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Since his retirement, former Mets and Phillies outfielder, Lenny Dykstra (“Dykstra”), has been involved in many civil and criminal proceedings. Recently, for example, Dykstra was sued by Noah Scheinmann (“Scheinmann”), the former ballplayer’s social media ghost writer, for breaching a contract in which Dykstra hired Scheinmann to create a social media presence to promote Dykstra’s book, “House of Nails: A Memoir of Life on the Edge.” According to the complaint ( here ), Scheinmann worked long hours, for days at a time, over an almost four-week period, writing Twitter feeds that attracted national media attention, talk show invitations, and an appearance at Live Nation: Scheinmann worked assiduously for Dykstra – masterminding and ghostwriting his Twitter presence, putting in 18-hour days while taking calls and answering text messages from Dykstra at all hours, coordinating various of Dykstra’s business efforts, advising Dykstra with respect to media and business opportunities, and dealing with the fallout from Dykstra’s boorish behavior. In addition to ghost writing Dykstra’s Twitter account, Scheinmann also conceived and created video content for Dykstra, assisted Dykstra in preparing for media appearances, fielded various media and business opportunities, strategized with Dykstra concerning new business opportunities, and acted as a liaison with Dykstra’s publishers, business contacts, and various representatives. Dykstra acknowledged Scheinmann’s role in his success on several occasions by expressing to third parties his appreciation for and confidence in Scheinmann’s efforts, stating, for example, that Scheinmann had “been the driving force behind building my brand and promoting the book via Twitter” and was “the only person I trust ….” Notwithstanding the success Dykstra achieved by reason of Scheinmann’s efforts, Scheinmann claimed that Dykstra refused to honor their agreements. As a result, Scheinmann said that he was owed $15,000 for the Twitter and social work, plus more than $76,000 for his share of other earnings Dykstra obtained as a result of the media attention. Dykstra denied any wrongdoing and accused Scheinmann of being the one who breached their agreements. Dykstra counter-sued seeking damages from Scheinmann. Thereafter, on March 30, 2017, Dykstra and Scheinmann agreed to settle their dispute, at least that is what Scheinmann thought. Four days later, on April 3, 2017, Dykstra refused to sign the settlement papers. Scheinmann moved to reopen the case to enforce the settlement. The Court granted the motion to reopen the case and granted the motion to enforce the settlement. As explained in the Court’s decision and order ( here ), between March 13 and March 14, the parties negotiated the terms of the settlement through email.  On March 15, 2017, Scheinmann’s attorney confirmed agreement on terms, stating in an email, “We have a deal.” Thereafter, Dykstra’s counsel raised the necessity of drafting a settlement agreement and mutual release. Scheinmann’s counsel rejected the need for one because “the entirety of the agreement” was defined in their prior emails (a $15,000 judgment and dismissal of Dykstra’s counterclaim), and because “ he judgment concludes the litigation.” Dykstra’s counsel maintained that a mutual release was “a standard item”, needed “to confirm that all disputes between the parties are resolved so that there is finality.” Scheinmann’s counsel disagreed, considered the matter resolved, and declined to reopen settlement discussions. The Court’s Ruling As this Blog has discussed previously ( here ), “ n exchange of emails may constitute an enforceable agreement if the writings include all of the agreement’s essential terms, including the fee, or other cost, involved.” Sullivan v. Ruvoldt , 16 Civ. 583, 2017 WL 1157150 at *6 (S.D.N.Y. Mar. 27, 2017). The issue for the Court, therefore, was whether the parties’ emails contained the necessary elements of an enforceable contract, e.g. , an offer, acceptance, consideration, mutual assent and intent to be bound. The Court found that they did: The emails contained the agreement’s material terms–indeed, its only terms. The judgment amount was specified with particularity as was the counterclaim dismissal, and no other term was ambiguous or left open for further negotiation. The mutual assent and intent to be bound by the emails is clear from the emails, i.e. , “Please let me know if we have a deal,” “We have a deal.” Citations omitted. The Court rejected the notion that a mutual release was a necessary and material term of the settlement: “Only after the parties had agreed did Dykstra’s counsel seek a mutual general release, which cannot be considered a ‘material’ term because, as noted, ‘ he judgment concludes the litigation’ whether or not a release is signed.” As the Court observed in a footnote, “Put another way, the release is not ‘essential to a determination of rights and duties’ because the agreement is clear, it settled this lawsuit and can be enforced as-is.” (Citations omitted.) Finally, the Court rebuffed the unsupported contention that because “a mutual release is . . . a ‘standard item’ in many … settlements”, its absence is material or “render the agreement ambiguous.” In doing so, the Court made it clear that “ t does not matter that the judgment itself had to be reduced to writing because doing so was a post-agreement formality, and neither party expressed a desire not to be bound in the absence of an executed writing.” (Citations omitted.) Takeaway Courts have repeatedly held that letters, faxes and other less formal written documents, such as emails and texts, can serve as an enforceable agreement. Indeed, because courts favor settlements and enforce them when they are “clear, final and the product of mutual accord” ( Bonnette v. Long Island College Hosp. , 3 N.Y.3d 281 (2004)), there is no reason to distinguish emails from other forms of written communications. If a document is not intended as a complete statement of settlement terms, then the parties should say so with disclaimers, such as “this writing is not intended as a final resolution of all issues in the case” or that “the parties’ agreement shall be subject to a more formal written stipulation of settlement.” See Williams v. Bushman , 70 A.D.3d 679 (2d Dep’t 2010). As Dykstra learned, emails containing words like “We have a deal”, along with language evidencing the elements of contract formation, will suffice to create an enforceable settlement agreement.

