Stocks Hit Record High As Fed Keeps Bond Buying At $85B A Month

By Sydney Ryan, J.D. Candidate 2016 | Posted on

The Federal Reserve announced on Wednesday that it would continue its current quantitative easing policies indefinitely, despite the unanimity on Wall Street that a scale-back was imminent. This announcement sent the Dow and S&P 500 to record highs.

According to Bernanke, with the federal funds rate remaining in the 0 – 0.25% range and unable to decrease any further, the central bank’s measures to stimulate the economy have been focused on complementary methods of “asset purchases and forward guidance about short-term interest rates.” For example, in September 2012, the Federal Open Market Committee (FOMC) initiated a stimulus plan to purchase $40 billion per month in agency mortgage-backed securities in addition to the $45 billion per month in longer-term securities that it was already acquiring as part of its Maturity Extension Program (MEP). In December 2012, the Fed announced that it would maintain its $85 billion per month asset purchase program, even after the MEP had ended, by continuing to purchase $45 billion per month in longer-term Treasuries.

However, in June 2013, the Federal Reserve suggested that it would begin a modest reduction in the pace of its purchases by as early as September 2013, and possibly end the program around mid-year 2014. This caused some turmoil on Wall Street over the summer, as the markets tried to adjust to the idea of a departure from the asset purchase program, and consequently lead to a decrease in stock prices and an increase in interest rates.

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BerkeleyLaw Lecture Series: The Economic Value of a Law Degree

By Avery Masters, J.D. Candidate 2015 | Posted on

Is it even worth it to go to law school?  The thought came before law school, and it wriggles into those moments when all that work and stress and money pile up.  It could come any time:  at 4 AM when you are trying to finish that last chapter; out for drinks with friends in the workforce who blithely pay for happy hour drinks without wincing at thoughts of crushing student loans; or when you discover that you didn’t get your first pick for a ‘big law’ summer associate position.  Myths and misconceptions have swirled amongst the legal community and the general public, as law professors, students, and others question the value of a law degree, leading in part to plummeting application numbers for law schools around the country.

On Thursday, September 12, 2013, Berkeley Law hosted Seton Hall University business law Professor Michael Simkovic in the first event in a lunchtime series sponsored by the Berkeley Center for Law, Business and the Economy and the Berkeley Business Law Journal.  Mr. Simkovic was previously an attorney at Davis Polk & Wardwell in New York concentrating in bankruptcy litigation as well as a strategy consultant at McKinsey & Company, where he specialized in legal, regulatory and business issues affecting financial services companies.  Professor Simkovic persuasively presents a different (and thankfully more positive) outlook for those considering whether to pursue a law degree. 

At the outset, Professor Simkovic tackled empirical claims that law school offers a poor return on investment.  He pointed out serious flaws in data sets being presented by those who claim that investing in a law degree is a low-value investment proposition.  For example, earnings in early years are not necessarily strong predictors of subsequent earnings because law degree holders—as opposed to those holding a bachelor’s degree—see steep growth in salary over a short period of time during their first few years of work.  It is also important not to conflate the recent dip in the general market with a dip solely in law.  In other words, while things may look worse in the legal market than they did ten years ago, it is important contextualize with broader market conditions.

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Appellate Court Holds PE Fund Potentially Liable for Bankrupt Portfolio Company’s Pension Obligations

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

[Editor’s Note:  This piece is authored by Kirkland & Ellis LLP.]

A corporation that owns 80 percent (or in some cases 50 percent) or more of a bankrupt subsidiary is liable for 100 percent of the subsidiary’s unpaid pension obligations under the Employee Retirement Income Security Act (ERISA) regardless of the activities of the parent corporation. However, a PE fund formed as a partnership or LLC (rather than as a corporation) is liable under this ERISA controlled-group-liability doctrine for a bankrupt portfolio company’s pension obligations only if the PE fund is engaged in a “trade or business.”

