Arising from a $650 Million financing dispute, Pastore LLC, representing a large national investment bank, argued at the Third Circuit on September 29th. The argument was in person in Philadelphia. Pastore LLC has brought a FINRA arbitration to collect the investment banking fee. White & Case had sought to enjoin the securities arbitration in the DE Bankruptcy Court. Pastore LLC’s clients prevailed, and the DE case was dismissed. White & Case’s client appealed to the Third Circuit, arguing that the DE Bankruptcy Court had jurisdiction to hear the case.
The Second Circuit Affirms Jury Verdict Win for Pastore’s Hedge Fund Clients in Multimillion-dollar Securities Fraud Case Brought by Billionaire Family Office
On November 15, 2021, the Second Circuit affirmed a jury verdict obtained by Pastore in a federal securities fraud case. This concluded a contentious, multi-year litigation, defeating claims of fraudulent inducement and securities fraud brought against two hedge fund executives by a billionaire family office special purpose investment vehicle. The billionaire family office, the heirs to and founders of a well-known apparel store, had invested in the fund’s General Partner limited liability company.
In 2018, The United States District Court for the District of Connecticut granted a summary judgment in favor of the defendants. The summary judgment was subsequently appealed up to the United States Court of Appeals for the Second Circuit, before being remanded back to, and concluding with, a jury trial in the United States District Court for the District of Connecticut. Pastore LLC was hired for the trial. After two weeks of evidence and 7 hours of jury deliberation, Pastore LLC was able to secure a favorable jury verdict for the clients. The jury had found in favor of the defense on a federal securities claim.
Then, the billionaire family office appealed the jury verdict to the Second Circuit and argued that it was entitled to a new trial because, it alleged, the district court’s abuse of discretion had a prejudicial impact on the jury’s verdict. Among other alleged errors, the billionaire family office alleged that evidence concerning a billion-dollar company investment agreement with one of the world’s largest private equity funds should be excluded. The Second Circuit stated, “the district court instructed the jury ‘the entity that holds an interest in a security suffers an economic loss if the investment experiences a decline in value.’ App’x 559. In other words, the district court instructed the jury that it should find that…suffered an economic loss if it determined that…owned the investment interest in…, regardless of the source of investment funds, and that this investment declined in value.”
In the continued legal battle over whether business interruption insurance policies cover business losses due to the COVID-19 pandemic, a recent case in the United States District Court for the District of Connecticut (the “Connecticut District Court”) adds to the debate. Generally, business interruption insurance covers losses resulting from the closure of the property due to some physical damage or loss to the business premises. In terms of losses incurred from the COVID-19 pandemic, policyholders have argued that the revenue lost from the closure of their businesses is covered by the business interruption insurance. However, insurers have argued that exclusions such as a Virus Exclusion provision prevent any claims resulting from the COVID-19 pandemic. The recent case in the Connecticut District Court provides a great illustration of this ongoing fight for coverage between the insurance industry and business.
In the case One40 Beauty Lounge LLC v. Sentinel Ins. Co., No. 3:20-cv-00643 (KAD), 2021 U.S. Dist. LEXIS 216320 (D. Conn. Nov. 9, 2021), One40 Beauty Lounge, LLC (“One40”) filed a class action against Sentinel Insurance Company (“Sentinel”), claiming the losses it sustained from closing its business due to the COVID-19 pandemic were covered by its insurance policy (the “Policy”) with Sentinel. Sentinel moved for judgment on the pleadings on the ground the Virus Exclusion provision of the Policy unambiguously excluded coverage of any losses resulting from the COVID-19 pandemic. Judge Kari Dooley acknowledged that she was not examining the issue of whether the Virus Exclusion provision prevented One40 from making a claim under the Policy in a vacuum because other courts had previously examined identical provisions and found it to be unambiguous.
One40 argued that even if the Virus Exclusion provision prevented coverage, a subsection of the Virus Exclusion provision allowed limited coverage for 30 days of losses. However, Judge Dooley stated that the subsections of the Virus Exclusion provision must be read together. When viewed as a whole, the subsection One40 relied upon did not provide One40 with limited coverage for 30 days. Since the Virus Exclusion provision unambiguously applied to prevent coverage for losses resulting from the COVID-19 pandemic, Judge Dooley granted Sentinel’s motion for judgment on the pleadings.
While the Connecticut District Court ruled that Virus Exclusion provisions prevent coverage for losses from the COVID-19 pandemic, coverage of business losses from the pandemic is still an open issue. As the COVID-19 pandemic continues to ebb and flow and impacts daily business procedures, policyholders will most likely continue to seek coverage for lost revenue resulting from the closure of their businesses.
One40 Beauty Lounge LLC v. Sentinel Ins. Co., No. 3:20-cv-00643 (KAD), 2021 U.S. Dist. LEXIS 216320 (D. Conn. Nov. 9, 2021).
Id. at *1.
Id. at *7.
Id. at *8.
Id. at *11.
Id. at *12.
