As Libor Nears its End, Deutsche Bank Traders Convictions are Overturned

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By Emily McGill*

            On January 27, 2022, the U.S. Court of Appeals for the Second Circuit in New York overturned the convictions of Matthew Connolly and Gavin Black, two former Deutsche bank traders.[1] Connolly and Black had been convicted in 2018 for wire fraud and conspiracy related to the London interbank offered rate (“Libor”) scandal of 2012.[2] Prosecutors were arguing that Connolly and Black were pressuring their peers to alter interest rates and submit false data to benefit their own positions.[3]

            Having been the world’s most important number, an interest rate benchmark underpinning $800 trillion in financial instruments, Libor was responsible for many transactions varying from complex derivates to simple mortgages.[4] Being integrated in a majority of global financial products, the rate would signal the health of a bank, hint when banks were in trouble, and create the basis for payments for trillions of dollars in debt ranging from corporations to home mortgages.[5] Due to Libor’s critical role in the financial marketplace, member banks would report their numbers to the British Bankers Association and the European Banking Federation each morning.[6] These institutions required that each bank use their subjective judgment in determining their submitted rates, and strictly prohibited derivatives traders to consider their own financial positions when exercising this judgment.[7]

In 2008, Libor grabbed the headlines and soon became regarded as the world’s biggest headache and the subject of late-night punchlines.[8] International banks such as Barclays, Deutsche Bank, Rabobank, UBS, and the Royal Bank of Scotland[9] were caught colluding to manipulate the rate so their traders could make a profit on derivatives pegged to the base rate.[10] Relying only on self-reported estimates, Libor was easy to manipulate, making it possible for a bank to submit artificially high or low rates.[11] While these manipulations go back as early as 2003, they were spotlighted between 2005 and 2007 when Barclay’s first manipulated Libor.[12] During this period, “swaps traders often asked the Barclays employees who submit the rates to provide figures that would benefit the traders, instead of submitting the rates the bank would actually pay to borrow money.”[13] Additionally, it was reported that “certain traders at Barclays coordinated with other banks to alter their rates as well.”[14]

            A direct result of the scandal coming to light was the immediate erosion of the public’s trust of the marketplace.[15] Despite still being a viable source until it will be phased out at the end of the year, Libor will be replaced by the Secured Overnight Financing Rate (“SOFR”), produced by the Federal Reserve Bank of New York.[16] The data provided by SOFR will be based on transaction data as opposed to estimates.[17]

            Prior to being overturned, Connolly had been sentenced to six months of home confinement with an order to pay a $100,000 fine.[18] Similarly, Black was sentenced to nine months of home confinement with a $300,000 fine.[19] According to the Second Circuit, there was a lack of evidence that the two traders had caused Deutsche Bank to make false Libor submissions.[20] Specifically, the government had failed to produce any evidence that any of the Libor submissions by Deutsche Bank were influenced by the traders and were rates that Deutsche Bank was not allowed to request, receive, or accept.[21] By failing to meet this evidentiary burden, the Court was unable to determine any false or misleading conduct that would warrant a conviction of wire fraud or conspiracy.[22] While the Department of Justice has yet to speak on the matter, counsel for the traders stated, respectively, that they are “elated Matt Connolly has been fully exonerated in this contrived case”[23] and are “deeply appreciative” of the outcome.[24]

Since 2012, federal prosecutors have been locked in a decade long battle to hold Wall Street accountable for its manipulation.[25] The recent decision from the Second Circuit dealt another blow to this effort, as prosecutors have previously come to terms with more than a dozen other traders have had their convictions overturned or been acquitted in both the U.S. and UK. [26] Regardless of the government’s failed attempts to hold the traders involved accountable, there will be no recovery for the reputation and use of Libor. While searching for a successor to Libor as the new benchmark, lawyers have already begun to prepare for its awaited demise in 2023 by writing fallback language into contracts.[27] As both the legal and financial world moves on from the fall of Libor, it seems that the entire ordeal may just be forgotten.


* J.D. Candidate, Class of 2022, Sandra Day O’Connor College of Law at Arizona State University.

[1] Jonathan Stempel, U.S. Appeals Court Throws Out Deutsche Bank Traders’ Libor-Rigging Convictions, Reuters (Jan. 27, 2022, 12:50 PM), https://www.reuters.com/business/deutsche-bank-traders-libor-rigging-convictions-are-thrown-out-new-york-2022-01-27/.

[2] Id.

[3] Chris Dolmetsch, Ex-Deutsche Bank Traders’ Libor Convictions Tossed on Appeal, Bloomberg (Jan. 27, 2022, at 8:13 AM), https://www.bloomberg.com/news/articles/2022-01-27/ex-deutsche-bank-traders-get-libor-rigging-convictions-tossed.

[4] Michael R. Koblenz, Kenneth M. Labbate, & Carrie C. Turner, Libor: Everything You Ever Wanted to Know but Were Afraid to Ask, 6 J. Bus. Entrepreneurship & L. 281, 284 (2013).

[5] Id.

[6] Id. at 285.

[7] Id.

[8] Lanah Nguyen & Jeanna Smialek, Libor, Long the Most Important Number in Finance, Dies at 52, New York Times (Jan. 13, 2022), https://www.nytimes.com/2022/01/12/business/ libor-finance.html.

[9] Miranda Marquit & Benjamin Curry, What is Libor and Why Is It Being Abandoned?, Forbes (Dec. 21, 2021, 11:20 AM), https://www.forbes.com/advisor/investing/what-is-libor/#:~:text=In%202012%2C%20extensive%20investigations%20into,player%20in%20this%20complicated%20scam.

[10] James McBride, Understanding the Libor Scandal, Council on Foreign Relations (Oct. 12, 2016, 8:00 AM), https://www.cfr.org/backgrounder/understanding-libor-scandal.

[11] Nguyen & Smialek, supra note 8.

[12] Id.

[13] Behind the Libor Scandal, New York Times (July 10, 2012), www.nytimes.com/interactive/2012/07/10/business/dealbook/behind-the-libor-scandal.html?_r=0.

[14] McBride, supra note 10.

[15] Id.

[16] Nguyen & Smialek, supra note 8.

[17] Id.

[18] Stempel, supra note 1.

[19] Id.

[20] U.S. v. Connolly, No. 19-03806, 2022 BL 28693, at *55 (2d Cir. Jan. 27, 2022).

[21] Id. at *54.

[22] Id. at *54-55.

[23] Stempel, supra note 1.

[24] Id.

[25] Matthew Goldstein, Two Former Deutsche Bank Traders Win Their Appeal in a Libor Manipulation Case, New York Times (Jan. 27, 2022), https://www.nytimes.com/2022/01/27 /business/libor-manipulation- deutsche-bank-traders.html.

[26] Id.

[27] Alec Foote Mitchell, LIBOR: The World’s Most Important Headache, 105 Minn. L. Rev. 1485, 1486 (Feb. 2021).

Microsoft Announces Plan to Acquire Activision Blizzard – Will it Work?

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By Robert Dyess*         

On January 18, 2022, Microsoft announced that it was acquiring Activision Blizzard in an all-cash transaction valued at $68.7 billion.[1] This will be a stock purchase,[2] with Microsoft paying $95 per share of Activision Blizzard’s stock.[3] After the acquisition, Microsoft stands to become the world’s third largest gaming company behind Tencent and Sony.[4] This transaction is set to be the largest all-cash acquisition on record (and the largest gaming industry deal in history), surpassing Bayer’s $63.9 billion acquisition of Monsanto in 2016.[5]

Understandably, the news of the proposed acquisition shocked the video game industry and consumers alike.[6] Activision Blizzard has been embroiled in a massive sexual harassment scandal that began when the California Department of Fair Employment and Housing filed a lawsuit against the company on July 20, 2021 after a two-year investigation.[7] This scandal has thus far caused the departure and termination of numerous high-ranking employees, as well as boycotts of Activision Blizzard’s video games by fans and various news outlets.[8] Accordingly, Activision Blizzard’s stock price plummeted from $91.51 on July 19, 2021 to low of $57.28 on November 30, 2021, and ended at $65.39 on January 13, 2022 (the final closing price before the merger announcement).[9]

Regardless of Activision Blizzard’s legal and public relations woes, this seems like a great move for Microsoft. Activision Blizzard’s diminished stock price essentially turned this deal into a bargain for Microsoft, because the $95 per share acquisition price is only slightly higher than Activision Blizzard’s pre-scandal trading price of $91.51 per share. Microsoft certainly has the cash on hand to take advantage of such a bargain.[10] Additionally, Activision Blizzard’s extensive game franchises include such popular titles as World of Warcraft, Call of Duty, and Candy Crush.[11] Microsoft will be able to integrate these game franchises into its Game Pass portfolio and bolster the pursuit of its own metaverse.[12]

Although this deal appears to be economically beneficial to Microsoft, there is a chance that it may not happen at all. Such a large tech acquisition is likely to draw the attention of the Federal Trade Commission (“FTC”). The FTC and Department of Justice are already starting to rewrite merger rules to address the recent boom in Big Tech acquisitions, and the FTC is currently trying to break up Facebook’s new parent company Meta.[13] Microsoft’s rhetoric about creating multiple metaverse platforms seems to echo the desires of Facebook/Meta, and thus may raise a red flag to regulators.

