Latest / Bloomberg Law / Weekend Law: NYC Mayor Charged, Crypto Face-Off & J&J Bankruptcy

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Weekend Law: NYC Mayor Charged, Crypto Face-Off & J&J Bankruptcy · Bloomberg Law

0:03
Speaker 1: This is Bloomberg Law with June Brusso from Bloomberg Radio.
0:10
Speaker 2: The foreign money, the corporate money, the bribery, the years
0:13
Speaker 2: of concealment is a grave breach of the public's trust.
0:17
Speaker 3: Public office is a privilege.
0:20
Speaker 4: We aalize that Mayor Adams abused that privilege and broke
0:23
Speaker 4: the law.
0:23
Speaker 1: Manhattan US Attorney Damian Williams announced the first criminal charges
0:28
Speaker 1: ever against a city mayor of New York City on Thursday,
0:32
Speaker 1: after unsealing a fifty seven page indictment charging Mayor Eric
0:37
Speaker 1: Adams with a decade long trail of corruption. The indictment
0:41
Speaker 1: accuses Adams of accepting illegal campaign contributions and more than
0:47
Speaker 1: one hundred thousand dollars worth of luxury travel and other
0:51
Speaker 1: perks from Turkish officials and business people in exchange for
0:55
Speaker 1: favors that included helping Turkey get Fire Department approvals to
0:59
Speaker 1: open a new diplomatic tower in Manhattan despite concerns about
1:04
Speaker 1: its fire safety system. Adams denied any wrongdoing and struck
1:08
Speaker 1: a defiant tone, vowing to remain in office.
1:12
Speaker 5: My day to day will not change.
1:15
Speaker 6: I will continue to do the job for eight point
1:18
Speaker 6: three million New York officers that I was elected to do.
1:22
Speaker 1: Joining me is Richard Brofald, a professor Columbia Law School
1:25
Speaker 1: and an expert on state and local government law. Which
1:29
Speaker 1: the indictment charges Adams with bribery, wire fraud, conspiracy, and
1:35
Speaker 1: soliciting campaign contributions from foreign nationals. What struck you most
1:40
Speaker 1: about it?
1:41
Speaker 7: I think the level of fact that the government has
1:43
Speaker 7: put in the indictment means that at least some of
1:46
Speaker 7: the counts terified counts. My sense that at least four
1:49
Speaker 7: of them are pretty straightforward, and if the government is
1:52
Speaker 7: able to prove in court the facts that they're alleging
1:55
Speaker 7: in the indictment, it would be very hard to defend
1:58
Speaker 7: against them.
1:58
Speaker 1: What are the four that straightforward?
2:01
Speaker 7: So they are the two that are about foreign campaign contributions,
2:04
Speaker 7: you know, one for the twenty twenty one campaign and
2:06
Speaker 7: one for the twenty twenty five campaign. That is flat
2:09
Speaker 7: out illegal and in fact, when you actually get to
2:11
Speaker 7: the count obviously there's a long factual backdrop, but those
2:14
Speaker 7: counts are like two paragraphs long. It's extremely shortened to
2:17
Speaker 7: the point. And if they can show that he kind
2:20
Speaker 7: of intentionally and with his team his associates worked with
2:24
Speaker 7: foreign donors knowing they were foreign donors to get them
2:28
Speaker 7: to contribute to his campaign. That's pretty close to open
2:30
Speaker 7: and shut if the facts prove out. And the other
2:33
Speaker 7: the other two that are pretty close. Those two just
2:35
Speaker 7: serve very powerful. Is the federal funds Riberry loads the
2:38
Speaker 7: ones that basically charge him with bilking the New York
2:42
Speaker 7: City Matching Funds program through various ways again getting the
2:46
Speaker 7: foreign donations, but also other donations where they broke them
2:49
Speaker 7: down and the persuaded the donors to use straw donors
2:52
Speaker 7: so that larger donations were funneled through smaller donors so
2:56
Speaker 7: that they were matchable under the New York City Matching
2:58
Speaker 7: Funds program. That also is in they can prove that
3:01
Speaker 7: that does seem like a straightforward effort on the part
3:04
Speaker 7: of the mayor to for the City of New York.
3:06
Speaker 7: And you know that's what the federal funds bribery thing is.
3:09
Speaker 7: You know, is he in effect using this for his
3:12
Speaker 7: own benefit. So they certainly have laid out a set
3:15
Speaker 7: of facts that if they can prove them, are pretty strong.
3:18
Speaker 7: There are no gold bars in this one, like him Mendez,
3:20
Speaker 7: but they've laid out a lot in.
3:22
Speaker 1: A lot of detail Williams also spoke about how Adams
3:26
Speaker 1: failed to disclose this free and discounted travel. Where does
3:31
Speaker 1: that fit in.
3:31
Speaker 7: That's a good question because I think a lot of
3:33
Speaker 7: what they describe in course are violations of New York
3:36
Speaker 7: City conflex of interest law, which is not a violation
3:38
Speaker 7: of federal law. I mean, the failer to disclose all
3:41
Speaker 7: of these things violated city law. They're giving that as
3:44
Speaker 7: all background, but they're not charging him per se for
3:47
Speaker 7: not disclosing, because that's not a federal violation. I think
3:49
Speaker 7: it goes to the idea that he was hiding it,
3:52
Speaker 7: that he knew that he was getting these benefits, and
3:54
Speaker 7: that there was something improper about the benefits that he
3:57
Speaker 7: was getting, and that he was getting them in order
3:59
Speaker 7: to subsequently influence of official actions. So to me, it's
4:02
Speaker 7: more maybe guilty conscience that he was covering his tracks,
4:05
Speaker 7: because even receiving benefits from these Turkish interests don't necessarily
4:09
Speaker 7: violate federal they might have violate a New York City
4:11
Speaker 7: conflicts law, and I think they were using it to
4:13
Speaker 7: show that this is part of a broader scheme to
4:16
Speaker 7: get money from these Turkish interests, either just sports campaign
4:20
Speaker 7: and or in exchange for him multimately doing them favors
4:23
Speaker 7: official favors.
