Maya Pillai

Trust, but verify. This is a common methodology in the audit world and was even mentioned by the SEC Acting Chief Accountant Paul Munter in his statement on “The Auditor’s Responsibility for Fraud Detection.” [1]  He commented, “[T]he mindset of ‘trust but verify’ may represent potential bias if it is anchored in the belief that management is honest and has integrity.” Well, that is bold. We all want to believe that management has nothing but the purest intentions. But, what happens when this spotlight turns on the investor? Does the same principle exist?

Section 3(a)(11) of the Securities Act, known as the “intrastate offerings exemption,” provides small businesses with options to procure financing. [2]  Rule 147, the “safe harbor” rule under § 3(a)(11), lists objective criteria with which companies must comply. [3]  The newly loosened exemption, Rule 147A, permits issuers to make offers to out-of-state residents, as long as sales are only made to in-state residents and allows for a company to be incorporated out-of-state when its principal place of business remains in-state. [4]  (The limited framework of the SEC’s interpretation of § 3(a)(11) precludes issuers under Rule 147A from offering securities to out-of-state residents.) [5]  Deregulation is good, right? Well, it depends. Based on my study of these changes—and the caution given by Munter— the provision permitting issuers to rely on representations by investors to display their in-state status should be reconsidered.

This criterion removes a key due diligence requirement for issuers. That isn’t really that important, right? Let’s look at current events. One of the many reasons for the downfall of Silicon Valley Bank (“SVB”) was the loosening of regulatory requirements. Had SVB still been subject to regular stress tests, portfolio misrepresentation would likely have been noted much earlier. Relying only on an investor’s representation to satisfy the in-state requirement shows the issuer conducts no additional “test” to verify residency. As such, the issuer is more likely to fail. Therefore, additional measures should be put in place under Rule 147A for issuers to confirm the veracity of a purchaser’s residency. Once again, trust, but verify.

Why is due diligence necessary? Especially in the financial sector, institutions can “uncover any potential risk … of doing business with a specific organization or individual by analyzing information from a variety of sources.” [6]  Due diligence takes on many forms and consists of a wide range of processes. Knowing the individual or organization from whom you receive money helps ensure every party complies with the applicable rules and regulations to avoid exposure to liability, such as imprisonment and fines. There is also a non-tangible consequence: reputational risk. Financial institutions, like law firms, rely heavily on their name and reputation. Public perception holds a significant amount of weight (notice who the sponsors are at the next golf tournament or non-profit fundraiser you attend). If a financial institution receives a fine or shuts down for non-compliance, that makes headlines around the world. (And, of course, reactions are evident in the stock markets.) Nonetheless, the big institutions (e.g., Wells Fargo, Bank of America, Charles Schwab, etc.) manage to stay afloat, despite bad press. Maybe the banks took a page from Kanye West when he said, “Bad publicity is still publicity.”

There should be preventative measures from the issuer to prevent investors from making false representations about their in-state status.

Rule 147A’s language currently reads,

Sales of securities pursuant to this section shall be made only to residents of the state or territory in which the issuer is resident, as determined pursuant to paragraph (c) of this section, or who the issuer reasonably believes, at the time of sale, are residents of the state or territory in which the issuer is resident. [7]

There is the word, “reasonably.” Does the SEC provide further guidance on the rule? Yes, at the end of paragraph (d), a note states, “Obtaining a written representation from purchasers of in-state residency status will not, without more, be sufficient to establish a reasonable belief that such purchasers are in-state residents.” [8] 

Once again, with the term “reasonable,” but now we gain a clearer picture. While the investor’s written representation is expected to be truthful, this is not always guaranteed. Perhaps the SEC should revise the guidance note for paragraph (d) to read, “Obtaining a written and truthful representation from purchasers of in-state residency status will not, without more, be sufficient to establish a reasonable belief that such purchasers are in-state residents.”

This feels a little better. However, these changes introduce a new uncertainty when evaluating a generally recognized valid measure to confirm a truthful representation from an investor. Remember, “trust, but verify!” A residency affidavit (which must be notarized) would certainly suffice,

“It has been verified that on the ___ day of _____, 202_, John Smith’s principal residence is at 123 Main St, Charlotte, NC 28204. The following documents have been presented to corroborate John Smith’s residency: [.]”

In addition to one’s driver’s license containing an investor’s current address, the following documents should also be considered in verifying an investor’s principal residence: (1) most recent mortgage statement or lease agreement; (2) most recent utility statement; (3) vehicle insurance card from your most current policy; and (4) most recent property tax receipt. An investor’s most recent credit card statement may not be the best because the statement could be addressed to your billing address, which may differ from your principal residence address. Even a W2 or 1099 from the most recent tax year could list a different address if you moved after those tax documents were created and provided to you.

Although partial to the suggestions above, I would be remiss if I did not also question whether the reasonable belief standard is best suited for the securities industry. [9]  From tort law, a reasonable belief is the belief that an ordinary person would hold under like circumstances as those faced by the person in question. It is worth noting that the SEC does not explicitly define “reasonable belief.” (For this essay, I assume the SEC adopted the tort law definition of this term.) In Rule 147A, reasonable belief is merely supported by obtaining a written representation from the investor regarding their residency. [10]  The individuals at these financial institutions tasked with reviewing the representations from purchasers are not your average teller or loan officer at Chase or Wells Fargo. These due diligence/compliance employees are held to a higher standard by their employers because of their expected understanding of the applicable rules and regulations for intrastate offerings. The fate of an entire company rests in the hands of those tasked with reviewing the necessary documents. If a single investor is not an in-state resident, then the entire offering is no longer in compliance with the exemption under Rule 147A.  [11]

In his concluding remarks, Munter reiterated, “[T]he value of the audit and the related benefits to investors, including investor protections, are diminished if the audit is conducted without the appropriate levels of due professional care and professional skepticism.” [12]  It is clear that the entire offering depends upon the accuracy of the audit. With such high stakes, this should be a more defined process. Trust, but verify.


[1] Paul Munter, The Auditor’s Responsibility for Fraud Detection, SEC (Oct. 11, 2022),

[2] Intrastate offerings, SEC (Apr. 6, 2023),

[3] Id.

[4] Id.

[5] Joe Green, SEC Adopts New Rules to Facilitate Intrastate Crowdfunding, LinkedIn (Oct. 28, 2016),

[6] What is Customer Due Diligence (CDD)?, SWIFT, (last visited Aug. 7, 2023).

[7] Intrastate sales exemption, 17 C.F.R. § 230.147(A) (2021).

[8] Id.

[9] Amanda M. Rose, The “Reasonable Investor” of Federal Securities Law: Insights from Tort Law’s “Reasonable Person” & Suggested Reforms, 43 Iowa 77, 79 (2017) .

[10] Covington & Burling LLP, SEC Enhances Exemptions for Local Offerings, Covington (Dec. 1, 2016),

[11] Alan Palmiter, Securities Regulation, (8th ed. 2021).

[12] Munter, supra note 1.


