City Council Votes in Richmond, CA, Mortgage Eminent Domain Proposal and UPDATE

By Christopher Hammond, J.D. Candidate 2015 | Posted on

After a seven-hour meeting that dragged into early Wednesday morning, the Richmond City Council voted 4-to-3 to continue pursuing its plan to condemn underwater mortgages using the city’s eminent domain power.  The development is just the latest in an ongoing and high-stakes dispute over a novel property law argument. 

Here is the background:  The city of Richmond, California, has long-faced deteriorating property values.  Once a shipbuilding powerhouse for the U.S. Navy during World War II, the region’s declining industrial based has hit Richmond particularly hard.  City leaders have struggled to attract redevelopment capital, as businesses have largely opted for other booming Bay Area locations.  And when the mortgage crisis hit, Richmond’s communities experienced rampant foreclosures.

In response, the City has considered a novel move:  mortgage condemnations through the power of eminent domain.  That is, the City’s proposl would condemn the underwater mortgage obligations, but not the real estate itself.  If implemented, banks would be forced to write down large portions of a borrower’s principal.  The Network has previously covered the mortgage eminent domain proposal and Mortgage Resolution Partners, which had backed Richmond’s plan.  And last September, the Berkeley Center for Law, Business and the Economy and Berkeley Business Law Journal hosted Adjunct Professor Bill Falik—who is a partner at MRP—to discuss the innovative (though controversial) scheme.  The Network covered counterarguments as well.

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Basel Committee and IOSCO Publish Policy Framework

By Christopher Hammond, J.D. Candidate 2015 | Posted on

[Editor’s note:  The following post is authored by Goodwin Procter LLP.]

The Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”) jointly issued a final policy framework (the “Policy Framework”) establishing minimum standards for margin requirements for non-centrally cleared derivatives.  The Policy Framework is a result of a 2011 G20 agreement calling upon BCBS and IOSCO to develop, for consultation, global standards for margin requirements for non-centrally cleared derivatives; BCBS and IOSCO released two consultative versions prior to releasing the current final version of the Policy Framework.

The Policy Framework requires the exchange of both initial and variation margin between so-called “covered entities” that engage in non-centrally cleared derivatives.  The document explains that margin requirements for such derivatives “would be expected” to reduce systematic risk by ensuring the availability of collateral to offset losses caused by a counterparty default, and would also promote central clearing by reducing the perceived cost benefits of engaging in uncleared derivatives transactions.  The Policy Framework further explains that margin requirements have certain benefits over capital requirements, such as being allocated to individual transactions rather than being shared across an entity’s full range of activities.  Margin is also, in the words of the document, “defaulter-pay” in the sense that the margin provided by the defaulting party is used to absorb the losses caused by the default, as opposed to capital’s “survivor-pay” model in which the non-defaulting party bears losses out of its own assets.

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CFTC Adopts Final Harmonization Rules for Commodity Pool Operators

By Christopher Hammond, J.D. Candidate 2015 | Posted on

[Editor’s Note:  The following post is authored by Davis Polk & Wardwell LLP.]

On August 13, 2013, the Commodity Futures Trading Commission (“CFTC”) adopted final regulations designed to harmonize the obligations of registered commodity pool operators (“CPOs”) under the CFTC Part 4. Regulations for commodity pools that are registered as investment companies (“RICs”) under the Investment Company Act of 1940 (“1940 Act”) with the obligations applicable to RICs under the 1940 Act and other securities laws. The final regulations also amend several Part 4 obligations as they apply to all registered CPOs with respect to all types of commodity pools.

In a significant departure from the harmonization rules proposed by the CFTC in February 2012, the final regulations adopt a “substituted compliance” framework that permits a registered CPO of a RIC to comply with the disclosure, reporting, and recordkeeping requirements applicable to the RIC under the Securities Act of 1933, the 1940 Act, and regulations of the Securities and Exchange Commission (“SEC”) in lieu of complying with many of the analogous Part 4 requirements that would otherwise apply to the registered CPO. Such substituted compliance is available under the final regulations for some, but not all, Part 4 requirements. Thus, while the harmonization rules provide important relief for registered CPOs of RICs with respect to most Part 4 compliance obligations, the rules do not address all requirements with which registered CPOs must comply. For example, the harmonization rules do not address requirements for registered CPOs under NFA bylaws. In addition, the harmonization rules do not affect the applicability of CFTC rules governing commodity interest trading activities, such as position limits or new swap regulatory requirements. Therefore, registered CPOs should carefully review their compliance programs in light of the harmonization rules to ensure they are meeting all applicable requirements.

