Blog
FTX Creditor Litigation Parallels to Enron/WorldCom
BY: Evan Paul, RBFL Editor
The collapse of cryptocurrency exchange FTX Trading Ltd. (“FTX”) due to its co-mingling of assets with Alameda Research LLC (“Alameda”) has resulted in a plethora of litigation by those seeking recovery of lost assets. On the more traditional end, this includes bankruptcy proceedings, civil actions by the Securities and Exchange Commission, the Commodities Futures Trading Commission, and creditor lawsuits against FTX executives individually. Additionally, a number of lawsuits have been filed by FTX creditors against third parties who are alleged to have perpetuated or facilitated the ongoing fraud at FTX. These include claims by crypto investors against Alameda, FTX’s two auditors, and a bank the two companies had a relationship with. These latter sorts of suits have been characterized as reminiscent of those after the collapses of Enron and WorldCom in that recovery is sought from third parties who enabled the fraud—there also auditors and banks. In the case of FTX, this group of alleged enablers also includes celebrity endorsers and corporate sponsors.
A handful of lawsuits in the Southern District of Florida have targeted not only FTX executives individually but also celebrities or corporate sponsors who endorsed the cryptocurrency exchange, including the Golden State Warriors and a number of professional athletes. These cases allege civil conspiracy as well as violations of the Florida Securities and Investor Protection Act and the Florida Deceptive and Unfair Trade Practices Act.
Two lawsuits in the Northern District of California name as defendants—in addition to FTX and Alameda executives individually, and in one case endorsers like the Golden State Warriors—FTX’s auditors, Armanino LLP (“Armanino”) and Prager Metis CPAs, LLC (“Prager Metis”). The plaintiffs allege that the auditors facilitated and covered up the ongoing fraud at FTX in the face of obvious red flags. These suits are similar to claims against Arthur Andersen LLP in the wake of the collapses of Enron and WorldCom. Arthur Andersen was the auditor for both companies and in both cases was alleged to have facilitated the underlying fraud. The accounting firm entered into substantial settlements with shareholder plaintiffs in both cases.
A final set of cases in the Southern District of California have also been filed against Silvergate Bank and Silvergate Capital Corporation (“Silvergate”), which are alleged to have aided and abetted FTX’s fraud by assisting in the commingling of funds with Alameda. These suits are reminiscent of the lawsuits against various banks involved in the Enron and WorldCom scandals, many of which ended up settling—in the case of Citigroup and J.P. Morgan, to the tune of billions of dollars.
While many of these cases against third parties are still in the early stages, the settlements by auditors and banks in the wake of the Enron and WorldCom scandals likely bode well for claims by FTX creditors against Armanino, Prager Metis, and Silvergate.
Key Sources
Justin Wise, FTX Customers Take Enron, WorldCom Path in Legal Fight for Cash, Bloomberg Law, January 6, 2023, https://news.bloomberglaw.com/business-and-practice/ftx-customers-take-enron-worldcom-path-in-legal-fight-for-cash.
Petitioner’s Motion for Transfer of Related Actions to the Southern District of Florida, ECF No. 1, at 2 n.1, In re: FTX Cryptocurrency Exchange Collapse Litigation, No. 3076 (J.P.M.L. Feb. 10, 2023).
Carolina Bolado, FTX Leader, Sports Stars Hit With Investor Suit Over Collapse, Law360, Nov. 16, 2022, https://www.law360.com/articles/1550002?scroll=1&related=1.
Complaint, ECF No. 1, v. Bankman-Fried et al., No. 3:22-cv-07444-JSC (N.D. Cal. Nov. 3, 2022).
Complaint, ECF No. 1, Gonzalez et al. v. Silvergate Bank et. al., No. 3:22-cv-1981 (S.D. Cal. Dec 14, 2022).
Scott Siamas, Primary Securities Fraud Liability for Secondary Actors: Revisiting Central Bank of Denver in the Wake of Enron, Worldcom, and Arthur Andersen, 37 C. Davis L. Rev. 895, 921 (2004).
Vaughn K. Reynolds, The Citigroup and J.P. Morgan Chase Enron Settlements: The Impact on the Financial Industry, 8 N.C. Banking Inst. 247 (2004), http://scholarship.law.unc.edu/ncbi/vol8/iss1/12.
Jeffrey A. Barrack, Auditor Responsibility Under the Federal Securities Laws: A Note from the Worldcom Securities Litigation, 29 J. Trial Advoc. 1 (2005)
Nicola White, FTX Collapse Puts Auditors in Crosshairs of Clients, Regulators, Bloomberg Tax, Nov. 30, 2022, https://news.bloombergtax.com/financial-accounting/ftx-collapse-puts-auditors-in-crosshairs-of-clients-regulator
Did the Bored Ape Yacht Club set sail? What happened to the NFT Craze?
BY: Emily West, RBFL Student Editor
In 2020 and 2021, non-fungible tokens (“NFTs”) took the internet and pop culture by storm; Yuga Labs launched the Bored Ape Yacht Club[1], Mike Winkelmann (aka “Beeple”) sold a single NFT digital artwork for $69M, and NBA Top Shot launched their NFT marketplace for basketball video clips. Early on, NFTs were known for being little more than digital art and social media profile pictures that had no other practical or tangible value. Today, however, it appears that the market expects much more from NFT creators, extending far beyond these digital art origins. Although the characteristic of digital art is still an essential element of the value of many NFTs on the market, they generally have adapted to include access to digital communities and have other value-driven assets.
