Volume 3, Issue 1

Published January 3, 2022

Articles

SORRY, THEY WERE ON MUTE: THE SEC’S “TOKEN PROPOSAL 2.0” AS BLUEPRINT FOR REGULATORY RESPONSE TO CRYPTOCURRENCY

J. Scott Colesanti

In 2008, as the world dreaded economic meltdown, one or more anonymous individuals titled “Nakomoto” posted a scientific white paper on the Internet. “Bitcoin” was thus born. That name – uttered but once in the white paper – would go on to define a movement, a market, and a mountain.

By late 2010, approximately 100 bitcoin had been mined; two years later, that number approached 10 million, and a second crypto had emerged. By 2018, bitcoin traded at over $18,000 per coin; a year later, that market value had plummeted to less than $5,000. Concurrently, tales of digital asset fortunes lost or stolen have abounded. Thus, the growth of cryptocurrency, while meteoric, has been dampened by theft, volatility, and misuse.

The peer-to-peer transactional system imagined by Nakomoto could hardly be said to have welcomed regulation. And yet, with a market cap measured in the trillions, cryptocurrency is on a path to inevitable regulation. And the Securities and Exchange Commission – the most feared of market regulators – can seemingly use its expansive definition of “security” to reach almost any digital asset arrangement tied to speculation.

Accordingly, Part II of this Article provides background on the definition of “security” as introduced by the federal securities laws. Next, Part III brings a tighter lens to the cases brought by the Commission for the purpose of juxtaposing the two recent “Token” proposals offered by an SEC Commissioner. Finally, Part IV suggests amendments to the bold proposal/quasi-rulemaking. In the main, these amendments concern definitions, the suggested public disclosures, and the harmonization with salutary Commission pronouncements to date.

In sum, the unconventional Token 2.0 proposal has inspired a Congressional Bill and emboldened the industry. This article lauds the initiative while suggesting the means by which it can crystallize into permanent, efficacious regulation.

THE MEME STOCK PARADOX

Victoria Chiu & Moin A. Yahya

This article examines the recent meme-stock trading saga that took place in early 2021. Financially underperforming companies that became the target of short-sellers suddenly saw their stock price rapidly and permanently rise. Large amounts of small investors were able to raise the price by buying shares in these companies and holding onto them. The saga demonstrates that the traditional rational investor models underlying the ‘fraud on the market’ theories of securities regulation are misplaced both in terms of describing the market and in terms of protecting investors. Traditional information disclosure requirements did not seem to disclose the proper information to large or regular investors. Rather, the decisions by large disparate investors created new information that seems to have rescued many of these companies. We offer three possible approaches to understand what happened: 1) discovery through collective wisdom, 2) discovery of new tastes in stocks, 3) pride of ownership. Each of these may explain how financially underperforming companies were able to attract substantial interest from small investors, so much so that short-selling hedge-funds were ousted from the market.

 

DOES A TAX RETURN FILED IN THE USVI START THE IRS STATUTE OF LIMITATIONS?

