This Blog has previously written about the financial exploitation of America’s seniors. ( Here , here , here and here .) As noted in these prior posts, unscrupulous investment professionals (such as, stockbrokers, financial advisors and insurance brokers) often exploit the fact that many elder and disabled investors are not market savvy and financially sophisticated or are trusting of those in a position of knowledge and authority. They prey on the fact that senior and vulnerable investors are often hesitant to admit they do not understand what is being presented to them. On September 29, 2017, the Securities and Exchange Commission (“SEC”) announced that it had charged a former broker, his company, and his business partner for preying on retirees and other investors in an alleged real estate investment scheme in which the defendants used high-pressure sales tactics to steal $6 million from their victims. In its complaint , the SEC alleged that Leonard Vincent Lombardo (“Lombardo”) operated the scheme over a four-year period at his Long Island-based company, The Leonard Vincent Group (“TLVG”), with assistance from its CFO Brian Hudlin (“Hudlin”). As noted in the SEC compliant, Lombardo has a long history of preying on investors: he previously worked at several brokerage firms, including Stratton Oakmont, the former pump-and-dump brokerage firm that was at the center of the “Wolf of Wall Street,” and has been barred from the brokerage industry by the Financial Industry Regulatory Authority for multiple violations, including fraud and unauthorized trading in customer accounts. According to the SEC, more than 100 investors were defrauded with false claims that their money would be invested in distressed real estate. Some were told that their investments had increased by more than 50 percent in a matter of months when in fact there were no actual earnings on their investments.  Lombardo allegedly invested only a small fraction of investor money in real estate and used the bulk of it for separate business ventures into the e-cigarette industry and personal expenses, such as car payments on his BMW and Mercedes, marina fees on his boat, and visits to tanning salons. “As alleged in our complaint, retirees entrusted their money to TVLG believing they were investing in high-return real estate investments, not electronic cigarettes or trips to the tanning salon,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “This is another case involving a fraudster trying to look the part of a wealthy financial advisor while doing nothing more than trying to separate people from their hard-earned money.” “Investors should be suspicious anytime they are guaranteed high investment returns,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy.  “High investment returns typically involve high risk, and cannot be guaranteed.” TLVG, Lombardo, and Hudlin agreed to settlements that are subject to court approval.  TLVG and Lombardo agreed to pay disgorgement of $5,878,729.41.  Earlier this year, Lombardo pled guilty in a parallel criminal case brought by the U.S. Attorney’s Office for the Eastern District of New York.  Without admitting or denying the SEC’s allegations, Hudlin agreed to pay a $40,000 penalty. Takeaway Financial exploitation of senior and vulnerable adults remains an all too common fact of life. Enforcement efforts, such as the action discussed in this article, should help. At the end of the day, however, vigilance by investors and those trusted persons charged with overseeing their assets and property is the best way to help detect and stop financial exploitation before it results in financial ruin. As Director Schock noted: “Investors should be suspicious anytime they are guaranteed high investment returns.” After all, there are no guarantees when it comes to investing.

Securities Litigation 101: Commencing and Contesting a Federal Securities Class Action Panelist: Jeffrey M. Haber A motion to dismiss often proves a decisive event in resolving a federal securities class action, raising the stakes both for defeating or winning the motion.  A premier faculty of experienced members of the plaintiff and defense bar will present an overview of the legal issues and strategic considerations that inform the filing of a securities class action and lead plaintiff selection process, the drafting of a securities complaint and the briefing of a motion to dismiss.  The panel will address the fundamentals of a securities claim, existing precedent and evolving theories, as seen from both sides of the bar.  The panel will also offer practical suggestions to increase each side’s chance of success.  The presentation will be particularly useful for litigators who are beginning a securities litigation practice as well as seasoned litigators returning to the practice who would like to refresh their knowledge. When : 6:00 pm – 8:00 pm Wednesday, October 4, 2017 Where : New York City Bar 42 West 44th St New York, NY 10036 For additional information or to register for the seminar or the live webcast, click here . ATTORNEY ADVERTISING. © 2017 Freiberger Haber LLP. The law firm responsible for this advertisement is Freiberger Haber LLP, 105 Maxess Road, Suite S124, Melville, N.Y. 11747, (631) 574-4454; 708 Third Avenue, 5th Floor, New York, New York 10017, (212) 209-1005. Prior results do not guarantee or predict a similar outcome with respect to any future matter. Contact: Freiberger Haber LLP Melville Office (Main Office) : 105 Maxess Road, Suite S124 Melville, N.Y. 11747 Tel: (631) 574-4454   New York Office : 708 Third Avenue, 5th Floor New York, N.Y. 10017 Tel: (212) 209-1005 Fax: (212) 209-7101 Email: info@fhnylaw.com

In the wake of the hack of personal consumer information from Equifax Inc.’s computers, congressional lawmakers have asked the Securities and Exchange Commission ("SEC") to investigate whether company executives violated insider trading laws. The cyber breach involved the theft of 143 million Americans’ personal data --including Social Security numbers, driver’s license records and birth dates. Equifax is one of the main credit bureaus that compiles data to form credit histories that banks rely on to issue loans. It has been reported that three executives of the company sold shares in an aggregate amount of $1.8 million days after the security breach was discovered on July 29. Equifax did not publicly disclose the hack until 6 weeks later, however. The company has “apologized” for the security breach, but has repeatedly claimed the executives were unaware of the breach at the time they sold their shares. Equifax has offered consumers the option of “locking” their credit information for free and to sign up for a credit monitoring service. In order to do so, consumers were required to waive their right to join a class action lawsuit that was filed in connection with the hack.  However, Equifax has since said that it is no longer enforcing the waiver, stating that it has updated its policy to provide that: "enrolling in the free credit file monitoring and identity theft protection products that we are offering as part of this cybersecurity incident does not prohibit consumers from taking legal action." Class Action Lawsuits Consumer Class Actions On September 11, 2017, USA Today reported that more than 20 consumer class actions had been filed against Equifax, adding that “additional cases are likely to come.” Among other things, the actions allege that Equifax negligently failed to protect customer information and willfully and/or negligently delayed notifying the public of the breach. The lawsuits also refer to earlier, smaller data breaches the company sustained in 2013, 2016, and earlier this year. According to one of the lawsuits, Equifax “knew and should have known of the inadequacy of its own data security.” Securities Class Actions Along with the consumer class actions, investors have filed securities class actions against Equifax and certain for its officers -- namely, the company’s Chairman and CEO, Richard F. Smith ("Smith"), and its CFO, John W. Gamble, Jr. ("Gamble"). According