By Jacob Winton

In 2004, the Wall Street Journal published an article titled U.S. Senators’ Stock Picks Outperform the Pros, reporting on an academic study that detailed the uncanny success of stock portfolios owned by United States Senators.[1]  “Politicians may have done a poor job improving the government’s bottom line,” the opening line quipped, “but they seem to be doing quite well with their own.”[2]  Financial disclosure forms from 1993 to 1998 showed not only that members of the US Senate saw higher returns than average Americans, but that they beat the market by an average of twelve percent per year, outperforming professional money managers by a factor of two.[3]

These Senators “appeared to know exactly when to buy or sell their holdings” in anticipation of fluctuations in the market.[4]  One of the study’s four authors, Professor Alan Ziobrowski, stated the obvious: “I don’t think you need much of an imagination to realize that they’re in the know.”[5]  Indeed, our elected officials are often privy to nonpublic information bound to trigger shifts in the market upon public release,[6] and studies like this one indicate that, for decades, legislators have been routinely converting their confidential access into personal financial gain.[7]

In 2010, the Wall Street Journal published another article, this time focusing on suspicious trades by congressional staffers with “ringside seats on the making of laws that affect American business.”[8]  An analysis of over 3,000 disclosure forms covering trading by Capitol Hill staffers in 2008 and 2009 showed that “[a]t least 72 aides on both sides of the aisle traded shares of companies that their bosses help oversee.”[9]  Importantly, the article also stated that existing insider trading laws did not apply to Congress, a claim that “set the blogosphere and mainstream media on fire.”[10]

Although the idea that Congress had exempted itself from insider trading laws came to be treated as conventional wisdom,[11] it was a falsehood.  For one thing, Congress could not have immunized itself from insider trading laws because “Congress ha[d] never enacted a federal securities law that explicitly prohibits anyone from insider trading.”[12]  Instead, Congress allowed insider trading to be prosecuted under SEC Rule 10b-5, promulgated pursuant to section 10(b) of the Securities Exchange Act of 1934,[13] which generally prohibits fraud or deception in connection with the purchase or sale of any security.[14]

Violations of Rule 10b-5 may be prosecuted as a civil offense by the SEC or as a crime by the Department of Justice.[15]  As a result, “U.S. insider trading law [was] almost entirely judge-made.”[16]  Nevertheless, it did not exempt Congress.  The Supreme Court had recognized two theories under which insider trading violates Rule 10b-5.[17]  The classical theory prohibits trades on nonpublic, corporate information because “the relationship between a corporate insider and the stockholders of his corporation gives rise to a disclosure obligation.”[18]  On the other hand, the misappropriation theory premises liability upon a duty to the informational source, prohibiting any “self-serving use of a principal’s information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, [which] defrauds the principal of the exclusive use of that information.”[19]

Professor Donna Nagy has outlined a persuasive argument that these two theories of liability cover congressional insider trading because of the “fiduciary-like” duties that members of Congress and legislative staffers owe to the public, to the federal government, and to other government officials.[20]  Nevertheless, in 2012, Congress passed the Stop Trading on Congressional Knowledge (“STOCK”) Act, placing explicit restrictions on trading by legislators and congressional staffers.[21]  The bill was introduced in its initial form by U.S. Representatives Brian Baird (D-Wash.) and Louise M. Slaughter (D-N.Y.) in 2006, at which time Representative Slaughter released a statement announcing the legislation and illustrating its general purpose:

“Congressman B learns that the Chairman of the Appropriations Committee has decided to provide a multi-million dollar defense contract for Company A in the Defense Appropriations bill.  This information has not been released to the public, but will almost certainly drive Company A’s stock price up when it becomes public knowledge.  Congressman B buys stock in Company A.  THIS IS NOT ILLEGAL UNDER CURRENT INSIDER TRADING LAWS, AND IS WHAT THE LEGISLATION ADDRESSES.[22]

As enacted, the STOCK Act provides in no uncertain terms that “Members of Congress and employees of Congress are not exempt from the insider trading prohibitions arising under [Rule 10b-5]” and explicitly affirms “a duty arising from a relationship of trust and confidence owed by each Member of Congress and each employee of Congress.”[23]  At the signing ceremony, President Obama conveyed the importance of the new law:

“The STOCK Act makes it clear that if members of Congress use nonpublic information to gain an unfair advantage in the market, then they are breaking the law.  It creates new disclosure requirements and new measures of accountability and transparency for thousands of federal employees.  That is a good and necessary thing.  We were sent here to serve the American people and look out for their interests—not to look out for our own interests.”[24]

Yet, reports indicate that public officials have continued to grow and protect their personal wealth by trading on information unavailable to the investing public.[25]  Indeed, the early days of the COVID-19 pandemic shed new light on this form of corruption.[26]

Senate Intelligence Committee Chairman Richard Burr (R-N.C.), for example, co-authored an op-ed on February 7, 2020 in which he publicly reassured the American people that “the United States today is better prepared than ever before to face emerging public health threats, like the coronavirus.”[27]  At a private luncheon around that same time, however, Senator Burr warned attendees that the coronavirus “is much more aggressive in transmission than anything that we have seen in recent history . . . . It is probably more akin to the 1918 pandemic.”[28]  Acting on the beliefs expressed privately, the Senator picked up between $628,000 and $1.72 million in cash by dumping a large share of his personal holdings on February 13, the week before financial markets began to tank in response to worsening news about the spread of COVID-19.[29]

In addition, the Department of Justice opened probes into the propriety of trades made by Senators Dianne Feinstein (D-Ca.), Kelly Loeffler (R-Ga.), and James Inhofe (R-Ok.), all of whom transferred hundreds of thousands of dollars’ worth of assets after being briefed by public health officials on the nature and scope of the emerging pandemic.[30]  At least 75 members of Congress or their spouses “bought or sold stock in companies that make COVID-19 vaccines, treatments, and tests in the weeks before and after the pandemic gripped the US.”[31]  The same trend has emerged around the current Russian invasion of Ukraine.[32]

Recent events underscore the apparent prevalence of corrupt trading in Congress and the impotence of current insider trading laws.[33]  Violations of the STOCK Act are punishable by fine, but the penalty is negligible and is often waived by House or Senate ethics officials.[34]  In response to calls from ethics watchdogs and lawmakers to tighten restrictions and increase penalties, a serious debate has emerged on Capitol Hill over an outright ban on federal lawmakers’ ability to trade stocks.[35]

That debate is important because even the “simple perception that officials might have prioritized their own financial well-being over the well-being of American households is damaging enough, even if the trades were innocuous.”[36]  A recent poll found that seventy-six percent of voters believe that lawmakers have an “unfair advantage” in the stock market and only five percent of respondents thought legislators should be able to trade stocks.[37]  When House Speaker Nancy Pelosi (D-Ca.) was asked in December of 2021 whether members of Congress should be banned from trading stocks, she responded simply, “no,” adding that “we are a free market economy.  They should be able to participate in that.”[38]  However, after opposing the effort for months, she relented due to growing pressure coming from within the Democratic party.[39]  In response, “there has been a push by both parties, in both houses of Congress, to establish stronger guardrails on congressional stock ownership.”[40]

“The fix is simple and obvious,” writes The Atlantic’s Annie Lowrey.[41] “Just don’t let public officials be active investors.”[42]  Senators Jon Ossoff (D-Ga.) and Mark Kelly (D-Az.) introduced legislation to that end on January 12, 2022.[43]  That law would require members of Congress and their families to place their stock portfolios into blind trusts for the duration of their term in office (allowing them to benefit from participation in the market while disallowing the abuse of nonpublic information) and would punish violations with a fine equal to the member’s entire congressional salary.[44]  The Ossoff-Kelly bill is one of many.[45]  Encouragingly, in the wake of the first House hearing on congressional insider trading on April 7, 2022, a bipartisan group of lawmakers has called on House leadership to swiftly bring a trading ban bill to the floor.[46]

Predictably, however, these efforts have been met with opposition.[47]  House Majority Leader Steny Hoyer (D-Md.) came out against a trading ban, declaring that “members ought not to be in a different situation that they would otherwise be if they weren’t members of Congress.”[48]  But that argument is a nonstarter. Members of Congress are not free to prioritize their own interests in the same way as civilians.  Their situation is inherently different because they are vested with the trust and confidence of both the federal government and the American electorate; they occupy a unique position of power and there is every reason to guard against the abuse of that power.  It should be uncontroversial to state that all forms of profiteering by public officials are unacceptable and should be disallowed.  If one accepts that basic premise, then banning members of Congress from trading stocks is a small and obvious step in the right direction.

[1] Jane J. Kim, U.S. Senators’ Stock Picks Outperform the Pros’, Wall St. J. (Oct. 26, 2004, 12:01 AM),  

[2] Id.

[3] Id. (During the “boom years of the 1990s” senators outperformed the market by 12%, money managers outperformed the market by 6%, and U.S. households underperformed the market by 1.4%.).

[4] Id.

[5] Id.