However, Microsoft may not have much to worry about. The FTC may ultimately not view the merger as anticompetitive because although Microsoft is nearly doubling its share of the gaming industry market, it will still only have a relatively small slice of the pie.[14] Microsoft will become the third largest gaming company after the merger, not the largest. Additionally, this acquisition is likely to be considered a vertical transaction, and courts are historically reluctant to apply antitrust restrictions to vertical transactions.[15] A vertical transaction is the joining of two or more companies that provide different functions.[16] In the video gaming sphere, Microsoft is primarily a platform provider and distributor, whereas Activision Blizzard is a video game publisher.[17] These functions are distinct enough to likely meet the definition of a vertical transaction.[18]

If anything, Microsoft can argue that the deal will bolster competition instead of quashing it because it will be able to compete with the likes of Tencent and Sony more effectively. Moreover, although there are concerns that Microsoft may push for more Xbox-exclusivity regarding such titles as Call of Duty, it has stated that it plans to keep Call of Duty available on the Sony Playstation.[19] Nevertheless, the sheer size of the deal may still invite heavy scrutiny from the FTC regardless of whether the transaction appears to be anticompetitive at first glance.

At this point, it is difficult to predict what sort of antitrust challenges Microsoft will face before the merger is finalized, if any at all. The news of the merger is still fresh, and the FTC is in the process of updating its M&A rules. Regardless, the deal stands to change the landscape of the video game industry as we know it.

* J.D. Candidate, Class of 2023, Sandra Day O’Connor College of Law at Arizona State University. Mr. Dyess is also licensed as a Certified Public Accountant in the State of California.

[1] Microsoft Corp., Current Report (Form 8-K) (Jan. 18, 2022), https://www.sec.gov/ix?doc=/Archives/edgar/data/0000789019/000119312522010667/d301984d8k.htm.

[2] See generally Asset Purchase vs Stock Purchase, Corporate Finance Institute (last visited Jan. 28, 2022), https://corporatefinanceinstitute.com/resources/knowledge/deals/asset-purchase-vs-stock-purchase/. A buyer may acquire a target company by either purchasing the target’s assets or purchasing the target’s stock. Here, Microsoft is purchasing all of Activision Blizzard’s stock.

[3] Microsoft to Acquire Activision Blizzard to Bring the Joy and Community of Gaming to Everyone, Across Every Device, Microsoft (Jan. 18, 2022), https://news.microsoft.com/2022/01/18/microsoft-to-acquire-activision-blizzard-to-bring-the-joy-and-community-of-gaming-to-everyone-across-every-device/.

[4] Id.

[5] Subrat Patnaik & Supantah Mukherjee, Microsoft to Gobble Up Activision in $69 billion Metaverse Bet, Reuters (Jan. 18, 2022), https://www.reuters.com/technology/microsoft-buy-activision-blizzard-deal-687-billion-2022-01-18/.

[6] Kyle Campbell, The Video Game Industry Reacts to Microsoft Buying Activision Blizzard,  USA Today (Jan. 18, 2022), https://ftw.usatoday.com/lists/microsoft-buys-activision-blizzard-reaction.

[7] Aaron Greenbaum, Everything You Need to Know About the Activision Blizzard Scandal, Den of Geek (Jan. 20, 2022), https://www.denofgeek.com/games/activision-blizzard-lawsuit-major-events-history-everything-explained/.

[8] Id.

[9] Activision Blizzard, Inc., CNBC (last visited Jan. 24, 2022), https://www.cnbc.com/quotes /ATVI. Note the consistent downward trend of Activision Blizzard’s stock price after July 20, 2021 until the merger announcement on January 18, 2022.

[10] Microsoft Corp., Quarterly Report (Form 10-Q) at *5 (Jan. 25, 2022), https://www.sec.gov/ix?doc=/Archives/edgar/data/0000789019/000156459022002324/msft-10q_20211231.htm#BALANCE_SHEETS. Microsoft had over $125 billion in cash and cash equivalents as of December 31, 2021. This is the most recent balance sheet on file with the SEC.

[11] Supra note 3.

[12] Id.

[13] David Meyer, Microsoft-Activision Deal Could Face Antitrust Challenges Over Gaming Implications, and Maybe the Metaverse Too, Fortune (Jan. 19, 2022), https://fortune.com/2022/01/19/microsoft-activision-deal-antitrust-gaming-metaverse/.

[14] Samson Amore, Why Antitrust Concerns Won’t Block Microsoft’s Activision Acquisition, dot.LA (Jan. 24, 2022), https://dot.la/activision-microsoft-antitrust-2656470772.html. Microsoft’s share of the gaming market was 6.5% in 2020, and it will increase to 10.7% with the addition of Activision Blizzard.

[15] Rory Young, Legal Expert Explains Why Microsoft’s Acquisition of Activision Blizzard Won’t Break Antitrust Laws, GameRant, (Jan. 19, 2022), https://gamerant.com/activision-blizzard-microsoft-acquisition-antitrust-laws/.

[16] Id.

[17] Id.

[18] Id.

[19] Id. Phil Spencer, CEO of Microsoft Gaming, stated that Microsoft will keep Call of Duty available on the Playstation instead of making it exclusive to the Xbox.

Biden’s Well-Intentioned Vaccine-Or-Test Mandate Faces Stiff Challenges

PDF Available

By Seth Neufeldt*

On September 9, 2021, President Biden announced a vaccine-or-test mandate for employers with over 100 employees,[1] which led to immediate opposition. Soon after OSHA announced the emergency temporary standard (“ETS”), Texas Attorney General Ken Paxton tweeted that he would challenge the rule.[2] Now, more than half of the states have filed lawsuits opposing the ETS. On November 5, 2021, the Fifth Circuit issued a temporary stay blocking the enforcement of the Biden administration’s mandate, citing “grave statutory and constitutional issues.”[3]

States opposing the ETS argue that the federal government is exerting too much authority – that vaccination falls solely under states’ police power to regulate the health and safety of their citizens. Their argument rests on Jacobson v. Massachusetts, which established states’ power to enforce vaccination of their citizens in response to the smallpox epidemic.[4] Additionally, two religious organizations argue that observing the rule would “wound the consciences of their employees and potentially cause them to sin.”[5] Some states also argue that OSHA lacks statutory authority to issue the ETS.

The Biden administration’s argument rests on the challenged statutory authority. The Occupational Safety and Health Act grants the Secretary of Labor the authority to issue an emergency temporary standard when workers are subjected to a grave danger and a new standard is necessary to protect them.[6] To succeed, the Biden administration would have to prove that the COVID-19 pandemic is such a grave danger that OSHA can wield this power. Though the ETS’s legal future remains uncertain, the White House has directed businesses to move forward with the rule, which may leave employers feeling unsure how to proceed.[7]

Many businesses may find comfort knowing that they have federal support for COVID-19 vaccine mandates. While some large businesses such as Tyson Foods may have the means and workforce available to allow challenges to vaccine mandates to persist without worrying about significant loss of capital,[8] others may have put off requiring their employees be vaccinated in fear of legal battles or a reduction in their workforce. Additionally, the ETS may inadvertently protect businesses from liability if an employee develops COVID-19. Even if an employer has complied with applicable safety standards, it can be liable for violating the general duty that employers provide a work environment free from recognized hazards likely to cause death or serious physical harm if the employer knows of an obvious hazard.[9] Though a suit against an employer for contracting COVID-19 is probably unlikely to succeed, businesses may find the ETS’s vaccine-or-test requirement reduces the hazard of contracting coronavirus at the workplace.

Many small businesses, even those outside of OSHA’s vaccine-or-test rule, may decide to issue vaccine mandates for employees when the requirement goes into effect for larger businesses in January 2022. This could help the country reach herd immunity; some estimate that 80-90 percent of people will need to be immune to COVID-19 to reach herd immunity.[10] The ETS incentivizes vaccinations over tests, as the rule does not require employers to provide or cover costs for employees’ COVID-19 tests.[11] With an increase in vaccinations, many people may feel comfortable enough to return to the workforce, filling a historically large amount of open jobs.

