Should mutual funds take a more active role in securities litigation? Data appears to suggest that they should.

According to Sean J. Griffith[1] and Dorothy S. Lund[2], authors of “Toward a Mission Statement for Mutual Funds in Shareholder Litigation”[3], mutual funds can improve returns for investors by taking on a greater role in enforcing shareholder and investor rights in court. Griffith and Lund survey participation in derivative suits, direct and class claims under state law, appraisal claims, and private securities litigation, and develop a recommendation for “a few simple changes [by which] mutual funds will be able to reap litigation benefits without substantially increasing their costs.”[4]

Amy Roy and Robert Skinner[5] offered a counterpoint in their piece “Mutual Funds Should Stay Out Of Shareholder Litigation,” asserting that “[l]itigation opportunities–like investment opportunities–come with opportunity costs, which the authors fail to acknowledge.” Focusing primarily on burdens of private securities litigation, such as serving as a lead plaintiff and what they view as the “myth” of improved opt-out recovery, Roy and Skinner concluded, “Notable exceptions aside, fund shareholders are generally better served by allowing their advisers to remain focused on what it is they were hired to do–investing their money and outperforming the market.”

Griffith and Lund responded to this critique in “Mutual Funds Should Use Litigation For Shareholders’ Benefit.” They wrote that the “notable exceptions” that Roy and Skinner brush aside are, in fact, “specific evidence . . . showing that shareholder litigation can benefit mutual funds and their investors–directly, by securing compensation, or indirectly, by deterring misconduct, among other things.” Looking at securities class actions and finding an active participation rate of only 0.6 percent–i.e., 10 cases out of 1,500 over a 10-year period–Griffith and Lund wonder (and rightly so) whether the true “rate of good cases to bad ones” could be so low.

Griffith and Lund’s conclusion that mutual funds’ “dismal litigation record . . . raises serious questions of whether mutual funds are acting as faithful governance intermediaries for their investors” presents an issue that both mutual fund managers and investors need to address, due in part to the rising prevalence of mutual funds.

By one recent measure, if mutual funds chose to functionally self-exclude from securities litigation, this would sideline nearly a quarter of all equity ownership:


As Congress noted when drafting the Private Securities Litigation Reform Act of 1995:

Private securities litigation is an indispensable tool with which defrauded investors can recover their losses without having to rely upon government action. Such private lawsuits promote public and global confidence in our capital markets and help deter wrongdoing and to guarantee that corporate officers, auditors, directors, lawyers, and others properly perform their jobs.[6]

This sentiment was echoed more recently by then-SEC Commissioner Luis Aguilar in his 2012 statement in the wake of the Supreme Court’s decision in Morrison v. National Australia Bank, Ltd.:

It is unrealistic to expect that the Commission will have the resources to police all securities frauds on its own, and as a result, it is essential that investors be given private rights of action to complement and complete the Commission’s efforts.[7]

Relegating the largest single group of institutional investors to the role of onlookers in the face of securities fraud is not the path to maintaining a robust and trustworthy capital market. Mutual funds would often do well to adopt a more active role in protecting their investors.


[1] T.J. Maloney Chair and Professor of Law at Fordham University School of Law.

[2] Assistant Professor of Law, University of Southern California Gould School of Law.

[3] Griffith, Sean J., and Lund, Dorothy S., Toward a Mission Statement for Mutual Funds in Shareholder Litigation (July 19, 2019), Univ. of Chicago L. Rev., Forthcoming; European Corporate Governance Institute–Law Working Paper No. 468/2019; USC CLASS Research Paper No. CLASS19-23; USC Law Legal Studies Paper No. 19-23. Available at SSRN:

[4] Id. at 48.

[5] Roy and Skinner are partners at Ropes & Gray LLP.

[6] H.R. Rep No. 104-369, at 31 (1995).

[7] Aguilar, Luis A., Statement by Commissioner: Defrauded Investors Deserve Their Day in Court, Secs. & Exchange Comm., Apr. 11, 2012, available at

Consumer lending as we know it today – and credit card lending in particular – depend on securitization for significant access to capital. However, the ability of banks to bundle and sell credit card debt-backed securities may be thrown into disarray depending on the outcomes of a pair of pending cases: Cohen v. Capital One Funding, LLC[1] and Cohen v. Chase Card Funding, LLC.[2]

The outcomes of these matters will likely turn on the application of a 2015 decision by the 2nd Circuit Court of Appeals regarding a statute that is more than 150 years old: the National Bank Act of 1864 (“NBA”).

