By Jeffrey M. Haber What anticompetitive business actions are considered unfair? Amidst the recent commotion surrounding the wildly elevated prices of certain products sold by Mylan Pharmaceuticals ("Mylan"), New York State Attorney General Eric Schneiderman is investigating whether the drug company has unfairly limited competition. Although Mylan has been accused of profiteering before, this time the product involved is EpiPen®, the emergency injector used for extreme emergency allergic reactions (anaphylaxis). Allergies requiring EpiPen administration may include severe allergic reactions to insect stings, nuts, shellfish, or certain medications. Because EpiPens are auto-injectors, they can be easily carried and used anywhere and can be administered by patients themselves or by untrained people who happen to be nearby. A single jab to the thigh dispenses lifesaving epinephrine. Mylan's Business Practices under Investigation Right now, the state attorney general's office is examining data to find out whether Mylan unfairly limited competition as a means of steeply increasing its prices for EpiPen. In a preliminary report, Schneiderman announced that the company "may have inserted potentially anticompetitive terms" into sales contracts with many school systems, thereby engaging in anti-competitive business practices or violating antitrust laws. If this turns out to be the case, Schneiderman says, "We will hold them accountable." Recently, Mylan was served with subpoenas for company information. Of course, investigation does not mean proof of wrongdoing. If your company is accused of, or investigated for, illegitimate practices, it is essential that you have a strong business attorney with skill and experience in commercial and complex litigation. Just how steep are the increases in price? The possible legal charges here are serious since they not only involve potentially illegal business practices, but matters of public health and lifesaving medical treatment. Mylan has increased the cost of the EpiPen product astronomically, apparently just because they can. In 2007, pharmacies paid less than $100 for a two-pen set (patients are advised to carry two in case they require a second dose). By 2009, the price had increased marginally to $103.50 per set. By July 2013, however, the cost was up to $264.50, and by May 2015 it had risen to $461. The alarming increases in price did not stop there. By May of this year, the price of two EpiPens skyrocketed to $608.61 — an increase of 500 percent in less than a decade. For individuals whose lives depend on these products (which typically have to be replaced annually), this is a tremendous burden. Possible Alternatives to the Outrageous Pricing In response to the uproar surrounding its pricing, the company has announced that it will be launching a $300 generic version of the medication within several weeks. Also, Mylan has stated that it has distributed more than 700,000 free EpiPens to 65,000 schools nationwide. While there are other generics, such as Adrenaclick, presently available, EpiPen is the recognizable brand name and patients are extremely reluctant to trust their lives to an unknown product. While the controversy and investigation rage on, Mylan spokeswoman Nina Devlin stated, "The program continues to adhere to all applicable laws and regulations." 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 How has Turing managed to get into even more trouble after last year's bombshell? It is difficult to imagine Martin Shkreli ("Shkreli") being shamed even more than he already has been, nor Turing Pharmaceuticals AG ("Turing") having its reputation further blackened by more bad news. Nonetheless, this is exactly what's happening. After last fall's commotion surrounding pricing discrepancies, Nancy Retzlaff ("Retzlaff"), once looked at as the most likely candidate for CEO of the company, has now brought federal charges against Turing for retaliating against her after she testified in a case involving a sexual assault by one of Shkreli's friends and a co-founder of the company -- Edwin Urrutia. When companies are involved in litigation and their reputations are on the line, the stakes can be very high. Executive positions, as well as the firm itself, can be at risk. Under such circumstances, it is imperative that the company brings in a business law firm of unchallenged competence to settle disputes, represent them vigorously in a court of law, and help them keep the business afloat and moving full-steam ahead through stormy waters. It is also important to hire attorneys able to understand and protect the rights of whistleblowers whose attempts to repair company defects are all too often met with retaliation. The Background Last February, Shkreli famously appeared smug and flippant during a Congressional investigation of his company's astonishing pricing practices. Retzlaff, a highly valued member of the Turing team at the time, supported the company, explaining away the fiftyfold overnight increase in the price of the drug Daraprim, used for over 50 years to treat a deadly parasitic infection, by stating that it had previously been underpriced and that it had great value to the patients who required it. While not especially convincing, her defense was considered professional and well-articulated, particularly in contrast to Shkreli's unseemly antics in the face of such serious charges. Shkreli later stepped down as chief executive of Turing after being arrested on securities fraud and wire fraud charges in connection with his activities at hedge funds and another pharmaceutical company he founded. Turing also faces investigations by the New York attorney general and the Federal Trade Commission. The Current Case Retzlaff now claims that, while in Washington for a Congressional hearing on the inflated price case, Edwin Urrutia, Shkreli's friend and the interim chief financial officer of Turing, made unwanted sexual advances to her, eventually assaulting her in a hotel bedroom. Retzlaff did not originally report the sexual assault because she feared, according to her lawyer, "reprisal, victim blaming, and being denied the C.E.O. position for which she was eminently qualified — all of which are now happening." When a co-worker made a strong complaint of unwanted sexual advances by the same man, however, Turing hired a private company to investigate the charges, and at that time Retzlaff spoke up. The investigation company substantiated the charges that Urrutia had made unwanted sexual advances to his accuser and had assaulted Retzlaff and other members of the staff. Urrutia, as a result, resigned from Turing "in lieu of termination." According to Retzlaff, before the assault and its aftermath, she had been a candidate for chief executive of the firm and had been promised restricted stock in the company. She charges that more recently she was told that she is no longer eligible for either. She also alleges that Shkreli had set a sexist and vulgar tone for the office with his own crude behavior, although he had left the company by the time her own sexual assault took place. Shkreli now states “I know she was made some promises, but she fell a little bit short of expectations.” 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 September 20, 2016, the Securities and Exchange Commission (“SEC”) announced that it awarded more than $4 million to a whistleblower who provided original information about a fraud that resulted in the recovery of monetary sanctions. Since 2011, the SEC has awarded more than $111 million to 34 whistleblowers pursuant to the agency’s whistleblower program. The SEC did not identify the whistleblower. By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity. Commenting on the award, Jane Norberg, Acting Chief of the SEC’s Office of the Whistleblower, stated: “Our program continues to incentivize whistleblowers to come forward with solid information that helps us bring violators to justice before more wrongdoing can occur.” Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, a whistleblower who provides original information to the SEC that leads to a successful enforcement action resulting in over $1 million in monetary sanctions may be awarded an amount not less than 10% and not more than 30% of the monetary sanctions collected. All payments made to whistleblowers are paid out of an investor protection fund established by Congress that is financed through monetary sanctions paid to the SEC by securities law violators. Links: SEC Press Release SEC Order SEC Whistleblower Resources Related reading: U.S. Supreme Court Unanimously Narrows The Definition Of Whistleblower Under Dodd-Frank 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 By: Jeffrey M. Haber One element of a fraud claim under New York law is justifiable reliance. A plaintiff must allege not only that a material misrepresentation was made, but also that the plaintiff actually relied upon that misrepresentation to its detriment. Reliance by a third party is insufficient. In ANS 1 Corp. v. Yosef, 2026 N.Y. Slip Op. 04918 (2d Dept. Aug. 12, 2026), the subject of today’s article, the Appellate Division, Second Department, reaffirmed that fundamental precept,[1] holding that fraud and civil conspiracy claims could not be maintained against a law firm where the complaint failed to allege that the plaintiffs themselves relied on the alleged misrepresentations. Instead, the only alleged reliance was by the purchaser of the property at issue, a pleading defect that proved fatal to both the fraud claim and the derivative claim for civil conspiracy to commit fraud. Background The dispute arose from the October 2021 sale of real property owned by ANS 1 Corp. The plaintiffs alleged that the transaction occurred without the consent of the company’s shareholder, who claimed to hold a 50% ownership interest pursuant to a shareholder agreement dated July 1, 2019. They further alleged that the defendant law firm, which represented the corporation in connection with the sale, knew of the shareholder’s ownership interest and the requirement that he consent to the transaction. According to the amended complaint, defendant falsely represented that he was the sole owner of the property and had authority to complete the sale. Based on those allegations, plaintiffs asserted causes of action sounding in fraud and civil conspiracy to commit fraud against, among others, the law firm. The law firm moved to dismiss the fraud-based claims under CPLR 3211(a). The Supreme Court denied the motion. On appeal, the Second Department modified that determination and dismissed the fraud and conspiracy claims against the firm. The Second Department’s Ruling The Court began its substantive discussion by articulating the elements of a fraud claim under New York law: “a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.”[2] The Court then addressed the issue on appeal: whether plaintiffs justifiably relied on the alleged misrepresentation. Although the amended complaint alleged that defendant falsely represented that he was the sole owner of the property, the Court found that the amended complaint contained no allegations showing that plaintiffs actually relied upon that representation. Instead, said the Court, plaintiffs alleged the opposite.[3] According to the amended complaint, the corporation’s shareholder maintained that he possessed an ownership interest in the corporation.[4] The amended complaint therefore did not allege that plaintiffs accepted or acted upon defendant’s statements: “the only party who relied on [defendant’s] alleged misrepresentation in any way was the purchaser of the subject property ….”[5] That fact was fatal to plaintiffs’ fraud claim because New York law requires reliance by the plaintiff asserting the fraud claim, not reliance by a third party.[6] “Since the amended complaint failed to connect the actions of [the law firm] ‘to a cognizable cause of action to recover damages for fraud,’” concluded the Court, “the [Supreme Court] should have granted those branches of [the law firm’s] motion which were pursuant to CPLR 3211(a)(7) to dismiss the second and sixth causes of action, alleging fraud and civil conspiracy to commit fraud, respectively, insofar as asserted against it.”[7] Regarding the civil conspiracy claim, New York does not recognize civil conspiracy as an independent cause of action. Rather, conspiracy allegations are merely a vehicle through which a plaintiff may connect various actors to an underlying tort.[8] Because plaintiffs failed to adequately plead fraud, there was no viable underlying tort to support a claim for civil conspiracy to commit fraud.[9] Accordingly, the conspiracy claim was dismissed as well.[10] Takeaway ANS 1 is a reminder that courts will closely examine whether a fraud claim alleges each required element, particularly justifiable reliance. Fraud claims often focus on the alleged falsity of a representation and the defendant’s intent (i.e., scienter), but ANS 1 demonstrates that those allegations are insufficient unless the plaintiff also alleges that it relied on the misrepresentation and suffered damages as a result. Where the complaint instead alleges that the plaintiff knew the truth, disputed the representation, or otherwise did not act in reliance upon it, the claim is vulnerable to dismissal. Equally important, the Court reaffirmed that reliance by a third party cannot substitute for reliance by the plaintiff. In ANS 1 Corp., the alleged misrepresentation concerned ownership and authority to sell the property, but the amended complaint alleged that the purchaser, rather than the plaintiffs themselves, relied on those statements. The Court held that such allegations do not satisfy the reliance element of fraud under New York law. As a result, even assuming the alleged misrepresentation was made, the fraud claim could not survive because the complaint failed to connect that misrepresentation to any justifiable reliance by the plaintiffs. The decision also reinforces the well-settled principle that civil conspiracy is not an independent cause of action in New York. Allegations of conspiracy merely serve to link multiple actors to an otherwise viable underlying tort. Consequently, where the underlying fraud claim is deficient, a claim for civil conspiracy to commit fraud necessarily fails as well. The Court’s dismissal of both causes of action illustrates the principle that a conspiracy claim “stands or falls” with the underlying tort upon which it is based.[11] Finally, ANS 1 Corp. highlights the value of a pre-answer motion to dismiss under CPLR 3211(a)(7) when a complaint fails to plead essential elements of a fraud claim. Rather than permitting the parties to engage in costly discovery into disputed factual issues concerning the property transaction and shareholder agreements, the Second Department focused on the threshold pleading requirements and dismissed the claims because the complaint failed to allege a legally cognizable theory of reliance. __________________________________ 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] Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 31 N.Y.3d 569 (2018). [2] Slip Op. at *2, quoting Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 (2009), and citing Nabatkhorian v. Nabatkhorian, 127 A.D.3d 1043, 1043-1044 (2d Dept. 2015). [3] Id. [4] Id. at 2-3 (“the allegations [in the amended complaint] were that [the corporation’s shareholder] consistently asserted his alleged interest in ANS …”). [5] Id. at *3. [6] Pasternack v. Laboratory Corp. of America Holdings, 27 N.Y.3d 817, 829 (2016); New York Tile Wholesale Corp. v. Thomas Fatato Realty Corp., 153 A.D.3d 1351, 1354 (2d Dept. 2017). [7] Id., quoting Mohammad v. Rehman, 236 A.D.3d 892, 894 (2d Dept. 2025); and citing Philip S. Schwartzman, Inc. v. Pliskin, Rubano, Baum & Vitulli, 215 A.D.3d 699, 703 (2d Dept. 2023); McSpedon v. Levine, 158 A.D.3d 618, 621 (2d Dept. 2018). [8] Philip S. Schwartzman, Inc., 215 A.D.3d at 703; Nabatkhorian, 127 A.D.3d at 1044. [9] Slip Op. at *3. [10] Id. [11] Nabatkhorian, 127 A.D.3d at 1044.In ANS 1 Corp. v. Yosef, 2026 N.Y. Slip Op. 04918 (2d Dept. Aug. 12, 2026), the subject of today’s article, the Appellate Division, Second Department, reaffirmed that fundamental precept,[1] holding that fraud and civil conspiracy claims could not be maintained against a law firm where the complaint failed to allege that the plaintiffs themselves relied on the alleged misrepresentations. Instead, the only alleged reliance was by the purchaser of the property at issue, a pleading defect that proved fatal to both the fraud claim and the derivative claim for civil conspiracy to commit fraud. Background The dispute arose from the October 2021 sale of real property owned by ANS 1 Corp. The plaintiffs alleged that the transaction occurred without the consent of the company’s shareholder, who claimed to hold a 50% ownership interest pursuant to a shareholder agreement dated July 1, 2019. They further alleged that the defendant law firm, which represented the corporation in connection with the sale, knew of the shareholder’s ownership interest and the requirement that he consent to the transaction. According to the amended complaint, defendant falsely represented that he was the sole owner of the property and had authority to complete the sale. Based on those allegations, plaintiffs asserted causes of action sounding in fraud and civil conspiracy to commit fraud against, among others, the law firm. The law firm moved to dismiss the fraud-based claims under CPLR 3211(a). The Supreme Court denied the motion. On appeal, the Second Department modified that determination and dismissed the fraud and conspiracy claims against the firm. The Second Department’s Ruling The Court began its substantive discussion by articulating the elements of a fraud claim under New York law: “a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.”[2] The Court then addressed the issue on appeal: whether plaintiffs justifiably relied on the alleged misrepresentation. Although the amended complaint alleged that defendant falsely represented that he was the sole owner of the property, the Court found that the amended complaint contained no allegations showing that plaintiffs actually relied upon that representation. Instead, said the Court, plaintiffs alleged the opposite.[3] According to the amended complaint, the corporation’s shareholder maintained that he possessed an ownership interest in the corporation.