However, others impacted by vaccine-or-test requirements may feel the need to find employment elsewhere. Recently, many Americans have increasingly taken advantage of exemptions to compulsory vaccination requirements.[12] Further, even if the Biden administration’s rule is allowed to stand, employers and employees alike may opt not to adhere to the vaccine-or-test requirement. Though employers can face stiff fines for failing to cooperate with the rule, there is no instrument in place to check that employers are adhering to the ETS, and OSHA will mostly rely on employee complaints and add coronavirus-related inspections when they are already at workplaces.[13] The OSHA rule, though well-intentioned, may not have as much of an effect on vaccination rates as the Biden administration hopes.

To be sure, the Biden administration is facing large challenges to its vaccine-or-test mandate. If the ETS is permitted to stand, the rule’s effect on businesses is uncertain. The country, however, may take one step closer to reaching herd immunity against the coronavirus.

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

[1] Press Release, President Joseph Biden, Remarks by President Biden on Fighting the COVID-19 Pandemic (Sept. 9, 2021), https://www.whitehouse.gov/briefing-room/speeches-remarks/2021/09/09/remarks-by-president-biden-on-fighting-the-covid-19-pandemic-3/.

[2] Texas Attorney General (@TXAG), Twitter (Sept. 10, 2021, 11:46 AM), https://twitter.com/TXAG/status/1436400690226663459.

[3] BST Holdings, L.L.C. v. OSHA, No. 21-60845, 2021 U.S. App. LEXIS 33117 (5th Cir. Nov. 5, 2021).

[4] Jacobson v. Massachusetts, 197 U.S. 11, 25 (1905).

[5] Dave Simpson, Religious Groups Fire Back In 5th Circ. Vax-Or-Test Rule Battle, Law360 (Nov. 9, 2021), https://www.law360.com/employment/articles/1439380/religious-groups-fire-back-in-5th-circ-vax-or-test-rule-battle?nl_pk=9b00d634-c396-4f97-bf60-b435a359a9e3&utm_source=newsletter&utm_medium=email&utm_campaign=employment.

[6] 29 U.S.C. § 655(c)(1).

[7] Press Briefing, the White House, Press Briefing by Principal Deputy Press Secretary Karine Jean-Pierre and Secretary of Transportation Pete Buttigieg (Nov. 8, 2021), https://www.whitehouse.gov/briefing-room/press-briefings/2021/11/08/press-briefing-by-principal-deputy-press-secretary-karine-jean-pierre-and-secretary-of-transportation-pete-buttigieg/.

[8] Lauren Hirsch & Michael Corkery, How Tyson Foods Got 60,500 Workers to Get the Coronavirus Vaccine Quickly, N.Y. Times, (Nov. 4, 2021), https://www.nytimes.com/2021/11/04/business/tyson-vaccine-mandate.html.

[9]Safeway, Inc. v. OSHRC, 382 F.3d 1189 (10th Cir. 2004).

[10] Matthew K. Wynia et al., Why A Universal COVID-19 Vaccine Mandate Is Ethical Today, Health Affairs Blog (Nov. 3, 2021), https://www.healthaffairs.org/do/10.1377/hblog20211029.682797/full/.

[11] COVID–19 Vaccination and Testing; Emergency Temporary Standard, 86 FR 61402 (Dep’t of Labor Nov. 5, 2021).

[12] Steve P. Calandrillo, Vanishing Vaccinations: Why Are SO Many Americans Opting Out of Vaccinating Their Children?, 37 U. Mich. J.L Reform 353, 388 (2004).

[13] COVID–19 Vaccination and Testing; Emergency Temporary Standard, 86 FR 61402 (Dep’t of Labor Nov. 5, 2021).

DOJ Sues to Block Acquisition of Top Publishing Rivals

PDF Available

By Dianne Dickman*

On November 2, 2021, the U.S. Department of Justice (“DOJ”) brought an antitrust lawsuit against the world’s largest publisher, Penguin Random House, LLC, seeking to block the company from acquiring one of its main rivals, Simon & Schuster, Inc.[1]

The DOJ’s complaint alleges that “[t]he merger would give Penguin Random House outsized influence over who and what is published, and how much authors are paid for their work.”[2] Additionally, the DOJ argues that the merger would grant Penguin Random House control of nearly half of the market for acquiring the publishing rights of the anticipated top-selling books.[3] Thus, the DOJ believes the merger of the first and fourth largest publishing houses would be anticompetitive, – ultimately harming American authors and consumers.[4]

The proposed acquisition was first announced in November of 2020 by the publishing houses’ parent companies, Bertelsmann and ViacomCBS.[5] The deal was said to be worth approximately $2.18 billion.[6] Penguin Random House’s merger with Simon & Schuster follows the trend of consolidation in the publishing industry.[7] Penguin and Random House themselves recently merged in 2013.[8]

Currently, the “Big Five” publishers dominate the publishing industry. The “Big Five” include The Hachette Group, Harper Collins, MacMillan, Penguin Random House, and Simon & Schuster.[9] These corporations compete amongst each other to acquire publishing rights from authors and are often the best option for authors publishing anticipated top-selling books. This is due to the “Big Five’s” ability to offer “high advances and extensive marketing and editorial support,” which smaller publishing houses cannot afford.[10]

As members of the “Big Five,” Penguin Random House and Simon & Schuster have immense control over the punishing industry. Penguin Random House publishes over 70,000 digital and 15,000 print titles annually[11] and earned over $2.4 billion in U.S. publishing revenues last year.[12] While Simon & Schuster own “over 30 U.S. imprints across three publishing groups and publishes over 1,000 new titles annually.”[13]  

The DOJ’s complaint further alleges that the proposed merger eliminates competition and solidifies Penguin Random House’s control over the industry. This is because Penguin Random House and Simon & Schuster compete against each other to acquire manuscripts and are often the final bidders in auctions for the publishing rights.[14] With the acquisition of Simon & Schuster, the DOJ stresses that the merger would eliminate necessary competition resulting in lower advances for authors and less variety of books for consumers.[15]

In response to the DOJ’s complaint, the two publishing houses issued a joint statement.[16] The statement noted that the publishing houses intend to fight the lawsuit.[17] They also claimed that the acquisition “is a pro-consumer, pro author, and pro-book seller transaction.”[18] Further arguing that the merger would not change the publishing industry’s competitive environment because they “compete with many other publishers including large trade publishers, newer entrants like Amazon, and a range of mid-size publishers . . . .”[19] The publishing houses have also publicly suggested that the merger is necessary to be a counterweight to Amazon.[20] However, Penguin Random House’s Global CEO had admitted that the company seeks to become an “exceptional partner” to Amazon through the merger.[21]

Lastly, the antitrust lawsuit against Penguin Random House seeking to block the acquisition of Simon & Schuster illustrates the Biden Administration’s aims to stop corporate consolidation.[22] In July of this year, President Biden signed an executive order which focused on promoting competition.[23] Since the executive order, the federal government has blocked a series of corporate deals, including the consolidation of American Airlines and JetBlue.[24] This DOJ suit is another indication of the Biden Administration’s more aggressive antitrust enforcement.[25]

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

[1] Press Release, Dep’t of Just., Justice Department Sues to Block Penguin Random House’s Acquisition of Rival Publisher Simon & Schuster (Nov. 2, 2021), https://www.justice.gov/opa/pr/justice-department-sues-block-penguin-random-house-s-acquisition-rival-publisher-simon.

[2] Complaint at 2, United States v. Bertelsmann SE & Co. KGaA, No. 1:2021cv02886 (D.D.C. Nov. 2, 2021).

[3] Id. at 4. See also Hamza Shaban, DOJ Sues to Block Penguin Random House’s Acquisition of Rival Publisher Simon & Schuster, The Washington Post (Nov. 2, 2021, 4:56 PM), https://www.washingtonpost.com/business/2021/11/02/penguin-random-house-simon-schuster-justice-department.

[4] Supra note 2, at 2-3.

[5] Id. at 9.

[6] Id.

[7] US Just. Dep’t Suing to Block Penguin Purchase of Simon & Schuster, THE GUARDIAN (Nov. 2, 2021, 1:46 PM), https://www.theguardian.com/books/2021/nov/02/penguin-simon-schuster-justice-department-sues.

[8]  Id.

[9] Carl T. Bogus, Books and Olive Oil: Why Antitrust Must Deal with Consolidated Corporate Power, 52 U. Mich. J.L. Reform 265, 272-73 (2019).

[10] Dep’t of Just., supra note 2, at 3.

[11] Penguin Random House, https://www.penguinrandomhouse.com/imprints/ (last visited Nov. 9, 2021), https://www.prnewswire.com/news-releases/penguin-random-house-and-simon–schuster-to-fight-department-of-justices-decision-to-file-suit-to-block-pro-consumer-pro-author-and-pro-book-seller-transaction-301414651.html.

[12] Dep’t of Just., supra note 2, at 8.

