Big boys and chinese wall

University of Chicago Law Review

Volumn 75, Issue 1, 2008, Pages 533-568

  Sullivan, Daniel ^a  

^a NONE

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EID: 42349102411     PISSN: 00419494     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Note

References (254)

1. Also called a "trading wall," "screening wall," "ethical wall," or an "informational barrier."
2. The short version of the Bankruptcy Code's definition of "claim" is a "right to payment." 11 USC § 101(5) (2000 & Supp 2005). This is a broad definition that includes stocks and other securities. For simplicity, this Comment will use "claimant" and "creditor" interchangeably, and "claim" and "debt" interchangeably. In addition, for reasons that will become apparent below, this Comment uses "claim" to mean only forms of debt to which the securities laws do not now, but might in the future, apply. Most of this trading involves bank debt because the Bankruptcy Code definition of "security" explicitly excludes trade debt.
3. See 11 USC § 101(49)(B)(vii) (2000 & Supp 2005) (stating that "security" does not include "debt or evidence of indebtedness for goods sold and delivered or services rendered").
4. See, for example, In re Pleasant Hill Partners, LP, 163 BR 388, 391 n 5 (Bankr ND Ga 1994) (explaining that FRBP 3001(e) outlines the procedure for transfer, typically through sale and purchase, of bankruptcy claims).
5. See Harold S. Novikoff and Barbara Kohl Gerschwer, Selected Topics in Claims Trading, in Chapter 11 Business Reorganizations 191, 195 (ALI-ABA 2003) ("The record number of bankruptcies during the past several years has brought with it an active market in claims trading.").
6. See also Chaim J. Fortgang and Thomas Moers Mayer, Trading Claims and Taking Control of Corporations in Chapter 11, 12 Cardozo L Rev 1, 2-3 (1990) (explaining that there is an active market for investors trading claims against corporations in Chapter 11).
7. If a claim is a "right to payment," 11 USC § 101(5), "claims trading" occurs when investors buy or sell that right. In bankruptcy, however, the right usually sells for less than face value because at the end of bankruptcy the claimants against the debtor may not-indeed probably will not-receive all the debtor owes them. The debtor's inability to pay back its creditors, after all, is usually why it filed for bankruptcy (the claims exceed the assets). This Comment uses "claims trading" to refer only to trading in claims that are currently not subject to the securities laws.
8. The basic idea of Chapter 11 is to provide a coherent framework for those with claims against the debtor to get a partial return on their claims, while reorganizing the debtor's capitalstructure so that it can pay its debts as a going concern, insofar as that is possible given economic realities. A reorganization plan does this. The creditors or claimants holding a certain threshold percentage of the value of the total claims against the debtor can control whether the reorganization plan is accepted.
9. See 11 USC § 1126(c) (2000). Frequently, part of a reorganization plan involves exchanging the debt a creditor holds for stock in the reorganized debtor. Thus acquiring claims against the debtor may give a creditor the chance to influence the plan so that its claims exchange for stock.
10. See Alan N. Resnick and Henry J. Sommer, eds, 9 Collier on Bankruptcy ¶1.03[4] at 1-55 to -56 (Matthew Bender 15th rev ed 2007).
11. See also Michael H. Whitaker, Note, Regulating Claims Trading in Chapter 11 Bankruptcies: A Proposal for Mandatory Disclosure, 3 Cornell J L & Pub Policy 303, 311 (1994) (observing that some traders acquire large blocks of claims to gain control by either blocking plans that do not give the trader a favorable equity stake or independently approving plans that do give the trader a favorable equity stake).
12. See Robert D. Drain and Elizabeth J. Schwartz, Are Bankruptcy Claims Subject to the Federal Securities Laws?, 10 Am Bankr Inst L Rev 569, 569 n 1 (2002) ("Commentators offer anecdotal evidence of a [bankruptcy claims] market in the billions of dollars.").
13. For more discussion of this basic point, see notes 34-36 and accompanying text.
14. See also Drain and Schwartz, 10 Am Bankr Inst L Rev at 620 (cited in note 7) (observing that claims traders, as voluntary investors in claims for profit, "have developed, if not a formal exchange, at least enough trading activity to create an informal market in distressed claims" and suggesting that this voluntary, active market in investment instruments resembles the securities markets). Again, securities are themselves claims against the debtor but this Comment uses "security" to denote those claims, like traditional bonds and stocks, to which the securities laws uncontroversially apply, and "claims" to denote those claims over which there is controversy regarding whether the securities laws apply to trading in them.
15. See generally, for example, Richard G. Mason and Gregory E. Pessin, Legal Issues in Claims Trading (Papers of the 32nd Annual Workshop on Bankruptcy and Business Reorganization, NYU School of Law, Sept 27-29, 2006) (discussing the importance of contemporary developments to the question of whether debt trading should be regulated under securities law);
16. Drain and Schwartz, 10 Am Bankr Inst L Rev 569 (cited in note 7) (arguing against treating bankruptcy claims as securities except in limited circumstances);
17. Thomas Donegan, Note, Covering the "Security Blanket": Regulating Bankruptcy Claims and Claim-Participations Trading under the Federal Securities Laws, 14 Bankr Dev J 381 (1998) (arguing for treating bankruptcy claims as securities);
18. James D. Prendergast, Applying Federal Securities Laws to the Trading of Claims in Bankruptcy, 3 Faulkner & Gray's Bankr L Rev 9 (1992) (same);
19. Anthony Michael Sabino, No Security in Bankruptcy: The Argument against Applying the Federal Securities Laws to the Trading of Claims of Chapter 11 Debtors, 24 Pac L J 109 (1992) (reviewing legal developments in bankruptcy and concluding that bankruptcy claims are not securities); Fortgang and Mayer, 12 Cardozo L Rev 1 (cited in note 4) (same). Despite this academic debate, the general view among bankruptcy judges and practitioners is that claims are not securities.
20. See Alan N. Resnick and Henry J. Sommer, 6 Collier Bankruptcy Practice Guide ¶ 94.08 at 94-127 (Matthew Bender 2007) ("The securities laws do not,... as interpreted by recent decisions, define trade claims in bankruptcy as 'securities.'").
21. As with "claims," one must be careful here with terminology. The Bankruptcy Code has a specific definition of "insider," 11 USC § 101(31) (2000 & Supp 2005), but this Comment defines "insider trading" simply as trading on material nonpublic information and "insider" as one who trades on such information.
22. 17 CFR § 240.10D-5 (2000).
23. 11 USC § 101 et seq (2000 & Supp 2005).
24. See, for example, Citicorp Venture Capital, Ltd v Committee of Creditors Holding Unsecured Claims, 160 F3d 982, 991-92 (3d Cir 1998) (granting equitable subordination where a fiduciary purchased notes at a discount based on inside information to make a profit and influence the reorganization plan for its own gain without disclosing this information to any third parties).
25. Creditors' committees are groups of creditors who work together to negotiate with the debtor regarding its reorganization. See 11 USC § 1103(c). Although any group of creditors can do this informally, § 1102 typically requires the appointment of an official creditors' committee consisting of the seven largest creditors.
26. See 11 USC § 1102(a)(1), (b)(1). In practice, this committee often includes a representative sampling of the general creditors, whether or not they are among the top seven.
27. See Douglas G. Baird, Elements of Bankruptcy 21-22 (Foundation 4th ed2006). Its purpose is to represent the interests of a certain class of creditors, usually the general unsecured creditors. Id.