to a press release issued on September 11 by the plaintiff's attorneys, the defendants issued materially false or misleading statements or failed to disclose that “(1) the Company failed to maintain adequate measures to protect its data system; (2) the Company failed to maintain adequate monitoring systems to detect security breaches; (3) the Company failed to maintain proper security systems, controls and monitoring systems in place; and (4) as a result of the foregoing the Company’s financial statements were materially false and misleading at all relevant times.” The complaint ( here ) was filed in the United States District Court for the Northern District of Georgia on behalf of all persons who purchased Equifax shares between February 25, 2016 and September 7, 2017 (the "Class Period"). The plaintiff specifically references the insider trading by Gamble and other company executives. The complaint also references a variety of alleged statements by the company during the Class Period relating to the quality of its data protection and security measures. As a result of the disclosure of the data breach, the complaint alleges that the company’s shares fell nearly 17%. Lawmakers’ Letter On September 12, letters signed by thirty-six U.S. Senators were sent to the SEC and the Federal Trade Commission seeking a probe of the stock sales by Equifax insiders -- namely, Gamble; the President of U.S. Information Solutions Joseph Loughran; and the President of Workforce Solutions Rodolfo Ploder. The bipartisan request highlights the degree of public outrage over the company’s handling of the cyber breach and the subsequent insider sales. “We request that you conduct a thorough examination of any unusual trading, including any atypical options trading, for violations of insider trading law ... and that you spare no effort in your investigations," the senators wrote in the letter. The Takeaway The insider trading allegations make the securities class action lawsuit more problematic for the defendants. Although Equifax has maintained that the selling executives were not aware of the breach when they traded and the sales themselves were relatively small, representing only a small portion of the sellers’ holdings, the timing of the sales is suspicious.  As noted, the trading took place after the breach had been discovered but before the breach was publicly disclosed. Courts look at the timing of the sales, in addition to the amount of the sales versus the insider’s total holdings, to determine if the sales are unusual or suspicious. None of the sales were made pursuant to scheduled 10b5-1 trading plans. Complicating the issue for the insiders are recent reports that Equifax was the victim of a separate security breach in March of this year. Equifax has not publicly disclosed the March breach. According to Bloomberg , in early March, “Equifax began notifying a small number of outsiders and banking customers that it had suffered a breach and was bringing in a security firm to help investigate.” According to the article, “the hackers entered the company’s computer banks the second time through a flaw in the company’s web software that was known in March but not patched until the later activity was detected in July.”  Gamble sold 14,000 shares on May 23, for proceeds of $1.91 million, more than twice the size of his Aug. 1 sale of 6,500 shares for $946,374. The securities class action plaintiffs and regulators will no doubt find this transaction and its timing worth investigating. The securities class action will be interesting to follow, in addition to the various regulatory and congressional investigations. In the past, securities class action and shareholder derivative plaintiffs have not fared well after bringing actions following the disclosure of data breaches. Time will tell what happens in this case. But, given the regulatory and congressional scrutiny of the breach and the insider trading, the outcome of this securities class action may be different than the previous data breach class actions involving other companies. Stay tuned.

It is widely known that there is a residential foreclosure crisis throughout the country and New York State is no exception. The New York State Legislature responded by promulgating a series of rules designed to protect residential homeowners.  These rules, however, place additional burdens on foreclosing lenders and courts throughout New York State have demonstrated little sympathy for foreclosing lenders that fail to follow these rules. For example, section 1303 of the Real Property Actions and Proceedings Law (“RPAPL”) requires that, under certain circumstances relating to residential property, a foreclosing mortgagee must send statutory notice to the mortgagor and tenants advising them, among other things, that they are in danger of losing their home and how to avoid foreclosure rescue scams. Similarly, RPAPL 1304 requires that at least ninety days prior to commencing legal action against a borrower with respect to a “home loan” (as defined in the relevant statutes (a “Home Loan”)), a lender must: send written notice to the borrower by certified and regular mail that the loan is in default; provide a list of approved housing agencies that provide free or low-cost counseling; and, advise that legal action may be commenced after ninety days if no action is taken to resolve the matter. In residential foreclosure actions involving a Home Loan, CPLR 3012-b requires that the complaint be accompanied by a certification signed by the foreclosing lender’s counsel that the underlying facts and documents have been reviewed, that based on such review there is a reasonable basis for the commencement of the action and that the foreclosing lender is the proper party plaintiff to the action. The Appellate Division, Second Department, in M&T Bank v. Joseph , 152 A.D.3d 579, 58 N.Y.S.3d 150 (2017), reminds all foreclosing lenders with respect to certain residential mortgages, that the rules established to protect homeowners are to be followed.  In M&T , the Bank loaned the defendant approximately $425,000 and secured the loan with a mortgage on defendant’s residential real property.  The defendant defaulted under the loan in June of 2010 and M&T commenced its action in December of that year.  After the defendant answered and the parties attended a mandatory settlement conference, M&T moved for, and was granted, summary judgment. On defendant’s appeal, the Second Department reversed the supreme court and, in so doing, reiterated that M&T was required to prove its strict compliance with RPAPL 1304 by tendering sufficient evidence in admissible form.  The Appellate Court was unmoved with the “unsubstantiated and conclusory” statement from a bank officer that “a 90-day default letter was sent in accordance with [] RPAPL 1304” as urged by M&T in the papers supporting its motion for summary judgment. Instead, in order to prove compliance, the Second Department required “an affidavit of service or proof of mailing from the post office evincing that it properly served the defendant pursuant to RPAPL 1304.” Significantly, the Second Department found that since M&T failed to meet its burden of proof that the requirements of RPAPL 1304 were satisfied, the motion for summary judgment should have been denied “regardless of the sufficiency of the defendant’s opposition papers.” TAKEAWAY The failure to follow the residential foreclosure rules can have significant consequences.  In M&T , the Second Department’s reversal of the supreme court’s grant of summary judgment came seven years after the action was commenced.  Substantial interest and legal fees likely accrued during the lengthy pendency of the action to the point where the equity in the real property may have been insufficient to make the bank whole.  Moreover, to the extent that the bank was otherwise entitled to recover its reasonable legal fees under the note and mortgage, the court might not consider “reasonable”, those fees related to litigating the insufficiency of M&T’s compliance with RPAPL 1304.