[13] Id.

 

[14] Id. at 3.

[15] Dep’t of Just., supra note 1, at 3.

[16] Press Release, Penguin Random House and Simon & Schuster to Fight Dept’ of Just.’s Decision to File Suit to Block Pro-Consumer, Pro-Author and Pro-Book Seller Transaction (Nov. 2, 2021).

[17] Id.

[18] Supra note 2, at 6. 

[19] Id.

[20] Mason Bissada, Just. Dep’t Sues to Block Penguin Random House Acquisition of Simon & Schuster, FORBES (Nov. 2, 2021, 3:17 PM), https://www.forbes.com/sites/masonbissada/2021/11/02/justice-department-sues-to-block-penguin-random-house-acquisition-of-simon–schuster/?sh=1ad1eeac1c54.

[21] Supra note 2, at 6.

[22] Siri Bulusu, Penguin, Simon & Schuster Deal Triggers Author Risk Probe at DOJ, BLOOMBERG LAW (Nov. 5, 2021, 9:10 AM), https://www.bloomberglaw.com/bloomberglawnews/antitrust/X6S3IMH4000000?bna_news_filter=antitrust#jcite.

[23] Exec. Order No. 14036, 86 Fed. Reg. 36987 (July 9, 2021).

[24] Elizabeth A. Harris et. al., Just. Dept’ Sues Penguin Random House Over Simon & Schuster Deal, N.Y. TIMES (Nov. 2, 2021), https://www.nytimes.com/2021/11/02/books/penguin-random-house-simon-schuster-merger-lawsuit.html.

[25] David McLaughlin, U.S. Sues Block Penguin Deal for Simon Schuster, BLOOMBERG LAW (Nov. 2, 2021, 10:54 AM), https://www.bloomberglaw.com/bloomberglawnews/antitrust/XDM3EGRK000000?bna_news_filter=antitrust#jcite.

Why More Consumers Need to Heed SEC Warnings Against Taking Stock Advice from Social Media

PDF Available

By Kianna Sarvestani*

The rise of social media has complicated efforts to ensure that accurate information is disseminated about a company’s financial health and investment advice more generally. With increasing frequency, many people now receive their news from social media because of the ease of access to these sources. There has also been an increase in influencers who are often professionals of various careers who receive a lot of engagement on their content on Twitter, Instagram, Facebook, etc.[1] Influencers frequently provided tips and advice that influence individuals’ behavior including endorsing products and disseminating information on fashion trends. Given the rise of influencers, there has been an increase of individuals who provide investment stock information on social media. This poses a variety of issues for investors. For the last few years, the Securities Exchange Commission (“SEC”) has targeted these social media actions from two sides. The SEC provides information on potential scams and red flags to investors and the SEC has taken action against those who have violated antitrust laws.

For four years now, the SEC has discouraged relying on information from social media when making investment decisions. In particular, the SEC Office for Education and Advocacy of Enforcement has spearheaded this initiative. This office has put out a variety of tips and red flag warnings to consider as it has consistently cautioned against trusting investment information from social media.[2] In a recent investor alert, the Office warned that there have been fake profiles created on social media impersonating investment professionals which provide misleading investment advice.[3] Additionally, the SEC has warned against investing in companies because a celebrity has “sponsored, invest in it or says it is a good investments.”[4]  Simply relying on celebrities is not a good indication that a stock is a good investment, even if a celebrity themselves invest in the stock – wealthier individuals are able to sustain a risk or loss in ways the average consumer cannot.[5]

The SEC Division of Enforcement has also brought several actions against individuals for violating antitrust laws, to combat this growing issue as well. These recent actions indicate the magnitude of the harm illegal social media schemes are having on the stock exchanges. Recently, the SEC brought an action against Steven Gallagher.[6] Gallagher had posted thousands of tweets on his Twitter account encouraging his followers to purchase certain stocks. These were stocks that Gallagher held personally. Once these stocks were at an inflated price, Gallagher would sell his stock and without informing his followers.[7] In sum, Gallagher was using Twitter to encourage followers to purchase stock he owned to inflate its price and then sell out to turn a profit. Gallagher allegedly made over a 1-million-dollar profit in this pump and dump scheme.[8] The SEC secured a temporary injunction and asset freeze against Gallagher and the case remains ongoing.[9] SEC officials warned again that this case is exactly why “investors should be wary of taking financial advice from unverified sources on Twitter and other social media platforms.”[10]

The SEC remains steadfast in discouraging investors from taking investment advice from social media as recent enforcement action illustrates how problematic this practice is. However, the issue remains that social media is a medium in which individuals spend on average 144 minutes a day on and it influences human behavior.[11] Furthermore, social media gives “investment advice” for free whereas genuine financial advisors often charge fees and commissions. It remains to be seen what additional precautionary efforts the SEC will consider in trying to discourage individuals from using advice they find on social media.

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

[1] Kelsi Listen, The Significance of a Viral Post on Social Media at 2 (April 2021) (unpublished manuscript) (Bridgewater College Library).

[2] Investor Alert, SEC Fraudulent Stock Promotions (March 29, 2016), https://www.sec.gov/oiea/investor-alerts-bulletins/ia_promotions.html.

[3] Investor Alert, SEC, Fraudsters Posing as Brokers or Investment Advisers – Investor Alert (July 27, 2021), https://www.sec.gov/oiea/investor-alerts-and-bulletins/fraudsters-posing-brokers-or-investment-advisers-investor-alert.

[4] Investor Alert, SEC, Fraudsters Posing as Brokers or Investment Advisers (March 10, 2021), https://www.sec.gov/oiea/investor-alerts-and-bulletins/celebrity-involvement-spacs-investor-alert.

[5] Id.

[6] Press Release, SEC, SEC Obtains Asset Freeze and Other Relief in Halting Penny Stock Scheme on Twitter (Oct. 26, 2021), https://www.sec.gov/news/press-release/2021-214.

[7] Id.

[8] Matt Robinson & Christian Berthelsen, Twitter User ‘Alexander Delarge’ Charged for Hyping Penny Stocks, Bloomberg Wealth(Oct. 26, 2021, 10:08 AM), https://www.bloomberg.com/news/articles/2021-10-26/twitter-user-alexander-delarge-charged-for-hyping-penny-stocks.

[9] SEC, supra note 6.

[10] Id.

[11] Gary Henderson, How Much Time Does the Average Person Spend on Social Media?, Digital Marketing (Aug. 24, 2020, 3:15 PM), https://www.digitalmarketing.org/blog/how-much-time-does-the-average-person-spend-on-social-media.

A Two Trillion Dollar Idea: How Minting a Coin Would Avoid Potential Economic Catastrophe.

PDF Available

By Alexander Rudolph*

Question: When is a two trillion-dollar coin the answer to a nation’s fiscal problems? Answer: When the likely alternative is economic catastrophe, and the opportunity presents itself as an immediate and affable solution to the problem at hand.

Normally that question and answer would sound like the sum total of a bad joke, but we live in a time when it may be the basis for the soundest fiscal policy to avoid a potential economic disaster. While the idea of minting a coin worth two trillion dollars may sound facially absurd, once the contemporary criticisms of the congressional debt ceiling are considered alongside the underlying congressional intent behind its implementation, it becomes clear that the law no longer serves the original purpose that it was meant to. Because the federal government should not risk a potential default in order to remain in compliance with a law that no longer serves its original purpose, the most prudent fiscal policy decision the Biden Administration could take to avoid a potential default would be to direct the Secretary of the Treasury to mint such an absurdly valuable coin and deposit it into the Federal Reserve. That fiscal policy decision would lower the national debt to well below the congressional limit, and effectively eliminate the possibility of the government defaulting on its debt.