28. Novikoff and Gerschwer, Selected Topics in Claims Trading at 195 (cited in note 4) (stating that committee members are not, however, necessarily fiduciaries to the debtor and citing Woods v National Bank and Trust Co of Chicago, 312 US 262, 268-69 (1941) in support).
29. Ralph R. Mabey, The Legal Consequences for a Claims Trader Who Is a Fiduciary 45, 46-49 (Papers of the 32nd Annual Workshop on Bankruptcy and Business Reorganization, NYU School of Law, Sept 27-29, 2006) (explaining who qualifies as a "fiduciary" and distinguishing the duties of ad hoc committee members from those of official committee members).
30. See Part IV.
31. For a detailed discussion of these requirements, see Part V.
32. Maintaining a Chinese Wall is not costless for a firm; it entails certain inefficiencies and is not always feasible. See text accompanying notes 128-30.
33. See, for example, In re Federated Department Stores, Inc, 1991 WL 79143, *2 (Bankr SD Ohio) ("Fidelity will not be violating its fiduciary duties as a committee member ... provided that FideUty employs an appropriate information blocking device or 'Chinese Wall.'").
34. A typical big boy letter might include the following representations by the buyer: that it is financially sophisticated; that it knows the insider may possess material nonpublic information; that it is not relying on any representations that the big boy letter does not contain; and that it is waiving all claims against the insider arising from the trade. Stephen E. Older and Joshua M. Bloomstein, Cutting "Big Boys" Down to Size, 38 Mergers & Acquisitions 38, 39 (2003) (noting that courts have not reached a clear decision on whether the letters are enforceable). For a current sample of the big boy language used in distressed debt trading documents,
35. see Loan Syndications and Trading Association, User's Guide for LSTA Distressed Debt Trading Documentation § IV.C.2.b.20 at 19-20 (2007), online at http://www.lsta.org/WorkArea/downloadasset.aspx?id=1114 (visited Jan 12, 2008).
36. See Part III for a detailed discussion of the difference between these two sources of liability. Although insider trading liability has some basis in the common law, see note 49 and accompanying text, the modern law is a creature of federal statute, whereas fiduciary duties derive from state common law. In its enforcement of the insider trading regulations, however, the SEC and courts have not kept this distinction clear.
37. See, for example, United States v O'Hagan, 521 US 642, 652-53 (1997) (expanding insider trading liability to include a " misappropriation" theory under which, even if he has no duty to the party with whom he trades, an insider with a fiduciary duty to his information's source can be liable to that source under Rule 10b-5).
38. Landreth Timber Co v Landreth, 471 US 681, 688 (1985) (holding that a sale of stock amounting to the entire business is regulated by securities law).
39. Reves v Ernst & Young, 494 US 56, 60 (1990) (discussing whether a promissory note is a security), quoting United Housing Foundation, Inc v Forman, 421 US 837, 849 (1975) (stating that securities laws are focused on preventing fraud and protecting the interests of investors).
40. Reves, 494 US at 61. Justice Marshall followed precedent in making clear that "Congress did not, however, intend to provide a broad federal remedy for all fraud." Id, quoting Marine Bank v Weaver, 455 US 551, 559 (1982) (holding that a certificate of deposit is not a security regulated by federal securities law).
41. Securities Act of 1933 ("Securities Act"), 48 Stat 74, codified as amended at 15 USC § 77a et seq (2000 & Supp 2002);
42. Securities Exchange Act of 1934 ("Exchange Act"), 48 Stat 881, codified as amended at 15 USCA § 78a et seq (2007).
43. The definitions from the Securities and Exchange Acts are very long and appear here only in relevant part. The Securities Act states: "The term 'security' means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement,... or, in general, any interest or instrument commonly known as a 'security.'" 15 USC § 77b(a)(1). The Exchange Act provides: "The term 'security' means any note, stock, treasury stock, security future, bond, debenture, certificate of interest or participation in any profit-sharing agreement, ... or in general, any instrument commonly known as a 'security.'" 15 USC § 78c(a)(10) (2000).
44. Commentators once thought that the absence of "evidence of indebtedness" from the Exchange Act's definition of security was significant (especially, for present purposes, if claims were to count as evidences of indebtedness). But the Supreme Court definitively precluded such thinking when it reaffirmed in 1990 that the definitions in the Acts are "virtually identical" and that "the coverage of the two Acts may be considered the same."
45. Reves, 494 US at 61 n 1. But see Resnick and Sommer, 6 Collier Bankruptcy Practice Guide ¶ 94.08[1] at 94-129 (cited in note 9) (arguing that the absence of "evidence of indebtedness" from the Exchange Act might mean that Rule 10b-5 does not regulate trade claims even if the Securities Act does). In any case, this Comment takes "note[s]" as the most likely term (appearing in both definitions) to apply to claims.
46. As mentioned in note 2, the Bankruptcy Code's definition of "security" explicitly leaves out trade claims.
47. 494 US 56 (1990).
48. See id at 65 (reasoning that not all notes are securities because Congress did not intend to create a general cause of action for fraud). The notes recognized as not being securities are: a note delivered in consumer financing; a note secured by a home mortgage; a short-term note secured by a lien on a small business; a note evidencing a "character loan" to a bank customer; a short-term note secured by an assignment of accounts receivable; a note finalizing an openaccount debt incurred in the ordinary course of business; or a note evidencing loans from a commercial bank for current operations. Id.
49. Id at 66-67 (reasoning that a transaction based upon profitable investment supports treatment as a security, but that another regulatory scheme may significantly reduce the risk of the instrument and render securities regulation unnecessary).
50. See, for example, the capable demonstration of possible opposing positions in Drain and Schwartz, 10 Am Bankr Inst L Rev at 619 (cited in note 7) (arguing for a context-dependent analysis because the Reves test can go both ways for bankruptcy claims). One could credibly take either side. Donegan, Prendergast, and Sabino engage in the most straightforward debate over the application of the Reves test. They assume that the moment a claim would become a security is the filing of the bankruptcy petition.
51. See Donegan, Note, 14 Bankr Dev J at 403 (cited in note 9) (implying that both the original claimant and any subsequent purchaser of the claim meet the passive investment requirement for securities regulation);
52. Prendergast, 3 Faulkner & Gray's Bankr L Rev at 13-14 (cited in note 9) (noting that all the criteria in Reves seem to argue for application of the federal securities laws in the claims trading environment);
53. Sabino, 24 Pac L J at 119-22 (cited in note 9) (arguing that a claim should not turn into a security once a bankruptcy petition is filed). For an important weakness of their focus on the time of the petition, see note 37. By contrast Fortgang and Mayer, the first and probably most thorough commentators on this question and on claims trading in general, point to the resale of the claim as the time of its possible transformation into a security. Fortgang and Mayer, 12 Cardozo L Rev at 52-53 (cited in note 4) ("The trade claim in bankruptcy would not be the first instrument which is not a securitywhen issued but is a security when resold. Consider the humble home mortgage."). For a contemporary discussion of the question,
54. see Mason and Pessin, Legal Issues in Claims Trading at 9 (cited in note 9) (arguing that increased liquidity and fewer covenantal protections in bank term loans, combined with the involvement of largely unregulated hedge funds in trading them, weaken the case against applying the securities laws to at least that kind of claim).
