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February 28, 2024

Actions in the Federal Courts – Month in Review Newsletter – February 2024

Fifth Circuit Grants Rehearing on Important Disclosure rule that Will Promote Economic quality in Corporate Board Rooms: Alliance for Fair Board Recruitment v. SEC, No. 21-60626 (5th Cir. Feb. 19, 2024).

The NASDAQ took a major step forward on the social justice front by issuing a new rule that would require each company listed on the exchange to publicly disclose the self-identified gender, racial, and LGBTQ+ status of each member of the company’s board of directors. The rule also requires each listed company to have, or explain why it does not have, at least two members of its board who are diverse, including at least one director who self-identifies as female and at least one director who self-identifies as an underrepresented minority or LGBTQ+.  The SEC approved the rule in August 2021, and it was promptly challenged in the U.S. Court of Appeals for the Fifth Circuit.

The Fifth Circuit rejected all of the challenger’s arguments and upheld the NASDAQ’s rule.  It ruled that the constitutional arguments did not apply because the NASDAQ is not a state actor; that the SEC had the authority to approve the rule; and that the SEC’s approval was neither arbitrary nor capricious.

However, the industry challenger quickly filed a petition for rehearing en banc, which is a request that all of the judges serving on the Circuit Court reconsider the issues presented.   Unfortunately, on February 19, 2024, the Court granted the petition and set a new briefing schedule.  That’s an ominous sign because the Fifth Circuit is known for issuing decisions that often side with industry and against regulators.

Supreme Court Declines To Review Second Circuit Ruling Finding That Syndicated Loans Are Not Securities:  Kirschner v. JP Morgan Chase Bank, N.A., No. 23-670 (Feb. 20, 2024). 

On August 24, 2023, the U.S. Court of Appeals for the Second Circuit ruled that syndicated loans are not securities, thereby dismissing investor claims for violations of the securities laws.  The claims arose after JP Morgan and other banks arranged a $1.775 billion loan to Millennium Health LLC and then syndicated or subdivided the loan via notes to over 400 mutual funds, hedge funds, pension funds, and other investors.  The notes then traded on secondary markets using standardized terms, just like stocks or bonds.  After the loan was issued, Millennium declared bankruptcy.

Nevertheless, the Second Circuit found that the notes were not securities under the Supreme Court’s Reves test, largely because the purchasers included supposedly sophisticated institutional investors.  The Second Circuit’s ruling means that investors in syndicated loan transactions are left without the protections of the securities laws.  The syndicated loan market has grown to $3 trillion, yet it is lightly regulated, despite the similarities between syndicated loans and other instruments that are treated as securities.  The failure to extend the protections of the securities laws to investors in syndicated loans leaves that significant market more vulnerable to fraud and abuse.

Federal Court Dismisses Racketeering Class Action Lawsuit Against Former Credit Suisse Officials Responsible For Bank Collapse And Loss Of Shareholder Value:  Stevenson v. Thornburgh, No. 1:23-CV-04458 (S.D.N.Y., FEB. 2024).   

After operating for more than 100 years, Swiss bank Credit Suisse precipitously collapsed in March 2023. In a shareholder class action brought against dozens of former Credit Suisse officials and the auditor KPMG, a group of shareholder plaintiffs alleged that the defendants had allowed 20 years of “continuous mismanagement,” leading to the failure of Credit Suisse and its subsequent takeover by UBS. According to the plaintiffs, the Credit Suisse collapse was “one of the worst instances of financial and operational misconduct and mismanagement of a large public financial company in history.” As a result, the plaintiffs alleged, this misconduct caused the price of Credit Suisse’s American depositary shares to plunge from $33.84 in 2013 to $2.01 on March 17, 2023.

In a 92-page decision released on Thursday, February 14, U.S. District Judge Colleen McMahon of the Southern District of New York held that accusations that the defendants allowed the improper “plunder” of Credit Suisse did not support the plaintiffs’ racketeering claims. The court held that the plaintiffs could not satisfy the demanding requirements of the RICO statute, largely because the allegations did not sufficiently explain how the connections between the defendants amounted to an unlawful enterprise under RICO.

The decision could make it more challenging for similarly situated shareholder plaintiffs to bring RICO claims against corporate defendants for alleged racketeering and misconduct. Moreover, the dismissal of the Swiss claim on the doctrine of forum non conveniens could make it more difficult for plaintiffs to seek justice against international firms in the United States.  In any event, one result of the decision is that shareholders undoubtedly harmed by the bank’s extraordinary spree of crimes and other unlawful conduct cannot recover their damages.



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