4:24
Speaker 1: There are also allegations about cover up, including that he
4:29
Speaker 1: created a fake paper trail to disguise some of the
4:33
Speaker 1: travel and perks. They say, it's always the cover up.
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Speaker 7: Of course, the idea that it wasn't just sloppy, wasn't
4:38
Speaker 7: just unintentional, that this was all part of a conscious plan.
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Speaker 1: The business is circumventing the city's ban on corporate contributions.
4:46
Speaker 1: How has that been to a federal.
4:47
Speaker 7: Again, it's I think part of this idea that he
4:51
Speaker 7: was using the wires, because they says all technically wire
4:54
Speaker 7: fraud to defraud in New York City, because again he
4:58
Speaker 7: was taking those corporate contributions, turning them into individual contributions
5:01
Speaker 7: and matching them. So in effect, this was again part
5:04
Speaker 7: of a scheme to use the wires to defraud New
5:08
Speaker 7: York City, and New York City received federal funds. That's
5:10
Speaker 7: why it's federal program bribery at US Code six sixty six.
5:14
Speaker 7: I mean, the foreign donations are clearly illegal under federal law,
5:18
Speaker 7: the domestic corporate ones, no. But what they're saying is
5:22
Speaker 7: that he was engaged in a scheme to defraud New
5:25
Speaker 7: York City, because it's not so much that he got
5:27
Speaker 7: the donations as he was leveraging the donations to kid
5:30
Speaker 7: matching fund money, and that's tax payer dollars.
5:32
Speaker 1: Adams was arraigned on Friday and pleaded not guilty, and
5:35
Speaker 1: we got a hint of the defense from his high
5:37
Speaker 1: profile lawyer, Alex Spiro, who's represented Elon Musk, jay Z
5:43
Speaker 1: and Alec Baldwin, among others.
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Speaker 2: There are no emails, text messages, or any corroboration whatsoever
5:51
Speaker 2: that the mayor knew about anything having to do with
5:53
Speaker 2: these campaign donations. The entire body of evidence is one
5:58
Speaker 2: staffer that says there was a conversation. What you have
6:04
Speaker 2: not learned is that that staffer has lied.
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Speaker 1: Now that's just a defense lawy's public take on the indictment.
6:12
Speaker 1: But perhaps the defense will center on I didn't know
6:15
Speaker 1: what my staffers were doing.
6:17
Speaker 7: I didn't know. I mean, somewhere along the lines of
6:19
Speaker 7: these are my staff I didn't know what they were doing.
6:21
Speaker 7: Hard to say I didn't know this was illegal, and
6:23
Speaker 7: it could be a I didn't know this was happening,
6:25
Speaker 7: And certainly I think it's probably the strongest defenses if
6:28
Speaker 7: there are already with the in some sense that taking
6:31
Speaker 7: all of these Turkish benefits really, you know, didn't violate
6:34
Speaker 7: any federal law. The government is going to have to
6:37
Speaker 7: link up all the benefits he got to the fact
6:40
Speaker 7: that he took them knowing they were intending to influence
6:42
Speaker 7: him in official actions. That's the bribery standard, that he
6:46
Speaker 7: knew that he was being influenced, that he took them
6:49
Speaker 7: knowing they were intended to influence his official actions. Frankly,
6:51
Speaker 7: that may be a challenge for the last count. I
6:53
Speaker 7: haven't really spoken about the last count until now, and
6:55
Speaker 7: that's the straightforward bribery that he took these things. He
6:58
Speaker 7: took all these benefits in exchange for basically pressuring the
7:01
Speaker 7: fire department to accelerate the approval of that building. The
7:04
Speaker 7: challenge there is that he was taking benefits for years
7:06
Speaker 7: and years before, so I think the government is going
7:09
Speaker 7: to have to kind of link up all of the
7:11
Speaker 7: free travel on the free hotel rooms that he got
7:15
Speaker 7: and connect that to the fact that he then did
7:18
Speaker 7: this favor for the Turkish government.
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Speaker 1: And that's what struck me that there was really only
7:23
Speaker 1: one major favor that he allegedly did after supposedly years
7:29
Speaker 1: and years of taking the travel benefits.
7:33
Speaker 7: I think that's going to be the hardest count because
7:36
Speaker 7: you've got the quid and you've got the quo, but
7:37
Speaker 7: do you have the pro you have the linkage. Whereas
7:41
Speaker 7: I think the easiest counts of the foreign funds because
7:43
Speaker 7: to me, if they made a payments and he knew
7:45
Speaker 7: about it and it was involved in making that happen,
7:48
Speaker 7: that's all you need to show for the foreign funds
7:51
Speaker 7: and for the matching funds, it's pretty close. If he
7:54
Speaker 7: knew where he was directing his team to work with
7:56
Speaker 7: these donors to break up their donations into smaller ones
8:00
Speaker 7: in funnel them through employees so that they were all matchable.
8:03
Speaker 7: That's also, you know, a violation of the city law.
8:06
Speaker 7: It connects up with the federal law that makes it
8:09
Speaker 7: a crime basically to the fraud a government that's receiving
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Speaker 7: federal funds.
8:13
Speaker 1: Rich The Supreme Court has been narrowing the scope of
8:17
Speaker 1: anti corruption laws for more than a decade. Would that
8:21
Speaker 1: line of decisions affect this case?
8:24
Speaker 7: Yeah, I mean I think that's a legitimate point. So
8:27
Speaker 7: one thing, those will not affect the foreign campaign contributions. Well,
8:31
Speaker 7: I think those are the ones that's going to be
8:33
Speaker 7: the hardest term to fight. That should not affect the
8:35
Speaker 7: foreign campaign contributions. For the others, they do require either
8:39
Speaker 7: the showing of an official action, and you know, that's
8:43
Speaker 7: the question of whether or not pressuring the fire Department
8:45
Speaker 7: was an official action. It may be in that it
8:48
Speaker 7: was trying to affect a government's decision and he was
8:51
Speaker 7: making phone calls to do that, but that's going to
8:53
Speaker 7: be the issue there will be if he take an
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Speaker 7: official action and was it sufficiently tightly linked up to
9:00
Speaker 7: the benefits he received. That one, I think is going
9:02
Speaker 7: to be tricky, And even the first one about the
9:04
Speaker 7: scheming to get the matching funds again is going to
9:08
Speaker 7: have to show that he was kind of showing that
9:11
Speaker 7: he would be influence in some way by these supportive people.