[4] The amended complaint therefore did not allege that plaintiffs accepted or acted upon defendant’s statements: “the only party who relied on [defendant’s] alleged misrepresentation in any way was the purchaser of the subject property ….”[5] That fact was fatal to plaintiffs’ fraud claim because New York law requires reliance by the plaintiff asserting the fraud claim, not reliance by a third party.[6] “Since the amended complaint failed to connect the actions of [the law firm] ‘to a cognizable cause of action to recover damages for fraud,’” concluded the Court, “the [Supreme Court] should have granted those branches of [the law firm’s] motion which were pursuant to CPLR 3211(a)(7) to dismiss the second and sixth causes of action, alleging fraud and civil conspiracy to commit fraud, respectively, insofar as asserted against it.”[7] Regarding the civil conspiracy claim, New York does not recognize civil conspiracy as an independent cause of action. Rather, conspiracy allegations are merely a vehicle through which a plaintiff may connect various actors to an underlying tort.[8] Because plaintiffs failed to adequately plead fraud, there was no viable underlying tort to support a claim for civil conspiracy to commit fraud.[9] Accordingly, the conspiracy claim was dismissed as well.[10] Takeaway ANS 1 is a reminder that courts will closely examine whether a fraud claim alleges each required element, particularly justifiable reliance. Fraud claims often focus on the alleged falsity of a representation and the defendant’s intent (i.e., scienter), but ANS 1 demonstrates that those allegations are insufficient unless the plaintiff also alleges that it relied on the misrepresentation and suffered damages as a result. Where the complaint instead alleges that the plaintiff knew the truth, disputed the representation, or otherwise did not act in reliance upon it, the claim is vulnerable to dismissal. Equally important, the Court reaffirmed that reliance by a third party cannot substitute for reliance by the plaintiff. In ANS 1 Corp., the alleged misrepresentation concerned ownership and authority to sell the property, but the amended complaint alleged that the purchaser, rather than the plaintiffs themselves, relied on those statements. The Court held that such allegations do not satisfy the reliance element of fraud under New York law. As a result, even assuming the alleged misrepresentation was made, the fraud claim could not survive because the complaint failed to connect that misrepresentation to any justifiable reliance by the plaintiffs. The decision also reinforces the well-settled principle that civil conspiracy is not an independent cause of action in New York. Allegations of conspiracy merely serve to link multiple actors to an otherwise viable underlying tort. Consequently, where the underlying fraud claim is deficient, a claim for civil conspiracy to commit fraud necessarily fails as well. The Court’s dismissal of both causes of action illustrates the principle that a conspiracy claim “stands or falls” with the underlying tort upon which it is based.[11] Finally, ANS 1 Corp. highlights the value of a pre-answer motion to dismiss under CPLR 3211(a)(7) when a complaint fails to plead essential elements of a fraud claim. Rather than permitting the parties to engage in costly discovery into disputed factual issues concerning the property transaction and shareholder agreements, the Second Department focused on the threshold pleading requirements and dismissed the claims because the complaint failed to allege a legally cognizable theory of reliance. __________________________________ 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] Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 31 N.Y.3d 569 (2018). [2] Slip Op. at *2, quoting Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 (2009), and citing Nabatkhorian v. Nabatkhorian, 127 A.D.3d 1043, 1043-1044 (2d Dept. 2015). [3] Id. [4] Id. at 2-3 (“the allegations [in the amended complaint] were that [the corporation’s shareholder] consistently asserted his alleged interest in ANS …”). [5] Id. at *3. [6] Pasternack v. Laboratory Corp. of America Holdings, 27 N.Y.3d 817, 829 (2016); New York Tile Wholesale Corp. v. Thomas Fatato Realty Corp., 153 A.D.3d 1351, 1354 (2d Dept. 2017). [7] Id., quoting Mohammad v. Rehman, 236 A.D.3d 892, 894 (2d Dept. 2025); and citing Philip S. Schwartzman, Inc. v. Pliskin, Rubano, Baum & Vitulli, 215 A.D.3d 699, 703 (2d Dept. 2023); McSpedon v. Levine, 158 A.D.3d 618, 621 (2d Dept. 2018). [8] Philip S. Schwartzman, Inc., 215 A.D.3d at 703; Nabatkhorian, 127 A.D.3d at 1044. [9] Slip Op. at *3. [10] Id. [11] Nabatkhorian, 127 A.D.3d at 1044.

By: Jeffrey M. Haber It is a fact of life that many securities brokers and financial advisors will be the subject of one or more customer complaints during his/her career. To be sure, some of those complaints will be justified. However, many of them will not be. In those latter instances, innocent brokers and financial advisors will have a blemish on his/her record that can be cleared only through an expungement proceeding. Expungement is essentially a three-step procedure. First, the broker or financial advisor must persuade a court or arbitration panel to expunge his/her record of the negative event. Rule 2080(b)(1) promulgated by the Financial Industry Regulatory Authority (“FINRA”) provides the grounds upon which an order of expungement should be granted: (a) the claim, allegation or information is factually impossible or clearly erroneous; (b) the broker or financial advisor was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (c) the claim, allegation or information is false. The process is started by filing an application naming the customer or the firm as a respondent. FINRA is also named as an additional party, unless FINRA waives the requirement. Second, if an expungement award is issued by an arbitration panel, the award must be judicially confirmed. Third, if confirmed, the award and the judgment (confirming the award) are to be sent to the Central Registration Depository (“CRD”) so that the matter can be removed from the broker or financial advisor’s record. In addition to Rule 2080, the process for seeking expungement is governed Rule 12805 of the FINRA Code of Arbitration Procedure for Customer Disputes. Rule 12805 covers the responsibilities of the arbitration panel hearing an application for expungement. The rule requires the panel to “[H]old a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement.” In a case that has gone to hearing on the merits, a panel will often consider a request for expungement as part of its deliberations. Rule 12805 further instructs that if the panel grants expungement, it must “[I]ndicate in the arbitration award which of the Rule 2080 grounds for expungement serve(s) as the basis for its expungement order and provide a brief written explanation of the reason(s) for its finding that one or more Rule 2080 grounds for expungement applies to the facts of the case.” If, however, a customer complaint is settled before a hearing on the merits, the panel must nevertheless hold a hearing on the record to evaluate the expungement application, including “review settlement documents and consider the amount of payments made to any party and any other terms and conditions of a settlement.” The broker or financial advisor must present testimony and evidence to the panel in support of the application, and the customer or other interested party must be given an opportunity to respond and be heard. Upon request of the broker or financial advisor, FINRA will typically keep the arbitration panel intact following the settlement for purposes of holding a hearing limited to the issue of the broker or financial advisor’s expungement request. Expungement Gets Some Bad Press: Royal Alliance Associates, Inc. v. Liebhaber The foregoing expungement process received some adverse press in September of 2014, when The New York Times Dealbook published an article (“A Murky Process” dated September 25, 2014) about an expungement proceeding in which Sandra A. Liebhaber (“Liebhaber”), a customer of Royal Alliance Associates, Inc. (“Royal Alliance”), attempted to oppose an expungement application by her broker, Kathleen Tarr (“Tarr”) (FINRA ID No. 13-01522 (Los Angeles, 9/10/14)), and was rebuffed by the panel, which issued the expungement award. As discussed below, in Royal Alliance Associates, Inc. v. Liebhaber, B264619 (Cal. Ct. App. Aug. 30, 2016), the Court of Appeals of the State of California vacated the expungement award because the arbitrators failed to allow Liebhaber and her counsel the opportunity to present testimony and evidence at the hearing. The Arbitral Proceeding From July 2002 through July 2010, Tarr was employed as a financial advisor with Royal Alliance, a securities broker-dealer and FINRA member. Starting in 2007, Tarr sold high-commission variable annuities and non-traded real estate investment trusts, or REITs, to dozens of AT&T employees who were eligible to receive early retirement offers from the company. By 2010, many of Tarr’s customers complained that she improperly steered them into portfolios of illiquid securities that were unsuitable for their retirement accounts. Liebhaber was a customer service representative for AT&T and one of Tarr’s clients. In May 2013, Liebhaber filed a complaint against Royal Alliance, claiming that Royal