Beckett Cantley & Geoffrey Dietrich

Statutes of limitations are paramount for the efficient, just, and democratic functioning of the U.S. court systems, and the federal government. Statutes of limitations help the courts control their dockets, but these statutes also protect U.S. citizens. Through these statutes, citizens are protected from frivolous claims by limiting how much time a litigant has for filing a complaint. Additionally, statutes of limitations serve as a vital component of the checks and balances against the power of the government because they limit how long branches of the government have for prosecuting citizens for certain crimes. Their existence motivates government agencies to be efficient in their legal pursuits and in their discovery of such crimes or wrongdoings. Yet, even within seemingly straightforward statutes of limitations, there is an extensive track of judicial interpretation, where courts are asked to decide at what point a statute begins to run, when does it toll, or whether it even attaches to the issue in the first place. One such gray area is the statute of limitations related to the IRS’s authority to assess any tax imposed after a return was filed. U.S. courts have been asked to interpret what constitutes a return, and what constitutes a filing when taxpayers challenge the IRS’s action as being time barred. This issue is further complicated when courts are asked to rule on whether the IRS action is time barred in matters dealing with those taxpayers who filed returns with the United States Virgin Islands (“USVI”). These Caribbean islands function as a territory of the United States and have a mirror tax system, where USVI residents can file their taxes with the USVI Bureau of Internal Revenue instead of filing with the IRS. The mirror system is meant to both alleviate some of the burdens of those living on the islands, as well as the IRS. The drawback, though, is that the USVI have a stringent process in determining residency. As such, a very narrow issue arises when U.S. taxpayers, believing that they are USVI residents—whether by technicality or mistake—file their taxes with the wrong administration. This article analyzes the distinct issue of does a tax return filed in the USVI start the IRS statute of limitations? The answer is derived from a recent Ninth Circuit ruling regarding the running of the statute of limitations and is analyzed within the history of court rulings for USVI – U.S. tax cases. Ultimately, this article demonstrates that a tax return filed in the USVI likely does not start the IRS statute of limitations. Mostly, the precedent of these cases serves as a cautionary tale for taxpayers who may one day find themselves at the litigation table against the IRS. 

 

 

SHAREHOLDER PROTECTION IN TENDER OFFERS: HOW TO RESOLVE PRESSING UNCERTAINTY IN SECTION 14(E) LITIGATION AND WHY IT MATTERS

Matthew S. Seafield

In 2018, the Ninth Circuit issued an unprecedented opinion in Varjabedian v. Emulex Corp. that split from the Second, Third, Fifth, Sixth, and Eleventh circuits to hold that only negligence, as opposed to scienter, is required to prove securities fraud in a Section 14(e) claim. As a result, there is an outstanding circuit split and unresolved question as to which standard applies—a question that has drawn the interest and commentary of many significant players in the financial industry, including the Securities and Financial Markets Association, the Chamber of Commerce of the United States, the Former Commissioners of the Securities and Exchange Commission, and the Business Roundtable. When Varjabedian was granted certiorari in 2019, each of these named groups—in addition to others—filed amicus briefs that warned of the potential negative economic implications from a negligence standard. Despite this, the Supreme Court dismissed the case as improvidently granted shortly after oral argument in a one sentence opinion.

Nevertheless, the Ninth Circuit’s textual analysis of Section 14(e) correctly shows errors in prior Section 14(e) jurisprudence and points out that legal precedent does not actually require scienter. Importantly, Section 14(e) may be divided into two separate clauses—the first clause being substantially similar to the language of Rule 10b-5 and the second clause being substantially similar to the language of Section 10(b). Prior courts held Section 14(e) to require scienter, in large part, because Section 10(b) and Rule 10b-5 have been interpreted to require scienter. To rebut this presumption, however, the Ninth Circuit referred to the Supreme Court’s decision in Ernst & Ernst v. Hochfelder to show that Rule 10b-5 does not require scienter due to its language but simply because its authorizing statute, Section 10(b), requires scienter. The Ninth Circuit also cites the Supreme Court in Aaron v. SEC to argue that language substantially similar to Section 14(e) requires only negligence. Moreover, the Ninth Circuit makes a persuasive argument for the negligence standard that considers legislative history and intent. Considering the importance of economic efficiency, however, a negligence standard may very well not be sustainable in the long run as it is likely to increase frivolous litigation and forced settlements that increase transaction costs.

Moving forward, the SEC should clarify its interpretation of Section 14(e) to explicitly state whether negligence or scienter is required. In doing so, the agency would provide administrative guidance to markets that mitigates uncertainty in a more expedient manner than the traditional legislative process. This clarification would likely take the form of an additional rule—proposed rule 14e-9—within Regulation 14E. At this point, SEC Commentary seems to imply that the agency interprets scienter to be required—an interpretation that would likely be granted Chevron deference under the SEC’s broad rulemaking authority. Because Chevron deference sets a high standard, any SEC rule clarification is unlikely to be overturned. However, in the event that it was, the question would almost certainly be back before the Supreme Court on appeal to resolve the issue. The importance of resolving this split should not be taken lightly—after all, uncertainty must be mitigated to provide investors with the confidence needed to spur economic activity—and SEC rule clarification appears to be the most viable path forward.