On September 7, 2017, the Securities and Exchange Commission ("SEC") announced that State Street Corp. agreed to pay more than $35 million to settle charges that it fraudulently charged secret markups for transition management services and separately omitted material information about the operation of its platform for trading U.S. Treasury securities.   Hidden Transition Management Fees The SEC charged State Street with defrauding six institutional investors by charging hidden markups for trades of U.S. Treasuries on its electronic platform. The scheme, which reportedly began in 2010, revolved around the highly competitive transition management business. State Street overcharged institutional investors that were changing fund managers of investment strategies for its services. According to the SEC, Ross McClellan, an executive vice president of State Street, oversaw the scheme that targeted large deals for markups because the overcharges would not draw attention. The scheme first targeted a sovereign wealth fund in the Middle East in 2010. The bank offered to rework its $6 billion portfolio without charging a commission. In reality, State Street booked $2.7 million (9 basis points) in markups that were disguised as  a “bid  offer spread.” McClellan directed two U.K.-based State Street traders to take the undisclosed markups, but one of the traders was picked up on a recorded line telling a colleague no one would notice, calling it a “rounding error.” Similar schemes saw the bank cheat an Irish government agency of $4.5 million and a U.K. postal company of $3 million in undisclosed transition management charges. “Agreeing to a fee arrangement and then secretly tucking in hidden, unauthorized markups is fraudulent mistreatment of customers,” said Paul G. Levenson, Director of the SEC’s Boston Regional Office that investigated the overcharges. In a statement, State Street said that the settlement concluded all governmental investigations related to the overcharging. “We deeply regret that our clients were impacted and that a small number of our employees failed to meet our expectations,” State Street said. “The impacted clients were fully reimbursed, and over the past several years we have taken significant steps to strengthen our controls for our transition management business, and more broadly to enhance our compliance program, culture and operating environment.” The settlement comes on the heels of a deferred prosecution agreement the bank previously entered into with the Department of Justice in January to resolve criminal charges that it engaged in the scheme that is the subject of the settlement with the SEC. ( Here .) State Street agreed to pay a penalty of $32.3 million to settle the criminal charges and offered to pay the same amount to the SEC as a penalty to resolve the civil charges. A copy of the SEC's order can be found here . Failure to Make Material Disclosures The SEC also charged the bank with failing to make material disclosures relative to “GovEx,” the bank’s electronic trading platform for U.S. Treasuries. The bank described the platform (known as the Last Look platform) as fair and transparent but gave special treatment to certain subscribers by allowing them to reject matches to quotes they had submitted.  “Firms that run trading platforms cannot mislead subscribers about their order handling operations,” said Kathryn A. Pyszka, Associate Director of the SEC’s Chicago Regional Office that investigated the GovEx-related disclosure failures. A copy of the SEC's order can be found here .

On September 5, 2017, Judge Lorna G. Schofield of the United States District Court for the Southern District of New York certified a class of Deutsche Bank employees who had filed an action under the Employee Retirement Income Security Act (“ERISA”), alleging self-dealing in the company’s retirement plan – the Deutsche Bank Matched Savings Plan (the “Plan”).  In particular, the Plaintiffs alleged that Deutsche Bank and the other defendants violated their fiduciary duties by loading the Plan with expensive funds that earned fees for the bank. The class includes between 22,000 and 32,000 current and former participants in the Plan. What is a Class Action? A class action is a type of lawsuit in which one or more persons bring an action on behalf of a group of persons, referred to as the “class.” Under federal law, the Federal Rules of Civil Procedure govern class actions. While the subject matter of class actions can vary widely, certain factors must be present for a court to certify an action as a class action: the issues in dispute are common to all members of the class; the issues predominate over all others, and the members of the class are so numerous as to make it impracticable to bring them all before the court. Moreno v. Deutsche Bank Americas Holding Corp. The plaintiffs claimed that as of 2009, the Plan had approximately $1.9 billion in assets and offered participants 22 “designated investment alternatives,” 10 of which were “proprietary Deutsche Bank mutual funds.” The gravamen of the complaint concerned Defendants’ inclusion of proprietary mutual funds among the Plan’s offerings. According to the Plaintiffs, “Deutsche Bank earned millions of dollars in investment management fees by retaining in the plan.” The complaint alleged that the Plan included three proprietary index funds that charged excessive fees in relation to other comparable index funds. The complaint also alleged that the Plan included actively managed proprietary funds in which Deutsche Bank charged management fees two to five times higher than “other actively managed funds in the same style,” and that such funds “consistently underperformed as measured by benchmark indices.” Plaintiffs further alleged that Deutsche Bank failed to include the least expensive share class for each of its offered proprietary funds and failed to rationally control recordkeeping costs. The Court found that these allegations satisfied the commonality element of Rule 23(a). Noting that “numerous courts have found commonality where plaintiffs challenge a 401(k) plan’s retention of investment products, including proprietary funds, alleging excessive fees,” the Court held that “numerous questions,” such as “whether each Defendant was a fiduciary” and whether Defendants were conflicted or acting imprudently would “generate common answers apt to drive the resolution of Defendants’ liability.” (Citation and internal quotation marks omitted.) Judge Schofield rejected the Defendants’ argument that the Plaintiffs could not show commonality because none of the alleged breaches affected all class members, holding that “ ommonality … does not mean that all issues must be identical as to each member.” The Defendants argued that “12,000 class members never invested in a single proprietary fund at any point during the relevant period.” The Defendants also argued that resolving this action involved “a massive series of individualized analyses that turn on when and in which funds each participant invested.” Again, the Court rejected the argument, holding that Defendants “misapprehends Plaintiffs’ claims, which are brought on behalf of the Plan. Liability is determined based on Defendants’ not Plaintiffs’ decisions.” As to the typicality and adequacy of representation elements, the Court found that the Plaintiffs satisfied both requirements. First, the Court found that “each class member’s claim arises from the same course of events and each class member makes similar legal arguments to prove the defendant’s liability.” (Citations omitted.) For example, the Plaintiff’s “claims arise from the same course of events – their participation in the Plan” and involve “similar legal arguments to prove liability – that Defendants mismanaged the Plan in violation of ERISA and continue to do so today.” Such allegations, held the Court, are “sufficient to show typicality.” Second, the Court found that the Plaintiffs were adequate representatives of the class because they and the class “share an interest in remedying any alleged mismanagement of the Plan in violation of ERISA,” “d not appear to have interests antagonistic to other class members,” and retained competent counsel to represent the interests of the class. The Court found “unpersuasive” the Defendants’ argument that the Plaintiffs were not adequate class representatives because they did not understand the case, noting that the claims “involve technical financial decisions affecting billions of dollars in assets and Plan fiduciaries’ compliance with the requirements of ERISA.” “It is understandable,” therefore, “that Plaintiffs, who are not lawyers or investment professionals, may have had difficulty answering questions about the claims.” Finally, the Court found that the Plaintiffs satisfied Rule 23(b)(1)(B), which permits class certification if prosecuting separate actions by or against individual class members would create a risk of adjudications with respect to individual class members that, as a practical matter, would be dispositive of the interests of the other members not parties to the individual adjudications or would substantially impair or impede their ability to protect their interests. Noting that a breach of fiduciary duty is a classic example of a Rule 23(b)(1)(B) case, and that the “the structure of ERISA favors the principles enumerated under Rule 23(b)(1)(B),” the Court found that the Plaintiffs satisfied the rule: the “Defendants’ alleged conduct was uniform with respect to each participant,” and that adjudicating Plaintiffs’ claims … would dispose of the interests of the other participants or substantially impair or impede their ability to protect their interests.” The Court went on to say that “Plaintiffs allege Defendants’ conduct affected members of a class of thousands similarly as each were exposed to the same investment options and seek to restore losses to the Plan’s assets, which are comprised of the individual accounts that allegedly paid excessive fees,” and remove “Defendants as fiduciaries,” in addition to “other equitable relief.” “Such relief, if ordered,” held the Court, “would as a practical matter dispose of the interests of non-party participants.” Notably, the Court ruled that although there was split over whether class certification under Rule 23(b)(1) for breach of fiduciary duty under ERISA is appropriate in the wake of recent Supreme Court decisions, the majority of courts “have held that it is.” Plaintiffs do not assert harms based on Defendants’ misconduct that is specific to his or her individual account. Rather, named Plaintiffs – whose collective participation in the Plan covers the entire class period – challenge Defendants’ process for selecting and retaining the investment options presented to all Plan participants. Adjudicating their claims challenging Defendants’ management of the Plan as a whole would necessarily affect the resolution of any concurrent or future actions by other Plan participants. The Court further found that although Rule 23(b)(2) does not permit the combination of “individualized awards of monetary damages,” the same is not true with regard to Rule 23(b)(1)(B), which is the rule under which the Plaintiffs were proceeding: “Plaintiffs’ class claims under Rule 23(b)(1) are derivative in nature, not individualized.… Any monetary relief will be paid to the Plan … and the Plan fiduciaries would be responsible for allocating the recovery among participants.” (Citations and internal quotation marks omitted.) A copy of the Court's opinion and order can be found here. Other 401(k) Class Action Lawsuits This ruling follows more than two dozen proposed class actions in the past three years against financial firms challenging in-house investment products in employees’ 401(k) plans. Firms targeted by proposed class actions include JP Morgan Chase Bank,  Charles Schwab, and Morgan Stanley, among others. The overarching issue in these lawsuits is that the firms violated their fiduciary duties under ERISA by packing their 401(k) plans with in-house funds that earn high fees, rather than providing participants less expensive options available through other investments. The Takeaway Although it remains to be seen whether the class will prevail in its claims against Deutsche Bank, Moreno is important because of the Court's analysis of Rule 23(b)(1), in particular, its adoption of the majority rule that Rule 23(b)(1) is an appropriate vehicle for resolution of breach of fiduciary duty claims under ERISA. The fact there is a split among the district courts makes the issue ripe for review by the Circuit Courts of Appeal, and possibly the United States Supreme Court. This Blog will continue to follow the issue as it develops.