[6] “Examples of this kind of information include classified briefings about national security issues, advance knowledge of regulatory actions, and nonpublic details about legislation, appropriations and tax policy.”  Ylan Mui & Christina Wilkie, Congress Moves to Ban Members from Trading Stocks as Pelosi Drops Opposition, CNBC (Feb. 9, 2022, 9:41 AM),

[7] See, e.g., Annie Lowrey, An Invitation to Corruption, The Atlantic (Mar. 20, 2020), (“One analysis of 61,998 stock trades made from 2004 to 2010, for instance, showed that politicians outperformed the market by 20 percent, with the portfolios of high-ranking Republicans beating the market by a whopping 35 percent.”).

[8] Brody Mullins et al., Congressional Staffers Gain from Trading in Stocks, Wall St. J. (Oct. 11, 2010, 12:01 AM),

[9] Id.

[10] Donna M. Nagy, Insider Trading, Congressional Officials, and Duties of Entrustment, 91 Bos. U. L. Rev. 1105, 1107 (2011).

[11] Id. at 1108.  For example, Former SEC Commission Chairman Arthur Levitt proclaimed in a Bloomberg radio broadcast that “members of Congress and their staffs … benefit from an exemption that the average investor doesn’t benefit from.  They’re immune from insider trading laws.”  Id.

[12] Id. at 1109 (emphasis in the original).

[13] 15 U.S.C. § 78j(b).

[14] Nagy, supra note 10, at 1109; see 17 C.F.R. § 240.10b-5.

[15] Nagy, supra note 10, at 1109.

[16] Id. at 1110.

[17] See generally Chiarella v. United States, 455 U.S. 222 (1980) (classical theory); United States v. O’Hagan, 521 U.S. 642 (1997) (misappropriation theory).

[18] Chiarella, 455 U.S. at 227 (highlighting “the unfairness of allowing a corporate insider to take advantage of that information by trading without disclosure”); see also Nagy, supra note 10, at 1110 (“Pursuant to this ‘classical theory,’ persons who owe duties of trust and confidence to an issuer’s shareholders must either disclose all material nonpublic information in their possession or abstain from trading in the issuer’s shares.”).

[19] O’Hagan, 521 U.S. at 652.

[20] Nagy, supra note 10, at 1109–11 (“almost all instances of real or hypothesized congressional insider trading can fit squarely within either the classical or misappropriation theory paradigms under Rule 10b-5”).

[21] Stop Trading on Congressional Knowledge (“STOCK”) Act of 2012, Pub. L. No. 112-105, 126 Stat. 291.

[22] Nagy, supra note 10, at 1130.

[23] STOCK Act § 4.

[24] Matt Compton, President Obama Signs the STOCK Act, The White House Blog (April 4, 2012 5:16 PM),

[25] See generally Dave Levinthal, 59 Members of Congress Have Violated a Law Designed to Stop Insider Trading and Prevent Conflicts-of-Interest, Bus. Insider (Mar. 23, 2022, 1:18 PM),; Congressional Trading in 2021, Unusual Whales (Jan. 10, 2022),; see also Valera Voce, Congressmen Used Insider Knowledge to Profit from War in Ukraine, The Mountain (Mar. 11, 2022),

[26] See, e.g., Robert Faturechi & Derek Willis, Senator Dumped Up to $1.7 Million of Stock After Reassuring Public About Coronavirus Preparedness, ProPublica (Mar. 19, 2020, 5:01 PM),; Jack Kelly, Senators Accused of Insider Trading, Dumping Stocks After Coronavirus Briefing, Forbes (Mar. 20, 2020 12:41 PM),

[27] Senator Lamar Alexander & Senator Richard Burr, Coronavirus Prevention Steps the U.S. Government Is Taking to Protect You, Fox News (Feb. 7, 2020, 12:25 PM),

[28] Faturechi & Willis, supra note 26.

[29] Lowrey, supra note 7.

[30] Ryan Lucas, Justice Department Closes Investigations of 3 Senators; Burr Inquiry Continues, NPR (May 26, 2020, 5:31 PM),

[31] Dave Levinthal, Ban Federal Lawmakers and their Family Members from Trading Stocks, 37 Former Lawmakers tell Congress, Bus. Insider (Apr. 6, 2022, 11:00 AM),

[32] Id.

[33] See Insider Trading, Congress and COVID-19: A Renewed Focus on the STOCK Act, Foley Hoag LLP (April 15, 2020),

[34] Levinthal, supra note 25.

[35] Id.

[36] Lowrey, supra note 7 (emphasis in the original).

[37] Karl Evers-Hillstrom, Three in Four Voters Support Banning Lawmakers from Trading Stocks: Poll, The Hill (Jan. 6, 2022, 4:05 PM),

[38] Press Release, Speaker of the House Nancy Pelosi, Transcript of Speaker Pelosi’s Remarks at Weekly Press Conference (December 15, 2021),

[39] See Steven T. Dennis et al., Stock-Trading Ban for Congress Hits Pushback from Right and Left, Bloomberg (Feb. 9, 2022, 5:36 PM),

[40] The Editorial Board, Members of Congress Should Not be Trading Stocks, Ever, N.Y. Times (Feb. 18, 2022),

[41] Lowrey, supra note 7.

[42] Id.

[43] Press Release, Senator Jon Ossoff, Sens. Ossoff, Kelly Introduce Bill Banning Stock Trading by Members of Congress.

[44] Id.

[45] Bryan Metzger, A Bipartisan Group of 19 Lawmakers Is Laying Out 3 Key Parameters for a Stock Trading Ban Following the House’s First Hearing on the Issue, Bus. Insider (Apr. 13, 2022, 11:09 AM), (“At least 20 bills have been introduced that address some of these issues.”).

[46] Id.; Kimberly Leonard & Dave Levinthal, Here Are 6 Things to Watch as Congress Considers Banning Lawmakers from Trading Stocks, Bus. Insider (Apr. 6, 2022, 3:07 PM),

[47] See Dennis, supra note 39.

[48] Mike Lillis, Joining Pelosi, Hoyer Says Lawmakers Should Be Free to Trade Stocks, The Hill (Jan. 19, 2022, 1:57 PM),

By Michael J. Riedl

Consumer lenders across America breathed an initial sigh of relief on February 8, as the Northern District of California sided with the Office of the Comptroller of the Currency (the “OCC”) and the Federal Deposit Insurance Corporation (the “FDIC”) in upholding the “valid-when-made” rule pertaining to high-interest consumer loans.[1]  By upholding this rule, the district court provided certainty in the first high-level challenge to the OCC and FDIC’s rules that were promulgated on June 2, 2020, and July 18, 2020, respectively.[2]  In a nutshell, the rules reaffirmed the allegedly long-standing—though recently in considerable uncertainty—authority for secondary market participants to purchase loans or loan obligations, and collect on the debt at the same interest rate as that of the original bank lender.[3]  In fact, such authority can be noticed in the Supreme Court as far back as 1833, when the Court held that as long as a loan was “in its inception, . . . unaffected by usury, [it] can never be invalidated by any subsequent usurious transaction.”[4]

While American banking law is complicated, irrational, inefficient, and “offends all of our aesthetic and logical instincts,” it largely works.[5]  In 1978, the Supreme Court espoused a fundamental tenet of modern American banking law.  In the landmark case of Marquette National Bank of Minneapolis v. First of Omaha Service Corp.,[6]  the Court held that a nationally chartered bank may export the maximum allowable interest rate of its charter state to loans made in other states.[7]  For example, a nationally chartered bank in Utah, where there is no statutory cap on interest rates,[8] could offer a loan to a citizen of New York at 50% APR, which is far more than the New York statutory maximum of 16%.[9]  The Marquette decision caused large, nationally chartered banks to consider moving to states with high, or nonexistent, usury caps or to aggressively lobby their state legislatures to raise interest rates.[10]  As a result, the nascent credit card and subprime lending boom continued to accelerate.