On September 28th, 2021, Senate Republicans successfully blocked a bill that was intended to fund the Federal government, despite repeated warnings from Treasury Secretary Janet Yellen about the economic calamity that a potential breach of the debt ceiling would create for the country.[1] Senate Minority Leader Mitch McConnell has steadfastly maintained that he does not intend to compromise and authorize any further increase to the debt ceiling during the current legislative session,[2] which would put the United States in a position where it will default on its outstanding debts if the ceiling is not raised by December 3rd of this year.[3] This battle is nothing new, as similar standoffs occurred as recently as 2011 and again in 2013, when Republican lawmakers wanted to stymie the Obama Administration’s policy agenda. As a result, in 2011 the United States lost its pristine AAA credit rating for the first time in the nation’s history, due to a perceived increase to the “political risk” intrinsic to U.S. debt.[4]

But how did it come to this? Despite this recently recurring political trend, the debt ceiling itself was not conceived to be, and generally has not historically been used as, an opportunity for such political brinksmanship. To the contrary, the concept of a Congressional limitation on the total amount of outstanding federal debt was originally created in the Second Liberty Bonds Act of 1917 as a more efficient alternative to having Congress authorize every individual debt that was issued by the federal government.[5]

Thus, in its early days the main function of the debt ceiling was to promote more efficient congressional discussion on the issues of the nation’s debt.[6] Although it was not a subject of partisan contention at its inception, the debt ceiling gradually came to be used by members of both parties as a means to position themselves as being “serious” about balancing the national budget.[7] At the same time however, those opposed to increasing the debt ceiling never truly considered the possibility of allowing a national default.[8]

Despite its sensible origins, contemporary political obstinacy on the issue of financing the nation’s financial obligations has called into question the very wisdom of having an established national debt ceiling to begin with. Only a few other countries have such a limitation, and of those the debt limit is so high that it effectively cannot ever be reached.[9] While the initial legislative intent behind its creation may have been to encourage bipartisan cooperation on the development of national economic policy, in recent practice it has been more aptly described as a “kind of apocalyptic Groundhog Day in American life,” and critics have begun to point out that the logic behind the debt ceiling is intrinsically nonsensical and potentially even unconstitutional.[10]

When the debt ceiling is considered along with the other spending powers granted to Congress, it is easy to see why the policy is criticized. Most laws passed by Congress include funding provisions that pay for their implementation. Because Congress is the constitutional entity responsible for approving spending, laws that have been passed by Congress have implicitly had their related spending already approved, even if the funding is not fully mentioned in the text of the law itself.[11] But the debt ceiling essentially acts as a barrier in this process, as it can prevent the Treasury from following its constitutional directive to pay for Congressional spending that has already been approved.[12] This policy would be sensible if Congress was willing and able to consider the national debt in the context of individual pieces of legislation that still required funding to go into effect. However, contemporary rhetoric on the issue often appears more preoccupied with vague narratives about governmental fiscal responsibility and political reprisal than anything else.[13]

If the underlying legislative intent behind the debt ceiling is not being respected by Congress, then why should the Executive Branch similarly respect that policy and allow a national default to be triggered if that limit is reached?  The common-sense answer seems to be that the Executive Branch should not be held hostage to that limitation, and the issuance of a two trillion-dollar coin would free it from that burden.

The Omnibus Consolidated Appropriations Act of 1997, in part empowers the Treasury Secretary to print platinum coins of any denomination for any reason.[14] Although the idea was originally intended to bolster government funding by pandering to domestic coin collectors; the plain language of the law gives the Treasury Secretary absolute discretion in terms of pricing, issuing, and disseminating any platinum coins that she chooses to mint. If a coin worth a few trillion dollars was then minted, the President could then direct the Chair of the Federal Reserve to accept said coin as payment for outstanding U.S. bonds.[15] The acceptance of those funds would directly lower the outstanding national debt, preventing the debt ceiling from being reached and thereby stave off triggering any default.

While minting a two trillion-dollar coin to lower the national debt may sound like the Treasury is proverbially ‘cooking its own books’ to avoid crossing the debt ceiling threshold, is that really so bad? Many experts seem to believe that keeping the debt ceiling in place would be worse, since as long as it exists the potential of a government default also exists, and the consequences of a default would be catastrophically harmful to the country.[16]

More recently, contemporary debt ceiling critics have begun to argue that it would be unconstitutional in a few distinct ways for the President and the Treasury Secretary to allow the United States to stop payments on its outstanding debt once the debt limit is reached or passed.[17] It is not entirely clear that even if the President were to just direct the Treasury Secretary to simply ignore the debt ceiling, that anyone would have legal standing to challenge her decision to do so.[18] But simply because a purely legalistic solution to a potential default might exist does not make it the ideal solution. Any legal challenge to the mechanics of the debt ceiling runs the risk of igniting a legal battle that could still result in default, which is an unnecessary risk when the law that authorizes the minting of a trillion-dollar coin is clear and incontrovertible.

Critics of the trillion-dollar coin argue that this novel solution could have its own unforeseeable impacts on the economy. The fact the government would in effect be printing more of its own currency to pay for its own debts has led many to speculate that minting this trillion-dollar currency would result in serious inflation impacting the value of the U.S. dollar. However, that criticism is largely speculative, and economists have long been disputed the idea that Quantitative Easing policies like this necessarily result in an increase to the rate of inflation in general.[19] Indeed, the simplest method the Federal Reserve could use to avoid causing inflation would be to sterilize the government’s spending of the coin by selling other assets from its balance sheet on a dollar-for-dollar basis, in which case the effect on the monetary base of the U.S. dollar would be projected to be net to zero.[20] To put it in simpler terms, because the government owes itself money, it can print more money to pay that debt that it owes itself without letting that currency into circulation and impacting the wider economy.[21] When the debt ceiling issue is considered alongside these facts, one must ask if it still serves any beneficial purpose. If the professional consensus is that the debt ceiling limitation itself is nonsensical, self-contradictory, and potentially unconstitutional, then why not take advantage of an existing legal loophole to avoid continually flirting with economic catastrophe? Because the idea sounds silly? That might have been why the Obama Administration rejected it, but that Administration had a more moderate Congress to work with, and the Biden Administration has been told by its Republican opponents that they cannot expect that same luxury this time around.[22]  The trillion-dollar coin proposal may be an absurd solution, but it is an absurd solution to an equally absurd problem. If embracing absurdity can bring financial stability, then it would be absurdly irresponsible for the Biden Administration not to do so.

* J.D. Candidate, Class of 2022, Arizona State University Sandra Day O’Connor College of Law.

[1] Jeff Stein, U.S. default this fall would cost 6 million jobs, wipe out $15 trillion in wealth, study says, Washington Post (Sept. 21, 2021), https://www.washingtonpost.com/us-policy/2021/09/21/debt-ceiling-recession-/.

[2] Joseph Zeballos-Roig, Treasury Secretary Yellen says she wants to get rid of the debt ceiling as McConnell threatens another default standoff in 2 months, Business Insider (Oct. 11, 2021), https://www.businessinsider.com/yellen-debt-ceiling-congress-mcconnell-gop-biden-default-2021-10.

[3] Emily Cochrane, Republicans Block Government Funding, Refusing to Lift Debt Limit, N.Y. Times (Oct. 6, 2021), https://www.nytimes.com/2021/09/27/us/politics/republicans-block-government-funding-bill-debt-limit.html.

[4] John Ditrexie, US Loses AAA Rating at S&P on Concerns Debt Cuts Deficit, Bloomberg (Aug. 6, 2011), https://www.bloomberg.com/news/articles/2011-08-06/u-s-credit-rating-cut-by-s-p-for-first-time-on-deficit-reduction-accord.

[5] CRS. Rep No. RL31967, at 3 (2015). (That law changed the overall congressional perspective regarding issues concerning the national debt away from paying for individual pieces of legislation by incurring new debt and embraced the concept that Congress should prevent the government from exceeding a certain total of outstanding debt that Congress had already determined would be too much).

[6] Linda Kowalcky & Lance T. LeLoup, Congress and the Politics of Statutory Debt Limitation, 53 Public Administration Rev. 14, 16 (1993), https://themonkeycage.org/wp-content/uploads/2011/07/debt-ceiling-leloup-1993.pdf. The debt ceiling used to be the central piece of legislation that enabled congressional debate and hearings to be held on issues involving the national budget, however following the passage of the Budget and Impoundment Act of 1974, the Congressional Budget Office would absorb that responsibility.

[7] Dylan Matthews, How Joe Biden Could End the Debt Ceiling — All By Himself, Vox (Sept. 28, 2021), https://www.vox.com/policy-and-politics/22684328/us-debt-ceiling-government-shutdown-biden-democrats. (As far back as John F. Kennedy and Lyndon B. Johnson’s presidencies, House Republicans were overwhelmingly voting against their opponents’ debt ceiling hikes (Senate Republicans were more prudent). But until the Obama administration, most votes against raising the limit were cheap talk.)

[8] Id. (Voting against an increase allowed politicians (including first-term Sen. Barack Obama) to posture as serious about balancing the budget, but the ultimate passage of the measure was never in jeopardy.)

[9] Tom Risen, Why Do Only US and Denmark Have a Debt Ceiling?, US World & News Report (Oct. 11, 2013), https://www.usnews.com/news/articles/2013/10/11/why-do-only-us-and-denmark-have-a-debt-ceiling. (The United States is the only democracy in the OECD, other than Denmark and Poland, that has a self-imposed legal limit on the amount of debt that it can issue.)

[10] Matthews, supra note 7.

[11] CRS Rep. No. R43389, at 4, (2021). (That understanding that Congress will pay for all of the laws that it passes, is why prior to 1917 and the creation of the aggregate debt ceiling, Congress was required to direct the Treasury to either issue loans or other financial instruments in order to issue that debt during that same legislative session.)