Attorneys are often asked whether an oral agreement is enforceable. Most will say that the answer depends on the law and the facts surrounding the agreement. As an initial matter, to be enforceable, an oral agreement must contain the elements of a binding contract, e.g. , an offer, acceptance, consideration, mutual assent, an intent to be bound, and agreement on all essential terms. (This Blog wrote about these elements here and here .) Even if these elements are present, the agreement must still satisfy the statute of frauds. In New York, the statute of frauds is found in General Obligations Law § 5-701 through 5-705. These provisions require a signed writing for certain types of agreements, including, but not limited to: (1) agreements that by their terms are “not to be performed within one year from the making thereof”; (2) the conveyance of real property; (3) contracts for the payment of finder’s fees; (4) agreements for “goods sold at public auction”; (5) contracts to pay compensation for services rendered in negotiating a business opportunity; and (6) modifications to written agreements which state that they cannot be changed orally. On May 4, 2017, the Appellate Division, First Department, had the opportunity to consider, among other things, GOL § 5-701(a)(1) in Galopy Corp. Int’l, N.V. v. Deutsche Bank, A.G. , 2017 NY Slip Op. 03599 . General Obligations Law § 5-701 (a)(1) - Agreements That by Their Terms are “Not To Be Performed Within One Year From The Making Thereof”: The statute of frauds neither applies to an agreement that “appears by its terms to be capable of performance within the year; nor to cases in which the performance of the agreement depends upon a contingency which may or may not happen within the year.” North Shore Bottling Co. v. Schmidt & Sons , 22 N.Y.2d 171, 176 (1968) (citation omitted). Instead, it applies to “those contracts only which by their very terms have absolutely no possibility in fact and law of full performance within one year.” D&N Boening v. Kirsch Beverages , 63 N.Y.2d 449, 454 (1984). The Court of Appeals has repeatedly held that the courts should “analyze oral agreements to determine if … there might be any possible means of performance within one year.”  D&N Boening , 63 N.Y.2d at 455. Thus, wherever an agreement is susceptible of fulfillment within one year, “in whatever manner and however impractical,” the courts should find “the Statute to be inapplicable, a writing unnecessary, and the agreement not barred.” Id . In D&N Boening , the Court of Appeals provided examples of oral agreements that fell outside the Statute of Frauds despite questions surrounding the possibility of performance within one year.  These included agreements: where either party had the option to terminate the agreement on seven months’ notice ( Blake v Voigt , 134 N.Y. 69); where the agreement merely set the terms of anticipated prospective purchases but did not bind either party to any particular transaction ( Nat Nal Serv. Stas. v Wolf , 304 N.Y. 332); where defendant had the option to discontinue at any time the activities upon which the agreement was conditioned ( North Shore Bottling Co. v Schmidt & Sons , 22 N.Y.2d 171); where defendant had the option of selling at any time the property on lease to plaintiff for four years ( Coinmach Inds. Corp. v Domnitch , 37 N.Y.2d 889); where no provision in the agreement directly or indirectly regulated the time for performance despite the extreme unlikelihood of its completion within one year ( Freedman v Chemical Constr. Co. , 43 N.Y.2d 260, 265); where employment was terminable for any just and sufficient cause wherever dismissal was deemed necessary for the welfare of the company ( Weiner v McGraw-Hill, Inc. , 57 N.Y.2d 458, 462). Id. at 455-56. However, oral agreements that are “terminable within one year only upon a breach by one of the parties” are unenforceable. Id. at 456. The reason: “termination is not performance, but rather the destruction of the contract where there is no provision authorizing either of the parties to terminate as a matter of right.” Id. at 456-57; see also Zupan v. Blumberg , 2 N.Y.2d 547, 552 (1957) (“The possibility of such wrongful termination is not, of course, the same as the possibility of performance within the statutory period.”). By contrast, “where one or both parties have … an explicit option to terminate their agreement within one year, that agreement is, by its own terms, capable of completion within that period and is not governed by the Statute.” Id. Galopy Corp. Int’l, N.V. v. Deutsche Bank, A.G.: In Galopy , the plaintiff, Galopy Corporation International, N.V. (“Galopy”), alleged that it provided collateral to guarantee the obligations of U21 Casa de Bolsa, C.A. (“U21”), a Venezuelan broker-dealer, under a derivative transaction entered into between U21 and Deutsche Bank AG (“Deutsche Bank”) in November 2009. Galopy claimed that it had an oral agreement with Deutsche Bank in which the latter agreed to return the collateral to Galopy at the conclusion of the transaction. According to Galopy, in breach of that agreement, Deutsche Bank AG paid the collateral to U21 after U21 was placed into liquidation by Venezuela’s securities regulator. Galopy claimed approximately $62.7 million in damages as a result of Deutsche Bank’s alleged failure to return the collateral purportedly provided by Galopy to guarantee U21’s obligations under the transaction. On August 18, 2016, Justice Shirley Werner Kornreich of the Supreme Court, New York County, granted in part and denied in part Deutsche Bank’s motion to dismiss the Amended Complaint, dismissing Galopy’s claims for promissory estoppel, unjust enrichment, and money had and received, but sustaining Galopy’s claim for breach of an oral contract. Galopy appealed, claiming, among other things, that the court erred by dismissing its claims for promissory estoppel, money had and received, and unjust enrichment. Deutsche Bank cross appealed, arguing that the oral agreement violated General Obligations Law §5-701(a)(1). The First Department unanimously reversed the motion court’s decision only to the extent it denied the motion as to the breach of contract cause of action. In doing so, the Court found that: The alleged oral contract had a settlement date of July 10, 2011, and therefore could not be performed within a year. The possibility of its being terminated earlier does not remove the contract from the scope of the statute of frauds. Unlike the situation in Financial Structures Ltd. v UBS AG (77 AD3d 417 <1st dept 2010> ), which involved an oral agreement with “methods of acceleration” that “would . . . advance[] the period of fulfillment” ( id. at 418 ), the termination provision in this case unwound and canceled the transaction. Citations omitted. Takeaway: In a perfect world, all contracts would be reduced to writing and signed by both parties, so that courts could determine the rights and obligations of the parties to the agreement. Unfortunately, we do not live in a perfect world. Therefore, whenever possible, people should have their agreements in writing and signed by both parties. If they do not have a written agreement, it does not necessarily mean that they cannot enforce their agreement, but it does mean that there are many impediments to overcome to convince a court to enforce it. So, to answer the question in the title of this post, the response is not necessarily. But, it is preferable, if not strongly urged.