The development of a robust secondary market for loan obligations further enhanced the credit card and subprime lending boom.  For example, an originating national bank could find willing buyers, in collection agencies, of nonperforming accounts and remove loans from their balance sheet by selling to secondary market participants who would bundle and securitize the loan obligations.[11]  Implicit in the sale of the loans, was that the buyer-assignee—often times a nonbank entity—would be able to “step into the shoes” of the originating bank and collect on the debt obligation at the same interest rates as the originating bank, had they kept the loan.  Such a principle is consistent with common law principles of assignment taught in first-year contract classes in American law schools.[12]  However, considering that only nationally and state-chartered banks are allowed to export interest rates, when they assign or sell their loans to nonbank entities, can those entities collect on those obligations at the same interest rates as the national bank?

For the longest time, the answer to that question was a resounding yes.  However, in 2015, the Second Circuit threw a wrench in the secondary market machinery.  In Madden v. Midland Funding, LLC,[13] the Second Circuit held that when a nationally chartered bank sells loans to a nonbank entity, that nonbank entity cannot collect on the debt at a rate that would be usurious under state law.[14]  The decision was immediately and widely panned.[15]  Despite a bevy of amicus briefs and the invitation of the solicitor general to write a brief, the Supreme Court denied certiorari.[16]  The uncertainty was immediate in the secondary loan market.[17]

For example, consider a $5,000 credit card loan to a consumer in New York that was originated by a nationally chartered bank in Utah.  Because of the decision in Marquette, the Utah bank can charge whatever interest rate it would like on the debt, as Utah does not have a usury limit for contracting parties.[18]  For purposes of the illustration, assume that the rate on past-due debt was 36%.  After the debt went into charge-off, the Utah bank sold it to a debt collection agency in New York.  Prior to Madden, both parties could be sure that the contractual interest rate, 36%, would be valid for the collection agency to pursue, and eventually seek a judgment on.  However, after Madden, that would no longer be the case.  The debt could only be collected at the statutory maximum of 16% in New York.[19]  Thus, after Madden, debt held by collection agencies or in asset backed securities was, almost overnight, worth considerably less.

Initially, Congress tried to take legislative action to fix the “Madden problem,” with the House of Representatives passing a bill to ensure that the “valid-when-made” doctrine would become law.[20]  However, the bill stalled in the Senate, which led the OCC and the FDIC to promulgate rules through notice and comment to ensure that if a loan was not usurious at the time it was made, and was thus “valid,” that loan did not become usurious through sale or assignment to a nonbank entity.[21]  Within two months, California, Illinois, and New York filed suit for declaratory and injunctive relief against the new rules.[22]  The plaintiff states first argued that the OCC rule would impermissibly allow the exportation of federal preemption of state law usury claims to secondary market participants. The states also argued that the OCC was trying to address the question as to whom the exportation doctrine applies.[23]  If either of these were true, then the OCC or FDIC would have exceeded its authority under Chevron, U.S.A., Inc.  v. National Resources Defense Council, Inc.[24]

However, the Northern District of California disagreed with the plaintiff states’ characterization, and held that the rule was addressing the question of whether a national bank must alter the contractually set interest rate of a loan it originated when selling it on the secondary market to a nonbank entity.[25]  Since the controlling statute, 12 U.S.C. § 85, did not speak directly to the issue, the OCC had the authority to promulgate the rule under Chevron.[26]  Moving on to the second question under a Chevron analysis, whether the OCC’s interpretation of 12 U.S.C. § 85 was manifestly unreasonable, the district court held that it was not.[27]    Rejecting testimony from a leading scholar on the issue, Professor Adam Levitin, that the “valid-when-made” principle is a modern invention, the court relied on basic contract law to justify its holding: that an assignee steps into the shoes of an assignor.[28] Thus, Michael J. Hsu, the Acting Comptroller of the Currency, stated after the ruling, the “legal certainty” in the ruling allows for “the interest permissible before the transfer [] to be permissible after the transfer.”[29]

[1] See Order Resolving Cross-Motions for Summary Judgment, California v. OCC, No. 4:20-cv-05200-JSW (N.D. Cal. Feb. 8, 2022); Order Resolving Cross-Motions for Summary Judgment, California v. FDIC, No. 4:20-cv-5860-JSW (N.D. Cal. Feb. 8, 2022).

[2] Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred, 85 Fed. Reg. 33,530 (June 2, 2020); Federal Interest Rate Authority Rule, 85 Fed. Reg. 44,146 (July 22, 2020).

[3] See id.

[4] Nichols v. Fearson, 32 U.S. 103, 106 (1933).

[5] See John D. Hawke, Jr., Comptroller of the Currency, Remarks Before the Exchequer Club Washington, D.C., (Apr. 16, 2003),

[6] 439 U.S. 299 (1978).

[7] Id. at 308.

[8] See infra note 18.

[9] N.Y. Banking Law § 14-a (McKinney 2014).

[10] See Charles R. Geisst, Beggar Thy Neighbor 221–23 (2013).

[11] See Michael Marvin, Interest Exportation and Preemption: Madden’s Impact on National Banks, the Secondary Credit Market, and P2P Lending, 116 Colum. L. Rev. 1807, 1837–40 (2016).

[12] See, e.g., Charles L. Knapp et al., Problems in Contract Law 1115–34 (9th ed. 2019); Restatement (Second) of Contracts § 317 (Am. L. Inst. 1981); 29 Williston on Contracts § 74:10, Assignment of contracts rights, generally (4th ed. 2021).

[13] 786 F.3d 246 (2015).

[14] Id. at 249.

[15] See Madden v. Midland Funding, LLC: Potentially Far Reaching Implications for Non-Bank Assignees of Bank-Originated Loans, Paul Hastings (June 11, 2015),

[16] 136 S. Ct. 2505 (2016).

[17] Outside of immediate uncertainty, the fact that secondary market participants may be less willing to purchase high-interest debt caused lenders in Second Circuit states to lend less in terms of average loan size and total number of loans. See Colleen Honigsberg et al., How Does Legal Enforceability Affect Consumer Lending? Evidence from a Natural Experiment, 60 J.L. & Econ. 673, 645 (2017).

[18] Utah Code Ann. § 15-1-1 (2019).

[19] N.Y. Banking Law § 14-a (McKinney 2014).

[20] Protecting Consumers’ Access to Credit Act of 2017, H.R. 3299, 115th Cong. (2018) (amending 12. U.S.C. § 85 to add “[a] loan that is valid when made as to its maximum rate of interest in accordance with this section shall remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be enforced by such third party notwithstanding any State law to the contrary.”). For a more thorough discussion of the congressional attempts to codify the “valid-when-made” doctrine, see Abbye Atkinson, Rethinking Credit as Social Provision, 71 Stan. L. Rev. 1093, 1113–20 (2019).

[21] See supra note 2 and accompanying text.  Specifically, the OCC’s rule, as codified in 12 C.F.R. § 7.4001(e) adds “[i]nterest on a loan that is permissible under 12 U.S.C. 85 shall not be affected by the sale, assignment, or other transfer of the loan.”

[22] See Complaint for Declaratory and Injunctive Relief, California v. OCC, No. 20-cv-5200 (N.D. Cal. July 29, 2020).

[23] See supra note 1, at 10–15.

[24] 467 U.S. 837 (1984).

[25] See supra note 1, at 12.

[26] Id. at 13.  While this is what the district court held, it does not take many logical connectors. See also 12 U.S.C. § 85.

[27] See supra note 1, at 13.

[28] See supra note 1, at 15. Professor Levitin takes the view that the “valid-when-made” doctrine is not well established, but rather is a modern invention “fabricated by attorneys for financial services trade associations.” See Adam J. Levitin, Spurious Pedigree of the “Valid-When-Made” Doctrine, 71 Duke L.J. Online 87 (2022).

