In a previous post, we discussed Kirschner v. JPMorgan Chase Bank,[1] an action in which the trustee of bankrupt Millennium Labs brought state law securities fraud claims on behalf of a group of “approximately 400 mutual funds, pension funds, universities, [CLO]s and other institutional investors,” against banks that organized a $1.765 billion syndicated loan.
The threshold issue faced by the court was whether an investor’s share of a syndicated loan qualifies as a “security” for the purposes of state securities laws. Federal courts have previously held that syndicated loan interests do not qualify as securities for purposes of federal securities fraud claims.[2]
The trustee in Kirschner urged the court to embrace an inclusive view of the definition of securities when applying the test originally set forth by the Supreme Court in Reves v. Ernst & Young, specifically in light of the possibility that an instrument can be deemed a security based on “the reasonable expectations of the investing public”:[3]
“Whatever similarities early generations of syndicated bank loans once shared with traditional commercial lending, the Note offering mirrored a high yield bond issuance.”[4]
The court, in its decision of May 22, 2020, took a less expansive view, observing that:
“[T]he Credit Agreement and [Confidential Information Memorandum] would lead a reasonable investor to believe that the Notes constitute loans, and not securities. For example, the Credit Agreement repeatedly refers to the underlying transaction documents as ‘loan documents,’ and the words ‘loan’ and ‘lender’ are used consistently, instead of terms such as ‘investor.’”[5]
Notably, the court premised its decision in part on the sophistication of the investors, concluding:
“[I]t would have been reasonable for these sophisticated institutional buyers to believe that they were lending money, with all of the risks that may entail, and without the disclosure and other protections associated with the issuance of securities.”[6]
The prevailing trend in capital markets is for increasingly sophisticated instruments to be made available to ever-broader groups of investors. Where the public once had limited—if any—access to short selling, short-term trading, and complex equity option strategies, all of these have become feasible for individual investors in recent years. Access to participation in syndicated lending may follow the same route, and this may eventually require courts to revisit the scope of investor protections available.
For now, the court has extended its deadline for counsel to the trustee to file its motion and supporting papers to amend the complaint through July 31, 2020.[7]
The case is Kirschner v. JPMorgan Chase Bank, N.A., No. 17-cv-06334-PGG (S.D.N.Y.).
[1] Kirschner v. JPMorgan Chase Bank, N.A., No. 17-cv-06334-PGG (S.D.N.Y.).
[2] Banco Espanol de Credito v. Pacific National Bank, 973 F.2d 51 (2d Cir. 1992).
[3] 494 U.S. 56, 66 (1990) (“The Court will consider instruments to be ‘securities’ on the basis of such public expectations, even where an economic analysis of the circumstances of the particular transaction might suggest that the instruments are not ‘securities’ as used in that transaction.”)
[4] Kirschner, ECF No. 81 at 17.
[5] Kirschner, ECF No. 119 at 18-19.
[6] Id. at 22.
[7] Kirschner, ECF No. 127.