Today, the Bored Ape Yacht Club is still a blue chip NFT[2] and they continue to mint new iterations of their traditional ape profile picture. However, they are also a leader in developing these utility driven creations. For example, Bored Ape launched the recent Dookey Dash extravaganza where hopeful minters competed in an online game for weeks to compete for their minting order. The event brought in 25,000 individuals who competed for the mint.[3]
The technology behind NFTs also has potential to reach far beyond its profile picture starting place. For example, NFTs can of course be one-of-a-kind art as well as in game experiences, a method to sell exclusive musical content, a way to buy/sell/trade virtual real estate, and can revolutionize the way that individuals store and verify personal information.
Before NFTs and the technology behind them can reach their full use and possibilities, there will likely need to be some sort of federal regulation. Given the vast range of ways NFTs and the blockchain can impact everyday life, such regulation could come from the SEC or another regulatory agency. There are certainly tax implications as well as privacy and security implications, family law and estate planning implications and countless others. Thus, regardless of the future regulations or developments in the technology, we can expect to continue hearing about NFTs and the blockchain into the future.
[1] Daryl Loh, From 0.08 To 769 ETH: Exploring The History And Rise Of The Bored Apes, Chain Debrief (March 12, 2022), https://chaindebrief.com/bored-ape-yacht-club-history-rise-of-bayc/.
[2] Jason Nelson, What Is a Blue Chip NFT, Decrypt (Nov 25, 2022), https://decrypt.co/resources/what-is-a-blue-chip-nft.
[3] https://finance.yahoo.com/news/fortnite-esports-star-wins-bored-022715592.html
AI Revenue Management and Antitrust Implications
BY: Rob Stigile
Following the publication of a blockbuster report detailing the use of apartment rent pricing software by some of the nation’s largest multifamily landlords, dozens of plaintiffs have filed suit alleging that use of the software violates section of the Sherman Act. These lawsuits may serve as an invitation for judicial reconsideration of certain antitrust concepts to better align with issues emerging from the 21st Century economy.
Although several of the complaints draw comparisons to pricing software used by the airline industry in the 1990s, the current litigation perhaps better resembles more recent litigation involving the ride-sharing app developer Uber Technologies, Inc. The plaintiffs in the Uber action failed to demonstrate how the app’s services constituted an agreement between competitors that violated antitrust regulations – a challenge that may sink these new lawsuits alleging landlord price fixing.
The software at the heart of this litigation – originally called YieldStar and later rebranded as AI Revenue Management – was developed by property management service provider RealPage, Inc. As detailed in extensive reporting by ProPublica, YieldStar collects a raft of information from its clients detailing real-time apartment leasing activity. It then calculates suggested asking rents and other lease conditions for individual apartments at properties that use the YieldStar service. As a result, property managers have described how the YieldStar recommendations led them to aggressively push asking rents and absorb higher-than-usual vacancy rates, resulting in dramatic increases in revenue.
The plaintiffs in the pending lawsuits claim, in some form or another, that this scheme amounts to unlawful collusion between ostensible market competitors to fix prices and otherwise distort the market for rental apartments. For their part, RealPage maintains that YieldStar “uses aggregated market data from a variety of sources in a legally compliant manner.”
Before being hired as RealPage’s principal scientist in 2004 to develop YieldStar, Jeffrey Roper helped write the price-fixing software that landed several large airlines in trouble. This program allowed airlines to communicate with one another about potential changes to their airfares and service schedules, which may have led to billions in inflated ticket prices.
Despite having the same architect, it does not yet appear that the YieldStar platform facilitates this sort of competitor communication, a potential infirmity that might sink the RealPage litigation in the same way the Uber lawsuit was tossed. As with the Uber lawsuit, the RealPage plaintiffs essentially argue the defendants’ actions constitute a hub-and-spoke conspiracy, by which the landlords (the “spokes”) feed information to RealPage (the “hub”), which then fixes prices for all participants in the cartel. However, without direct communication between the spokes (the “rim” of the wheel), courts have declined to find any violation of antitrust laws.
As highlighted by the failed Uber lawsuit and these current complaints against RealPage, the 21st Century data and algorithm-driven service economy falls into an antitrust void that has been recent source of concern among legal scholars. Non-public market information can be accumulated by a third-party service provider and used to benefit participating competitors, who can insulate themselves by not directly coordinating business activity. Without new legislation, consumers will need to rely on the courts to reconsider their definition of collusive activity in this new economy.
Sources:
Heather Vogell, Rent Going Up? One Company’s Algorithm Could Be Why, ProPublica (Oct. 15, 2022), https://www.propublica.org/article/yieldstar-rent-increase-realpage-rent.
See Complaint, Alvarez et al. v. RealPage, Inc. et al., No. 22-cv-01617 (W.D. Wash. Nov. 10, 2022) for an example of the lawsuits pending against RealPage.
Organisation for Economic Co-operation and Development, Hub-and-Spoke Arrangements – Note by the United States 2 (2019) (describing hub-and-spoke collusion under United States antitrust law).
Cary Coglianese & Alicia Lai, Antitrust by Algorithm, 2 Stanford Computational Antitrust J., 2022, at 5 (describing how the Uber lawsuit failed for lack of a “rim” to the hub-and-spoke conspiracy).
“30 Under 30” Pipeline to Prison
BY: Katie Negron, RBFL Student Editor
The Forbes 30 Under 30 List has grown to showcase and introduce people making substantial differences and innovations in their given community. Broken into several categories including tech, finance, medical, entertainment, and more, the list has evolved to become a notable achievement for many younger entrepreneurs. Over the course of the list’s development, an interesting pattern has surfaced that shows the connection between alumni of the list and their propensity to commit white collar crimes.
