Covering the “Security Blanket”:

Regulating Bankruptcy Claims and Claim-Participations Trading under the Federal Securities Laws

By Thomas Donegan *
Emory Bankruptcy Developments Journal | 1998
Emory University School of Law

* J.D., Emory University School of Law, 1998; B.A., with honors, University of Florida, 1994. The author wishes to thank Professor William Carney for his guidance, and his wife and family for their love and support.

Text: 19,829 words
… In the 1990s, the federal bench has seen a marked increase by individuals and corporations filing petitions for bankruptcy protection. … Purchase and sale of claims, so long as the purchaser is not the debtor, an affiliate of the debtor, or an insider, simply substitutes one creditor for another . . . . The right to make those decisions and the risks inherent in bankruptcy proceedings are merely shifted to another who stands in the shoes of the original claimant. … A claim seller is typically motivated by its own self-interest rather than the debtor’s interest, while the investor is seeking to ultimately gain value from the instrument greater than his cash outlay, and not a short-term, fixed interest rate. … However, the peculiar nature of postpetition claims trading compels the federal securities laws to focus more on protection of the typically unsophisticated claim seller than the “bottom-feeding investor.” …

n23 T. Rowe Price Prepares $ 125 [Million] Distressed Fund, BUYOUTS, Dec. 4, 1995 (interviewing Todd Ruppert, partner). The attraction of bankruptcy claims as potential profit-generators is understandable. For example, Harvard University tripled its original investment of $ 129 million in distressed companies last year, while other clients are similarly seeking returns which can average more than 22% per year. See Alyssa A. Lappen, “The Greenhaus Effect” (Vulture Investor Shelley Greenhaus), INSTITUTIONAL INVESTOR, Oct. 1, 1995, at 317.

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Alyssa A. Lappen is a U.S.-based investigative journalist. She is the former Managing Editor at the Leeb Group (2012-2017); a former Senior Fellow of the American Center for Democracy (2005-2008); and a former Senior Editor of Institutional Investor (1993-1999), Working Woman (1991-1993) and Corporate Finance (1991). She served six of her 12 years at Forbes (1978-1990) as an Associate Editor. Ms. Lappen was also a staff reporter at The New Haven Register (1975-1977). During a decade as a freelance, her work appeared in Big Peace, Pajamas Media, Front Page Magazine, American Thinker, Right Side News, Family Security Matters, the Washington Times and many other Internet and print journals. Ms. Lappen also contributed to the Terror Finance Blog, among others. She supports the right of journalists worldwide to write without fear or restriction on politics, governments, international affairs, terrorism, terror financing and religious support for terrorism, among other subjects. Ms. Lappen is also an accomplished poet. Her first full-length collection, The Minstrel's Song, was published by Cross-Cultural Communications in April 2015. Her poems have been published in the 2nd 2007 edition of Blood to Remember: American Poets on the Holocaust and both 2007 issues of Wales' award-winning Seventh Quarry: Swansea Poetry Magazine. Dozens of her poems have appeared in print and online literary journals and books. She won the 2000 annual Ruah: A Journal of Spiritual Poetry chapbook award and has received a Harvard Summer Poetry Prize and several honorable mentions.

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