55. The only two cases to ask whether bankruptcy claims are securities contradicted each other on similar, rather narrow, facts. Compare SEC v Texas International Co, 498 F Supp 1231, 1240 (ND III 1980) (holding that fraud claims against a debtor counted as securities where the settlement provided for transferal of claims into equity in the reorganized debtor), with Lipper v Texas International Co, 1979 WL 1200, *4 (WD Okla) (holding that the bankruptcy claims sold by members of a tort class action settlement fund were not securities where the settlement provided for transferal of claims into equity in the reorganized debtor).
56. See, for example, Banco Espanol de Credito v Security Pacific National Bank, 973 F2d 51, 56 (2d Cir 1992) (holding, over a strong and well reasoned dissent, that loan participations are analogous to commercial bank loans and thus do not count as securities under the Reves test). Loan participations, like claims, are instruments that normally are not securities, but "the manner in which [they] ... are used, pooled, or marketed might establish that such participations are securities." Id. Banco Espanol both illustrates the difficulty of applying the Reves test mechanically and provides some ideas relevant to claims trading regulation.
57. See, for example, United Housing Foundation, 421 US at 849 ("The primary purpose of the Acts of 1933 and 1934 was to eliminate serious abuses in a largely unregulated securities market. The focus of the Acts is on ... the need for regulation to prevent fraud and to protect the interest of investors.").
58. See Drain and Schwartz, 10 Am Bankr Inst L Rev at 620 (cited in note 7) (noting that vulture investors actively seek to become creditors with the intent of turning a profit or gaining control). These observations, and those of this paragraph generally, owe a great deal to Drain and Schwartz's article at 620-21.
59. Id at 620-21. Note that by including the integrity of the reorganization process among the concerns of securities law, Drain and Schwartz might follow the courts in mixing fiduciary liability with insider trading liability.
60. See, for example, Resnick and Sommer, 9 Collier on Bankruptcy ¶ 94.08[1] at 94-132 (cited in note 6) ("It is therefore, difficult to see how, under existing case law, claims in bankruptcy can fall within the definition of 'security,' unless they qualified as securities prior to bankruptcy."). This observation may have further implications. Nothing about the filing of a bankruptcy petition changes the nature of the claim, which predates bankruptcy. The only thing a petition does is allow a bankruptcy court to intervene according to the claims trading remedies. This means that where the debtor has not yet filed a petition and no court can apply the bankruptcy remedies, the case for nonapplication of the securities laws to claims trading may be correspondingly weaker.
61. Drain and Schwartz, 10 Am Bankr L Rev at 575 (cited in note 7).
62. Even before Reves, the Supreme Court at least twice based a holding that certain instrument are not securities on the presence of an alternative regulatory regime. See Marine Bank, 455 US at 559 (holding that a bank certificate of deposit is not a security due to the adequate protection provided by the alternative regime of the banking laws);
63. International Brotherhood of Teamsters v Daniel, 439 US 551, 569-70 (1979) (holding that an interest in a noncontributory compulsory pension plan is not a security due to the alternative ERISA regime). Furthermore, the majority in Banco Espanol emphasized the narrow, commercial scope of the purchases at issue and the presence of an alternative regulatory regime under the Office of the Comptroller of Currency. 973 F2d at 55.
64. The distinction between fiduciary duties and insider trading proper is not new, although it seldom receives attention. One exception is Frank H. Easterbrook and Daniel R. Fischel, The Economic Structure of Corporate Law 269 (Harvard 1991) (pointing out problems with conflating fiduciary duties and insider trading). The original emphasis here is on the distinction in the context of claims trading and the extent to which it separates the two legal regimes.
65. For general information on fiduciary duties and insider trading, see Larry D. Soderquist and Theresa A. Gabaldon, Securities Law 143 (Foundation 2d ed 2004) (noting that insider trading regulations are most commonly applied to insiders with a fiduciary duty to their traders, which may be the shareholders, to whom they have a fiduciary duty as beneficial owners of the corporation);
66. Easterbrook and Fischel at 265 (cited in note 40) (explaining the cause of action for insider trading).
67. See Arthur R. Pinto and Douglas M. Branson, Understanding Corporate Law 199 (Matthew Bender 2004) ("[A fiduciary relationship] is generally created when one is given power that carries a duty to use that power to benefit another."). The word fiduciary comes from the Latin fides, meaning "faith," or fiducia, meaning "trust," "confidence," or "assurance."
68. See The American Heritage Dictionary of the English Language 656 (Houghton Mifflin 4th ed 2000).
69. See Pinto and Branson, Understanding Corporate Law at 200 (cited in note 42) (claiming that the duty of care requires the diligence of a reasonable person in similar circumstances and that the duty of loyalty requires the fiduciary to act in the best interests of the corporation and in good faith). Although one typically speaks of a duty of loyalty, it is worth noting that this really denotes a duty of disinterestedness - a less vague and indeterminate term than loyalty, and tied closer to the meaning of fiduciary. This Comment follows standard usage of the duty of "loyalty," but on the assumption that the core of the duty is to be disinterested with respect to the principal's property. Thanks to Richard Levin for this insight.
70. See, for example, In re TASER International Shareholder Derivative Litigation, 2006 WL 687033, *14 (D Ariz) (describing allegations of breach of duty of care and loyalty where fiduciaries released misleading information so they could sell stock at inflated prices).
71. See, for example, McMullin v Beran, 765 A2d 910, 921 (Del 2000) (discussing the duty of care);
72. Guth v Loft, 5 A2d 503, 510 (Del 1961) (discussing the duty of loyalty).
73. See also Diamond v Oreamuno, 248 NE2d 910, 915 (NY 1969) ("[N]othing in the Federal law [ ] indicates that it was intended to limit the power of the States to fashion additional remedies to effectuate similar purposes.... The primary source of the law in this area ever remains that of the State which created the corporation.").
74. For the debate about what state common law might be like now absent 10b-5, compare Easterbrook and Fischel, The Economic Structure of Corporate Law at 264-66 (cited in note 40) (arguing that the common law does not preclude insider trading unless trade was induced by misrepresentations by the insider or the insider violated the corporate opportunity doctrine),
75. with Douglas M. Branson, Choosing the Appropriate Default Rule-Insider Trading under State Law, 45 Ala L Rev 753, 754 (1994) (arguing that there are at least five state law foundations for civil insider trading liability).
76. Section 10(b) delegates to the SEC the regulation of manipulation or deception in the purchase or sale of securities. 15 USC § 78j(b) (2000). Note that the language of the statute controls the reach of Rule 10b-5.
77. See Ernst & Ernst v Hochfelder, 425 US 185, 214 (1976) (recognizing that the scope of Rule 10b-5 "cannot exceed the power granted the Commission by Congress under 10b").
78. The SEC promulgated Rule 10b-5 pursuant to § 10(b) of the Exchange Act. 15 USC § 78j (2000). Rule 10b-5 says:
79. It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
80. (a) To employ any device, scheme, or artifice to defraud,
81. (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
82. (c) To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
83. CFR § 240.10b-5.
84. For an outline of the state common law on insider trading in the 1930s, see Stephen M. Bainbridge, Securities Law: Insider Trading 7-23 (Foundation 1999). Despite its common law antecedents, federal law on insider trading is now firmly a creature of statute, and plaintiffs and prosecutors must base their complaints on the statutory text.
85. See Santa Fe Industries v Green, 430 US 462, 472 (1977).
86. Reves, 494 US at 61 (quotation marks and citations omitted).
87. Thus the black letter elements of insider trading are: materiality, causation of reliance, reliance to the noninsider's detriment (harm), and a duty to disclose. See Bainbridge, Securities Law: Insider Trading at 58-63 (cited in note 49). For more on the element of reliance,
88. see Ann Morales Olazábal, Loss Causation in Fraud-on-the-Market Cases Pott-Dura Pharmaceuticals, 3 Berkeley Bus L J 337, 343 (2006).