On May 10, 2017, the Securities and Exchange Commission (“SEC”) announced the settlement of an enforcement action against Barclays Capital, Inc. (“Barclays”), the London-based bank, to refund advisory fees and/or mutual fund sales charges to clients who were overcharged by the bank in connection with two advisory programs. Barclays agreed to pay more than $97 million to settle three sets of violations that resulted in clients being overcharged by nearly $50 million.  In the Order Instituting Administrative and Cease-and-Desist Proceedings , the SEC found that between 2010 and 2015, the bank’s former wealth-management business charged fees to more than 2,000 clients for due diligence and monitoring of certain third-party investment managers and investment strategies when in fact the business unit did not perform the represented services. The SEC also found that Barclays collected excess mutual fund sales charges or fees from 63 brokerage clients by recommending more expensive share classes when less expensive share classes were available.  Another 22,138 accounts paid excess fees to Barclays due to miscalculations and billing errors by the firm. “Barclays failed to ensure that clients were receiving the services they were paying for,” said C. Dabney O’Riordan, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Each set of clients who were harmed are being refunded through the settlement.” The SEC found that Barclays violated Sections 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-7, as well as Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. Barclays agreed, without admitting or denying the SEC’s findings, to create a Fair Fund to refund advisory fees to harmed clients.  The Fair Fund will consist of $49,785,417 in disgorgement, plus $13,752,242 in interest and a $30 million penalty.  Barclays will refund an additional $3.5 million to advisory clients who invested in third-party investment managers and investment strategies that underperformed while going unmonitored.  Those funds will also go to brokerage clients who were steered into more expensive mutual fund share classes. Earlier this month, the SEC announced that Barclays agreed to pay more than $16.5 million as part of a settlement stemming from allegations that the bank failed to supervise two former mortgage bond traders who allegedly lied to and overcharged Barclays’ non-agency residential mortgage-backed securities clients. The current settlement was announced on the same day that Barclays’ chief executive officer Jes Staley apologized to shareholders during the bank’s annual meeting for attempting to identify a whistleblower last year after the bank received two anonymous letters that involved a former colleague of Staley’s at JPMorgan Chase whom Staley had hired. Barclays revealed last month that Staley was under investigation by regulators and faced a “very significant” pay cut and a formal written reprimand over the incident.

The Justice Department has joined a whistleblower lawsuit against United Healthcare Group, Inc. ("UHG" or "United") in connection with payments made to the company for its Medicare Advantage Plan. ( Here .) The suit claims the insurer obtained inflated risk-adjusted payments from the Medicare program by providing false and inaccurate information about the health risks of patients enrolled in UHG's largest Medicare Advantage Plan, UHC of California. The original lawsuit was filed by James Swoben, a former employee of Senior Care Action Network (SCAN) Health Plan, under the qui tam provisions of the False Claims Act. "The intervention of the United States in this matter illustrates our commitment to ensure the integrity of the Medicare Part C program," said Acting Assistant Attorney General Chad A. Readler of the Justice Department's Civil Division. What is the Medicare Advantage Program? The Medicare Advantage program is a privately run alternative to the government's Medicare program for the elderly and disabled. Private insurers who participate in this program provide coverage in return for contractual monthly payments. Those payments are determined, in part, on patient-risk scores that are based on their medical conditions in the previous year. United is reportedly the nation's largest Medicare Advantage organization, providing healthcare services and prescription drug benefits to millions of individuals across the country. Currently, about 30 percent of Medicare beneficiaries are enrolled in Medicare Advantage programs. UHG False Claims The suit claims that UHG disregarded information about patients' medical conditions in order to increase the risk-adjusted premiums received from the Medicare program for beneficiaries under the care of a United service provider, Healthcare Partners ("HCP"). In particular, United allegedly funded chart reviews conducted by HCP, and ignored information from these reviews about invalid diagnoses. In short, UHG  received payments to which it was not entitled. "Since 2005, UnitedHealth knew that many diagnosis codes that it submitted to the Medicare Program for risk adjustment were not supported and validated by the medical records of its enrolled beneficiaries," according to the complaint. This lawsuit comes on the heels of another qui tam action the Justice Department joined in February in which the government alleged United defrauded the Medicare program ).  The False Claims Act allows whistle-blowers to file lawsuits against companies on behalf of the government and receive between ten and thirty percent of any recovery. If you know of a violation of the False Claims Act, you should speak with an experienced attorney who can help you understand and explore your options in blowing the whistle on fraud.