[12] Because the debt ceiling is now assessed on an aggregate rather than an individual policy basis, the federal government often finds itself in a position where, for example, it passes a law that costs $10, authorizes provisions that pay for up to $8 of its costs via taxation, but then faces the separate but related issue of exceeding the national debt ceiling when it attempts to issue debt to recoup those costs.

[13] Jennifer Bendery, Mitch McConnell’s Bogus Argument for Refusing To Raise The Debt Limit, Huffington Post (Sept. 30, 2021), https://www.huffpost.com/entry/mitch-mcconnell-raise-debt limit_n_61547973e4b075408bd1ba9f.

[14] The Omnibus Consolidated Appropriations Act of 1997, H.R. 36101, 104th Cong § 5112 (k), (1997).

[15] Satoshi Kamabayashi, Toss a Coin: A Crackpot Idea to Circumvent America’s Debt Ceiling Gains Currency, The Economist (Jan 12, 2013), https://www.economist.com/finance-and-economics/2013/01/12/toss-a-coin.

[16] Wendy Edelberg &Louise Sheiner, How Worried Should We Be If the Debt Ceiling Isn’t lifted?, Brookings Institute (Sept. 28, 2021), https://www.brookings.edu/blog/up-front/2021/09/28/how-worried-should-we-be-if-the-debt-ceiling-isnt-lifted/.

[17] Neil H. Buchanan, Bargaining in the Shadow of the Debt Ceiling: When Negotiating over Spending and Tax Laws, Congress and the Press and the President Consider the Debt Ceiling a Dead Letter, George Washington University (2013), https://scholarship.law.gwu.edu/faculty_publications/323/.

[18] Jeffery Rosen, How Would the Supreme Court Rule on Obama Raising the Debt Ceiling Himself?, New Republic, (July 28, 2011), https://newrepublic.com/article/92884/supreme-court-obama-debt-ceiling

[19] Lowell R. Ricketts, Quantitative Easing Explained, Fed. Res. Bank of St. Louis (April, 2011), https://files.stlouisfed.org/files/htdocs/pageone-economics/uploads/newsletter/2011/201104.pdf

[20] Kamabayashi, supra note 15.. (The Federal Reserve could ensure that commercial banks do not lend out excess reserves in a few distinct ways, as long as the Federal Reserve pays interest on those bank’s reserves at the Fed, the return commercial banks would receive from them is greater than the banks could receive from alternative uses.)

[21] Dylan Matthews, The Trillion-dollar Coin Scheme, Explained By the Guy Who Invented It, Vox (Oct. 7, 2021), https://www.vox.com/22711346/trillion-dollar-coin-mintthecoin-debt-ceiling-beowulf. (The Federal Reserve is able to do this because around 35% of the outstanding debt that is accounted for in the debt ceiling limitation is already held by the Federal Reserve in the form of US Treasury bonds.)

[22] Ezra Klein, Treasury: We Won’t Mint a Platinum Coin to Sidestep the Debt Ceiling, Wash. Post (Jan. 12, 2013), https://www.washingtonpost.com/news/wonk/wp/2013/01/12/treasury-we-wont-mint-a-platinum-coin-to-sidestep-the-debt-ceiling/.

Estate Tax Changes Make Death and Taxes Even More Certain

PDF Available

By Camerin Ketterling*

Joe Biden’s presidential victory in the 2020 election put estate planning attorneys and their clients in precarious positions. Not only did a Democrat winner threaten the generous tax rates of the Trump era, but Biden’s win also threatens historically high federal estate tax exclusions. These exclusions refer to the maximum value an estate can reach before federal taxes must be paid from the estate before disbursement to beneficiaries.[1] The estate tax exclusion ranged between $1.5 million in 2004 and 2005 to roughly $5 million throughout most of the 2010s.[2] In 2017, former President Donald Trump’s “Tax Cuts and Jobs Act”[3] amended the Internal Revenue Code in part by increasing the exclusion amount from $5.49 million in 2017 to $11.18 million in 2018.[4]

Automatically adjusting for inflation, this year’s estate tax exclusion increased to a massive $11.7 million.[5] As it stands, the current tax code provides that the exclusion will revert to $5 million after the year 2025.[6] However, with a new democratic regime in Washington, estate planning attorneys are preparing for more immediate changes in estate taxes and are concerned that their carefully drafted estate plans may no longer adequately protect their clients’ assets.

President Biden’s “American Families Plan” aims to increase social programs as well as address inequities in the United States tax system, and to accomplish this, the Biden administration needs to raise revenue through increased taxes.[7] Lowering the estate tax exclusion is not the only method the Biden administration has considered for increasing revenue through estate taxes. In May 2021, the Department of the Treasury published a description of proposed tax changes under the Biden administration, one of which being the implementation of capital gains taxes on deceased persons’ estates.[8] Currently, a decedent’s estate does not pay any capital gains taxes on its accrued unrealized gains. Instead, the cost basis of the estate’s assets is “stepped up” to equal the value on the date of death.[9] This means that if the beneficiary sells an inherited asset, she will pay the capital gains tax based on the value of the asset at the time of the decedent’s death as opposed to its original purchase price. This results in a significant loss of revenue for the federal government. With some exclusions, Biden’s proposal would tax those unrealized gains as if the decedent had sold the asset at the time of death.[10]

Although many are worried about the estate tax changes, small business owners who want their children to inherit their businesses represent an area of special concern. These concerns prompted the accounting firm, Ernst & Young, to conduct a study on the possible effects of capital gains taxes being accessed on inherited small businesses.[11] The study noted that many family businesses will probably have liquidity issues as well as issues in valuing the business and the assets of the business, which could get them into trouble with the IRS.[12] More particular concerns center around family farms. Although subject to debate, some argue that those who inherit farmland may have to sell part of the land to pay the estate tax as most of the value is locked into the land itself as opposed to being held in cash reserves.[13] Fears revolving around small businesses are not lost on the current administration. The Department of the Treasury’s proposals on capital gains included a provision explaining, “[p]ayment of tax on the appreciation of certain family-owned and -operated businesses would not be due until the interest in the business is sold or the business ceases to be family-owned and operated.”[14]

Adding to the uncertainty, it is not yet clear which proposed estate tax change will be implemented when all is said and done. The Department of the Treasury’s proposals do not include any mention of adjusting the exclusion amount. On the contrary, in September of 2021, the House Ways and Means Committee issued tax proposals which include lowering the exclusion to $5 million in 2022, but the committee neglected to include any proposal for capital gains adjustments for estate taxes.[15] Although uncertainty remains around how estate taxes will change in the coming year, estate planners and their clients can be confident that their carefully devised plans will likely need adjusting.

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

[1] 26 U.S.C.A § 2010(c).

[2] Estate Tax, IRS, https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax.

[3] Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, 131 Stat. 2054.

[4] Supra note 2.

[5] Id.

[6] Supra note 1.

[7] Press Release, Fact Sheet: The American Families Plan, THE WHITE HOUSE (April 28, 2021), https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/28/fact-sheet-the-american-families-plan/.

[8] US Dep’t of Treasury, General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals (May 2021), https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf#page=69.

[9] 26 U.S.C. § 2031(a).

[10] Supra note 8.

[11] Ernst & Young, Repealing Step-Up of Basis on Inherited Asset: Macroeconomic Impacts and Effects on Illustrative Family Businesses (2021), https://www.fb.org/files/FBETC_Stepped-Up_Basis_Report_2021.

[12] Id.

[13] Glenn Kessler, Ad Exaggerates Potential Impact of Biden Estate Plan, THE WASHINGTON POST (October 19, 2021), https://www.washingtonpost.com/politics/2021/10/19/ad-exaggerates-potential-impact-biden-estate-tax-plan/.

[14] Supra note 8.

[15] H.R. 5376, 117th Cong. (2021).

Should Hotels Be Classified as Single Asset Real Estate?

PDF Available

By Ryan Deutsch*

The recent enactment of the Small Business Reorganization Act of 2019 (“SBRA”) has generated significant discussion in the bankruptcy world.[1] The SBRA created Subchapter V of Chapter 11 to distinguish small business bankruptcies from typical larger Chapter 11 cases. The goal of the SBRA is to streamline the bankruptcy process for Chapter 11 debtors by reducing costs, and offering other enticing benefits.[2] Usually, the SBRA only applies to debtors with secured and unsecured debts of less than $2,726,000.[3] However, the recent passage of the Coronavirus Aid, Relief, and Economic Security Act[4] (“CARES Act”) extended this debt ceiling to $7,500,000.[5] This extension expands the number of debtors qualifying for Subchapter V bankruptcy by a significant magnitude.

