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On November 3, 2016, the Appellate Division, First Department revived a case against J.P. Morgan Securities LLC and JPMorgan Chase & Co., the parent company of Bear Stearns & Co. Inc. (“Bear Stearns”), that had been dismissed over losses that the plaintiff, Aozora Bank, Ltd. (“Aozora”), a Japanese lender, suffered after investing in collateralized debt obligations (“CDOs”) it claims Bears Stearns used as a “dumping ground” for its most toxic, risky assets. In Aozora Bank, Ltd. v. J.P. Morgan Securities LLC, 2016 NY Slip Op. 07260 , the Court dismissed Aozora’s claims because, inter alia , disclaimers in offering documents put Aozora on notice that Bear Stearns had colluded with the collateral manager to accept into the CDO toxic assets from Bear Stearns’ own balance sheet. The Facts: Aozora sought damages against JPMorgan arising from its investment in HG-COLL 2007-1, Ltd. (“HGC”), an asset-backed CDO. Aozora alleged that Bear Stearns portrayed HGC as a legitimate investment vehicle, but in reality, secretly used HGC as a “dumping ground” to “offload” Bear Stearns’ most toxic, risky assets that it no longer wished to own. Aozora sought damages against JPMorgan under several theories of liability, including fraud, breach of the implied covenant of good faith and fair dealing, tortious interference with contractual relations, and negligent misrepresentation. JPMorgan moved to dismiss the complaint on statute of limitations grounds and for failing to state a cause of action upon which relief could be granted, as well as for failing to plead fraud with the requisite particularity and state of mind. The Motion Court’s Ruling: The motion court dismissed Aozora’s fraud claim on the grounds that, among other things,  Aozora could not have relied on any misstatement and omission because it was aware of the information it claimed to have no knowledge of through various offering documents:  Azora’s admission that it reviewed asset-level information, at the time it invested in HGC, requires dismissal of the fraud claim.… This conclusion is supported by numerous disclaimers contained in the HGC Offering Circular …. It is well-settled that “a specific (rather than general) disclaimer in a guarantee bars the guarantor’s claim for fraud in the inducement, where the guarantor specifically disclaimed reliance on the very information which it now claims caused it to be misled.” This legal principle is particularly compelling when “the guarantee in question had been the product of ‘extended negotiations between sophisticated business people’ involved in a ‘multimillion dollar’ transaction.” * * * The disclaimers in the HGC Offering Circular made clear that, by agreeing to invest in HGC, Aozora was capable of analyzing and assessing the risks associated with the investment, and that it was using its independent judgment in assessing these risks. Aozora Bank, Ltd. v. J.P. Morgan Securities LLC , Index No. 652274/2013 (Sup. Ct. N.Y. Cnty. Apr. 22, 2015) at 23-24 (citations omitted.) The motion court also dismissed the claim for breach of the implied covenant of good faith and fair dealing.  Aozora contended that JPMorgan “secretly influenced collateral selection and filled HGC with at least $185.2 million of assets that alone knew toxic and wished to remove from books” thereby making the disclaimers in the offering documents irrelevant. Id . at 36-37. The motion court rejected the argument, noting that it was unsupported by any legal authority.  In doing so, the court declined to “nullify the express disclaimers contained in the HGC Offering Circular.” Id . at 37. This was especially important since Aozora never claimed that “the assets comprising HGC failed to meet the eligibility requirements set forth in the Documents” and was required to “conduct an independent investigation of the characteristics of the notes and risks of ownership of the notes.” Id . As far as the motion court was concerned, Aozora essentially alleged an unsustainable breach of contract claim. Id . (citation omitted). Aozora appealed the dismissal of the fraud and the breach of the implied covenant of good faith and fair dealing claims. The First Department’s Decision: In a unanimous decision, the First Department reversed the decision of the motion court as to both claims. With regard to the fraud claim, the Court found that, notwithstanding the disclaimers in the offering documents, Aozora could not have known that Bear Stearns and Ischus Capital Management, LLC (“Ischus”), the collateral manager, colluded to mix HGC with toxic assets from Bear Stearns’ balance sheet: Plaintiff adequately stated a claim for fraud. Defendants failed to show that plaintiff’s reliance on statements that the collateral manager would select collateral independently was unreasonable as a matter of law. The complaint alleges that plaintiff, while aware or on notice of the concentration of Bear Stearns underwritten assets in the collateralized debt obligation (CDO) at issue, was unaware of how this compared to other CDOs generally or those managed by the same collateral manager. On this motion, defendants have not shown that the disclaimers in the offering documents put plaintiff on notice that defendants had already colluded with the collateral manager to accept into the CDO toxic assets from Bear Stearns's own balance sheet. (Citations omitted.) With regard to the breach of the implied covenant of good faith and fair dealing, the Court found that Aozora stated a claim because the allegation was based upon a separate tort that was independent of the rights under the offering agreements – that is, it was based on a breach in the performance of the agreements: Plaintiff adequately stated a claim for breach of the duty of good faith and fair dealing, given the allegation that defendants subverted the collateral manager to favor the interest of Bear Stearns, and given that many of the CDO’s assets were purchased after plaintiff's investment ( see Aozora Bank, Ltd. v Credit Agricole Corporate & Inv. Bank , 2015 NY Slip Op 31426 , *17 ). Takeaway: The Court’s decision stands as a reminder that a party to an agreement cannot hide behind general warnings of adverse events, such as potential conflicts of interest or collusive conduct, when that party knows, with certainty, and yet fails to disclose, that those events were then occurring.  As a federal court long ago observed: the law “provides no protection to someone who warns his hiking companion to walk slowly because there might be a ditch ahead when he knows with near certainty that the Grand Canyon lies one foot away.” In re Prudential Secs. Ltd. P’ships Litig. , 930 F. Supp. 68, 72 (S.D.N.Y. 1996). This is especially so when one of the parties warrants, as in Aozora , that it did not omit to state any material fact necessary to make their statements not misleading. The Court’s decision is notable because it confirms the long-standing principle that disclaimers and disclosures do not defeat a plaintiff’s reliance when the information necessary to discover the fraud was within the defendant’s peculiar knowledge.  (In September, this Blog posted an article about the justifiable reliance element of fraud.) This makes sense, even if the plaintiff is a sophisticated investor and required to exercise due diligence prior to the subject transaction.  As the facts in Aozora showed, there was no way for Aozora to know from the disclaimers or its diligence that Bear Stearns and Ischus colluded to include toxic assets in HGC. The Court’s decision also stands as a reminder that a party can breach the implied covenant of good faith and fair dealing by defeating the purpose of the agreement through his/her actions. This is true even when the conduct at issue does not violate the express terms of the agreement. (In September, this Blog posted article about how the implied covenant of good faith and fair dealing can stand as a separate basis of liability.) That is what happened in Aozora . The bank believed that Bear Stearns and Ischus would, in good faith, select the asset portfolio pursuant to the written representations in the offering documents.  Aozora had no reason to believe that Bear Stearns would engage in self-dealing. As the First Department found, such conduct is a separate, actionable wrong.

