CLEESQ Publishes CLE Course Delivered By Attorney Willcox “Joint Ventures Antitrust Primer; Case Study — When Restraints on JV Members are Lawful but Price-Confidentiality Requirements Imposed on the JV’s Customer Prevent Comparison of Prices”

The most significant part of the course discusses the underwriting fees charged in Debtor-in-Possession Financings (DIPs), wherein the banks either don’t disclose the underwriting fees to the court or file a motion to made public a version with the underwriting fees redacted. The efforts of the banks to keep the secret and therefore impossible for customers to compare seems to be successful; some banks underwriting a $2 billion DIP financing 80% guaranteed by the federal government charged .75%, a fact only learned by the author when, in response to the banks’ efforts to keep the fees secret, other creditors objected and the banks (temporarily) posted the relevant fee letter publicly. In contrast, the author found a underwriting directly to the public (where the fees must be disclosed) of comparable size wherein the banks charged only .28%.

On March 5th, Attorney Willcox gave a CLE presentation for CELESQ, setting forth the basics of joint venture analysis, and using such examination to assess whether a custom and practice of an oligopoly of Wall Street Banks to keep certain fees confidential in a series of syndicates is unlawful as a series of unnecessary restraints of trade that prevent customers from comparing these prices.

Set forth below is the course description:

“The purpose of this course is to provide a primer about joint ventures.  First, what they are and why they formed.  Next, the course will explain the antitrust implications of joint ventures, via examination of the relevant statutes, case law and agency guidelines.   The course will focus on restraints imposed collectively on the venture members – – most importantly, what attributes make them illegal or not. “

“The course then turns to a previously published examination of a series of joint ventures: Wall Street syndicates for private underwritings in excess of $100 million. The course notes that a small oligopoly of commercial and investment banks dominates the arranging and underwriting of loans and bonds for publicly traded companies, and that each underwriting is performed by a syndicate that constitutes a joint venture of competitors.  Further, that each syndicate requires the borrower to agree not to disclose the syndicate’s fee, an obligation that requires not just violation of the securities laws, but constitutes a price-related restraint of each joint venture at issue.  The course concludes that the series of price-related restraints compelling price confidentiality impacts the market for the fees in question by preventing customers to compare them, or show them to competitors in fee negotiations.”

The following is an expanded abstract of the course, with an emphasis on the market for Debtor in Possession underwriting fees, as they are the only such fees that require court approval.

As for damages, despite the Custom and Practice, after twenty years of research, the author has uncovered several private underwriting fees. Sometimes these fees are pure “discounts” off of the face value of the loans (typically when they are sold as securities). However, large syndicated loans often split the cost to the issuer between “arrangement fees”, a flat fee charged across all tranches of the loan, and “underwriting fees” which are a percentage of the gross amount of the loan. With some simple calculations and proration, the gross underwriting fee can be calculated from the four corners of the Fee Letter, provided it has not been redacted.

Based on the calculations made by the author to date, the gross underwriting fees in the private underwriting market range from .28% to 2.75%.

The most reliable source of information has been from the submarket for Debtor-in-Possession (“DIP”) financings, which are an integral part of Chapter 11 financings. In such, the Debtor, concurrent with the filing for bankruptcy, obtain a new loan which has priority over all prior financings.

In such cases, the banks use one or more options to keep the fees confidential: they either make no reference to the fees in the Motion to Approve DIP Financing, or they file a Motion to Keep the Fee Letter under Seal. If they use the second option, they contend that it is a “custom and practice” in the finance industry to keep such fees confidential, and that banks might not participate in DIP financings if they had to disclose this information. Sometimes the banks attach a redacted Fee Letter to the Motion.

In one instance, the banks filed a Motion to Seal for a DIP loan of $2 billion to United Airlines (UAL), 80% of which the federal government guaranteed. When creditors objected, the banks, rather than resisting (and risking close analysis of their arguments by the court), simply filed the Fee Letter. Mr. Willcox promptly downloaded it, showing that the aggregate fee for the loan was .75% (note: several years later, Mr. Willcox revised the PACER site from which he had obtained the UAL Fee Letter. It had disappeared).