It has long been the policy in New York to favor and encourage arbitration as a means of expediting the resolution of disputes and conserving judicial resources. Rio Algom Inc. v. Sammi Steel Co., Ltd. , 168 A.D.2d 250, 251 (1st Dept. 1990). For this reason, when parties have chosen arbitration as their forum for dispute resolution, they are precluded “from using the courts as a vehicle to protract litigation.” Matter of Weinrott (Carp) , 32 N.Y.2d 190, 199 (1973). Notwithstanding, there are times when parties choose not to invoke their arbitration clause. For example, if a defendant believes that the plaintiff’s claims are without merit, it may prefer to have a court rule on a motion to dismiss, rather than an arbitrator who is not bound by a court’s procedural and substantive rules. If a party ignores the arbitration provision, and runs to court, does that party waive its right to arbitration? In Primer Constr. Corp. v. Empire City Subway Co., Ltd. , 2017 NY Slip Op. 31909(U) (Sup. Ct. N.Y. County Sept. 6, 2017), Justice Bransten of the Supreme Court, New York County, Commercial Division, answered the question, yes. Primer Construction Corp. v. Empire City Subway Co., Ltd. Background The case arose from an agreement between Primer Construction Corp. (“Primer”), a general contractor that provides capital municipal work for New York City and its agencies, Verizon-New York, Inc., d/b/a Verizon Communications (“Verizon”), a private utility company that owns and/or operates surface and subsurface utility facilities within New York City, Empire City Subway Company, Ltd. (“Empire City”), a wholly-owned subsidiary of Verizon, and the New York City Department of Design and Construction (“DDC”). Pursuant to the agreement, the defendants agreed to cooperate with and compensate contractors, such as the plaintiff, working on DDC projects involving the defendants’ utility facilities. In June 2014, Primer entered into an agreement with the DDC for the construction of a culvert ( e.g. , a tunnel that allows water to flow under a road) in Queens, New York. The project, however, interfered with an underground network of utility lines owned by the defendants, requiring Primer to move, protect, or secure those facilities. In October 2014, Primer and the defendants entered into an agreement pursuant to which Primer would place the utility lines above the culverts (the “Interference Agreement”). The Interference Agreement contained a binding arbitration clause, which stated that “ ny and all disputes arising out of this Agreement or a breach thereof shall be submitted to arbitration ….” The agreement also contained a binding written modification clause, which stated that the agreement “shall not be modified or rescinded, except by a writing signed by a duly authorized representative of both parties.” Soon after work began, Primer found that the interference work could not be completed as originally agreed. Primer alerted the defendants to the problem, but the defendants refused to provide alternative methods for project completion. Nevertheless, Primer continued to perform the work as set forth in the Interference Agreement. Primer claimed that the defendants owed it $1.3 million for the work it performed. Primer filed the action in May 2015, and an amended complaint in November 2016, asserting three causes of action against the defendants: (1) fraudulent misrepresentation/fraudulent inducement; (2) breach of contract; and (3) quantum meruit. The defendants moved to dismiss. The Court’s Ruling Before ruling on the motion to dismiss, the Court addressed the question of whether it had subject matter jurisdiction to hear the dispute in light the arbitration provision in the Interference Agreement. The Court held that the parties had waived the arbitration requirement in the Interference Agreement. The Court found that Primer waived the right to arbitrate “by choosing to litigate the dispute in” court and the Defendants “waived the right” to arbitrate “by participating in the instant litigation.” Thus by “choos to take the course of litigation,” the parties had “waived the right to submit the question to arbitration.” Matter of City of Yonkers v. Cassidy , 44 N.Y.2d 784, 785 (1978). The Court also found that even if the parties had not manifested their “acceptance of the judicial form” by participating in the lawsuit ( Stark v. Molod Spitz DeSantis & Stark, P.C. , 9 N.Y.3d 59, 66 (2007)), they had orally waived the arbitration provision in the Interference Agreement. The Court held that such waiver was enforceable notwithstanding the “written modification provision at issue.” Taylor v. Blaylock & Partners, LP. , 240 A.D.2d 289, 290 (1st Dept. 1997). As a result, the Court concluded that it had subject matter jurisdiction to hear the matter. Takeaway Arbitration is an alternative way to resolve a dispute without going to court. It can be binding, in which the arbitrator issues a decision that can be enforced by the courts, or non-binding, in which the arbitrator issues an advisory opinion that the parties can accept or reject. Before the parties can arbitrate their dispute, they must have agreed to do so. However, like any contract, the parties to an arbitration agreement can modify, waive or abandon the right to arbitrate. They can choose to litigate in court or they can agree to waive the agreement to arbitrate. And, they can waive the agreement orally even if the contract requires modification only in writing. Primer exemplifies these principles.

