What is being done about fraud in the FHA's mortgage insurance program? In September, the U.S. Department of Justice announced that Regions Bank ("Regions") agreed to pay $52.4 million to resolve allegations that it violated the False Claims Act. The Alabama-based bank knowingly originated mortgage loans insured by the Federal Housing Administration ("FHA") that did not meet the underwriting guidelines of the U.S. Department of Housing and Urban Development ("HUD"). What is an FHA Direct Endorsement Lender? Since January 2006, Regions has been a direct endorsement lender ("DEL") in the FHA's mortgage insurance program which gives these lenders the authority to originate, underwrite and endorse mortgages for FHA insurance. If the borrower subsequently defaults, the holder of the note can submit an insurance claim to HUD to recoup the losses related to the default. Under the program, the FHA relies on the DEL to certify compliance. As part of the settlement, Regions admitted that from January 1, 2006 to December 31, 2011, it certified loans that did not meet HUD underwriting requirements regarding borrower creditworthiness. The bank also admitted that its quality control department did not review a sufficient number of FHA loans. Even worse, when deficiencies were identified, bank employees often cured the deficiencies, understating the defect rate being reported to senior management. In addition, Regions did not comply with HUD guidelines regarding the bank's review of Early Payment Default loans. The guidelines require a review of all loans that became 60 days past due within the first six months, but Regions reviewed only those loans that became 90 days past due. Lastly, the bank did not fully adhere to HUD's self-reporting requirements, which require DELs to report fraud and other serious violations or other material deficiencies. In fact, the bank identified numerous loans containing deficiencies between 2006 and 2011, but did not begin self-reporting until 2011. By failing to comply with the requirements of the FHA program, HUD insured hundreds of loans that were ineligible and incurred substantial losses. The Takeaway The FHA mortgage insurance program is designed to encourage home ownership for lower income borrowers or those suffering from financial hardship. Lenders are given incentives to make potentially riskier loans in exchange for government guarantees to reimburse holders of the loans for default-related losses. By failing to adhere to HUD's underwriting guidelines, and recover losses from the FHA program, Regions essentially made false claims to the government. The question remains as to how far reaching these issues are at the FHA, and whether there is the potential of a crisis similar to the one that culminated in the collapse of the subprime mortgage market in 2008. For this reason, the False Claims Act rewards whistleblowers who successfully recover funds on behalf of the government. 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.

How can I protect my business from conduct risk? The U.S. Attorney in Manhattan recently announced a number of charges against two former executives of American Realty Capital Properties, Inc. ("American Realty"), a real estate investment trust ("REIT"), for their role in a 2014 accounting scandal. Brian Block, the former chief financial officer ("CFO"), is facing six criminal counts for securities fraud, conspiracy and the making of false statements. Lisa McAlister, the REIT's former chief accounting officer, previously pleaded guilty to four counts, including securities fraud and conspiracy, and has been cooperating with authorities, according to U.S. Attorney Preet Bharara. "Market investors are entitled to be told the truth from publicly traded companies," Bharara said in a statement. "When investors are lied to about material information, as is alleged to have happened here, the perpetrators need to be investigated and prosecuted." In addition, the Securities and Exchange Commission has filed civil charges against the two former executives, seeking fines as well as officer and director bans. The attorney representing the fallen CFO said that the charges were "unwarranted" and that his client would prevail at trial. The American Realty Scandal The September 2014 accounting scandal wiped out almost $4 billion of the REIT's market value. The U.S. Attorney alleges that the defendants manipulated American Realty's adjusted funds from operations ("AFFO"), a key metric used by analysts to measure the performance of a REIT. Authorities contend that Block concealed an error in the calculation of AFFO -- one that he had been warned about internally -- and, with McAlister in his office, input fictitious numbers into a spreadsheet that was later incorporated into the financial results American Realty reported to the public and the SEC. According to the government, the fictitious data made it appear that American Realty met Wall Street forecasts, when, in fact, it had not. On October 29, 2014, the REIT acknowledged that the