With the Custom and Practice of keeping private underwriting fees confidential, it is not easy to find a basis for comparison for this fee. However, the size of the UAL Loan, some $2 billion, meant it approached the low end for underwritings directly to the public, for which the Securities & Exchange Commission requires the underwriters to disclose the underwriting fee publicly as part of the transaction. A notable example is the Honda Finance 2018 $2 billion underwriting wherein the aggregate underwriting fee, prorated over 3 tranches, was .28%.

When shown that the banks charged a DIP financing fee for an 80% government guaranteed loan that was three times that charged for a public underwriting secured only by the the assets of a public company, Professor Paul Rose, Professor of Law at the Moritz School of Law in Ohio, commented that “it is problematic that the [Agency Banks] would charge three times as much. I don’t see any real justification for it and would be curious to hear their explanations”.

Another quote of interest from Professor Rose from the underlying Article, explained in more detail during the seminar: 

“the failure to file these agreements suggests that it is the ‘custom and practice’ of Wall Street banks to violate the securities laws by directing customers to keep documents relating to their fees confidential.” 

Also, on reviewing the article, the authors of a 2020 Article , “Collusion in Markets with Syndication,” commented that “[t]his is great. It seems like the fees are known internally through the network of banks, so they can monitor compliance with the collusive agreement, but not known externally, so it is hard for a new entrant to figure out the best way to undercut the collusive agreement.”

The program is certified for CLE in many states.

And here is the video, removed from the paywall (you can watch, but will not get CLE credit)

And here are the original Powerpoint(tm) slides.

Even further, after the publication of the Article, another piece Saavedra, D. Do firms follow the SEC’s confidential treatment protocols? Evidence from credit agreements. Rev Account Stud 28, 1388–1412 (2023) (“JAS Article”) noted a substantial pattern of failure of issuers to disclose promptly and clearly interest rates on loans, with the allegation that the borrowers were trying to conceal their actual financial condition from customers. Further the JAS Article noted that the level of the underwriting fees could be construed as a sign of the company’s financial health, meaning they would be material to investors. In short, the JAS Article reasons that the failure to disclose the underwriting fees is a violation of the securities laws.

The First Department, disregarding the spirit of Chevron, dismisses a qui tam tax fraud case. Subsequent expert opinion shows the ruling cost New York State and New York City up to $75 million each.

You can download the complete powerpoint presentation below:

24_01_05_city_final_combined-3Download

Further, neither jurisdiction has any statute of limitation on these claims. Each has damages, taxes interest and penalties, of approximately $25 million. However, neither jurisdiction has sought to pursue these claims. Even further, the Relator, with a 17 page supporting letter, documenting each email over 2 years, has alleged to the New York City Inspector General that the New York City Law Department, and unnamed members of the New York City Department of Finance, deliberately engage in a pretense of investigation for the time period at issue, hoping the Relator would abandon the claim.

All the of the above can be traced to the decision of the New York State First Department to follow the spirit of the Chevron Doctrine and defer to the expert testimony Relator anticipated he could produce in due course.

The Chevron doctrine is subject to challenge before SCOTUS. How much deference should courts pay to the expert opinion of agencies? Or, in the spirit of Chevon, experts in general.

I (hereafter “Relator”)have an example of a case wherein the First Department Appellate Division of New York State faced complex allegation of tax fraud and, without permitting discovery and the introduction of expert testimony, dismissed the case. As explained in more detail below, this cost the State of New York potentially $75 million.1

In the early 2000s, through litigation, Relator discovered what Relator believe to be tax fraud inflicted on the US and New York City by several Wall Street Banks. The transactions at issue (the “PSINet Transactions” were private placements of securities in 1990 with 85% of the funds raised in the United States by US Banks (The “US Affiliates”) and 15% raised in the UK by the British counterparts of the US Banks (the “UK Affiliates”).