89. Soderquist and Gabaldon, Securities Law at 148 (cited in note 41) (discussing the reliance requirement in nondisclosure situations), citing Affiliated Ute Citizens v United States, 406 US 128 (1972) (holding that a failure to disclose material facts is enough to establish reliance)
90. and Shapiro v Merrill Lynch, Pierce, Fenner & Smith, Inc, 495 F2d 228 (2d Cir 1974) (extending Affiliated Ute to situations involving anonymous market transactions).
91. See Part VB. For one case holding that big boy letters rebut this presumption, see Rissman v Rissman, 213 F3d 381, 384 (7th Cir 2000) ("A written anti-reliance clause precludes any claim of deceit by prior representations.").
92. See also Mark E. Betzen and Richard Meamber, Rule 10b-5 and Related Considerations in Acquisition Agreements, Jones Day Commentaries (June 2004), online at http://wwwl.jonesday.com/pubs/pubs_detail.aspx?pubID=S1265 (visited Jan 12, 2008) (addressing potential effects of common "big boy" boilerplate language).
93. The Supreme Court recently furthered the conflation of insider trading liability proper and fiduciary hability. In United States v O'Hagan, 521 US 642 (1997), the justices expanded 10b-5 liability to include a "misappropriation" theory, according to which an insider can be liable to the source of his information if he has a fiduciary duty to that source, even if he has no duty to the party with whom he trades. Id at 652, codified in 17 CFR § 240.10b5-2. The opinion does not explain why Rule 10b-5 should remedy this misappropriation, which would seem to be a straightforward violation of the law of fiduciary duties adjudicable in state court. The problem is that misappropriation, just like, for example, self-dealing by committee members, is merely a species of the wider class of violations of the fiduciary duty of loyalty and fair dealing. But the law of fiduciary duties is not the law of insider trading, and misappropriation theory confuses the two. There is therefore a latent federalism issue in this aggrandizement of federal insider trading law, for in expanding its reach it encroaches upon a traditional province of state courts.
94. See Bainbridge, Securities Law: Insider Trading at 63-67 (cited in note 49). The Supreme Court has occasionally recognized the issue,
95. see, for example, Santa Fe, 430 US at 473-74, but decisions such as O'Hagan confirm its unwillingness to apply the distinction rigorously.
96. See, for example, Chiarella v United States, 445 US 222, 227-28 (1980) (noting that hability depends on fraud and holding that one cannot commit fraud by withholding information unless there is a duty to disclose).
97. See SEC v Chenery Corp, 318 US 80, 85-86 (1943) ("[T]o say that a man is a fiduciary only begins analysis; it gives direction to further inquiry."). See also Easterbrook and Fischel, The Economic Structure of Corporate Law at 269-70 (cited in note 40) (arguing that both actual contracts and the probable outcome absent transaction costs suggest legal rules opposite those devised by emphasizing fiduciary duties).
98. Part IV illustrates the relationship between fiduciary duties and trading claims to control the reorganization.
99. FRBP 3001(e) used to allow courts the power to review most trades sua sponte on substantive grounds, but Congress amended the Rule in 1991 in the wake of some bankruptcy court decisions that aggressively regulated claims trading. For an example of the pre-amendment use of this rule,
100. see In re Revere Copper & Brass, Inc, 58 BR 1, 2 (Bankr SDNY 1985) ("Bankruptcy Rule 3001(e)(2) contemplates that the court will enter the order of substitution only after a hearing on notice and further permits the court to enter such an order as is appropriate."). Now the court merely fulfills a ministerial role and can only step in when a transferor objects to a claim transfer.
101. See In re Olson, 120 F3d 98, 102 (8th Cir 1997) (holding that the language of the Rule as amended is mandatory and gives the court no role absent an objection). No court has held, however, that the amended Rule precludes the claims trading remedies themselves This is because "the purpose of the amendment is to lessen the court's involvement when claims are transferred," In re Odd Lot Trading, Inc, 115 BR 97, 101 (Bankr ND Ohio 1990), not the court's ability to fashion remedies for parties who sue claims traders.
102. The classic, commonly cited case for a bankruptcy court's inherent powers of equity is American United Mutual Life Insurance Co v City of Avon Park, 311 US 138, 146 (1940) ("That power [to adjust the remedy] is ample for the exigencies of varying situations. It is not dependent on express statutory provision. It inheres in the jurisdiction of a court of bankruptcy.").
103. See In re Kmart Corp, 359 F3d 866, 871 (7th Cir 2004) (rejecting the argument that 11 USC § 105 provides free-floating authority for orders not otherwise allowed in the Code).
104. See also Baird, Elements of Bankruptcy at 6-7 (cited in note 14) (arguing that § 105 of the Code reflects the equitable origins of bankruptcy, but that a judge's particular exercises of his power under § 105 must rest on other provisions of the Code). Debate continues about the extent of the bankruptcy courts' equitable powers.
105. See generally Adam J. Levitin, Toward a Federal Common Law of Bankruptcy: Judicial Lawmaking in a Statutory Regime, 80 Am Bankr L J 1 (2006) (arguing that courts lost most of their equitable power when certain sections of the Code were repealed);
106. Alan M. Ahart, The Limited Scope of Implied Powers of a Bankruptcy Judge: A Statutory Court of Bankruptcy, Not a Court of Equity, 79 Am Bankr L J 1 (2005) (arguing that a bankruptcy judge has very little inherent power and no equitable power);
107. Mareia S. Krieger, "The Bankruptcy Court is a Court of Equity": What Does That Mean?, 50 SC L Rev 275 (1999) (considering why a bankruptcy court is characterized as a court of equity and to what degree it can serve as one);
108. Brian Leepson, Note & Comment, A Case for the Use of Broad Court Equity Power to Facilitate Chapter 11 Reorganization, 12 Bankr Dev J 775 (1996) (reviewing arguments for and against bankruptcy courts' equitable power and arguing for a broad equity power). The view that bankruptcy courts retain equitable powers is the dominant one and consistent with the plain language of § 105 of the Code.
109. See 11 USC § 105(a) ("The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.").
110. See, for example, In re Revere Copper, 58 BR at 2 ("One of the evils attendant upon a solicitation of assignment of claims for a cash payment... is that solicited creditors may be unaware of their rights and options.").
111. See, for example, In re Applegate Property, 133 BR 827, 835 (Bankr WD Tex 1991) ("The purchasing of claims by an affiliate or insider of the Debtor for the sole or principle [sic] purpose of blocking a competitor from purchasing such claims... cannot, as a matter of law, be in good faith.").
112. See, for example, In re Allegheny International, Inc, 118 BR 282, 299 (Bankr WD Pa 1990) ("Japonica sought and received inside information as a proponent of a plan. This court finds as a matter of fact that Japonica is an
113. This view of core concerns both reflects Drain and Schwartz's two scenarios most meriting application of the securities laws and accords with the Supreme Court's concern in Wolf v Weinstein, 372 US 633 (1963), that fiduciaries who trade in the securities of the debtor risk two "particular dangers," id at 642. Even though that case involved noncreditor insiders of the debtor, the Court's observations remain applicable:
114. On the one hand, an insider is in a position to conceal from other stockholders vital information concerning the Debtor's financial condition or prospects, which may affect the value of its securities, until after he has reaped a private profit from the use of that information. On the other hand, one who exercises control over a reorganization holds a post which might tempt him to affect or influence corporate policies-even the shaping of the very plan of reorganization-for the benefit of his own security holdings but to the detriment of the Debtor's interests and those of its creditors and other interested groups.