[29] Press Release, Office of the Comptroller of the Currency, Acting Comptroller Issues Statement on Court Decision Regarding ‘Madden Rule’ (Feb. 9, 2022)


By: Christian Schweitzer

The runaway freight train that is the American student debt crisis continues to accelerate, as borrowers now owe a collective $1.73 trillion in debt.[1] As President Biden and Congress press forward with retroactive reforms to cancel debt for certain limited classes of borrowers,[2] it seems worthwhile to return to conversations about forward-looking reforms to minimize new debt. One potential guardrail to new student debt is the Income Share Agreement (“ISA”),[3] a financing product that serves as an alternative to student loans by offering students educational funding in exchange for the student’s promise to pay the lender a fixed portion of their future income for a set number of years.[4]

Though the principles that underlie ISAs arguably date back to human capital contracts envisioned by free marketeer Milton Friedman,[5] their proliferation into the realm of higher education is relatively recent. In 2002, a Chilean company called Lumni created a fund to invest in students pursuing higher education, with the expected returns to be an agreed percentage of the students’ future income for ten years following graduation.[6] Since then, Lumni and others have expanded to the United States, and the ISA model has been adopted by nonprofit, for-profit, and government entities.[7] While ISAs are increasing in popularity, data on the ISA education financing market share is lacking.[8] Analyzing the client base of Vemo,[9] a leading education finance intermediary, as a proxy, researchers estimate that in addition to private ISA funds, roughly sixty colleges in the U.S. offered ISA financing as of July 2019, up from eight colleges in 2017.[10]

Advocates for the expansion of ISAs see them as more than an alternative to student loans but offering a host of other benefits, including equality of opportunity, student protections, information transparency, innovation, and student support.[11] As a quintessentially free-market device, these experts argue that ISAs open the doors of higher education to students of all racial and financial backgrounds, without the need for federal subsidies.[12] Further, ISAs can be more student protective than traditional private loans, because the risk of low post-graduate income or unemployment is allocated to the lender.[13] Because ISAs carry such low risks to students, they may be attractive to debt-averse students for whom higher education would be otherwise inaccessible.[14] Additionally, ISAs incentivize lenders to offer academic and career support to students, because students who go on to be high earners present the greatest return on investment.[15] Lastly, competition between lenders should encourage innovation in the delivery of financing and education itself, as investors will be more willing to dedicate dollars towards more venerable education providers.[16]

As ISAs have grown in popularity, they have also been subjected to a great deal of scrutiny, including from student’s rights organizations.[17] The harshest of perspectives describes the ISA arrangement as a modern-day indentured servitude because they create the opportunity for a borrower’s repayment to be much more than the value of their education.[18] Indeed, there are legitimate moral concerns created by allowing private funds and corporations to effectively create ownership interests in aspiring young professionals.[19] Additionally, there are practical concerns that ISAs are ripe for unfairness due to opportunities presented for unethical conduct by both lenders and borrowers.[20] Borrower exploitation of the system may manifest as either adverse selection, opting into an ISA knowing privately they intend to earn less than declared in the application process, or as moral hazard, where a borrower does not work as hard for economic success because earning more will lead to paying more to the lender.[21] Lender exploitation could arise by drafting unfair terms for the rate or duration of repayment, as well as inequality in selecting groups who are most often approved for funding.[22] Lastly, critics note that additional risks for investors in ISAs could lead to repayment ultimately being more expensive for successful students than traditional student loans. [23]

Potential weaknesses aside, a nationally representative survey found that 46% of individuals support ISAs to only 22% who oppose them.[24] Given this support and the utility of ISAs, what can regulators do to mitigate their harms and protect borrowers? Some ISA researchers have recommended comprehensive drafting of new regulations which balance controls against likely borrower and lender abuses, in a manner that attempts to anticipate new loopholes lending contracts could include without curbing the innovation that makes ISAs desirable.[25] On the contrary, borrower advocates have argued that ISAs operate similarly to traditional credit agreements and thus can be governed by existing consumer financial protection regimes at the state and federal level, such as the Equal Credit Opportunity Act.[26] Still, others have called for analysis on a case-by-case basis, advocating for simply categorizing ISAs as analogous to a type of traditional transaction and then regulating it under existing regimes. [27]

ISAs are not a one-size-fits-all solution to ongoing student debt issues in the United States. However, they can be a tool in the swiss army knife of policymakers that contributes to meaningful progress. Especially for lower-income and risk-averse students, ISAs can provide a pathway to higher education that traditional student loans do not. For ISAs to be most effective, regulators must continue to work towards solutions that leave the door open to lending innovation, while cutting off avenues for predatory practices. With proper oversight, the broader implementation of ISA funding can be an important piece of next-generation education reform.

[1] Abigail Johnson Hess, The U.S. has a Record-breaking $1.73 Trillion in Student Debt—Borrowers from These States Owe the Most on Average, CNBC (Sept. 9, 2021, 1:03 PM),

[2] Zack Friedman, Biden has Cancelled $11.5 Billion of Student Loans, but Here’s What This Means for Student Loan Forgiveness, Forbes (Oct. 12, 2021, 8:30 AM),

[3] Income Share Agreements, Student Borrower Prot. Ctr., (last visited Oct. 18, 2021).

[4] Id.

[5] Shu-Yi Oei & Diane Ring, Human Equity: Regulating the New Income Share Agreements, 68 Vand. L. Rev. 681, 685 (2015).

[6] Id. at 693–94.

[7] Id. at 693.

[8] Richard Price, Unlocking the Potential of ISAs to Tackle the Student Debt Crisis, Christensen Inst. 7 (Aug. 2019),

[9] About Us, Vemo, (last visited Oct. 18, 2021).

[10] See Price, supra note 8, at 7.

[11] Miguel Palacios et al., Investing in Value, Sharing Risk: Financing Higher Education Through Income Sharing Agreements, Am. Enter. Inst. 1–2 (Feb. 2014),

[12] Id. at 7.

[13] Id. at 8.

[14] Id.

[15] Id. at 9.

[16] Id. at 8–9.

[17] See Income Share Agreements, supra note 3.

[18] Elliot Hannon, Is This Indentured Servitude or the New Venture Capital?, SLATE (Oct. 29, 2013, 10:45 AM),

[19] See, e.g., Ken Previti, The American School for Indentured Servants, RECLAIM REFORM (June 19, 2013), (discussing how corporations are legally indenturing college students as a creative means to profit).

[20] See Oei & Ring supra note 5, at 708.

[21] Greg Madonia & Austin Smith, My Future or Our Future? The Disincentive Impact of Income Share Agreements, Mia. Univ. Farmer Sch. of Bus. 1, 21 (2016).

[22] Stephen Hayes & Alex Milton, Solving Student Debt or Compounding the Crisis? Income Share Agreements and Fair Lending Risk, Student Borrower Prot. Ctr. 4–5 (2020),

[23] See generally Jeff Schwartz, The Corporatization of Personhood, 2015 U. Ill. L. Rev. 1119 (2015) (explaining that ISA fees and other social or transactional costs can add up to make the arrangement burdensome for the borrower).

[24] Jennifer Delaney et al., Perceptions of Income Share Agreements: Evidence from a Public Opinion Survey, 45 J. Edu. Fin. 97, 106 (2019).

[25] Dubravka Ritter & Douglas Webber, Modern Income-Share Agreements in Postsecondary Education: Features, Theory, Applications, Fed. Rsrv. Bank of Phila. 34 (Dec. 2019),

[26] Hayes & Milton, supra note 22, at 9. Benjamin Roesch, Applying State Consumer Finance and Protection Laws to Income Share Agreements, Student Borrower Prot. Ctr. 7–10 (Aug. 2020),

[27] Oei & Ring, supra note 5, at 709–10.

By Elizabeth A. Napps

The end of January 2021 brought a few trending headlines.  We all expected to see stories of President Joe Biden’s inauguration, if not breakout star poet Amanda Gorman.  The unexpected story, however, came the following week when Americans were reminded of the existence of GameStop and learned all about “stonks.”  To the uninitiated, the term “stonks” references a popular meme poking fun at the unpredictability and (in)sanity of the stock market.[1]  Another new household name was the Reddit forum “r/wallstreetbets,” which is self-described as “a community for making money and being amused while doing it.”[2]  Users of the subreddit coordinated to purchase previously unpopular stocks, most notably GameStop, ultimately leading to a “10-day realized volatility [of] 308%” just prior to the market opening on January 26, 2021.[3]  By the close of trading on January 27, 2021, the stock price had increased by 1,915 percent from the beginning of the year.[4]

As GameStop stock surged throughout the week, the Securities and Exchange Commission (the “SEC”) and the White House acknowledged monitoring market volatility to “maintain fair, orderly, and efficient markets . . . .”[5]  In response to the volatility, trading apps including Robinhood Markets, Inc. (“Robinhood”) placed temporary pauses on trading of the affected stocks.[6]  Two days after its first statement, the SEC, without naming any specifics, again acknowledged its close review of the “actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities;” pledged to protect investors from “abusive or manipulative trading activity that is prohibited by the federal securities laws;” and cautioned investors against participating in such activity.[7]

There has been extensive fallout and speculation about what actions the SEC may take against individual traders and platforms like Robinhood, but what does it all mean? What is really likely to happen?