 The Relator based his claims on documents showing the “US Affiliates”, the investment banks of an internet start up the year prior (1998) , simply chose in one tax year to have the UK Affiliates be the “principals” in almost two billion in bond placements. 

The Purchase Agreements for each of the two transactions (July and November) described the UK Affiliates as the “initial purchasers” of the securities at issue, with the US Affiliates as simply agents for the UK Affiliates

Even though 85% of the money was raised by the US Affiliates in the United States, the UK Affiliates on some (but not all) of the documents were the purported principals. 

Further, in multiple documents (included the front and back of the two prospecti, the US Affiliates identified themselves as the principals.

The structure of the transactions, again, well documented, was simply that the US Affiliates, acting as de facto principals, raised 85% of the $1.6 billion in the US, and wired the funds from the New York City closing to the UK, where the UK Affiliates simply booked the fees at the UK’s then-lower corporate tax rate. Slides 121 to 169, and the accompanying video, of a Powerpoint presentation, on the case show this fraud in detail.

In 2005, Relator sought to report this to the IRS. At that time, the IRS had a terrible reputation for treating whistleblowers poorly. As can be seen in the following few paragraphs, it lived up to its reputation.

In March 2005, the IRS referred Relator to a Special Agent (the “SA”) in New York. The SA said he needed to confirm there was no previous audit taking place before he could meet with me. Two weeks later, the SA called to notify me there was no pre existing audit, and we arranged a meeting at the IRS’ offices off of Times Square. At the meeting, the SA and his colleagues asked some questions, but showed no deep interest in examining the case.

In April, 2005, I received a notice of rejection from the Ogden Utah IRS Office. In response, I made several phone calls seeking to find out what was the basis for the rejection. I ultimately reached a lawyer in the International Division of the IRS (IRS Attorney), who asked me to submit a memorandum explaining my allegations of fraud.

I heard nothing back, However, in 2006, Congress passed legislation creating the IRS office of Whistleblower (“OOW”). It gave IRS whistleblowers various protections, such as an appeal to the Tax Court on a reward denial. However, such protections applied only to information provided after the passage of the Act.

On reading this news, I called the IRS Attorney . However, he gave a vague response, indicating there was a recovery had taken place, but, due to a pre existing audit, I was not eligible for a reward.

In 2007, I made inquiry to the head of the newly created OOW. However, his June 2007 response made an oblique reference to a prior denial (of which I was not aware) and said that it had been “well-reasoned”. Based on a review of cases where the IRS has had no hesitation telling whistleblowers the IRS recovered nothing, Relator viewed the letter as an excuse to deny a reward because the Relator could not appeal the ruling.

In 2011, New York State passed tax amendments to its qui tam legislation that permitted private relators to bring actions on behalf of the State and its municipalities.

In 2012, the Relator filed such an action on behalf of New York State, alleging Wall Street defrauded it as a result of the PSINet transactions. The Relator was aware that tax whistleblowers had a history of poor treatment by the government. However, Relator though the claims were so compelling that the government and courts would assist. Further, I believed the documentation on file with the IRS relating to my interactions with the SA Agent and IRS Agent would demonstrate the IRS had In November 2012, I wrote a letter to the New York State Taxpayer Protection Bureau (TPB), setting how the US tax code made funds earned in the geographic United States taxable in the United States. However, the TPB did not think the case had merit. Further, it declined to interview either the OOW to determine if the IRS had effectuated a recovery, or the IRS Attorney, who would certainly provide expert opinion on the facts (Relator did not have subpoena authority for these efforts).

Instead, the TPB declined to intervene on behalf of NYS, characterizing the case as a “fishing expedition”. The courts typically view such a declination as a “black mark” on a case, based on the assumption a thorough investigation was conducted.

The trial court’s dismissal, did not even address the merits of these allegations, focusing instead on statute of limitations. However, the appellate court, taking the fact finding and international tax law interpretation into its own hands at the motion to dismiss stage (and therefore before expert reports were due), ruled the tax fraud allegations were “pure speculation”.