Elizabeth Holmes, Sam Bankman-Fried, Carline Ellison, and Martin Shkreli are some of the most infamous examples of this pattern. Each is a young, successful entrepreneur who experienced radical success and inevitable downfall. Why is there this “pipeline to prison” phenomenon stemming from the list? Perhaps it is attributable to the founders’ personalities, the industries they occupy, or most likely, the nature of their large, private companies that provide ample opportunities for fraud. The list also showcases a different trend from years past where infamous white collar criminals tended to be older, white men. Many of the notable names today are younger entrepreneurs of different backgrounds.
When creating their businesses, many of the common issues began and grew in the early stage of the company while they were raising funds and building their brands. Given that companies are staying private longer, rather than aspiring to IPOs early on, that provides ample time and opportunity for many of the young and eager entrepreneurs to take advantage of the circumstances. The private nature means a minimal amount of oversight as compared to public companies.
Private equity and startups have grown together to create a peculiar relationship. There is an interesting distinction, or lack thereof, in this realm of business where it is difficult to determine lying versus selling an idea. To get investors and funding, many entrepreneurs sell their idea with the hopes of generating funding to make them come to fruition. The major question is, where is the line drawn between lying to investors about unfeasible goals and truly just needing funding for their idea to become fruitful for them and investors?
While it is never the intention to stop the flow of innovation and creation of companies, steps should be taken to try and deter this kind of fraud from taking place while companies are in this private stage. This phenomenon is on the radar of regulatory agencies as they try to find the best solutions going forward to avoid the next possible Elizabeth Holmes.
SOURCES:
Lisa Myers, A Brief History of White-Collar Crime, Northwest Career College Blog (Oct. 5. 2020),
https://www.northwestcareercollege.edu/blog/a-brief-history-of-white-collar-crime/.
Parmida Enkeshafi, Universalizing Fraud, 18 Duke J. of Const. L. & Pub. Pol’y Sidebar 47 (2022).
Stonks.com (@Stonks_dot_com), Twitter (Nov. 29, 2022, 2:09 PM), https://twitter.com/Stonks_dot_com/status/1597669014246785024.
Timothy Smith, FTX: An Overview of the Exchange and Its Collapse, Investopedia (Jan. 5, 2023),
https://www.investopedia.com/ftx-exchange-5200842.
White - Collar Crime, Cornell Law School, https://www.law.cornell.edu/wex/white-collar_crime#:~:text=The%20Commerce%20Clause%20of%20the,to%20regulate%20white%2Dcollar%20crime (last visited Feb. 9, 2023).
The success of B Corps: Funding, Profitability, and Public Perception
BY: Aster Cheng, RBFL Editor
The priorities of consumers are changing––as consumers place more weight on the environmental and social impacts of companies in their decision making, more companies are choosing to become B Corporations (“B Corps”).[1] B Corps are for-profit companies who have met a standard of ESG factors established by B Lab, a nonprofit organization.[2]
To be considered a B Corp, companies must (1) pass an initial assessment to demonstrate “high social and environmental performance”; (2) alter its corporate governance structure to be accountable to all stakeholders, not merely shareholders; and (3) allow their performance evaluations to be publicly available on B Lab’s website. [3]
B Corps’ costs include the certification fee, annual membership fees, and administrative costs for B Lab requirements like preparing social impact reports.[4] However, some B Corps view these costs to be necessary, citing the community as a benefit of being certified[5] due to additional business opportunities[6] and discounts through B Lab partnerships.[7]
B Corps are still new and whether they are more profitable than companies who are not certified B Corps remains unanswered.[8] However, trends have shown that consumers favor companies and investments within the ESG space.[9] McKinsey researchers have found that companies in the top quartile for gender diversity are 15 percent more likely to perform above medians, and those that rank in the top quartile for racial and ethnic diversity are 35 percent more likely to perform above medians.[10]
Consumers are also increasingly mindful of whether a company’s values align with their own before spending their money.[11] Ben & Jerry’s, a subsidiary of a Certified B Corp (Unilever), claims their own company’s research shows that consumers are 2.5 times more loyal to companies that integrate values-driven action throughout their supply chains.[12]
Corporations are increasingly taking on the persona of a responsible citizen, while performing practices that prioritize maximizing their profits.[13] Several certified B Corps have been exposed for predatory practices within their supply chain, yet none of their certifications have been revoked. Nespresso, a certified B Corp despite being a subsidiary of Nestlé, has been involved in a string of human rights violations like wage theft and child labor.[14] Another B Corp, Danone, dropped the contracts of 89 small organic farms across New York and New England.[15] B Lab reviewed the situation and found that this was not in violation of B Corp standards.[16]
While B Lab is the first to take on this level of a project, there are still obvious improvements needed. As the trend of conscious consumerism grows, companies have realized there is an upside to being a B Corp. It is up to B Lab to enforce and revise the standards they have set to ensure that companies are focused on their ethical mission rather than what the façade of prioritizing ethics can do for its profits. Without enforcement or regulation, these standards mean little and the B Corp label is nothing more than a greenwashed marketing ploy.
[1] B Corp, https://www.bcorporation.net/en-us/ (last visited Nov. 29, 2022) [https://perma.cc/7TXA-LWT3].
[2] Id. (explaining the goals and nature of B Corps).
[3]B Lab, B Impact Assessment, https://www.bcorporation.net/en-us/programs-and-tools/b-impact-assessment (last visited Oct. 16, 2022) (displaying B Lab’s impact assessment which is filled out by all prospective B Corporations during initial certification and for all recertification every two years) [https://perma.cc/N4VV-6KRZ].
