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Leveraged Loans

Supreme Court declines to hear Kirschner appeal, ends loans-as-securities debate

The decision leaves intact a federal appeals court ruling that leveraged loans are not subject to securities laws, including SEC disclosure requirements.

The US Supreme Court announced on Feb. 20 that it would not hear an appeal in the lengthy Kirschner v. JP Morgan lawsuit, leaving intact a federal appeals court ruling that private, institutional leveraged loans are not subject to securities laws.

“This leaves in place the decision of the US Court of Appeals for the 2nd Circuit that such loans are NOT securities and ends, once and for all, this misguided legislation,” said Elliot Ganz, the head of advocacy for the Loan Syndications and Trading Association.

The Supreme Court’s denial of the plaintiffs’ petition affirms the appeals court ruling last August that term loan Bs are not securities. A federal district court had dismissed the Kirschner case in May 2020.

Term lenders represented on the Kirschner side had originally sued in 2015 over a 2014 term loan B underwritten for Millennium Laboratories, claiming defendants JP Morgan and Citigroup violated securities law by failing to disclose prior to the loan’s issuance that Millennium was the subject of a fraud investigation by the US Department of Justice.

Millennium disclosed publicly in 2015 it had settled the case with the DOJ and later defaulted on the arranged term loan before filing for bankruptcy.

The LSTA and other industry participants had argued that requiring typical securities disclosures on syndicated loans would “wreak havoc” on the loan market and were unnecessary since term loans are underwritten by institutional investors. The LSTA also argued at the time that reclassifying loans would complicate US banks’ ability to hold the assets of CLOs that acquire senior loans of speculative-grade companies, under Volcker Rule restrictions on bank investments in securities.

“We are extremely gratified by this decision,” Ganz said. The “immensely positive result for the $1.4 trillion syndicated loan market” comes after a nearly five-year legal tussle as well as advocacy efforts with the SEC and other regulators.

Featured image: Rudy Sulgan/Getty Images

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