Individual Traders

The Securities Exchange Act of 1934 (the “Exchange Act”) was enacted to regulate and control transactions in securities and “insure the maintenance of fair and honest markets in such transactions.”[8]  Although anyone can invest in the stock market, there are some regulations that must be followed.  Primary among them here is the prohibition of market manipulation.  Under Section 9 of the Exchange Act, it is unlawful for a person to effect any transaction in a security to “creat[e] a false or misleading appearance of active trading in any security . . . or a false or misleading appearance with respect to the market for any such security . . . .”[9]  Although the Commodity Futures Trading Commission has separately recognized a four-part test regarding manipulation,[10] the SEC’s definition of “market manipulation” remains in flux to a degree.[11]

Although it may take months or years for the SEC to complete any investigation, enforcement actions, or criminal prosecutions against Reddit investors appear unlikely except in exigent circumstances.[12]  For example, Massachusetts is investigating one high profile Redditor, Keith Gill, for a possible violation of state securities regulations because he has a higher fiduciary duty as a registered broker-dealer and previously worked for MassMutual.[13]  After his identification, Gill became the face of early investors who helped increase the popularity of GameStop stock, with even the House Committee on Financial Services calling him to testify during its hearings about recent market volatility.[14]  Gill testified that his only involvement in the GameStop trading was as an amateur investor sharing his ideas solely for the educational value, not manipulation.[15]

Generally, Redditors were largely transparent about their motives and any charge against them would diverge from a typical SEC case.[16]  Although some have characterized the trading as a “pump and dump scheme,” wherein promoters first “try to [pump up] the price of a stock with false or misleading statements” before “selling their own holdings of the stock [and] dumping shares into the market,”[17] questions linger over whether any false or misleading transactions were ever actually made.[18]  Many later investors were evidently joining the bandwagon of rising stock prices and excited to see if their efforts could disrupt Wall Street.[19]  Considering the high volume of media coverage, the most likely enforcement targets would be early investors and participants in the Reddit forum, like Gill.[20]  Although the SEC would need to match the individual traders to posts on Reddit, this would likely not be an impossible feat.[21]  On the whole, the consensus among observers remains that it would be difficult to prove a case against the typical Reddit investor.[22]

Robinhood and Other Platforms

In the wake of Robinhood and other platforms temporarily freezing trading on the suspect stocks, an immediate uproar resulted in over thirty lawsuits against the company[23] and bipartisan congressional calls to investigate.[24]  For its part, Robinhood said that the “halting of buy orders and leveraged trading” was “entirely about market dynamics and clearinghouse requirements.”[25]  Robinhood CEO Vlad Tenev repeated this refrain while testifying to Congress about the company’s actions.[26]  Indeed, former SEC chief economist Chester Spatt told Yahoo Finance that this action was actually an example of the regulations working, because the firm needed to halt trading in order to make sure the high volume of trades could be covered.[27]

Observers also emphasize that Robinhood’s Customer Agreement (the “Agreement”) with each user allows for this action.[28]  The Agreement includes provisions about the clearance of trades, Robinhood’s right to “prohibit or restrict the trading of securities” at its discretion, and even an arbitration agreement.[29]  Furthermore, the Agreement includes a provision about applicable laws and regulations, which permits Robinhood to not complete “any transaction it believes would violate any federal or state law, rule or regulation or the rules or regulations of any regulatory or self-regulatory organization.”[30]  Based on the SEC’s acknowledgement of market volatility and the suspect nature of the increased trading on the securities at issue, it is plausible that Robinhood could rely on this provision as well.  In an early indication that courts would be likely to side with Robinhood, the Central District of California recently denied a request for a temporary restraining order that would have forced Robinhood “to abstain from any further limitations on trading in any stock . . . .”[31]

Future Impact

Although much of the conversation is centered on what already occurred, there remains a question of what may happen to future investors.  There is already some indication that the SEC is watching social media more closely and may be inclined to take action against future attempts by a subreddit or other congregation of amateur traders to spearhead a pump and dump scheme.  On February 11, 2021, the SEC enacted a two-week trading suspension for SpectraScience, Inc. (“SCIE”) under section 12(k) of the Exchange Act.[32]  Although this action was in part because the corporation is inactive, the SEC further acknowledged that “since late January 2021, certain social media accounts may be engaged in a coordinated attempt to artificially influence SCIE’s share price . . . .”[33]  This suggests a new inclination by the SEC to suspend trading where social media activity may have contributed to market manipulation.[34]  A former SEC senior trial counsel hypothesized that the SEC did not halt trading on GameStop because of an “inability to identify an actionable violation of the federal securities laws . . . .”[35]  Although that may have been true with regards to GameStop and other similarly situated stocks, this was evidently not the case with SCIE.

In addition to the SEC’s seemingly new willingness[36] to suspend trading in part because of social media influence, prospective traders should also be cautious of joining similar Reddit-led stock purchases because it is clear they work.  Certainly, social media-inspired investing seems to be becoming a trend.  Indeed, r/wallstreetbets currently boasts over 9.2 million users[37] and a recent Elon Musk tweet of an investment meme garnered a million likes.[38]  Although famous investors like Musk are at more risk of being investigated for illegal stock touting, it is not inconceivable the SEC would choose to investigate other traders as well.[39]  Continued market volatility of this sort may soon appear to be a premeditated, coordinated plan by Redditors and the like to drive stock prices up in manipulative schemes.  A savvy investor would be wise to avoid jumping on the bandwagon.[40]

[1] Jordan Weissmann, What We Talk About When We Talk About Stonks, Slate (Jan. 28, 2021, 3:53 PM), (describing “stonks” as “an exclamation . . . that you don’t take any of this finance stuff too seriously, that you are in it as much for the [laughs] as the opportunity to actually make a buck”).

[2] The WSB FAQ, Reddit, (last visited Feb. 22, 2021).  For an inside view about the attitudes of some Redditors, see Caitlin McCabe, A Week Inside the WallStreetBets Forum That Launched the GameStop Frenzy, Wall St. J. (Feb. 13, 2021, 2:41 PM),

[3] Matt Levine, GameStop Is Just a Game, Bloomberg (Jan. 26, 2021, 12:14 PM),

[4] Dean Seal, White House, SEC “Monitoring” Volatile GameStop Stock, Law360 (Jan. 27, 2021, 9:07 PM),

[5] Public Statement, Sec. & Exch. Comm’n, Joint Statement Regarding Ongoing Market Volatility (Jan. 27, 2021),; see also Seal, supra note 4.

[6] Tucker Higgins, Lawmakers from AOC to Ted Cruz Are Bashing Robinhood Over Its GameStop Trading Freeze, CNBC (Jan. 28, 2021, 5:17 PM),  Affected stocks on Robinhood included GameStop, American Airlines, AMC, BlackBerry, Bed Bath & Beyond, Castor Maritime, Express, Koss, Nokia, Sundial Growers, Tootsie Roll Industries, and trivago.  Id.

[7] Public Statement, Sec. & Exch. Comm’n, Statement of Acting Chair Lee and Commissions Peirce, Roisman & Crenshaw Regarding Recent Market Volatility (Jan. 29, 2021),; see also Investor Alert: Thinking About Investing in the Latest Hot Stock?, Sec. & Exch. Comm’n (Jan. 30, 2021), (cautioning potential investors about the risks of following social media trends).