[4] Melanie Broome, “I Want to be a B Corp”: What This Means and What to Consider Before Stepping Into the World of Benefit Corporations, Davis Wright Tremaine LLP (Jul. 6, 2020), https://www.dwt.com/blogs/startup-law-blog/2020/07/i-want-to-be-a-b-corp. (“There are additional costs and (potentially significant) administrative burdens associated with PBCs and Certified B Corps. PBCs and Certified B Corps have to prepare social purpose reports. This will likely take time to create, thereby adding costs to the company’s bottom line. Additionally, Certified B Corps are required to pay annual membership fees based on the B Corp’s annual sales.”) [https://perma.cc/W6AD-87ZL].
[5] See Alex Buerkle, Kylee Chang, and Max Storto, Just Good Business: An Investor’s Guide to B Corp, Yale Ctr. for Bus. and the Env’t, (Sept. 14, 2022) https://cbey.yale.edu/sites/default/files/Just%20Good%20Business_An%20Investor%27s%20Guide%20to%20B%20Corps_March%202018.pdf (“Many Certified B Corps cite the B Corp community as a primary benefit of becoming certified.”).
[6] See, e.g., Press Release, Brewbound, New Belgium Brewing to Release Second Ben & Jerry’s Ice Cream-Inspired Beer, (Jun. 20, 2016), https://www.brewbound.com/news/new-belgium-brewing-release-second-ben-jerrys-ice-cream-inspired-beer/ [https://perma.cc/2BB5-RD4W] (elaborating on the release of new ice cream flavors); see also Press Release, Newswise, B-Corporations Unite: Green Home Store New Living Partners with Savvy Rest Organic, (Oct. 30, 2013), https://www.newswise.com/articles/b-corporations-unite [https://perma.cc/F9RV-4WN9] (explaining new partnership between Green Home Store and Savvy Rest Organic, as well as its implications for B Corps).
[7] See Buerkle et al., supra note 9, at 33 (“In addition, Certified B Corps gain access to discounts through B Lab-cultivated partnerships. These savings can support cash-strapped entrepreneurs and often exceed B Corp licensing fees in value. For example, Salesforce offers up to 20 percent off its Client Relationship Manager (CRM), Intuit offers free Quickbooks licenses, and Inspire Commerce and NetSuite offer discounts on their credit card processing and enterprise software, respectively.”).
[8] See id. at 22 (elaborating on current feelings in public and legal society about trajectory of B Corps).
[9] See Hale, infra note 30 (displaying growth in ESG investments).
[10] Vivian Hunt, Dennis Layton, and Sara Prince, Why Diversity Matters, McKinsey & Company (Jan. 2015), https://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters (“Companies in the top quartile for racial and ethnic diversity are 35 percent more likely to have financial returns above their respective national industry medians. Companies in the top quartile for gender diversity are 15 percent more likely to have financial returns above their respective national industry medians”).
[11] Tara Gallagher, Letting Your Mission Drive Success: Lessons from Ben & Jerry’s and Seventh Generation, Sustainable Brands (2014), https://sustainablebrands.com/read/organizational-change/letting-your-mission-drive-success-lessons-from-ben-jerry-s-and-seventh-generation (“In fact, consumers that are aware of Ben & Jerry’s values are 2.5 times more loyal. To account for this, Miller states: “Ben & Jerry’s is authentic. Standing for something in a world where people so often stand for nothing is incredibly powerful.”) [https://perma.cc/2V8M-4Q8F].
[12] Id.
[13] Suntae Kim, Matthew J. Karlesky, Christopher G. Myers, and Todd Schifeling, Why Companies Are Becoming B Corporations, Harvard Business Review (Jun. 17, 2016), https://hbr.org/2016/06/why-companies-are-becoming-b-corporations [https://perma.cc/R745-89VG] (proclaiming that corporations are starting to change their attitude and public image, elaborating on the effects of this change).
[14] See Daniel Camargos, Labor inspectors fine leader of cooperative that supplies coffee to Nespresso and Starbucks, Repórter Brasil, (Sep. 9, 2021), https://reporterbrasil.org.br/2021/09/labour-inspectors-fine-leader-of-cooperative-that-supplies-coffee-to-nespresso-and-starbucks/ (explaining the issues and human rights violations found with the sourcing of coffee to Starbuck and Nespresso); see also Jamie Doward, Children as young as eight picked coffee beans on farms supplying Starbucks, The Guardian, (Mar. 1, 2020), https://www.theguardian.com/business/2020/mar/01/children-work-for-pittance-to-pick-coffee-beans-used-by-starbucks-and-nespresso. [https://perma.cc/5FK5-W5D6] (elaborating on the potential human rights violations undertaken by coffee producers who also happen to be B Corps).
[15] Lisa Held, Losing Danone Contracts Compounds the Dairy Crisis for Small Farms in the Northeast, Civil Eats, (Nov. 8, 2021), https://civileats.com/2021/11/08/losing-danone-contract-compounds-dairy-crisis-small-farms-northeast/. [https://perma.cc/Y2D8-V933] (explaining the impact of Danone’s decision to cut ties with many dairy farmers).
[16] Max Goldberg, With Danone Cutting the Contracts of 89 Small Organic Dairy Farmers, B Corp has Made a Decisions About the Company’s Certification Status, (Oct 27, 2021), https://organicinsider.com/newsletter/b-corp-danone-certification-status-cut-contracts-89-organic-dairy-farmers-new-york-new-england-your-weekly-organic-insider/. [https://perma.cc/WN42-59MU] (elaborating on the decision-making process of B lab and their application of that process to the issue of dairy farmers cut off by Danone).