It’s an unfortunate fact of life that victims of natural disasters, such as Hurricanes Harvey and Irma, and those who try to help them, often become the targets of fraud. As the floodwaters recede and the clean-up effort begins, officials have sounded the alarm, warning victims and volunteers about this threat. On September 4, 2017, Corey Amundson (“Amundson”), the Acting United States Attorney for the Middle District of Louisiana and head of the National Center for Disaster Fraud, highlighted the concern in an interview with NPR ( here ). According to Amundson, “it starts with charity fraud, contractor fraud, emergency assistance fraud” and “evolves into program fraud” as the federal government provides financial assistance to those in need. Amundson said that these types of fraud fall into two categories: (i) impersonations – individuals impersonating FEMA inspectors, insurance inspectors and National Flood Insurance Program inspectors, and (ii) false submissions – individuals filing claims on property they do not own or with social security numbers that belong to someone else. Amundson also noted the use of technology to defraud hurricane victims, citing identity fraud and false web domains that sound like disaster relief organizations that in reality are not as common examples. Amundson offered the following advice to the victims of natural disasters and volunteers who are trying to help them: Do not respond to emails soliciting donations and do not open any email attachments or links. Avoid charitable organizations whose names sound familiar “but are just slightly off.” Only work with and donate money to known and trusted charities, and only work directly with them, not with people claiming to be working on their behalf. Bullying or intimidation is a red flag for fraud. While all fraud cannot be prevented, Amundson advised people to use their “gut feelings” and “common sense,” to protect themselves from fraud. After all, as Amundson noted, “if something feels off, it probably is.” On September 13, 2017, the Financial Industry Regulatory Authority (“FINRA”) issued a fraud alert about the risk of financial fraud in the wake of hurricanes Harvey and Irma ( here ). Echoing some of the things Amundson noted, FINRA warned that hurricane victims should not “be surprised” if they “receive unsolicited  phone calls , emails and texts, including from  messaging apps , about investments that exploit a variety of hurricane-related opportunities.” FINRA noted that “stocks or  crowdfunding investments  associated with clean-up, rebuilding and breakthroughs in science and technology that purport to address current and future flood-related issues” are common forms of financial fraud. FINRA cautioned against responding to unsolicited communications that, among other things, promise “swift and exponential growth”; mention “contracts or affiliations with federal government agencies or large, well-known companies”; use facts from respected news sources “to bolster claims” of stock increases; and use pressure tactics to secure immediate investment, such as “You must act now!” FINRA offered the following advice to victims of natural disasters to “avoid potential scams”: Investigate before investing. “Never rely solely on information you receive in an unsolicited email, text message or cold call from a smooth talking “analyst” or “account executive” promoting a stock.” “Use  FINRA BrokerCheck ®  to check registration status and additional information on investment professionals and firms.” Find out the identity of the sender. “Many companies and individuals that tout stock are corporate insiders or are paid to promote the stock. Look for statements (usually found in the fine print) that indicate cash payments or the receipt of stock for disseminating a report on the company.” Find out where the stock trades. “ Most unsolicited stock recommendations involve stocks that can’t meet the listing requirements of The Nasdaq Stock Market, the New York Stock Exchange or other U.S. stock exchanges. Instead, these stocks tend to be quoted on an over-the-counter (OTC) quotation platform like the OTC Bulletin Board (OTCBB) or the OTC Link Alternative Trading System (ATS) operated by OTC Markets Group, Inc.” “Companies that list their stocks on registered exchanges must meet minimum listing standards. For example, they must have minimum amounts of net assets and minimum numbers of shareholders. In contrast, companies quoted on the OTCBB or OTC Link generally do not have to meet any minimum listing standards (although companies quoted on the OTCBB, OTC Link’s OTCQX and OTCQB marketplaces are subject to some initial and ongoing requirements).” Read a company’s SEC filings. “ Most public companies file reports with the SEC. Check the SEC’s EDGAR database  to find out whether the company files with the SEC. Read the reports and verify any information you have heard about the company.” Takeaway Victims of natural disasters have enough to worry about. They should not have to worry about being victimized by fraudsters. Yet, they do. As FINRA noted in its alert, “fraud routinely follows on the heels of disaster.” Hurricanes Harvey and Irma “are no exception.” While it may not be possible to prevent all types of fraud, Amundson and FINRA offer sound advice for the targets of fraud to protect themselves: use common sense, ask questions and be vigilant. By doing so, hurricane victims can protect themselves from being victimized again.

Black’s Law Dictionary has defined “escheat” as “ reversion of property to the state in consequence of a want of any individual competent to inherit.”  Many people are aware that money in forgotten bank accounts is frequently deemed abandoned and is escheated to the State, however, the scope of the APL, is significantly broader. New York’s Abandoned Property Law (“APL”), sets forth various circumstances in which property is deemed to be abandoned and thus escheated to New York State.  Thus, section 102 of the APL, which is the declaration of the policy behind the APL, provides that “ t is hereby declared to be the policy of the state, while protecting the interest of the owners thereof, to utilize escheated lands and unclaimed property for the benefit of all the people of the state, and this chapter shall be liberally construed to accomplish such purposes”. Unclaimed property held or owing by banking organizations is governed by Article III of the APL.  Other provisions in the APL relate to unclaimed deposits and refunds for utility services (Article IV), unclaimed property held or owing for payment to security holders (Article V), unclaimed property held by securities brokers (Article V-A), unclaimed life insurance funds (Article VII), unclaimed condemnation awards (Article X), unclaimed property paid or deposited into federal courts (Article XII), unclaimed or abandoned property in the possession, custody or control of the United States of America (Article XII-A) and various categories of miscellaneous unclaimed property (such as, but not limited to, unclaimed property resulting from the administration of the NYS Vehicle and Traffic Law, uncashed travelers checks and money orders, unclaimed consumer credit balances) (Article XII). This blog reflects upon Article VI of the APL, which addresses the escheatment to New York State of unclaimed or unknown court funds.  Attorneys and litigants routinely deposit money into court for a variety of reasons pursuant to statute and/or court order.  These deposited funds are subject to section 600 of the APL, which deems, with some exceptions, the following unclaimed property as abandoned: (a) “any monies including the monetary proceeds from the sale of tangible personal property and securities or other intangible property paid into court which … shall have remained in the hands of any county treasurer, or the commissioner of finance of the city of New York, for three years.…”; (b) certain “…monetary proceeds representing any legacy or distribution share to which an unknown person is entitled….”; and, (c) “… monies paid to a support bureau of a family court, for the support of a spouse or child, which shall have remained in the custody of a county treasurer, or the commissioner of finance of the city of New York, for three years….”  The potentially absurd result of the blind application of Article VI of the APL is illustrated by the circumstances of the case discussed below (the true names of the parties having been changed). ABC Corporation (“ABC”) was the owner of real property in New York State on which it constructed a large building (the “Project”).  The general contractor on the Project (“GC”) was terminated, for cause.  The GC and almost two dozen subcontractors filed mechanics liens approximating $1.8 million (the “Liens”). In March of 2012, the GC commenced an action to foreclose its lien (the “Lien Foreclosure Action”).  In April of 2012, ABC moved the Court for an order pursuant to section 20 of New York’s Lien Law fixing the amount necessary for ABC to pay into Court to discharge all of the Liens (the “Discharge Motion”).  In May of 2012, the Court granted ABC’s Discharge Motion and directed that upon the deposit of the sum of $1.1 million with the County Clerk (the “Deposit”), the Liens would be discharged.  