Champerty. Most people have never heard of the word, and, even if they did, it is more likely they do not remember what it means. The same is probably true for most lawyers, who most likely encountered the doctrine when they studied for the bar exam. So what is champerty? Black’s Online Law Dictionary (2d ed.) defines champerty as: “A bargain made by a stranger with one of the parties to a suit, by which such third person undertakes to carry on the litigation at his own cost and risk, in consideration of receiving, if he wins the suit, a part of the land or other subject sought to be recovered by the action.” In plain English, this means that champerty occurs when a person or entity agrees to finance someone else’s lawsuit in exchange for a portion of the judicial award. The prohibition of champerty dates back to the middle ages. Martin, Syndicated Lawsuits: Illegal Champerty or New Business Opportunity? , 30 Am Bus LJ 485 (1992). Some commentators believe that the doctrine go back to ancient Greece and ancient Rome. E.g. , Jason Lyon, Revolution in Process: Third-Party Funding of American Litigation , 58 UCLA Law Review 571, 580 (2010). Regardless of its origins, champerty was considered to be against public policy – a person who has nothing to do with the matter being litigated should not be able to profit from it. Over time, however, the prohibition on champertous transactions began to decline. Today, the states are split on the enforcement of the prohibition. Some jurisdictions strictly enforce the doctrine, others enforce it less strictly, while the remainder have abolished the doctrine. The Law in New York: New York continues to enforce the prohibition of champerty. See Judiciary Law § 489(1). Judiciary Law §489(1) provides, in pertinent part: No person or co-partnership, engaged directly or indirectly in the business of collection and adjustment of claims, and no corporation or association, directly or indirectly, itself or by or through its officers, agents or employees, shall solicit, buy or take an assignment of, or be in any manner interested in buying or taking an assignment of a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon …. The New York Court of Appeals has placed a heavy burden of proof on the party claiming champertous conduct, requiring a showing that the primary, if not the sole, purpose of the transaction was the collection of a claim. In Bluebird Partners v. First Fid. Bank , 94 N.Y.2d 726, (N.Y. 2000), the Court noted that it had been historically “hesitant to find that an action is champertous as a matter of law….” Id . at 735-36. Indeed, prior jurisprudence showed that “a mere intent to bring a suit on a claim purchased does not constitute the offense; the purchase must be made for the very purpose of bringing such suit, and this implies an exclusion of any other purpose.” Id . at 735 (quoting Moses v. McDivitt , 88 N.Y. 63, 65 (1882)).  Thus, “in order to constitute champertous conduct in the acquisitions of rights, …the foundational intent to sue on that claim must at least have been the primary purpose for, if not the sole motivation behind, entering into the transaction.” Id . at 736. In Bluebird Partners , the Court found that the record did not support a finding of champerty as a matter of law, because it could not be determined that profiting from litigation was the primary motivation behind the acquisition of the certificates at issue. Almost a decade later, the New York Court of Appeals had the opportunity to further comment on the requirements needed to find champerty. In Trust for the Certificate Holders of Merrill Lynch Mortg. Investors v. Love Funding (Merrill Lynch Mortg.) , 13 N.Y.3d 190 (2009), the Court held, in response to certified questions from the U.S. Court of Appeals for the Second Circuit, that a corporation or association does not violate Judiciary Law § 489(1), as a matter of law, when the “purpose in taking assignment of … rights … was to enforce its … preexisting proprietary interest in the ….” Id . at 201-02.  The Court explained that “the critical issue” in assessing champerty is the purpose behind the acquisition of rights that allowed the plaintiff to file the lawsuit. Id . at 198-99. The Court made it clear that intent to enforce does not, by itself, constitute champerty. Id . at 200 (noting that “if a party acquires a debt instrument for the purpose of enforcing it, that is not champerty simply because the party intends to do so by litigation.”). Because the plaintiff had a preexisting interest in the loan and would suffer the damages of any default on the loan, the Court found that, as a matter of law, it did not violate New York. Id . at 202. After Love Funding , many considered champerty to be a dead doctrine in New York, except in the rare case where the facts and evidence truly reflected a champertous transaction. Indeed, cases in the lower courts confirmed this view. E.g. , Seomi v. Sotheby’s , 27 Misc.3d 1231(A) (Sup. Ct. N.Y. Cnty. 2010); IRB-Brasil Resseguros v. Inepar Invs. , No. 604448/06, 2009 WL 2421423, at **19, 20 (Sup. Ct. N.Y. Cnty. July 31, 2009) (holding that an assignment of the rights of a noteholder was not champertous where the assignee had purchased $14 million worth of notes itself, and was a signatory to the subject notes); Nat’l City Commercial Capital v. Becker Real Estate Servs ., 24 Misc. 3d 912 (Sup. Ct. Suffolk Cnty. 2009) (holding that the defendant failed to demonstrate that champerty was the primary purpose behind the plaintiff’s acquisition of a financial lease). On October 27, 2016, in  Justinian Capital SPC v. WestLB AG , 2016 NY Slip Op. 07047, the Court of Appeals reminded everyone that the champerty doctrine is alive and well. Justinian Capital SPC v. WestLB AG: The Facts: In 2003, non-party Deutsche Pfandbriefbank AG (“DPAG”) invested nearly 180 million euros (approximately $209 million) in notes (the “Notes”) issued by two special purpose companies, Blue Heron VI Ltd. and Blue Heron VII Ltd. (collectively, the “Blue Heron Portfolios”). The Blue Heron Portfolios were sponsored and managed by the defendant WestLB. By January 2008, the Notes had lost much (if not all) of their value. Slip op. at 2. In the summer of 2009, DPAG’s board of directors approved the filing of a lawsuit against WestLB, a German bank partly owned by the German government, to recover the losses caused by the devaluation of the Notes. Both DPAG and WestLB were receiving substantial support from the German government at the time. Because of these relationships, the DPAG board feared that pursuing a lawsuit against WestLB would result in the loss of government support for the bank. Consequently, the DPAG board determined to have a third party bring the lawsuit and remit a portion of any proceeds to DPAG. In February 2010, DPAG discussed this option with the plaintiff Justinian Capital SPC (“Justinian”), a Cayman Islands shell company with little or no assets. Id . at 2-3. In April 2010, DPAG and Justinian entered into a sale and purchase agreement (the “Agreement”) pursuant to which DPAG assigned the Notes to Justinian for a base purchase price of $1,000,000 (representing $500,000 for the Blue Heron VI notes and $500,000 for the Blue Heron VII notes). Justinian did not, however, pay for the Notes. Under the Agreement, the only consequences of Justinian’s failure to pay appeared to be that interest would accrue on the $1,000,000 and that Justinian’s share of any proceeds recovered from the lawsuit would be reduced from 20% to 15%. At the time of the appeal, Justinian had not paid any portion of the $1,000,000 purchase price, and DPAG had not demanded payment. Id . at 3. Within days after the Agreement was executed, and shortly before the statute of limitations was to expire, Justinian filed a summons with notice against WestLB. The subsequently filed complaint alleged causes of action for breach of contract, fraud, breach of fiduciary duty, negligence, negligent misrepresentation, and breach of the covenants of good faith and fair dealing, all in connection with WestLB’s purchase of ineligible assets for the Blue Heron Portfolios. Id . WestLB moved to dismiss the complaint on champerty grounds. The court found questions of fact with respect to the champerty defense and instructed the parties to conduct discovery on that issue. Following the close of this limited discovery, WestLB moved for summary judgment. Id . at 3-4. The motion court dismissed the complaint, concluding that the Agreement was champertous because Justinian had not made a bona fide purchase of the Notes and was, therefore, suing on a debt it did not own. The motion court also concluded that Justinian was not entitled to the protection of the safe harbor under Judiciary Law § 489(2) because Justinian had not made an actual payment of $500,000 or more. Id . at 4 (citing 43 Misc. 3d 598 (Sup Ct, N.Y. Cnty 2014)). On appeal, the Appellate Division, First Department, affirmed, largely adopting the rationale of the motion court. Id . (citing 128 A.D.3d 553 (1st Dep’t 2015)). The Court of Appeals granted leave to appeal, and affirmed the holding of the lower courts, though for somewhat different reasons. Id . The Court’s Ruling: In a 5-2 ruling, the Court concluded that Justinian’s acquisition of the Notes represented a “sham transaction” that was designed to put Justinian in a position to champertously sue WestLB: Here, the impetus for the assignment of the Notes to Justinian was DPAG’s desire to sue WestLB for causing the Notes’ decline in value and not be named as the plaintiff in the lawsuit. Justinian’s business plan, in turn, was acquiring investments that suffered major losses in order to sue on them, and it did so here within days after it was assigned the Notes…. here was no evidence … that Justinian’s acquisition of the Notes was for any purpose other than the lawsuit it commenced almost immediately after acquiring the Notes.