Alliance was negligent, breached its fiduciary duty to her, and violated state securities laws by selling her “illiquid, high-risk investments” that were “inappropriate and unsuitable” for her individual retirement account. Slip op. at 3. Liebhaber sought $325,000 in compensatory damages. Royal Alliance settled the action for $30,000, or less than 10% of requested damages, after an arbitration panel was convened but before a hearing was held. Id. Royal Alliance requested that the arbitrators keep the case open so that it could seek expungement of Liebhaber’s claim and settlement from Tarr’s CRD record. Id. at 3-4. On June 9, 2014, Royal Alliance submitted a request for expungement on behalf of Tarr to the previously convened arbitration panel. Liebhaber remained a party to the action; Tarr was not, however, named as a party. Royal Alliance sought expungement because it faced other FINRA arbitrations in which former customers claimed that Tarr had caused them harm. In later briefing, Royal Alliance explained that it wanted to use the expungement award in “ongoing arbitrations and in any later filed arbitration” as evidence of no wrongdoing. Less than a month later, on June 30, 2014, Liebhaber’s counsel advised the arbitration panel that he did not intend to file a pre-hearing brief but planned to call Liebhaber and Tarr as witnesses at the arbitration hearing. According to the Court, the record was devoid of a response by Royal Alliance or the arbitration panel, as well as written evidence and submissions by the parties. Slip op. at 4. On August 12, 2014, the panel held a telephonic hearing to consider the expungement application. Liebhaber and her counsel, Royal Alliance and its counsel, and Tarr participated in the hearing. Royal Alliance argued that expungement was warranted because Liebhaber’s allegations against Tarr were false, stating that the investments Tarr recommended were suitable for Liebhaber, and Liebhaber’s alleged net losses could be attributed to withdrawals from her retirement account and “the 2008 market crash.” Slip op. at 4. Royal Alliance also noted that a complaint similar to Liebhaber’s had been previously expunged from Tarr’s record. (Note: Tarr had 44 customer complaints and a termination on her record.) Tarr also spoke during the hearing, but did so without being sworn in by the panel. Tarr vigorously disputed Liebhaber’s allegations, noting that the allegations against her were inimical to her background as “the daughter and granddaughter of ministers.” Slip op. at 4-5. Tarr spoke uninterrupted and without questions. Id. at 5. Liebhaber’s counsel contended, among other things, that Royal Alliance failed to show that her claims against Tarr were false or factually impossible, and proposed a procedure in which both Tarr and Liebhaber would be asked to respond to questions about Liebhaber’s claims. Tarr’s counsel objected to the proposed procedure. The presiding arbitrator concluded that such questioning was unnecessary. Another panel member, however, wanted to hear such questioning, especially since “the [FINRA] guidelines are pretty clear that we’re supposed to be looking at everything because this was a settled case, and that the more information we have, the easier it is for us to make what I would consider to be a fair and well reasoned decision regarding expungement.” That arbitrator undermined the point, however, by adding that such questioning should not exceed “another two hours.” The third arbitrator agreed with the presiding panel member. Thereafter, the presiding arbitrator denied Liebhaber’s request. Slip op. at 6. Liebhaber’s counsel stated for the record his objection to the panel’s ruling, noting that he had “not been given a full and fair opportunity to respond to … the claims that have been made in the hearing.” Id. at 7. After rebuttal and additional discussion about the panel’s ruling, the panel concluded the proceeding. On September 10, 2014, the panel issued an award recommending expungement. Slip op. at 7. The award tracked the language of Rule 2080, and found that Liebhaber’s “claim, allegation, or information” against Tarr was “factually impossible or clearly erroneous; and … The claim, allegation, or information is false.” Slip op. at 7-8. The panel cited several reasons for its findings, including the difference between the damages Liebhaber sought ($325,000) and the settlement amount ($30,000). Id. at 8. The panel concluded the amount of the payment reflected a business decision by Royal Alliance rather than Liebhaber’s actual net out-of-pocket losses. Id.. The Petition to Confirm the Expungement Award Pursuant to FINRA Rule 2080, Royal Alliance sought confirmation of the expungement award. Liebhaber opposed the petition, and requested that the award be vacated on the grounds that: “(a) Liebhaber’s rights were substantially prejudiced by misconduct of the arbitrators; (b) the arbitrators exceeded their powers in denying Liebhaber’s request to present evidence at the hearing; and (c) Liebhaber’s rights were substantially prejudiced by the refusal of the arbitrators to hear evidence material to her claims.” Slip op. at 10. On May 18, 2015, the trial court held a hearing to consider the petition to confirm the award. In connection with the hearing, the court issued a tentative ruling to vacate the award. Following oral argument, the trial court adopted its tentative ruling and vacated the expungement award. The court did so “on the ground that Liebhaber’s rights were substantially prejudiced by misconduct of the arbitrators, the arbitrators exceeded their powers, and Liebhaber’s rights were substantially prejudiced by refusal of the arbitrators to hear evidence material to the controversy.” Slip op. at 12. The court also found that the arbitrators violated FINRA Rule 2080 “by allowing Ms. Tarr to provide an unsworn statement in support of expungement while also preventing Liebhaber’s attorney from cross-examining Ms. Tarr in order to determine if the requirements of Rule 2080 were met.” Id. The Court of Appeals’ Decision The Court of Appeals affirmed the trial court’s ruling. It found that “Liebhaber’s rights as a party to the arbitration proceedings were substantially prejudiced within the meaning of [Code of Civil Procedure] section 1286.2, subdivision (a)(5),” which “provides that the trial court ‘shall vacate’ an arbitration award if ‘The rights of the party were substantially prejudiced by . . . the refusal of the arbitrators to hear evidence material to the controversy or by other conduct of the arbitrators contrary to the provisions of this title.’” Slip op. at 16. Addressing the first question – whether the arbitrators refused to hear evidence material to the controversy or engage in other conduct contrary to the provisions of California law – the Court of Appeals found that the panel in fact had refused to give Liebhaber the opportunity to be heard, present oral evidence, and cross-examine Tarr during the hearing. Slip op. at 16-18. As to the second question – whether Liebhaber’s rights were substantially prejudiced – the Court of Appeals found that they were. In so holding, the Court concluded that “‘the arbitrators might well have made a different award’ if they had allowed Liebhaber to tell her side of the story or question Tarr’s.” Slip op. at 19 (citation omitted). Consequently, the Court held that “the hearing was not fair,” because Royal Alliance received “an unfettered opportunity to bolster its written” submission, while Liebhaber was “denied even a limited chance to do the same.” Id. at 20. Takeaway Royal Alliance teaches the importance of making a record during an arbitration proceeding. As discussed above, Liebhaber’s counsel created a substantial record showing that Liebhaber did not have a fair hearing. He was able to use that record to show prejudice from the arbitrators’ conduct – one of the bases for vacatur of an arbitral award. Since vacatur of an award is very difficult to obtain, as discussed in a July post on this blog, having a detailed record is a good way to persuade a court of entitlement to such relief. Royal Alliance also teaches that, although customers typically remain silent during expungement proceedings, they do not have to remain so, even after settling their claims. As discussed above, Liebhaber felt strongly enough to ensure that other investors would know about Tarr’s behavior notwithstanding the settlement. Of course, customers who believe their broker or financial advisor has been falsely charged with wronging should likewise speak up during an expungement hearing. It should be noted that FINRA participated as a party in the confirmation proceeding and opposed the actions of the arbitrators. At the hearing, FINRA told the trial court that FINRA had “an interest and really a duty here, in protecting the integrity of the [CRD] and the information contained in it.” As such, given the record of proceedings, FINRA argued that the arbitrators broke FINRA’s rules in denying Liebhaber and her counsel the opportunity to testify and be heard. Also, not long after Liebhaber challenged the expungement award, FINRA revised its expungement guidance with respect to customer participation at expungement hearings. The Arbitrators’ Guide now provides, as mentioned above, that arbitrators should “allow customers