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Speaker 7: So that's what I'm saying. I think the most straightforward
9:18
Speaker 7: is the accepting of foreign funds first campaign, the foreign
9:21
Speaker 7: campaign contributions.
9:22
Speaker 1: And I think it was on the last day of
9:24
Speaker 1: the term that the Supreme Court came down with that
9:28
Speaker 1: controversial opinion six to three, with the conservatives of course
9:32
Speaker 1: and the majority basically finding that the federal law that
9:35
Speaker 1: prescribes bribes to state and local officials. Doesn't make it
9:40
Speaker 1: a crime for those officials to accept gratuities for their
9:44
Speaker 1: past acts.
9:45
Speaker 7: Snyder, Yes, bribe, so on about right illegal gratuities, but
9:49
Speaker 7: that he hadn't been charged with taking a bribe, so
9:52
Speaker 7: that's not the same thing. They are charging bribery here.
9:55
Speaker 7: The problem in that case is the way the government
9:57
Speaker 7: framed what the man did. Is first he did the
10:00
Speaker 7: favors for the private companies, and then he went to
10:04
Speaker 7: them and said, you know, give me a no show job.
10:06
Speaker 7: Is something like that, The government didn't charge bribery. The
10:08
Speaker 7: government basically charged accepting an illegal gift. Here they're charging bribery.
10:13
Speaker 1: You never know what the Supreme Court would do. He
10:15
Speaker 1: could get convicted below, and the Supreme Court could say,
10:17
Speaker 1: wait a second. There are plenty of those cases, including
10:20
Speaker 1: former Virginia Governor Bob McDonald, the Bridgegate cases.
10:25
Speaker 7: Yeah, and the Supreme Court has rejected many many corruption convictions.
10:29
Speaker 1: Is there a reason why?
10:30
Speaker 7: It's hard to say? I mean, one argument is these
10:33
Speaker 7: are all involved state and local officials, and maybe the
10:35
Speaker 7: Supreme Court is a little nervous about federalizing the state
10:38
Speaker 7: and local misconduct. Maybe they think it should be better
10:40
Speaker 7: handled by local das. I don't know, And sometimes there's
10:43
Speaker 7: a sort of a First Amendment element, but which I
10:46
Speaker 7: think is pretty thin about. You know, people are trying
10:48
Speaker 7: to influence government all the time. We don't want to
10:50
Speaker 7: make it a crime to be a lobbyist, for example.
10:53
Speaker 7: But I think a lot of their concerns are federalism concern.
10:55
Speaker 1: There are lots of calls for Adams to resign, but
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Speaker 1: New York Governor kathycl she has the power to remove him.
11:03
Speaker 7: The governor can remove him. The governor has authority under
11:05
Speaker 7: state load to remove the mayor. SDR when he was governor,
11:08
Speaker 7: came very close to removing Mayor Walker, who resigned while
11:11
Speaker 7: he was subject to the procedure for removal. The state
11:14
Speaker 7: law says very little about the grounds for removal. It
11:17
Speaker 7: gives a little bit more on the process, a little
11:19
Speaker 7: bit of due process that the governor would have to
11:22
Speaker 7: afford the mayor in terms of, you know, the charges
11:24
Speaker 7: against him and being able to present a defense. But yes,
11:27
Speaker 7: state law most definitely, very vaguely, definitely does authorize the
11:32
Speaker 7: governor to remove the mayor.
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Speaker 1: So many ramifications and the US Attorney just about promise
11:39
Speaker 1: there would be more prosecutions. Thanks so much, rich That's
11:43
Speaker 1: Professor Richard Rflt of Columbia Law School coming up next.
11:47
Speaker 1: Coinbase and the SEC face off in court. I'm June Grass.
11:52
Speaker 1: When you're listening to Bloomberg Cryptocurrency Exchange. Coinbase and the
11:57
Speaker 1: Securities and Exchange Commission faced on off in the Third
12:00
Speaker 1: Circuit Court of Appeals this week, as Coinbase is trying
12:04
Speaker 1: to force the SEC to create new rules that would
12:08
Speaker 1: govern digital assets. Appellate Judges Thomas Ambro and Stefanos Phoebus
12:14
Speaker 1: question the SEC's refusal to engage in rule making and
12:18
Speaker 1: its approach of regulating by enforcement.
12:21
Speaker 8: It almost looks as if to an outside observer, as
12:26
Speaker 8: if you're going after the platforms in a way that
12:29
Speaker 8: will crush the industry without really getting into rulemaking.
12:33
Speaker 4: It is true that this case is not directly about
12:36
Speaker 4: due process, but there are some serious notice concerns with
12:39
Speaker 4: we might hit you with serious civil penalties, but we
12:43
Speaker 4: won't tell you what will trigger the civil penalties.
12:47
Speaker 1: Although Judge Ambro did acknowledge how new the field is.
12:51
Speaker 9: In this area, which is you know, since two thousand
12:54
Speaker 9: and eight, two thousand and nine, it is so new.
12:57
Speaker 9: I can see why a lot of regulators are or
13:00
Speaker 9: people considering regulation are saying we better go slow on
13:04
Speaker 9: this one.
13:04
Speaker 8: This is a new world.
13:07
Speaker 1: And Judge Biebis asked Coinbase, as attorney Eugene Scalia, what's
13:11
Speaker 1: the endgame here?
13:13
Speaker 6: Eranor we are asking now that they be ordered to
13:15
Speaker 6: proceed directly to a rule making. We think they have
13:17
Speaker 6: had more than enough opportunity to answer Coinbas's workability concerns
13:23
Speaker 6: extraordinary remedy.
13:24
Speaker 4: What would we say has to be in such a rule?