The Deposit was promptly made and, accordingly, the Liens were discharged. In the summer of 2016, ABC’s accountants, in conjunction with a routine audit, and in light of the significant amount of the Deposit, wrote to the County Clerk to inquire on the status of the Deposit.  In the County’s response to the request (the “Response”), ABC was advised that in the spring of 2016, the County Clerk deemed the Deposit abandoned and turned same over to the NYS Office of Unclaimed Funds, less a 2% “Treasurer’s Fee” that the County retained for itself (the “Turnover”).   In its Response, the County also advised that it provided notice of the Turnover in a legal advertisement placed in the local press. The news that the County turned over to New York State as abandoned property the $1.1 million Deposit was met with a resounding “HOLY ESCHEAT”. While the Turnover appears to be authorized under the APL, the County Clerk’s actions seem to lack sensibility.  The Deposit was made pursuant to an Order of the Court under section 20 of the Lien Law, which provides, in pertinent part, that a deposit made pursuant to that section “shall be repaid to the party making the deposit…upon the discharge of the liens against the property pursuant to law”, that such deposits of money “shall be considered as paid into court and shall be subject to the provisions of law relative to the payment of money into court and the surrender of such money by order of the court” and that orders for the surrender of such deposits to the lienor or depositor “may be made by any court of record having jurisdiction of the parties….”  Thus, the Deposit should have remained in the County Clerk’s possession until further order of the Court. Further, at the time the Turnover was made, the parties were still actively litigating the Lien Foreclosure Action and the Clerk was aware of the name and address of each and every litigant and their respective counsel.  Nonetheless, the only “notice” of the Turnover was made by publication pursuant to APL section 601(1), which provides that “ n or before the First day of February in each year, such county treasurer or the commissioner of finance of the city of New York shall cause to be published a notice entitled: ‘NOTICE OF NAMES OF PERSONS APPEARING AS OWNERS OF CERTAIN UNCLAIMED PROPERTY HELD BY (title of officer).’”  Under the facts of the case discussed herein, it should be apparent that published notice was not the best way to notify known and active litigants that their valuable property was about to be turned over to the State. Section 1406 of the APL establishes various claims procedures for the return of property deemed abandoned.  In the case discussed herein, upon learning of the Turnover, ABC moved the Court in the Lien Foreclosure Action pursuant to APL section 1406(2) for an order directing New York State to return the Deposit (the “Return Motion”).  Pursuant to Section 1406(2), claims is in the amount of $10,000 or more based on turnovers to New York State pursuant to, inter alia, APL section 600(1)(a), “…may be established only on order of the court which had original jurisdiction of the underlying matter, after service of a notice upon the state comptroller and upon due notice to all parties to the action or proceeding which resulted in the monies being paid into court….” At the time the Return Motion was made, the Lien Foreclosure Action was still active and the Deposit was still required to be in place pursuant to section 20 of the Lien Law.  ABC was reluctant to have the Deposit returned to the County Clerk because of its prior decision to deem the Deposit abandoned.  Thus, in its Return Motion ABC requested that the Deposit be delivered to ABC’s counsel to be held in an escrow account (as opposed to returning the Deposit to the County Clerk).  The Return Motion was granted and ABC’s counsel retained the Deposit until the matter was resolved and a subsequent court order permitted the delivery of the Deposit to ABC. Takeaway Whenever deposits into court are required, a review of the APL should be made to determine whether the circumstances present one in which the deposit may be deemed abandoned after three years and, if so, steps should be taken before the end of three years to ensure that any such deposits are not deemed abandoned pursuant to the APL. In addition, query whether it might make sense to request that the Court include in any order directing that a deposit be made into court, language prohibiting the County Clerk from deeming such deposit to be abandoned without further order of the court and/or without personally notifying the litigants of such intentions so that prophylactic steps can be taken to prevent such actions by the County Clerk.

The claim of assumpsit (from the Latin indebitatus assumpsit ) was “developed to redress circumstances involving unjust enrichment or to ‘prevent a man from retaining the money of, or some benefit derived from, another which it is against conscience that he should keep.’” Tri-State Chem., Inc. v. Western Organics, Inc. , 83 S.W.3d 189, 193-94 (Tex. App.-Amarillo 2002, pet. denied) (citation omitted); Parsa v. State of New York , 64 N.Y.2d 143, 148 (1984). “It encompassed an obligation imposed by law on one to pay a sum of money or to deliver specific property to another.” Tri-State Chem ., 83 S.W.3d at 193-94. Over time, assumpsit was divided into various categories, two of which lawyers know today as money had and received and quantum meruit. Id . at 194. Money had and received is a common law claim in which the plaintiff seeks the return money from another on equitable grounds. Parsa , 64 N.Y.2d at 148; New York v. Park , 204 A.D.2d 531 (2d Dept. 1994). All the plaintiff need show is that the defendant holds money, which in equity and good conscience, belongs to him. Staats v. Miller , 150 Tex. 581, 584, 243 S.W.2d 686, 687-88 (1951) (citation omitted). As the U.S. Supreme Court has observed, a cause of action for money had and received is “less restricted and fettered by technical rules and formalities than any other form of action. It aims at the abstract justice of the case, and looks solely to the inquiry, whether the defendant holds money which . . . belongs to the plaintiff.” United States v. Jefferson Elec. Mfg. Co. , 291 U.S. 386, 402-03 (1934). The Law in New York A claim for money had and received requires a showing that: (1) the defendant received money belonging to the plaintiff; (2) the defendant benefited from the receipt of the money; and (3) under principles of good conscience the defendant should not be allowed to retain that money. Litvinoff v. Wright , 150 A.D.3d 714 (2d Dept. 2017). On August 17, 2017, Justice Scarpulla of the Supreme Court, New York County, Commercial Division, dismissed a claim for money had and received because the plaintiff failed to establish that the defendant retained or benefitted from the receipt of the money. 413 W. 48th St. Housing Development Fund Corp. v. Saparn Realty, Inc . , 2017 NY Slip Op. 31773(U) (Sup. Ct., N.Y. Co. Aug. 17, 2017). 413 W. 48th St. Housing Development Fund Corp. v. Saparn Realty, Inc. Background In May 2012, the plaintiff, 413 West 48th Street Housing Development Fund Corporation (“HDFC”), retained the defendant, Saparn Realty, Inc. (“Saparn”), as the managing agent for its property. As part of Saparn’s responsibilities, it was required to collect and deposit funds in a separate bank account as agent of HDFC, without commingling them with any other funds collected from other properties managed by Saparn. Saparn was also required to provide copies of bank statements to HDFC every month. In October 2012, HDFC implemented a policy requiring that at least $200,000 be kept in its reserve account, to be used for emergency purposes only. HDFC communicated that policy to Saparn. Over time, Saparn stole funds from HDFC’s reserve account. In August 2013, HDFC learned that its bank accounts with Saparn were closed out, and its reserve fund had “vanished.” To conceal the theft of funds, Saparn delivered false reports to HDFC, containing altered bank statements showing a balance of more than $200,000 in the reserve account. HDFC investigated and discovered that Saparn had been transferring money out of HDFC’s bank accounts since May 2013. HDFC reported the theft to the New York District Attorney and informed other building owners defrauded by Saparn, including The Oaks at La Tourette Condominium Section II (“Oaks”), one of the defendants in the action. HDFC commenced the action against Saparn and its principals to recover the money that was stolen from it. Thereafter, it discovered that approximately $91,000 of the money taken from the reserve account was deposited into two bank accounts held by Oaks. HDFC had no dealings with Oaks, so there was no agreement or obligation pursuant to which that payment was made. HDFC informed Oaks of its findings and demanded the return of its funds in March 2014, and again in September 2014. Oaks refused to return any of the money demanded by HDFC. Thereafter, HDFC sued Oaks for the funds. HDFC moved for summary judgment on, among other things, its