executives "intentionally" concealed the accounting errors, which caused American Realty to overstate its AFFO. On that day, the REIT's shares plunged by 37 percent. American Realty eventually restated 3-1/2 years of its reported financial results. American Realty, which went public in 2011 and was part of Nicholas Schorsch's commercial real estate empire, is now the Phoenix-based VEREIT, Inc. Although Schorsch has not been charged in the case, another of his businesses filed for bankruptcy seven months ago, giving lenders control of an affiliated investment advisory unit. At this juncture, it is unclear whether the U.S. Attorney is investigating these matters further. The Takeaway This case illustrates how essential it is for investment firms and other financial service providers to have policies and procedures in place to mitigate conduct risk. The illegal actions of senior executives, officers and directors can have a significant adverse affect on a business, resulting in serious market losses that ultimately harm investors. If your firm is being investigated or is embroiled in an investor lawsuit, you should engage the services of an experienced business litigation attorney. 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: Jonathan H. Freiberger Frequently, litigation is resolved consensually. Most often in such cases, the parties execute a settlement agreement, and their attorneys execute and file a stipulation of discontinuance. It is not uncommon for settlement agreements to contain various terms and conditions of the settlement – some of which will be satisfied after the dismissal of the action. For example, if the settlement involves the payment of money from one litigant to another, the settlement agreement may call for numerous payments to be made over time. In other cases, a settlement may require one party to perform remedial work for, or otherwise deliver goods and/or services to, the other party in the future. Today’s article addresses whether a party that settles an action that is discontinued can revive same by motion in the discontinued action, or is required to commence a new plenary action. This situation was addressed by the Court of Appeals long ago in Yonkers Fur Dressing Co. v. Royal Ins. Co., 247 N.Y. 435 (1928). The Plaintiff in Yonkers[1] owned a fur plant that was destroyed by fire. Yonkers commenced litigation against its insurance carrier because it refused to pay the claims related to the fire. While the carrier believed the fire to be suspicious, it did not have proof of wrongdoing. Shortly before the action was scheduled for trial, the parties reached a settlement. “When the case[] appeared on the day calendar for trial …, [it], in accordance with the agreement of settlement, [was] marked "settled and discontinued" in open court by counsel for all parties.” Yonkers, 247 N.Y. at 442. One month later, the insurance company’s lawyer filed a motion to vacate the settlement agreement, arguing that new evidence suggests that the fire was caused by arson started at the request of Yonkers’ president and, in anticipation of the fire, Yonkers’ president arranged to have machinery, customers’ furs and other valuables (for which insurance claims were made) removed from the plant. Yonkers argued, among other things, that “the settlement agreement should not be set aside on a motion in the action; that an equitable action to set aside the settlement was the proper remedy.” Yonkers, 247 N.Y. at 443. The court granted the carrier’s motion, and the Appellate Division affirmed. The Court of Appeals reversed. The Court explained: The settlement of the original controversies involved in [this] action[] resulted in a new agreement to the effect "that the above entitled litigation is settled and terminated, the insurance companies in interest having agreed to pay the sum of $92,500 in full settlement of all claims." This is not a mere arrangement between counsel made during the pendency of the case from which a party might be relieved when both parties could be restored substantially to their former position in court and when it would be inequitable to hold the parties to it. It is the settlement and termination of the litigations, marking a fresh start by the plaintiff from a new coign of vantage. The compromise was wholly foreign and extrinsic to the litigation and to any action by the court. The signing of stipulations and entry of orders of discontinuance were not conditioned upon the payment of the money. They would be evidence merely, not the fruit of the settlement. When the case[] [was] marked "settled and discontinued" in open court by the parties, it was as if [it] had never been begun. Yonkers, 247 N.Y. at 444 (internal quotation marks and ellipses omitted). The Court noted that a “contract of settlement, if valid in itself, is final and is to be sustained by the court without regard to the validity of the original claim.” Id. at 445 (citation omitted). The Court further noted that the case being decided was distinguishable from prior cases