A commercial mortgage-backed security (“CMBS”) is a group of bonds comprised of commercial real estate loans commonly contained in trusts which are then sold to investors. As of 2020, the largest loan contributors to the CMBS market include large banks, such as Citibank, Goldman Sachs, Morgan Stanley, Deutsche Bank, JPMorgan Chase, Wells Fargo, and Bank of America. The commercial property loans securitized by CMBS are generally compromised of commercial properties such as apartment buildings, hotels, factories, office buildings and parks, or shopping malls. These bundles of bonds are also referred to as tranches. CMBS loans are ranked – those with the highest rating have the lowest risk, and those with the lowest rating have the highest risk. Lower risked bonds are known as senior issue, and higher risk bonds are known as junior issue. After the bonds are sold, the bank receives the money from the sale. The bank then lends these proceeds to a subsequent borrower to collect additional fees.
Investing in CMBS poses a lower risk to borrowers than a residential mortgage-backed security (“RMBS”) loan because commercial mortgages typically have a fixed term. CMBS loans are also compromised of fewer loans than RMBS loans. Many investors seek out this loan because they are interested in obtaining property for an extended period of time and CBMS loans provide lower interest rates. Other incentives of CMBS loans include a higher leverage financing, and CMBS loans are nonrecourse loans, and thus have a wider range of accessibility, because investors with lower credit are more readily able to obtain these loans. 
Although there are numerous advantages of CMBS loans, there are several disadvantages tied to a CMBS loan investment. First, these loans have prepayment penalties, which penalize a borrower for paying back a loan outside of the fixed term, even in the circumstance where the borrower pays the loan back earlier than the predetermined date. Second, CMBS loans go through a defeasance profess before prepayment, which can be a painstaking process involving the borrower consulting with a financial advisor in order to set up alternative securities to replace any collateral and interest that the lender no longer is obligated to. Lastly, the terms of CMBS loans are more difficult to negotiate, and a borrower has little or no say in the terms of the loans.
The CMBS market has been greatly impacted by the COVID-19 pandemic. A shift towards working from home has created a failure of roughly $5.5 billion commercial mortgage loans since the summer of 2020. The delinquency rate of CMBS loans in June 2020 was reported to be 10.32%.  The delinquency rate continued to increase during October of 2020, during the second wave of the pandemic. The trends of CMBS loans due to the financial crisis that the pandemic has caused are almost identical to the trends of CMBS loans during the 2012 financial crisis, which poses an alarming issue when considering the impact the 2012 crisis had on the CMBS market. The rise of delinquency rates is directly correlated to the effects that COVID-19 has had on commercial real estate: apartment owners, retail owners, restaurants, and hotels are bringing in substantially less income, and are left unable to pay mortgage and other commercial property-related debts.
The last financial crisis in 2012 led to grave delinquencies in the CMBS market, which may signal that the CMBS market will undergo similar disruption in the future, indicative of a similar systemic risk. However, much has been learned from former financial crises and the risks they pose on all types of mortgage backed-security loans, to avoid unnecessary risk in the CMBS market. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act after the 2007-2008 financial crisis, which affects CMBS by “including risk-retention requirements for asset-backed security sponsors, increased disclosure requirements, the Volcker Rule and enhanced capitalization requirements for banks.”
These protective measures are an attempt to make the CMBS market a safer space for investors by decreasing the systematic risk that the CMBS market decline may have on the overall economy. An unforeseen consequence has been an increase in the price of entry into the CMBS market which affects retail investors, and aspects such as the Volcker Rule, which decreases market liquidity and restricts proprietary trading by preventing a bank from holding inventories of secondary market securities and disallowing a banks from investing in real estate.
While the effects from the COVID-19 pandemic may affect the CMBS market and make these loans less accessible to borrowers, overall, the Dodd-Frank reforms have likely mitigated a majority of the risk to the CMBS market directly tied to COVID-19 and will provide a lasting benefit by decreasing this systematic risk impacting the overall economy.
 Owen Haney, The Virus, Risk, and Commercial Mortgage-Backed Securities: Examining Dodd-Frank’s Impact in the Midst of a Pandemic, 26 Fordham J. Corp. & Fin. L. 391, 394 (2021)
Carol M. Kopp, Commercial Mortgage-Backed Securities (CMBS), Investopedia, (October 25, 2020), https://www.investopedia.com/terms/c/cmbs.asp
Thomas Kenny, What are Commercial Mortgage-Backed Securities?, The Balance, (October 7, 2021), https://www.thebalance.com/what-are-commercial-mortgage-backed-securities-cmbs-416910
Carol M. Kopp, Commercial Mortgage-Backed Securities (CMBS), Investopedia, (October 25, 2020), https://www.investopedia.com/terms/c/cmbs.asp
Maegan E. O’Rourke, The New Normal: How the Dodd-Frank Risk Retention Rules Affect the Future of CMBS, 51 Suffolk Univ. L. Rev. 77, 81-82 (2018).
