By: Jeffrey M. Haber CPLR 3213 provides an expedited procedure for enforcing an “instrument for the payment of money only.” When a promissory note arises from a broader contractual relationship, however, two distinct questions may determine whether the holder is entitled to relief. First, does the note contain a standalone and unconditional obligation to pay, or must the court look to the underlying agreement to establish the parties’ payment obligations? Second, can an asserted fraud defense defeat enforcement where it rests on the other party’s alleged failure to perform that underlying agreement? A promissory note does not necessarily fall outside CPLR 3213 merely because it refers to another agreement or was executed as part of a larger transaction. The central inquiry is whether the note contains an unconditional promise to pay a sum certain at a definite time, or whether payment depends on obligations that can be established only by looking beyond the note. Similarly, the possibility that the maker may assert defenses arising from the underlying transaction does not, by itself, alter the note’s character as an instrument for the payment of money only. Fraud presents a related but analytically distinct issue. A party cannot transform a claim for breach of an underlying agreement into fraud simply by alleging that the other party represented that it was performing, or would perform, its contractual obligations. A viable fraud defense requires more than an alleged failure to perform: the asserted misrepresentation must be sufficiently particularized, and the evidence must support fraudulent intent when the representation was made. A subsequent failure to perform, standing alone, does not establish that the promisor never intended to perform. Both principles were before the Appellate Division, First Department in Cura Found. v Shaya, 2026 N.Y. Slip Op. 06061 (1st Dept. Oct. 20, 2026). Cura arose from a charitable pledge (the “Pledge”) followed by a $6.5 million promissory note (the “Note”) for the unpaid balance. Defendant resisted enforcement of the Note on two related grounds: that the Note was inseparable from plaintiff’s obligations under the Pledge and that plaintiff had fraudulently represented that it was complying, and would continue to comply, with those obligations. The motion court denied plaintiff’s CPLR 3213 motion, reasoning that the Note “integrates” the Pledge and that plaintiff had not established the enforceability of the underlying pledge. The First Department reversed, holding that the Note contained “an unconditional promise to pay a sum certain,” did not “incorporate the pledge agreement wholesale,” and qualified as an “instrument for the payment of money only.” The First Department also addressed the defendant’s fraud defense. The Note made his payment obligations “unconditional and absolute” and provided that they were not subject to “any defense, offset or counterclaim of any kind whatsoever for any reason.” Separately, the Court held that the fraud defense failed because “the only fraud alleged relates to a breach of the pledge agreement,” defendant provided no details concerning the alleged representations, and plaintiff’s alleged failure to establish the agreed upon fund did not show that plaintiff lacked an intention to do so when the promise was made. The Cura Foundation v. Shaya[1] Plaintiff is a nonprofit organization to which defendant pledged to make a charitable contribution. In January 2019, defendant initially pledged $10 million to plaintiff. The parties subsequently revised that commitment, and, on May 8, 2020, defendant signed a written pledge agreement reducing his Pledge to $7.5 million. By May 2021, $6.5 million remained outstanding under the Pledge. On May 4, 2021, the parties executed a promissory note for that amount. The Note stated that defendant was providing it “to pay the balance due of the Irrevocable Pledge Commitment made between the [parties].” It set forth the amount defendant was obligated to pay and specified the dates on which payments were due. The Note also addressed its relationship to the underlying Pledge. Section 15.2 stated that the Pledge was “integrated” into the Note and that the two documents together “constitute[d] the [parties’] entire understanding” concerning the matters addressed and superseded their prior and contemporaneous discussions, agreements, and representations. At the same time, the Note provided that it was given “for value received” and that defendant “unconditionally promise[d] to pay” plaintiff $6.5 million. It further provided that defendant’s payment obligations were “unconditional and absolute” and were “not subject to any defense, offset or counterclaim of any kind whatsoever for any reason.” Defendant failed to make the payments required by the Note. Thereafter, plaintiff moved for summary judgment in lieu of complaint under CPLR 3213, relying on the executed Note and defendant’s failure to make the required payments when due. Defendant opposed the motion principally by relying on plaintiff’s alleged obligations under the Pledge. Defendant contended that plaintiff failed to fulfill obligations it had undertaken in connection with the parties’ agreement. Among other things, defendant asserted that plaintiff promised to establish an “ADEL fund” but failed to do so. Defendant also asserted fraud. According to defendant, plaintiff represented that it was complying with the Pledge and would continue to perform its obligations under that agreement. He attested that he executed the Note “[i]n reliance on [plaintiff]’s representations that it would continue adhering to its performance obligations under the Pledge Agreement.” Defendant therefore maintained that plaintiff’s alleged breach of the Pledge and its representations concerning performance provided grounds for opposing enforcement of the Note. The motion court denied plaintiff’s motion. Although the Note stated that it was executed “for value received” and contained defendant’s unconditional promise to pay $6.5 million, the motion court focused on the Note’s integration of the Pledge (i.e., the merger clause). The Pledge stated that plaintiff “intend[ed] to act in reliance on the pledge.” Plaintiff’s moving papers, however, did not establish that plaintiff had, in fact, relied on defendant’s pledge. Therefore, the motion court concluded that plaintiff did not establish, as a matter of law, that the Pledge constituted an enforceable unilateral contract. On appeal, the First Department unanimously reversed. The Court began with the requirements of CPLR 3213 and held that the Note was “an instrument for the payment of money only.”[2] The Court noted that the Note was signed by defendant, contained “an unconditional promise to pay a sum certain,” and specified definite times when the required payments were due.[3] The Note’s connection to the Pledge did not require a different result.[4] In particular, the Court rejected the contention that the Note fell outside CPLR 3213 merely because it stated that defendant was providing it “to pay the balance due of the Irrevocable Pledge Commitment made between the [parties].”[5] The Court also rejected defendant’s reliance on the merger clause, which provided that the Note and Pledge “constitute[d] the entire understanding of [the parties] with respect to the matters discussed [therein] . . . , and supersede[d] all prior and contemporaneous discussions, agreements, and representations” concerning the matters addressed.[6] That language, said the Court, did “not prevent the [N]ote from being an instrument for the payment of money only.”[7] Contrary to defendant’s argument, said the Court, “the [N]ote [did] not incorporate the pledge agreement wholesale.”[8] Rather, concluded the Court, the provision “merely says that the pledge agreement and the [N]ote represent the parties’ entire understanding.”[9] Thus, the Note’s relationship with the Pledge did not prevent it from constituting an instrument for the payment of money only. The Court further emphasized that “[t]he possibility that defendant might advance defenses that would raise issues outside the [N]ote [did] not change the [N]ote’s character as one for the payment of money only.”[10] Having determined that the Note fell within CPLR 3213, the Court concluded that plaintiff had made its prima facie showing by producing the Note executed by defendant and proof that defendant had failed to make the payments required by its terms.[11] Next, the Court addressed defendant’s fraud defense and concluded that it did not raise a triable issue of fact.[12] As an initial matter, the Court relied on the sweeping waiver contained in the Note. Defendant agreed that his “payment obligations . . . [were] unconditional and absolute and [were] not subject to any defense, offset or counterclaim of any kind whatsoever for any reason.”[13] The Court held that such a provision was enforceable and therefore barred defendant’s attempt to resist payment based on fraud.[14] Importantly, the Court held that defendant’s fraud defense would fail even if he had not waived the right to assert it.[15] Defendant claimed that plaintiff had “engaged in fraud . . . by representing that [it] was complying with the Pledge’s promises when it was not.”[16] The Court found that theory legally insufficient because “the only fraud alleged relates to a breach of the pledge agreement.”[17] In other words, the allegation that plaintiff represented that it was performing its contractual obligations when it allegedly was not did not supply an independent basis for fraud. Defendant’s evidence also failed to substantiate the asserted misrepresentation. Although Defendant attested that he executed the Note “[i]n reliance on [plaintiff]’s representations that it would continue adhering to its performance obligations under the Pledge Agreement,” his affirmation provided “no details about the alleged representations.”[18] Thus, concluded the Court, defendant’s “conclusory affirmation [was] insufficient to defeat plaintiff’s motion for summary judgment in lieu of complaint.”[19] Finally, defendant failed to establish fraudulent intent (i.e., scienter).[20] Even assuming, as defendant contended, that plaintiff promised to establish the ADEL fund and ultimately failed to do so, the subsequent failure to perform did not establish that plaintiff had no intention of establishing the fund when the parties entered into the Pledge, said the Court.[21] The Court therefore found no basis to permit the fraud defense to prevent enforcement of the Note.