… Here, the lawsuit was not merely an incidental or secondary purpose of the assignment, but its very essence. Justinian’s sole purpose in acquiring the Notes was to bring this action and hence, its acquisition was champertous. (Internal quotations and citations omitted.) The Court also ruled that the transaction did not come within the statutory safe harbor. Judiciary Law § 489(2) exempts the purchase or assignment of notes or other securities from the restrictions of Section 489(1) when the notes or other securities “hav an aggregate purchase price of at least five hundred thousand dollars.” In concluding that the transaction did not come within the safe harbor, the Court found that because the $1 million purchase price listed in the transaction documents “was not a binding and bona fide obligation to pay the purchase price other than from the proceeds of the lawsuit,” Justinian’s acquisition of the Notes did not satisfy the safe harbor’s requirements: The record establishes, and we conclude as a matter of law, that the $1,000,000 base purchase price listed in the Agreement was not a binding and bona fide obligation to pay the purchase price other than from the proceeds of the lawsuit. The Agreement was structured so that Justinian did not have to pay the purchase price unless the lawsuit was successful, in litigation or in settlement. The due date listed for the purchase price was artificial because failure to pay the purchase price by this date did not constitute a default or a breach of the Agreement. The Agreement permitted Justinian to exercise the option to let the due date pass without consequence and simply deduct the $1,000,000 (plus interest) from its share of any proceeds from the lawsuit. The Court explained that its finding was consistent with the legislative history and the purpose of the safe harbor provision: The legislative history reveals that a purchase price of at least $500,000 was selected because the Legislature took comfort that buyers of claims would not invest large sums of money to pursue litigation unless the buyers believed in the value of their investments. This comfort is lost when a purchaser of notes or other securities structures an agreement to make payment of the purchase price contingent on a successful recovery in the lawsuit; such an arrangement permits purchasers to receive the protection of the safe harbor without bearing any risk or having any skin in the game, as the Legislature intended. The Legislature intended that those who benefit from the protections of the safe harbor have a binding and bona fide obligation to pay a purchase price of at least $500,000, irrespective of the outcome of the lawsuit. That is precisely what is lacking here…. (Internal quotations and citations omitted.) Two justices dissented, arguing that the majority decision depended upon reaching conclusions about the intent and motivation of the parties, which, they said, are not issues to decided on summary judgment. Takeaway: The Court’s decision will have broad implications for small litigation funders and distressed debt purchasers. See , e.g. , Reuters , New York’s Top Court Clamps Down On Shoestring Litigation Funders , dated October 28, 2016).  As a result of the Court’s decision, these financiers must have “skin in the game” when they enter into transactions that do not exceed $500,000. That means that they must ensure, among other things, that the payment obligations set forth in the transaction papers are bona fide – that is, the purchase price will be paid on a date certain or contemporaneously with the execution of the agreement, and the payment will not be contingent or revocable. It also means that transactions involving disallowance provisions, consideration without apparent or facial value, complex financing arrangements, or other provisions that indicate the buyer does not actually hold at least $500,000 in the investment will be closely scrutinized.  Consequently, these companies and purchasers will have to document and retain records showing that the primary intent and purpose of the transaction comports with the Court’s ruling. Otherwise small funders and debt purchasers will learn that the champerty prohibition is alive and well in New York.

On October 20, 2016, the Financial Industry Regulatory Authority (“FINRA”) announced that it had submitted proposed rule changes to the Securities Exchange Commission (“SEC”) for approval that are intended to help member firms detect and prevent the abuse and financial exploitation of senior and vulnerable adult customers.  If approved, the proposed rules would allow member firms to temporarily halt the disbursement of funds or securities from their customers’ accounts if they believe the customer is being financially exploited, and to notify a person identified by the customer of the hold and suspected wrongdoing. Elder Abuse and Financial Exploitation Defined Elder abuse is a serious and growing problem that affects millions of seniors each year. Financial exploitation is the most common form of elder abuse. There is no single definition of elder abuse or financial exploitation. Because financial exploitation can occur in many ways ( see below), FINRA has taken a broad view of the types of conduct that fall within its scope.  Consequently, the proposed rules define “financial exploitation” to include: “(A) the wrongful or unauthorized taking, withholding, appropriation, or use of a specified adult’s funds or securities; or (B) any act or omission by a person, including through the use of a power of attorney, guardianship, or any other authority, regarding a specified adult, to: (i) obtain control, through deception, intimidation or undue influence, over the specified adult’s money, assets or property; or (ii) convert the specified adult’s money, assets or property.” The Problem of Elder Abuse and Financial Exploitation Financial exploitation often occurs by those entrusted with the responsibility to protect a senior’s assets, such as children and family members, attorneys, accountants, guardians, and investment brokers and financial advisors. As such, financial exploitation is often manifested by: 1) the unauthorized appropriation, sale or transfer of property; 2) the unauthorized taking of personal assets; 3) the misappropriation, misuse or transfer of monies from a personal or joint account; or 4) the failure to use a senior’s income and assets for required support and maintenance. Financial exploitation tends to be underreported.  Often, the victim feels ashamed or embarrassed that it happened. Its financial impact can be devastating, especially for seniors who are living on fixed incomes and who have no financial ability to offset the economic losses caused by the exploitation or recover the funds once they leave the account. Federal and State Attempts to Address the Problem For some time, the federal government has been trying to adopt legislation and programs to detect and prevent the incidence of elder abuse.  Below is a brief overview of the government’s more recent efforts. In 2010, as part of the Patient Protection and Affordable Care Act, Congress enacted the Federal Elder Justice Act (“EJA”).  The EJA is designed to strengthen federal and state efforts to prevent and deal with financial exploitation and abuse. In June 2015, Senators Richard Blumenthal and Kelly Ayotte introduced the Robert Matava Elder Abuse Victims Act of 2015.  The proposed legislation was intended to protect, serve, and advance the rights of victims of elder abuse and financial exploitation by, among other things, encouraging states and other qualified entities to hold offenders accountable and enhance the capacity of the justice system to investigate, pursue, and prosecute elder abuse cases. In December 2015, the White House Conference on Aging issued a report devoted to, among other things, ensuring that “elder abuse and financial exploitation are more fully recognized as a serious public health challenge and addressed accordingly and effectively.” On the state level, most states protect seniors (and vulnerable adults) through guardianships, Adult Protective Services, and criminal actions and penalties.  Only four states specifically target the financial exploitation of seniors.  As noted by FINRA, those states – Delaware, Missouri, Washington and Indiana – permit financial institutions, including broker-dealers, to place temporary holds on “disbursements” or “transactions” if the firm suspects the financial exploitation of covered persons. Additionally, the North American Securities Administrators Association (“NASAA”) drafted model legislation in 2015 that requires qualified individuals to report suspected financial exploitation to the state’s Adult Protective Services, the state securities regulator, and trusted third parties designated by the senior investor (the “Model Act”). So far, only two states – Alabama and Indiana – have enacted the Model Act into law.  