because here, the litigation “was terminated,” and a new liability was “substituted” for, and “superseded,” the old. Id. at 446. The Court concluded that the carrier may be able to bring a new suit to unwind the settlement “for reasons that may invalidate a contract,” but “when a compromise results in the termination of an action and the execution of a new agreement giving effect to the settlement, it cannot be undone in the discretion of the court, on motion in the action and on conflicting affidavits raising anew the same dispute once settled, merely to bring about a final disposition of the original action on its merits.” Id. (citation omitted). Against this backdrop, we discuss HSBC Bank USA, N.A. v. Rini, a foreclosure action decided by the Second Department on August 5, 2026. Just prior to a traverse hearing, the parties “entered into a conditional agreement to settle the action, which included a term for a loan modification for the defendant.” The conditional agreement was placed on the record and the court “stated that it would retain jurisdiction over the action.” Thereafter, the parties executed and filed a stipulation of discontinuance pursuant to which “the plaintiff withdrew the complaint and discontinued the action, the defendant withdrew her answer and counterclaims, and all claims interposed in the action were discontinued.” The stipulation, however, failed to address whether the court retained jurisdiction for any purpose. Nine months later, the plaintiff moved to vacate the stipulation of discontinuance and to restore the action because the defendant failed to complete the contemplated loan modification papers. The motion court granted the motion and scheduled a hearing to determine if the conditional agreement was breached. On the defendant’s appeal, the Court reversed, explaining: A motion must be addressed to a pending action. A court lacks jurisdiction to entertain a motion after the action has been unequivocally terminated by the execution of an express, unconditional stipulation of discontinuance or actual entry of judgment in accordance with the terms of the settlement. Here, the Supreme Court lacked jurisdiction to entertain the plaintiff's motion, among other things, to vacate the stipulation of discontinuance and to restore the action to the court's active calendar. The action was unconditionally discontinued by the stipulation of discontinuance executed by the plaintiff and the defendant and filed with the court, in which the plaintiff withdrew the complaint and discontinued all claims interposed in the action, and the stipulation was silent as to the court's retention of jurisdiction for any. Accordingly, under the circumstances, the plaintiff's requested relief was not available by way of a motion and could only be obtained by commencing a plenary action. Citations and internal quotation marks omitted. Jonathan H. Freiberger 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. [1] The facts recited for the Yonkers case are greatly simplified for editorial purposes.

By: Jeffrey M. Haber New York’s former Debtor and Creditor Law (“DCL”) imposed a straightforward but powerful rule: transfers made by an insolvent debtor without fair consideration may be set aside for the benefit of creditors. A recent decision from the Appellate Division, Second Department, Ardent Harmony Fund, Inc. v. Fuschetto Home Improvements, LLC, 2026 N.Y. Slip Op. 04919 (2d Dept. August 12, 2026), underscores the principle that defendants seeking dismissal of fraudulent conveyance claims at the summary judgment stage bear the burden of establishing, with admissible evidence, that the transfers they received were supported by fair consideration. Mere assertions that services were performed are not enough. In Ardent Harmony, the Second Department reversed an order of the Supreme Court, Nassau County, holding that defendant failed to establish its entitlement to judgment as a matter of law on claims brought under former DCL §§ 273, 274, and 278, as well as a related claim for unjust enrichment. Background Plaintiffs commenced the action in 2018 seeking, among other relief, to set aside transfers to non-parties allegedly made by defendants, who were judgment debtors of the plaintiffs. According to the complaint, defendants transferred substantial sums of money to a home improvement company while owing unsatisfied judgments to the plaintiffs. Plaintiffs alleged that the transfers were made without fair consideration and had the effect of rendering the defendants insolvent or leaving them with unreasonably small capital. Plaintiffs sought relief under former DCL §§ 273, 274, and 278 and also asserted a cause of action for unjust enrichment. Defendants moved for summary judgment dismissing the complaint. The Supreme Court granted the motion. On appeal, the Second Department reversed and reinstated the claims. The Second Department’s Decision Under former DCL §§ 273 and 274, a conveyance could be deemed constructively fraudulent where it was made without fair consideration and the transferor was thereby rendered insolvent or left with unreasonably small capital. Former DCL § 278 permitted a creditor to set aside a fraudulent conveyance unless the transferee qualified as a purchaser for fair consideration. Significantly, defendant did not dispute that the transfers at issue rendered the judgment debtors insolvent or left them with unreasonably small capital.