13:28
Speaker 1: Joining me? Is securities law expert James Park, a professor
13:31
Speaker 1: at UCLA Law School. Jim tell us how this ended
13:34
Speaker 1: up before the Third Circuit Court of Appeals in Philadelphia.
13:38
Speaker 5: Coinbase filed a petition with the SEC asking it to
13:42
Speaker 5: write rules relating to crypto, and the SEC denied that petition,
13:48
Speaker 5: and so Coinbase filed the lawsuit saying that the denial
13:52
Speaker 5: was arbitrary and capricious. That's a standard that's typically applied
13:55
Speaker 5: in administrative law. And the district court initially denied that petition,
14:02
Speaker 5: and now it was appealed to the Third Circuit Court
14:05
Speaker 5: of Appeals and they heard the oral argument on it.
14:09
Speaker 1: The lawyer for Coinbase Eugene Scalia, and I have to
14:12
Speaker 1: say he did sound a little like his father, the
14:15
Speaker 1: late Justice Antonin Scalia.
14:18
Speaker 7: Uh that right.
14:18
Speaker 1: Wow. So he told the three judge panel that the
14:22
Speaker 1: SEC had provided no explanation for denying the request for rulemaking,
14:28
Speaker 1: and Coinbase is complaining about the SEC's regulation by enforcement.
14:34
Speaker 5: I think their main argument is that the SEC has
14:38
Speaker 5: publicly said to various crypto organizations come in and register,
14:43
Speaker 5: and their argument is that this is disingenuous because there
14:47
Speaker 5: is no real practical, pragmatic way for these associations to
14:54
Speaker 5: register and provide disclosure. And this reflects the decentralized nature
15:00
Speaker 5: of blockchain projects, where you are essentially creating a network
15:05
Speaker 5: community that runs itself without any central manager that is
15:10
Speaker 5: in charge. And unlike a corporation where you have a
15:14
Speaker 5: corporate entity and a centralized management team that can collect
15:19
Speaker 5: disclosure about the corporation, put it into SEC filings and
15:23
Speaker 5: file it in theory, you do not have that with
15:27
Speaker 5: crypto projects. And their argument is that you know, these
15:30
Speaker 5: crypto projects associations cannot come in and register because there
15:34
Speaker 5: is no central issuer that can provide disclosure. And until
15:39
Speaker 5: we have a set of rules that tells us how
15:41
Speaker 5: this works. We simply cannot move forward.
15:45
Speaker 1: Is it often that agencies are asked in quarter anywhere
15:50
Speaker 1: to make rules because usually you think the less rules,
15:53
Speaker 1: the better for those who are being regulated.
15:55
Speaker 5: It's true, and it's just an interesting example where the
15:59
Speaker 5: industry is demanding a certain amount of certainty, and because
16:04
Speaker 5: this is a industry that is still emerging, is on
16:08
Speaker 5: the border in terms of legality. I think that coinbase
16:12
Speaker 5: and others in the industry believe that a set of
16:15
Speaker 5: rules or a statute would confer a certain amount of
16:18
Speaker 5: legitimacy on crypto because if you regulate it, it must
16:23
Speaker 5: be permissible. In some instances. There are certainly cases where
16:28
Speaker 5: you see corporations in the industry asking for more specificity
16:33
Speaker 5: with respect to administrative rules. That is something that we
16:36
Speaker 5: do see from time to time. Whether or not that
16:39
Speaker 5: happens in a formal petition for rulemaking, I think that
16:42
Speaker 5: is much less common and that this is an unusual case.
16:45
Speaker 1: Let's talk about the SEC's position and the how we test.
16:49
Speaker 1: They're saying, basically, look, we don't need to make any
16:52
Speaker 1: new rules. We have rules here.
16:54
Speaker 5: That's their argument is that we have an established legal framework.
16:58
Speaker 5: We have the Securities active nineteen teen thirty three. We
17:01
Speaker 5: have how we test that says that investment contracts that
17:05
Speaker 5: securities in certain circumstances. We have shown you through various
17:09
Speaker 5: administrative releases and enforcement actions how we think to how
17:14
Speaker 5: we test applies to crypto and in some circumstances they
17:17
Speaker 5: are security. When something is a security, we have a
17:21
Speaker 5: set procedure where you have to file a registration statement
17:24
Speaker 5: if you want to sell those securities to the general public.
17:27
Speaker 5: If you are in exchange that has securities trading on it,
17:30
Speaker 5: you also have to register with us as well. And
17:33
Speaker 5: I think they would say, you know, you want this
17:35
Speaker 5: to be this centralized organization where no one is in charge.
17:39
Speaker 5: But the reality is that there is usually a central
17:43
Speaker 5: group of individuals who basically start these crypto projects. They
17:48
Speaker 5: are developing the code, they develop the applications, They reach
17:52
Speaker 5: out to investors, they promote it, they promise high returns,
17:56
Speaker 5: They keep, you know, a lot of crypto for themselves.
17:59
Speaker 5: Of the price of the crypto goes up, they make
18:01
Speaker 5: a lot of money. Kind of like a controlling shareholder
18:04
Speaker 5: or insider of the organization. You know, those organizers could
18:08
Speaker 5: certainly provide disclosure. They could, you know, certainly be responsible
18:12
Speaker 5: for filing a registration statement, and that has not happened,
18:16
Speaker 5: and I think that's what they would argue.
18:18
Speaker 3: In response.
18:19
Speaker 1: A couple of the judges did acknowledge that this was
18:21
Speaker 1: a new area and maybe you'd want to proceed slowly,
18:25
Speaker 1: But then you had some sort of accusations against the SEC.
18:29
Speaker 1: One judge said that it looks like you're going after
18:32
Speaker 1: platforms in a way that would crush the industry without
18:35
Speaker 1: getting into rulemaking, and another said, it's not that you're
18:38
Speaker 1: not interested in the area, it's just that you're interested
18:41
Speaker 1: in picking off wrongs without giving higher level guidance. It's
18:45
Speaker 1: hard to measure which way it's going, but it did
18:47
Speaker 1: seem like they had a lot of hard questions for
18:49
Speaker 1: the SEC.