Additionally, Vermont has adopted the Model Act by regulation, and Louisiana has passed legislation that protects voluntary disclosures. The new rules proposed by FINRA are, for the most part, consistent with the Model Act. In the text accompanying the proposed rules , FINRA explained that even though the proposed rules and the Model Act are not identical, “FINRA and NASAA … worked together to achieve consistency where possible and appropriate.” FINRA’s Experience with Financial Exploitation and The Proposed Rule Changes In recent years, fighting the financial exploitation of elderly investors has been a high priority for regulators, such as FINRA and the Consumer Financial Protection Bureau. In April 2015, for example, FINRA launched its Securities Helpline for Seniors, which was intended to be a “‘go-to’ resource for senior investors with securities-related questions and concerns.” ( See December 2015 Report, here .)  As explained by Susan Axelrod, FINRA Executive Vice President, Regulatory Operations, “Since its launch in April 2015, the helpline has received calls highlighting some of the issues firms are facing when it comes to senior investors, including how firms respond when they suspect a senior customer is being exploited.” Approximately six months later, in October 2015, FINRA issued Regulatory Notice 15-37, in which it sought public comment on the rules that it has now submitted to the SEC. The proposed rules submitted to the SEC are, for the most part, unchanged from those set forth in Regulatory Notice 15-37. The proposed rules require member firms to “make reasonable efforts to obtain the name of contact information for trusted” individuals who are designated by senior and vulnerable adult account holders (the “Trusted Contact Person”). The Trusted Contact Person must be 18 years or older, such as a close friend and family member, and cannot be “authorized to transact business on behalf of the account.”  As noted by FINRA in Notice 15-37, the Trusted Contact Person is intended to “be a resource for the firm in administering the customer’s account and in responding to possible financial exploitation.” Under the proposed rules, the member firm is required to notify the Trusted Contact Person if financial exploitation is suspected ( e.g. , when a customer tries to change his/her Trusted Contact Person “from an immediate family member to a previously unknown third party .…”).  If the Trusted Contact Person is not available or the firm reasonably believes that he/she has engaged, is engaged or will engage in the financial exploitation of the senior or vulnerable account holder, then the firm must contact an immediate family member, unless the firm reasonably believes that the family member has engaged, is engaged or will engage in the financial exploitation of the account holder. Under those circumstances, the proposed rules allow the firm to conclude that the Trusted Contact Person “was not available” and “use the temporary hold provision” to protect the senior or vulnerable account holder. Additionally, the proposed rules permit a member firm to place a temporary hold on the disbursement of funds or securities from the account of a senior or vulnerable adult customer when the member reasonably believes that financial exploitation may be, is likely to be, or is occurring. As noted in the press release, “ urrently, FINRA’s rules do not explicitly permit firms to contact a non-account holder or to place a temporary hold on disbursements of funds or securities where there is a reasonable belief of financial exploitation of a senior or other vulnerable adult.” When a member places a temporary hold on the account, the proposed rules require the firm to immediately initiate an internal review of the facts and circumstances that caused the member to reasonably believe that financial exploitation has occurred, is occurring, has been attempted or will be attempted. In addition, as noted, the proposed rules require the member to provide notification of the hold and the reason for the hold to the Trusted Contact Person, if available, as well as all parties authorized to transact business on the account. While the proposed rules do not establish an affirmative requirement to withhold funds, it creates a safe harbor for firms that do so when: (1) there is reason to suspect financial exploitation; (2) the Trusted Contact Person has been notified of the hold, as well as all parties authorized to transact business on the account; and (3) the firm undertakes an immediate review of the facts and circumstances necessitating the hold.  The temporary hold would last up to 15 business days, unless extended by a state regulator or agency or court of competent jurisdiction. If, after conducting the internal review, and the member firm reasonably believes that financial exploitation has occurred or is occurring (or has or will be attempted), the member firm can extend the hold for up to another 10 business days. The proposed rule changes are not effective until approved by the SEC. Notably, the SEC staff can decline to adopt the proposed changes or request changes or amendments to the rule proposal. Takeaway: FINRA’s effort to implement rules that empower member firms to detect and prevent the financial exploitation of seniors and other vulnerable adults is laudable. Having a trusted person to contact when financial exploitation is suspected and allowing a temporary hold on account activity will ensure that senior account holders do not fall victim to the financial exploitation by others. Regardless of whether the SEC adopts the proposed rules, FINRA’s efforts should be held as an industry best practice that member firms should strive to achieve. LINKS: Press release dated October 20, 2015 Proposed Rule Changes NASAA model legislation or regulation to protect vulnerable adults from financial exploitation, adopted January 22, 2016 FINRA Regulatory Notice 15-37, October 2015

On September 28, 2016, one day before the Securities and Exchange Commission (“SEC”) announced its first stand-alone action to enforce Section 21F(h) of the Securities Exchange Act of 1934 (discussed on this Blog here ), the SEC settled with Anheuser-Busch InBev SA/NV (“AB InBev”) for its alleged violations of the Foreign Corrupt Practices Act (“FCPA”) and the anti-retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Pursuant to the settlement, AB InBev agreed to pay $6 million to the SEC in disgorgement ($2.7 million), prejudgment interest ($300,000), and a civil penalty ($3 million). According to the SEC, AB InBev “used third-party sales promoters to make improper payments to government officials in India to increase the sales and production of InBev products in that country.” Although employees repeatedly complained about the adequacy of AB InBev’s internal controls to detect and prevent the improper payments, “the company failed to ensure that transactions involving the promoters were recorded properly in its books and records.” As set forth in the SEC Order, AB InBev: (1) failed to report employee complaints about the wrongful conduct; (2) failed to timely respond to subpoenas; (3) broadly asserted the privilege, causing the SEC to expend additional resources on the investigation; and (4) entered into a separation agreement with a former employee that prevented the employee from communicating directly with the SEC about possible securities law violations. Regarding the separation agreement, the SEC found that employees were required to maintain information about AB InBev “in strict secrecy and confidence,” and were threatened with a $250,000 liquidated damages penalty if they violated the non-disclosure terms of the agreement. According to the SEC, after signing the separation agreement, the employee, who had previously communicated with SEC about the wrongdoing, stopped doing so. The SEC said that AB InBev’s separation agreement “chilled” employees “from communicating with the SEC” in violation of SEC Rule 21F-17(a). “Anheuser-Busch InBev recorded improper payments by its sales promoters in India as legitimate expenses in its financial accounting, and then exacerbated the problem by including language in a separation agreement that chilled an employee from communicating with the SEC,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit. In addition to paying $6 million, AB InBev agreed to cooperate with the SEC and report its compliance with the FCPA, and make “reasonable efforts to notify certain former employees that Anheuser-Busch InBev does not prohibit employees from contacting the SEC about possible law violations.” Takeaway: The SEC’s settlement with AB InBev is notable for a few reasons. First, the settlement evinces the continued effort by the SEC to root out corporate efforts to chill whistleblowing. “Threat of financial punishment for whistleblowing is unacceptable,” said Jane Norberg, Acting Chief of the SEC’s Office of the Whistleblower, in the AB InBev announcement.  “We will continue to take a hard look at these types of provisions and fact patterns.” Second, the settlement confirms the SEC’s interest in bringing internal controls cases against companies with inadequate processes and procedures, even when the company at issue is a partner in a venture with less than a controlling interest in the joint operation. As noted in the SEC Order, although AB InBev held less than 50% of the voting power of the joint venture, the SEC required AB InBev to “proceed in good faith to use its influence, to the extent reasonable under the issuer’s circumstances, to cause such domestic or foreign firm to devise and maintain a system of internal accounting controls.” Third, nearly 50% of the settlement amount was comprised of the disgorgement of ill-gotten gains. Yet, AB InBev was not charged with violating the anti-bribery provisions of the FCPA. The settlement, therefore, reinforces the SEC’s long-held position that disgorgement is appropriate when there are only violations of the books and records or the internal controls provisions of the FCPA. LINKS: SEC Press Release ; and SEC Order