On April 26, 2017, the House Financial Services Committee (the “Committee”) held a hearing, entitled “A Legislative Proposal to Create Hope and Opportunity for Investors, Consumers, and Entrepreneurs.” ( Here .) The purpose of the hearing, which lasted over three hours, was to examine the discussion draft of the “Financial CHOICE Act of 2017” (“CHOICE Act 2.0”), which was introduced by Committee Chairman Jeb Hensarling on April 19, 2017. (Discussed here .) The CHOICE Act 2.0 seeks to repeal and make fundamental changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) , as well as other financial regulatory laws. On May 4, 2017, the Committee voted to send the CHOICE Act 2.0 to the full House for a vote. ( Here .) Last week, this Blog discussed the proposed change to the SEC Whistleblower program included in the Choice Act 2.0 ( here ); namely, that relators who are non-criminally culpable participants (deemed “co-conspirators” under the discussion draft) in the alleged violation are ineligible to receive a reward for their information. In this installment, this Blog will address the proposed bill’s effort to protect fiduciaries from challenges by those whose interests they are charged with protecting. DOL Fiduciary Rule In May of last year, this Blog wrote about the Department of Labor’s (“DOL” or “Department”) fiduciary rule (“Fiduciary Rule”), which requires financial advisors to put their clients’ interests first when making investment recommendations for retirement accounts, such as 401(k)s and IRAs. ( Here .) The rule, designed to prevent conflicts of interest, had strong support from the Obama administration and investor advocates who argued that inappropriate recommendations cost retirement investors $17 billion a year. On February 3, 2017, President Trump signed a memorandum directing the DOL to determine whether the Fiduciary Rule should be revised or rescinded. (Discussed here .) The memorandum directed the DOL to delay the implementation date of the rule by 180 days. Pursuant to that direction, on March 10, 2017, the DOL filed a notice proposing to delay the start of the Fiduciary Rule from April 10 to June 9, 2017. ( Here .) After a 15-day public comment period, the DOL sent its delay notice to the Office of Management and Budget for review. ( Here .) Following the OMB’s review, the DOL publicly released an official 60-day delay to the effective date of the Fiduciary Rule. Although the DOL has been tasked with reviewing the desirability of, and necessity for, the rule, if enacted into law before June 9, the CHOICE Act 2.0 will effectively take that decision away from the Department. Under the previous version of the CHOICE Act, the DOL was prohibited from issuing a fiduciary duty rule until 60 days after the Securities and Exchange Commission (“SEC”) issues a rule.  In that regard, the act would have blocked the Fiduciary Rule from becoming effective until 60 days after the SEC initiates a fiduciary rule governing the standards of conduct for brokers when providing personalized investment advice about securities to a retail customer. The CHOICE Act 2.0 abandons the 60-day time limit, instead requiring the DOL to issue a fiduciary rule that is “substantially similar” to the SEC’s rule.  Since the SEC has not issued a fiduciary duty rule, the CHOICE Act 2.0 effectively prevents the Fiduciary Rule from becoming effective. Fiduciary Duty Under Section 36(b) of The Investment Company Act of 1940 The Investment Company Act of 1940 (“ICA”) regulates investment companies, including mutual funds. See Jones v. Harris Assocs. L.P. , 559 U.S. 335, 338 (2010). “Congress adopted the because of its concern with the potential for abuse inherent in the structure of investment companies.” Id. at 339 (citing Daily Income Fund, Inc. v. Fox , 464 U.S. 523, 536 (1984)). The ICA provides various safeguards for shareholders in response to the risk of abuse, including limitations on affiliations of fund directors with investment advisors and a requirement that fees for advisors be approved by the directors and shareholders of the funds. Id . In 1970, Congress amended the ICA to “strengthen the ‘cornerstone’ of the Act’s efforts to check conflicts of interest, the independence of mutual fund boards of directors, which negotiate and scrutinize advisor compensation.” Id . (citation omitted). In that regard, the ICA includes a broad provision empowering the SEC to bring actions in a federal district court to seek civil penalties or injunctive relief against individuals or entities that violate the ICA. 15 U.S.C. § 80a-41(d)-(e). In creating Section 36(b), Congress imposed a fiduciary duty on investment advisors with respect to the receipt of compensation for services. Section 36(b) provides shareholders with a private right of action to enforce this obligation. Section 36(b) does not, however, give plaintiffs the right to sue for alleged breaches of general fiduciary duties. Case law makes clear that a breach may be shown only where the fee charged is “so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.” Jones , 559 U.S. at 346. The court’s function is to use “the range of fees that might result from arm’s-length bargaining as the benchmark for reviewing challenged fees” and “identify the outer bounds of arm’s length bargaining.” Id . In applying this standard, courts consider the following factors: (1) the nature and quality of the services provided to the fund and shareholders; (2) the profitability of the fund to the adviser; (3) any “fall-out financial benefits,” those collateral benefits that accrue to the adviser because of its relationship with the mutual fund; (4) comparative fee structure (meaning a comparison of the fees with those paid by similar funds); and (5) the independence, expertise, care and conscientiousness of the board in evaluating adviser compensation. Id . at 1426, n.5 (citing Gartenberg v. Merrill Lynch Asset Mgmt., Inc. , 694 F.2d 923, 929-32 (2d Cir. 1982)). These factors are non-exclusive. Therefore, courts are to consider “all relevant circumstances.” Gartenberg , 694 F.2d at 929); see also Sivolella v. AXA Equitable Life , Civ. A. No. 11-cv-4194 (PGS)(DEA), 2016 WL 4487857, at *4 (D.N.J. Aug. 25, 2016) (“The Court weighs all of the evidence presented and the gravity of each factor to adjudicate the case.”) (citation omitted). Plaintiffs have the burden of proving a breach of fiduciary duty under Section 36(b).  Jones , 559 U.S. at 340 (internal citations omitted); 15 U.S.C. § 80a-35(b). This means that plaintiffs must meet the burden of proving their case by a preponderance of the evidence. Kasilag v. Hartford Inv. Fin’l Servs., LLC , 2:11-cv-01083, at *7 (D.N.J. Feb. 28, 2017). The CHOICE Act 2.0 seeks to change the foregoing by requiring private plaintiffs to state their claim with particularity and prove it by clear and convincing evidence. By imposing these requirements, the CHOICE Act 2.0 seeks to treat the ICA’s breach of fiduciary duty claim like a fraud claim. Under the Federal Rules of Civil Procedure, fraud claims must be pled with particularity. Most states require the plaintiff to prove fraud with clear and convincing evidence, rather than a preponderance of the evidence generally applicable to civil claims. Some jurisdictions also apply the higher pleading standard to breach of fiduciary claims, in effect treating them as fraud claims. By imposing a heightened pleading standard and burden of proof, the CHOICE Act 2.0 will make it even more difficult for a plaintiff to sustain breach of fiduciary duty claims against officers, directors or other specified fiduciaries of the investment company.