115. Id. Importantly, the first danger is ambiguous. Commentators have described it as a "misuse of inside information by the fiduciary,"
116. Robert C. Pozen and Judy K. Mencher, Chinese Walls for Creditors' Committees, 48 Bus L 747, 753 (1993), but it is unclear what constitutes the misuse andwhy. Is it the duty of the corporate insider to the corporation's shareholders not to profit at their expense? Or is it the duty not to profit personally from inside information? The former seems preferable, given that American law has moved away from the blanket "disclose or abstain" rule of SEC v Texas Gulf Sulphur Co, 401 F2d 833, 849 (2d Cir 1968), which suggested that parties to a trade had to have equal information. This is not the law today.
117. See Moskowitz v Lopp, 128 FRD 624, 633 (ED Pa 1989) ("Read together, Chiarella and Dirks stand for the proposition that insider liability under Rule 10b-5 is limited to investors to whom the corporate insider owes a fiduciary duty."), citing Chiarella v United States, 445 US 222 (1980), and Dirks v SEC, 463 US 646 (1983).
118. See generally, for example, In re Pleasant Hill Partners, LP, 163 BR 388 (Bankr ND Ga 1994); In re Applegate Property, 133 BR 827;
119. In re Cumberland Farms, Inc, 181 BR 678 (Bankr D Mass 1995), reversed on other grounds, Haseotes v Cumberland Farms, Inc, 216 BR 690 (D Mass 1997).
120. See Part V
121. See, for example, In re Enron Corp, 333 BR 205, 237 (Bankr SDNY 2005) (holding that equitable subordination applies to any claims held by a claimant where inequitable conduct took place).
122. See also Steven O. Weise, Teresa Wilton Harmon, and Lynn A. Soukup, 2006 Commercial Law Developments, in Commercial Lending and Banking Law 1, 62-63 (ALI-ABA 2007) (claiming that equitable subordination is one of the two most common tools of bankruptcy courts).
123. Citicorp Venture Capital, Ltd v Committee of Creditors Holding Unsecured Claims, 160 F3d 982, 986 (3d Cir 1998) (granting equitable subordination where the fiduciary purchased notes at a discount based on inside information to make a profit and influence the reorganization plan for its own gain without disclosing this information to any third parties).
124. See, for example, In re Cumberland Farms, 181 BR at 681; In re Gladstone Glen, 739 F2d 1233, 1236-37 (7th Cir 1984).
125. See also In re Norcor Manufacturing Co, 109 F2d 407, 411 (7th Cir 1940) (holding that a fiduciary could not purchase a claim at a discount and then claim an amount in excess of the value actually paid).
126. The cases, in chronological order, are: In re Papercraft Corp, 187 BR 486, 501-02 (Bankr WD Pa 1995) (declining to subordinate claims because no harm was proven even though the creditor controlled a board seat on the debtor's board and purchased claims without the connection);
127. In re Papercraft Corp, 211 BR 813, 824, 827 (Bankr WD Pa 1997) (holding that the creditor's conduct was inequitable and should therefore be subordinated);
128. Citicorp, 160 F3d at 982 (affirming the district court decision);
129. In re Papercraft Corp, 247 BR 625, 632-33 (Bankr WD Pa 2000) (subordinating claims to an amount below the purchase price to compensate the other parties for the fiduciary breach);
130. Citicorp Venture Capital, Ltd v Committee of Creditors Holding Unsecured Claims, 323 F3d 228, 236 (3d Cir 2003) (affirming the bankruptcy court decision).
131. This account of the facts comes from the circuit court's summation. See Citicorp, 160 F3d at 984-86. The claims against the debtor are divided into separate classes for the purpose of voting on the plan. Any creditor with 33 percent or more of the claims in each class of claims against the debtor has a "blocking position" in the reorganization plan.
132. See 11 USC § 1126(c) ("A class of claims has accepted a plan if such plan has been accepted by creditors ... that hold at least two-thirds in amount... of the allowed claims,").
133. See In re Papercraft, 187 BR at 495 n 7.
134. Citicorp, 160 F3d at 985. It should be noted that CVC did not play a role in creating the delay-it merely exploited the situation. Id at 992. For the requirement that the debtor file a disclosure statement, see 11 USC § 1126(b).
135. Citicorp, 160 F3d at 985.
136. Id.
137. Id at 986.
138. See In re Papercraft, 247 BR at 632-33.
139. It is worth noting that doctrinally, "[t]he Papercraft cases stand for the proposition that equitable subordination may go beyond disgorgement of profits." Mabey, Legal Consequences at 52 (cited in note 16).
140. Citicorp, 160 F3d at 987-88.
141. Id at 987.
142. This ambiguity is also present in the Supreme Court's opinion in Wolf, 372 US at 642.
143. See, for example, In re Figter Ltd, 118 F3d 635, 639 (9th Cir 1997) ("If a selfish motive were sufficient to condemn [ ] policies of interested parties, very few, if any, would pass muster.");
144. In re Mikulec Industries, Inc, 1992 WL 170685, *2 (WDNY) ("It is well-settled that a vote cast in a creditor's self-interest is not necessarily a vote cast in bad faith. In this sense, creditors are expected to vote selfishly-that is, consistently with their economic best interests.").
145. Citicorp, 160 F3d at 989 (emphasis added) (reasoning that the latter intention showed that CVC did not have the best interests of the debtor in mind when it secretly purchased claims at a discount).
146. Id (quotation marks and citations omitted).
147. Id (noting that this was an unfair advantage even though "CVC ultimately did not vote its claims").
148. Id at 989-90 (concluding that these three harms were together "sufficient to justify subordination").
149. Id at 991-92 (remanding to the bankruptcy court for a determination of "whether the record supports the proposition that the non-selling creditors suffered loss as a result of a delay in confirmation caused by CVC advocacy of its competing plan and objections to the [alternative] plan").
150. See 11 USC § 1126.
151. "[T]he court may designate any entity whose acceptance or rejection of such plan was not in good faith, or was not solicited or procured in good faith or in accordance with the provisions of this title."
152. Mabey, Legal Consequences at 55 (cited in note 16).
153. Id at 56 n 60 (collecting cases).
154. 118 F3d 635 (9th Cir 1997) (holding that a creditor did not act in bad faith where it used acquired claims to protect its interests as the major creditor of the debtor and prevented a plan that may have resulted in an undesirable mix of debtors and nondebtors in a property on which the creditor held a lien).
155. Id at 639 (cautioning that this does not mean creditors must act with a high degree of altruism).
156. Id (quotation marks omitted). See also Novikoff and Gerschwer, Selected Topics in Claims Trading at 201-04 (cited in note 4).
157. 118 BR 282 (Bankr WD Pa 1990).
158. See id at 298-99.
159. See also In re Papercraft, 187 BR at 498 ("Upon insolvency of the corporation, the director's fiduciary duty extends to the corporation's creditors and is enforceable by the trustee.").
160. In re Allegheny, 118 BR at 286-87.
161. Id at 290 (noting that Japonica acquired blocking positions in two classes that had directly opposed interests to one another).