On October 3, 2016, the United States Supreme Court invited the U.S. Solicitor General to express the U.S. Government’s views about the application of the False Claims Act (“FCA”) public disclosure bar. 31 U.S.C. § 3730(e)(4)(A).  The request was made in the United States ex rel. Advocates for Basic Legal Equality v. U.S. Bank , a qui tam action that the Sixth Circuit held was properly dismissed because of the public disclosure bar. In United States ex rel. Advocates for Basic Legal Equality v. U.S. Bank , 816 F.3d 428 (6th Cir. 2016), the Sixth Circuit held that prior public disclosures are “substantially the same” for purposes of the public disclosure bar if they “encompass” the allegations in the subject qui tam action even though the prior disclosures do not reveal the specific fraud alleged. Based upon that analysis, the court dismissed the case against U.S. Bank on the grounds that two prior public disclosures barred the action. The Public Disclosure Bar The public disclosure bar precludes a relator from pursuing a qui tam action if the allegations have been publicly disclosed through official proceedings or in the news media, unless the relator was an original source of the information upon which the action was based.  The bar operates regardless of whether the whistleblower knew about or reviewed the public information prior to filing the complaint. Courts generally apply a two-part test to determine whether the public disclosure bar applies. First, the courts inquire whether there has been any public disclosure of the fraud in (1) a federal criminal, civil, or administrative hearing in which the government is a party; (2) a congressional, Government Accountability Office, or other federal report, hearing, audit or investigation; or (3) the news media (such as newspapers; scholarly, scientific, and technical periodicals, including trade journals; advertisements in periodicals; and widely accessible internet publications). Second, the courts look to whether the whistleblower’s allegations are substantially the same as the previously disclosed fraud. If either requirement is not satisfied, the bar does not apply and the relator can proceed with the action. If both requirements are met, the action is barred unless the relator qualifies as an original source under the FCA. An original source is “an individual who either (i) prior to a public disclosure … , has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under .” The Proceedings in Advocates for Basic Equality Advocates for Basic Legal Equality involved a mortgage insurance program, backed by the Federal Housing Administration, that encouraged banks to lend money to high-risk borrowers. The insurance provided under the program covered the losses incurred by a lending institution that were caused by a borrower who defaulted on a loan. To participate in the program, a lender, such as U.S. Bank (which participated in the program), had to certify that it would meet, and did meet, certain requirements each time it requested an insurance payment. 816 F.3d at 429. The key requirement to be certified, for purposes of the action, was that the lender, in this case U.S. Bank, would engage in “loss mitigation” measures, such as attempting to arrange a face-to-face meeting with the defaulting borrower, before foreclosing. Id . The relator, Advocates for Basic Legal Equality (“ABLE”), an Ohio non-profit organization that advances the interests of low-income individuals, claimed that U.S. Bank did not satisfy the loss mitigation requirement. It alleged that U.S. Bank promised to engage in loss mitigation, failed to do so, and then lied about the failure.  816 F.3d at 429. ABLE cited to three foreclosures where this happened, claiming that those instances demonstrated a widespread pattern showing that U.S. Bank wrongfully foreclosed on 22,000 homes and wrongfully collected $2.3 billion in federal insurance benefits. Id . ABLE filed the action on behalf of itself and the United States claiming that U.S. Bank violated the FCA. The Department of Justice declined to intervene. Id . The district court found that two of ABLE’s claims stated a violation of the FCA. United States v. U.S. Bank, N.A. , No. 3:13 CV 704, 2015 WL 2238660, at *4–7 (N.D. Ohio May 12, 2015). Nevertheless, it dismissed the action because ABLE based its case on information that had been publicly disclosed, precluding it from bringing the lawsuit as a qui tam plaintiff. Id . at *8–11. In that regard, the court found that ABLE’s allegations had been publicly disclosed in: (1) a 2011 consent order between U.S. Bank and the federal government, which required U.S. Bank to implement a wide variety of reforms, including measures “to ensure reasonable and good faith efforts, consistent with applicable Legal Requirements, are engaged in Loss Mitigation and foreclosure prevention for delinquent loans”; and (2) a 2011 foreclosure practices review from three federal agencies, which noted that various banks, including U.S. Bank, had failed to take a variety of loss mitigation measures, and which emphasized the need for banks to make “reasonable and good faith efforts … to engage in loss mitigation and foreclosure prevention for delinquent loans where appropriate.” 816 F.3d at 431. The Sixth Circuit affirmed the dismissal, holding that a general disclosure suffices to bar a case involving more specific and detailed claims of wrongdoing: “the broader, publicly disclosed category (a variety of mortgages) encompasses ABLE’s narrower category (federally insured mortgages).” 816 F.3d at 432. The court reasoned that if the rule were “ therwise, one could always—or at least nearly always—evade the public disclosure requirement by focusing the allegations in a second action on sub-classes of potential claims covered by the initial action.” Id . ABLE filed a writ of certiorari with the Supreme Court. Split in the Circuits? According to ABLE, there is a split between the Sixth Circuit, on the one hand, and the Seventh and Ninth Circuits, on the other hand, about how to define “substantially the same”. ABLE contends that the Seventh and Ninth Circuits have considered and rejected the Sixth Circuit’s “broad-brush approach”, holding that “a complaint that is similar only at a high level of generality” does not “trigger[] the public disclosure bar.” Petition for Certiorari at 1 (citing United States ex rel. Mateski v. Raytheon Co. , 816 F.3d 565, 575 (9th Cir. 2016); United States ex rel. Goldberg v. Rush Univ. Med. Ctr. , 680 F.3d 933, 936 (7th Cir. 2012). In those circuits, public disclosure of some wrongdoing does not bar an FCA action unless it “alerted the government to the specific areas of fraud alleged” in the action. Mateski , 816 F.3d at 579. Only disclosures alleging “that a particular had committed a particular fraud in a particular way” suffice. Goldberg , 680 F.3d at 935. In response, U.S. Bank contends that there is no split between the circuits.  U.S. Bank notes that the panels in the Seventh and Ninth Circuits merely held that “where a relator alleges a different type of fraud from what has been publicly disclosed, courts should not construe the disclosures and allegations so broadly as to obviate the distinction between the kind of fraud alleged and the kind of fraud disclosed.” Brief in Opposition at 15 (citations omitted). According to U.S. Bank, nothing in the Sixth Circuit’s opinion conflicts with the Seventh and Ninth Circuits: “The Sixth, Seventh, and Ninth Circuits all apply the same overarching rule: public disclosures bar a given complaint when they reveal allegations or transactions that are substantially the same as those presented in the complaint and so suffice to put the government on notice of its allegations.” Id . at 24 & n.8 (noting that the First, D.C. and Tenth Circuits are each in accord). Better Markets, Inc., which filed an amicus brief, contends that the Eighth Circuit’s approach offers another view in the split among the circuits.  The Eighth Circuit requires the prior public disclosure to “expose[ ]” “the essential elements” of “the transaction as fraudulent” in order for the bar to apply. United States ex rel. Rabushka v. Crane Co. , 40 F.3d 1509, 1512 (8th Cir. 1994). According to Better Markets, the Eighth Circuit found persuasive a similar articulation by the D.C. Circuit.  See United States ex rel. Springfield Terminal Ry. v. Quinn , 14 F.3d 645, 654 (D.C. Cir. 1994) (“The language employed in § 3730(e)(4)(A) suggests that Congress sought to prohibit qui tam actions only when . . . the critical elements of the fraudulent transaction themselves were in the public domain.”).  