Thus, debtors that ordinarily would not qualify for Subchapter V benefits are permitted, at least for a brief period, to capitalize on these benefits. Many small hotel chains are filing for Subchapter V due to the recent downturn in the industry caused by the COVID-19 pandemic. However, a hurdle arises for hotels seeking Subchapter V benefits—escaping single asset real estate (“SARE”) classification. The SARE classification bars debtors from filing under Subchapter V.[6]  The Bankruptcy Code defines Single Asset Real Estate as the following:

The term “single asset real estate” means real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor . . . and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto.[7]

On April 20, 2021, a Florida Bankruptcy court issued an opinion addressing whether a hotel filing for Subchapter V benefits classified as a SARE Debtor.[8] The Debtor, ENKOGS1, LLC, owned and operated a seventy-nine-room hotel.[9] Bankruptcy Judge Karen Jennemann, who presided over the case, noted that although the phrasing of the SARE statutory definition is somewhat puzzling, it essentially requires a debtor to show they do more than just manage the real property.[10]

Courts have interpreted the statute as imposing the following three requirements for characterizing a Debtor’s case as a SARE: (1) the debtor must have real property constituting a single property or project, (2) which generates substantially all of the gross income of the debtor, and (3) on which no substantial business is conducted other than the business of operating the real property and activities thereto.[11]

Most of the SARE debate in this case focused around the third prong of the test. Determining whether an entity qualifies as a SARE is a fact specific analysis. In this case, the Debtor hotel employed fifteen individuals, provided room cleaning services, laundry services, internet/wi-fi services, phone services, parking, complimentary breakfast, a swimming pool, and a fitness center.[12] Judge Jennemann found that this collection of services excluded the hotel from SARE status.

Judge Jennemann’s decision states that “[e]very amenity is designed to attract guests to choose that hotel over other lodging options. And every amenity is essential to the hotel’s financial success.” Additionally, Judge Jennemann reasons, “Even hotels that offer fewer services at no additional charge will require more staff, more cost, and more effort than companies managing vacant land or even an apartment complex where tenants sign a one-year lease and require little additional assistance.”[13]

These statements beg two assumptions. First, that there must be different levels of effort deployed by apartment complex management and hotel management. And second, that hotels are a unique industry in their use of amenities to attract guests for financial success.

Judge Jennemann’s reasons for distinguishing hotels from apartment complexes as a SARE classification are problematic under a critical examination. For instance, the decision reads, “the hotel has no-expectation that short-term, overnight guests, for example, will fix a drippy bathroom sink.”[14] However, residents of apartment complexes are also often not required to fix their sinks and amenities. Instead, tenants often rely on an emergency maintenance technician to come to their apartment. Maintenance Technicians come even in the wee hours of the night. The same comparison can be made for other services the Debtor hotel offers. For example, most apartment complexes provide wi-fi, swimming pools, a fitness center, and study or conference rooms. Especially in the era of COVID-19, apartment complexes are taking extra precautions to clean these facilities often, just as a hotel would require cleaning daily. Thus, apartment complexes use the same amount as effort as hotels by having maintenance on call as frequently as hotels.

Additionally, although tenants often do not check in to apartment complexes after business hours, leasing officers require commendable effort to ensure that each room is ready for move-in and guiding the new tenant through the move-in process. Leasing managers make up for their lack of twenty-four-hour duty for the extra time with the tenant during the check-in process. As already mentioned, if any crisis comes up in the middle of the night, tenants can often call emergency maintenance to solve those issues. Therefore, apartment complexes and hotels are not quite as distinguishable from a managerial effort standpoint or when looking at services provided. 

Furthermore, it is not entirely true that hotels are unique in using amenities to diversify themselves from competition. Apartment complexes often strategically design their facilities to include amenities that diversify their complex from competitors. Thus, apartment complexes like hotels offer unique amenities to attract potential tenants from rival businesses. Whether in the form of a resort-style pool, a bonfire pit, or a unique putting green, apartment complexes advocate to potential tenants on why they are different from the competition. Thus, hotels and apartment complexes are not so different in their desire to provide distinctive amenities to create financial success.

Since the beginning of the COVID-19 pandemic, it is no secret that many industries are losing business compared to pre-pandemic times. Congress recognized this and extended the CARES Act to March of 2022 to provide a window of opportunity for industries to remedy their financial ruin. Hotels are of the industries hit hardest, and while the debt ceiling for filing under Subchapter V remains at the peak of $7,500,000, many hotels will try to use this window as an opportunity to file. In turn, many debtor hotels will face challenges from creditors attempting to classify the hotel as SARE. However, relying on Judge Jennemann’s opinion, it appears hotels will have a jump start in litigating around SARE status.

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

[1] Small Business Reorganization Act of 2019, Pub. L. No. 116-54, 133 Stat. 1079.

[2] James Blake Bailey & Edwin G. Rice, The Small Business Reorganization Act, Tampa Bay Bus. & Wealth, (Feb. 26, 2020), https://tbbwmag.com/2020/02/26/the-small-business-reorganization-act/.

[3] Id.

[4] Coronavirus Aid, Relief, and Economic Security Act, sec. 1113, Pub. L. No. 116-136, 134 Stat. 281, 310 (2020).

[5] President Biden signed the “CARES Extension Act of 2021” to extend the expiration dates of certain bankruptcy provisions, including the debt ceiling for small businesses, until at least Mar. 27, 2022. See COVID-19 Bankruptcy Relief Extension Act of 2021, sec. 2, Pub. L. No. 117-5, 135 Stat. 249.

[6] 11 U.S.C. § 1182(1)(A).

[7] 11 U.S.C. § 101(51B).

[8] In re ENKOGS1, LLC, 626 B.R. 860, 861 (Bankr. M.D. Fla. 2021).

[9] Id.

[10] Id. at 862.

[11] E.g., In re Scotia P. Co., LLC, 508 F.3d 214, 220 (5th Cir. 2007).

[12] Supra note 9, at 863.

[13] Id. at 864.

[14] Id. at 864.

Ushering in the New Era of Campaign Finance Law: A Discussion on Americans for Prosperity Foundation v. Bonta

PDF Available

By Kristen Iteen*

In wake of the January 6th Capitol riots, corporate political donations have once again become the forefront of business and political debate.[1] However, criticism and discussion regarding political donations and public disclosure is not a novel issue. The United States Supreme Court and policymakers have continuously grappled with the topic of campaign finance and public disclosure laws. Nevertheless, after creating well known public disclosure precedent, the Supreme Court has once again moved the goal line for political transparency.

On July 1st, 2021 the Supreme Court handed down the decision Americans for Prosperity Foundation v. Bonta.[2] The main issue in this case was whether California’s disclosure requirement violated charities’ First Amendment rights.[3] Specifically, California required charitable organizations to disclose the identities of major donors to the State Attorney General’s Office.[4] The Americans For Prosperity Foundation and the Thomas More Law Center, two tax-exempt organizations, argued that the mandatory disclosure law violated their First Amendment right of free association because the disclosure requirement would make donors less likely to contribute given the risk of reprisals.[5] However, the State argued that it has an interest in preventing charitable fraud and self-dealing, and that up-front collection of donor information improved the efficiency and efficacy of the Attorney General’s regulatory efforts.[6]

While finding California’s law unconstitutional, the Court created noteworthy precedent regarding the standard of review and what constitutes a valid facial challenge for public disclosure cases in the future.[7] Drawing on former electoral and campaign finance precedent, Chief Justice Roberts writing for the majority, applied exacting scrutiny with a narrow tailoring requirement.[8] Additionally,  while citing the general rule for challenging facially neutral laws in the First Amendment context, Justice Roberts recognized a second type of facial challenge whereby a law may be invalidated as overbroad if a substantial number of its applications are unconstitutional, judged in relation to the statute’s plainly legitimate sweep.[9] Roberts reasoned that California’s law was not narrowly tailored, as there were various alternative mechanisms through which the Attorney General could obtain donor information.[10] Given this lack of tailoring, Roberts found that the law was overbroad and therefore not facially valid.[11]

In arriving at this conclusion, Roberts reasoned that every demand that is not narrowly tailored to achieve a legitimate state interest and that might chill first amendment association fails exacting scrutiny. [12] As Justice Sotomayor pronounced in her dissenting opinion, joined by Justice Breyer and Kagan, the majority’s analysis “marks reporting and disclosure requirements with a bull’s eye.”[13] Hinting that more nonprofits and corporations are likely to combat other disclosure requirements by arguing that the law is not narrowly tailored while simulations showing little or no burden. Sotomayor further argued that, given Roberts’ analysis and creation of precedent, regulated entities who wish to avoid their obligations can now do so by “vaguely waving toward First Amendment privacy concerns.”[14]

It is important to note that while campaign finance reform often arises as a political debate, the organizations presenting amicus briefs in support of the plaintiff-petitioners spanned the ideological spectrum: from the American Civil Liberties Union to the Proposition 8 Legal Defense Fund; from the Council of American-Islamic Relations to the Zionist Organization.  For instance, The ACLU and the NAACP Legal Defense and Education Fund argued that a critical corollary of the freedom to associate is the right to maintain the confidentiality of one’s association.[15] Similarly, Americans For Prosperity Foundation, founded by Republican mega-donors Charles and David Koch, echoed similar sentiments regarding the right to anonymous association.[16]

Overall, it is not a matter of if, but when other organizations and corporations are going to rely on the precedent established by Americans for Property Foundation v. Bonta, to strike down disclosure requirements in other areas of the law such as campaign finance.