A FINRA arbitration panel recently awarded an investor over $1 million in compensatory and punitive damages related to claims that a Wilbank Securities Inc. broker misled her about the performance of a variable annuity. The investor alleged fraud, breach of contract, negligent supervision and breach of fiduciary duty in connection with the underperforming investment. The investor purchased the variable annuity at a Wilbanks branch in Colorado in 2008, and claims she was promised a 7 percent compounded annual return. She sold the investment in 2012 and received a rate of return that was far less, according to her attorney. The $536,720 in compensatory damages was designed to help the investor recoup those losses. In addition, she was awarded the same amount in punitive damages, which were attributed to the bank's pattern of harming a group of variable annuity investors who experienced similar problems. Variable Annuities at a Glance A variable annuity is a tax-deferred retirement vehicle that allows an investor to select a variety of investments, and then pays out a level of income in retirement that is determined by the performance of the chosen investments. Variable annuities are designed to boost savings by providing investors with long-term capital growth.   Although advocates believe fixed, indexed and variable annuities are a critical component of retirement security because they provide a guaranteed income stream, critics contend that variable annuities are too complex for ordinary investors. The Wilbanks Arbitration In this proceeding, the arbitration award says Wilbanks denied the allegations and filed a counterclaim. The investment adviser argued that the investor's claim was brought more than seven years after she bought the annuity, which did not meet the requirements of FINRA Rule 12206 or state law statutes of limitations. The investor's claim was filed in January 2016. The three-member panel denied Wilbank's counterclaim but awarded the investor less than she originally sought. In any event, this story highlights the importance of the FINRA arbitration process in protecting investors from losses due to misconduct, or sales practice violations. Most brokerage agreements between investors and financial advisors include a mandatory arbitration clause. These proceedings are a faster and less expensive method of resolving disputes than a court trial.  If you are an investor who is seeking to bring a claim, or an investment adviser in need of representation before a FINRA review panel, you are well advised to engage the services of an  experienced securities arbitration attorney.

One remedy the Securities and Exchange Commission ("SEC" or "Commission") has long relied upon in cases involving broker misconduct is disgorgement. In a nutshell, disgorgement is a remedy that requires a party who profits from illegal conduct to pay back any ill-gotten gains obtained from that conduct. On April 18, the U.S. Supreme Court heard oral argument in  Kokesh v. Securities and Exchange Commission , a case involving a New Mexico-based investment adviser who was sued in federal district court by the SEC in 2009 for misappropriating investors' money. The adviser was ordered to pay $2.4 million in penalties, plus $34.9 million in disgorgement of ill-gotten profits. The disgorged amounts, however, did not go to the victims, instead, it went to the U.S. Treasury. The U.S. Court of Appeals for the 10th Circuit upheld the disgorgement award as not time-barred by 28 U.S.C. §2462, the statute of limitations requiring that “enforcement of any civil fine, penalty, or forfeiture” be “commenced within five years from the date when the claim first accrued.” Although the 10th Circuit’s opinion comported with that of other courts of appeals (including the First Circuit and the District of Columbia Circuit), it conflicted with the 11th Circuit, which broke from its sister circuits in Securities and Exchange Commission v. Graham . As noted, under 28 U.S.C. §2462, the SEC has five years to seek penalties, forfeitures, and other punitive remedies, in civil enforcement matters. The Commission, therefore, is incentivized to commence enforcement proceedings seeking such relief within this time frame, especially given the Supreme Court's 2013 decision in Gabelli v. Securities and Exchange C ommission , in which the Court held that the limitations period set forth in Section 2462 begins to run when the fraud occurs, not when it is discovered -- a point raised by the SEC during the argument. The issue in Kokesh is whether disgorgement is a penalty governed by the five-year limitation period. The Commission argued that the statute of limitations did not apply to disgorgement, claiming that disgorgement is equitable relief, which is not a form of punishment but restores the defendant to the position s/he was in prior to the misconduct occurring, while Kokesh argued that disgorgement is either a “forfeiture” or a “penalty” and thus subject to the five-year limitation period. During the argument, the justices questioned how the SEC applies disgorgement and whether it has the legal authority to force the disgorgement of profits for conduct occurring more than five years from the date of the enforcement action. For example, Justices Alito, Sotomayor and Kennedy questioned the source of authority for the Commission to pursue disgorgement remedies, while newly-seated Associate Justice Neil Gorsuch raised concerns that there is no statute in place governing the remedy and whether the government keeps the money or if it is paid to the victims. "We kind of have a special obligation to be concerned about how far back the government can go when it's something that Congress did not address because it did not specify the remedy," Chief Justice John Roberts said. Justice Kennedy suggested that perhaps there was a “non-categorical” approach, characterizing disgorgement as non-penal and not subject to any statutory definition ( e.g. , a civil fine, penalty, or forfeiture) when the only objective of the remedy is victim compensation: "The case is presented to us as if disgorgement is this category we must adopt. … It’s always a penalty or it’s always not a penalty. It seems to me that maybe we can give guidance on when it is a penalty." A ruling is expected in June. Takeaway At this juncture, some observers of the Court believe it will likely rule against the SEC. If the SEC loses, it could impact cases in the pipeline, as well as those in which the defendants were ordered to disgorge profits for conduct dating beyond the five-year statute of limitations. In light of Justice Kennedy's “non-categorical” suggestion, it is possible that the Court could create an alternative to the positions advanced by the SEC and Kokesh that is based on that suggestion. In that event, Kokesh could declare victory, while the possibility that the statute of limitations would not apply to enforcement actions that only seek victim compensation would remain open. Regardless of how the Court rules, many believe it will take an act of Congress to determine whether the five-year statute of limitations applies to disgorgement.

After the 2016 presidential election, President Trump promised to dismantle the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), and the regulations promulgated thereunder. ( Here .) The president, however, was silent on whether he intended to alter the Securities and Exchange Commission’s whistleblower program. ( Here .) Last year, House Financial Services Committee Chairman Jeb Hensarling sponsored the Financial CHOICE Act , as a road map for the president’s promised effort to repeal the Dodd-Frank Act. In February of this year, Chairman Hensarling circulated a memo to senior members of the committee in which he outlined changes to the act, which includes a number of provisions that would impact the SEC and its enforcement program. On April 19, 2017, Chairman Hensarling released an updated version of the Financial CHOICE Act (“CHOICE Act 2.0”), a discussion draft that builds on the previous version of the bill (H.R.5983 in the 114th Congress). Large portions of the legislative text remain unchanged from the original version of the act, though the CHOICE Act 2.0 provides more regulatory relief than its predecessor.  Notably, version 2.0 includes a provision that bars “co-conspirators” from recovering whistleblower awards. On April 26, 2017, the Financial Services Committee commenced hearings to discuss the amended and updated version of the act. The bill is expected to be marked-up in early-May. Under the SEC’s whistleblower program, a person who provides “original information” that the SEC uses in furtherance of an enforcement action can recover a reward of between 10% – 30% of the total amount of money collected by the SEC. In creating the whistleblower provisions under the Dodd-Frank Act, Congress recognized that employees with knowledge of a securities or commodities law violation often are participants in that violation.  Consequently, to further the purposes of the program, participants in the violation are eligible to receive an award as long as they are not convicted of criminal conduct relating to the violation. Observers have noted that there is sufficient support in the House Financial Services Committee and the House to pass the CHOICE Act 2.0. However, passage of the bill in the Senate is less certain given Democratic opposition. Takeaway Barring rewards to whistleblowers who may be complicit in alleged wrongdoing is inimical to the SEC’s enforcement objectives.  Indeed, whistleblowers who come forward with original information about a violation of the securities laws should be encouraged, not discouraged, from doing so, even if they may have participated in the wrongdoing. Often, the information possessed by these individuals is valuable to law enforcement authorities, who, without the whistleblower, would not have known of the alleged violation. Therefore, by encouraging individuals who may have participated in the violation, but who are not criminally culpable, to come forward with information, the SEC can further its mission to protect investors and the financial markets. This Blog will continue to monitor developments related to the CHOICE Act 2.0 as the proposed bill moves through the committee and Congress.