[22] Takeaway Cura is significant not simply because the Court permitted enforcement of the Note under CPLR 3213, but because of how the Court treated both the Note’s relationship to the underlying pledge agreement and the defenses arising from that agreement. A promissory note does not cease to be an instrument for the payment of money only merely because it identifies the underlying transaction, refers to another agreement, or states that the two documents constitute the parties’ entire understanding. As Cura shows, the question to be resolved concerns whether the note itself contains an unconditional obligation to pay a sum certain at specified times or instead requires proof of outside obligations to establish the right to payment. At the same time, Cura underscores that asserting fraud does not necessarily create a factual issue sufficient to defeat enforcement of an otherwise unconditional note. That is particularly so where the alleged fraud is simply the claimed failure to perform the underlying agreement. In Cura, the Court found the fraud defense deficient at several levels: defendant had contractually agreed that his payment obligations were unconditional and not subject to defenses; the alleged fraud concerned the same nonperformance underlying the claimed contractual breach; his assertions concerning the purported representations lacked detail; and the subsequent failure to establish the ADEL fund did not demonstrate fraudulent intent when the alleged promise was made. The decision therefore reinforces two related principles under New York law: the existence of an underlying agreement does not necessarily defeat CPLR 3213 treatment, and characterizing the other party’s alleged contractual nonperformance as fraud does not, without more, create a defense to an unconditional obligation to pay. __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice. Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. __________________________________ [1] The factual background comes from the parties’ briefs on appeal and the First Department’s decision. [2] Slip Op. at *1. [3] Id., citing Weissman v. Sinorm Deli, 88 N.Y.2d 437, 444 (1996); DDS Partners v. Celenza, 6 A.D.3d 347, 348 (1st Dept. 2004). [4] Id. [5] Id., citing Seaman-Andwall Corp. v. Wright Mach. Corp., 31 A.D.2d 136, 137 (1st Dept. 1968) (rejecting argument “that, as the note was given as one factor in a transaction embracing other features, proof dehors the instrument must be given”), aff’d, 29 N.Y.2d 617 (1971). [6] Id. [7] Id. [8] Id. [9] Id. [10] Id. [11] Id. at *2 (citations omitted). [12] Id. [13] Id. [14] Id., citing SCP (Bermuda) v. Bermudatel Ltd., 242 A.D.2d 429, 430 (1st Dept 1997); see also SCP (Bermuda) v. Bermudatel Ltd., 224 A.D.2d 214, 215 (1st Dept. 1996). [15] Id. [16] Id. [17] Id., citing Sanyo Elec. v. Pinros & Gar Corp., 174 A.D.2d 452, 453 (1st Dept. 1991). [18] Id. [19] Id., citing Kenney v. Jacobs, 200 A.D.3d 419, 420 (1st Dept. 2021). [20] Id., citing Sanyo, 174 A.D.2d at 453. [21] Id. [22] Id.

By: Jeffrey M. Haber What happens when the beneficial owners of notes seek to enforce them even though the governing indenture designates someone else as the registered “Holder”? And can an issuer avoid liability for nonpayment based on an intervening foreign law when its contract contains no force majeure provision allocating the risk of such a change in law? Those were the principal questions before the Court in BFAM Asian Opportunities Master Fund, LP v. Glory Health Indus. Ltd., 2026 N.Y. Slip Op. 05997 (1st Dept. Oct. 15, 2026), a dispute arising from approximately $335 million in senior notes issued by the Chinese real estate developer Glory Health Industry Limited. Although the parties did not dispute that the notes were in default, they sharply disputed whether the beneficial owners had standing to sue and whether Chinese laws restricting Glory Health’s ability to make payments excused its performance. The Appellate Division, First Department held that the plaintiffs established standing by following the procedures governing their beneficial interests and obtaining authorization to sue through Euroclear. It also rejected defendants’ impossibility defense, reasoning that the indenture contained no force majeure clause addressing the risk that Chinese law might change in a manner conflicting with the parties’ contractual obligations. A force majeure clause generally allocates the risk that extraordinary events beyond the parties’ control will prevent performance under the contract and identifies the circumstances under which nonperformance may be excused. BFAM Asian Opportunities Master Fund, LP v. Glory Health Indus. Ltd. In February 2022, Glory Health Industry Limited, a Chinese real-estate developer, issued approximately $335 million in 14.25% senior notes (“Notes”) pursuant to an indenture dated February 23, 2022, which was later amended by a First Supplemental Indenture dated April 25, 2022 (“Indenture”). The Notes were issued through a single Global Note, were governed by New York law, and matured on August 23, 2024. Several Glory affiliates guaranteed Glory Health’s payment obligations under the Notes. The Global Note was registered in the name of a common depositary, or its nominee, for the accounts of Euroclear Bank SA/NV and Clearstream Banking S.A. Under the Indenture, the person in whose name a note was registered constituted its “Holder.” The Indenture separately addressed investors holding beneficial or book entry interests through the clearing system. Section 2.06 provided that, while the notes remained in global form, the Common Depositary or its nominee would be treated as the sole Holder and beneficial owners would not themselves be considered “Holders.” Instead, participants were required to rely on Euroclear’s or Clearstream’s procedures, and indirect participants were required to rely on the procedures of the participants through which they owned their interests, to transfer their interests or exercise rights belonging to Holders. Beginning in 2022, Glory failed to make payments required under the Notes. Those defaults included mandatory redemption payments and scheduled interest payments. The Indenture provided that, upon a qualifying event of default, the Trustee or Holders of at least 25% of the outstanding principal amount could accelerate the Notes. It also separately addressed enforcement of payment obligations following default. The plaintiffs acquired beneficial interests in the Notes in approximately February and March 2023 and ultimately held 26.54% of the outstanding Notes, representing approximately $88.8 million in principal. They held those interests through prime brokers participating in Euroclear rather than as registered Holders themselves. In connection with their interests, plaintiffs obtained statements of account, commonly referred to as STAC letters, from Euroclear through their respective prime brokers. The letters certified the Notes held in the prime brokers’ Euroclear accounts and identified the interests allocated to the respective plaintiffs. They also authorized the underlying beneficial owners, in accordance with Euroclear’s operating procedures, to maintain proceedings against issuers, guarantors, and other parties where Euroclear, its nominee, a depositary, or the depositary’s nominee was the registered owner of the securities. On March 23, 2023, following the payment defaults, certain beneficial owners sent Glory a notice purporting to accelerate the outstanding principal and accrued interest. Plaintiffs thereafter commenced suit seeking payment under the Notes and moved for summary judgment on their breach of contract claims. By the time the motion was decided, there was no dispute that the Notes had matured and remained unpaid. The dispute instead centered on whether plaintiffs, as beneficial rather than registered owners, had standing to enforce the Notes and whether defendants’ performance was excused by impossibility. On standing, plaintiffs relied principally on Euroclear’s operating procedures and the STAC letters. The operating procedures authorized Euroclear participants and the underlying beneficial owners to maintain proceedings against issuers and guarantors in which Euroclear, its nominee, a depositary, or its nominee was the registered owner. The parties also stipulated that the entities in the ownership structure, including the Common Depositary and its nominee, were governed by Euroclear’s procedures. Because plaintiffs obtained the STAC letters through their prime brokers, they maintained that they had followed the chain contemplated by Section 2.06 rather than attempted to exercise Holder rights independently. Defendants separately contended that their failure to pay was excused by impossibility arising from Chinese governmental restrictions imposed during the country’s real estate crisis. They submitted evidence that Chinese national and local authorities had adopted measures restricting developers’ use of proceeds from presold residential projects and requiring certain funds to be maintained in supervised accounts and used for construction-related purposes. Defendants maintained that these restrictions prevented Glory from transferring funds from its Chinese real estate projects to satisfy the offshore Notes. Thus, although the action arose from Glory’s failure to pay the Notes, the summary-judgment dispute did not principally concern whether amounts remained unpaid. Rather, it presented two threshold questions: whether the beneficial owners had obtained sufficient authority through the Euroclear structure to sue notwithstanding that they were not themselves registered Holders, and whether the Chinese regulatory restrictions excused defendants’ nonperformance under the doctrine of impossibility. The motion court granted plaintiffs’ motion. On appeal, the First Department unanimously affirmed. The Court held that “[p]laintiffs established prima facie that they had standing to commence th[e] action by submitting Euroclear’s policies and operating procedures, as well as statements of account (STAC letters) from Euroclear to the prime brokers authorizing plaintiffs to bring suit.”[1] The Court found that “[t]his evidence was sufficient to establish that plaintiffs had met any requirements imposed by § 2.06 of the indenture.”[2] The Court rejected defendants’ argument “that the STAC letters [were] not in and of themselves effective to authorize suit because they flatten[ed] the structure for exercising rights under the indenture, allowing plaintiffs to circumvent the proper procedure and receive authorization directly from Euroclear.”[3] The Court explained that “[a]ll relevant parties in the chain of custody of the notes under the indenture were subject to Euroclear’s procedures, and the evidence in the record show[ed] that plaintiffs worked through their prime broker participants to obtain the STAC letters from Euroclear.”[4] “Indeed,” said the Court, “defendants stipulated that all of the parties in the ownership structure [were] governed by the Euroclear policies and procedures.”[5] Therefore, concluded the Court, “[b]y including Euroclear’s policies and procedures, as well as the authorizations in the form of the STAC letters, plaintiffs showed that all parties, including indirect participant beneficial owners of the notes, were authorized to bring this action.”[6] In opposing plaintiffs’ motion, defendants argued that Glory Health’s performance was excused because of an intervening Chinese law making it impossible for the company to make payments due under the Indenture and Notes.[7] The Court held that “Supreme Court properly rejected this defense.”