cause of action for money had and received against Oaks. HDFC argued that its money was wrongfully deposited into Oaks’ bank accounts, thereby conferring a benefit on Oaks. HDFC argued that, even though Oaks did not participate in the wrongdoing, it could not retain the windfall. Oaks also moved for summary judgment, arguing that because it was a victim just like HDFC, it should not have to lose money twice by having its own money stolen and then having to pay another of Saparn’s victims. One victim of a fraudulent scheme should not be permitted to recover from another victim. Oaks further claimed that Saparn admitted to moving funds between accounts and creating false bank statements, so it could not be established that any money Oaks had in its account belonged to HDFC. The Oaks account was used as a vehicle to move money between other third parties. The money deposited into its account from HDFC could have just as easily been transferred out. The Court’s Decision The Court held that HDFC failed to meet its burden of establishing “that Oaks benefitted from the receipt of HDFC’s money,” finding that “any factual conclusion to that effect could only be made on speculation.” The Court agreed with Oaks that “ oth parties were victims of Saparn’s fraud.” While HDFC has demonstrated that Oaks received money from HDFC’s account, HDFC has not made a prima facie showing that Oaks either retained or benefitted from the receipt of that money. HDFC has not provided any forensic report of its own, or any expert analysis of Oaks’ accounts. There is simply no probative evidence submitted to establish that Oaks benefitted from the receipt of HDFC’s money, and any factual conclusion to that effect could only be made on speculation. Both parties were victims of Saparn’s fraud. Accordingly, the Court dismissed HDFC’s claim for money had and received. Takeaway Money had and received is a category within the common law cause of action of assumpsit. The remedy for the claim is restitution, or the return of money, to restore the plaintiff to his/her original position. 413 W. 48th St. Housing Development Fund Corp . teaches that even where a plaintiff can demonstrate that a third party received money belonging to the plaintiff, the plaintiff must nevertheless make a prima facie showing of entitlement to the relief requested. As HDFC learned that showing cannot be based on speculation.  It must be based on evidence.

In prior posts, this Blog has written about the financial exploitation and abuse of vulnerable adults. ( Here , here and here .) Late last month, CNBC ran a story about this growing and disturbing problem. ( Here .) Financial exploitation of the elderly and vulnerable is a common occurrence. According to the U.S. Department of Justice, financial exploitation of senior adults is one of the most frequently reported forms of elder abuse. Indeed, a recent survey from the North American Securities Administrators Association (“NASAA”) found that three in 10 state securities regulators had reported an increase in complaints from victims of financial fraud and exploitation. ( Here .) As the incidence of exploitation and abuse increase, so do the costs to its victims. An oft-cited study by the MetLife Mature Market Institute, the National Committee for the Prevention of Elder Abuse, and the Center for Gerontology at Virginia Polytechnic Institute and State University, titled “Broken Trust: Elders, Family & Finances,” estimates that about one million seniors lose approximately $2.6 billion annually from financial exploitation and abuse. ( Here .) In 2011, MetLife updated its estimate to at least $2.9 billion. Other, more recent studies, estimate the losses to exceed $36 billion a year, 12 times the MetLife estimate. ( Here .) The numbers from these studies show that the financial exploitation of senior and vulnerable adults is growing, and not just with older adults experiencing cognitive decline. “Many of the victims of financial fraud are not demented or disabled,” Patricia Boyle, professor of behavioral sciences at Rush University Medical Center in Chicago, told the International Association of Gerontology and Geriatrics conference in July. Indeed, one in 18 “cognitively intact” seniors fall victim to financial fraud and exploitation each year, according to a recent study in the American Journal of Public Health. ( Here .) Researchers believe that the true prevalence of exploitation and abuse is underestimated. Financial Exploitation of Investors Financial exploitation occurs when individuals steal and/or misuse a vulnerable adult’s financial assets and property for their own personal gain, often without the informed celder exploitation elder exploitation and abuseand abusonsent or knowledge of their victim. According to a recent study by the New York State Office of Children and Family Services, titled “The New York State Cost of Financial Exploitation Study,” approximately five million seniors and vulnerable Americans are financially exploited each year.” ( Here .) The financial exploitation and abuse of senior and vulnerable investors ( e.g. , senior citizens and the disabled) takes many forms. The most common involves: churning, unauthorized trading, unsuitable investing, over-concentrating an investor’s portfolio in a single type of investment or iEndustry segment, and misrepresenting the risk or potential returns of an investment product for the purpose of generating high commissions. Unscrupulous investment professionals (such as, stockbrokers, financial advisors and insurance brokers) often exploit the fact that many elder and disabled investors are not market savvy and financially sophisticated or are trusting of those in a position of knowledge and authority. They prey on the fact that senior and vulnerable investors are often hesitant to admit they do not understand what is being presented to them. Regulatory Action Last October, the Financial Industry Regulatory Authority (“FINRA”) announced that it had submitted proposed rule changes to the Securities and Exchange Commission (“SEC”) to help member firms detect and prevent the abuse and financial exploitation of senior and vulnerable adult customers. (This Blog wrote about the proposed rule changes here .) On March 30, 2017, FINRA announced that the SEC approved the proposed rule changes. In connection with the announcement, FINRA issued Regulatory Notice 17-11, and set February 5, 2018, as the effective date for the new rules. ( Here .) The changes approved by the SEC involve two key protections for seniors and other vulnerable investors. First, member firms will be required to make reasonable efforts to obtain the name and contact information of a trusted contact person for a customer’s account. Second, member firms will be permitted to place a temporary hold on the disbursement of funds or securities when there is a reasonable belief of financial exploitation and abuse. The NASAA Model Act In 2016, NASAA adopted a model act that resembles FINRA’s rule. ( Here .) The model act requires brokers and advisers to report instances of suspected elder abuse to state authorities, and authorizes them to delay disbursements of funds for up to 15 days if they believe their clients were being abused, conferring civil and administrative liability protections in those cases. The model act has served as the basis of legislation or regulations in five states. Alabama and Indiana adopted laws, and Vermont promulgated a regulation, which implements the model act’s mandatory reporting requirements, immunity, and delayed disbursement provisions. Louisiana passed a law that maintains the model act’s immunity and disbursement provisions, but relaxed its reporting requirements, making them only voluntary. Texas recently passed a bill that closely tracks the model act, requiring investment professionals to report suspected exploitation and abuse and offering a 10-day hold on suspicious disbursement requests. Some, like California, adopted the model act’s mandatory reporting requirements, while others, like Washington State, enacted more robust statutory schemes that are nearly identical to the model act. Dozens of states have used the model act as the template for their own proposed legislation and/or regulations. Maryland, Mississippi, New Mexico, North Dakota, and Oregon, for instance, are considering legislation that imposes mandatory reporting requirements in line with the model act. At least two states, New York and Tennessee, are considering bills that would provide for voluntary reporting of suspected financial exploitation. Takeaway Financial exploitation and abuse of senior and vulnerable adults remains an all too common fact of life. Defending seniors and vulnerable adults from financial exploitation and abuse starts with trusted persons who are sensitive to facts and circumstances that are, or seem to be, out of the ordinary. Recent legislative and regulatory efforts should help. At the end of the day, however, vigilance by trusted individuals in overseeing and monitoring the property and assets of the elderly and vulnerable is the best way to help detect and stop financial exploitation and abuse before it results in financial ruin.