The False Claims Act (“FCA” or the “Act”) prohibits businesses and individuals from defrauding the government by knowingly presenting, or causing to be presented, a false claim for payment or approval. The FCA serves as the foundation upon which the states have structured their false claims act statutes. Notably, the FCA does not cover tax fraud and securities/commodities fraud. Blowing the whistle on tax fraud is covered by the Tax Relief and Health Care Act of 2006, and blowing the whistle on securities/commodities fraud is covered by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Both acts offer whistleblowers the opportunity to report violations of the tax and securities/commodities laws and receive a reward for helping the government recover the money lost due to fraud or other illegal conduct. The FCA has proven to be one of the most effective laws to recover money that has been taken from the government through fraud. The Act encourages individuals with knowledge of fraud against the government to come forward by authorizing them to file an action in the name of the government, and by rewarding them with a percentage of any recovery achieved by that lawsuit. A person who brings a successful “qui tam” action can receive between 15% and 30% of the government’s recovery depending upon whether the government intervenes in the action. If the government intervenes, the award generally falls between 15% and 25% of the government’s recovery. If the government declines to intervene and the whistleblower pursues the action alone, the award generally falls between 25% and 30% of the government’s recovery. The New York False Claims Act In 2007, New York passed its own false claims act statute (“NYFCA”). The NYFCA largely tracks the language of the federal FCA. In that regard, it imposes liability on a defendant for knowingly presenting false or fraudulent claims for payment/approval and making or using false records or statements material to a false or fraudulent claim. Like the federal FCA, treble damages are available, the knowledge requirement can be satisfied by showing recklessness, and whistleblowers can receive a portion of any recovery obtained by the state. In 2010, the legislature amended the NYFCA. For relators, the amendments relaxed the pleading requirements. Relators no longer need to allege fraud with particularity. Instead, a complaint will withstand a dismissal motion “if the facts alleged in the complaint, if ultimately proven true, would provide a reasonable indication of one or more violations . . . and if the allegations in the pleading provide adequate notice of the specific nature of the alleged misconduct.” The amendments also simplified the statute of limitations by extending it to 10 years without qualification; previously it had been six years, or three years if the government had actual or constructive knowledge of the violation. Notably, unlike the FCA, which, as noted, excludes false claims related to tax fraud, the New York amendments include such claims. Under the amended act, individuals and businesses with more than $1 million in net income or sales may be liable for tax fraud if the damages resulting from their improper tax filings amount to at least $350,000. $40 Million Settlement with Harbert Management Corporation for Tax Violations On April 18, 2017 ( i.e. , tax day), New York Attorney General Eric T. Schneiderman announced a $40 million settlement with Alabama-based Harbert Management Corporation (“Harbert Management” or “HMC”) and top executives at the firm in connection with allegations that HMC’s investment firm, Harbinger Capital Partners (“Harbinger Capital”), a $26 billion hedge fund based in New York City, failed to pay millions of dollars in New York State tax on performance income for several years. The settlement resolves claims that were brought by a whistleblower under the NYFCA. “Our investigation uncovered a brazen and deliberate decision to avoid paying millions in taxes owed to New York State,” said Attorney General Schneiderman. “Harbert Management made a clear choice to skirt the rules and as a result, ordinary New York taxpayers were left footing the bill. On tax day, this sends a forceful reminder to businesses that if they think they can get away with tax evasion in New York, they should think again.” When businesses operate both inside and out of New York City and New York State, they must apportion for tax purposes the part of their income derived from or connected with New York.  According to Schneiderman, in 2001, Harbert Management sponsored and organized the New York-based Harbinger Capital Partners Master Fund I Limited hedge fund (“Harbinger Fund”), and hired Philip Falcone as its primary investment decision-maker. Harbinger Capital Partners Offshore Manager LLC (“Offshore Manger”) served as the investment manager for the Harbinger Fund from 2002 through 2009. As investment manager, Offshore Manager earned a performance fee income equal to 20 percent of the Harbinger Fund’s net profits. Offshore Manager’s members, which included several senior executives at Harbert Management, were required to pay New York State income tax on this performance fee income. According to the New York AG, they did not. Schneiderman noted that in 2005, the individuals at issue were advised by outside accounting professionals that New York tax would be due on the fee income earned during 2004, despite the fact that some of them lived and worked in Alabama. Notwithstanding, Offshore Manager apportioned all performance fee income to the lower-tax state of Alabama, where Harbert Management’s headquarters were located and where back office and support functions for the Harbinger Fund were conducted. During the ensuing tax years (in particular, 2005, 2008 and 2009), Offshore Manager continued to file returns that failed to report any nexus to, or performance income derived from, activities performed in New York. Not surprisingly, Offshore Manager did not correct any of these tax filings, even as the Harbinger Fund became more successful, and the New York investment team grew larger. As noted, the settlement resolves claims that were initially brought by a whistleblower. The whistleblower, whose identity remains protected, will receive 22 percent of the settlement ($8.8 million), the largest amount and percentage share ever for a whistleblower in a NYFCA case not involving Medicaid. A copy of the settlement can be found here .

