With...legal and business insights | Episode 4: With... a brief look

Join our host Joe Morales as he discusses recent legal developments including details regarding a U.S. Supreme Court case.

Listen to the full episode:


J. Morales: Welcome to another episode of With… Legal and Business insights. I’m your host, Joe Morales. As I mentioned in our last episode, I’m working on a number of future episodes which will tackle a wide array of legal and business topics and will feature interviews with Withers attorneys. Today however, I’m debuting a new segment called With a Brief Look. The goal of this segment is to bring listeners up to speed on recent legal developments in a concise manner. Hopefully you learn something new and I encourage you to reach out for additional information regarding the topics that I present. So this isn’t law school and also keep in mind that we’re not providing any legal advice via this podcast. I remind our listeners to read the disclaimer on our website and I’m sure you were planning to visit withersworldwide.com anyway, so you could find out more information about our firm and me.

Don’t forget that Whiters it is on Twitter with the username at withersLLP follow us there so you know when another podcast episode is available and we also post links to articles by our attorneys and other interesting updates. I’m also on Twitter using the handle joe_morales02. let me know what you think of the podcast. Later on I’ll get to some new revenue legislation issued by New York state, but first let’s debut our newest segment by taking a brief look at a securities law case decided by the US Supreme Court in late March, 2019. In a case called Lorenzo V. Securities and Exchange Commission, the US Supreme Court expanded liability under SEC rule 10b-5 under the US Securities Exchange Act of 1934 by concluding that the dissemination of false or misleading statements with intent to defraud can violate 10b-5 subsections A and C, even if the person disseminating such statements couldn’t be held liable as a quote unquote maker under subsection B of 10b-5. Now we should unpack that a little bit and to do so it’s worth putting 10b-5 in context from let’s say a hundred thousand feet.

Let’s start with the Securities Exchange Act of 1934 which is sometimes referred to as just the exchange act with a 34@. Among other things, the exchange act created the US Securities and Exchange Commission, the SEC and granted the SEC authority over the securities industry rural 10b-5 is a rule promulgated by the SEC under the exchange act, which has been amended over the years since it became law in 1934. So, congress passed the exchange act and FDR signed it into law, but the SECissued the specific rule we’re talking about today. I’ll spare you a more extensive lesson on administrative law and the rule making process as it exists today. Rule 10b-5 is sometimes referred to as the quote unquote anti-fraud rule. Under this rule, in connection with the purchase or sale of any security, it’s unlawful to; 1) employ any device scheme or artifice to defraud, 2) make any untrue statement of material fact, or 3) engage in any act, practice or course of business which operates or would operate as a fraud or deceit.

See subsections A, B, and C of rule 10b-5 respectively. In more basic terms. It’s unlawful to commit fraud when buying and selling securities. A few years ago in 2011 to be exact, the US supreme court narrowly construed the second prong of rule 10b-5 the prong that says it’s unlawful to make any untrue statement of material fact. In a case known as Janus capital group INC versus First Derivative Traders, the court ruled that a mutual fund investment adviser could not be held liable for false statements contained in their respective prospectuses of its clients because the advisor was not the quote unquote maker of such false statements under the rule. The court said that the maker of a statement is the person with ultimate control and authority over the statement. All of that is very high level context for the case decided at the end of March, 2019. In the Lorenzo case, the Supreme Court concluded that even if the disseminator of false or misleading statements did not quote unquote make such statements within the meaning of rule 10b-5 subsection B, the disseminator could still fall within the scope of subsections A and C of the rule.

The court rejected a claim that liability under 10b-5 could only attach through subsection B, citing sufficient overlap across the three prongs of the rule. In this case, the director of a placement agent sent emails to perspective investors claiming the client had 10 million in assets, even though he knew that the client had recently disclosed total assets of less than 400,000. From the articles and memoranda that I’ve read, this most recent case confirms that a person may be primarily liable for disseminating false or misleading information even if that person was not responsible for the content of the corresponding communications if that person knew the information was false or misleading. It will be interesting to follow how lower courts throughout the US apply the Supreme Court’s decision. Before we get to our next topic, let me give you a few updates on what’s happening across the firm, both here in the US as well as abroad.

Steve Wilson, one of our real estate attorneys based in San Francisco, has spoken on a number of panels regarding qualified opportunity zones, which are a hot topic these days. My corporate partner, David Guinn, of our New York office recently participated in a family office panel to discuss family office structuring and other organizational considerations. Reaz Jafri also of our New York office spoke with business insider of regarding challenges currently facing H-1B visa applicants. And Michael Rueda, who appeared on our debut episode, authored an article for Forbes on entrepreneurship efforts that are shaking up the US Soccer Federation. I’ve been fortunate enough to work with Steve, David, Reaz and Michael over the years and all of them know their stuff. Finally, our colleagues based in Milan recently won the Private Client and Wealth Management Award at Legal Communities 2019 Tax Awards, which is great news. You can find out more information about everything and everyone I just mentioned on our firm’s website withersworldwide.com. Okay, let’s hop into today’s second topic.

New Revenue Legislation in New York that changes New York’s real estate transfer tax and mansion tax. I’ll say that a number of our clients have already reached out to us for advice on this one. Here are the headlines. First, the state transfer tax will increase from 0.4% of the transaction dollar amount to 0.65% of the transaction dollar amount for the following deals; 1) commercial real estate transactions greater than $2M, 2) residential real estate transactions greater than $3M. Note that in New York, the seller usually pays transfer taxes. Second, the old mansion tax rate, which was 1% on all transfers at or greater than $1M will change. For transactions from $1M to $2M, the mansion tax rate will be 1%. For transactions from $2M to $3M, the mansion tax rate will be 1.25%. From there, the rate will continue to increase and will top out at 3.9% for transactions of $25M or more.

Now note that in New York, the buyer is responsible for paying the mansion tax. Now, another very important wrinkle in the legislation is that at least initially only New York City will satisfy the criteria for both tax increases. So if you invest in or otherwise own New York City real estate, you want to keep this on your radar. My understanding is that these changes go into effect this coming July. All right, so a segment title With a Brief Look isn’t called that for no reason at all. So this concludes today’s episode. Here’s another reminder that you can find out more information about the firm and me at withersworldwide.com and be sure to check us out on Twitter withersLLP and joe_morales02 respectively. Let us know what you think of this episode and the new segment as well as the podcast in general. And look out for new episodes of With… Legal and Business Insights coming soon. Thanks for spending a few minutes with me. I’m your host, Joe Morales, and I will speak to you next time.

With...legal and business insights podcast

Providing insights into an array of interesting business and legal issues.