162. Id at 297.
163. Id at 290.
164. Novikoff and Gerschwer, Selected Topics in Claims Trading at 204 (cited in note 4) (noting that the bad faith determination seemed to be based on the mechanics of the acquisition of claims, which evinced an ulterior motive). Other voting remedies support this conclusion.
165. See, for example, In re Applegate Property, 133 BR at 835 (emphasizing in the context of a vote exclusion remedy under 11 USC § 1129(a)(10) that a creditor cannot buy claims for the purpose of preventing a competitor from buying the claims).
166. In re CGE Shattuck, LLC, 254 BR 5, 12-13 (Bankr D NH 2000) (denying a disclosure statement for an intercreditor commitment where the commitment appeared to be a de facto reorganization plan).
167. The provision requires anyone who solicits an acceptance or rejection of a plan from a holder of a claim or interest before the transmittal of a court-approved disclosure to provide that holder with a summary of the plan and a written disclosure statement, approved by the court, containing "adequate information." Section 1125(a) of the Code defines "adequate information" basically as whatever information about the debtor's financial position "would enable ... a hypothetical investor of the relevant class to make an informed judgment about the plan."
168. See Mabey, Legal Consequences at 55 (cited in note 16).
169. 58 BR 1 (Bankr SDNY1985).
170. Phoenix solicited creditors to transfer their claims to Phoenix for 20 percent of face value. Id at 1. The court was "concerned that the assignor-creditors ha[d] not been plainly advised of their options" and could not make a good decision about whether to sell their claim. Id at 2. It appeared that Phoenix was trying to buy claims from unsophisticated parties for 20 percent of face value so it could recover around 65 percent of face value when the reorganization plan was approved. Id at 2.
171. See id at 2-3 (requiring the claims purchaser to provide disclosure of the debtor's proposed reorganization plan to any future sellers and imposing a thirty-day grace period for previous sellers to revoke their sales).
172. See Drain and Schwartz, 10 Am Bankr Inst L Rev at 578, 589 (cited in note 7) (arguing that bankruptcy courts have narrowly construed solicitation under § 1125(b) since a 1991 amendment to Rule 3001(e) aimed at limiting oversight of claims trading), citing Century Glove, Inc v First American Bank of New York, 860 F2d 94, 101 (3d Cir 1988) (rejecting any definition of solicitation under § 1125(b) that would limit creditor negotiations and asserting that § 1125 must be read narrowly) and In re Clamp-All Corp, 233 BR 198, 205-06 (Bankr D Mass 1999) (asserting that Century Glove is now the majority view).
173. See 118 BR at 296-97.
174. See In re Northwest Airlines Corp, 363 BR 701, 704 (Bankr SDNY 2007) (explaining that the Rule arose because of apparent deception and overreaching by unofficial committees).
175. See also Resnick and Sommer, 9 Collier on Bankruptcy ch 2019 (cited in note 6).
176. See also id ¶ 2019.05[1]-[2] at 2019-8 to -9.
177. See In re Northwest Airlines, 363 BR at 704 (holding that Rule 2019 requires an unofficial committee to provide information on individual committee members, not just the committee in the aggregate). In a subsequent decision, Judge Gropper also denied the motion of the ad hoc committee to file its documents under seal.
178. See id at 709 (holding that Rule 2019's purpose of allowing those potentially represented by the committee to assess the representative nature of the committee overrode any interest the committee members had in keeping the information confidential).
179. See id at 704. Note that the members of unofficial committees may be fiduciaries of those similarly situated. Id;
180. Mabey, Legal Consequences at 48-49 (cited in note 16). Almost no case law exists on Rule 2019, and what does exist mostly involves mass tort litigation over asbestos cases. The In re Northwest Airlines opinion broke new ground, and the repercussions of the holding are not yet clear. Interpreting Rule 2019 as requiring disclosures of individual creditors'claim transfers gives the Rule a certain force it lacked in the past, but as of this printing the holding has not gained wide purchase.
181. See note 116 and accompanying text.
182. See, for example, In re Kaiser Aluminum Corp, 327 BR 554, 560 (D Del 2005) (affirming an order restricting access to Rule 2019 information to those who file a motion with the court);
183. Baron & Budd, PC v Unsecured Asbestos Claimants Committee, 321 BR 147, 166-67 (Bankr D NJ 2005) (holding that an order requiring disclosure of any fee-sharing relationships between committee members did not exceed the scope of Rule 2019, because they are pertinent facts in connection with the employment of the entity);
184. In re CF Holding Corp, 145 BR 124, 126 (Bankr D Conn 1992) (holding that Rule 2019 was designed to cover those who act in a fiduciary capacity to those they represent and applies to attorneys who represent more than one claimant).
185. See Resnick and Sommer, 9 Collier on Bankruptcy ¶¶ 2019.01-.02 at 2019-3 to -4 (cited in note 6). Claims traders on unofficial committees must meet the requirements of Rule 2019 over and above any Chinese Walls or big boy letters they use. It may be that Judge Gropper is responding to the comparative freedom of unofficial committees-they owe narrower fiduciary duties and are not subject to as much monitoring as official committees-by ensuring that Rule 2019 applies to rein in overreaching by their unregulated members, particularly hedge funds.
186. See Eric R Fisher and Andrew L. Buck, Hedge Funds and the Changing Face of Corporate Bankruptcy Practice, 25 Am Bankr Inst J 24, 87-88 (2007) (asking whether Rule 2019 can cover short selling when the seller does not hold the stock and also whether such coverage is desirable given that many unofficial committees include hedge fund managers). For an outline of the particular difficulties hedge funds trading in distressed debt pose to the reorganization process, see generally id.
187. In re Scotia Development LLC, No 07-20027-C-11 (Bankr SD Tex, Apr 18, 2007) (unpublished order entered eight days following the denial of a motion at an April 10, 2007 hearing) (denying the motion on the grounds that the creditors opposing the motion did not constitute a committee within the meaning of Rule 2019). For the initial reaction to the In re Northwest Airlines decision among practitioners, see generally Paul D. Leake and Mark G. Douglas, Ad Hoc Committee Disclosure Requirement - A Bitter Pill to Swallow for Distressed Investors, Bus Structuring Rev (Jones Day May/June 2007), online at http://www.jonesday.com/pubs/pubs_detail.aspx? pubID=S4311 (visited Jan 12, 2008).
188. See Part III. Recall that as fiduciaries, they may not violate their duty of loyalty by trading against the interest of their principals.
189. Novikoff and Gerschwer, Selected Topics in Claims Trading at 199-200 (cited in note 4).
190. 1991WL 79143 (Bankr SD Ohio).
191. See id at * 2 ("Ordered, that Fidelity will not be violating its fiduciary duties as a committee member and accordingly, will not be subjecting its claims to possible ... adverse treatment by trading in securities of the Debtor ... provided that Fidelity employs an appropriate information blocking device or 'Chinese Wall.'").
192. See Novikoff and Gerschwer, Selected Topics in Claims Trading at 200 (cited in note 4) (listing several examples of bankruptcy courts issuing Chinese Wall orders).
193. See also, for example, In re House of Fabrics, 1995 Bankr LEXIS 1380, *4 (Bankr CD Cal) ("Ordered, the institutional members of the Equity Committee who engage in the trading of securities will not be violating their fiduciary duties as committee members by trading securities of the Debtor ... provided that the Equity Committee member institutes appropriate and effective information blocking procedures."). 122 Novikoff and Gerschwer, Selected Topics in Claims Trading at 201 (cited in note 4).