Litigants and their attorneys who fail to comply with discovery demands and/or discovery orders do so at their peril. Such non-compliance can lead to penalties and sanctions, especially when the non-compliance arises from deliberate behavior. When a party deliberately fails to comply with discovery demands and/or discovery orders, the requesting party may file a motion to compel compliance pursuant to Section 3124 of the Civil Practice Rules and Procedure (“CPLR”) or a motion to preclude evidence pursuant to CPLR 3126. A motion under CPLR 3126 may result in an order against the recalcitrant party, including preclusion of evidence in support of, or in opposition to, a claim or defense, or striking all or part of a pleading. While striking a pleading is a drastic remedy, the courts in New York will do so when the non-compliant party demonstrates a willful or contemptuous pattern of behavior. New York appellate courts have repeatedly granted preclusive relief under CPLR 3126 as a means of addressing recalcitrant parties who fail to comply with discovery demands and/or discovery orders. E.g. , Flax v. Standard Sec. Life Ins. Co. of N.Y. , 150 A.D.2d 894 (3d Dept. 1989) (holding that the plaintiff’s failure to comply with a preclusion order requiring him to file a verified and responsive bill of particulars entitled the defendants to a dismissal of the entire complaint); Neveloff v. Faxton Children’s Hospital & Rehabilitation Center , 227 A.D.2d 457, 458 (2d Dept. 1996); Figdor v. City of New York , 33 A.D.3d 560 (1st Dept. 2006); Brandenburg v. County of Rockland Sewer Dist. #1, State of N.Y. , 127 A.D.3d 680, 681 (2d Dept. 2015); Shah v. Oral Cancer Prevention Intl., Inc. , 138 A.D.3d 722 (2d Dept. 2016); Lucas v. Stam , 147 A.D.3d 921 (2d Dept. Mar. 29, 2017). In doing so, they have “encourage the courts to employ a more proactive approach … upon learning that a party has repeatedly failed to comply with discovery orders. . . .” Figdor , 33 A.D.3d at 560. This “more proactive approach” comports with the concerns expressed by the New York Court of Appeals not too long ago about the impact of dilatory tactics on the functioning of the court system and the adjudication of claims: …there is also a compelling need for courts to require compliance with enforcement orders if the authority of the courts is to be respected by the bar, litigants and the public.                                                      *** As this Court has repeatedly emphasized, our court system is dependent on all parties engaged in litigation abiding by the rules of proper practice. The failure to comply with deadlines not only impairs the efficient functioning of the courts and the adjudication of claims, but it places jurists unnecessarily in the position of having to order enforcement remedies to respond to the delinquent conduct of members of the bar, often to the detriment of the litigants they represent. Chronic noncompliance with deadlines breeds disrespect for the dictates of the Civil Practice Law and Rules and a culture in which cases can linger for years without resolution. Furthermore, those lawyers who engage their best efforts to comply with practice rules are also effectively penalized because they must somehow explain to their clients why they cannot secure timely responses from recalcitrant adversaries, which leads to the erosion of their attorney-client relationships as well. For these reasons, it is important to adhere to the position we declared a decade ago that “ f the credibility of court orders and the integrity of our judicial system are to be maintained, a litigant cannot ignore court orders with impunity.” Gibbs v. St. Barnabas Hosp. , 16 N.Y.3d 74, 81 (2010) (quoting Kihl v. Pfeffer , 94 N.Y.2d 118, 123 (1999). On April 12, 2017, the Appellate Division, Second Department continued the trend of sanctioning willful and contumacious behavior. In Mears v. Long , 2017 NY Slip Op. 02782 , the Court affirmed the order of the motion court granting the plaintiffs’ motion to strike the defendants’ answer and for leave to enter a default judgment against them based on their failure to comply with court-ordered discovery. In doing so, the Court explained: The nature and degree of the sanction to be imposed on a motion pursuant to CPLR 3126 is within the broad discretion of the motion court. The striking of a pleading may be appropriate where there is a clear showing that the failure to comply with discovery demands or court-ordered discovery is willful and contumacious. The willful and contumacious character of a party’s conduct can be inferred from the party’s repeated failure to comply with discovery demands or orders without a reasonable excuse. Here, the defendants’ willful and contumacious conduct can be inferred from their repeated failures, without an adequate excuse, to comply with discovery demands and the Supreme Court’s discovery orders. Accordingly, the court providently exercised its discretion in granting the plaintiffs’ motion pursuant to CPLR 3126 to strike the defendants’ answer and for leave to enter a default judgment against the defendants. Internal citations omitted. Takeaway As the Court of Appeals observed in Gibbs , the legal system depends upon the parties’ compliance with the rules of practice and the court’s orders. A party’s failure to comply with deadlines and orders “not only impairs the efficient functioning of the courts”, but also jeopardizes a party’s ability to support or oppose the claims and defenses in the action. Mears reinforces these principles and warns that willful and contumacious behavior will not be countenanced by the courts.

