JPMorgan Chase & Co. won a federal appeals court ruling that a $1.8 billion leveraged loan at issue in a court case was not a security, a win for the banking and private equity industries.
The decision Thursday by the US Court of Appeals in Manhattan came in a securities fraud lawsuit brought by a trustee for note purchasers in a 2014 syndicated loan deal led by JPMorgan. Soon after the notes began trading, the borrower, drug-testing company Millennium Health ran into legal troubles and filed for bankruptcy the next year.
The trustee, Marc Kirschner, declined to comment on the decision.
Loan notes are not currently considered securities, so a ruling against JPMorgan would have had sweeping ramifications for regulation of the leveraged loan market. A lower court had previously dismissed Kirschner’s fraud claims on the grounds that notes were not securities.
“The District Court did not erroneously dismiss plaintiff’s state-law securities claims because plaintiff failed to plausibly suggest that the notes are securities,” Circuit Judge Jose Cabranes wrote on behalf of the three-judge appellate panel.
The Securities and Exchange Commission declined in July to share its view on whether leveraged loans are securities, a development widely seen as making it less likely that the court would overturn the status quo.
The case had drawn heavy attention from the finance industry, including private equity firms. A trade group for banks involved in the loans, the Loan Syndications and Trading Association, lobbied the SEC heavily while the regulator deliberated on the court’s request to provide feedback. holding over 10 meetings with SEC staff and three of its five commissioners.
Kirschner said JPMorgan and the other banks withheld key information that would have tipped off investors about trouble at Millennium. The company in May 2015 announced it had reached a $246 million settlement with the Justice Department and other parties over billing fraud allegations.
The case is Kirschner v. JPMorgan Chase Bank, 21-2726, Second US Circuit Court of Appeals (Manhattan).
This article was provided by Bloomberg News.