In contrast to many other cases dismissing fraud as “speculation”, the appellate court did not set forth the allegations on which the Relator based of tax fraud, or explained why they were speculation.

Unfortunately for that ruling, in the months prior to the appellate court ruling, I had set forth the facts of the case in clear detail to a nationally known tax professor, whose written letter in response opined that the transactions in question were “structured to evade . . New York State taxes” and that the defendants should pay these taxes. Even further, the tax expert noted the importance of obtaining the results of the IRS inquiry as part of a complete investigation.

Experts with national reputations do not base their opinions on “speculation”; therefore, the evidence before the appellate court was not such.

The damage caused by this ruling was not limited to the taxes owed to New York State.

In early 2016, the Relator noticed that New York City had a corporate franchise tax which applied to the transactions at issue. In March of 2016, the Relator filed a qui tam case on behalf of that entity, alleging tax fraud in the PSINet transactions.

The Relator’s Second Amended Complaint, included the above-described opinion of Professor Reuven Avi-Yonah and other experts. It included supporting appendices, Volumes One Two and Three.  

One of the experts, Professor Richard Painter of the University of Minnesota, tweeted “[i]f the factual allegations in these pleadings are true, the banks inflicted a huge fraud on New York State and New York City. Someone should investigate this”.

The Defendants sought to dismiss the case on the grounds that the Relator’s case against the State meant that pressing the same claims against the City were barred by the doctrines of res judicata and collateral estoppel. Insert Motion to Dismiss.

In response, Relator filed an Opposition to Motion to Dismiss, with multiple expert opinions.

In January 2017, the City of New York accepted evaluation of the case per court order. In late July 2017, late January 2018 and late July 2018, the City Law Department filed “reports” to the court, to which Relator was not privy. However, the Law Department told Relator the reports simply stated the investigation was ongoing. During these two years, the Law Department never provided any documents or information relevant to the case to Relator.

The First Department affirmed the trial court’s dismissal of the second case, on the grounds of res judicata and collateral estoppel.

On conclusion of the case, the Relator reviewed how the New York City Law Department spent two years (2017-2018), reporting to the court it was investigating the case, when the Law Department never produced any documents, interviewed any witnesses or reported to Relator any information he requested.

Specifically Relator saw no evidence the Law Department had reviewed the tax returns at issue to determine the amount of refunds available as damages. Further, the Law Department never interviewed plaintiff’s tax expert nor disclosed to Relator its “Tax Refund Policy”; or opened a major attachment to one of Relator’s emails, sent in July 2018, in response to the Law Department’s request for “additional evidence of fraud”. 

In September 2019, the Court unsealed the Complaint.  After that time, the Law Department ceased communications with Relator, even declining to confirm receipt of filings or consent to efiling

In December 2020, the Relator found one of his emails to “Attorney X” of the Law Department returned undeliverable. On inquiry, Attorney X had left the Law Department without advising the Relator of this fact, or finding another attorney to communicate with Relator.

On the basis of these facts and a review of the emails between the Relator and the New York City Law Department, the Relator filed a complaint with a senior member of the New York City Law Department, alleging that the City, through its Law Department, had deliberately obstructed the case by spending two years

After almost a year of silence, in January 2024, the Relator passed on the complaint to the New York City Inspector General. To date, Relator has received no response.

Even after the dismissal of the Relator’s claims, the State and City of New York still have claims for about $25 million each.

This is what happens when courts substitute their opinions for experts.