[8] The Court noted that under the terms of the Indenture, it “was expressly governed by New York law, and it did not contain a force majeure clause addressing the risk that Chinese laws would change so as to conflict with New York law.”[9] “Thus,” concluded the Court, “defendants failed to raise an issue of fact as to whether they bore the risk of conflicts between New York and Chinese law.”[10] Takeaway BFAM Asian Opportunities underscores the importance of the contractual framework governing both the enforcement of debt instruments and the allocation of risks that may affect performance. Although plaintiffs were beneficial owners rather than registered “Holders” of the Notes, that distinction did not prevent them from suing. The Indenture required beneficial owners to act through the applicable clearing system procedures, and plaintiffs did so by working through their prime brokers and obtaining Euroclear’s authorization to sue. Thus, the formal designation of another entity as the registered Holder was not dispositive where the beneficial owners followed the contractual mechanism for exercising Holder rights. BFAM Asian Opportunities also illustrates the application of the impossibility defense under New York law. Defendants argued that intervening Chinese laws restricting Glory Health’s ability to make payments excused its performance. But the Indenture expressly selected New York law and contained no force majeure clause allocating the risk that Chinese law might later change in a manner conflicting with Glory Health’s contractual obligations. Without such a provision, defendants failed to raise an issue of fact as to whether they bore the risk created by the conflict between New York and Chinese law. BFAM Asian Opportunities thus addresses both the ability of beneficial owners to enforce globally held securities and the consequences of failing to contractually allocate the risk that foreign law may later interfere with performance. __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice. Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. __________________________________ [1] Slip Op. at *2. [2] Id. [3] Id. [4] Id. [5] Id. [6] Id., citing Cortlandt St. Recovery Corp. v. TPG Capital Mgt., L.P., 76 Misc. 3d 1224(A), 2022 N.Y. Slip Op. 51044(U), *9 (Sup. Ct., N.Y. County 2022), mod. on other grounds, 249 A.D.3d 406 (1st Dept. 2026). [7] Id. [8] Id. [9] Id. [10] Id., citing Deutsche Bank Sec., Inc. v. Montana Bd. of Invs., 7 N.Y.3d 65, 73 (2006), cert. denied, 549 U.S. 1095 (2006); Kel Kim Corp. v. Central Mkts., 70 N.Y.2d 900, 902 (1987).

By Jeffrey M. Haber On January 6, 2017, the SEC announced that it awarded $5.5 million to a whistleblower who came forward with information that led to a successful SEC enforcement action. The whistleblower is the 38th relator to receive an award under the SEC whistleblower program. In total, since 2011, the SEC has paid approximately $142 million to whistleblowers who provided information resulting in the collection of monetary sanctions against violators of the securities laws. To date, the SEC has recovered $904 million from enforcement actions resulting from whistleblower tips. According to the Order Determining Whistleblower Award Claim, the relator came forward “while still employed with the company … and … provided critical information that helped end an on-going fraud that preyed predominantly on a more vulnerable investor community.” The Commission agreed to make the award notwithstanding the fact that the relator failed to comply with Rule 21F-9(d), which requires tips to be in writing “if the information was first submitted to the Commission during the interim period between the enactment of the whistleblower program—i.e., July 21, 2010, when the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) was signed into law—and the effective date of the Commission’s whistleblower rules.” The Commission found that, among other things, “the Commission’s staff was already actively working with the Claimant before the enactment of the Dodd-Frank Act, and, in such circumstances, … it would have been counter-productive and unreasonable to require that the Claimant revert to providing information to the Commission staff in writing.” The SEC declined to identify the whistleblower or the wrongdoers. By law, the SEC protects the confidentiality of whistleblowers and does not release information that might directly or indirectly reveal the whistleblower’s identity. Commenting on the award, Jane Norberg, Chief of the SEC’s Office of the Whistleblower, stated: “Whistleblowers play a key role in bringing wrongdoing to the SEC’s attention, and this whistleblower helped prevent further harm to a vulnerable investor community by boldly stepping forward while still employed at the company.” Under the program, whistleblowers are eligible for an award if they voluntarily provide the SEC with original information that leads to a successful enforcement action that exceeds $1 million. The award can range from 10 percent to 30 percent of the money collected. All payments come from an investor protection fund established by Congress that is financed through monetary sanctions paid to the SEC by securities law violators. No money is taken or withheld from harmed investors to pay whistleblower awards. Takeaway This Blog has repeatedly noted that the SEC’s whistleblower program is, by all accounts, a success. In Fiscal Year 2016 (ended September 30, 2016), the SEC awarded more than $57 million to whistleblowers under the program. As the SEC rings in the new year with this award, the SEC is clearly signaling that it wants whistleblowers to continue to come forward with original information regarding alleged violations of securities laws. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber What is the fate of the fiduciary rule under the Trump Administration? In May of last year, this Blog wrote about the Department of Labor’s fiduciary rule, which requires financial advisors to put their clients’ interests first when making investment recommendations for retirement accounts, such as 401(k)s and IRAs. The rule, designed to prevent conflicts of interest, has strong support from the Obama administration and investor advocates who argue that inappropriate recommendations cost retirement investors $17 billion a year. While legal challenges have been brought based on claims that the Labor Department failed to adhere to regulatory procedures when promulgating the rule (discussed here and here), two federal courts have already disagreed, while a consolidated case in Texas is still pending. In any event, as of now, the rule is effective and advisory firms must be in compliance by April 2017. However, the provision requiring financial advisors to acknowledge their role as a fiduciary in a contract with investors does not become effective until 2018. What Would It Take to Roll Back the Rule? At the same time, some observers believe the incoming Trump Administration could roll back the fiduciary rule. To do so, however, there are a number of regulatory hurdles to clear. The rule is actually under the purview of the DOL’s Employee Benefits Security Administration, which is headed by an assistant secretary. As of now, this slot has not been filled, so immediate action on the rule is not likely. Though, it is important to note that Trump’s nominee for secretary of labor, Andrew Puzder, is a vocal opponent of the regulation. Also, changing or replacing the rule means undoing what was a 6-year effort by the Labor Department. This would essentially require new rulemaking—a process that could take years, not months, according to some observers. In light of the fact that the compliance deadline is fast approaching, however, it is possible that this date will be delayed until incoming officials have the opportunity to evaluate the measure. Nonetheless, many financial firms have already started preparing for the new rule by devising new policies and procedures. Moreover, the Trump administration could seek to repeal the rule through congressional action. However, that option, while having the support of the Republican-controlled Congress, would have to overcome likely opposition from Democrats, especially in the Senate. Finally, the Trump administration could stop defending the regulation in the pending lawsuits. By doing so, the new administration would be conceding the cases to the rule’s opponents. Readers may recall, the Obama administration took this approach with the Defense of Marriage Act in 2011. The Takeaway Given the time and money already spent to meet the deadline, it may be in the best interest for these firms to proceed as the fate of the fiduciary rule is uncertain at best. In the meantime, investment advisors should seek the advice and counsel of an experienced securities attorney for developments regarding any changes to the DOL fiduciary rule. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber Business owners hate litigation. In fact, there are few things they hate more. Litigation damages relationships, tarnishes reputations, and interferes with business operations. Even small claims divert time, money and talent. So, how can corporations and small businesses avoid these costs and expenses? The answer: alternative dispute resolution, such as arbitration and mediation. Over the past few decades, it has become commonplace for corporations and small businesses to incorporate arbitration provisions into their agreements with customers and employees. While these clauses often seem to be merely procedural, they are not. They prevent consumers and employees from having their day in court before a judge or a jury. Over the past few decades, the courts have endorsed the use of arbitration as an alternative to litigation, reduced the ability of individuals to avoid arbitrating their disputes, and narrowed the possibility of obtaining judicial review. They have adopted pro-arbitration doctrines such that arbitration agreements are almost always upheld when challenged, even when individuals can show that an arbitration clause was buried in fine print or incorporated by reference to an obscure and inaccessible source. This Blog previously wrote about this issue here. But, as a New Jersey appellate court ruled last year, to be enforceable, an arbitration provision must not only be clear and unambiguous, but it must clearly state that the customer is waiving his/her right to bring a claim in a court of law before a judge or a jury. Defina v. Go Ahead and Jump 1, LLC d/b/a Sky Zone Indoor Trampoline Park, Docket No. A-1371-15T3 (N.J. Super. Ct. App. Div. July 12, 2016). The Facts and Motion Court Proceedings The defendant, Go Ahead & Jump 1, LLC, owned and operated an indoor trampoline facility in Pine Brook, N.J., known as the Sky Zone Indoor Trampoline Park (“SZITP”). Before using the facility, the defendant required all customers to sign an agreement entitled, “Participation Agreement, Release and Assumption of Risk” (the “Agreement”). Slip op. at 2. The Agreement contained a number of substantive provisions, including a release of liability for any injury to person or property caused by participation in the park, a