DOES YOUR CLAIM ARISE OUT OF PROFESSIONAL SERVICES? PROFESSIONAL LIABILITY POLICIES AND PROFESSIONAL SERVICES EXCLUSIONS

John Zulkey

This article reviews over five hundred decisions across the country which analyzed whether the underlying claims arose out of professional services for operation of either a professional liability coverage grant or professional services exclusion. It is broken up in to three parts, with the first part addressing broad issues such as when something is deemed “professional,” what it means to be a “service,” and when a claim is deemed to “arise from” a professional service rather than being tangential to it.

The second section analyzes common disputes that arise in this context, such as if a claim arises out of professional services if it involved: 1) billing and payment; 2) advertising and referrals; 3) defamation; 4) employment; or 5) sexual assault.

The last section groups together professional services decisions by profession, specifically reviewing claims against: 1) attorneys; 2) medical professionals; 3) banking and investment professionals; 4) insurance agents/brokers; 5) accountants; 6) realtors and property managers; and 7) technology professionals.

This overlapping of insolvency proceedings in different countries regarding a common debtor represents a recurring and seemingly intractable challenge of transnational commercial law.  Management of bankruptcy and insolvency cases with cross-border aspects has evolved – and improved – considerably over recent decades.  But it remains a legal domain that is very much in flux, with a spectrum of institutional approaches and varying degrees of transnational cooperation and coordination.  This Essay addresses the move in India to adopt one of these approaches.  In brief, it argues that questions of design of such a regime may be of secondary importance to other institutional challenges, especially the capacity and inclination of judicial actors who will be responsible for operating the regime to cooperate and coordinate with foreign entities, courts, and institutions.

Comments

JUDICIAL REVIEW OF CORPORATE NON-PROSECUTION AND DEFERRED PROSECUTION AGREEMENTS: A NARROW ROAD TO CHECKING PROSECUTORIAL DISCRETION

Jacob Stock

Non-prosecution agreements (“NPAs”) and deferred prosecution agreements (“DPAs”) are popular tools for United States Attorneys’ Offices responding to corporate crime. These agreements offer companies an opportunity to resolve cases without bringing a case to trial, with some strings attached. Prosecutors hold all the cards when negotiating these agreements, and prosecutorial discretion has resulted in an overly harsh—and at times even dystopian—response to criminal wrongdoing by corporations. Because case law has all but foreclosed the possibility of substantive judicial review of the terms of these agreements, this Comment explores a narrower but related solution: judicial review for the sole purpose of determining whether a defendant corporation materially breached a DPA or NPA.    

TOSSING BABY WITH THE BATHWATER: SUBSTANTIVE DUE PROCESS AND THE REGULATORY TAKINGS DOCTRINE APPLIED TO THE COVID-19 PANDEMIC

Josh Bethea

This paper explores the issues facing property owners in challenging government regulation in response to COVID-19. Specifically, this paper lays out the relevant law and its development over time, points out the flaws in the current law, and ultimately recommends that courts alter their analysis of these issues. The ideal analysis will avoid strict scrutiny review and give broad deference to state actors during public emergencies. However, it will also grant claimants relief where state actors have readily available, less harmful, and cheaper alternatives to their offending regulation. Such an analysis will protect important property rights against permanent erosion over time—even during pandemics.

By altering their analysis in three main ways, courts may avoid tossing out the baby with the bathwater—or in other words, avoid tossing out important property rights while still rejecting strict scrutiny review of state emergency actions. First, courts ought to deny the legitimate exercise of police power as a threshold inquiry. Second, courts ought to determine the nature of the claimant’s loss before engaging in a justification analysis. Third, courts ought to conduct a justification analysis when courts find the nature of the claimant’s loss to be substantial enough to invoke a presumption of government liability.

These are the hallmarks of the balanced interests test, which grants state actors broad discretion during emergencies while permitting recovery where readily available, less harmful, and cheaper alternatives to an offending regulation exist. This is a test that keeps the baby but not the bathwater.