The Use of Cryptocurrency to evade OFAC Sanctions
By: Ryan Connolly, RBFL Student Editor
On August 8, 2022, OFAC sanctioned the cryptocurrency mixer Tornado Cash. OFAC alleges that Tornado Cash has been used, through its transaction anonymizing services, to launder over $7 billion worth of cryptocurrency since 2019. Among the most notable launderers was Lazarus Group, a North Korean state-sponsored hacking group who had recently committed the largest known virtual currency heist to date. As OFAC steps up its sanctions regime against Russia, Treasury officials are keenly focused on cryptocurrency mixers and how they might be used to evade sanctions and support the Russian war effort. At the same time, cryptocurrency advocates, such as Coinbase, argue that the sanctioning of mixers like Tornado Cash is equivalent to banning highways because criminals might use them to flee law enforcement.
Recently, OFAC’s sanctioning of individuals and entities that utilize cryptocurrency to launder money has been blessed by the judiciary. In affirming the DOJ’s move to prosecute an individual accused of using cryptocurrency to evade OFAC sanctions, Magistrate Judge for the District of Columbia, Zia Faruqui, bluntly stated: “Issue One: virtual currency is untraceable? WRONG” and “Issue Two: sanctions do not apply to virtual currency? WRONG.” Thus, OFAC appears to have the go ahead to continue their crackdown on the usage of cryptocurrency to evade sanctions.
As of March 30, 2023, there are over 23,000 different cryptocurrencies in circulation. With established financial institutions like JPMorgan Chase providing their customers access to cryptocurrency funds, and cryptocurrency exchange Coinbase boasting a $15 billion dollar market cap as of March 2023, there is clearly market demand for licit cryptocurrency services.
With no outright ban on cryptocurrency around the corner, OFAC has opted to provide guidance for entities that transact in cryptocurrency or provide crypto related services. Although there is strict liability for the violation of OFAC sanctions, penalties may be reduced based on mitigating factors, such as adherence to OFAC recommendations.
OFAC published guidance in October of 2021 that focuses on five key principles: (1) management commitment, (2) risk assessment, (3) internal controls, (4) testing and auditing, and (5) training. Safety measures that go to these principles include the use of geolocation tools and the implementation of know-your-customer procedures to prevent facilitating transactions involving sanctioned countries or persons. Entities or individuals that touch cryptocurrency would be wise to ensure they have a compliance program in place that adequately addresses cryptocurrency specific risks, such as its use for sanctions evasion. As such, an entity’s investment in their compliance program should scale proportionately with the riskiness of the activities they engage in, with cryptocurrency mixing certainly qualifying as a high-risk activity. With neither OFAC sanctions nor cryptocurrency likely to diminish in importance, organizations who touch cryptocurrency should prioritize beefing up their compliance programs such that they meet OFAC’s recommendations, lest they incur civil and or criminal penalties for violating sanctions.
Sources:
Treas. Dep’t, U.S. Treasury Sanctions Notorious Virtual Currency Mixer Tornado Cash, Treas. Dep’t (Aug. 8, 2022), https://home.treasury.gov/news/press-releases/jy0916 [https://perma.cc/JRK5-96D5].
Treas. Dep’t, U.S. Treasury Issues First-Ever Sanctions on a Virtual Currency Mixer, Targets DPRK Cyber Threats, Treas. Dep’t (May 6, 2022), https://home.treasury.gov/news/press-releases/jy0768 [https://perma.cc/BDY5-NJ2K].
Kate Rooney, Coinbase bankrolls lawsuit against Treasury Department following Tornado Cash sanctions, CNBC, https://www.cnbc.com/2022/09/08/coinbase-bankrolls-suit-against-treasury-department-following-tornado-cash-sanctions.html (Sep. 8, 2022) [https://perma.cc/EFE4-UZFP].
Treas. Dep’t, BASIC INFORMATION ON OFAC AND SANCTIONS, https://home.treasury.gov/policy-issues/financial-sanctions/faqs/topic/1501, (Sep. 10, 2002) [https://perma.cc/8CQH-NY25].
Sohini Podder et al., JPMorgan to give all wealth clients access to crypto funds - Business Insider, Reuters (July 22, 2022), https://www.reuters.com/business/finance/jpmorgan-give-all-wealth-clients-access-crypto-funds-business-insider-2021-07-22/#:~:text=July%2022%20(Reuters)%20%2D%20JPMorgan,reported%20on%20Thursday%2C%20citing%20sources [https://perma.cc/7N2P-3GQN].
In re: Criminal Complaint, No. 22-mj-0067, 2022 WL 1573361 (D.D.C. May 12, 2022).
OFAC, Sanctions Compliance Guidance for Virtual Currency, OFAC, https://home.treasury.gov/system/files/126/virtual_currency_guidance_brochure.pdf, (Oct. 2021) [https://perma.cc/Z7BU-6HTY].
DAOs: The Future of Business Organization?
BY: Marina Phillips, RBFL Editor
Decentralized Autonomous Organizations (“DAOs”) are becoming an increasingly popular means of organizing people from around the world for a common purpose. For those who are unfamiliar with the term, DAOs are essentially organizations or entities formed in blockchain and can be formed for both for-profit or not-for-profit purposes. DAOs are governed by smart contracts which are self-executing codes written into the blockchain where the DAO is formed and which represent the operating agreement between the members of the DAO. Once the members agree on how the DAO will operate, the smart contract executes the governance actions coded within it automatically. One reason DAOs have increased exponentially in popularity is the decentralized nature of the entity. This essentially contributes to more transparency and collaboration among members. Without a central governing group like those in traditional organizational entities, the members collectively make governance decisions so that they all can benefit as a group and individually. However, DAOs come with many questions about liability and who bears the responsibility should something go wrong, taxes, and regulations.