Better Markets requested that the Court adopt a rule based on this approach: Previous public disclosures bar a qui tam action only where they contain information that, taken as true, describes fraud with sufficient particularity to state a claim to relief under the False Claims Act. In other words, if the disclosures, standing as the sole allegations in a hypothetical complaint against the same defendant, are insufficiently particularized to survive a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure (and the heightened pleading standard for fraud under Rule 9(b)), then they do not bar a qui tam suit that features additional allegations. Potential Outcome This Blog believes that there is a split among the circuits. In analyzing the different approaches, the Seventh and Ninth Circuits advance a framework that strikes a balance between the competing interests of the parties. By requiring a nexus between the prior public disclosure and the qui tam action such that the government is alerted to the fraud alleged ( Mateski , 816 F.3d at 579), both the relator and the defendant have a fair and reasonable framework upon which to argue over the application of the bar. The Sixth Circuit’s approach is far too broad. By analyzing the issue in terms of whether the prior disclosure “encompasses” the alleged fraud, the court creates a rule that potentially has no limit. Any general allegation of fraud necessarily “encompasses” specific frauds that the government does not know about.  The Sixth Circuit’s approach therefore would swallow virtually every fraud filed under the FCA. Finally, the rule proposed by Better Markets takes the Eighth and D.C. Circuits’ rulings (which are closer to the approach of the Seventh and Ninth Circuits) too far. Such a rule would allow virtually every qui tam action to escape the application of the public disclosure bar. Indeed, relators would be able to base their qui tam actions on public disclosures, without adding anything material ( i.e. , original source information) to the claim, because the prior public disclosures did not state a claim under 12(b)(6) and meet the heightened pleading requirements of Rule 9(b). The Supreme Court has not set a deadline for the Solicitor General to file its brief. If the Court takes the case, it will likely result in a decision that clarifies the FCA’s requirement that the prior public disclosure be “substantially same” as the allegations in the qui tam complaint. Links: Petition for a writ of certiorari filed. (Response due August 26, 2016) Brief of respondent U.S. Bank, N.A. in opposition filed. Brief amicus curiae of Better Markets, Inc. filed. Reply of petitioner U.S., ex rel. Advocates for Basic Legal Equality, Inc. filed.

Today’s newspapers often report stories about the perils of arbitration. In 2015, for example, The New York Times published a series of articles titled, “Beware the Fine Print” – a special report examining how arbitration clauses buried in contracts deprives Americans of their constitutional rights. (Silver-Greenberg & Corkery , In Arbitration, a Privatization of the Justice System , N.Y. Times (Nov. 1, 2015).) According to the California Assembly Committee On Judiciary, an increasing number of businesses are using arbitration provisions in order to evade California law. Among other things, these provisions allow businesses to select the laws or venues of another state (and even another country) that the business deems to be favorable to its interest to govern a legal dispute if one should arise. Since the bargaining power often rests with the business, the committee found that Californians are often forced to agree to such terms. Given the burden and expense of traveling to another forum, and the favorability of the selected law to the business interest, the committee concluded that most Californians were unlikely to vindicate their legal rights. To protect Californians, and in particular California-based employees, the Legislature sought to level the playing field by ensuring that California-based employees could not be forced to litigate or arbitrate their California-based claims outside of California, under out-of-state laws, as a condition of employment.  Accordingly, it passed SB-1241 . SB-1241 targets choice of venue provisions found in employment agreements that require a worker to arbitrate in a different state and choice of law provisions that select a different state’s law to control the arbitral proceeding. In particular, the bill prohibits an employer, as a condition of employment, from requiring an employee who primarily resides and works in California to agree to a provision that would require the employee to adjudicate ( i.e. , either through litigation or arbitration) a claim arising in California outside of the state or deprive the employee of the substantive protection of California law with respect to a controversy arising in California. The bill makes any provision of a contract that violates the prohibitions of the law voidable upon request of the employee and requires a dispute over a voided provision to be adjudicated in California under California law. The bill further specifies that injunctive relief is available to the employee and authorizes a court to award reasonable attorney’s fees should the employee prevail. Notably, the bill excepts an agreement that is negotiated by counsel on behalf of an employee. The law applies to contracts entered into, modified, or extended on or after January 1, 2017. In addition to the foregoing law, the California Legislature sought to fill a gap left in the sections of the California Code of Civil Procedure governing arbitration proceedings. As noted by the California Senate Rules Committee, while certain California laws and procedures govern all aspects of a non-judicial arbitration – from the conduct of arbitrators, private arbitration companies, and the arbitration proceedings, to the enforcement of arbitration agreements and arbitration awards, as well as related judicial proceedings – it is silent as to the right of the parties to have a court reporter in an arbitration proceeding. The California Legislature enacted SB-1007 so that a party to an arbitration can have a court reporter present to create an official record of the proceeding. The law requires the party requesting a certified shorthand reporter to make the request in his/her demand for arbitration, or a response, answer, or counterclaim to a demand for arbitration; or at a pre-hearing scheduling conference at which a deposition, proceeding, or hearing is being calendared.  If the arbitrator refuses the request, then the party can petition a court for an order to compel the arbitrator to grant the party’s request. The petitioning party may include a request for an order to stay any deposition, proceeding, or hearing related to the arbitration pending the court’s determination of the petition.  For indigent consumers in consumer arbitration, a court reporter will be provided upon request at the expense of the non-consumer party. On September 25, 2016, California Governor Jerry Brown signed both bills into law. Takeaway : With regard to SB-1241, this Blog believes that the playing field should be level. This is not to say that employers do not have an obligation to protect their rights. However, the line gets crossed when out-of-state employers impose choice-of-law and forum selection provisions on their workers, many of whom are unable to obtain counsel to negotiate on their behalf, in order to make it more difficult for employees to pursue legitimate claims, and ensure that any disputes are decided in a forum that is most favorable to the employer. As the California Employment Lawyers Association wrote in support of the SB-1241: Most workers lack the resources to travel across the country — let alone around the world — to pursue an employment claim in another state or country. The problem is particularly acute for lower income workers and disabled workers. Those workers that do have the resources and ability to travel might well find that the protection that they had under California law does not exist, or is not as comprehensive, in the jurisdiction that will be deciding their dispute. [ . . . ] With regard to SB-1007, having a transcript of proceedings is important to a participant’s ability to appeal an adverse arbitration decision. As State Senator Bob Wieckowski stated in support of SB-1007: Consumers are frequently forced into binding arbitration if they purchase common goods or services. When they go into arbitration it is critical that they have a court reporter present to create an official record.  This will protect their due process rights and provide a reviewing court with evidence of bias or misconduct if any occurs in the arbitration proceedings. The ability for a reviewing court to have evidence of bias or misconduct cannot be underscored enough. This Blog previously wrote about such a situation last month. Here . In that case,  Royal Alliance Associates, Inc. v. Liebhaber , B264619 (Cal. Ct. App. Aug. 30, 2016) , the Court of Appeals vacated an expungement award because, as the transcript of proceedings showed, the arbitrators improperly failed to allow counsel the opportunity to present testimony and evidence at the hearing.