and their counsel to participate in the expungement hearing in settled cases if they wish to.” Jeffrey M. Haber is a partner and co-founder of 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, a partner at Freiberger Haber LLP On May 31, 2016, the Appellate Division, First Department, issued MP Cool Investments Ltd. v. Forkosh, 2016 NY Slip Op. 05944, a case involving allegations of fraud in connection with the production and sale of a commercial heating and ventilation system by an Israeli-based company. In the decision, the First Department unanimously affirmed the motion court’s dismissal of the plaintiff’s fraud claims because they were not pleaded with particularity, did not establish justifiable reliance on the defendants’ misrepresentations, and failed to demonstrate scienter or an intent to deceive. The Factual Background of MP Cool The plaintiff, a Manhattan-based private equity fund with $4.3 billion in assets under management, is an admitted sophisticated investor that specializes in capturing value in distressed companies in less efficient markets around the world. In December 2009, MatlinPatterson entered into an agreement with DuCool, Ltd., an Israeli company that claimed to have had breakthrough dehumidification technology, to obtain a majority interest in the company. Pursuant to the agreement, MatlinPatterson invested $30 million in DuCool, giving it an initial 49% interest in the company. By 2012, MatlinPatterson had invested $70 million in DuCool and acquired a 72% majority interest in the company. Subsequent investments brought MatlinPatterson’s equity interest in DuCool to 90%. As permitted under the purchase agreement, MatlinPatterson had a 90-day due diligence period during which it was given full access to DuCool’s business operations, properties, technology data and plans. MatlinPatterson was also given direct access to all of DuCool’s customers, though it only approached one customer. To conduct the agreed upon due diligence, MatlinPatterson, among other things, hired two consultants: QuinetiQ, to perform technical evaluations of DuCool’s technology, manufacturing facility, and installation sites; and McKinsey, to evaluate DuCool’s business model, financial information, and market potential. McKinsey drafted a proposed business plan for the company that was included in the parties’ initial purchase agreements. After the initial investment, but before the second investment, MatlinPatterson appointed three of the seven members of the board of directors and two of McKinsey’s representatives were installed as officers of DuCool. The Allegations and the Motion Court’s Ruling MatlinPatterson claimed that in the period before it purchased any interest in DuCool (pre-investment) and during the two-year period after its first investment (i.e., 2010 through 2012), when it acquired a majority interest in DuCool, the defendants made numerous false representations and provided inaccurate data about DuCool’s air conditioning technology, financial condition and overall successes in the United States and other markets. MatlinPatterson alleged that it relied on the representations and data, inducing it to repeatedly invest in DuCool, believing it was a better performing company than represented. MatlinPatterson also alleged that after it invested in DuCool, the defendants deceived it by intentionally concealing known problems with DuCool’s installations in at least three major sites in the United States and Costa Rica and made numerous false statements about energy cost savings in an April 2011 “study” that touted DuCool products’ performance and cutting edge technology. The defendants moved to dismiss the complaint. The motion court granted the motion and the plaintiff appealed. The Appellate Ruling As an initial matter, the First Department noted that the plaintiff failed to allege fraud with particularity as to each individual defendant and the various time periods involved. The Court observed that the complaint simply “bundled, bare-boned and conclusory allegations” – the type of allegations that do not suffice to plead a fraud claim. Turning to the justifiable reliance element – one of the two elements highlighted by this post – the Court noted that MatlinPatterson is a sophisticated investor that conducted extensive due diligence both before and after its initial investments. Such sophistication and knowledge undermined any claim of justifiable reliance: Plaintiff is an experienced and sophisticated investor. It did not plead facts to support the justifiable reliance element of fraud. Plaintiff had total, unfettered access to every aspect of DuCool’s company information both before and after its initial investment, even before it held a controlling interest in DuCool. Although learning through the due diligence conducted by its own technology and business consultants that there were frequent technological problems with DuCool products, some of them “severe,” plaintiff proceeded to invest in the company. Thereafter, as the 49% shareholder, plaintiff had the largest percentage ownership of any individual shareholder and it had access to information concerning the operations of the business. There is no factual basis on which to conclude that the alleged fraud involved matters peculiarly within defendants’ knowledge, because plaintiff had the means to discover the truth behind any false claims about the condition of the company and whether this was a feasible investment. Slip op. at 3 (citations omitted). Regarding the scienter element – the second element highlighted by this post – the Court found that the due diligence conducted by the plaintiff negated any inference that the defendants knew DuCool would fall short of projections: With respect to the scienter element of its claim, although “most likely to be within the sole knowledge of the defendant and least amenable to direct proof,” plaintiff is still required to allege facts “from which it is possible to infer defendant knowledge of the falsity of statements” when they were made. It has not done so. Plaintiff, based upon its own due diligence, concluded that DuCool presented a profitable, albeit speculative, investment opportunity given its development of new technology and registered patents. Although the company may not have performed as plaintiff expected, this does not support a reasonable inference that defendants knew that DuCool would fall short of its business projections. The parties’ agreement not only contained plaintiff’s express acknowledgment that success was speculative, but also a further acknowledgment that “any business plans prepared by the Company, have been, and continue to be, subject to change and that any projections included in such business plans or otherwise are necessarily speculative in nature. . .” Slip op. at 3-4 (citations omitted). Takeaway Unfortunately, there are times when an acquired business or investment does not live up to expectations. When this happens, the acquiring or investing party sues. MP Cool stands as a reminder that in New York (and some other jurisdictions) an aggrieved party cannot come to court claiming fraud when it has conducted due diligence and obtained information that undermines the strength of its claim. Though sophisticated parties can be the victim of fraud, they cannot complain if they have knowledge of the very fraud of which they complain. MP Cool also reminds us that scienter is a very difficult element to plead. In fact, the scienter element is the hardest to plead because the evidence of intent most often rests solely with the defendant. Because of this difficulty, intent is often inferred from circumstantial evidence. Pludeman v. N. Leasing Sys., Inc., 10 N.Y.3d 486, 488 (N.Y. 2008). Notwithstanding, as the First Department made clear, scienter must be plead with particularity. Slip op. at 3. Conclusory allegations, such as those in MP Cool, will not suffice. The plaintiff must allege facts from which there is some “rational basis for inferring that the alleged misrepresentations were knowingly made.” Houbigant, Inc. v. Deloitte & Touche LLP, 303 A.D.2d 92, 93 (1st Dep’t 2003). As MatlinPatterson learned in MP Cool, the failure to meet this hurdle will result in dismissal. 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 August 30, 2016, the Securities and Exchange Commission (“SEC”) announced that it awarded a company insider $22.5 million for providing “detailed” information about a “well-hidden fraud at the company where the whistleblower worked.” Though not disclosed by the SEC, news outlets reported that the company involved was Monsanto Co. The $22.5 million award is the second-largest the SEC has awarded a whistleblower since the program’s inception in 2011. Among other things, the SEC recognized the “extensive assistance” provided by the whistleblower in “help the agency halt” the fraud. According to the news media, the fraud concerned accounting improprieties involving a rebate program Monsanto used to sell Roundup, a popular weed killer. The SEC accused Monsanto of falsifying its earnings through a corporate rebate program that was designed to increase the product’s sales. The SEC said that Monsanto “lacked sufficient internal controls to account for millions of dollars in rebates that it offered to retailers and distributors. It ultimately booked a sizeable amount of revenue, but then failed to recognize the costs of the rebate programs on its books.” Monsanto neither admitted nor denied the charges. The whistleblower’s attorney told news outlets that the whistleblower, a finance executive at Monsanto, went to the SEC only after first trying to correct the accounting issues internally. Commenting on the award, Jane Norberg, Acting Chief of the SEC’s Office of the Whistleblower, said: Company employees are in unique positions behind-the-scenes to unravel complex or deeply buried wrongdoing. Without this whistleblower’s courage, information, and assistance, it would have been extremely difficult for law enforcement to discover this securities fraud on its own. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, a whistleblower who provides original information to the SEC that leads to a successful enforcement action resulting in over $1 million in monetary sanctions may be awarded an amount not less than 10% and not more than 30% of the monetary sanctions collected. Since 2011, the SEC has awarded more than $107 million to 33 whistleblowers who “provided the SEC with original and useful information that led to a successful enforcement action.” The largest amount awarded to a whistleblower by the SEC was $30 million in 2014. 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, a partner at Freiberger Haber LLP On September 1, 2016, the Commodity Futures Trading Commission (“CFTC” or the “Commission”) announced that it was seeking comment on proposed amendments to the rules governing the Commission’s whistleblower program, its authority to administer the program and issue whistleblower awards, and its authority to implement anti-retaliation enforcement measures. The amendments, if adopted, will make the CFTC’s whistleblower program congruous with that of the Securities Exchange Commission (“SEC”), and would enable the CFTC to initiate enforcement proceedings against employers that retaliate against whistleblowers who engage in lawful whistleblowing activities. The CFTC is seeking comments on the proposed amendments on or before September 29, 2016. Background In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) to combat illegal and fraudulent conduct on Wall Street and promote compliance with the federal securities and commodities laws. The Dodd-Frank Act contains whistleblower provisions that authorize the SEC and CFTC to pay cash rewards to whistleblowers who voluntarily provide the agencies with information about securities and commodities fraud and other violations of the securities and commodities laws. Under the CFTC whistleblower program, the CFTC will pay an award to any individual, or group of individuals, who voluntarily provides “original information” to the Commission about a violation of the commodities laws. If the information leads to a successful enforcement action of more than $1 million, the whistleblower may receive an award of between 10% and 30% of the sanctions collected. The amount of the award is dependent upon a number of factors, including the significance of the information provided and the degree of the whistleblower’s assistance. The CFTC whistleblower program has been around for five years. In that time, there have been only four awards – this blog recently wrote about the latest award – and no enforcement proceedings to protect whistleblowers from retaliation by their current or former employers. The absence of proceedings to enforce the anti-retaliation provisions of the Dodd-Frank Act stand in stark contrast to the more recent actions of the SEC – actions that this blog recently discussed. Since the adoption of the CFTC regulations governing the whistleblower program, the Commission did not view its enforcement authority to cover retaliation against whistleblowers. The proposed amendments indicate that the Commission now intends to promote its whistleblower program and actively protect whistleblowers against activity that chills lawful whistleblowing activity. The Commission made this clear in the notice of the proposed amendments: “Upon reconsideration of its statutory authority on this important issue, and noting that harmonization between the SEC’s and the Commission’s Whistleblower programs would be beneficial to the public by making the consequences of illegal retaliation more uniform, the Commission has decided to join the SEC on that path.” The Proposed Amendments The proposed amendments will make it easier for whistleblowers to seek awards and provide them more opportunity to participate in the awards process. Among other things, if approved, the changes would do the following: enhance the process for reviewing whistleblower claims; assign overall responsibility for administering the whistleblower program to the Director of the Division of Enforcement, and clarify the staff’s authority to administer the whistleblower program; replace the Whistleblower Award Determination Panel with a Claims Review Staff; provide the CFTC with the opportunity to review Proposed Final Determinations; revise the rules governing whistleblower eligibility requirements to make clear that (1) the Commission may consider claims for awards “in a covered action, in a related action, or both,” (2) a claimant may be eligible for an award by providing original information without being the original source of the information, and (3) a claimant will have additional time to submit a TCR by extending the timeframe from 120 to 180 days; revise the award claims review process by (1) replacing the Whistleblower Awards Determination Panel with a review process handled by the Claims Review Staff; (2) assigning responsibility for handling deficient claims with the Whistleblower Office; (3) allowing claimants an opportunity to correct deficiencies or withdraw the claim before finalization of the denial of the claim, (4) allowing the Whistleblower Office to require additional information of the claimant in connection with award applications, (5) allowing claimants an opportunity to demonstrate that they voluntarily provided the same original information to a governmental agency in a related action that led to the CFTC’s successful enforcement action and the successful enforcement action of the related action, and (6) allowing claimants the opportunity to contest the Preliminary Determination, including making available the record supporting the award determination; permit claimants who submitted original information in a related action to receive an award based on the monetary sanctions collected; provided, however, the claimant does not receive more than one award for the same action; and assign responsibility to the Claims Review Staff for the issuance of Preliminary Determinations and Proposed Final Determinations, and issuance of Proposed Final Dispositions to the Whistleblower Office. Whistleblower Protection and Anti-Retaliation Enforcement Authority The proposed changes also include a new emphasis on the protection against retaliation by current or former employers. In the notice of the proposed amendments, the CFTC said that it wants to “set aside” its prior interpretation of whether it has the authority to initiate enforcement proceedings against employers that retaliate against whistleblowers engaged in lawful activity under the Commodity Exchange Act (the “Act”). The Commission previously held that it lacked the statutory authority to bring enforcement proceedings against those who retaliate against a whistleblower in violation of the Act. That interpretation was contrary to that of the SEC. As the CFTC explained, the proposed amendments would end “the incongruous situation where whistleblowers enjoy protection from retaliation through SEC enforcement action under the securities laws, but no such protection through Commission enforcement action under the CEA.” Takeaway The proposed amendments signal the CFTC’s intention to devote more resources and attention to its whistleblower program and the protection of whistleblowers engaged in lawful whistleblowing activities. This new focus should increase the number of tips and awards, as well as guard against the incidence of employer retaliation. It will also encourage employers to adopt compliance programs and related policies that comply with the CFTC’s new regulations, including detecting and preventing retaliation. 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.

