News Release: Court Accepts Brief Seeking Debt Classification in Case Against Big Banks


Feb. 28, 2023

Carter Dougherty

Court Accepts Brief Seeking Debt Classification in Case Against Big Banks

Washington, D.C. — The Second Circuit Court of Appeals has accepted an amicus brief arguing that syndicated loans are risky debt instruments that pose “significant economic implications for families and communities” and must be regulated as securities, according to Americans for Financial Reform. 

In the case, JP Morgan Chase and Citigroup are being sued for misleading investors over the quality of syndicated loans. In this financial construct, a bank or group of banks harvest lucrative fees for organizing the loan on behalf of companies often in distress among investors, which can include pension, hedge and mutual funds. 

“Our financial system is being threatened by the lack of basic protections in syndicated loans. This risky debt is being sold off in a manner that is exposing our entire financial system to unacceptable risk with little recourse given the lack of regulation,” said Andrew Park, senior policy analyst at Americans for Financial Reform. “The banks are pushing this debt, giving it a stamp of approval and failing to reveal problems associated with it. The likes of JP Morgan Chase and Citigroup are making money from a system built on an elaborate charade.”

AFR argues the global financial system is again being put at risk because of syndicated loans, which is larger than the subprime-mortgage collateralized debt obligations market. As fears grow over a risk of increased defaults, there are concerns that jobs and retirement funds are being jeopardized because syndicated loans are subject to little regulation in comparison to traditional bank loans and bonds and with no recourse in the event of a default

“Modern syndicated loans, just like modern loan participations, allow banks to evade securities laws and non-banks to evade banking laws,” states the brief. It adds that legislation introduced by Congress in 2008 in the wake of the financial crisis, “didn’t intend to allow such a huge $2.5 trillion syndicated loan market to evade securities regulation”.

The original case highlights the risky nature of the debt behind syndicated loans. It centers on investors suing JP Morgan Chase, Citigroup, Bank of Montreal and SunTrust after they sold $1.8 billion of debt in 2014 on behalf of a company which was being investigated by the federal government over illegal billing of Medicaid and Medicare.

The firm in question, Millennium Healthcare, filed for Chapter 11 bankruptcy in November 2015 after settling for over $250 million with the Department of Justice. Investors sued the banks, arguing they knew about the illegal practices and allegedly inflated revenues but prevented Millennium Healthcare, which conducted drug laboratory testing, from making disclosures. Investors also allege JP Morgan Chase, as well as receiving fees from underwriting the debt, was trying to refinance its own loan of $300 million to Millennium Healthcare.

Investors lost at the District Court. It is now before the Second Circuit. Oral arguments in the appeal will begin on March 9.

The risk involved in syndicated loans has also been linked to controversial company Adani, whose stock price has nose-dived after it was accused of fraud and stock-price manipulation. In 2022 alone, Adani Group companies received at least US$5 billion through syndicated loans, according to data compiled by Bloomberg. Some of the key parties include global banks such Standard Chartered, Barclays, Deutsche Bank, DBS, Citigroup, ING, Emirates NBD, First Abu Dhabi Bank, Qatar National Bank, MUFG Bank and Mizuho Bank.

“There is a reason why regulation of loans is a positive thing: there should be scrutiny of the debt and the company selling it; banks should not be allowed to sell off debt without full disclosure; financial institutions selling debt must be able to stand over what they are selling,” Park said. “We are urging the court to stop this ‘wild west’ market which has terrifying parallels to the subprime mortgage crisis that engulfed the US and countries around the world.”

A similar case is also before the courts involving investors in unsecured convertible notes suing tech communications firm Avaya after allegedly being misled over the company’s finances. Avaya filed for bankruptcy this month. 

The International Monetary Fund, the Federal Reserve and the Bank for International Settlements have been warning of the risk of the growing leveraged loan market for several years. Despite this it has continued to grow. Rising interest rates are creating fears that the market could see an increase in default over leveraged loans in the coming years.