As DAOs become a go-to organizational structure for many, legislatures and regulatory agencies around the world are scrambling to figure out how to bring legal certainty to DAOs and their members. Outside of the U.S., countries like Switzerland, the Cayman Islands, Bulgaria, and Malta are passing their own DAO-friendly legislation that encourages DAOs to form in their respective countries. Malta stands out in particular due to its unique approach in creating a new type of business entity called a “Technology Arrangement” that operates similarly to a limited company in Malta. Additionally, Malta has created a new agency, the Digital Innovation Authority, to specifically regulate blockchain businesses. This novel approach does not try to fit DAOs into existing legal frameworks but instead considers the unique features of DAOs that don’t necessarily correlate with traditional entities. By creating a new regulatory agency to focus exclusively on blockchain businesses and organizations, Malta is setting itself up to better adjust to new innovations and pass regulations that fit not only DAOs but any new blockchain businesses that may evolve in the future.
In the U.S., Wyoming became the first state to pass legislation designating legal entity status to DAOs by creating a DAO LLC statute. Many states are following in Wyoming’s footsteps and passing statutes of their own that would give LLC status to DAOs. However, by trying to fit a DAO into an LLC framework, states are ignoring the unique features of DAOs like decentralization and anonymity of members that give rise to issues not contemplated by traditional statutes. Instead, states should focus on creating task forces, departments, or agencies that specifically focus on blockchain organizations and can suggest ways to tweak the existing entity structures to better fit the make-up of a DAO while also bringing it within a legal framework where states can better protect the members of DAOs from liability. In giving DAOs a way to form as a legal entity and creating regulations that are DAO-friendly, legislatures can establish hubs for technological innovation within their states that will bolster that state’s economy overall.
Sources:
David Gogel, Bianca Kremer, Aiden Slavin & Kevin Werbach, Decentralized Autonomous Organizations: Beyond the Hype 7 (World Econ. F. 2022).
Geoffrey See et al., Are ‘Decentralized Autonomous Organizations’ the business structure of the future?, World Econ. F. (June 23, 2022), https://www.weforum.org/agenda/2022/06/are-dao-the-business-structures-of-the-future/.
A.J. Zottola, Channing D. Gatewood and Sydney M. West, Venable LLP, Smart Contracts, LexisNexis (Oct. 3, 2022), https://plus.lexis.com/document/?pdmfid=1530671&crid=664800f4-3052-4344-b355-d4278121383b&pddocfullpath=%2Fshared%2Fdocument%2Fanalytical-materials%2Furn%3AcontentItem%3A6691-6BB1-JF1Y-B49C-00000-00&pdworkfolderid=dac7bddd-8318-42d4-b95f-990fbdec4239&pdopendocfromfolder=true&prid=2cb69f13-b06e-4c57-85ed-6760bc758a24&ecomp=mfgg&earg=dac7bddd-8318-42d4-b95f-990fbdec4239.
Miles Jennings & David Kerr, A Legal Framework for Decentralized Autonomous Organizations, Andreessen Horowitz DAO 1, 12-13 (2022), https://a16zcrypto.com/wp-content/uploads/2022/06/dao-legal-framework-part-1.pdf.
Marlene Ronstedt & Andre Eggert, Among Blockchain-Friendly Jurisdictions, Malta Stands Out, CoinDesk (July 4, 2018, 4:00 AM, updated Sept. 13, 2021, 4:08 AM), https://www.coindesk.com/markets/2018/07/04/among-blockchain-friendly-jurisdictions-malta-stands-out/.
Michael Tabone et al., DAO: The Evolution of Organization, CoIntelegraph Research 1, 16 (2022), https://research.cointelegraph.com/reports/detail/dao-the-evolution-of-organization.
Critical Liftoff Failure: NewSpace’s Mission Derailed
BY: Will Jagiello, RBFL Student Editor
Even with the greatest of efforts, progress towards solving a complex problem may be inexorably damaged by events completely out of the most skilled actor’s control. The budding NewSpace[1] sector that took the market by storm in 2020 (and continued astronomically through 2021) learned this lesson when Silicon Valley Bank (“SVB”) collapsed. While the ensuing 2023 Bank Run had widespread consequences across myriad industries, especially those primarily funded by Venture Capital (“VC”) investments, precariously-positioned NewSpace startups and SVB were intimately linked.
SVB’s first forays into aerospace investments were with launch and satellite startups, and over time, they became hailed as “the [NewSpace] industry’s ultimate market leader and growth champion.”[2] As such, they were uniquely positioned to provide lines of credit to the emerging leaders of the pandemic’s valuation craze – and were willing to provide such loans on non-standard, startup-friendly terms. Essentially, SVB served as an alternative to the traditional VCs that financed nearly the entire sector. Thus, NewSpace’s largest industry players (and critically, their cash-flows) were reliant upon SVB’s unique business practices.