In July 2013, a federal appellate court (reversing a 2012 district court pro-PE fund decision) concluded that a PE fund (formed as a partnership or LLC) is engaged in a trade or business and hence would be liable for its bankrupt portfolio company’s unpaid pension obligations if it owned the requisite percentage of its stock…

Because this is the first federal court of appeals to weigh in on this complex trade-or-business issue, there is considerable uncertainty whether a PE fund will ultimately be viewed as engaged in a trade or business for ERISA liability purposes and hence liable for an 80 percent(or in some cases 50 percent) or greater bankrupt portfolio company’s pension obligations.  Because the ERISA provisions that could make a PE fund and its 80 percent (or in some cases 50 percent) or greater portfolio companies liable for the pension obligations of an 80 percent (or in some cases 50 percent) owned bankrupt portfolio company are exceedingly complex, each PE fund investment (and each restructuring of such an investment) should be reviewed with care

For the complete Newsletter, click here.

Court of Appeals for the Third Circuit Extends New Source Review “Past Violation” Rulings

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

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

On August 21, the U.S. Court of Appeals for the Third Circuit in the Homer City case joined and extended the consensus holdings of three other U.S. courts of appeals in rulings that failure to obtain a Prevention of Significant Deterioration (PSD) permit is a one-time and past rather than a continuing violation under Clean Air Act regulations.  This decision has important implications for companies facing PSD enforcement cases brought by U.S. EPA, states or environmental groups pursuing citizen suits.  This decision bolsters the consensus that the 5-year statute of limitations may apply to bar civil penalties for older alleged violations.  The decision also breaks new ground by finding that current owners are not liable for past violations occurring on the watch of former owners, and those former owners are also not liable for injunctive relief.  The court also suggested that civil penalties even for more recent violations not barred by the statute of limitations could be very low, accruing only for the number of days during which the company began or possibly undertook the construction in question.  Finally, the court joined other courts in holding that claims that the company violated Title V permitting regulations by omitting PSD requirements, which claims may not be raised in an enforcement case.  The growing consensus also makes the Supreme Court unlikely to grant a request for review.

To read the entire Client Alert, click here.

START-UP NY: A Less Taxing Proposal

By Jared Mayberry, J.D. Candidate 2015 | Posted on

In an attempt to foster entrepreneurialism and job creation, New York State has passed a tax incentive program called START-UP NY.  The program alleviates tax liability for start-up companies that move to or start in one of the specified tax-free communities within the State.  There are, however, limitations on the companies that qualify for participation.  Among these limitations, restaurants, retail businesses and certain professional organizations are completely excluded from the program, and any business that can participate must not compete with a local business located outside the tax-free community. Nevertheless, the companies that are able to qualify are eligible for substantial benefits.

The program alleviates all tax liability for the participating company for a ten-year period, including corporate/business taxes, sales taxes and property taxes.  Furthermore, employees of the qualifying company will not pay income taxes during the first five years and will only have to pay taxes on income over $200,000 for individuals, over $250,000 for a head of household and over $300,000 for taxpayers filing a joint return during the second five year period.  In light of the potential for misconduct, participating companies will be subjected to significant oversight.

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Company Receives Credit in SEC Regulation FD Case Brought and Settled Against Former Vice President for Investor Relations

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

[Editor’s Note:  This post is authored by Gibson, Dunn & Crutcher LLP.]

On September 6, 2013, the Securities and Exchange Commission (SEC) announced that it had brought — and settled — a cease-and-desist case under Regulation Fair Disclosure (Reg. FD), which requires that public companies broadly disclose material nonpublic information to the public that their covered officers and employees intentionally or inadvertently disclose to market professionals and stockholders.  The SEC charged Lawrence D. Polizzotto, a former Vice President of Investor Relations at First Solar, Inc., with selectively disclosing that the company was unlikely to receive financing under a conditional loan from the Department of Energy.  Mr. Polizzotto agreed to pay a $50,000 fine to settle the charges, although he did not admit or deny the findings.

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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.