[1] Instead, the dispute centered on whether the defendant had established that the funds it received constituted fair consideration for work allegedly performed on behalf of the judgment debtors. The Court concluded that it had not. Although defendant claimed that the transfers related to work it performed, it failed to submit sufficient evidentiary proof in admissible form demonstrating that the payments represented fair consideration for those services: Contrary to the determination of the Supreme Court, the defendant did not submit sufficient evidentiary proof in admissible form to establish that the transfers of funds it received from the [judgment debtors] constituted “fair consideration” for the work it purported to have undertaken for them.[2] “Consequently,” concluded the Court, “the [Supreme Court] should have denied those branches of the defendant’s motion which were for summary judgment dismissing the causes of action alleging violations of Debtor and Creditor Law former §§ 273, 274, and 278 insofar as asserted against it as the defendant failed to establish its prima facie entitlement to judgment as a matter of law dismissing those causes of action insofar as asserted against it.”[3] The Court also held that defendant “failed to establish its prima facie entitlement to judgment as a matter of law dismissing the cause of action to recover for unjust enrichment insofar as asserted against it.”[4] Under New York law, to plead a claim for unjust enrichment, the plaintiff must alleged “(1) the defendant was enriched, (2) at the plaintiff’s expense, and (3) that it is against equity and good conscience to permit the defendant to retain what is sought to be recovered.”[5] The Court held that defendant failed to demonstrate that “it was not enriched at the plaintiffs’ expense and that it [was] not against equity and good conscience to permit it to retain the sums sought to be recovered.”[6] Takeaway Ardent Harmony highlights the role that fair consideration plays in constructive fraudulent conveyance litigation under former DCL §§ 273 and 274. Where a creditor establishes, or a defendant does not dispute, that challenged transfers rendered a debtor insolvent or left the debtor with unreasonably small capital, the litigation often turns on whether the transferee can demonstrate that reasonably equivalent value was provided in exchange for the transferred assets. The Court’s decision makes clear that conclusory assertions that services were performed or value was provided in connection with the conveyance are insufficient to defeat a claim for violation of the former DCL’s constructive fraud provisions. The decision also serves as a reminder concerning the proof required to prevail on summary judgment. A defendant moving for summary judgment must affirmatively establish its entitlement to judgment as a matter of law before the burden shifts to the plaintiff. Here, because defendant failed to submit evidentiary proof in admissible form demonstrating that the payments it received constituted fair consideration for work allegedly performed, it failed to satisfy its prima facie burden. As a result, the Court denied summary judgment. Equally significant is the Court’s treatment of the unjust enrichment claim. The decision underscores that equitable remedies may remain viable even where a defendant contends that it received funds in exchange for services. To obtain dismissal of an unjust enrichment claim, a defendant must establish, prima facie, that it was not enriched at the plaintiff’s expense and that equity and good conscience permit it to retain the benefit received. Where the record leaves unresolved questions regarding the legitimacy of the transfers or the value allegedly provided in return, dismissal is inappropriate. Ultimately, Ardent Harmony Fund reinforces a fundamental principle of New York fraudulent conveyance law: where an allegedly insolvent debtor transfers assets, the recipient must be prepared to demonstrate through admissible evidence that the transfer was supported by fair consideration. Absent that showing, fraudulent conveyance and related equitable claims will survive and proceed to further litigation. __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice. Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. ___________________________________ [1] Slip Op. at *1. [2] Id. [3] Id., citing Can Man Carting, LLC v. Spiezio, 165 A.D.3d 1029, 1031 (2d Dept. 2018). [4] Id. [5] Deerin v. Ocean Rich Foods, LLC, 158 A.D.3d 603, 606 (2d Dept. 2018) (internal quotation marks omitted). [6] Slip Op. at *1 (citation omitted).

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.