[8] 15 U.S.C. § 78b,

[9] 15 U.S.C. § 78i(a),

[10] Prohibition on Price Manipulation, 76 Fed. Reg. 41,398, 41,407 (July 14, 2011) (to be codified at 17 C.F.R. § 180.2), (confirming that the Commission will apply a four-part test developed in case law: “(1) That the accused had the ability to influence market prices; (2) that the accused specifically intended to create or effect a price or price trend that does not reflect legitimate forces of supply and demand; (3) that artificial prices existed; and (4) that the accused caused the artificial prices.”).

[11] See Alexis Keenan, Will the SEC Sue GameStop Traders? The Case Could Pose a ‘Super Weird’ Challenge, Yahoo Fin. (Jan. 28, 2021),; Levine, supra note 3 (“Nobody knows what this means.”).

[12] Bruce Brumberg, Investigations Into GameStop Trading and Reddit: Former SEC Enforcement Chief Provides Insights, Forbes (Feb. 9, 2021, 10:00 AM), (suggesting that registered financial advisors or those engaging in illegal touting may be targeted by the SEC).

[13] Andy Rosen, Regulators Subpoena Mass. Resident ‘Roaring Kitty’ Regarding GameStop Saga, Bos. Globe (Feb. 9, 2021, 6:06 PM),  Keith Gill was separately named a defendant in a proposed class-action lawsuit for allegedly misleading investors through his YouTube channel, though he maintains his innocence.  Christian Berthelsen, “Roaring Kitty” Sued for Securities Fraud Over GameStop Rise, Bloomberg (Feb. 17, 2021, 12:31 PM), (noting the case is Iovin v. Gill, No. 21-cv-10264, D. Mass. (Springfield)).

[14] See Nathaniel Popper, Reddit’s ‘Roaring Kitty’ Will Speak at GameStop Hearing, N.Y. Times (Feb. 12, 2021),  This is the first of three hearings about market volatility, with the SEC expected to feature in the future.  See @RepMaxineWaters, Twitter (Feb. 19, 2021, 5:48 PM),

[15] Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide: Hearing Before the H. Comm. on Fin. Servs., 117th Cong. (2021), (statement of Keith P. Gill).

[16] See Brumberg, supra note 12; see also Keenan, supra note 11 (noting a case could “unravel” because the traders “appear to have acted openly”).

[17] Pump and Dump Schemes, Sec. & Exch. Comm’n, (last visited Feb. 22, 2021) (cautioning that investors lose money once shares flood the market and drive the price per share down).  The volatility in the market led to a “short squeeze,” which occurs when stock prices surge, forcing short sellers, who predicted the price would drop, to purchase the stock to protect themselves from further losses, thus increasing the price even more.  See April Joyner & Saqub Iqbal Ahmed, “GameStop Effect” Could Ripple Further as Wall Street Eyes Short Squeeze Candidates, Reuters (Jan. 28, 2021, 1:30 PM),  Except in the most extreme cases of a “short squeeze,” the SEC rarely prosecutes for manipulation.  See Complaint, Sec. & Exch. Comm’n v. Falcone, No. 12 CIV 5027 (S.D.N.Y. June 27, 2012), 2012 WL 2457466 (available at

[18] See Brumberg, supra note 12; see also Yoel Minkoff, GameStop Rally: Is there a Case for Market Manipulation?, Seeking Alpha (Jan. 31, 2021, 9:09 AM), (suggesting that “irrational exuberance” does not equate to “fraud and misinformation”).

[19] See Dave Michaels & Alexander Osipovich, “GameStop Stock Surge Tests Scope of SEC’s Manipulation Rules, Wall St. J. (Jan. 28, 2021, 7:49 AM),; see also McCabe, supra note 2 (describing some investors’ views); @elonmusk, Twitter (Jan. 26, 2021, 4:08 PM), (addressing the activity in a more mainstream outlet).

[20] See, e.g., Keenan, supra note 11 (“Regulators may have more success targeting the buying behavior that took place at the very beginning of the effort, [Michigan School of Law professor Gabriel Rauterberg] said.”).

[21] Id.

[22] See Minkoff, supra note 18 (quoting Duke Law Prof. Gina-Gail S. Fletcher as saying, “[t]he statutory provisions and the case law related to [market manipulation] are all over the place and they don’t favor the SEC”); see also Brumberg, supra note 12 (“[I]t could be tough to prove [a] case.”).

[23] Mengqi Sun, Robinhood Faces Civil Lawsuits Over Trading Restrictions, Wall St. J. (Feb. 3, 2021, 3:32 PM),

[24] Higgins, supra note 6.  

[25] Ethan Wolff-Mann, Robinhood “Didn’t Change the Rules” on Users Amid Market Mayhem, Former SEC Economist Explains, Yahoo Fin. (Jan. 29, 2021), (quoting Robinhood CEO Vlad Tenev).  Clearinghouses serve as intermediaries between buyers and sellers in the transfer of securities, and may ask members to front more money, called margin, in the event of volatile market and risky trades.  See Telis Demos, Why Did Robinhood Ground GameStop? Look at Clearing, Wall St. J. (Jan. 29, 2021, 7:33 PM), (explaining why a broker like Robinhood would choose to suspend trading in the face of a possible margin call).

[26] Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide: Hearing Before the H. Comm. on Fin. Servs., 117th Cong. 8 (2021), (statement of Vladimir Tenev, CEO, Robinhood Markets, Inc.).

[27] Wolff-Mann, supra note 25.

[28] See id.; Jeff John Roberts, Robinhood is Being Sued Over the GameStop Meltdown. Do Investors Have a Case?, Fortune (Jan 28, 2021, 07:44 PM), (suggesting that the lawsuits may just be a tactic to reach a quick settlement in the face of an “uphill” legal battle).

[29] Robinhood Financial LLC & Robinhood Securities, LLC Customer Agreement, Robinhood 8, 11, 29 (last updated Dec. 30, 2020),

[30] Id. at 9.

[31] Dean Seal, Early Robinhood Ruling Marks Rocky Start for Traders’ Suits, Law360 (Feb. 11, 2021, 8:30 PM), (noting that Judge Virginia Phillips held that the plaintiff trader “failed to establish a likelihood of success on the merits”).

[32] In re SpectraScience, Inc., File No. 500-1 (Feb. 10, 2021),; see also 15 U.S.C. § 78l(k),

[33] Id.

[34] Seal, supra note 4.

[35] Id. (quoting Nick Morgan).

[36] This is not the first time the SEC has taken a close look at social media and message boards.  See, e.g., Press Release, Sec. & Exch. Comm’n, SEC Brings Fraud Charges in Internet Manipulation Scheme (Sept. 20, 2000), (reaching a settlement with an investor accused of online market manipulation; Nicholas Groom, Whole Foods CEO Sorry for Anonymous Web Posts, Reuters (July 17, 2007, 7:10 PM), (acknowledging an SEC probe into deceptive posts made online).  One difference between the message boards of the 1990s and today is the much larger scale.  See generally Brian Cheung, Before WallStreetBets: A History of Online Message Boards and ‘Stonks’, Yahoo Fin. (Feb. 2, 2021),

[37] See Reddit, supra note 2.

[38] @elonmusk, Twitter (Feb. 4, 2021, 2:57 AM),

[39] 15 U.S.C. § 77q(b); see Brumberg, supra note 12 (cautioning that “stock-promotional efforts” may result in liability under Section 17(b) of the Securities Act of 1933, which is a strict liability statute not requiring a finding of fault).

[40] From a practical perspective, many investors, especially novices, lost significant amounts of money by joining the investment rollercoaster at the apex.  See Drew Harwell, As GameStop Stock Crumbles, Newbie Traders Reckon with Heavy Losses, Wash. Post (Feb. 2, 2021, 5:34 PM),

By Cole Tipton

SummitBridge National v. Faison

In this bankruptcy action, SummitBridge National (“National”) appeals the district court’s holding that it is barred from claiming attorney’s fees incurred after a bankruptcy petition was filed.  The contract between National and Ollie Faison (“Faison”) stated that Faison would pay “all costs of collection, including but not limited to reasonable attorneys’ fees.”  The Fourth Circuit reversed the district court’s holding and stated that the Bankruptcy Code does not preclude contractual claims to attorney’s fees that were guaranteed by a pre-bankruptcy contract.  The determination of the district court was reversed and remanded for further proceedings.