When parties negotiate the terms of a contract, they cannot account for every contingency or event that may affect performance. To be sure, they try. But, it is simply not possible to account for every occurrence that might arise during the course of the contract. This inability, therefore, gives the parties wide latitude in the performance and enforcement of their contractual obligations. Underlying this discretion is the duty to act in good faith and with fair dealing. As set forth in the Restatement (Second) of Contracts, “[E]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” Restatement (Second) of Contracts § 205 (1981). A party to a contract breaches these duties when his/her conduct frustrates the purpose of the contract, e.g., by failing to perform the things necessary to carry out the purpose for which the contract was entered and to refrain from destroying or injuring the other party’s right to receive the fruits of the contract. Such conduct is often described as bad faith, and is identified by, among other things, “evasion of the spirit of the bargain,” “abuse of a power to specify terms,” “interference with or failure to cooperate in the other party’s performance,” and willful rendering of imperfect performance. E.g., Restatement (Second) of Contracts § 205 cmt. d. It is widely recognized that New York was the first jurisdiction to identify the duty of good faith and fair dealing as an implied covenant that made a contract enforceable. See Wood v. Lucy, Lady Duff - Gordon, 222 N.Y. 88 (1917). Wood involved an endorsement and licensing agreement in which the parties agreed that the plaintiff could sell or license the defendant’s fashion designs in exchange for the payment of one half of all the profits and revenues generated under the agreement. A dispute arose and the defendant argued that there was no agreement between the parties. The court rejected the defendant’s argument, stating: The defendant insists, however, that it lacks the elements of a contract. She says that the plaintiff does not bind himself to anything. It is true that he does not promise in so many words that he will use reasonable efforts to place the defendant’s endorsements and market her designs. We think, however, that such a promise is fairly to be implied. The law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman, and every slip was fatal. It takes a broader view today. A promise may be lacking, and yet the whole writing may be “instinct with an obligation,” imperfectly expressed. If that is so, there is a contract. Id . at 90-91 (citations omitted). New York Law: In the 1933, the New York Court of Appeals expressed the duty found in Wood as an implied covenant of good faith and fair dealing. In Kirk La Shelle Co. v. Paul Armstrong Co., a case involving a dispute between parties to a settled copyright litigation, the Court held that “in every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract, which means that in every contract there exists an implied covenant of good faith and fair dealing.” 263 N.Y. 79, 87 (N.Y. 1933). Since Kirk La Shelle, the courts in New York have implied a covenant of good faith and fair dealing in the course of the performance of all contracts. See, e.g., Van Valkenburgh, Nooger & Neville v. Hayden Publ. Co., 30 N.Y.2d 34, 45 (N.Y.), cert. denied, 409 U.S. 875 (1972); Dalton v Educational Testing Serv., 87 N.Y.2d 384, 389 (N.Y. 1995). While the duties of good faith and fair dealing do not imply obligations “inconsistent with other terms of the contractual relationship” (Murphy v. American Home Prods. Corp., 58 N.Y.2d 293, 304 (N.Y. 1983)), they do include “any promises which a reasonable person in the position of the promisee would be justified in understanding were included.” Rowe v. Great Atl. & Pac. Tea Co., 46 N.Y.2d 62, 69 (N.Y. 1978) (citation omitted). When the contract contemplates the exercise of discretion by the parties, it includes a promise not to act arbitrarily or irrationally in exercising that discretion. Tedeschi v. Wagner Coll., 49 N.Y.2d 652, 659 (N.Y. 1980). New York law does not, however, “recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing when a breach of contract claim, based upon the same facts, is also pled.” Harris v. Provident Life and Acc. Ins. Co., 310 F. 3d 73, 81 (2d Cir. 2002). Therefore, when a complaint alleges both a breach of contract and a breach of the implied covenant of good faith and fair dealing based on the same facts and seeks the same relief, the latter claim will be dismissed as redundant. JFK Holding Co. LLC v. City of New York, 98 A.D.3d 273 (1st Dep’t 2012); MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 87 A.D.3d 287 (1st Dep’t 2011); Logan Advisors, LLC v. Patriarch Partners, LLC, 63 A.D.3d 440, 443 (1st Dep’t 2009). Rebecca Broadway L.P. v Hotton Recently, the Appellate Division, First Department had the opportunity to once again consider the covenant of good faith and fair dealing. On August 16, 2016, the First Department decided Rebecca Broadway L.P. v Hotton, NY Slip op. 05839, a case that arose “from an unsuccessful effort to produce a Broadway musical about a ghost.” Id. at 1. As the New York Law Journal observed, the facts of the case “offer[ ] enough twists and turns to rival a stage play.” Jason Grant, Appellate Ruling Sets the Stage for Trial in Broadway Scandal, NYLJ, Aug. 18, 2016, available here. Distilled to their essence, the facts of the case are as follows: After it was reported that a major foreign investor in the production had died, it emerged that the supposedly deceased backer had never been more than a ghost himself —the man had never existed, except as a deceptive construct conjured up by a dishonest fundraiser, who has since been incarcerated for this wrongdoing. The publicity agent for the show, when he began to suspect the truth about the supposedly deceased foreign investor, expressed his concerns to the producer's principal, who essentially told him to keep quiet about it. Apparently stung by this dismissive treatment, the publicity agent sent four anonymous emails to another potential investor (this one an actual, living person), who had wished to remain anonymous. The last of these emails, sent under a fictitious name, made various highly negative allegations about the producer and the show's prospects, and urged the potential investor not to back the play. After receiving this email, the potential investor promptly withdrew from involvement in the production, preventing it from going forward. Slip op. at 1-2. The plaintiff, Rebecca Broadway Limited Partnership (“RBLP”), sued Marc Thibodeau (“Thibodeau”) a publicity agent for breach of contract, tortious interference with business relations and defamation. The motion court granted RBLP’s motion for summary judgment as to Thibodeau’s liability for breach of contract and denied RBLP’s summary judgment as to RBLP’s causes of actions for tortious interference with business relations and defamation. The motion court also denied Thibodeau’s cross motion for summary judgment for, among other things, breach of contract. Thibodeau appealed the motion court’s order. The First Department affirmed. “As to the breach of contract cause of action,” the First Department found that the motion court “properly granted RBLP summary judgment as to liability on that claim.” Slip op. at 4. The Court found that the “record establishes that Thibodeau, without RBLP’s authorization, and using confidential information he had obtained as a result of his employment as RBLP’s press representative,” caused “a key potential investor” “to withdraw his financial commitment,” to the show, “which resulted in the cancellation of rehearsals and the play’s failure to open.” Id. That sufficed to breach the terms of the agreement with RBLP. The First Department noted that “[E]ven assuming that his conduct did not violate the express terms of his agreement to act as the play’s press representative, Thibodeau breached the implied duty of good faith and fair dealing by essentially defeating the purpose of the agreement by his actions.” Slip op. at 4 (citation omitted). In so holding, the Court found that "Thibodeau was hired by RBLP to use his public relations skills to facilitate the production of a play; his actions, in which he made use of confidential information that RBLP had entrusted to him in the course of his employment, made it impossible for RBLP to produce the play as planned. It is difficult to imagine a plainer case of a party to a contract utterly defeating the purpose for which the other party had entered into that contract, or a more blatant example of an agent's disloyalty to his principal." Id. Having affirmed the motion court’s decision, the First Department turned to the denial of Thibodeau’s cross motion for summary judgment. Thibodeau claimed that RBLP breached the covenant of good faith and fair dealing by instructing him to answer all questions about the project, notwithstanding the direction to refrain from discussing possible foreign investors. The First Department rejected this claim: Although Thibodeau might well have felt uncomfortable in meeting the press while under orders not to give them the information they sought, RBLP did not breach the covenant of good faith and fair dealing by giving him those instructions. Again, while the record establishes that RBLP — as was its right — directed Thibodeau not to respond substantively to questions concerning the Abrams (i.e., foreign investor) issue, Thibodeau does not allege that RBLP ever directed him to respond falsely to press inquiries. He could have responded to questions about Abrams, both truthfully and consistent with RBLP’s directives, by stating that RBLP was investigating the matter. RBLP, as Thibodeau’s principal, was entitled to limit the subjects that Thibodeau, as RBLP’s agent, was authorized to discuss substantively with the press and public; if Thibodeau was uncomfortable with that limitation on his authority, he was free to resign. Slip op. at 5. The Court went on to observe that even if RBLP breached the covenant of good faith and fair dealing before Thibodeau breached his covenant, the result would remain unchanged. As the Court