To read the entire Client Memorandum, click here.

Week in Review: Verizon’s Vodafone Buyout

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The week’s business news was widely dominated by Verizon’s buyout of Vodafone’s 45% stake in their joint venture, Verizon Wireless.  Why?  The short answer is:  “That’s what happens when news breaks of the largest such deal since the dot-com crash (circa 2000), the second-largest in the telecom industry, and the third-largest… ever.”

The slightly longer answer is that the deal is still, to some degree, clouded in a bit of mystery.  The New York Times today asked a few obvious questions:  Why $130 billion for 45% of an enterprise valued (in total) at $176 billion?  Why not earlier, like Verizon’s opportunities to make the move in 2001 and 2004?  And why did Verizon choose a joint venture in the first place?  The article describes a good deal of ‘inside baseball’–perhaps detailing the thought process of each company’s management team as they sought to lead the wireless charge in the United States.  This week’s post in The Economist, titled “A $130 billion divorce,” asked what Vodafone planned to do with the large payout?  And now, according to Bloomberg, Reuters, and other outlets, a Verizon shareholder class action suit is seeking to block one of history’s largest deals.  The plaintiffs are pointing to Verizon’s share performance since rumors of the deal surfaced:  down approximately 7.5%.

The Network will keep up-to-date as the deal moves forward.

Upcoming BCLBE Event: “The Economic Value of a Law Degree”

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The Berkeley Center for Law, Business and the Economy will be hosting “The Economic Value of a Law Degree” on Thursday, September 12th at 12:45p.  The event is co-sponsored by the Berkeley Business Law Journal and will take place at the Boalt Hall School of Law.  Registration is suggested (sign up here).

How much is a law degree worth?  Prof. Simkovic will present his research into the market value of a law degree.  His study, co-authored with Frank McIntyre, is one of the first to examine the issue since the financial crisis.  Through US Census data and statistical techniques from labor economics, Simkovic will present his conclusions on the average lifetime earnings of a law degree compared to a bachelor’s degree.  Simkovic’s methods have generated significant controversy, and an ongoing battle in the press and the academy.

Simkovic’s paper is available here, and the powerpoint presentation from the American Law & Economics Association Conference is available here.  The debate between Simkovic & McIntyre and their critics can be followed on Brian Leiter’s Law School Reports.

The Section 409A Valuation: Do You Really Need One?

By Christopher Hammond, J.D. Candidate 2015 | Posted on

[Editor’s Note: The following post is authored by Foley & Lardner LLP]

Yes. You do. That was easy. But perhaps we have gotten ahead of ourselves and we should start at the beginning of the story. While Section 409A is a tax provision, its genesis was the perceived abuse of deferred compensation arrangements by rapacious executives in the Enron and WorldCom debacles. Like the “golden parachute” rules of Section 280G, Section 409A is intended to work some good old-fashioned social engineering magic through the tax code. It was quite handy that these rules also made the IRS happy as Section 409A works in part by reigning in the ability of employees to “manipulate” or select the year in which they would have to recognize taxable income from various types of deferred compensation schemes. You see, the IRS does not like taxpayers to have any flexibility when it comes to the timing of recognition of income. Section 409A succeeded in achieving some of its narrow objectives but as is often the case, in ways that likely went well beyond the specific concerns that the statute was originally intended to address. The treatment of stock options under Section 409A is one of those unfortunate extensions. Regardless, we now have to live with these rules.

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D.C. Circuit’s Rail Freight Contacts Decision Reflects Greater Scrutiny of Antitrust Class Certification in the Wake of Supreme Court’s Comcast Ruling

By Arnold and Porter LLP | Posted on

[Editor’s Note: The following post is authored by Arnold & Porter LLP]

Earlier this month, the influential U.S. Court of Appeals for the D.C. Circuit issued an important decision on the standards for certifying antitrust class actions.  Taking its cue from the Supreme Court’s decision this past March in Comcast Corp. v. Behrend, the D.C. Circuit vacated a lower court decision certifying a class of shippers in an antitrust case against railroads alleging collusion on fuel surcharges.  The ruling in In re: Rail Freight Fuel Surcharge Antitrust Litigation is significant as the first known decision to apply Comcast to reject a proposed antitrust class.  Companies facing overreaching class action suits may be able to take comfort that, after a few lower court decisions sidestepping Comcast, the principles set forth in that decision are now catching on in the lower courts.