194. See, for example, In re Federated Department Stores, 1991WL at *2-3 (ordering that the creditor not suffer adverse effects for trading in debtor claims so long as it implements courtapproved Chinese Wall procedures).
195. See also Mabey, Legal Consequences at 58 (cited in note 16).
196. See generally Carolyn E.C. Paris, How to Draft for Corporate Finance § 23:5:5 at 23-35 (PLI 2004) (noting that even with Chinese Walls there may still be conflicts and perceived conflicts).
197. In re Enron Corp, 2005 WL 3832053, *1 (Bankr SDNY 2005).
198. The other two conclusions were that: "[T]he transfer of a claim subject to equitable subordination does not free such claim from subordination in the hands of the transferee," id, and "a transferee purchasing a post-petition claim cannot avail itself of the 'good faith' defense because such transferee is not a purchaser who took without knowledge of potential actions that could be brought against the purchased claim," id at *2. The validity of these conclusions is now in doubt after the district court reversed the bankruptcy court on the first one on the strangely formalistic ground that the transfers at issue were sales instead of assignments.
199. See In re Enron Corp, No 01-16034, slip op at 30-38 (SDNY, Aug 27, 2007).
200. Mabey, Legal Consequences at 54-55 n 47 (cited in note 16).
201. Paris, How to Draft for Corporate Finance § 23:5:5 at 23-35 (cited in note 124) (arguing that it may make sense to have a general on top of the wall making sure the firm as a whole is acting rationally). It may not be clear that making a firm look foolish when it potentially cheats the bankruptcy system is necessarily a bad thing. After all, why should allowing firms to save face weigh in the calculus? But it is not just a matter of saving face. A firm might look foolish because it pursues investment strategies that it would never pursue if the committee members could tell the traders what they know. This is a natural cost of the Chinese Wall, on the one hand, and of insider trading laws, on the other. But if the Chinese Wall is unnecessary and a defense to the insider trading liability is available, then the firm can benefit from this information and avoid what are avoidable losses to investors, whether the firm's own in-house investment portfolio or the investments of outside customers or fund participants.
202. Id.
203. See Fisher and Buck, 25 Am Bankr Inst J at 88 (cited in note 115).
204. For some of the representations typical of a big boy letter, see note 21.
205. The example should not change if the roles of buyer and seller here are reversed (and indeed, the suggestion here is that both parties might be insiders).
206. But see Mason and Pessin, Legal Issues in Claims Trading at 17 (cited in note 9) (pointing out that "there is a strong argument to be made" that if the buyer has greater information, the law should not protect the seller at all, regardless of whether or not there is a big boy letter).
207. Wendell H. Adair and Brett Lawrence, Big Boy Letters: Playing It Safe after O'Hagan, 17 J Corp Renewal 1, 1 (2004). For a view of big boy letters in another context-as a future nondisclosure agreement committing one party to sell stock conditional on seller behavior to another,without the buyer's disclosing its inside information-
208. see M. Todd Henderson, Deconstructing Duff & Phelps, 74 U Chi L Rev 1739, 1755-56 (2007).
209. The LSTA includes big boy language in its standard terms for distressed debt trading documentation.
210. See Loan Syndications and Trading Association, User's Guide for LSTA Distressed Debt Trading Documentation § IV.C.2.b.20 at 19-20 (cited in note 21).
211. 91 F3d 337 (2d Cir 1996).
212. Id at 339 (affirming a dismissal of fraud claims against a business that allegedly inflated its value in representations to a purchaser), quoted in Stephen R. Hertz, Do Big Boy Letters Really Work?, 3 Debevoise & Plimpton Priv Eq Rep 5, 20 (2003), online at http://www.debevoise.com/ files/Publication/2736c2ae-9f14-4dee-b653-982519a39acl/Presentation/ PublicationAttachment/aa 138944-92c4-4eef-8a6e-d30d0532e511/Spring%202003.pdf (visited Jan 12, 2008) (concluding that Harsco and other cases notwithstanding, it is not certain that big boy waivers would be enforced).
213. See Harsco, 91 F3d at 340-41.
214. Id.
215. Hertz, 3 Debevoise & Plimpton Priv Eq Rep at 21 (cited in note 136) (drawing another distinction between Harsco and big boy letters-that big boy letters are typically done with little due diligence before signing). One might wonder why parties do not simply use Harsco-style agreements instead of big boy letters. One reason is that the agreement in Harsco was both more particularized and more generous than big boy traders would like. Big boy letters have become boilerplate in claims trades, whereas the document in Harsco was designed more specifically for theagreement in that case.
216. See 91 F3d at 340. Big boy traders are also unlikely to want the remedies that the contract in Harsco contained.
217. See id (finding that the contract allowed the termination of the deal during the diligence period if the buyer learned that any representations were false).
218. See, for example, McCormick v Fund American Companies, Inc, 26 F3d 869, 880 (9th Cir 1994) (holding that nondisclosure of material information was not actionable because plaintiff knew of the nondisclosure); Jensen v Kimble, 1 F3d 1073, 1077 (10th Cir 1993) (holding that omissions were not actionable where the buyer advised the seller of the buyer's nondisclosures).
219. 15 USC § 78cc (2000).
220. 15 USC § 78cc(a).
221. Compare AES Corp v Dow Chemical Co, 325 F3d 174, 180 (3d Cir 2003) (holding that § 29(a) does invalidate such clauses);
222. Rogen v Ilikon Corp, 361 F2d 260, 268 (1st Cir 1966) (same), with Rissman v Rissman, 213 F3d 381, 387 (7th Cir 2000) (holding, without considering § 29(a), that nonreliance clauses are valid);
223. Harsco, 91 F3d at 343 (holding that, notwithstanding § 29(a), nonreliance clauses are valid).
224. 325 F3d 174 (3d Cir 2003).
225. Id at 180 (explaining that, while the provisions are evidence of nonreliance, it would eviscerate § 29(a) if they were the basis for finding nonreliance as a matter of law).
226. See also Hertz, 3 Debevoise & Plimpton Priv Eq Rep at 7 (cited in note 136) (observing that the decision does not seriously undermine big boy letters because of their remaining evidentiary value for the reasonable reUance element).
227. There are two ways to understand this fact with implications for the question, unexplored here, of why the securities law has an antiwaiver provision in the first place. A more limited view would be that because the parties to big boy trades in bankruptcy are usually sophisticated, they do not need the benefit of such a provision. That is, the only parties that use big boy language in claims trades are sufficiently aware of the risks they take with their trades that the courts can trust them with their decision to waive without overriding it. A more expansive view, however, would be that the usefulness of big boy letters, even when less sophisticated parties are involved,
228. see notes 151-54 and accompanying text, argues against there being any antiwaiver provision at all in the securities law. Although the tendency here is to the more expansive view, more needs to be done on this important ancillary question.
229. As a matter of law, § 29(a) does not apply to big boy claims trading; and even if it did, it would not erase the evidentiary capacity of nonreliance language to defeat the presumption ofreliance. Practically speaking, the only bite § 29(a) has is to make motions to dismiss a bit harder, forcing some defendants to wait until summary judgment.
230. See Part III. This does not mean, however, that big boy letters preclude liability where the buyer in a big boy trade immediately resells the claim or security to another buyer without a big boy letter. Several " downstream" buyers have brought suit in such cases, but the most highprofile case settled before it could produce an opinion. There remains, therefore, great uncertainty as to how courts will treat this issue. See generally Jenny Anderson, Side Deals in a Gray Area, NY Times Cl (May 22, 2007). Nor is it clear how the SEC will react to big boy letters. The Commission muddied the waters recently by pursuing a civil action against Barclays for insider trading in several instances, some of which involved big boy letters. The SEC settled, however, and the settlement agreement does not provide much guidance on the position the Commission will take on big boy letters as such.
