LSTA warns bank regulators about lawsuit to treat loans as securities

June 7, 2023Media Mention
Asset Securitization Report

Sky Moore, Partner in the firm's Corporate, Finance & Securities Group, shared his insights with Asset Securitization Report regarding whether loans syndicated to institutional investors (the issue in the recent lawsuit Kirschner v. J.P. Morgan) are securities under Reves vs. Ernst & Young, a pivotal Supreme Case decided in 1990 that defines securities.


Schuyler Moore, a partner at Greenberg Glusker, said that under the Reves precedent, term loan B transactions closely match the four factors it lays out to determine whether a financial instrument is a security: 1) The debt was sold to raise capital and investors anticipated profit, 2) there was common trading of the notes, 3) the public reasonably perceived the asset as an investment, and 4) there were no risk-reducing factors that would disqualify application of the securities acts.

"It seems to me that the answer is obviously 'yes' to all of these for any loans sold to a group of investors, whatever name you call the loan," Moore said.

Moore pointed to recent SEC decisions to treat digital assets such as cryptocurrencies and non-fungible tokens (NFTs) as securities that should steer a similar decision for loans.

"A security is really anytime someone gives money to someone else and expects to get money back, unless it falls into some type of exemption," he said, adding, "A rose by any other names still smells like a rose; courts look to the substance of the transaction."

Moore said that the Reves decision provides numerous exceptions, such as home mortgages and consumer loans—transactions between one bank and a borrower—but term loan Bs are syndicated to a broad swathe of investors. He added that the Second Circuit could presumably justify an exception based on the market's longevity and breadth of use, the "everybody is doing it theory," and that could send the case to the Supreme Court.

"The Supreme Court would have to say they are securities, or they would have to reverse a lot of current law," Moore said.