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

[1] Andrew Ross Sorkin et al., How Corporate Donations Changed After the Capitol Riot, New York Times (Aug. 19, 2021), https://www.nytimes.com/2021/04/19/business/dealbook/corporate-donations-capitol-riot.html.

[2] Americans For Prosperity Foundation v. Bonta, 141 S.Ct. 2373 (2021).

[3] Id. at 2379.

[4] Id..; Cal. Govt. Code Ann. §12584 (West 2018).

[5] Americans for Prosperity Foundation, 141 S.Ct. at 2380.

[6] Id. at 2381.

[7] Id. at 238.

[8] Id. at 2383.

[9] Americans for Prosperity Foundation, 141 S.Ct. at 2387 (quoting United States v. Stevens, 130 S.Ct. 1577, 1587 (2010)).

[10] Id. at 2387.

[11] Id. at 2389.

[12] Id. at 2387.

[13] Americans for Prosperity Foundation, 141 S.Ct. at 2392 (Sotomayor, J., dissenting).

[14] Id.

[15] Brief Amici Curiae of The American Civil Liberties Union, Inc. at 4, Americans for Prosperity Foundation v. Bonta, 141 S.Ct. 2373 (2021) No. 19-251.

[16] Brief for Petitioner, Americans for Prosperity Foundation v. Bonta, 141 S.Ct. 2373 (2021) No. 19-251.

Epic Games v. Apple: Taking on Big Brother

PDF Available

By Marcel Ruzan*

When Apple Computers released its infamous “1984” commercial during Super Bowl XVIII it was intended to be symbolic of Apple taking on the proverbial “Big Brother” that the established giants of the tech industry represented. Thirty-seven years and over a trillion dollars in revenue later, Apple has gone from the plucky underdog to a technology behemoth that is the most valuable company on the planet.[1] Apple’s success comes from its stellar brand loyalty with consumers, and its consistent, easy-to-use software that people of all ages feel comfortable using.

Part of the comfort comes from the closed nature of the App Store on iOS compared to the open and more blurry nature of Android’s various app stores and downloading methods. The only way to download apps onto the iPhone or iPad is through Apple’s App Store, which is tightly controlled by the folks at Apple, subjecting apps to rigorous checks and scrutiny. For all this work Apple claims to do in exchange for access to the iOS ecosystem and over a billion users, software developers are required to pay what has been unofficially dubbed “The Apple Tax” which is a 30% cut of all in-app sales that occur.[2]

The App Store, the closed nature of iOS, and the Apple Tax have ruffled the feathers of developers for years, but on August 13, 2020, everything was shaken up. Epic Games, the creators of the video game Fortnite, implemented its own in-app payment method within the mobile version of Fortnite that bypassed Apple’s payment system and avoided the Apple Tax.[3]  When Apple removed Fortnite from the App Store, in accordance with the policies that Epic Games agreed to, Epic surprised Apple and retaliated with a sixty-five page lawsuit and released a video called “Nineteen Eighty-Fortnite” which was an obvious parody of Apple’s 1984.[4] It was clear that Epic intended to be removed from the App Store due to the immediacy of the lawsuit and the PR campaign that followed. Epic claimed that Apple violated the Sherman Act and the California Unfair Competition Law because it “unlawfully maintains a total monopoly in the iOS App Distribution Market” and filed ten total claims against Apple.[5]  California’s UCL has a lower bar for remedies that allow claims to be brought on general unfair practices, and does not require a monopoly for courts to act.[6] The California UCL looks for “any unlawful, unfair, or fraudulent business act or practice” and a practice may be deemed unfair even if it is not prohibited by other antitrust laws.[7]

A challenging aspect about claiming Apple is a monopoly, is that Epic needed to define the market that Apple was monopolizing, and ultimately Epic lost that battle. Epic tried and failed to prove that Apple was an illegal monopolist in control of the iOS platform as a whole, and the payment processing system within iOS.[8] The court determined that Epic failed to meet the burden of establishing the relevant market and that “digital mobile gaming transactions” was the correct market for this claim.[9] To meet the burden, Epic needed to show that new rivals are being prevented from entering the defined market and that existing rivals lack the ability to expand their output which could challenge the defendant’s high price.[10] District Court Judge Yvonne Gonzalez Rodgers wrote that Epic overreached in its claims and market definition, and this caused the trial record to not be “as fulsome with respect to antitrust conduct in the relevant markets as it could have been.”[11] At multiple points during her opinion, Judge Yvonne Gonzalez Rodgers points to anti-competitive activities Apple is conducting but states that it does not rise to the level of monopolistic behavior because Epic could not meet the burden.[12] It was noted that Sony, Microsoft, and Nvidia each entering into the mobile gaming submarket in recent years shows that the submarket is dynamic and currently evolving.[13] Judge Yvonne Gonzalez Rodgers was extremely skeptical of Epic’s motivations because she noted that Epic had already penetrated and dominated other video game markets, and also noted that Epic viewed Apple as an impediment to the mobile gaming market.[14]

One of the most controversial App Store policies, which was a part of the lawsuit and the only claim out of the ten that Epic won, is the Anti-Steering provision. This provision prevented developers from not only providing an in-app option to purchase the content off the app but also prevented developers from even telling consumers that the option existed.[15] For example, Netflix could offer subscriptions through the iOS app, be forced to give up that 30% cut, and would be unable to inform their consumers that they could have subscribed through the website. At the time of writing, the Netflix prices are the same on the iOS app as they are on the website, so it does not seem massively detrimental. Yet if Netflix had offered a discount through the website subscription option, they would not be able to tell consumers in the app about those savings. The court determined that the Anti-Steering provision was anticompetitive, and that Apple had no real justification for the behavior.[16] Apple was required to eliminate that provision from the App Store agreement, with the court stating that it will “increase competition, increase transparency, increase consumer choice and information while preserving Apple’s iOS ecosystem which has procompetitive justifications.”[17]

At the conclusion of the trial, Judge Yvonne Gonzalez Rodgers stated that Apple’s enforcement of the Anti-Steering provision was anticompetitive under the California UCL, but concluded that it did not raise Apple to the level of a monopoly under the Sherman Act.[18] The court also determined that Epic had violated its App Store agreement with Apple and was required to pay damages for its breach of contract.[19] While Apple may have walked away from this trial without a monopoly label, the ruling was not exactly an endorsement of its practices. The Pandora’s box may still burst open if future lawsuits bring a more persuasive challenge, or if Epic is successful upon appeal. There is genuine concern that technology companies can spend decades and billions of dollars developing closed software only to be forced to open them up if they become too successful. If consumers flock to a closed system, especially in the current state of consumer data privacy, courts shouldn’t look to further “competition” at the cost of the security and privacy that a closed system provides. Only time, and multiple appeals, will tell if Apple remains the hero of the story, or if it becomes the Big Brother it feared.

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

[1] Jenna Ross, The Biggest Companies in the World in 2021, Visual Capitalist (June 10, 2021), https://www.visualcapitalist.com/the-biggest-companies-in-the-world-in-2021/.

[2] Adi Robertson, A Comprehensive Breakdown of the Epic v. Apple Ruling, The Verge (Sep. 12, 2021), https://www.theverge.com/2021/9/12/22667694/epic-v-apple-trial-fortnite-judge-yvonne-gonzalez-rogers-final-ruling-injunction-breakdown.

[3] Id.

[4] Id.

[5] Epic Games, Inc. v. Apple Inc., No. 4:20-cv-05640-YGR, 2021 U.S. Dist. LEXIS 172303, at *327-28 (N.D. Cal. Sep. 10, 2021).

[6] Cal. Bus. & Prof. Code § 17200.

[7] Epic Games, supra note 5, at *287.

[8] Id. at *11-12.

[9] Id. at *13.

[10] Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1438-39 (9th Cir. 1995).

[11] Epic Games, supra note 5, at *327.

[12] Id. at *13.

[13] Id. at *231.

[14] Id. at *11-12.

[15] Robertson, supra note 2.

[16] Epic Games, supra note 5, at *327.

[17] Id. at *328.

[18] Id.

[19] Id. at *326.