231. See SEC v Barclays Bank PLC, Litigation Release No 20132 (May 30, 2007), online at http://www.sec.gov/litigation/litreleases/2007/lr20132.htm (visited Jan 12, 2008) (mentioning only that Barclays used big boy letters in some of the deals at issue).
232. See also Karl Groskaufmanis, Revisiting Insider Trading in the Debt Markets: Lessons for Debt Investors and Members of Committees in Bankruptcy Cases (2007), online at http://www.mondaq.co.uk/ article.asp?articleid=49536 (visited Jan 12, 2008) (registration required) (concluding that the SEC did not defer to Barclay's big boy letters in any way).
233. Also, in a case where the insider receives his information from the debtor, he may also require the debtor's approval of his intent to trade or risk breaching his fiduciary duty under the misappropriation theory in United States v O'Hagan, 521 US 642, 652-53 (1997) (expanding insider trading liability to include a "misappropriation" theory under which, even if he has no duty to the party with whom he trades, an insider with a fiduciary duty to his information's source can be liable to that source). As long as the information is not disclosed or used against the firm or its shareholders, the debtor probably would not object and the disclosure of intent to trade should relieve the insider at least of misappropriation liability or other fiduciary liability under either the securities laws or state corporate law. Indeed, O'Hagan itself required even less, for the decision implied that a "trader in possession of material, nonpublic information could avoid liability under misappropriation theory by disclosing his intention to trade to the information provider without actually disclosing to the trading counterparty the nonpublic information." Adair and Lawrence, 17 J Corp Renewal at 1 (cited in note 133).
234. See also O'Hagan, 521 US at 654. In other words, even though a committee member forgoes the Chinese Wall, when he trades pursuant to a big boy letter he can still avoid breaching his duty of confidentiality to the debtor, which was one of the core concerns of the bankruptcy courts. Note that regardless of the O'Hagan language, common sense suggests he should still get the debtor's approval of his trade if the debtor was the source of the inside information. After all, telling someone you intend to take his information without his consent is just as much theft as if you stole it without such "disclosure."
235. See notes 69-86 and accompanying text.
236. As noted above, disclosure to and approval of the debtor and even the creditors' committee of the insider's intent to trade should avoid the remnant of misappropriation liability. One early commentary on Chinese Walls in bankruptcy suggested that disclosure to the committee would suffice to allow a creditor on a committee to trade in the debtor's claims. Pozen and Mencher, 28 Bus L at 754 (cited in note 63). This Comment takes the somewhat different position that a big boy letter containing the approval or consent of the source of the information should preclude most liability.
237. See, for example, Easterbrook and Fischel, The Economic Structure of Corporate Law at 294 (cited in note 40) (arguing that the price conveys information about the firm more effectively than disclosure when insiders are allowed to trade).
238. See id at 297-98 (arguing that this helps unsophisticated parties because they can free ride on the search costs of others).
239. See Kenneth E. Scott, Insider Trading: Rule 10b-5, Disclosure and Corporate Privacy, 9 J Legal Stud 801, 804 (1980) (suggesting that one theory for inside information disclosure is that it disseminates knowledge so that all investors can make better informed judgments).
240. See also Stephen M. Bainbridge, Corporation Law and Economics 595 (Foundation 2002) (noting that because on impersonal exchanges the seller would still sell absent the insider, unsophisticated parties are hurt by the lack of disclosure, such as the fact that an insider is on the market).
241. This debate is voluminous. The seminal work critiquing securities regulation remains Henry Manne, Insider Trading and the Stock Market 47-110 (Free 1966). For a small sampling of the contemporary debate, compare Saikrishna Prakash, Our Dysfunctional Insider Trading Regime, 99 Colum L Rev 1491, 1497 (1999) (arguing that Rule 10b-5 should not be used to regulate information disparities when it is aimed at preventing deception);
242. Easterbrook and Fischel, The Economic Structure of Corporate Law at 253-314 (cited in note 40) (arguing that the market should regulate insider trading and disclosure rules);
243. David D. Haddock and Jonathan R. Macey, A Coasian Model of Insider Trading, 80 Nw U L Rev 1449, 1451 (1986) (arguing that shareholders would normally permit insider trading in exchange for paying lower wages in a Coasian world);
244. Dennis W. Carlton and Daniel R. Fischel, The Regulation of Insider Trading, 35 Stan L Rev 857, 894 (1983) (arguing that federal regulations are broader than those firms would negotiate privately and regulation should be left to private parties), with Mark Klock, Mainstream Economics and the Case for Prohibiting Insider Trading, 10 Ga St U L Rev 297, 298 (1994) (arguing that economic theory and evidence contradicts Manne's conclusion that insider trading promotes market efficiency);
245. Gary Lawson, The Ethics of Insider Trading, 11 Harv J L & Pub Policy at 727 (1988) (outlining the normative foundation for condemning insider trading under a property rights view);
246. James D. Cox, Insider Trading and Contracting: A Critical Response to the "Chicago School," 1986 Duke L J 628, 655-57 (arguing that the current law is the correct policy and overcomes collective action and information asymmetry problems);
247. Robert J. Haft, The Effect of Insider Trading Rules on the Internal Efficiency of the Modern Corporation, 80 Mich L Rev 1051, 1053 (1982) (arguing that prohibiting insider trading could enhance business decisionmaking in corporations).
248. See, for example, Elizabeth Warren and Jay Lawrence Westbrook, Contracting Out of Bankruptcy: An Empirical Intervention, 118 Harv L Rev 1197, 1216 (2005) ("Unsophisticated creditors may voluntarily contract with a debtor for large or small amounts, but they lack the expertise required to discover and evaluate differing bankruptcy terms.").
249. Some commentators assert that when a fiduciary uses inside information for his own gain he has, ipso facto, misused it. See, for example, Mark J. Krudys, Insider Trading by Members of Creditors' Committees-Actionable!, 44 DePaul L Rev 99, 141-42 (1994). The Papercraft cases suggest that the primary harms worrying the courts concern the reorganization process, the debtor's confidential information, and unsophisticated parties.
250. See notes 69-86 and accompanying text. Under Wolf v Weinstein, 312 US 633, 655 (1963), fiduciary liability is prophylactic and does not require actual harm. This Comment takes the position that there should have to be some harm to the creditors to whom the committee member is a fiduciary in order for insider claims trading to be actionable.
251. 521 US 642 (1997).
252. For a typical statement of the current consensus, see Fisher and Buck, Hedge Funds and the Changing Face of Corporate Bankruptcy Practice, 25 Am Bankr Inst J at 87 n 5 (cited in note 115) ("[E)ntities sitting on official committees [with access to inside information] cannot trade when in possession of such material, nonpublic information absent appropriate ethical screening measures isolating employees sitting on the committee from those with trading authority").
253. One arrives at this suggestion as a result of the basic structure of this Comment. That is, under Reves as currently read, Rule 10b-5 does not apply to claims trading, partially because of the existence of the bankruptcy remedies. One therefore considers how well these remedies do in the absence of Rule 10b-5. In the bankruptcy remedies, the distinction between fiduciary and
254. See notes 69-86 and accompanying text.