choice of law and venue provision, a severability clause and an arbitration provision. The arbitration provision provided, in pertinent part, that “any disputes regarding th[is] agreement,” would be resolved “by binding arbitration before one arbitrator” rather than through trial. Importantly, the Agreement stated that by signing the document, the participant was “waiv[ing] any right … to a trial.” Id. at 2-4. On February 8, 2014, Michael Defina signed the Agreement electronically on the defendant’s website. He certified that he was the legal guardian of two participants: Alexander Defina, his nine-year-old son, and another child. Defina’s son was injured while participating in various activities in the facility, including “Ultimate Dodgeball.” Id. at 4. More than a year later, on June 18, 2015, the plaintiffs (Alexander and his parents as guardians ad litem) filed a complaint against SZITP, alleging various violations of the law related to Alexander’s injuries, including the failure to provide adequate warnings and instructions regarding the dodgeball activity; negligence in creating, advertising and promoting an ultra-hazardous and dangerous dodgeball game; and the failure to properly supervise, attend to, control or regulate the conduct of other invitees over whom the defendant had supervisory responsibility, thereby rendering the dodgeball game unsafe and ultra-hazardous for persons participating in that game. Id. at 5. Among other relief, the plaintiffs sought compensatory and punitive damages, interest, attorney’s fees, and costs of suit. Id. On September 2, 2015, the defendant filed a motion to compel arbitration and stay proceedings. Id. The plaintiffs opposed the defendant’s motion and filed a cross-motion to rescind the Agreement. Id. On October 23, 2015, the motion court granted the motion to compel arbitration and stayed the action. Id. at 5-6. The court found that the arbitration clause was enforceable. Id. at 6. The motion court denied the cross motion. The plaintiffs thereafter filed a motion for reconsideration. After hearing oral argument, the motion court denied the motion. Id. The court rejected, among other things, the “plaintiffs’ contention that the arbitration clause clearly and unambiguously placed the person signing it on notice that he was waiving the right to a trial and agreeing that any disputes would be determined by binding arbitration.” Id. at 7. The plaintiffs appealed. The Appellate Division’s Ruling On appeal, the plaintiffs argued, among other things, that the motion court erred by finding that the arbitration clause in the Agreement was enforceable. The Court agreed. In doing so, the Court found that the arbitration clause did not clearly and unambiguously “inform Michael Defina that he was giving up his right to bring [his] claims in court and have a jury resolve the dispute”: We are convinced that the arbitration clause at issue in this matter did not clearly and unambiguously inform plaintiff that he was giving up his right to bring claims arising out of the participation in activities at SZITP in a court of law and have a jury decide the case. The arbitration clause states that the person signing the agreement waives any right to a “trial” and agrees that any dispute shall be determined “by binding arbitration before one arbitrator to be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures.” Although the clause refers to a “trial”, there is no “clear and unambiguous statement that the person signing the Agreement is waiving [his] right to sue or go to court to secure relief.” Indeed, there is no reference in the clause to a court or a jury. The Agreement also does not explain how arbitration differs from a proceeding in a court of law. We conclude that the Agreement did not clearly and unambiguously inform Michael Defina that he was giving up his right to bring [his] claims in court and have a jury resolve the dispute. Accordingly, we conclude that the trial court erred by finding that arbitration clause in the Agreement is enforceable. We therefore reverse the order compelling arbitration and staying further trial court proceedings. Id. at 12 (internal quotations and citations omitted). Conclusion As the Defina court noted, there is a strong public policy “both at the state and federal levels favoring arbitration agreements.” Id. at 8. Notwithstanding, mandatory arbitration agreements have come under fire as of late. Consumer advocates, legislators, and judges have argued that such agreements unfairly deny people access to the courts, as well as exclude them from exercising their constitutional right to a jury. While not declaring arbitration agreements unenforceable or against public policy, the Defina court nevertheless took a stand to ensure that the party with no bargaining power (i.e., the customer or employee) understood the consequences of an otherwise clear and unambiguous arbitration agreement. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber Your client comes to you with a complaint that was recently served on him. Among other claims, the plaintiff contends that your client breached his agreement to sell widgets. After discussing the claims with your client, you decide to file an answer. Your analysis of the contract claim leads you to conclude that the contract is void because performance would require your client to violate certain labor laws. In addition to general denials, you assert several affirmative defenses, including the defense of illegality. New York’s Civil Practice Law & Rules (“CPLR”) § 3018(b) provides that a party must plead as an affirmative defense “all matters which if not pleaded would be likely to take the adverse party by surprise or would raise issues of fact not appearing on the face of a prior pleading.” CPLR 3018(b) lists the defenses commonly asserted, including “facts showing illegality either by statute or common law,” but makes it clear that the list is not exhaustive. What happens, however, when the defendant fails to plead an affirmative defense? As a general rule, the defense would be deemed waived. However, where the defendant raises the defense in motions (many affirmative defenses can be asserted as a basis for a motion under CPLR 3211), for example, the courts have ruled that the defense may be entertained because there is no surprise or prejudice by its assertion. That was the holding of the Appellate Division, First Department in American Stevedoring, Inc. v. Red Hook Container Terminal, LLC, 145 A.D.3d 570, 2016 NY Slip Op 08470 (1st Dep’t Dec. 15, 2016). The Facts Red Hook Container Terminal, LLC (“RHCT”) provided stevedoring services at a marine container terminal located in Brooklyn, New York (the “Brooklyn Terminal”). Prior to RHCT, American Stevedoring, Inc. (“ASI”) provided those services at the Brooklyn Terminal. During RHCT’s tenure, RHCT entered an equipment lease agreement with ASI (the “Lease”) for certain inland marine equipment, then valued by ASI at approximately $10 million (the “Equipment”). Most of the Equipment was located at the Brooklyn Terminal. Slip op. at 2. The Lease included provisions that were designed to protect ASI’s Equipment and to assure an orderly transfer of the Equipment from RHCT at the end of the lease period. The Lease was to terminate on March 31, 2012. After the expiration of the Lease, RHCT retained possession of the Equipment. Id. On March 27, 2012, a few days before the expiration of the Lease, ASI advised RHCT of the location to deliver the Equipment. RHCT objected to the location because delivery would block city streets for a full day and was not within the 20-mile limit provided in the Lease. On April 13, 2012, ASI provided RHCT with another location for delivery of the Equipment. Five days later, RHCT informed ASI that the second location was not acceptable, primarily because the owner of the site did not give RHCT permission to store the Equipment at that location. In response, ASI commenced the action. The Proceedings Before the Motion Court ASI asserted many claims against RHCT, including one for breach of contract. ASI sought the return of the Equipment and recovery of compensatory and punitive damages. RHCT counterclaimed for, among other things, its post-Lease storage fees for the Equipment. Thereafter, the parties moved for partial summary judgment. ASI based its motion on RHCT’s failure to return the Equipment as provided for in the Lease. RHCT sought dismissal of the breach of contract claim, among others, on the grounds that it was not obligated to deliver the Equipment because the delivery sites selected by ASI were unsuitable and/or did not satisfy the requirements of the Lease. RHCT claimed that by delivering the Equipment to the locations identified by ASI, it would have required RHCT to trespass or otherwise violate the law. The Motion Court granted ASI’s motion with regard to the breach of contract claim. In granting partial summary judgment, the court rejected RHCT’s illegality argument because it was not pleaded as an affirmative defense. ASI argues that an illegality defense is an affirmative defense which must be pleaded in a responsive pleading or addressed in a motion to dismiss lest it be waived. The defense was not pleaded. . . . While RHCT has referred to the issue of having the permission of the site owner during the pendency of this case, for example, by demanding that ASI provide evidence of permission to use the site when the Third Location was specified, the issue appears to have been touched on only in the context of questioning whether RHCT would be able to access the site and complete delivery. RHCT has not shown that it previously raised a concern about trespassing or illegality. Rather, it expressed a concern that it would be denied access. Accordingly, … RHCT has waived the illegality defense. Slip op. at 8 (citation omitted). The First Department’s Ruling In a unanimous ruling, the First Department reversed the motion court’s holding that Red Hook waived its affirmative defense of illegality. In so doing, the Court noted that “[o]n prior motions defendant had raised the argument that it should not be forced to commit trespass,” which, the Court observed, the “plaintiff had responded to.” Consequently, “[b]ecause plaintiff … was not surprised or prejudiced by its assertion, the defense may be entertained.” The Takeaway CPLR 3018 is clear: an “affirmative defense” must be pleaded to be preserved. If it is not so pleaded, it is waived. Therefore, the failure to plead an affirmative defense could have significant consequences. But, as American Stevedoring teaches, such consequences may not always follow when the defendant demonstrates that the plaintiff had a full and fair opportunity to respond to, and oppose, the defense being asserted – that is, the plaintiff suffers no prejudice or surprise by the assertion of the defense. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber From time to time, this Blog has written about lawsuits involving corporations, including those brought as shareholder derivative actions (here). As this Blog explained, a derivative action is a lawsuit brought by a shareholder of a company, on behalf, and for the benefit, of the company to enforce or defend a legal right or claim. Derivative actions seek the recovery of damages and/or equitable relief arising from unlawful or improper conduct engaged in by officers, directors, or other persons in control of the company. The power of the derivative action is immeasurable. It allows a shareholder to compel changes in a company that otherwise might not happen, such as corporate governance reforms that strengthen and protect shareholder value, removal of officers or directors whose misconduct harmed the corporation, and monetary payments in the form of damages and/or disgorgement (repayment) of ill-gotten gains. Although a shareholder has the derivative action in his/her arsenal, he/she cannot immediately run to court to redress an alleged wrongdoing. The shareholder must first formally demand the company’s board of directors act in the manner that the shareholder requires, such as suing the wrongdoers. The “demand” requirement, however, can be waived if the suing shareholder can show that such a demand would have been futile. If the shareholder makes a demand on the board, then the board must be allowed time to determine the proper course of action to pursue. To assist it, the board will often seek outside counsel and/or create a committee of disinterested directors who were not involved in the transaction about which the shareholder is complaining. If the board and/or committee recommend legal action, then the board will likely file an action against the wrongdoers who have pursued, or are pursuing, the illegal or improper course of conduct. If, however, the board and/or the committee determine that legal action is not appropriate, then the demanding shareholder may commence an action for the benefit of the company. A derivative action typically involves claims against an officer or director of the corporation, but can also include claims against others, such as outside accountants or advisors. Misconduct that can be addressed by a derivative action can include, among others, breach of the duties of loyalty, due care, and/or candor; fraud or other unlawful activity; self-dealing by insiders; conflict of interest; waste of corporate assets; improprieties related to executive compensation (including share ownership); and decisions that expose the company to harm or risk (e.g., violations of the law). KNET, Inc. v. Ruocco: Consideration for the Issuance of Company Stock and the Board’s Business Judgment On December 28, 2016, in KNET, Inc. v. Ruocco, 145 A.D.3d 989, 2016 NY Slip Op. 08853 (2d Dep’t 2016), the Appellate Division, Second Department, had the opportunity to consider a derivative action involving, among other things, the breach of fiduciary duty in connection with the issuance of stock to corporate insiders. KNET arose from conduct that, according to the plaintiffs, caused losses, near ruin and harm to the corporate plaintiff, Interceptor Ignition Interlocks, Inc. (“Interceptor”). By their complaint, the plaintiffs, shareholders of Interceptor, sought the recovery of damages caused by one or more of the defendants’ breach of fiduciary duties, corporate waste, mismanagement, self-dealing, and engagement in conduct that contravenes the by-laws of Interceptor and the rights of its shareholders to participate in the management of its corporate business. The Facts Interceptor was originally formed as Safe Start, Inc. in 2000 by the defendant, John Ruocco (“Ruocco”). Ruocco had developed and patented a proprietary ignition interlock system for use in automobiles of drivers who had been convicted of driving under the influence of alcohol. Ruocco incorporated Safe Start to market and sell the device. In February 2007, Ruocco changed the name of the company to Interceptor, and amended the certificate of incorporation to provide that Ruocco was the owner of 500,000 of Interceptor’s 10,000,000 shares. At the time, the par value of Interceptor’s shares was $.001 per share. In May 2007, Interceptor issued 1,500,000 shares of company stock to Rosemarie Sylvester (“Sylvester”), Ruocco’s sister and a defendant in the action, as well as to himself. Three years later, in May 2010, Ruocco and Sylvester were each issued 2,500,000 shares of Interceptor stock, for a total of 4,000,000 shares each. Interceptor also issued shares to outside investors, pursuant to subscription agreements, at $2 per share. In June 2010, Interceptor entered into a business development agreement and a consulting agreement with the plaintiff, KNET, Inc. (“KNET”), a company owned by the plaintiff Gary Melius (“Melius”). These agreements allowed KNET to earn shares of Interceptor at par value if KNET performed certain services for Interceptor. Pursuant to the agreements, KNET would earn 2,803,214 shares of Interceptor stock upon the enactment of a state or federal law requiring the use of Interceptor’s device, 934,405 shares for introducing Interceptor to one or more public officials and one or more automobile insurers, 934,405 shares upon Interceptor being certified in at least one state where it was not yet certified, and 3,176,976 shares upon securing financing for Interceptor “in the minimum amount” set by Interceptor. In November 2010, the financing provision of the consulting agreement was amended, in pertinent part, to provide that if Interceptor received a loan of $1,500,000 from Flushing Savings Bank, KNET would receive 5% of the outstanding shares of Interceptor. The Motion Court Proceedings In 2013, Melius, as principal of KNET, and Thomas Grogan, the owner of 57,500 shares of Interceptor stock, filed a derivative complaint against Ruocco and Sylvester, alleging, among other things, that Interceptor issued shares to Ruocco and his family members without adequate consideration, resulting in at least $10,000,000 in damages. Following proceedings involving a request for injunctive relief, the plaintiffs moved for summary judgment on their claim to invalidate the shares of Interceptor stock that Ruocco and Sylvester had issued years before for allegedly little or no consideration, to enjoin them from voting those shares, and to determine the number of shares of Interceptor held by KNET. By order dated December 24, 2013, the Supreme Court granted the plaintiffs’ motion. In doing so, among other things, the court invalidated all but 500,000 shares of Interceptor stock issued to Ruocco and all of the shares of Interceptor stock issued to Sylvester “based upon defendants’ undisputed failure to provide sufficient consideration for their shares.” Slip op. at 2. Under New York law, “directors of a corporation cannot issue or dispose of the corporate stock to themselves for an inadequate consideration.” Id. (citation omitted). The reason being, directors “owe a fiduciary responsibility to the shareholders in general and to individual shareholders in particular to treat all shareholders fairly and evenly.” Id. (internal quotation and citation omitted). Therefore, a director breaches that duty when he/she issues new stock for no or inadequate consideration. Id. (citations omitted). In pertinent part, the court found: The record demonstrates that defendants’ shares were improperly issued and issued without sufficient consideration. Once Ruocco … accepted $50,000 for 25,000 shares … he could no longer treat Interceptor as his own personal property and thereafter issue to himself or his sister shares for either no or minimal consideration. * * * Here, 5 million shares were issued in 2010 for no consideration and reliance cannot be made to the claimed October 31, 2006 transfer of funds to which no nexus is shown of an intended purchase of stock. In any event, the inadequate price is demonstrated by the sale of stock for two dollars a share, when defendants claim that on the very next day, they acquired shares for a pittance. * * * No legitimate business purpose was offered supporting the issuance of stock to the defendants at the price claimed, nor was the claim made that the price they paid a fair one. Id. at 13–15 (internal quotations and citations omitted). The Second Department Ruling Citing to New York’s Business Corporation Law and the business judgment rule, the Second Department reversed the Supreme Court’s grant of summary judgment, finding issues of fact for the trier of fact to resolve. With respect to the contention that Ruocco and Sylvester were improperly issued shares in Interceptor, consideration for shares may consist of “money or other property, tangible or intangible; labor or services actually received by or performed for the corporation for its benefit or in its formation . . . In the absence of fraud in the transaction, the judgment of the board or shareholders, as the case may be, as to the value of the consideration received for shares shall be conclusive” (Business Corporation Law § 504 [a]). Here, issues of fact exist as to whether Ruocco and Sylvester were improperly issued shares in Interceptor since the parties’ submissions indicate that Ruocco was the founder of the corporation and performed services in the formation of Interceptor (see Matter of Heisler v Gingras, 90 NY2d 682, 687 [1997]), that Ruocco and Sylvester invested in the company, and that Sylvester’s shares may have been a gift from Ruocco. Slip op. at 3. The Takeaway KNET teaches two important lessons. First, as set forth in New York statutory law, consideration for the issuance of shares comes in all forms. Business Corporation Law § 504. Money is not the only form of consideration. Second, the business judgment of the board of directors cannot be easily disturbed absent fraud, waste, a breach of fiduciary duty or bad faith. The “business judgment rule” presumes that the directors of a corporation will act in the corporation’s best interests. Thus, if a plaintiff sues a company’s officers or directors for breaching a fiduciary duty, he/she will have to show that the officers or directors were not acting in the best interests of the company and that they failed to meet their duties of loyalty, care, or good faith. As the plaintiffs in KNET learned, if they are to succeed, they will have to prove that Ruocco caused Interceptor to issue company stock for little or no value in violation of Business Corporation Law § 504 – that is, he breached his fiduciary duties to the company and its shareholders. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber On December 22, 2016, the Department of Justice (“DOJ”) announced that Teva Pharmaceutical Industries Ltd. (“Teva”), the world’s largest manufacturer of generic pharmaceutical products, and its wholly-owned Russian subsidiary, Teva LLC (“Teva Russia”), agreed to resolve criminal charges and to pay a criminal penalty of more than $283 million for violating the Foreign Corrupt Practices Act (“FCPA”). The charges relate to various schemes involving the bribery of government officials in Russia, Ukraine and Mexico. The Securities and Exchange Commission (“SEC” or “Commission”) also announced on that date, the filing of a cease and desist order against Teva, whereby the company agreed to pay approximately $236 million in disgorgement to the SEC, including prejudgment interest. In total, Teva agreed to pay nearly $520 million in criminal and regulatory penalties. The announcements came one day after the DOJ and SEC, together with Brazilian and Swiss authorities, reached a settlement of $3.6 billion with Odebrecht SA, the engineering conglomerate, and its affiliate Braskem SA, in connection with violations of the FCPA related to the Petrobras corruption scandal. The Russian Connection According to the DOJ, Teva and Teva Russia admitted that its executives and employees paid bribes to a high-ranking Russian government official for the purpose of increasing sales of Teva’s multiple sclerosis drug, Copaxone, in annual drug purchase auctions held by the Russian Ministry of Health. Between 2010 and at least 2012, pursuant to an agreement with a repackaging and distribution company owned by the Russian government official, Teva earned more than $200 million in profits on Copaxone sales to the Russian government. Moreover, the Russian official earned approximately $65 million in corrupt profits through inflated profit margins granted to the official’s company. The relationship ultimately ended in 2013, several months after the official resigned his position. The Ukrainian Connection Teva admitted to paying bribes to a senior government official within the Ukrainian Ministry of Health to influence the Ukrainian government’s approval of Teva drug registrations, which were necessary for the company to market and sell its products in the country. Between 2001 and 2011, Teva engaged the official as the company’s “registration consultant,” paid him a monthly fee and provided him with travel and other things of value totaling approximately $200,000. In exchange, the official used his official position and influence within the Ukrainian government to influence the registration in Ukraine of Teva pharmaceutical products, including Copaxone and insulins. The Mexican Connection Teva admitted that it failed to implement an adequate system of internal accounting controls and failed to enforce the controls it had in place at its Mexican subsidiary, which allowed bribes to be paid by the subsidiary to doctors employed by the Mexican government. Teva admitted that its Mexican subsidiary had been bribing these doctors to prescribe Copaxone since at least 2005. In total, Teva Mexico illegally paid approximately $16.8 million to doctors employed at government hospitals. Teva executives in Israel responsible for the development of the company’s anti-corruption compliance program in 2009 had been aware of the bribes paid to government doctors in Mexico. In November 2011, a Teva employee with responsibility for financial controls over Teva Mexico even identified deficiencies in internal accounting controls in Teva’s Latin American operations, writing a memorandum that said the company could not guarantee that it was not “executing payments that would violate FCPA anti-bribery provisions” or “properly accounting for any such payments under the books and records provision of the FCPA.” Despite their knowledge of inadequate controls, Teva executives approved policies and procedures that they knew were not sufficient to meet the risks posed by Teva’s business and were not adequate to prevent or detect payments to foreign officials. Teva also admitted that its executives put in place managers to oversee the compliance function who were unable or unwilling to enforce the anti-corruption policies that had been put in place. The DOJ and SEC Settlements Teva entered into a deferred prosecution agreement (“DPA”) in connection with a criminal information, charging the company with one count of conspiracy to violate the anti-bribery provisions of the FCPA and one count of failing to implement adequate internal controls. Pursuant to the DPA, Teva will pay a criminal penalty of $283,177,348. Teva also agreed to continue to cooperate with the DOJ’s investigation, enhance its compliance program, implement rigorous internal controls and retain an independent corporate compliance monitor for a term of three years. Teva Russia agreed to plead guilty to a one-count criminal information, charging the company with conspiring to violate the anti-bribery provisions of the FCPA. The plea agreement is subject to court approval. The DOJ said that Teva had not self-reported the violations and so was not eligible for a more significant discount or a declination of prosecution, but that the company had received a 20 percent discount off the sentencing guidelines for cooperating with the government’s investigation and engaging in remediation. Although Teva cooperated with the investigation, it nevertheless did not receive full credit for that cooperation because of “vastly overbroad assertions of attorney-client privilege and not producing documents on a timely basis.” In the SEC action, Teva agreed to pay more than $236 million in disgorgement and interest to the Commission. The criminal cases are United States v. Teva Pharmaceutical Industries Ltd., case number 1:16-cr-20968, and United States v. Teva LLC (Russia), case number 1:16-cr-20967, and the civil case is Securities and Exchange Commission v. Teva Pharmaceutical Industries Ltd., case number 1:16-cv-25298, all in the U.S. District Court for the Southern District of Florida. The Takeaway Andrew Ceresney, the former Director of the SEC’s Enforcement Division, once suggested that FCPA violations would become an “increasingly fertile ground” for whistleblowers under the SEC Whistleblower Program. Although it appears that the Teva settlements did not result from the SEC Whistleblower Program or the False Claims Act, publicly available documents show the presence of internal whistleblowing. As noted in the SEC complaint, “On or about February 23, 2007, an anonymous letter was delivered to a Teva internal auditor stating, among other things, that Teva Mexico was authorizing illicit payments to government officials as an incentive to increase sales.” Teva even initiated an internal investigation in response to the charges made in the letter, and terminated 11 Teva Mexico employees for their role in the alleged wrongdoing. Unfortunately, Teva’s internal accounting controls were still not sufficient to meet the risks posed by Teva’s business in Mexico. The internal whistleblowing that occurred in Teva is consistent with recent statistics showing that employees who discover misconduct first report it internally. For example, according to the SEC in its latest annual report to Congress, to date almost 65% of award recipients were company insiders, approximately 80% of whom raised concerns internally to supervisors or compliance personnel, or understood these personnel were aware of the violations, before reporting their concerns to the SEC. In 2015, only 50% of award recipients were company insiders. These statistics indicate that the majority of employees who learn of violations of the law first report the misconduct internally – action that is encouraged by the SEC. In fact, the SEC has implemented several rules under the Whistleblower Program that are intended to encourage internal reporting of misconduct through company ethics and compliance programs and procedures. For example, a person who reports misconduct internally can receive whistleblower status under the law, so long as the person reports the same information to the SEC within 120 days. This means that the whistleblower will not lose his/her place vis-à-vis a whistleblower award if someone else reports the same information to the SEC before he/she does so. a person who reports misconduct internally can receive credit for the findings made by the company in response to the whistleblower’s report. Thus, where a company conducts an investigation and discloses the results of the investigation to the SEC, the whistleblower receives credit for triggering the investigation and reporting to the Commission. a person who reports (or fails to report) misconduct internally is a factor considered by the SEC in determining how much to award the whistleblower. Under the SEC Whistleblower Program, a whistleblower, whose information led to a successful enforcement action, can receive between 10% and 30% of the amount recovered by the SEC. Notably, the courts are split on whether employees who first report misconduct internally are entitled to the law’s protections against retaliation. Not surprisingly, the SEC has advocated that those protections should extend to internal whistleblowers. Whether the courts will ultimately rule in favor of the whistleblower remains to be seen. However, one thing is certain, the SEC Whistleblower Program is designed to encourage whistleblowers to first report misconduct internally. To learn more about the SEC Whistleblower Program, visit the SEC Whistleblower pages of this website. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber What could this legislation mean for New York businesses? New York Attorney General Eric T. Schneiderman recently introduced legislation intended to reduce the use of non-compete agreements in the workplace. The bill is designed to protect the rights of workers to find better employment opportunities, particularly for low-wage earners who have been hindered in their ability to move to new jobs because of non-compete agreements. Schneiderman’s bill includes: A ban on all non-compete agreements for low-wage workers; A requirement that all non-compete agreements be accompanied by financial incentives; and A damages clause for employees who are damaged by unlawful non-compete agreements. While proponents of the bill, like New York State Senator Diane Savino, believe that requiring low-wage workers to sign a non-compete agreement “goes against the principles of the labor movement, the free market economy and good government policy,” business owners argue that non-compete agreements are critical to business models and retaining quality employees. When these two opposing ideologies clash in the business world, commercial litigation can ensue. What Could This Bill Mean for Business? If the Schneiderman bill is adopted, businesses will need to review their policies and agreements pertaining to non-compete agreements. In fact, it may be a good idea for businesses to review their agreements well in advance, to make sure that their non-compete agreements conform to current statutory requirements and case law. Some things to look out for: Is the non-compete agreement too broad? In order for a non-compete agreement to be valid under New York law, it must be reasonable in terms of time, activities and geographic scope. This means that the agreement cannot restrict employee activities outside of business activities and market reach. Additionally, the agreement should not restrict activities longer than one year post-employment. Does the non-compete cover a legitimate business interest? Non-compete agreements are valid under New York law only if they protect things like trade secrets, customer lists or some other legitimate business interest. Businesses should review their non-compete agreements to ensure that they cover employees who have access to these types of information. Does the non-compete apply if the employee is terminated without cause? Enforcing a non-compete agreement when an employee is terminated without cause could land the business in hot water if the non-compete is unreasonable. A court may in fact rule that the entire agreement is completely unenforceable. Under the proposed scheme, employees may be able to seek damages if they are successful in overcoming the restrictions in a non-compete agreement in court, assuming the employee has actually been damaged. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber Can I receive a financial award for blowing the whistle on my company? A Texas federal jury has found the entities formerly known as Allied Home Mortgage Capital Corporation (“Allied Capital”) and Allied Home Mortgage Corporation (“Allied Corporation” and together with Allied Capital, “Allied”) and CEO Jim Hodge liable for violating the False Claims Act (“FCA”) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) in connection with more than a decade of fraudulent misconduct related to Allied’s participation in the Federal Housing Administration (“FHA”) mortgage insurance program. The jury determined that Allied and Hodge violated the FCA by falsely representing that FHA mortgage loans were originated from HUD-approved Allied Capital branches and the loans complied with the program’s requirements. FHA mortgage insurance is designed to make home ownership possible and more widely available by protecting lenders against mortgage defaults. To participate in the program, HUD requires lenders to have licensed offices. However, Allied Capital, with Hodge’s knowledge and approval, operated more than one hundred so-called shadow branches (or net branches) that were opened by independent parties at their own expense with no risk to the lender. Allied Capital then originated mortgage loans using the ID number of approved branches in an effort to circumvent the HUD licensing requirements. In addition, the loans were written by Allied Corporation with little or false underlying documentation in violation of HUD underwriting requirements. For each FHA-insured mortgage loan, Allied Corporation was required to certify to HUD that the loan was underwritten according to HUD’s guidelines. Those guidelines ensure that FHA-insured loans are made only to borrowers who can repay them, thereby seeking to avoid losses to HUD’s FHA insurance fund and foreclosures on borrowers’ homes. Allied Corporation, however, recklessly underwrote and certified at least 1,192 loans for FHA insurance that were ineligible under HUD’s guidelines. This fraudulent misconduct resulted in losses to HUD of $85,612,643 when those loans defaulted. Allied Capital was one of the largest FHA lenders before the 2008 financial crisis and, as the housing market collapsed, had one of the highest default rates in the country. The scam was exposed when a whistleblower, an Allied Capital employee who managed several branches, filed a qui tam action. In November 2011, the government intervened by filing a complaint-in-intervention. In sum, the jury found that Allied Capital violated the FCA by representing the loans were written with due diligence in accordance with HUD’s underwriting guidelines and were eligible for FHA insurance. The United States was awarded a total of $92,982,775 in damages: $85,612,643 against Allied Capital and Allied Corporation and $7,370,132 against Hodge. There may be additional fines assessed under the FCA and FIRREA for the violations. In particular, the FCA provides for treble damages, meaning the government could recover as much as $280 million. “For years, Jim Hodge and Allied lied to HUD in order to fraudulently reap profits from the FHA mortgage insurance program,” said Manhattan U.S. Attorney Preet Bharara. “This case represents yet another recovery by the United States – this time after a trial – for fraud perpetrated against HUD by participants in the Direct Endorsement Lender program.” The Takeaway Mortgage fraud helped trigger the financial crisis. As we know, the crisis had a devastating impact on the financial system. Thanks to the help of whistleblowers, such as in this case, the government has been able to recover monies that were fraudulently taken from programs that have cost taxpayers tens of millions of dollars. Indeed, the amounts recovered here are substantial. There have been only two FCA actions against a lender related to the mortgage crisis that have gone to trial and verdict: this case and the Hustle – Bank of America case. The other cases have been settled; several of them recovered some of the largest amounts in U.S. history. As HUD Inspector General David A. Montoya said about the jury verdict and award: “This should serve as a notice to all those determined to engage in illegal schemes such as these that they are not beyond the reach of the federal law enforcement community.” If you have knowledge of a violation of the False Claims Act, an experienced attorney can help you explore your legal options for compensation. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber We live in a technologically advanced world. Our phones are smart, our tablets are mini-computers, and our laptops/notebooks are more powerful than ever. We can interact with each other through email, text messaging and other forms of electronic communications. Gone, for the most part, are the more formal, traditional ways of communicating with each other, e.g., letters and faxes. As the modern ways of communicating have become the norm, many business executives and owners are often surprised to learn that the exchange of emails and text messages can constitute a binding contract. But why is this so? In Stonehill Capital Management, LLC v. Bank of the West, 28 N.Y.3d 439, 2016 NY Slip Op. 08481 (N.Y. Dec. 20, 2016), the New York Court of Appeals (New York’s highest court) answered this question by explaining that such communications will result in an enforceable agreement when the “totality” of “the parties’ conduct and the ‘objective manifestations’ of their intent” demonstrate the presence of a contract – that is, there is (1) an offer, (2) that is accepted, (3) for which there is the exchange of consideration (i.e., the payment or other benefit to one party or a detriment to another party), and (4) an agreement on material terms. This holistic approach means that where these elements are satisfied through informal means, there will be an enforceable contract, even if there is language indicating that the agreement is subject to the execution of definitive documentation. Stonehill Capital Management, LLC, et al. v. Bank of the West The Facts Stonehill involved an auction to sell a collection of loans. The auction was conducted by Mission Capital Advisors LLC (“Mission”) on behalf of Bank of the West (the “Bank” or “BOTW”). In connection with the auction, potential bidders, such as Stonehill Capital Management LLC and its affiliated funds (“Stonehill”), were provided an offering memorandum that set out the specific terms of the auction, including a provision stating that final bids would be “non-contingent offers (the acceptance of which by seller will require immediate execution of pre-negotiated Asset Sale Agreement(s) by Prospective Bidder accompanied by a 10% non-refundable wire funds deposit)” and that “the seller reserves the right, at their sole and absolute discretion, to withdraw any or all of the assets from the loan sale at any time.” On April 20, 2012, Mission informed Stonehill by telephone that BOTW accepted Stonehill’s bid at auction. Mission followed up with an email on April 27, 2012, confirming that, “subject to the mutual execution of an acceptable Loan Sale Agreement,” BOTW accepted Stonehill’s offer to purchase the loans. The email contained the material terms of the agreement, including a description of the asset for sale, the purchase price, the date of closing, and the manner of payment. Thereafter, BOTW’s counsel initiated a series of email exchanges with Stonehill to move the deal to conclusion. Stonehill, for its part, sought and obtained approval of the credit agreement transfer forms to complete and record the transfer of the loans to it. Before executing the final sale agreement, BOTW learned that Stonehill was providing financing to the underlying borrower, the proceeds of which would be used to pay off the loans at par, plus accrued interest. BOTW stood to realize a greater recovery if it kept the loans on its books than it would if it sold the loans to Stonehill. Consequently, BOTW refused to sign the documentation. When Stonehill cried foul, BOTW argued that there was no binding agreement because the acceptance of Stonehill’s bid was expressly “[s]ubject to the mutual execution of an acceptable Loan Sale Agreement” and the parties failed to execute such definitive documentation. The Proceedings in the Supreme Court and Appellate Division Stonehill filed suit against BOTW and Mission, alleging breach of contract and breach of the implied covenant of good faith and fair dealing, and seeking indemnification. In its amended complaint, Stonehill added a cause of action for unjust enrichment and demanded $1.5 million in damages. Thereafter, Stonehill moved for summary judgment, and BOTW moved to dismiss and cross moved for summary judgment. The Supreme Court denied BOTW’s motion to dismiss and cross motion for summary judgment, and granted Stonehill’s motion for summary judgment on the breach of contract cause of action. The court held that because the purchase and sale agreement was pre-negotiated, BOTW’s acceptance of Stonehill’s bid created a binding contract. The court explained that when the transaction’s material terms are otherwise reasonably certain, making that agreement “subject to” definitive documentation does not preclude the finding of an enforceable contract. On appeal, the First Department reversed, holding that Stonehill had failed to establish a valid acceptance on the contract issue. Stonehill Capital Mgmt., LLC v. Bank of the W., 127 A.D.3d 429, 2015 NY Slip Op. 02900 (1st Dep’t Apr. 7, 2015). The court found that Stonehill failed to establish that “the parties intended to be mutually bound by an agreement,” because the conditions comprising a valid acceptance were not fulfilled, e.g., the bank remained silent when presented with changes proposed by Stonehill, although it agreed to most of the material terms, it did not fulfill the condition requiring a written agreement and tender of a deposit equal to 10% of the purchase price. Slip op. at 1. Thus, concluded the court, even if all the material terms were agreed upon, Stonehill failed to establish that “acceptance was clear, unambiguous and unequivocal so as to render such terms enforceable.” Id. at 2 (internal quotation and citation omitted). Not surprisingly, Stonehill appealed. The Court of Appeals Decision The Court framed the issue to be decided as: whether there was “a binding agreement between the parties, which damaged Stonehill.” Slip op. at 3. The Court found that there was such an agreement. Id. at 5. The Court