18:50
Speaker 5: I suspect it's very possible, and it's maybe probable that
18:54
Speaker 5: these questions reflect a certain skepticism about the SEC's position.
18:58
Speaker 5: And you know, the idea that the SEC is crushing
19:02
Speaker 5: the crypto industry is probably accurate to some extent. Now,
19:06
Speaker 5: the SEC would say, well, the reason we are closely
19:10
Speaker 5: regulating this industry and preventing the schemes from flourishing and
19:14
Speaker 5: selling and distributing crypto to a lot of members of
19:16
Speaker 5: the public is because we're concerned that a lot of
19:19
Speaker 5: these projects are fraught and that investors are going to
19:22
Speaker 5: lose a lot of money, and if we don't keep
19:25
Speaker 5: an eye on it, we're going to be blamed. People
19:27
Speaker 5: are going to ask us, you know, what were you doing,
19:29
Speaker 5: And given past experience with you know, FTX for example,
19:34
Speaker 5: and some of the other scandals that we've seen, there
19:38
Speaker 5: is probably good reason to be very careful about allowing
19:42
Speaker 5: wide scale distributions of crypto to public investors in the
19:47
Speaker 5: United States. So I think that the judges, though, you know,
19:52
Speaker 5: I think that probably reflects a sincere questioning of the
19:55
Speaker 5: SEC and its regulatory approach. It has moved sometimes in
20:00
Speaker 5: contradictory ways, in ways that are ambiguous, and you've seen
20:05
Speaker 5: some shifts in their policy where sometimes they are open
20:08
Speaker 5: to passing rules, other times, you know, they seem to
20:12
Speaker 5: not be open to that, and so they have kind
20:14
Speaker 5: of shifted their position here and there. The SEC would say, well,
20:17
Speaker 5: this reflects the difficulty of keeping up with this innovative
20:21
Speaker 5: technology and understanding exactly what's going on. And we were
20:24
Speaker 5: very careful at first. We didn't crush it right from
20:27
Speaker 5: the beginning because we just wanted to see how it
20:29
Speaker 5: would evolve, and over time with experience, we now understand
20:33
Speaker 5: there are some real problems in dangers. There have not
20:36
Speaker 5: been a whole lot of useful applications of crypto that
20:40
Speaker 5: we know of, other than its use as a currency
20:43
Speaker 5: to make transfers of money that would not be permitted
20:46
Speaker 5: under other federal regulations like banking law, and that's sort
20:50
Speaker 5: of the main thing that it has been used for.
20:52
Speaker 5: So I think that you know, the questions do reflect
20:54
Speaker 5: a general frustration at the SEC, and maybe you know
20:59
Speaker 5: the reality, I think that the SEC is not interested
21:03
Speaker 5: in creating an easy path for these crypto firms to flourish.
21:08
Speaker 5: I think that is probably accurate.
21:09
Speaker 1: So do you think that that's the reason why they're
21:11
Speaker 1: not making rules, because it seems pretty clear under Gary
21:15
Speaker 1: Gensler that they consider digital assets as securities.
21:19
Speaker 5: It's complicated. I think that there are a lot of
21:22
Speaker 5: really difficult issues here, and there are no clear answers
21:26
Speaker 5: as to what sorts of regulations you would pass, and
21:30
Speaker 5: a lot of the sort of issue of whether a
21:32
Speaker 5: digital asset is a security or not is very fact
21:34
Speaker 5: intensive so you know, to give an example, sometimes crypto
21:39
Speaker 5: is purchased for consumptive reasons. I want this digital coin
21:43
Speaker 5: because it gives me access to this service. Sometimes it's
21:46
Speaker 5: purchased because I want to make money, because I'm speculating,
21:49
Speaker 5: I'm investing in this network. And if it's investment, it's
21:53
Speaker 5: more likely to be a security. If it's more for
21:55
Speaker 5: consumptive means, then that's less likely to be a security.
21:59
Speaker 5: How do you write a rule that tells us when
22:02
Speaker 5: something is more of a consumptive purchase in something that
22:05
Speaker 5: is for investment. It is very difficult to do so,
22:09
Speaker 5: and you know that I think is part of the
22:12
Speaker 5: reason why the SEC is wary about getting into this
22:16
Speaker 5: process of trying to draw these distinctions. It would much
22:19
Speaker 5: rather look at these situations case by case and bring
22:24
Speaker 5: an enforcement action and maybe litigate it before a judge,
22:27
Speaker 5: as opposed to trying to answer some you know, questions
22:31
Speaker 5: that may not be answerable. And I think that's a
22:33
Speaker 5: reason why they are not essentially writing these rules. And
22:37
Speaker 5: I do think that FTX and the Crypto winter, as
22:40
Speaker 5: they say, is something that has really affected the SEC's
22:44
Speaker 5: view of crypto. And if you write rules that permit
22:48
Speaker 5: crypto firms to sell widely to the public and there
22:51
Speaker 5: are significant frauds, then the SEC will get blamed for
22:54
Speaker 5: that too, So it may not be in their interest
22:57
Speaker 5: to go forward with extensive rules.
23:01
Speaker 1: So at one point, one of the judges said to
23:04
Speaker 1: Coinbase's attorney, well, what rule would we tell them to make?
23:08
Speaker 1: I mean, do they have to say specifically or just
23:10
Speaker 1: say SEC engage in rule making on crypto.
23:14
Speaker 5: Well, I don't think the Third Circuit at this stage
23:17
Speaker 5: would order the SDC to engage in rule making. I
23:21
Speaker 5: think probably the best possible result for Coinbase, which I
23:25
Speaker 5: think is feasible, is that the Third Circuit will say
23:27
Speaker 5: that your denial was arbitrary and capricious because it didn't
23:31
Speaker 5: explain enough as to why you are not making rules.
23:35
Speaker 5: And so I think the SEC will still get a chance,
23:38
Speaker 5: even if it loses this case, to articulate the reasons
23:43
Speaker 5: for denying coinbases petition. But I think just the procedural
23:48
Speaker 5: setting of this particular appeal is not one where even
23:52
Speaker 5: if the SEC loses, they're going to be writing rules
23:56
Speaker 5: on crypto, you know, a month after the decision comes out.
