Recently, Pastore LLC perfected its appeal in New York’s First Department Appellate Division. Pastore LLC represents a celebrity chef in the matter, which involves a contract dispute dealing with election of remedies issues. The chef is well known and has high-end restaurants in New York and Las Vegas, and the issue in the case involves some of his historical publicity. Ultimately, the matter involves sophisticated contractual provisions, and thus the chef hired Pastore LLC to handle these contractual agreements.
Tag: Tyler Rutherford
Tokenized Assets: What are They and how are They Regulated?
As the decentralized world of blockchain continues to grow, tokenized assets have caught the eye of investors and regulators alike. Tokenized assets may be fungible or non-fungible. Fungible tokenized assets are interchangeable and indistinguishable such as Bitcoin and other cryptocurrencies (“Crypto”). Non-fungible tokens (“NFTs”) are unique tokens that are non-divisible and cannot be replaced because each token has a unique value.[1] Tokenized assets result from taking a tangible asset (such as real estate, paintings, and precious metals) or an intangible asset (such as a digital picture or a YouTube video) and converting the asset ownership into a digital token on a blockchain.[2] This process is known as tokenization.[3] By taking a real-world asset and making a digital representation, it creates a broader investor base, geographic reach, and a reduction in transaction times.[4] Moreover, placing the digital token on a blockchain ensures no single authority can erase your ownership in the tokenized asset.[5]
While tokenized assets can allow for a broader base of investors, like the Crypto market, the NFT market lacks clear regulations from the regulatory agencies such as the U.S. Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”).[6] Moreover, state regulatory bodies have yet to issue guidance on the tokenized asset market.[7]
The current legal framework was not designed to regulate and guide the creation and trade of digital assets.[8] Moreover, the question of what category an NFT falls into depends on the particular asset that was tokenized.[9] For example, the CFTC has stated that renewable energy credits and emission allowances are commodities as defined by the Commodity Exchange Act.[10] However, the SEC has stated that depending on the facts and circumstances of a given NFT, it might be considered an investment contract under the Howey test, which would cause the NFT to be regulated under the Securities Act of 1933 and Securities Exchange Act of 1934.[11] The legal uncertainty within the NFT market led SEC Commissioner Hester Peirce to recently state that guidelines would help provide the public with an understanding of how the SEC is approaching these issues.[12] The lack of a clear regulatory framework has made investors susceptible to fraud, and it allows for bad actors to avoid domestic and international anti-money laundering laws.[13]
Additionally, there is no standardized set of rights that accompanies an NFT since the seller determines what rights follow the NFT.[14] Therefore, sellers and buyers alike should understand the limitations that a transfer, assignment, or license may have on the NFT.
While tokenized assets allow for quick cross-border investment and increased liquidity of real-world assets, investors are left without a clear regulatory framework and, at times, not knowing what rights follow the purchase of an NFT. As the decentralized world of blockchain continues to grow, it is imperative that investors and businesses use common sense, sound legal advice, and diligence to navigate this market. Given the lack of legal certainty, attorney legal opinions on these assets will likely immunize any reasonable use.
[1] Tokenization: Opening Illiquid Assets to Investors, BNY Mellon (June 2019), https://www.bnymellon.com/us/en/insights/all-insights/tokenization-opening-illiquid-assets-to-investors.html.
[2]Id.
[3]Id.
[4]Id.
[5] What is asset tokenization?, Hedera, https://hedera.com/learning/what-is-asset-tokenization#:~:text=Asset%20tokenization%20is%20the%20process,either%20digital%20or%20physical%20assets.&text=Asset%20tokenization%20could%20convert%20ownership,0.0002%25)%20of%20the%20property (last visited Feb. 3, 2022).
[6] William de Sierra-Pambley, Tokenization: Opportunity and Regulation, Finding a Balance, Sheppard Mullin (Oct. 18, 2021), https://www.jdsupra.com/legalnews/tokenization-opportunity-and-regulation-5158893/.
[7]Id.
[8]NFTs: Key U.S. Legal Considerations for an Emerging Asset Class, Jones Day (April 2021), https://www.jonesday.com/en/insights/2021/04/nfts-key-us-legal-considerations-for-an-emerging-asset-class.
[9]Id.
[10]Id.
[11]Id.
[12] Sarah Wynn, SEC’s Peirce says agency guidance on nonfungible tokens needed, Roll Call (Jan. 25, 2022), https://rollcall.com/2022/01/25/secs-peirce-says-agency-guidance-on-nonfungible-tokens-needed/.
[13]NFTs: Key U.S. Legal Considerations for an Emerging Asset Class, supra note 11.
[14]Id.
Examiner’s Report Supports Pastore’s Client’s Claims Involving a High-End Westchester Development
Pastore LLC represents a large creditor and owner of a construction management company in a bankruptcy matter in the Southern District of New York where a billionaire filed bankruptcy to avoid liability to his business partner, Pastore LLC’s client, concerning high-end developments in Westchester and Connecticut. Pastore LLC with co-counsel made a motion to have an examiner review the company’s finances. The examiner’s report indicated that he owes millions back to the bankruptcy estate.