concluded that “based on the totality of the parties’ actions and communications, … they agreed to an enforceable contract, with express material terms and post-formation requirements.” Id. at 4. The totality of the parties’ conduct and the “objective manifestations” of their intent is evidenced by BOTW’s inclusion of pre-negotiated auction terms in the Offering Memorandum, BOTW’s acceptance of Stonehill’s bid in correspondence that communicated the terms of the purchase and the date and instructions for the closing, the email exchanges between BOTW’s counsel and Stonehill which indicated the sale was moving ahead and included references to documents necessary for closing the transaction, and BOTW’s utter failure to identify or explain any objections to the LSTA form prior to the May 18th correspondence announcing its withdrawal from the sale. This established the parties’ intent to enter a binding agreement in which BOTW would sell the Goett Loan to Stonehill at the accepted final price. Id. Having found that there was a binding offer and acceptance, the Court rejected BOTW’s argument that an agreement was not formed because the transaction was “subject to” the “mutual execution of an acceptable” agreement and “a 10% deposit” – terms that, according to BOTW, “were never fulfilled.” Id. In doing so, the Court held: Certainly, when a party gives forthright, reasonable signals that it means to be bound only by a written agreement, courts should not frustrate that intent. Such a forthright, reasonable signal is not obvious from the mere inclusion in an auction bid form of such formulaic language that the parties are “subject to” some future act or event. Less ambiguous and more certain language is necessary to remove any doubt of the parties’ intent not to be bound absent a writing . . . . We disagree with BOTW that the “subject to” language in the April 27th email clearly expresses an intent not to be bound to the sale of the Goett Loan. This email stated that closure of the transaction required execution of a signed document and Stonehill’s tender of the 10% deposit. That, however, is not the same as a clear expression that the parties were not bound to consummate the sale and that BOTW could withdraw at any time, for any reason. Nor did BOTW make known its desire for an unrestricted exit from the deal before accepting Stonehill’s bid . . . . This was never made explicit before the bid was accepted either. There is a difference between conditions precedent to performance and those prefatory to the formation of a binding agreement . . . . ‘Most conditions precedent describe acts or events which must occur before a party is obliged to perform a promise made pursuant to an existing contract, a situation to be distinguished conceptually from a condition precedent to the formation or existence of the contract itself.’ Here, the signed writing and deposit were post-agreement requirements necessary for the consummation of the transfer, as established by the continued exchange of documents necessary to the asset transfer. Id. at 4-5 (citations omitted). “To adopt BOTW’s argument,” therefore, “would mean that the auction was neither final nor binding—in direct contravention of the auction sale terms and the usual manner in which reserve auctions proceed.” Id. at 5. Indeed, “[t]he fact that the parties anticipate and identify future events necessary to close the sale is not the legal equivalent of an intent to delay formation of a binding contract absent the passage of those events.” Id. Consequently, the Court reversed the First Department’s order, and reinstated Stonehill’s breach of contract claim against BOTW. The Takeaway While Stonehill is not the first decision in New York to recognize the formation of a contract through less traditional means, it does reinforce the concept that the trial courts should look at the “totality of the parties’ actions and communications” in determining whether there is an enforceable agreement. This is especially important when the parties include “subject to” language in their communications. As the Court noted, when the terms of an agreement are set, “subject to” language is merely a “post-agreement requirement[] the parties [were] obliged to perform pursuant to an existing agreement.” Slip op. at 5. It is only where the parties’ communications require specific terms to be agreed upon at a later date does the “subject to” language negate the finding of an enforceable agreement. Stonehill also makes clear that not all disclaimers will negate the formation of a contract. In a footnote, the Court rejected BOTW’s claimed “right to withdraw” assets, stating that, “read in context, the disclaimer concerns BOTW’s ability to withdraw assets from the ‘sale,’ and not whether it may withdraw an acceptance of an offer.” Id. at n.4. Thus, parties should take care to avoid relying on “subject to” language and disclaimers to escape the formation of a contract when their actions and communications demonstrate otherwise. As Stonehill teaches, language in emails and other electronic media such as: “for discussion purposes only and cannot be used to create a binding contract”; “this email is not an acceptable offer and doesn’t evidence any intention by the sender to enter into a contract”; and “this email is nonbinding unless and until a more formal and definitive written contract between the parties is signed” may not save the day if the parties’ actions and communications manifest a different story. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber What anti-money laundering compliance programs should financial firms have in place? The Financial Industry Regulatory Authority (“FINRA”) recently announced that it had fined Credit Suisse Securities (USA) LLC, a former unit of Credit Suisse AG, $16.5 million for anti-money laundering (“AML”), supervision, and other violations. The self-regulatory watchdog found that the firm’s monitoring program for detecting suspicious activity was deficient in two material ways. First, Credit Suisse primarily relied on its registered representatives to identify and escalate potentially suspicious trading, including in microcap stock transactions. That reliance, however, was misplaced as representatives did not always escalate and investigate high-risk activity, as required. Second, the firm failed to properly implement its automated surveillance system, which was set up to detect, and monitor for, suspicious money transfers. FINRA found that a significant portion of the data feeds into the system were missing information or had other issues that compromised the effectiveness of the system. Credit Suisse also failed to use certain scenarios designed by the system to identify common suspicious patterns and activities, and failed to adequately investigate activity identified by the scenarios that the firm did use. “It’s critical that firms have effective AML systems in place so that they can comply with their obligations to review and report suspicious transactions, including those involving trading in microcap securities or potentially suspicious money transfers,” said Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement. What FINRA Found According to the announcement, from January 2011 through September 2013, Credit Suisse failed to effectively review trading for AML reporting purposes. The firm expected its registered representatives, who were the primary contact with the customers, to identify and report unusual or suspicious activities or transactions (i.e., activities and transactions described in Credit Suisse’s AML policies as red flags) to the firm’s AML compliance department. In turn, the compliance department was required to investigate the activity or transaction, document its findings and file Suspicious Activity Reports (“SARs”) where appropriate. However, the systems and procedures the firm used to monitor trading for other purposes were not designed to detect potentially suspicious activity from an AML perspective and the other departments and branches of the firm did not assume responsibility for reviewing trading for AML reporting purposes. As a result, in certain circumstances, Credit Suisse did not investigate suspicious trading adequately to assess whether a SAR should be filed. In addition, Credit Suisse’s reliance on representatives to escalate potentially suspicious trading failed to account for the fact that most orders it received from its foreign affiliates came in to the firm electronically and thus were not seen by the firm’s sales traders. FINRA also found that from January 2011 through December 2015, Credit Suisse failed to effectively review suspicious money transfers. The firm used an automated surveillance system to identify red flags of suspicious activity. Credit Suisse failed to implement the automated surveillance system properly by, among other things, inadequately inputting the data into the system, and failing to use available scenarios that were applicable to the money-laundering risks presented by its business. Although Credit Suisse self-identified some of the deficiencies and retained a consulting firm to assist in evaluating them, the firm initially failed to devote adequate resources to resolve the issues in a timely fashion, and some of the deficiencies remain unresolved today. In addition, FINRA found that Credit Suisse did not have adequate staffing to review the tens of thousands of alerts the automated system generated in any given year. Finally, FINRA found that Credit Suisse’s supervisory systems and controls were deficient as it relates to compliance with the prohibition of the sale of unregistered securities. Certain Credit Suisse customers deposited and sold microcap stock through the firm, which should have raised red flags indicating that the shares were potentially part of an illegal distribution. The firm failed to instruct its representatives on how to determine whether those securities were registered or subject to an exemption from registration prior to executing those trades. As a result, Credit Suisse facilitated the illegal distribution of at least 55 million unregistered shares of securities. The firm subsequently implemented additional procedures limiting the trading of microcap securities. Credit Suisse said in a statement that it had cooperated with FINRA’s inquiry, and that the firm had been taking “appropriate internal remedial efforts.” In addition to the fine, Credit Suisse agreed to adopt and implement policies and procedures within 90 days to address the problems cited in the Letter of Acceptance, Waiver and Consent (which can be found here). Credit Suisse neither admitted nor denied the charges but did agree to FINRA’s findings. The Takeaway This case illustrates the need for FINRA member firms to have sufficient AML compliance programs in place since money laundering and other suspicious activity is often concealed in securities transactions, particularly in microcap stocks. Not only can compliance violations result in significant fines, such deficiencies could also trigger wider securities investigations. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.