Click here to see the entire Arnold & Porter Advisory.

Private Equity Giant Blackstone Agrees to $85 Million Settlement

By Christopher Hammond, J.D. Candidate 2015 | Posted on

As the real estate market was turning sour in 2007, Blackstone Group LP was preparing to go public.  Timing was not quite perfect, however, as the world’s largest private equity firm happened to be heavily invested in property and other particularly vulnerable holdings.  While Blackstone’s IPO launched at $31 per share, market troubles and the firm’s exposure led to sharp declines within the next year–in 2008, its shares were trading at less than one-quarter of that price.  Litigation ensued, with some investors claiming that Blackstone’s executives had not properly disclosed the declining values of some of its assets during the IPO process.

After five years of litigation, the parties have reached a settlement.  A U.S. federal judge, sitting in Manhattan, must still approve of the $85 million agreement.  For more detailed coverage of the case and its developments, see Businessweek and Reuters.

Week in Review: Litigation

By Christopher Hammond, J.D. Candidate 2015 | Posted on

In an increasingly globalized economy, the New York Times’ Dealbook reports that law firms have gained traction (and legal fees) in complex international arbitration.  A number of firms have positioned themselves to “catch a rising wave of business” in this behind-the-scenes market.  For more, see NYTimes.

Bank of America will walk away empty-handed in its $1.7 billion suit against the Federal Deposit Insurance Commission, as a Washington federal judge dismissed the suit earlier this week.  For more, see Bloomberg.

Also from the federal bench, Facebook’s proposed $20 million settlement has been approved.  The suit claimed that social media site had failed to adequate protect children’s online privacy through its “Sponsored Story” advertisement features.  U.S. District Judge Richard Seeborg (N.D. Cal.) found “significant value” in the settlement, as Facebook will also give users more control over their uploaded content.  For more, see Reuters.

FTC Adopts Final Guidance on Cross-Border Swaps and Compliance Schedule

By Davis Polk and Wardwell LLP | Posted on

[Editor’s Note: The following post is authored by Davis Polk & Wardwell LLP]

On July 12, 2013, the Commodity Futures Trading Commission (“CFTC”) adopted final cross-border guidance (the “Final Guidance”) that provides guidelines for the application of the CFTC’s swap regulatory regime to cross-border swap activities. At the same time, the CFTC adopted a phase-in compliance schedule (the “Exemptive Order”) that extends, with material changes, the cross-border exemptive order issued by the CFTC in January 2013.

The Final Guidance and the Exemptive Order address several topics, including: (1) the final definition of U.S. person for purposes of the CFTC’s swap regulatory regime; (2) guidance on which swaps a non-U.S. person must include in, and can exclude from, its swap dealer de minimis and major swap participant (“MSP”) threshold calculations; (3) guidance on the types of offices the CFTC would consider to be a “foreign branch” of a U.S. swap dealer or MSP and the circumstances in which a swap transaction would be considered to be “with” such a foreign branch; (4) guidance on how swap-related requirements will be applied to cross-border swap transactions and when substituted compliance would be available if the CFTC determines that a foreign jurisdiction’s rules are comparable to its own; and (5) phased-in compliance periods for many of the swap regulatory regime’s requirements. For more information, see the July 3, 2012 Davis Polk Client Memorandum, CFTC Finalizes Cross-Border Swaps Guidance and Establishes Compliance Schedule.

Comments on the Exemptive Order are due on August 21, 2013.

The full Davis Polk Client Advisory includes recent update on the following topics:

SEC Rules and Regulations

  • SEC Grants No-Action Relief to Allow Registered Investment Companies to Maintain Assets with 
  • CME to Meet Margin Requirements for Additional Swaps Cleared by CME
  • SEC Extends Immediate Effectiveness of Post-Effective Amendments to Additional Closed End Funds

Industry Update

  • CFTC Adopts Final Guidance on Cross-Border Swaps and Compliance Schedule
  • SEC’s Division of Investment Management Answers Questions Concerning Form 13F

Litigation

  • Department of Justice Indicts Hedge Fund Advisers and SEC Charges Advisers’ Founder
  • CFTC Brings First “Spoofing” Case Against High-Frequency Trading Firm