Pastore Brings Claims to Thwart Violations of Securities Laws by Broker-Dealers
Pastore LLC has brought claims to thwart violations of securities laws by broker-dealers to funnel money away from a rightful beneficiary to a wrongdoer. The scheme, as alleged in the federal complaint, conducted by the broker-dealers led to violations of their supervisory responsibilities under the Securities Exchange Act of 1934 (the “Exchange Act”) and the Investment Advisers Act of 1940 (the “Advisers Act”) as well as multiple FINRA rules. Moreover, FINRA and the SEC have previously fined these broker-dealers for conducting similar schemes. A recent article regarding this matter can be found here.
S.D.N.Y. Grants Pastore’s Motion for Alternative Service Against International Cryptocurrency Corporation
Pastore LLC represents a financial services company in a cryptocurrency contract dispute with a Uruguay joint-stock company with its principal place of business in Sao Paulo, Brazil. In an effort to effectuate service of process against the Uruguayan company, Pastore LLC filed a Motion for Alternative Service with the United States District Court for the Southern District of New York (the “S.D.N.Y.”). In an order that recognized the steps Pastore LLC had taken to comply with the standards of service of process on an international corporation, the S.D.N.Y. granted the Motion for Alternative Service and has allowed Pastore LLC to effectuate service of process via e-mail. The matter involves the trading of a carbon credit crypto coin on the Gemini exchange, as a result of Pastore’s client’s relationship with the well-known founders of the exchange. A recent article regarding this matter can be found here.
Stablecoins: What are They?
A little-known area of the growing cryptocurrency market is stablecoins. Stablecoins, a type of cryptocurrency, are not mined through an open network like Bitcoin and Ethereum.[1] Instead, stablecoins derive their value from another asset.[2] Most stablecoins are pegged to a national currency.[3] For example, the USD Coin is a stablecoin that is pegged to the U.S. dollar.[4] Therefore, one USD Coin is always worth one U.S. dollar.[5] By deriving their value from a national currency, stablecoins avoid the volatility that is usually associated with cryptocurrencies.[6] Like other cryptocurrencies, stablecoins are stored in digital wallets.[7]
While Treasury Secretary Janet Yellen has recognized the potential benefits of stablecoins such as “supporting beneficial payment options,” there are no regulations in place to monitor stablecoin reserves. [8] Government regulators are concerned about the implications of a relatively stable cryptocurrency that allows investors to avoid anti-money laundering (“AML”) regulations. [9] Recently, the President’s Working Group on Financial Markets (“PWG”), consisting of Treasury Secretary Janet Yellen, the chairpersons of the Board of Governors of the Federal Reserve, Securities and Exchange Commission, and Commodity Futures Trading Commission, issued a report recommending Congress to pass legislation to regulate the stablecoin market.[10]
The legislation recommended by the PWG report would limit the issuance of stablecoins to insured depository institutions and establish a federal framework to regulate other parties in stablecoin arrangements, such as the party that facilitates the transfer of stablecoins between individuals and the entity that stores the stablecoins.[11] While the PWG believes the proposed legislation should be passed urgently, it recommends in the meantime that agencies use their current authority to address the risks posed by the unregulated stablecoin market.[12] Moreover, the PWG recommends that international AML standards should be implemented to prevent the use of stablecoins by illicit actors.[13]
While stablecoins are still operating in an unregulated environment, one thing is clear: the market is only continuing to grow, and the SEC and other government agencies are taking notice of the unregulated area. Common sense, sound legal advice, and diligence will help any business or investor navigate this market despite the uncertainty surrounding stablecoins.
[1] Julian Dossett, Stablecoins: What they are, how they work and how to buy them, CNET (Dec. 6, 2021), https://www.cnet.com/personal-finance/crypto/stablecoins-what-they-are-how-they-work-and-how-to-buy-them/.
[2]Id.
[3] Kathryn G. Wellman; Neil T. Bloomfield, President’s working group report calls for stablecoin regulation, Reuters (Dec. 2, 2021), https://www.reuters.com/legal/transactional/presidents-working-group-report-calls-stablecoin-regulation-2021-12-02/.
[4] What is USD Coin? Coinbase, https://www.coinbase.com/usdc (last visited Dec. 28, 2021).
[5]Id.
[6] Wellman; Bloomfield, note 3.
[7] Dossett, note 1.
[8] Felicia Hou, Stablecoins are taking over the crypto world hot topic for Congress—here’s what they are and the fastest-rising ones to keep an eye on, Fortune (Dec. 8, 2021), https://fortune.com/2021/12/08/stablecoins-cryptocurrency-congress/ (quoting Janet Yellen.
[9] Wellman & Bloomfield, note 3.
[10] Id.
[11] President’s Working Grp. on Fin. Mkts., the Fed. Deposit Ins. Corp., & the Off. of the Comptroller of the Currency, Report on Stablecoins (Nov. 2021).
[12] Id.
[13] Id.
Second Circuit Affirms Jury Verdict Win for Pastore’s Hedge Fund Clients
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.”
Application of Business Interruption Insurance to Losses from COVID-19
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.[1] 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.[2] 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.[3]
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.[4] However, Judge Dooley stated that the subsections of the Virus Exclusion provision must be read together.[5] When viewed as a whole, the subsection One40 relied upon did not provide One40 with limited coverage for 30 days.[6] 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.
[1]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).
[2]Id. at *1.
[3]Id. at *7.
[4]Id. at *8.
[5]Id. at *11.
[6]Id.
[7]Id. at *12.