs.[7] This contribution is the majority of all the funds available in the bankruptcy state to compensate the tens of thousands of claimants. However, the Sackler family received roughly $11 billion in profits from Purdue Pharma, predominately from the sale of OxyContin.[8]

In September of 2021, the Bankruptcy Court approved a plan for reorganization only to have that confirmation overruled by the District Court in December of 2021.[9] The District Court did not accept the lower court’s statutory basis for the non-debtor release, finding it violated other provisions of the bankruptcy code.[10] This set the stage for a fight in the Second Circuit Court of Appeals which could draw the attention of the Supreme Court. However, on March 10, 2022, the Bankruptcy Court approved a new plan, agreed to by many of the dissenting states. This new plan had the Sackler’s contribute an additional $1.7 billion to the plan, bringing their contributions up to around $6 billion. While this is certainly a win for the victims of opioid abuse there remain many unanswered legal questions around the use of non-debtor releases.[11]

Clarity around the legality of non-debtor releases may be coming. In response to public outcry over the Sackler release, legislation was introduced in both the House and Senate reforming non-debtor releases. The Nondebtor Release Prohibition Act of 2021, as the name implies, prohibits the use of non-debtor releases outside of asbestos cases.  Whether or not the bill becomes law remains to be seen.[12] The House Judiciary Committee already passed the bill while the Senate Judiciary Committee has yet to act. A complete prohibition might not be the best move. Debtors in mass-tort claim bankruptcies are unlikely to have the assets to pay even a fraction of the claims made against them and third parties with deeper pockets, like insurers or owners, may not fund a reorganization absent liability protection. This could result in virtually endless litigation against those third parties, which is great for lawyers but not so great for the victims of dangerous products.

* J.D. Candidate, Class of 2023, Sandra Day O’Connor College of Law at Arizona State University.

[1] See Barry Meier, Origins of an Epidemic: Purdue Pharma Knew its Opioids were Widely Abused, N.Y. Times (May 29, 2018), https://www.nytimes.com/2018/05/29/health/purdue-opioids-oxycontin.html.

[2] See Laura Strickler, Purdue Pharma Offers $10-$12 billion to settle opioid claims, NBC News (August 27, 2019), https://www.nbcnews.com/news/us-news/purdue-pharma-offers-10-12-billion-settle-opioid-claims-n1046526.

[3] See In re Purdue Pharma, L.P., 635 B.R. 26, 34 (S.D.N.Y., 2021).

[4] See Elizabeth D. Lauzon, Validity of Non-Debtor Releases in Restructuring Plans, 18 A.L.R. Fed. 3d Art. 2 (Originally published in 2016).

[5] See In re Purdue Pharma, 635 B.R. at 43.

[6] See Barry Meier, Origins of an Epidemic: Purdue Pharma Knew its Opioids were Widely Abused, N.Y. Times (May 29, 2018), https://www.nytimes.com/2018/05/29/health/purdue-opioids-oxycontin.html .

[7] See 11^th Amended Joint Chapter 11 Plan of Reorganization of Purdue Pharma L.P. and its Affiliated Debtors at 1, August 31, 2021, ECF No. 3706, In re Purdue Pharma L.P., No. 19-23649 (RDD), 635 B.R. 26 (Bankr. S.D.N.Y. Sept. 17, 2021).

[8] See Samson Amore, John Oliver Creates Anti-Opioid Website Just to Mess with Purdue Pharma (Video), The Wrap (August 8, 2021), https://www.thewrap.com/john-oliver-anti-opioid-website-purdue-pharma/ .

[9] See In re Purdue Pharma, L.P., 635 B.R. 26, 34 (S.D.N.Y., 2021).

[10] See id. at 47-70.

[11] See Meryl Kornfield, Opioid victims confront Purdue Pharma’s Sackler family: ‘It will never end for me,” Washington Post (March 10, 2022), https://www.washingtonpost.com/business/2022/03/10/opioid-purdue-pharma-bankruptcy-sackler/.

[12] See Nondebtor Release Prohibition Act of 2021, H.R.4777, 117^th Congress (2021).

PDF Available

By Ian Stanford^*

           On February 2, 2022, the IRS announced it would refund $3,293 to a Nashville couple who had paid that amount in taxes for Tezos tokens they had acquired through staking.^[1] The couple, Joshua and Jessica Jarret, filed a lawsuit in May 2021 arguing that tokens acquired through staking should be considered property created by the taxpayer thus not taxable until they are sold.^[2] Staking rewards are earned by locking one’s cryptocurrency up in order to help validate transactions on the blockchain.^[3] Estimates show that the staking of cryptocurrencies resulted in fifteen billion dollars of staking rewards in 2021.^[4] As the nascent industry of cryptocurrencies continues to grow, the IRS’s handling of the taxation of staking rewards will be an issue of significant importance.