Last year, this Blog wrote about the importance of assigning title to, or ownership in, a claim, when assigning the right to pursue an action to another party. ( Here .) Recently, the issue arose in connection with an action alleging, among other things, fraud and negligent misrepresentation in connection with the purchase and sale of residential mortgage-backed securities (“RMBS”). On April 12, 2017, in Royal Park Investments SA/NV v. Morgan Stanley ( here ), Justice Charles E. Ramos of the Supreme Court, New York County, Commercial Division, dismissed with prejudice four complaints filed by Royal Park Investments SA/NV (“Royal Park”) against Morgan Stanley and other investment banking firms because the tort claims alleged by Royal Park had not been properly assigned to it. Background The action arose out the purchase of RMBS by Fortis Bank (“Fortis”) and certain affiliates of the bank between January 12, 2005 and July 27, 2007. Fortis Bank was a sophisticated financial institution that extensively invested in the RMBS market. In 2007, Fortis began to experience significant financial trouble, as a result of its exposure to U.S. structured credit assets. On May 12, 2009, Royal Park acquired Fortis and, in connection with the transaction, entered into a Portfolio Transfer Agreement (“PTA”), pursuant to which Royal Park acquired from Fortis the RMBS that were structured, marketed, and/or sold by the defendants between 2005 to 2007. Royal Park maintained that in the offering documents provided to Fortis, Morgan Stanley (and the other banks) failed to disclose and affirmatively misrepresented material information regarding the nature and credit quality of the loans underlying the RMBS and used the offering documents to defraud it and its assignors into purchasing “investment grade” securities at inflated prices. The defendants moved to dismiss the complaints on the ground that Royal Park lacked standing to sue because the PTA did not assign Royal Park any non-contractual claims. The Motion Court’s Ruling Justice Ramos granted the motions to dismiss, holding that the PTA lacked any language transferring tort claims to Royal Park: It is well settled in New York, that the right to assert a fraud claim related to a contract or note does not automatically transfer with the respective contract or note. There must be some language that evinces an intent to transfer fraud claims. *** Here, it is undisputed that the PTA transfers to RPI all rights, title, and interest in and to the Portfolio Property, which is expressly limited to contractual rights and obligations. *** There is simply no language in the documents evidencing an outward expression of an intent to assign the tort claims at issue. Contrary to RPI’s assertions, the above-mentioned language of rights, title, and interest in and to the Portfolio Property reveals no verifiable intention to include tort claims. Internal citations omitted. Since the Court found the PTA to be clear and unambiguous, it refused to examine any extrinsic evidence to demonstrate the intent of the parties, especially since the purpose of doing so was “to create an ambiguity in the PTA when none exists.”  As the Court noted, given the sophistication of the parties and their counsel, if the parties “intended to assign non-contractual claims, they would have done so through express language.” Justice Ramos found that they had not done so. Takeaway Two lessons flow from Royal Park : 1) the right to assert a fraud claim related to a contract or note does not automatically transfer with the respective contract or note. There must be some language that evinces an intent to transfer fraud claims; and 2) where the assignment pertains to a contract or note, the court will examine the contract or note to determine whether it is complete, clear, and unambiguous, and if so it will enforce the agreement according to the plain meaning of its terms.

Last month, the Fifth Circuit issued U.S. ex rel Abbott v. BP Exploration and Production, Inc . , --- F.3d ---, 2017 WL 992506 (5th Cir. Mar. 14, 2017), a decision in which it applied the materiality standard set forth by the Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar , 136 S. Ct. 1989 (2016) (discussed here ), to dismiss a qui tam action using the implied certification theory as the basis for liability. In doing so, the Fifth Circuit joined the First ,  Seventh ,  Eighth , and  Ninth  Circuits in issuing post- Escobar rulings. Background Kenneth Abbott (“Abbott”), a former BP administrative employee, claimed that BP falsely certified compliance with various safety regulations applicable to the construction and maintenance of its Atlantis Platform (“Atlantis”), a semi-submersible oil production facility in the Gulf of Mexico. Abbott alleged that without the false certifications, the Atlantis would not have been approved. Abbott filed a complaint under the False Claims Act (“FCA”) and sought over $200 billion in damages. The government declined to intervene. As a result of his lawsuit, the Department of the Interior (“DOI”) began reviewing BP’s compliance with the regulatory requirements identified by Abbott. In a detailed report, the DOI found Abbott’s claims to be both “unfounded” and “without merit.” Consequently, the DOI concluded that there “no grounds for suspending the operations of the Atlantis . . . or revoking BP’s designation as an operator . . ..” Despite the DOI’s findings, Abbott continued with his qui tam action. Following discovery, the district court granted summary judgment in BP’s favor on all claims, describing BP’s alleged misconduct as “paperwork wrinkles,” which could not have affected the government’s decision to pay. U.S. ex rel. Abbott v. BP Exploration and Production, Inc. , Case No. 4:09-CV-01193 (S.D. Tx. Aug. 21, 2014) (ECF No. 431). Abbott appealed. The Fifth Circuit’s Ruling In affirming the district court’s ruling, the Fifth Circuit found that the regulatory violations cited by Abbott were immaterial to the government’s decision to pay the claims. In doing so, the Court explained that the FCA’s materiality standard is “demanding” and noted that the Supreme Court “debunked the notion that a Governmental designation of compliance as a condition of payment by itself is sufficient to prove materiality.” Consequently, it was necessary to consider whether the government’s payment was dependent upon regulatory compliance – that is, for example, whether the government paid the claim with knowledge of the regulatory violation. Applying the foregoing analysis, the Court found that although the government did not know of BP’s alleged regulatory violations when it paid the claims, compliance with the regulations was not material to the government’s decision to pay: hen the DOI decided to allow the Atlantis to continue drilling after a substantial investigation into Plaintiffs’ allegations, that decision represents “strong evidence” that the requirements in those regulations are not material. These “strong facts” have not been rebutted by Plaintiffs’ evidence such that Plaintiffs have failed to create a genuine dispute of material fact as to materiality. The district court therefore correctly granted summary judgment on the FCA claims in favor of BP. Takeaway At the time of its issuance, Escobar was largely considered to be a victory for the United States and whistleblowers using the implied certification theory of liability to fight fraud under the FCA. Though the Supreme Court recognized the viability of the theory, it nevertheless limited the reach of the theory by instructing the lower courts to strictly enforce “the ’s materiality and scienter requirements.” Although the Supreme Court did not provide a test for materiality under the FCA, it reminded the lower courts that the standard was “familiar and rigorous,” “demanding” and not “too fact intensive”. In the short time since the Supreme Court decided Escobar , many circuit courts have applied Escobar to limit the reach of implied certification cases by rejecting claims asserted by relators who cannot establish materiality or satisfy the scienter requirement. Abbott falls within this trend. Apart from falling in line with other circuit courts, Abbott is important for its use of post-payment evidence to show that that alleged noncompliance was not material to the government’s decision to pay claims. As such, FCA Defendants should find Abbott to be a powerful resource to secure dismissal of implied certification cases brought against them.