News Release: AFR Calls for Proper Investor Protections in $2.5 Trillion Risky Debt After Court Ruling


Aug. 24, 2023

Carter Dougherty


Americans for Financial Reform is calling on Congress and banking regulators to address the repeated mishaps and losses in the $2.5 trillion syndicated “loan” market following a court ruling today.

The 2nd circuit appeals court affirmed a lower court decision that syndicated loans are not securities and therefore banks are not liable for clear mis-statements and omissions when selling the debt to investors.

Andrew Park of Americans for Financial Reform urged immediate regulation.
“This decision leaves investors, many of whom manage money on behalf of retirees and other savers, unnecessarily exposed to the risk of losses with little recourse available to them. The shocking circumstances around Millennium Health at the center of this case has reminded everyone what can happen to investors when there are no securities laws and since then we have seen similar such instances around misleading and incomplete disclosures. Given that, we can expect there will continue to be a debate around what the appropriate policy solutions still are.”

Americans for Financial Reform has previously urged banking regulators, the Department of Treasury and the Securities and Exchange Commission to work together to ensure that disruption and losses in the syndicated loan and securitized markets do not cascade into the broader economy, leading to further bankruptcies and job losses.

Americans for Financial Reform flagged to the court media reports on lobbying by banks and the loans industry and pressure from other regulatory agencies on the SEC.

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 fraudulently billing Medicaid and Medicare, including billing for tests on people who were deceased and unnecessarily testing of senior citizens for crack-cocaine.

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 failing to disclose what they knew about the company’s questionable practices and investigation to investors. 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.

Syndicated loans involve a bank or group of banks harvesting lucrative fees for organizing the loan on behalf of companies often in distress among investors, which can include pension, hedge and mutual funds. The syndicated loans market was a $500 billion market 10 years ago; now it is a $2.5 trillion market.

AFR submitted an amicus brief in the case highlighting the need for regulation with the court subsequently requesting in a rare move the SEC’s opinion on regulation. Despite asking for three extensions to a deadline, the SEC last month said it was “not in a position” to provide an opinion.

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.

In its brief, AFR argued that syndicated loans pose “significant economic implications for families and communities” and must be regulated as securities. The global financial system is again being put at risk because of this unregulated market, the brief states. 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”. Investors lost at the District Court with the appeal going ahead before the Second Circuit.

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. After selling additional debt in July 2022, the company suddenly warned investors that its earnings would drop more than 60% merely weeks later. Avaya six months after its new debt then ended up filing for bankruptcy, leaving investors burned and angry yet again.