Minimum Competence - Daily Legal News Podcast
Minimum Competence
Tues 5/23 - DOJ Goes After Banks for COVID Frauds, Class Action Suit Against Musk is Thrown Out, TikTok Sues Montana, and Column Tuesday

Tues 5/23 - DOJ Goes After Banks for COVID Frauds, Class Action Suit Against Musk is Thrown Out, TikTok Sues Montana, and Column Tuesday

We have the DOJ taking aim at COVID loan frauds, a class action suit against Musk is thrown out, TikTok sues Montana and Column Tuesday: I argue the crypto electricity tax should target AI instead.

We have an interesting “this day in legal history” for today – on May 23, 1788 South Carolina ratified the U.S. Constitution and became the eighth state. 

South Carolina's journey towards statehood can be traced back to the early days of the United States. Initially, the area was encompassed within the original territory defined in the 1663 charter establishing Carolina, which included both North and South Carolina. The separation of the two regions took place in 1712 and was officially solidified when the Carolina Colony dissolved in 1729, with a shared boundary resembling the present states. However, the precise delineation of this boundary was not settled until 1813. During this time, South Carolina relinquished some of its territory to the United States, which ultimately formed part of the Georgia and Mississippi Territory in 1802. On May 23, 1788, South Carolina ratified the U.S. Constitution, becoming the eighth state among the original 13 to join the Union. 

72 years later it would be the first state to secede from the Union, on December 20, 1860 following the election of Abraham Lincoln. The South Carolina Declaration of Secession formally pointed to one of Lincoln’s most famous lines as the reason secession was necessary:

“A geographical line has been drawn across the Union, and all the States north of that line have united in the election of a man to the high office of President of the United States, whose opinions and purposes are hostile to slavery. He is to be entrusted with the administration of the common Government, because he has declared that that ‘Government cannot endure permanently half slave, half free,’ and that the public mind must rest in the belief that slavery is in the course of ultimate extinction.”

The Civil War, in effect, began in Charleston Harbor on April 12, 1861. We all make mistakes; granted, most of our mistakes don’t rise to the level of starting a Civil War to preserve slavery – but all the same. Happy Birthday, South Carolina. 

The Justice Department is shifting its focus to financial institutions involved in Covid-19 loan fraud cases, aiming to uncover evidence of banks approving fake loans or bypassing fraud-detection measures. This shift comes after the successful prosecution of small-time scammers who misused emergency relief loans. The government faces challenges in holding lenders accountable, including forgiving Trump-era guidance that banks may cite in their defense. Larger banks with sophisticated prevention practices are less vulnerable, while regional banks, local institutions, and fintechs face greater scrutiny. So far, the Department of Justice (DOJ) has achieved limited results, but a 10-year statute of limitations allows ample time for investigations in the finance sector. DOJ's acting Covid enforcement chief has hinted at a new focus on lenders and financial institutions that enabled fraudulent activity. Cases are expected to primarily seek civil liability, although criminal charges may be possible for willful and systemic offenders. 

Fintechs, especially those lacking experience in establishing anti-fraud controls, are likely targets. The compressed time frame and evolving regulatory guidance during the rollout of programs like the Paycheck Protection Program (PPP) offer potential defenses for institutions. The Bank Secrecy Act, which requires financial institutions to prevent money laundering, could also be leveraged in enforcement efforts. However, experts are skeptical about the DOJ's ability to achieve an enforcement sweep similar to the post-housing crisis period. Investigations may utilize the False Claims Act and scrutinize customer due diligence and failure to report fraud or suspicious activity. Both traditional and online lenders, including brick-and-mortar and regional banks, may face scrutiny, especially if there was a close relationship with fraudulent borrowers. The complexity of the Covid-19 relief programs and the government's execution may be raised as arguments in defense.

Covid Loan Fraud Probes Turn to the Bankers Who Approved Them

A proposed class-action lawsuit against Elon Musk, claiming he cheated Twitter shareholders during the company's buyout, has been dismissed by a judge. U.S. District Judge Charles Breyer in San Francisco ruled that the plaintiff lacked standing to sue because the lawsuit challenged Musk's actions associated with the buyout, rather than the fairness of the buyout itself. The judge found no evidence that Musk's belated disclosure of a 9.2% Twitter stake or the delay in the closing of the buyout caused harm to the plaintiff. The plaintiff had alleged that Musk’s stake allowed him to buy more shares at lower prices prior to the actual buyout. Additionally, there was no proof that Musk helped two friends breach their fiduciary duties by favoring their own and Musk's interests. The plaintiff's lawyers have not yet commented on the ruling. Musk, who also heads Tesla Inc, is the world's second-richest person. Twitter has faced challenges in maintaining ad revenue and recently appointed a new CEO.

Judge throws out shareholder lawsuit against Elon Musk over Twitter buyout | Reuters

TikTok has filed a lawsuit against the state of Montana in response to its ban on the Chinese-owned app. Montana became the first state to prohibit the use of TikTok, with the ban scheduled to take effect on January 1. You will remember our previous reporting on Montana TikTok users suing Montana, now their state has been brought into the legal fray. TikTok argues that the ban violates the First Amendment rights of the company and its users. The lawsuit, filed in a Montana federal court, also claims that the ban is pre-empted by federal law and infringes upon matters of exclusive federal concern, as well as violating the Commerce Clause of the U.S. Constitution. The ban imposed by Montana carries potential fines of $10,000 per violation by TikTok. Former President Donald Trump previously attempted to ban TikTok and WeChat at the federal level, but those efforts were halted by court decisions. 

TikTok sues Montana after state bans app | Reuters

The Biden administration's plan to introduce a Digital Asset Mining Energy (DAME) excise tax on electricity used for crypto mining is deeply flawed. While the tax aims to offset climate change, I argue that it is administratively unworkable and misdirected. The lack of clarity on enforcement and the diverse nature of crypto miners pose challenges. Monitoring individual computers or installing spyware would be impractical and costly. Instead, the focus could be shifted to taxing the electricity usage of data centers and artificial intelligence (AI). 

AI models and language generation require significant amounts of electricity, making them potential targets for taxation. The growing AI sector offers an opportunity to offset future energy demands on the grid. However, implementing an excise tax on AI also poses challenges in determining the purpose of electricity usage. An alternative proposal is to broaden the tax to include data centers more generally, avoiding market distortion and future-proofing the tax. 

Otherwise, sectors such as the chemical industry and major technology companies like Google and Microsoft consume substantial amounts of electricity and could be suitable targets. If the goal is to regulate crypto, I suggest focusing on specific regulations rather than an impractical and ineffective excise tax.

Crypto Mining Electricity Excise Tax Should Target AI Instead

Minimum Competence - Daily Legal News Podcast
Minimum Competence
The idea is that this podcast can accompany you on your commute home and will render you minimally competent on the major legal news stories of the day. The transcript is available in the form of a newsletter at