What type of fraud is Laurence Balter accused of? Laurence Balter, a former fund adviser and registered investment advisor, stands accused by the Securities and Exchange Commission ("SEC") of "multiple breaches of fiduciary duty." Breaches of fiduciary duty occur when financial advisers prioritize their own interests over those of their clients. The SEC accuses Balter, who was operating through Oracle Investment, located in Washington and Hawaii, of collecting more than $500,000 in profitable trades from an omnibus account  (an account between two future brokers), while leaving his clients, many of them elderly, relatively naïve investors, holding the bag. The SEC initiated a cease-and-desist proceeding  on the matter. Allegations of this type are, of course, serious. Often the situation is extremely complicated. Professional experience is always required to unravel the tangle of evidence. If you find yourself or your firm accused of improperly managing a customer's account, or if you are investor who believes that your account has been mismanaged, you should immediately contact a securities arbitration attorney . The SEC, which is taking its case against Balter before an internal administrative court, alleges that he "reaped more than a half-million dollars in ill-gotten gains by siphoning winning trades from his clients and withdrawing more than his fair share of management fees," while misleading his clients about both his investment strategies and his fees. The SEC states that its goal in the matter is to determine appropriate remedial action in terms of appropriate civil penalties and reimbursements to Balter's former clients. Not the First Time Balter's Actions Have Come under Scrutiny This is not the first time Balter has been accused of fraudulent conduct. According to Financial Industry Regulatory Authority (FINRA) records, Balter has twice before been the subject of customer disputes, one involving excessive fees and the other concerning suitability of investments and charges of an unauthorized sale. The SEC describes three distinct schemes, involving 120 accounts, that Balter is accused of perpetrating between 2011 and 2014 and points out that during the years in question, Oracle Investment Research managed accounts were, at their peak, valued at $47 million. An Ounce of Prevention For the advisor, the best way to deal with allegations of misconduct is to prevent them by following the rules of the road. This is one of the reasons it is invaluable to engage the services of an experienced securities attorney to make sure your actions comply with existing (and changing) regulations. For the customer, the best way to protect your yourself from misconduct is to be vigilant in the review of your account.  This means, among other things, reviewing your monthly statements and asking questions if something looks wrong. After all, it is your hard earned money that may be at risk.

Bryan Reichel, founder of PureChoice -- deceptive or duped? Business lawsuits involving accusations of fraud can be complicated and confusing. It is sometimes difficult to decipher who is lying and who is telling the truth. On the one hand, there is a successful CEO, who is alleged to have committed fraud to develop or maintain a lavish lifestyle. While, on the other hand, there is an accuser who stands to gain money and power by overthrowing the existing kingpin. If you find yourself accused of fraudulent behavior, it is essential that you engage the services of an  experienced business attorney who will untangle the threads to find out where the deception begins and where it leads, and to vigorously defend you from your accuser. Two Opposing Views of Bryan Reichel Bryan Reichel, 61, founder and CEO of PureChoice, a Minnesota company that developed and sold air- monitoring equipment, has been described by his lawyer as a visionary who managed to survive the financial crisis, but was then evicted from his own company by greedy investors. The prosecuting attorney, of course, has an entirely different point of view. He presented Reichel as a fraud who lied to the investors who helped him establish his new business in order to retain the profits for himself. According to the federal grand jury that indicted Reichel in 2014, he committed seven counts of wire fraud and lied to his investors. In 2015, a grand jury added five more charges based on his alleged attempts to hide his assets in order to defraud the bankruptcy court. The federal prosecutor, in addressing the jurors, claimed that “This case is all about self-dealing.” The Specific Allegations When Reichel was soliciting investments, he touted PureChoice as a company on the cusp of success. Indeed, his company initially drew attention from some big Minnesota companies, such as Honeywell and 3M. It is alleged, however, that he was lying about his company's success and that PureChoice was already losing money at the time. It is further alleged that, in a Ponzi-like scheme, he was using new investment money to pay off old investors, as well as to fund his lavish life style, which included a large mansion, many posh vehicles, pricey trips, and an expensive gun collection. From 1992 until 2011, his investors lost a net total of approximately $25 million. In addition, by 2010, his company had racked up $40 million in debt. Unsurprisingly, at trial, Reichel's attorney presented an entirely different story. He described Reichel as an innovative entrepreneur who won the support of many well-informed corporate executives who invested millions of dollars in PureChoice. Some were even guarantors of PureChoice's debt. Among the investors in PureChoice were a father-and-son team, George and David Anderson, heirs to Crown Iron Works. While the government alleges that they were the ones who lost the most from Reichel's scheme, approximately $12.3 million, Reichel's attorney presents a completely different series of facts. Reichel's attorney notes that George Anderson believed, after the Sept. 11 attacks, that Reichel's technology could be used to save the U.S. power grid from an electromagnetic pulse attack.  Armed with this idea, Anderson traveled to Washington to testify before a congressional committee about "his" proposed solution to an imminent threat. Having started investing in PureChoice in 2003, he and his son eventually took over the company and its intellectual property, ousting Reichel in 2010. In 2011, Reichel filed for bankruptcy while fighting a lawsuit in which Anderson was seeking to recover a $1.5 million loan from him. If this all seems complicated, hold onto your hats. Anderson's attorney says that Reichel moved family finances and failed to disclose significant amounts of personal property when he filed for bankruptcy protection. Reichel's lawyer, on the other hand, says this was the result of poor advice he was given by a previous attorney. Reichel also accuses Anderson of falsely reporting to the bankruptcy court that Reichel had hidden gold bars and stashed substantial amounts of money in the Cayman Islands. It is clear from the complications of a case like this why it is so important to retain an experienced business law and litigation attorney if you become entangled in a lawsuit alleging fraud. It is unlikely that anyone without such a background could extricate him or herself from such a situation.

What is behind the lawsuit accusing Hitachi of Stealing Trade Secrets from Purolite? At the end of August, Purolite, an American water treatment company based in Pennsylvania, filed a lawsuit against the American branch of Japanese conglomerate Hitachi. According to Purolite, Hitachi violated the stipulations of a business agreement by sharing Purolite's confidential trade secrets concerning the decontamination of water, including water contaminated by radioactive waste. Purolite accuses Hitachi of sharing Purolite's trade secrets with other companies in expectation of securing a major contract and cutting Purolite out of the deal. The lawsuit was filed in U.S. District Court for the Southern District of New York. The case revolves around technological methods Purolite developed for repair of the damage caused by the disaster at Japan's Fukushima Daiichi Nuclear Power Plant in 2011. The catastrophic damage resulted from the combined forces of an earthquake and subsequent tsunami that shut down the facility's cooling system. Tragically, the plant still continues to contaminate not only the water used to cool its nuclear reactors, but the groundwater as well. What makes the Fukushima site unique? Several factors differentiate the Fukushima site from other nuclear power plants. These include: the large amount of saltwater at Fukushima; the presence of a much higher number of atoms with excess nuclear energy (radionuclides); and the tremendous amount of water requiring radioactive waste removal (the largest in history). All of these factors complicate the cleanup process and all were taken into consideration when Purolite began work on developing a core technology. The water decontamination system Purolite created makes use of ion-exchange resins formed into tiny beads that are capable of trapping radioactive ions for removal. What makes the system developed by Purolite all the more effective is that it enables the removal of radionuclides to a non-detectible level without a desalination process. Purolite's Case of Trade Secret Misappropriation A confidential business agreement signed in 2011 by Purolite and Hitachi-GE Nuclear Energy ("HGNE") was designed as a collaboration in which Purolite would provide water treatment expertise to HGNE, whose expertise is in the operation of power plants, in order for the team to obtain contract work at Fukushima. According the agreement, HGNE was prohibited from sharing trade secrets for a period of 10 years. When their joint proposal was submitted to TEPCO, the Japanese electric company poised to complete the cleanup of Fukushima, however, the bid was rejected. Purolite alleges that HGNE, having violated the business agreement, began working with other companies to develop less costly water treatment processed based on Purolite's technologies and to outbid their "partners." Purolite further alleges that HGNE had already breached the agreement, even before the bid was filed, by disclosing trade secrets to competitors, including Avantech, a water treatment firm located in South Carolina. The lawsuit lists eight counts of allegations against Hitachi, Avantech and other defendants and seeks damages of at least one billion dollars. One count included in Purolite’s complaint has been made under the terms of the recently passed  Defend Trade Secrets Act of May 2016 . This act amended the federal criminal code, enabling owners of trade secrets to file civil action in U.S. district courts to seek injunctive relief, compensatory damages and attorney’s fees in cases of trade secret misappropriation. If your company is involved in a dispute involving misappropriation of trade secrets, it is crucial that you have the support of a skilled business attorney  to protect your firm's reputation and its bottom line.