The Supreme Court has stated that the NBA preempts state laws that “significantly interfere” with a “national bank’s exercise of its powers,”[3] a ruling that has been applied to cover state usury laws that set maximum rates of interest. As a result, a bank must comply with the usury law of the state “in which the bank [is] located”[4] – if the borrower moves to a state with a lower rate cap, the interest rate remains valid.

In 2015, the 2nd Circuit decided Madden v. Midland Funding, LLC.[5] In Madden, a Delaware-based bank had issued a loan to a New York borrower with an interest rate that complied with Delaware law.[6] The bank, however, then sold the loan to a debt purchaser. But because the purchaser was neither a national bank itself nor acting “on behalf of” a national bank, the 2nd Circuit found that New York’s usury law[7] did not “significantly interfere” with the bank and held that New York’s maximum interest rate cap applied.

Now, plaintiffs in Capital One and Chase Card seek to extend this reasoning to ABS that hold credit card debts. Because the debts are now owned by an independent trust, plaintiffs allege the credit card ABS entity has no right to assert that state usury laws preempt the interest rates being charged on the underlying debts.


Should plaintiffs prevail, banks’ ability to free up capital and spread risk across nonbank institutional investors would be severely hampered – and would likely face a period of upheaval as the effects on the billions of dollars of outstanding CCABS are sorted out.

The 2nd Circuit’s decision in Madden has sparked criticism from regulators[8] and at least two efforts in Congress to legislate a change to the ruling.[9] However, until such a change is enacted, market participants will have to watch the courses of Capital One and Chase Card.


[1] No. 19-cv-03479 (E.D.N.Y.).

[2] No. 19-cv-00741 (W.D.N.Y.).

[3] Marquette Nat. Bank v. First of Omaha Svc. Corp., 439 U.S. 299, 313 (1978).

[4] Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 33 (1996).

[5] 786 F.3d 246 (2d Cir. 2015).

[6] 6 Del. C. § 2301 et seq.

[7] NY CLS Gen Oblig § 5-501 et seq.

[8] See, e.g., amicus brief of the F.D.I.C. and Office of Comptroller of the Currency, In re: Rent-Rite Super Kegs West Ltd., No. 19-cv-01552 (D. Colo.), dkt. no. 11.

[9] See, e.g., Sykes, J., Banking Law: An Overview of Federal Preemption in the Dual Banking System (Jan. 23, 2018), available at

We are proud to announce that our team achieved a key victory as plaintiffs’ pro bono counsel in Doe v. Esper, a constitutional challenge to the Pentagon’s transgender service policy. The government’s policy is to discharge or deny enlistment to anyone who will not serve in the gender to which they were assigned at birth, or who is undergoing hormone therapy or other gender-confirmation procedures.

The Hon. Colleen Kollar-Kotelly of the U.S. District Court for the District of Columbia granted our team’s motion to compel production of documents withheld by the Department of Defense (DOD) and other government defendants.  The court rejected the government’s argument that it should automatically be accorded a high level of deference because the policy resulted from military-decision-making, and ruled that “[a]dditional discovery is needed to determine if the [challenged Mattis] Plan is the product of considered military decision-making that reasonably and evenhandedly regulates the matter at issue.”

The judge further agreed that DOD could not invoke the deliberate process privilege, which protects documents revealing the process behind government decisions, because “[t]hose documents go to the heart of Defendants’ intent and decision-making process … — both key issues in establishing the legitimacy of the disputed transgender policy.” The opinion made clear that “Plaintiffs’ need for the information overcomes Defendants’ privilege.”

As noted in Lowenstein’s press release about the victory, we are pleased to contribute our trial skills to protect the rights of individuals fighting on behalf of our country.

According to survey results published in September, 2019, by Lowenstein Sandler, over 80 percent of hedge funds of all sizes are using alternative data in some capacity, with 75 percent of respondents saying they use it to make better investment predictions.

Completed by C-level executives, data scientists, equity analysts, portfolio managers, and legal/compliance officers in the private funds industry, the survey assessed how funds of all sizes use alternative data. Funds were grouped by size–less than $500 million, $500 million to $5 billion, and greater than $5 billion–to determine how data use, and concerns about it, differ at varying levels of asset value.