23:59
Speaker 5: I think what happened is that they would look at
24:01
Speaker 5: the petition again and they might deny it again but
24:06
Speaker 5: give more extensive reasons. That's one possibility. On the other end,
24:10
Speaker 5: maybe they will change their mind. It's certainly possible that
24:12
Speaker 5: they could change their mind and say, hey, we will
24:14
Speaker 5: write rules. But I would be surprised if they did that.
24:17
Speaker 5: So we're a long ways from the SEC being required
24:22
Speaker 5: to write rules relating to crypto and.
24:25
Speaker 1: So we'll keep seeing this being litigated, especially at the
24:29
Speaker 1: district court level. Thanks so much, Jim. That's Professor James
24:32
Speaker 1: Park of UCLA Law School. Coming up next, Jay and
24:36
Speaker 1: Jay tries bankruptcy for a third time. I'm June Grosse.
24:40
Speaker 1: When you're listening to Bloomberg. Johnson and Johnson first file
24:45
Speaker 1: for bankruptcy in North Carolina, then in New Jersey. Both
24:49
Speaker 1: cases were dismissed. Will the third time in Texas be
24:53
Speaker 1: the charm? Jay and Jay is trying to resolve tens
24:57
Speaker 1: of thousands of lawsuits that allege it's t HEUK based
25:00
Speaker 1: baby powder caused cancer, and it says it has the
25:04
Speaker 1: support of eighty three percent of claimants for a roughly
25:07
Speaker 1: eight billion dollar settlement, but lawyers for claimants who oppose
25:12
Speaker 1: the settlement are asking Houston bankruptcy judge Christopher Lopez to
25:17
Speaker 1: transfer the case back to New Jersey. Joining me is
25:20
Speaker 1: Anthony Casey, a business and corporate bankruptcy professor at the
25:24
Speaker 1: University of Chicago Law School. Tony tell us why Jay
25:28
Speaker 1: and Jay ran into trouble with its bankruptcies.
25:32
Speaker 3: So this goes back to twenty twenty one. Johnson and Johnson,
25:37
Speaker 3: their consumer subsidiary, had been the defendant in suits alleging
25:41
Speaker 3: ovarian cancers Theliomo being caused by mostly their baby products line,
25:46
Speaker 3: although there's some other products involved containing calc and so
25:50
Speaker 3: there was a bad judgment around that time, and this
25:53
Speaker 3: leads to the decision in twenty twenty one to file
25:57
Speaker 3: an entity into bankruptcy. And this is and people start
26:00
Speaker 3: talking about the Texas two step. Now, the allegation is
26:03
Speaker 3: that there's asbestos in the product, and so what they
26:07
Speaker 3: looked to as a precedent where a few other companies
26:09
Speaker 3: had filed what had become majoratively known is Texas two steps.
26:13
Speaker 3: The idea of the Texas two step is step one.
26:17
Speaker 3: You divide the defendant entity into two entities, one that
26:22
Speaker 3: houses the kind of ongoing business and one that houses
26:25
Speaker 3: the liabilities. Step two, you put the liability company into bankruptcy,
26:30
Speaker 3: and if you describe it that way, a lot of
26:33
Speaker 3: people get worked up and say, oh, look, that's a
26:35
Speaker 3: fraud and transfer. Everyone kind of skips over. There's an
26:38
Speaker 3: intermediate step, which is you also include a funding agreement,
26:41
Speaker 3: and the funding agreement says when the entity goes into bankruptcy,
26:45
Speaker 3: the new asset company guarantees to make available the value
26:49
Speaker 3: of the assets that were available before the division. They said.
26:53
Speaker 3: This kind of majorably became known as the Texas two step.
26:55
Speaker 3: Where did that come from? Well, the statute under which
26:58
Speaker 3: you divide the company in the first step is a
27:00
Speaker 3: Texas divisional merger statute. So Johnson and Johnson, really Johnson
27:05
Speaker 3: and Johnson Consumer NK JJCI was called that company does
27:10
Speaker 3: the divisional merger creates the new JJCI and the LTL
27:14
Speaker 3: LTL files in the Western District of North Carolina. There's
27:18
Speaker 3: a funding agreement that says all of the assets that
27:21
Speaker 3: were available before the division are still available, the value
27:25
Speaker 3: of those are available and guaranteed for whatever liabilities end up,
27:29
Speaker 3: and in case those assets lose value, the parent company
27:32
Speaker 3: J and J guarantees to make good on any change
27:36
Speaker 3: in value. That was bankruptcy number one.
27:39
Speaker 1: So that was transferred to New Jersey, where the bankruptcy
27:43
Speaker 1: judge refused to dismiss the case, but tell us what
27:47
Speaker 1: happened When that was appeal to the Third Circuit.
27:50
Speaker 3: The Third Circuit says, no, you should have dismissed the case.
27:55
Speaker 3: Nothing to do with the Texas two step other than
27:59
Speaker 3: the funding agreement provided value. And the Third Circuit says,
28:02
Speaker 3: there's too much money available here for you to claim
28:05
Speaker 3: that you need to be in bankruptcy. You're too solvent,
28:08
Speaker 3: you're not in immediate financial distress. So that case gets dismissed.
28:13
Speaker 3: A couple hours after the dismissal becomes effective, you have
28:17
Speaker 3: attempt to and a file bankruptcy again, and this time
28:20
Speaker 3: in the district of New Jersey. So what they do
28:23
Speaker 3: following kind of the logic of that Third Circuit opinion
28:27
Speaker 3: is they reduce the amount of money available, but they
28:30
Speaker 3: maintain enough so that we're still a solvent entity so
28:32
Speaker 3: that we're not going to underpay creditors. Is the way
28:35
Speaker 3: that they the second letter framed it, and they file
28:38
Speaker 3: bankruptcy again, and this time in the District of New Jersey.