           In 2014, the IRS issued Notice 2014-21 which provides that cryptocurrencies are to be treated as property for federal tax purposes.^[5] While the notice discusses the tangentially related issue of cryptocurrency mining, the IRS has not yet issued official guidance on how tokens earned through staking should be treated for tax purposes. Because of this, the case brought by the Jarrets has garnered much attention from the crypto community. However, it is important to note that the IRS’s offer of a refund to the Jarrets does not mean that other taxpayers can now stop paying taxes on their tokens earned through staking. The IRS did not issue any additional guidance, they simply offered the individual taxpayers a refund. 

           The Jarrets rejected the IRS’s offer because the IRS did not provide a reason as to why the refund was offered.^[6]The Jarrets hope that by continuing their lawsuit they can induce the IRS to issue new guidance regarding the taxation of staking rewards.^[7] Accordingly, the refund offered to the Jarrets should not be relied upon as a precedent by future taxpayers until official guidance is provided. Indeed, the 2021 IRS 1040 form instructions indicated that taxpayers should include as a transaction “[t]he receipt of new virtual currency as a result of mining and staking activities.”^[8]

           If the IRS chooses to issue guidance stating that staking rewards are not taxable until the tokens are sold, it will have two strong policy reasons to support its decision. First, the taxation of unsold tokens earned through staking creates a potential liquidity issue for taxpayers. The receipt of new tokens does not provide a taxpayer with any cash to pay for the taxes incurred. Thus, the taxing of staking rewards forces taxpayers to raise the cash needed to pay the tax from other sources which may result in inefficient economic outcomes. Second, given that cryptocurrencies may decrease in value after the staking rewards are received, the IRS may be imposing taxes at values far above the actual value eventually received by the taxpayer.

           The pending legal battles and the ultimate path the IRS decides to take in taxing staking rewards will have a large economic impact in the growing blockchain industry. Many blockchains, like Bitcoin, who do not utilize a proof-of-stake validation system will not be as concerned. However, individuals and corporations that are engaged in staking should keep a close eye on the outcome of this case and any other guidance the IRS may issue in the future.

^* J.D. Candidate, Class of 2023, Sandra Day O’Connor College of Law at Arizona State University.

^[1] Kamran Rosen, In Huge Precedent, IRS Refunds Income Taxed on Unsold, Staked Crypto, Forbes (Apr. 3, 2022, 3:41 PM), https://www.forbes.com/sites/kamranrosen/2022/02/02/in-huge-precedent-irs-says-it-will-not-tax-unsold-staked-crypto/?sh=2b220d10464c.

^[2] Id.

^[3] Ethereum, (Apr. 3, 2022, 3:58 PM), https://ethereum.org/en/staking/#main-content.

^[4] Staked, (2021), https://staking.staked.us/state-of-staking.

^[5] IRS., Notice 2014-21 (2014), https://www.irs.gov/pub/irs-drop/n-14-21.pdf

^[6] Pallav Raghuvanshi & Shira Peleg, A Recent Court Case Leaves Many Speculating on the Taxation of Staking Rewards, National Law Review (Apr. 3, 2022, 4:20 PM), https://www.natlawreview.com/article/recent-court-case-leaves-many-speculating-taxation-staking-rewards.

^[7] Cheyenne Ligon, IRS Offers Tezos Staker Refund on Rewards Tax in Break From Current Policy, CoinDesk (Feb. 3, 2022), https://www.coindesk.com/policy/2022/02/03/irs-offers-tezos-staker-refund-on-rewards-tax-in-break-from-current-policy/.

^[8] IRS, 1040 Instructions (2021), https://www.irs.gov/pub/irs-pdf/i1040gi.pdf.

By Dylan Patel*

PDF Available

            It is no secret that M&A activity has attracted antitrust regulators given the high metabolism of corporate takeovers over the past century.[1] This past year marked a record year for M&A volume despite the continued economic concerns created by COVID-19.[2] In 2021, high domestic equity valuations coupled with low interest rates contributed to a staggering deal volume that is expected to carry over into this year.[3] Even though the financial landscape looks bright for mergers and acquisitions this year, regulatory scrutiny is increasing as changes to antitrust policy, including the FTC and DOJ’s temporary suspension of the Hart-Scott-Rodino waiting period and the FTC’s implementation of pre-consummation warning letters, will inevitably create longer timelines for deals.[4]

            Senator Elizabeth Warren and Representative Mondair Jones introduced legislation this month to block deals worth more than $5 billion or that lead to high market shares.[5] The proposed bill, the Prohibitive Anticompetitive Mergers Act, would essentially allow regulators to reverse mergers if they materially harm workers, consumers, and small businesses.[6] One of the key elements of the bill is the increased power for the FTC and DOJ to block mergers without a court order.