Ponzi schemes seem to be in vogue lately. Last week the Securities and Exchange Commission (“SEC”), and the Department of Justice, announced the filing of two enforcement and criminal proceedings involving Ponzi schemes ( here and here ), one involving New York sports radio personality, Craig Carton, and the other involving a New Jersey-based tax preparer and investment adviser. Both are charged with bilking investors out of millions of dollars. What is a Ponzi Scheme? Named after the originator of this type of investment fraud, Charles Ponzi, a Ponzi scheme involves the payment of purported returns to existing investors from funds contributed by new investors. To make the scheme work, the perpetrator solicits new investors by promising to invest money in securities that will generate high returns with little or no risk.  Ponzi schemes rely on a constant flow of money from new investors in order to provide “returns” to earlier ones. This constant payment of “returns” gives the illusion that the investor is receiving “profits” from a legitimate business. However, when the cash flow stops, the scheme falls apart. Bernie Madoff is probably the most well-known perpetrator of a Ponzi scheme. Over more than 17 years, Madoff carried out the largest Ponzi scheme in history, defrauding thousands of investors out of tens of billions of dollars. What are the Common Characteristics of a Ponzi Scheme? Many Ponzi schemes share the following characteristics: Guaranteed promise of high returns with little or no risk to principle. Consistent returns regardless of market conditions. Unregistered investments. Undisclosed and/or complex investment strategies. Periodic statements, confirmation tickets and other documentation withheld from investors. Inability to withdraw client money. WFAN Radio Host Charged with Ticket Ponzi Scheme On September 6, 2017, the SEC charged Craig Carton, a New York sports radio personality, and Joseph Meli (“Meli”), a New York City resident, with stealing millions of dollars from investors who were allegedly promised their funds would be used for the purchase and resale of concert tickets. (The SEC’s announcement can be found here .) The SEC alleged that Carton and Meli falsely claimed they had access to large blocks of face value tickets to popular concert performances.  (The SEC’s complaint can be found here .) According to the complaint, investors were falsely promised high returns from the price markups in ticket resales.  However, instead of purchasing tickets for resale, Carton and Meli allegedly misappropriated at least $3.6 million to repay earlier investors and cover such other expenses as Carton’s gambling debts.  Additionally, Carton allegedly misappropriated $2 million “by making misrepresentations to investor and a third-party concert venue, so as to trick the concert venue into forwarding the investor’s funds to an entity controlled by Carton.” According to the SEC’s complaint, one investor was provided documents falsely representing that large blocks of Adele tickets were being purchased at face value directly from Adele’s management company when in fact there was no such agreement. “As alleged in our complaint, investors were lured with promises of big profits from resales of A-list concert tickets, but little did they know their money was being used to cover Carton’s gambling debts among other things,” said Paul Levenson, Director of the SEC’s Boston Regional Office. The SEC is seeking disgorgement of ill-gotten gains plus interest and penalties against Carton and Meli along with six businesses they control: Advance Entertainment LLC, AdvanceM Ltd., Misoluki Inc., Misoluki LLC, Ticket Jones LLC, and Tier One Tickets LLC. Meli is no stranger to run-ins with the law. Earlier this year, he was charged with operating a Ponzi scheme involving the purported resale of tickets to the Broadway musical Hamilton and other events. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced ( here ) that it filed criminal charges against Carton and his associate, Michael Wright. Carton and Wright were charged with securities fraud, wire fraud, and conspiracy to commit those offenses. (The criminal complaint can be found here .) Acting Manhattan U.S. Attorney Joon H. Kim said: “As alleged, Craig Carton and Michael Wright deceived investors and raised millions of dollars through misrepresentation and outright lies. Their schemes were allegedly propped up by phony contracts with two companies to purchase blocks of concert tickets, when in fact, Carton and Wright had no deals to purchase any tickets at all. As alleged, behind all the talk, the Wright and Carton show was just a sham, designed to fleece investors out of millions ultimately to be spent on payments to casinos and to pay off other personal debt.” FBI Assistant Director-in-Charge William F. Sweeney Jr. said: “Carton and Wright thought they could get off easy by allegedly paying off their debts with other people’s money. They then attempted to pay off investors with money that would eventually become future debt, as alleged. We see this time and time again, the rise and fall of a Ponzi scheme destined for failure. The truth is, the time will come when your luck runs out. Unfortunately for those arrested today, that time is now.” If convicted, Carton can serve up to 45 years of prison time and pay fines that can exceed $5 million. Tax Preparer and Investment Advisor Charged With Stealing Investor Money Also on September 6, 2017, the SEC announced that it charged a New Jersey-based tax preparer and investment adviser with stealing more than $1 million from clients to support his gambling habit and other personal expenditures. In its complaint , the SEC alleged that Scott Newsholme (“Newsholme”) “fabricated account statements, doctored stock certificates, and forged promissory notes as part of a scheme in which he convinced clients seeking his financial planning advice to give him their money to invest in various securities.”  Instead of investing clients’ money, Newsholme allegedly cashed their investment checks and pocketed the funds “while assuring clients that their assets were safe and flourishing.”  According to the SEC, “Newsholme used investor money for personal expenses, gambling in Atlantic City, and Ponzi-like payments to clients who sought a return of their funds.” In a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced the filing of criminal charges against Newsholme. In that regard, Newsholme was charged with one count of mail fraud, wire fraud, and securities fraud. (The criminal complaint can be found here .) If convicted on the mail and wire fraud counts, Newsholme can serve a maximum sentence of 30 years in prison and pay a $1 million fine. The securities fraud count carries a maximum sentence of 20 years in prison and a $5 million fine. Takeaway The SEC has warned investors to be vigilant in protecting themselves before they invest money. ( Here .) “Whether you are a first-time investor or have been investing for many years, there are some basic questions you should always ask before you commit your hard-earned money to an investment.” Many of the questions investors should ask are based upon the common features of a Ponzi scheme. If these questions are not answered, investors should not be afraid to request more information. Any push-back or doublespeak should raise red flags. After all, as the proverb says: “if it sounds too good to be true, then it probably is.”