28:41
Speaker 3: This time the bankruptcy judge says, well, i'm looking at
28:44
Speaker 3: the opinion before I'm looking at what you did. There's
28:46
Speaker 3: still enough money available that you're not close enough to
28:51
Speaker 3: financial distress, So I'm going to have to dismiss this case.
28:54
Speaker 3: That goes on appeal to the Third Circuit. The Third
28:56
Speaker 3: Circuit says that's right.
28:58
Speaker 1: Affirms filed the next bankruptcy outside the third Circuit, which
29:04
Speaker 1: is the only circuit that has that financial distress rule,
29:08
Speaker 1: and also changed its strategy.
29:11
Speaker 3: So in the third round, Johnson and Johnson's announced, rather
29:16
Speaker 3: than file bankruptcy and then see what happens, we're going
29:19
Speaker 3: to get the vote first. We're going to go out
29:22
Speaker 3: to all the claimants and try to build a settlement. Now,
29:25
Speaker 3: the goal of the first two bankruptcies was to be
29:27
Speaker 3: in bankruptcy and then build a settlement that creates a
29:30
Speaker 3: fund that allows claimants both past and future to come
29:34
Speaker 3: and collect against that fund. This time around, they're like, well,
29:37
Speaker 3: let's get everyone on board on the fund first. So
29:39
Speaker 3: they do what it's called a prepackaged bankruptcy. So we're
29:42
Speaker 3: going to get a vote of all the potential claimants
29:44
Speaker 3: and we've got to get a supermajority to get a
29:47
Speaker 3: settlement through. Now, during that time, they apparently determined that
29:51
Speaker 3: they were going to use bankruptcy to settle the ovarian
29:54
Speaker 3: cancer tout claims, but not them as athelioma claim so
29:58
Speaker 3: they separate those off. We have a vote among the
30:01
Speaker 3: ovarian cancer claimants over the summer, and they now say
30:04
Speaker 3: they have roughly eighty three percent of the potential claimants
30:08
Speaker 3: voting for a settlement, and the settlement was kind of
30:12
Speaker 3: laid out here. If you vote for this, here's the
30:14
Speaker 3: plan we're going to put before the bankruptcy court while
30:17
Speaker 3: a vote when we go in Are you on board
30:19
Speaker 3: with this? So what they did then was another divisional merger,
30:23
Speaker 3: a file in Texas, this time with the vote in place,
30:26
Speaker 3: the plan drafted in line, hoping to get the kind
30:30
Speaker 3: of approval through the Texas Bankruptcy Court.
30:32
Speaker 1: So the opponents of this, some of the lawyers representing claimants,
30:37
Speaker 1: say that JJ is trying to game the system because
30:40
Speaker 1: it's trying to get bankruptcy protections that are meant for
30:44
Speaker 1: companies that can afford to pay their debts. Do you
30:47
Speaker 1: agree with that?
30:48
Speaker 7: I mean no.
30:49
Speaker 3: So this has been the debate from the beginning with
30:52
Speaker 3: the question of whether or not bankruptcy is the right
30:55
Speaker 3: place for mass tort claims to be resolved, whether or
30:58
Speaker 3: not the Texas two step is a positive or negative. Now,
31:02
Speaker 3: one thing to note is that Chapter eleven corporate bankruptcy
31:05
Speaker 3: has always been a tool for resolving collective action problems
31:10
Speaker 3: among creditors where their actions could destroy value. And the
31:14
Speaker 3: way that they can destroy value is you ultimately get
31:16
Speaker 3: a race to the courthouse. And so if you think
31:19
Speaker 3: about any of these mass work cases, you've got tens
31:22
Speaker 3: of thousands of claimants. Some of them are going to
31:24
Speaker 3: get a zero recovery, some of them are going to
31:26
Speaker 3: get a billion dollar recovery. And what happens is that
31:29
Speaker 3: we don't know when these claims, particularly asbestos, will end,
31:33
Speaker 3: because asbestos shows up years later, and so you have
31:36
Speaker 3: a decade long future of litigation that's costing. You know,
31:40
Speaker 3: at one point, I think they said it was costing
31:42
Speaker 3: a billion dollars a year to litigate these cases, and
31:44
Speaker 3: that's destroying value. Now, the third circuitance first opinion said, look,
31:48
Speaker 3: you're Johnson and Johnson. There's enough money for this to
31:51
Speaker 3: go on for quite some time without it causing any problem. Now,
31:55
Speaker 3: that won't always be true, right if you have one
31:57
Speaker 3: hundred thousand claims that are worth millions of dollars each,
32:00
Speaker 3: deble bankrupt any company in the world. And what's really
32:03
Speaker 3: going on is stakeholders are losing value in the current
32:07
Speaker 3: world because there's just endless litigation. If money runs out,
32:11
Speaker 3: it'll be the case that the first to come win
32:14
Speaker 3: and the later to come lose. And bankruptcy has the
32:18
Speaker 3: only mechanism in our legal system that can get parties
32:21
Speaker 3: to a global resolution that says, here's the money available,
32:25
Speaker 3: let's stop destroying value. And that benefits the debtor, but
32:29
Speaker 3: it also benefits the creditors because it gets the money
32:32
Speaker 3: put aside and available sooner rather than later. So, if
32:36
Speaker 3: you're one of the current eighty thousand claimants or so,
32:40
Speaker 3: when is your trial going to happen? When is your
32:42
Speaker 3: settlement going to happen? Outside of bankruptcy? And if you're
32:45
Speaker 3: someone who doesn't even know that they're sick yet, you know,
32:47
Speaker 3: the timing of when the value gets put aside for
32:50
Speaker 3: you is years or decades away. So bankruptcy, the way
32:54
Speaker 3: I look at it, is intended to solve those kinds
32:56
Speaker 3: of problems.
32:57
Speaker 1: The attorneys for the tel claimants who oppose the latest
33:01
Speaker 1: settlement proposal are trying to get it transferred out of Texas,
33:06
Speaker 1: and the Justice Department's Bankruptcy monitor of the US Trustees
33:10
Speaker 1: Office had filed in New Jersey to get it transferred
33:14
Speaker 1: to that.
33:15
Speaker 3: State, and that already failed. Right, so the New Jersey motion,
33:19
Speaker 3: I didn't quite understand why you're trying to file it there.