Unfortunately, the FDIC’s depositor reassurances are too little, too late for these high-flying startups, which have been struggling to maintain a foothold since the markets began to cool.[3] Space ventures of any sort involve significant initial and long-term expenditures, extensive timelines, and a much lower chance of success than other scientific industries.[4] The entire industry’s investment interest is highly speculative, driven by decades-out projections and collapsed SPAC listings. When economic woes cause these investors to prefer safer investments or hold cash back for the moment, NewSpace researchers are among the first to feel the pullback. For instance, Astra Space went public at a whopping $2.1 billion valuation in 2021 – only to find itself now worth barely over $125 million and facing imminent NASDAQ de-listing.[5] Plagued by runaway cash burn, as well as the slower-than-projected scientific progress that is so inherent in all attempted space ventures, even the most-hyped prospects were barely staying afloat prior to SVB’s collapse.
Today, as most businesses flee for the safety of megabanks and VCs opt to sit on their war chests, NewSpace leaders find themselves without their most reliable go-to liquidity source. The prevailing megabanks are largely unwilling to extend the short-term types of credit that high-burn-rate startups require to conduct primary research activities, so without an existing revenue stream or cash coffers, these promising companies will be unable to progress at all. If the players wish to survive and hold out for more advantageous future conditions, they must seek alternative courses to both financing and their business models to ensure survival through suboptimal conditions. Near-term growth opportunities were already dubious because of general market conditions, but this latest economic comet has left an impact crater the size of the NewSpace industry, and revitalizing small, private participation in the sector will take reforms of atmospheric proportion.
[1] NewSpace refers to the emergence of the private space industry. NewSpace ventures are becoming more common, spanning areas such as private launch companies, small satellite constellations, or sub-orbital tourism. See SpaceTec Partners, NewSpace, https://www.spacetec.partners/markets/newspace/#:~:text=NewSpace%20refers%20to%20the%20emergence,traditional%20space%20industry%20supply%20chain.
[2] Anne-Wainscott Sargent, Silicon Valley Bank: The Ultimate Advocate of NewSpace Investment, Via Satellite (June 27, 2019) https://www.satellitetoday.com/innovation/2019/06/27/silicon-valley-bank-the-ultimate-advocate-of-newspace-investment/.
[3] Mateo Anelli, The Best and Worst Funds and Trusts in August, Trustnet.com (Sep. 1, 2022) https://www.trustnet.com/news/13324689/the-best-and-worst-funds-and-trusts-in-august (showcasing Seraphim’s 24.6% quarterly loss as the third worst of any individual trust in the UK).
[4] See generally Catherine Amirfar et al., Funding the New Space Race: Risks and Opportunities for Sponsors and Investors, DEBEVOISE & PLIMPTON LLP (May 2022).
[5] Joey Roulette, Rocket maker Astra seeks more time to avert Nasdaq delisting, Reuters (March 17, 2023) https://www.reuters.com/markets/us/rocket-maker-astra-seeks-more-time-avert-nasdaq-delisting-2023-03-17/.
The Russian Invasion of Ukraine and Its Effect on U.S. Housing Affordability
BY: Michael Coleman, RBFL Student Editor
What does the Russian invasion of Ukraine have to do with housing affordability in the United States? While perhaps not the proximate cause of rising housing costs, a domino-effect of Vladimir Putin’s quest for hegemony of the Crimean Peninsula and beyond has had considerable impact on much of the inflation we see today in America and worldwide. Responding to the invasion’s effect on global supply chains, in addition to the coronavirus pandemic, American monetary policy has succeeded at reducing inflation in consumer goods. But, as this blog post will discuss, the Federal Reserve has traded this for higher housing costs. Meanwhile, there are more reliable legislative alternatives which don’t make homeownership more out-of-reach for younger generations of Americans.
Russia was the number one exporter of liquefied natural gas (LNG) in 2021. Today, Russian sanctions and Ukrainian port blockages have resulted in food shortages across the planet. These supply chain issues have contributed to drastic levels of inflation in the United States. Prior to 2020, the inflation rate hovered around 2%. When the pandemic hit the U.S., the Federal Reserve Board cut interest rates to 0% to spur the economy. But with such easy, widespread access to money, we have experienced tremendous rates of inflation as demand for goods increased without commensurate increases in supply. June 30, 2022, Russian supply chain issues and low interest rates caused inflation to peak at 9.06% from the previous year. In response, the Federal Reserve has issued nine rate hikes in the past year, most recently on March 23, 2023. Now, the current Federal Funds Rate sits at 4.75-5.00%.
This series of rate hikes has been somewhat effective in mitigating inflation, which as of February 28, 2023, sits at 6.04%. But the practice has had unintended consequences. The current nationwide 30-year mortgage is 6.32%, more than double the low point of 2.65% on January 7, 2021. This has had tremendous impact on the housing market. Here in Boston, between March 2022 and February 2023, monthly home sales are down 53.8% and the average time on the market for a real estate listing increased from 23 days to 56 days. Additionally, 38.3% of homes were sold above asking price last March, compared to only 22.0% this February. Despite this, home prices have stagnated, currently hovering at a median sale price of $739,000. Only now, what was once a monthly mortgage payment of $2,382.31 on that home is now $3,667.05 (assuming buyers make the standard 20% down payment). This translates to a mortgage 53.9% more expensive than a mere two years ago.
To counter inflation without raising housing costs, “market improvement laws” would be more optimal. Three of these include price transparency laws, deregulation in licensing law, and strengthening of antitrust laws. Price transparency laws seek to eliminate the information asymmetry between consumers and producers, who often use inflation as an excuse to raise prices more than their costs actually increased. The laws would, hypothetically, display how much more a product should cost the supplier and how much more the supplier actually priced the item. This would, of course, cause consumers to be less inclined to purchase a product if they were able to compare levels of unjustified mark-up and, consequently, drive down prices to a point where businesses sell at prices which truly reflect their increased costs. Deregulation in licensing law refers to a growing call for less bureaucracy in the form of permits. Most notably, this occurs in occupational licenses, as state licensing laws impact approximately 30% of occupations. Zoning laws and car dealership licensing also are areas for significant future reform. Finally, strengthening antitrust laws would have sizable impact on reducing the effects of inflation, as an estimated 18-37% of increases in prices can be attributed to price-fixing in some capacity.