  1. All of my claims are documented in a video I have prepared, cited later on in the post. My purpose in this presentation is to give a general introduction to a complex set of facts. The video shows the raw documents, which will provide a much deeper level of comprehension ↩︎

National Academy of Continuing Legal Education Just Published My Course “Antitrust Primer for the Internet/Information Age”

https://www.nacle.com/CLE/Courses/Antitrust-Primer-in-The-Age-of-The-Internet-Information-2406

Here are the slides (with no video; you may read for information purposes, but for which you will receive no CLE Credit);

District of Columbia Federal Court Accepts The Arguments of Mr. Willcox on Motion to Remand by Godiva Chocolatier, Inc. – Don’t Forget That “Carve Out”

Efforts of Defendants to keep Representative Actions in DC Federal Court have been uniformly unsuccessful. In the most recent example, FAHEY EX REL. GENERAL PUBLIC OF THE DISTRICT OF COLUMBIA v. GODIVA CHOCOLATIER, INC., (D.D.C. February 12 2020), Godiva sought to keep a representative action in federal court by claiming enormous costs of an injunction which would require it to disclose that its

While this post does not purport to address all of the arguments raised by Godiva, one claim is worthy of addressing. Godiva claimed that the total costs directly arising from an injunction included a sum (kept under seal by the court at Godiva’s request) for changing labels on its products nationwide, “disposal of previously mislabeled stock and the adjustment of Godiva’s labeling process”.

Rather than accepting this argument, the court accepted rebuttal of Mr. Willcox, who pointed out that “the proper perspective for viewing the costs of an injunction—as well as the other expenses that factor into the amount in controversy—is not the total cost to the defendant, but the cost divided by the number of plaintiffs who benefit. ” In addition, “there is no need for the company to destroy its product and forgo six months’ worth of sales, because there is “no public interest in forcing the defendant to destroy existing inventory.” Pl.’s Reply at 6. He also notes that any requested injunction in this case “would be accompanied by a proposal that [Godiva] be able to sell its existing inventory,” perhaps in combination with a “national announcement … to the public that the old inventory was defectively labeled and in fact made in the United States.”

The Godiva Court further rejected the argue that Godiva would have to cease all its sales in light of an injunction, noting that “the product at issue is not inherently defective, but simply requir[es] additional disclosure . . . . Relief in fraudulent advertisement cases does not always require recall or cessation of production.  . . .

Finally, the Godiva Court noted that “[w]hile Godiva might still have to wait six months to cycle through its inventory and have uniform, CPPA-compliant products . . Godiva does not explain why its sales could not continue across the rest of the country, particularly through its brick-and-mortar stores and third-party vendors in other states.”

“Third, it may be that neither a temporary cessation in sales nor the destruction of current inventory is necessary, because Fahey suggests in his brief that “any injunction would be accompanied by a proposal that [Godiva] be able to sell its existing inventory.” . . . . . . Such a carve-out in the injunction could avoid a significant percentage of the $[REDACTED/] million in lost sales as well as the losses of $27.3 million in unused inventory and $3.4 million in unused packaging. ” (citations omitted).

The Godiva ruling is yet another of a line of cases remanding representative actions under the DC Consumer Protection Act. While these may not be novel issues, the attempt to keep it in federal court include what the court viewed as inflated estimates of compliance with an injunction. Keeping in mind options such as the “carve out” option in a settlement, and its reduction in the cost of the case to the Defendant are important when crafting an opposition to a Motion to Remand

Professor Richard Painter Comments On Twitter About The Failure Of NYS and NYC To Take Action on $42 Million Of Alleged Tax Fraud Against Them

New York’s Facebook antitrust investigation now has 46 other attorneys general onboard — TechCrunch

New York Attorney General Letitia James is turning up the heat on the state’s antitrust investigation into Facebook, which is seeking “to determine whether Facebook’s actions may have endangered consumer data, reduced the quality of consumers’ choices, or increased the price of advertising.” Her coalition previously consisted of attorneys general from a total of eight […]

New York’s Facebook antitrust investigation now has 46 other attorneys general onboard — TechCrunch

Thomas C. Willcox, Esq

1701 16th Street, NW, Suite 211

Washington DC   20009

Ph 202.239.2742

thomaswillcox@willcoxlaw.com.co

            Home

            About

            Practice

            Articles & Publications

  Contact Us

            Thomas C. Willcox is an independent U.S. lawyer based in Washington, D.C.  His practice, launched in 1997, focuses on antitrust, consumer protection and whistleblower cases.