33:22
Speaker 3: There's lots of legal problems with trying to get the
33:26
Speaker 3: New Jersey court to take the case from Texas. Partly,
33:31
Speaker 3: there is a bankruptcy rule that says if a debtor
33:34
Speaker 3: with a pending case files it somewhere else, the court
33:38
Speaker 3: with the pending petition can bring it in. But the
33:40
Speaker 3: New Jersey court dismissed the case. Right, there's no petition
33:43
Speaker 3: pending there, So one, it's not clear the court could
33:46
Speaker 3: take it. But two, the court had the discretion not to,
33:50
Speaker 3: and it already denied that motion saying, you know, for now,
33:53
Speaker 3: I'm not taking the case, okay. So then the right
33:55
Speaker 3: place to bring a venue transfer motion is in the
33:57
Speaker 3: court where the case that you want transferred is penn
34:00
Speaker 3: That's what the statute says. That would be the Texas court,
34:03
Speaker 3: But what's the argument for transferring it? So where should
34:06
Speaker 3: this case be? The New Jersey case has been dismissed.
34:09
Speaker 3: Texas actually is the first and obvious place to file
34:14
Speaker 3: for a company that has used the Texas Statute to
34:18
Speaker 3: structure itself in this way where we simplify the bankruptcy
34:21
Speaker 3: and think about it the simplification, the mesothelioma claimants aren't
34:25
Speaker 3: voting for a bankruptcy settlement. The ovarian claimants are, and
34:30
Speaker 3: so the value of the separation, just to use an example,
34:33
Speaker 3: is we're going to put the ovarian claimants into the
34:36
Speaker 3: bankruptcy process, which overwhelming they voted in favor of, and
34:39
Speaker 3: we're not going to put the mesothelial my claimants. We're
34:41
Speaker 3: also not going to put all the other creditors of
34:44
Speaker 3: the operations of the business. We're not going to have
34:47
Speaker 3: them subject to the bankruptcy and we're not going to
34:49
Speaker 3: have them able to step in and make objections. So
34:52
Speaker 3: we're really simplifying so that the only way that a
34:55
Speaker 3: plan gets confirmed in the Texas bankruptcy is if there
34:59
Speaker 3: is a valid vote of a supermajority of these claimants.
35:02
Speaker 3: No one else can affect that. It's really just about
35:05
Speaker 3: whether or not they want this settlement, and that's the
35:09
Speaker 3: simplification that the Texas two step allows.
35:13
Speaker 1: I can understand why the lawyers who want to try
35:15
Speaker 1: their cases want the bankruptcy case moved out of Texas,
35:20
Speaker 1: but why the bankruptcy trustee want it moved to New Jersey.
35:24
Speaker 3: So I think the Trustees Office has taken a negative
35:29
Speaker 3: view of a lot of the mass TOWRT bankruptcy structures.
35:34
Speaker 3: Maybe there is a view that you need to truly
35:37
Speaker 3: be insolvent, you know, this is partly why they appealed
35:40
Speaker 3: to the Supreme Court in the Purdue case. They had
35:43
Speaker 3: a policy view that you're not supposed to use third
35:45
Speaker 3: party releases in master bankruptcy cases. I'm a little surprised
35:49
Speaker 3: in their motion in New Jersey because the office tends
35:51
Speaker 3: to be kind of textualless and formalists, and if you
35:54
Speaker 3: look at the rule, I don't see how the New
35:56
Speaker 3: Jersey Court had the power, and so they were asking
35:59
Speaker 3: it to do something I think that would be not
36:02
Speaker 3: formalist beyond the power of the statute, which is not
36:05
Speaker 3: the way I normally think of their positions.
36:07
Speaker 7: That said, I.
36:07
Speaker 3: Think that they view themselves as the watchdog of bankruptcy process,
36:10
Speaker 3: which I think is a good thing. But they have
36:13
Speaker 3: a view that what large companies are doing to reach
36:16
Speaker 3: mass towards settlements and bankruptcy is problematic. I think that's
36:19
Speaker 3: an incorrect view, but I think that's what's driving this.
36:23
Speaker 3: Their views are put out there even when they conflict
36:27
Speaker 3: with the majority views of the claimants. And that was
36:29
Speaker 3: true in Purdue for sure, and it seems to be
36:31
Speaker 3: true here as well. They're just like, but this is
36:34
Speaker 3: the way it should be done, and that's why they
36:36
Speaker 3: want it in New Jersey. Means the claimants are everywhere,
36:38
Speaker 3: so it's not clear, like why New Jersey is better
36:40
Speaker 3: for a claimant than anywhere else. Now, maybe their view
36:43
Speaker 3: is you've already been dismissed in New Jersey. You should
36:46
Speaker 3: stay there. You shouldn't be able to try to change things. Companies,
36:50
Speaker 3: circumstances change over time. So how long do they think
36:53
Speaker 3: they're bound by the fact that they had a ruling
36:56
Speaker 3: in one court at one time? Like, are they bound
36:58
Speaker 3: into infinity to never find anywhere ever? Again? That can't
37:01
Speaker 3: be right. So I'm not totally sure the theory that
37:03
Speaker 3: the Trustee's office has, but it seems to be that
37:06
Speaker 3: they don't like what's going on in a kind of
37:09
Speaker 3: a vague.
37:09
Speaker 1: Sense, and there'll be basically nothing going on until October eleventh,
37:14
Speaker 1: while Judge Lopez considers whether the bankruptcy will move forward
37:18
Speaker 1: in Houston. Thanks Tony Best, Professor Anthony Casey of the
37:21
Speaker 1: University of Chicago Law School, and that's it for this
37:24
Speaker 1: edition of the Bloomberg Law Podcast. Remember you can always
37:27
Speaker 1: get the latest legal news by subscribing and listening to
37:30
Speaker 1: the show on Apple Podcasts, Spotify, and at Bloomberg dot com,
37:34
Speaker 1: Slash podcast, Slash Law. I'm June Grosso and this is
37:39
Speaker 1: Bloomberg