            While large M&A deals may benefit the corporate executives and large shareholders, Senator Warren’s proposed bill is highly prohibitive and disastrous for corporate dealmakers and the spirit of competition. First, one of the most detrimental effects is the diminution of innovation.[7] In areas like fintech, big data, and even healthcare, the pro-competitive merger justifications can benefit the consumer directly. Particularly, consumers “benefit from competition because, when producers face rivalry, they seek to attract customers through lower prices and higher quality.” [8] Moreover, Senator Warren’s proposal would vastly disrupt one of the most fundamental benefits of big mergers, which is the advanced pipeline of products and services that trickle down to consumers. Granted, deals initially financially benefit the largest shareholders in the industry, but these effects are trivial when considering the bigger picture.

            Secondly, the Prohibitive Anticompetitive Mergers Act, if passed, would create a catastrophic setback to the entire M&A industry because of inflation and rising interest rates. As previously, 2021 was a record year for deals, creating $5 trillion in total volume, partially thanks to low interest rates and stable inflation.[9] If this bill is passed at a time where inflation has been at one of its highest levels and as the Federal Reserve attempts to raise the Federal Funds rate this year to combat recessionary sentiment, deal volume will take huge hit. This is especially problematic for larger businesses that are attractive for acquisitions by massive public companies. Specifically, when it becomes economically difficult to operate financially under the market, most businesses will resort to the option for a sale at a premium.[10] Inflation has a direct correlation to the cost of financing.[11] On the other hand, when the Treasury rate or risk free rate is higher, the discount is greater because an acquirer “could safely park their money” in a risk-free investment with high interest instead of buying a business.[12] Furthermore, inflation, coupled with stronger antitrust regulatory power in the hands of the FTC and DOJ, will lead many businesses to exit within the next few years. Unfortunately, these sales will be hindered when deals reach $5 billion.

            Lastly, the proposed bill will also negatively limit private equity firms’ ability to continue to aggregate smaller businesses into one large company. The bill will prohibit these private equity “roll up” strategies that quickly consolidate industries.[13] Private equity roll up strategies involve firms buying smaller companies in an effort to create a larger company to dominate a niche market.[14] So far in 2021, there were “1,741 roll-up transactions in the U.S. with a total value of $164 billion, compared to 3,168 roll-ups worth a combined $323.4 billion in all of 2020.”[15] Generally, private equity firms have had a major goal of “flipping companies” to make them more profitable and in turn to resell them at a premium.[16] Senator Warren’s proposal would merely eliminate the incentive for PE firms to buy smaller private businesses.

            The Prohibitive Anticompetitive Mergers Act seems to create more anticompetitive consequences than expected on the surface. While the activities that the act aims to solve may be justified, the timing and extensive ramifications will be detrimental for the industry. Currently, with the unstable economy and uncertainty about the markets for the near future, the last thing that the M&A industry needs is greater regulatory scrutiny.

* J.D. Candidate, Class of 2023, Sandra Day O’Connor College of Law at Arizona State University.

[1] Marina Martynova & Luc Renneboog, A Century of Corporate Takeovers: What Have We Learned and Where Do We Stand? (Jan. 10, 2009), 32 J. BANK. FIN. 2148 (2008).

[2] 2022 M&A Outlook: Continued Strength After a Record Year, MORGAN STANLEY (Jan. 14, 2022), https://www.morganstanley.com/ideas/mergers-and-acquisitions-outlook-2022-continued-strength-after-record.

[3] Id.

[4] US M&A Roars Into 2022 on the Momentum of a Record-Shattering Year, but Challenges Loom, According to a New Report by White & Case and Mergermarket, WHITE & CASE (Feb. 1, 2022),https://www.whitecase.com/news/press-release/us-ma-roars-2022-momentum-record-shattering-year-challenges-loom-according-new.

[5] Joshua Fineman, Sen. Warren Introduces Bill to Block Mergers,SEEKING ALPHA (Mar. 16, 2022), https://seekingalpha.com/news/3814219-sen-warren-said-to-introduce-bill-to-block-mergers.