By addressing disruptive levels of inflation, the Federal Reserve has acted within its authority to raise the Federal Funds Rate and effectively begun to tame rising costs of goods. But, the entities best suited for addressing this trend are not in the Federal Reserve but in legislative bodies, like Congress and state legislatures, who have power to regulate and deregulate certain industries to drive down costs for American consumers.
Sources:
Sönnichsen, Global gas exporting countries 2021, Statista (July 5, 2022),
Historical Inflation Rates: 1914-2022, U.S. Inflation Calculator, https://www.usinflationcalculator.com/inflation/historical-inflation-rates/.
30-Year Fixed Rate Mortgage Average in the United States, St. Louis FRED, https://fred.stlouisfed.org/series/MORTGAGE30US.
Taylor Tepper, Federal Funds Rate History 1990 to 2022, Forbes (Sept. 21, 2022), https://www.forbes.com/advisor/investing/fed-funds-rate-history/.
Boston Housing Market Trends, Redfin (Feb. 28, 2023), https://www.redfin.com/city/1826/MA/Boston/housing-market.
See Rory Van Loo, Inflation, Market Failures, and Algorithms, 5 (July 21, 2022) (unpublished manuscript).
See Mark Kelman, Could Lawyers Stop Recessions? Speculations on Law and Macroeconomics, 45 Stan. L. Rev. 1215, 1259 (1993).
See Morris M. Kleiner & Evgeny Vorotnikov, Analyzing Occupational Licensing Among the States, 52 J. Reg. Econ. 132, 136 (2017).
Francine Lafontaine & Fiona Scott Morton, Markets: State Franchise Laws, Dealer Terminations, and the Auto Crisis, 24 J. Econ. Persp. 233, 240 (2010).
Gillian B. White, How Zoning Laws Exacerbate Inequality, The Atlantic (Nov. 23, 2015), https://www.theatlantic.com/business/archive/2015/11/zoning-laws-and-the-rise-of-economic-inequality/417360/.
John M. Connor & Robert H. Lande, The Size of Cartel Overcharges: Implications for U.S. and EU Fining Policies, 51 Antitrust Bull. 983, 983 (2006).
Mandatory ESG Disclosure for Funds: Why is it Needed?
BY: Taylor Miller, RBFL Student Editor
In June 2022, the Securities and Exchange Commission (SEC) announced a new proposed rule that would require certain disclosures from investment advisers and investment companies on their environmental, social, and governance practices. This rule follows in the wake of the European Union’s Sustainable Finance Disclosure Regulation passed in 2018. Though there are differences, both rules generally have a three-tiered disclosure structure based on divide how central ESG factors are to the fund’s investment decisions. It has been questioned, however, whether ESG deserves its own disclosure requirements.
SEC Commissioner Hester Pierce asks this exact question in her response to the proposed rule. By her reasoning, the threats posed by false ESG disclosures are already covered under enforcement proceedings for false information. In general, the SEC demands that material information regarding investment objectives, strategies, risks and governance be disclosed. While common sustainable investing strategies like the use of negative/positive screens or impact objectives would definitely fall under this requirement, solely relying on broad disclosures rules ignores two big issues: the expansive use of ESG factors and the relative confusion surrounding ESG.
Most recently, it was reported that $8.4 trillion dollars of assets under management in the US qualifies as a “sustainable investment”, representing 12.6 percent of total US AUM. Worldwide, the number is believed to be $35 trillion as of 2020. Analysts report that ESG AUM is on track to exceed $53 trillion by 2025, representing one third of global AUM. Despite a growing number of assets being categorized as sustainable investments, there is still inconsistencies over how people define and implement ESG factors and considerations. Two funds could both claim to be “sustainable” and claim to incorporate ESG factors into their investment decisions, but they could be doing it in completely different ways, both involving different risks, results, and considerations. The variation of ESG practices increases the risk of misrepresentation and investor confusion.
Whereas ESG strategies do generally fall under material information that is required to be disclosed, the growth of the field as well as the variety within demands that a formalized and consistent method of disclosure be implemented. By requiring consistent disclosure, investors will be able to inform themselves more easily on how funds view and utilize ESG strategies and make the best decision on which fund best aligns with their own values. Though the SEC proposed rule may not be perfect, it is a big step in consistent and decision-useful disclosures in an area that is only growing.
Key Sources:
Enhanced Disclosure by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices, 84 Fed. Reg. 36654, 36658 (June 17, 2022) (to be codified at 17 C.F.R. 200).
Regulation 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector, 2019 O.J. (L 317) 2 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02019R2088-20200712
Commissioner Hester M. Pierce, Statement on Environmental, Social, and Governance Disclosures for Investment Advisers and Investment Companies, U.S. Securities and Exchange Commission (May 25, 2022), https://www.sec.gov/news/statement/peirce-statement-esg-052522
U.S. SIF Foundation, 2022 Report on US Sustainable Investing Trends 2 (2022), https://www.ussif.org//Files/Trends/2022/Trends%202022%20Executive%20Summary.pdf
Bloomberg Intelligence, ESG assets may hit $53 trillion by 2025, a third of global AUM, Bloomberg Professional Services (Feb. 23, 2021) https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/