The report, entitled Alternative Data = Better Investment Strategies, But Not Without Concerns, is the first survey of its kind from the firm’s Investment Management Group; it was authored by Peter D. Greene, partner and Vice Chair of the group, with contributions from partner Benjamin Kozinn.

“It is not surprising to me that an overwhelming majority of funds are using alternative data,” said Greene. “What is interesting is how funds of various sizes are using it and how they plan to expand their use in the future. In a changing industry, it is more important than ever to learn what alternative data can do, while also acknowledging the limitations and concerns that come with using such data.”

81 percent of respondents’ organizations plan to increase their budgets for alternative data. Of those, the majority plan to increase budgets by 11-25 percent.

The survey results also show an increasing interest in using newer data sources such as web scraping and biometrics to stay competitive. 57 percent of respondents expect to use web scraping as a data source within a year, a jump from the 49 percent who currently use it; and 32 percent said they currently use biometric data now, with 45 percent expecting to use it in the future.

However, concerns do remain over new regulations and privacy laws, cost and time investment, and the ability to distinguish relevant information from large volumes of data.

Most respondents (98%) said they used alternative data in combination with fundamental analysis to make investment decisions.

The release of the report was noted by HedgeweekBusiness WireOpalesque, the Managed Funds Association newsletter, Institutional InvestorAssociated PressYahoo! Finance,, and Chief Investment Officer.

In a case pending in federal court in New York, Kirschner v. JPMorgan Chase Bank, N.A., No. 17-cv-06334-PGG (S.D.N.Y.), a bankruptcy trustee may upend what has long been accepted wisdom on Wall Street: securities laws apply to stocks, bonds, equity options, and the like – but not to syndicated loans.

Kirschner is brought by the bankruptcy trustee on behalf of a group of “approximately 400 mutual funds, pension funds, universities, [CLO]s and other institutional investors,” and alleges that the banks that led Millennium Labs’ 2014 loan syndication violated state securities laws of California, Massachusetts, and Colorado, among other claims.

Syndicated loans, often referred to as “leveraged loans,” are term loans extended to companies by a group of lenders. Like corporate bonds, syndicated loans are debt instruments that entitle the holder to interest and principal.  However, unlike traditional securities, interests in a syndicated loan are not sold like a bond, but assigned to the new holder.  As a result, only current investors have standing to bring claims against the borrower.  Another difference is that syndicated loans are not offered through a risk-warning-laden prospectus, but rather a confidential information memorandum, or “CIM.”  The CIM is not a public document, and is generally only made available to lenders upon approval of the borrower.[1]

Enter privately-held Millennium Laboratories LLC, a San Diego-based company that performed urinalysis drug testing for Medicare, Medicaid programs, and commercial insurance companies.  In 2014, Millennium Labs teamed up with a group of banks to organize a $1.765 billion term loan to refinance older debt and pay out a substantial cash dividend to insiders.

Less than a year later, however, lenders found Millennium Labs besieged under a barrage of legal threats from federal regulators and civil litigants that would ultimately lead to the company’s bankruptcy – risks that the trustee in Kirschner asserts were well known to Millennium Labs and its bankers but fraudulently concealed from investors in the 2014 CIM.

As the true depth of these risks was revealed in late 2015 and early 2016, the market value of Millennium Labs’ loan fell sharply:

The secondary market price of Millennium Labs’ syndicated loan during 2016 highlights one of the hazards of this type of investment – as the extent and gravity of the company’s litigation risks were becoming known, Millennium reportedly refused to provide prospective lenders access to the CIM, leading to nearly three months in mid-2016 of no secondary market activity with lenders locked into their stale-priced positions:

As defendants point out in their motion to dismiss, federal courts have for some time agreed that bank loans such as these do not qualify as “securities” for purposes of federal securities laws, citing Banco Espanol de Credito v. Pacific National Bank, 973 F.2d 51 (2d Cir. 1992). Although the Second Circuit did affirm this lower-court determination in Banco Espanol de Credito, the panel cautioned: “We recognize that even if an underlying instrument is not a security, the manner in which participations in that instrument are used, pooled, or marketed might establish that such participations are securities.” Id. at 56.