[6] Id.

[7] Roger L. Martin, M&A: The One Thing You Need to Get Right,HARV. BUS. REV., June 2016, at 42, 44.

[8] See Michael L. Katz & Howard A. Shelanski, Mergers and Innovation, 74 ANTITRUST L.J. 1, 39 (2007).

[9] MORGAN STANLEY, supra note 2.

[10] Martynova & Renneboog, supra note 1.

[11] How Inflation Will Affect M&A and Funding, ORION CAP. GRP., https://www.orioncg.com/newsletters/how-inflation-will-affect-ma-and-funding/ (last visited Apr. 3, 2022).

[12] Id.

[13] Press Release, Elizabeth Warren, Senate, Warren, Jones Introduce Bicameral Legislation to Ban Anticompetitive Mergers, Restore Competition, and Bring Down Prices for Consumers (Mar. 16, 2022), https://www.warren.senate.gov/newsroom/press-releases/warren-jones-introduce-bicameral-legislation-to-ban-anticompetitive-mergers-restore-competition-and-bring-down-prices-for-consumers.

[14] Arleen Jacobius, Firms Turn to Roll-ups to Find Instant Growth (July 12, 2021), Pensions & Investments, https://www.pionline.com/private-equity/firms-turn-roll-ups-find-instant-growth.

         [15] Id.

[16] Id.

PDF Available

By Ruzanna Mirzoyan*

Historically, warfare was the predominant method of solving conflicts between countries, but after World War I, the United States expanded its use of economic sanctions.[1] Sanctions are a nonviolent form of coercion that also push forward a specific policy or political agenda.[2] However, some have argued that “in reality, economic sanctions are by no mean’s peaceful and quite often deadlier and more destructive than military action.”[3] Currently, the United States uses financial and economic sanctions more than any other country.[4] Sanctions can vary, but common penalties are travel bans, embargoes, export controls, capital controls, trade sanctions, and asset freezes.[5]

In the United States, sanctions can originate in either the executive or legislative branch, but they typically start with the president issuing an executive order that declares a national emergency in response to an “unusual and extraordinary foreign threat.”[6] Recently, President Biden issued Executive Order 13661, sanctioning the Russian Federation for its invasion of Ukraine.[7]

The U.S. sanctions have cut off Russia’s largest bank, Sberbank, from the U.S. financial system, and entirely blocked Russia’s second-largest bank, VBT.[8] Additionally, U.S. sanctions have restricted Russian technology exports and prohibited any United States technologies produced by foreign countries, such as semiconductors, lasers, sensors, and maritime technologies.[9] More surprisingly, Switzerland, abandoned its ancient neutrality and imposed sanctions against Russia and Vladimir Putin by freezing any assets belonging to Putin, Prime Minister Mikhail Mishustin and Foreign Minister, Sergey Lavrov.[10] Switzerland is also closing its airspace to Russia and have an entry ban for individuals closely connected to Putin.[11]

Whether sanctions are effective depends on various factors such as the country’s size, assets, and natural resources. In Russia’s case, the current sanctions are slowly suffocating the country. In response, Russia announced a temporary ban on grain and sugar sales to ex-soviet countries, such as Armenia, to ensure its army and people have enough.[12] However, Armenia heavily relies on trade with Russia, and this ban will increase prices of essential goods for Armenian people.[13] Therefore, sanctions against Russia have artificially expanded and now affect small countries which are not responsible for Russia’s invasion. Furthermore, while not under a direct order from the United States government, there is social pressure for private companies to act.[14] Companies like Chanel, Hermés, Netflix, Instagram, Nike, Boeing, Apple, and  DLA Piper, have taken a stand against the war and exited Russia.[15]

Many Russian people strongly oppose the war in Ukraine and have even risked their freedom by publicly protesting.[16] But while many Russians have exhibited brave acts in condemning the government, they have little to no say on the sanctions imposed against Russia. The country has virtually reverted to its Soviet state when Western influence or goods were strictly prohibited. However, Russians have become reliant on working for American companies, purchasing goods from American retailers, and using American media platforms; without them Russians face a drastic lifestyle change that also creates immense financial constraints. Openly protesting the war or expressing support for Ukraine can face up to twenty years in prison, so people are protesting with their feet.[17] As many as 200,000 Russians have fled to nearby countries like Georgia, Armenia, and Turkey.[18] According to one Russian, many feel that “the only way we can protest is to leave the country, take our skills and money with us.”[19] With air travel becoming increasingly limited, people are traveling by car or train.[20]