US v. Pratt

In this criminal action, Samual Pratt (“Pratt”) appeals his conviction of various counts of sex trafficking and child pornography due to evidentiary errors.  Pratt contends the district court should have suppressed evidence from his cellphone and should not have admitted certain hearsay statements.  First, the Fourth Circuit held that it was reversible error to admit evidence from Pratt’s cellphone because the phone was seized without consent and the government waited thirty-one days before obtaining a search warrant.  The Court stated that such a delay was unreasonable.  Second, the Fourth Circuit held that an unavailable witness’s hearsay statements were admissible because Pratt had procured the witness’s unavailability through phone calls and threats.  Accordingly, the Fourth Circuit vacated Pratt’s convictions on the two counts prejudiced by the cell phone evidence, vacated his sentence, and remanded.

Parker v. Reema Consulting Services, Inc 

In this civil action, Evangeline Parker (“Parker”) appeals the district court’s dismissal of her complaint against her employer, Reema Consulting Services, Inc. (“Reema”).  The central issue of the appeal was whether a false rumor circulated by Reema that Parker slept with her boss for a raise could give rise to liability under Title VII for discrimination “because of sex.”  The Fourth Circuit held that because the complaint alleged Reema spread the rumor and acted on it by penalizing the employee, a cognizable claim for discrimination “because of sex” was alleged.  The district court’s dismissal was reversed.

US Dep’t of Labor v. Fire & Safety Investigation

In this civil action, Fire & Safety Investigation Consulting Services, LLC (“Fire & Safety”) appealed the district court’s determination that they violated the Fair Labor Standards Act (“FLSA”) for failing to pay overtime compensation.  Fire & Safety uses an alternative work schedule for its employees in which an employee works 12 hours per day for 14 days and then receives 14 days off.  Because employees under this plan will work 88 hours in one work week, Fire & Safety pays its employees a blended rate for all 88 hours that is supposed to account for the 48 hours of overtime worked, rather than paying 40 hours of standard pay plus 48 hours of overtime.  The Fourth Circuit held that this blended rate fails to observe the formalities required by the FLSA which requires all overtime hours be recorded and paid at one and one-half times the standard rate of pay for all hours worked over 40.  Accordingly, the Fourth Circuit affirmed the district court’s judgment, including over $1.5 million in back wages and liquidated damages.

Trana Discovery, Inc. v. S. Research Inst.

In this civil action, Trana Discovery, Inc. (“Trana”) brought a fraud and negligent misrepresentation action against Southern Research Institute (“Southern”).  Trana alleged that Southern had provided false data in research reports of a new HIV medication it was researching.  The district court granted summary judgment for Southern on both claims.  The Fourth Circuit upheld the grant of summary judgement, stating that there was no genuine dispute of material fact due to an insufficiency of evidence regarding damages and the standard of care Southern was exacted to.  Accordingly, summary judgement was affirmed.

Jesus Christ is the Answer v. Baltimore County, Maryland

In this civil action, Jesus Christ is the Answer Church (“Church”) brought an action alleging violation of the First Amendment’s Free Exercise Clause, the Fourteenth Amendment’s Equal Protection Clause, the Maryland Declaration of Rights, and the Religious Land Use and Institutionalized Person Act.  Church alleged that Baltimore County, Maryland (“Baltimore”) had infringed upon their State and Federal rights by denying their modified petition for zoning variances to establish a church.  Several neighbors, who had expressed open hostility towards Church, opposed the petition.  After the petition was denied, Church filed an action in district court which was dismissed for failure to state a claim.  On appeal, the Fourth Circuit reversed and remanded because Church’s complaint contained facts sufficient to state a claim that was “plausible on its face.”  The Fourth Circuit held that the neighbors apparent religious bias towards Church was sufficient to plead a plausible Constitutional claim and violation of the Religious Land Use Act. 

Curtis v. Propel Property Tax Funding

In this civil action, Garry Curtis (“Curtis”) brought a suit on behalf of himself and similarly situated individuals against Propel Property Tax Funding (“Propel”), alleging violations of the Truth in Lending Act, the Electronic Funds Transfer Act, and the Virginia Consumer Protection Act.  Propel was engaged in the practice of lending to third parties to finance payment of local taxes.  The district court denied Propel’s motion to dismiss and certified two interlocutory questions.  Propel appealed, asserting that Curtis did not have standing and that he failed to state a claim for relief.  The Fourth Circuit upheld the district court’s ruling, finding that: 1) Curtis had standing because he was personally subject to the harms these consumer protection statutes were designed to protect against; and 2) Curtis had sufficiently pled violations of the lending acts because Propel was conducting consumer credit transactions.

US v. Charboneau

In this civil action, Blake Charboneau (“Charboneau”) challenges the determination that he is a “sexually dangerous person” under the civil commitment provisions of the Adam Walsh Child Protection and Safety Act of 2006.  The district court held that Charboneau was a “sexually dangerous person” within the meaning of the act and committed him to the custody of the Attorney General.  On appeal, Charboneau raised two issues: 1) whether he must be diagnosed with a paraphilic disorder to be committed under the act; and 2) if the record supported the district court’s findings.  The Fourth Circuit affirmed the district court’s judgment, holding that an actual diagnosis was not necessary under the act and the record was sufficient under a clear error standard of review.

US v. Johnson

In this criminal action, Willie Johnson (“Johnson”) appealed a district court’s order to resentence him for bank robbery under the sentencing recommendation in his original plea agreement.  Johnson argued that the government’s original agreement not to seek a mandatory life sentence under the federal three-strikes law was not beneficial because his prior state crimes should not be counted for federal three-strikes treatment.  The Fourth Circuit held that state crimes are encompassed by the three-strikes program and the district court’s decision to honor the original sentencing recommendation was affirmed.

Mountain Valley Pipeline, LLC v. 6.56 Acres of Land

In this civil action, owners of 6.56 acres of land appealed a district court judgement granted Mountain Valley Pipeline, LLC (“Pipeline”) a preliminary injunction for access and possession of property it was acquiring through eminent domain.  The Fourth Circuit reviewed the district court’s application of the test set forth in Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7, 20 (2008) for preliminary injunctions.  In doing so, the Court found that Pipeline had established it was likely to succeed on the merits, would suffer irreparable harm, the balance of equities was in its favor, and that an injunction served the public interest.  Accordingly, the district court was affirmed. B.V. v. US Patent & Trademark

In this civil action, and the U.S. Patent and Trademark Office (“USPTO”) appeal the district court’s grant of summary judgment protecting the trademark BOOKING.COM. appeals the district court’s grant of attorney’s fees to the USPTO, and the USPTO appeals the court’s decision that BOOKING.COM is protectable.  The Fourth Circuit held that BOOKING.COM is not generic and can be registered as a descriptive mark with secondary meaning.  Moreover, the Court upheld the grant of USPTO’s expenses because the Lanham Act requires a party to pay “all the expenses of the proceeding” when a USPTO decision is appealed to the district court.  Thus, the district court’s judgment was affirmed.

US v. Jones

In this criminal action, James Eric Jones (“Jones”) appeals the district court’s denial of a motion to vacate, set aside, or correct his sentence.  Jones was originally sentenced under the Armed Career Criminal Act (“ACCA”) which requires a mandatory fifteen-year minimum sentence for defendants with at least three prior violent felony convictions.  However, Jones claims that he does not qualify for sentencing under the act because his South Carolina conviction for assaulting, beating, or wounding a police officer is not a violent conviction as defined by the ACCA.  The Fourth Circuit held that assaulting, beating, or wounding a police officer does not qualify under the ACCA because it includes conduct that does not involve violent physical force. Therefore, the district court’s judgment was vacated and remanded.