noted, Thibodeau could have resigned and terminated the agreement with RBLP: Even if RBLP could be deemed to have somehow breached its implied duty to Thibodeau of good faith and fair dealing before he committed his own breach of that covenant by sending the anonymous emails, we would not reach a different result. Any such material breach by RBLP, before the breach by Thibodeau, would have given Thibodeau grounds to suspend his own performance and, absent a timely cure by RBLP of its breach, to terminate his contract with RBLP (and then, perhaps, to seek damages for breach) …. But a first material breach of the parties’ agreement by RBLP, if there was one, would not have justified Thibodeau’s remaining in RBLP’s employ while using confidential information entrusted to him to sabotage the production. A party to a bilateral contract, when faced with a breach by the other party, must make an election between declaring a breach and terminating the contract or, alternatively, ignoring the breach and continuing to perform under the contract. Such a party has no right to represent himself as continuing to perform under the contract —and continuing to receive the other party’s performance in exchange — while at the same time surreptitiously breaching his own duty by flouting his own implied duty of good faith and fair dealing. Slip op. at 5-6 (citations and quotations omitted). Takeaway: The implied duty of good faith and fair dealing has long been accepted as a judicial tool of contract analysis. It is aimed at ensuring that the parties to a contract do not interfere with the other party’s performance or destroy the other party’s expectations with respect to the benefits of the contract. Rebecca Broadway serves as a recent example of the duty and how it can serve as the basis for a separate cause of action. Rebecca Broadway is also notable for its admonition to contracting parties about how to conduct themselves when there is a breach. In this regard, the Court made it clear that when a party to a contract breaches the agreement, the non-beaching party must make an election of remedies between declaring a breach and terminating the contract or, ignoring the breach and continuing to perform under the contract. 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 New York, NY (Law Firm Newswire) August 10, 2016 - The Legal 500 USA, a leading legal ranking and referral guide, has again recognized Mr. Haber, co-founding partner of Freiberger Haber LLP, for his work as a plaintiff’s attorney in securities litigation. Mr. Haber was identified in the 2016 edition as a “recommended” lawyer in the “Dispute Resolution: Securities Litigation – Plaintiff” category. Mr. Haber was also “recommended” in the 2011–2012 and 2014–2015 editions of The Legal 500 USA. The Legal 500 is an independent guide that ranks law firms and individual lawyers around the world. It spends several months each year conducting in-depth research into the legal market, using information provided by law firms and “feedback from peers and clients.” The purpose of the guide is “to assess … overall visibility and reputation … buyers of legal services with an objective analysis of the U.S. market….” About Freiberger Haber LLP Located in New York City, Freiberger Haber LLP is dedicated to representing corporations, small businesses, partnerships and individuals involved in a broad range of complex business and commercial litigation matters. Freiberger Haber LLP combines the sophistication and counsel of a large national law firm with the economy, flexibility, commitment and personal attention of a small firm. 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 How many awards has the Commodity Futures Trading Commission ("CFTC") made under its whistleblower program? The CFTC awarded a whistleblower $50,000, the second such award this year. The $50,000 award comes on the heels of a $10 million award earlier in 2016, the largest award under its program to date. Authority Under the Dodd-Frank Act The whistleblower award program created under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") in 2010 authorized the commodities watchdog, along with the Securities and Exchange Commission ("SEC"), to reward whistleblowers who report violations of the commodities and securities laws. The CFTC program rewards individuals for voluntarily providing original information about Commodity Exchange Act ("CEA") violations, provided that the information leads to an enforcement action that results in monetary sanctions greater than $1 million. The whistleblower gets an award of between 10 and 30 percent of the amount collected by the CFTC. Under the law, the CFTC cannot identify the whistleblower, or the enforcement action on which the award is based. The $50,000 award is based on monetary sanctions collected by the CFTC thus far, and the whistleblower will receive between 10 and 30 percent of any additional sanction collected. CFTC Whistleblower Awards in 2016 Since the program was rolled out, the CFTC has made four awards for a total of $10.6 million, which is far less than awarded under the SEC's whistleblower program in which 32 awards of more than $85 million have been made - the largest being $30 million. While the CFTC was slow in rolling out its program - the first award was in 2014 - the program is said to be picking up steam. Protection Against Retaliation The Dodd-Frank Act also protects whistleblowers under the CFTC program, whether or not the individual is eligible for an award. Employers are prohibited from terminating, demoting, suspending, threatening, harassing (directly or indirectly), or in any manner discriminating against a whistleblower for any lawful act taken by the whistleblower under the CFTC program. These protections apply to any whistleblower who reasonably believes the information provided is related to possible violations of the CEA. Whistleblowers can also file a lawsuit in federal court in the event that they are discharged or discriminated against by an employer. The Takeaway The $10 million award earlier this year and the latest $50,000 award are an indication that the CFTC is becoming more aggressive in its enforcement activities. If you have knowledge of a violation of the CEA, an experienced attorney can help you report your concerns and obtain compensation. For related coverage, see our posts on IRS Whistleblowers Win Big as Court Ruling Stands and Former Employee Sued by Tesla Claims Whistleblower Status. 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 a FINRA arbitration? The Financial Industry Regulatory Authority ("FINRA") issued a Regulatory Notice in July 2016 reminding member firms that customers have a right to request arbitration "at any time." In addition, the self-regulator stated that customers do not forfeit their right to a FINRA arbitration by signing an agreement that calls for another venue. The notice also reiterated that FINRA members cannot require registered representatives and certain employees to waive their right to arbitration in a pre-dispute arbitration agreement. FINRA Arbitration at a Glance The FINRA arbitration forum protects customers from a wide range of practice violations, such as unsuitable investment advice, churning, breach of fiduciary duty, and the like. Arbitration is a more expedient and cost-effective approach to dispute resolution than a court trial. The process involves selecting a neutral third party, the "arbitrator," to resolve the dispute. By pursuing arbitration, a customer waives the right to pursue the matter in court, and the arbitrator's decision is final and binding. The Regulatory Notice is a reminder that failing to comply with the rules concerning arbitration agreements, or failing to submit disputes to a FINRA forum, are rules violations that could result in disciplinary action. The notice serves as a warning to firms that have reportedly been including restrictive provisions regarding dispute forums in their arbitration agreements. While these restrictions are more common in disputes between member firms and registered representatives, the real issue in customer disputes tends to be the selection of law. In a related development, FINRA has also filed a proposed rule with the SEC to amend its Code of Arbitration Procedure for Customer Disputes. The goal is to provide a more efficient arbitration process that is also less costly, while maintaining the rights of the parties involved in a dispute. Some observers believe the process could be made more efficient, but argue that any cost savings should be passed through to the customers involved in the proceeding. FINRA has continued to refine its arbitration and dispute-resolution procedures since; see our post on FINRA's proposed changes to the expungement process for a related development. Notwithstanding FINRA's July 2016 notice, brokers and investment advisors have a duty to act in a reasonable and prudent manner when acting as a fiduciary, and are required to put their customers' interests first. A registered representative who becomes embroiled in a dispute with a customer or employer should engage the services of an experienced securities arbitration attorney. For a broader look at how the process works, see our post, In Focus: Securities Arbitration. 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.