While Russian people are finding new homes in cities like Tbilisi, Georgia, or Yerevan, Armenia, they struggle to feel accepted as locals are hesitant to accept them. Particularly for Georgia, it has been only fourteen years since Russia invaded Georgia, and some citizens fear another invasion. However, Armenia is seeing a potential opportunity to grow its IT businesses and is positioning itself as an attractive destination.[21] Software engineers and others alike are motivated to begin anew in Armenia, as locals speak Russian, the cost of living is low relative to Moscow, and Russians do not need a work permit.[22]

Furthermore, Russians are struggling financially, even if they previously lived comfortably as many cannot access their bank accounts and withdraw their money.[23] Those who rely on their relatives abroad for financial support also cannot receive any money because payment companies like Wise and Remotely suspended their service to Russia.[24] But tech entrepreneurs have found ways to connect the newcomers on a messaging app, Telegram.[25] There, Russians can discuss where to find housing, how to open bank accounts, and whether it is safe to speak Russian.[26]

While the United States hoped its sanctions would curtail Russia’s invasion of Ukraine, the sanctions have stimulated a massive exodus from the country. This may not be a violent style of warfare, but this exodus may nonetheless damage Russia’s government, people, and economy. However, the extent of that damage is yet to be seen, meanwhile there is hope for Russians to begin new lives.

* J.D. Candidate, Class of 2023, Sandra Day O’Connor College of Law at Arizona State University.

[1] Justin Stalls, Article: Economic Sanctions, 11 Miami Int’l & Comp. L.Rev. 115, 116 (2003).

[2] Id.

[3] Id.

[4] Jonathan Masters, What Are Economic Sanctions? Council on Foreign Relations(August 12, 2019), https://www.cfr.org/backgrounder/what-are-economic-sanctions#chapter-title-0-5.

[5] Brent Radcliffe, How Economic Sanctions Work, Investopedia (Feb. 24, 2022), https://www.investopedia.com/articles/economics/10/economic-sanctions.asp.

[6] Masters, supra note 4.

[7] Id.

[8] Fact Sheet: Joined by Allies and Partners, the United States Imposes Devastating Costs on Russa, The White House (Feb. 24, 2022), https://www.whitehouse.gov/briefing-room/statements-releases/2022/02/24/fact-sheet-joined-by-allies-and-partners-the-united-states-imposes-devastating-costs-on-russia/.

[9] Id.

[10] Laura Hen, Switzerland Ditches Neutrality to Sanction Russia and Putin, CNN Business (Mar. 1, 2022), https://www.cnn.com/2022/03/01/business/switzerland-sanction-russia-freeze-assets-intl-hnk/index.html.

[11] Id.

[12] Russia Temporarily Bans Grain Exports to Ex-Soviet Countries, Reuters (Mar. 14, 2022), https://financialpost.com/pmn/business-pmn/russia-temporarily-bans-grain-exports-to-ex-soviet-countries.

[13] Id.

[14] As Companies Leave Russia, Their Assets Could be Seized, ABC News (Mar. 12, 2022), https://abcnews.go.com/Business/wireStory/companies-leave-russia-assets-seized-83405396.

[15] Here Are Some of the Companies That Have Pledged to Stop Business in Russia, The New York Times (Mar. 21, 2022), https://www.nytimes.com/article/russia-invasion-companies.html.

[16] In Russia, those who protest or publicly oppose the government are subject to imprisonment. Delaney Nolan, Russia-Ukraine: What do Young Russians Think About the War? ALJAZEERA (Mar. 18, 2022), https://www.aljazeera.com/features/2022/3/18/what-do-russians-think-about-the-war-we-asked-five-young-people.

[17] Rayhan Demytrie, Russia Faces Brain Drain As Thousands Flee Abroad, BBC News (Mar. 13, 2022), https://www.bbc.com/news/world-europe-60697763.  

[18] Id.

[19] Id.

[20] Id.

[21] Arshaluis Mdgesyan, Armenia Anticipates Influx of Russian Businesses, Capital, eurasianet (Mar. 10, 2022), https://eurasianet.org/armenia-anticipates-influx-of-russian-businesses-capital.

[22] Id.

[23] Demytrie, supra note 18.

[24] Hannah Lang, Payment Companies Wise, Remitly Suspend Money Transfer Businesses in Russia, Reuters (Feb. 28, 2022), https://www.reuters.com/technology/payments-company-wise-suspends-money-transfer-business-russia-2022-02-28/.

[25] Demytrie, supra note 18.

[26] Id.