Further, that ruling was delivered contrary to an amicus brief submitted by the Securities and Exchange Commission, eliciting a vociferous dissent by then-Chief Judge Oakes, who noted:“I fear that the majority opinion misreads the facts, makes bad banking law and bad securities law, and stands on its head the law of this circuit and of the Supreme Court….” Id.

Whether the analysis in Banco Espanol de Credito proves equally availing for purposes of the various state laws that the Trustee in Kirschner relies on remains to be seen.

Defendants’ motions to dismiss the claims in Kirschner have been fully briefed and both sides have requested oral argument.


[1] A publicly filed exhibit in Kirschner offers a rare look at a CIM.  See Decl. in Sup. of Mot. to Dismiss, Ex. B, Parts 1 & 2, Kirschner, No. 17-cv-06334-PGG, Dkt. Nos. 79-2 & 79-3 (S.D.N.Y. June 28, 2019).


Do student loans bear any similarities to mortgage loans, which lay at the heart of the 2008 economic crisis? The short answer is yes. Student loan asset-backed securities (SLABS), much like residential mortgage-backed securities (RMBS), are loans bundled and packaged into securities available for purchase by investors. Bearing ominous resemblance to the precursors to the 2008 financial crisis, the number of student loan borrowers, as well as the average balance per borrower, continues to rise every year, while most recent college graduates are unable to find jobs allowing them to pay back their loans.

According to members of Congress, the U.S. is already in crisis over growing student loan debt. The House Committee on Financial Services held a hearing on Tuesday, September 10th entitled “A $1.5 Trillion Crisis: Protecting Student Borrowers and Holding Student Loan Servicers Accountable.” A five-person panel warned the Committee that there is currently $1.5 trillion in outstanding student loans, from about 44 million borrowers, with approximately 11% of those loans more than 90 days delinquent.

At the hearing, Ashley Harringston, Senior Policy Counsel for the Center for Responsible Lending, testified that 70 percent of 2016 graduates had student loan debt. The crisis is impacting not only low and middle-class families: even students from high-income families are borrowing to attend college, perhaps choosing to attend higher-ranked and more expensive schools. The executive director of the Student Borrower Protection Center, Seth Frotman, called the student loan crisis a “trillion-dollar blackhole in our financial markets.” But with nine pending pieces of legislation aimed at tackling rising student debt, members of Congress disagree on how to handle this crisis. Time will tell whether Congress – and the American people – have learned from the 2008 financial crisis, or whether history is doomed to repeat itself.

Last week, Governor Cuomo signed into law a bill to amend the New York Civil Practice Law and Rules (“CPLR”) to extend the statute of limitations to six years for financial fraud claims brought under the Martin Act.  One of the strongest blue sky laws in the country, New York’s Martin Act gives wide latitude to the state’s Attorney General to investigate and prosecute financial fraud, both criminally and civilly.  The statute is a particularly useful weapon in the state’s arsenal, as it does not require the Attorney General to prove scienter, or fraudulent intent, in order to prevail.

Continue Reading New York Legislature Extends Statute of Limitations for Martin Act Claims

Investors in a private cryptocurrency firm brought a class action securities lawsuit against the firm itself, Latium Network, Inc. (Latium) and individually against Latium’s founder and CEO David Johnson and co-founder and chief commercial officer Matthew Carden. The lawsuit alleges that the defendants are subject to strict liability for violating Section 5 of the Securities Act of 1933 by offering and selling unregistered securities in the form of LatiumX tokens. According to the complaint, filed in federal court in Newark last week, the defendants attempted to represent the $17 million Latium initial coin offering (ICO) as a sale of “utility-based tokens,” while in fact the ICO was an offer and sale of securities subject to registration requirements of the federal securities laws because the defendants claimed that the value of the LatiumX tokens would increase after the launch of the new cryptocurrency platform.[1]

Continue Reading Private Cryptocurrency Firm Hit With Class Action Lawsuit Over Initial Offering

On Thursday, March 29, Barclays Capital Inc. and several of its affiliates (together, Barclays)–as well as two former Barclays executives–agreed to settle a three-year Department of Justice (DOJ) investigation concerning Barclays’ marketing and sale of residential mortgage-backed securities (RMBS) between 2005 and 2007.

Continue Reading DOJ Settles RMBS Action Under FIRREA with Barclays for $2 Billion