Understanding CMBS and CLO Markets, Signet Investments, “https://signetinvestments.com/understanding-cmbs-and-clo-markets/” https://signetinvestments.com/understanding-cmbs-and-clo-markets/ (Last visited November 6 2021)
Commercial Mortgage-Backed Securities (CMBS): A guide, Quicken Loans (January 27, 2021), https://www.quickenloans.com/learn/cmbs
Dorothy Neufield, Commercial Mortgage Delinquencies Near Record Levels, Visual Capitalist (July 16, 2020), https://www.visualcapitalist.com/mortgage-delinquencies/
U.S. CMBS Delinquencies Resume Increase in October, Fitch Ratings (November 6, 2020), “https://www.fitchratings.com/research/structured-finance/us-cmbs-delinquencies-resume-increase-in-october-06-11-2020” https://www.fitchratings.com/research/structured-finance/us-cmbs-delinquencies-resume-increase-in-october-06-11-2020
Owen Haney, The Virus, Risk, and Commercial Mortgage-Backed Securities: Examining Dodd-Frank’s Impact in the Midst of a Pandemic, 26 Fordham J. Corp. & Fin. L. 391, 394 (2021)
 Peter J. Irwin et al., CMBS Loan Workouts During COVID-19: A Borrower’s Perspective, Debevoise & Plimpton (May 14, 2020), https://www.debevoise.com/-/media/files/insights/publications/2020/05/20200514-cmbs-loan-workouts-during-covid-19.pdf https://www.debevoise.com/-/media/files/insights/publications/2020/05/20200514-cmbs-loan-workouts-during-covid-19.pdf
Steven L. Schwarcz, Systematic Regulation of Systematic Risk, 2019 Wis. L. Rev. 1, 1 (2019).
Owen Haney, The Virus, Risk, And Commercial Mortgage-Backed Securities: Examining Dodd-Frank’s Impact in the Midst of a Pandemic, 26 Fordham J. Corp. & Fin. L. 391, 401 (2021)
Craig Furfine, The Impact of Risk Retention Regulation on the Underwriting of Securitized Mortgages, 58 J. FIN. SERVS. RSCH. 91, 93 (2020).
Volcker Rule, The Real Estate Round Table https://www.rer.org/policy-issues/capital-credit/volcker-rule https://www.rer.org/policy-issues/capital-credit/volcker-rule (Last visited November 6, 2021)
A recent decision in the United States District Court for the District of Connecticut appears to be the first of its kind in the nation. In the case Audet et al v. Garza et al, a federal jury recently weighed in on whether cryptocurrency products were considered securities. The jury held that four digital-asset products linked to cryptocurrency were not securities.
In the case, a class of customers brought an action against GAW Miners LLC (“GAW Miners”) and ZenMiner LLC (“ZenMiner”) for running a cryptocurrency Ponzi scheme. When GAW Miners and ZenMiner were faced with demands from customers for the physical cryptocurrency mining equipment which they could not meet, GAW Miners and ZenMiner turned to Hashlets, Hashpoints, Paycoin and HashStakers (collectively the “Digital Assets”).  These Digital Assets provided customers with a portion of the computing power without owning the physical hardware. Moreover, the Digital Assets served as virtual wallets for the promissory notes and virtual currency of GAW Miners and ZenMiner. The plaintiffs argued that these Digital Assets were investment contracts and therefore were unregulated securities.
The plaintiffs asked Judge Michael Shea to rule as a matter of law that the Digital Assets were securities under the Howey test.  The Supreme Court in Howey stated an investment contract exists when “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”  However, in an unusual decision, Judge Shea declined to rule as a matter of law that the Digital Assets were securities. Instead, the judge left the issue of how to classify the Digital Assets for the jury. Despite the SEC previously referring to one of the Digital Assets, Hashlets, as a security in a case against one of the former defendants in this case, the jury ruled that the Digital Assets were not investment contracts, and therefore, they were not securities.
The issue of how to define cryptocurrencies is an ongoing debate, and the federal jury’s ruling in this case does not settle it.
 Elise Hansen, Crypto Mining-Linked Products Weren’t Securities, Jury Finds, Law360 (Nov. 2, 2021), https://www.law360.com/articles/1436790/crypto-mining-linked-products-weren-t-securities-jury-finds.
 HHR Wins Groundbreaking Jury Verdict in Crypto Fraud Trial, HHR (Nov. 3, 2021), https://www.hugheshubbard.com/news/hhr-wins-groundbreaking-jury-verdict-in-crypto-fraud-trial.
 Hansen, supra note 1.
 Alison Frankel, In apparent first, Conn. class action jury finds crypto products are not securities, Reuters (Nov. 3, 2021), https://www.reuters.com/legal/transactional/apparent-first-conn-class-action-jury-finds-crypto-products-are-not-securities-2021-11-03/.
 SEC v. W. J. Howey Co., 328 U.S. 293, 298–99 (1946).
 HRR, supra note 3.
 Hansen, supra note 1.