New York, NY ( Law Firm Newswire ) October 14, 2016 -  The Law Office of Jeffrey M. Haber is pleased to announce that Mr. Haber has once again been named by Super Lawyers magazine to be among the top lawyers in the New York metropolitan area. The Law Office of Jeffrey M. Haber was recognized for his work in securities litigation. As part of his history of professional achievements, he was also recognized as a Super Lawyer in 2008-2010 and 2012-2015. Super Lawyers magazine is an affiliate of Thomson Reuters. It recognizes attorneys who have distinguished themselves by both a high degree of professional achievement and by peer recognition. Each year, no more than 5 percent of lawyers are recognized as Super Lawyers by the magazine. The annual selection involves a survey of lawyers, independent research evaluation of candidates, and peer reviews within each practice area. The magazine publishes its lists nationwide, as well as in leading city and regional magazines and newspapers across the country. A description of the selection process can be found on the Super Lawyers website About The Law Office of Jeffrey M. Haber Located in New York City, The Law Office of Jeffrey M. Haber is dedicated to representing corporations, small businesses, partnerships and individuals engaged in a broad range of business and litigation matters. For over 25 years, The Law Office of Jeffrey M. Haber has been involved in high-profile, complex litigations and arbitrations and has served in various roles in both individual and class action lawsuits which have resulted in million and multimillion-dollar settlements and awards. The Law Office of Jeffrey M. Haber practice combines the sophistication and counsel of a large national law firm with the economy, flexibility, commitment, and personal attention of a small firm. ATTORNEY ADVERTISING. © 2016 The Law Office of Jeffrey M. Haber. The law firm responsible for this advertisement is The Law Office of Jeffrey M. Haber, 708 Third Avenue, 5th Floor, New York, New York 10017, (212) 209-1005. Prior results do not guarantee or predict a similar outcome with respect to any future matter. For more information, please contact Freiberger Haber LLP at (212) 209-1005. The Law Office of Jeffrey M. Haber 708 Third Avenue, 5th Floor New York, N.Y. 10017 Tel: (212) 209-1005 Fax: (212) 209-7101 Email: jhaber@jhaberlaw.com

Practitioners involved in qui tam litigation often encounter questions concerning when the statute of limitations begins to run. Under the False Claims Act (“FCA”), the government (or relator) must file a suit not “more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed.” 31 U.S.C. § 3731(b). The majority of the courts have held that “the official of the United States” means the U.S. Attorney General or his/her designees.  E.g. , United States v. Wells Fargo Bank, N.A. , 972 F. Supp. 2d 593, 607 (S.D.N.Y. 2013). Recently, a federal district court in Illinois had the opportunity to consider this issue.  Although the court adopted the majority interpretation concerning who within the government must have notice of an FCA claim, it allowed discovery into other governmental entities to determine whether the government was on notice of the alleged claims.  United States v. Kellogg Brown & Root Services, Inc. , No. 4:12-cv-04110-SLD-JEH (C.D. Ill. Sept. 16, 2016). Background: On November 19, 2012, the government filed a lawsuit against Kellogg Brown & Root Services, Inc. (“KBR”), alleging violations of the FCA and breach of contract relating to logistical support provided by KBR to the United States Army during the Iraq war in 2004.  According to the government, KBR submitted bills from a subcontractor, First Kuwaiti Trading Company (“FKTC”), that it “knew or should have known” were “wildly inaccurate.…” Slip op. 1-2. These bills were submitted in 2004; the government, however, did not file its complaint until November 19, 2012. KBR filed a motion to compel the government to respond to various discovery requests, including those relating to the running of the statute of limitations. KBR argued that the government’s suit was time-barred, because a government official may have had knowledge of the allegations prior to November 19, 2009.  In response, the government claimed that the action was not time-barred under the FCA’s tolling provision. See 31 U.S.C. § 3731(b)(2). The Court’s Ruling: The court framed the question to be resolved as “which government officials’ knowledge matters” in determining when the statute of limitations begins to run. Slip op. at 6. It began answering that question by noting that “ he text and structure of the False Claims Act, as well as the overwhelming weight of the case law that construes it, require a narrower reading of § 3731(b)(2) ….” Id . As such, “The official of the United States,” as used in the FCA, “means the Attorney General or her designees.” Id . KBR argued that Section 3731(b) “should be construed as broadly as” the statute of limitations applicable to breach of contract actions. Slip op. at 7 (citing 28 U.S.C. § 2416(c)). Section 2416(c) provides that a suit is time barred after a certain period of knowledge “by an official of the United States charged with the responsibility to act in the circumstances.” (Emphasis added.) Courts have interpreted Section 2416(c) “to encompass government employees outside the Department of Justice.” Slip op. at n.11.  Looking at the two provisions, the court emphasized that they were different in text and meaning. Id . at 6-9. Noting the difference between “an official” and “the official,” the court found that the breach of contract statute of limitations applied to lawsuits filed by a broad range of government entities, while the FCA statute of limitations applied to lawsuits filed by the Attorney General or his/her designees. Id . Having answered the question framed (i.e. , “which government officials’ knowledge matters”), the court turned to when the statute of limitations is triggered, noting that the statute of limitations begins to run when “the government official charged with bringing the civil action discovers, or by reasonable diligence could have discovered, the basis of the lawsuit.” Slip op. at 7 (citing United States ex rel. Miller v. Bill Harbert Intern. Const. , 505 F. Supp. 2d 1, 7 (D.D.C. 2007)). Thus, if the “relevant government official or officials knew or should have known of the basis of the FCA claims via reasonable diligence before November 19, 2009, then those claims are time-barred.” Id . KBR sought broad discovery to show that, as noted, the statute of limitations was triggered before November 19, 2009.  KBR argued that many government agencies had investigated KBR for similar alleged misconduct. Thus, if any of those agencies “report facts that would put DOJ Civil on notice of a potential FCA claim,” it was entitled to learn of those reports. Slip op. at 12. The court agreed, holding that “KBR entitled to discovery related to government communications to DOJ Civil that could tend to show DOJ Civil’s knowledge of facts that should have put it on notice of any FCA claims arising out of KBR’s alleged false claims.” Id . In so holding, the court rejected the government’s argument that only “publicly available government reports or memoranda are relevant to its knowledge” as being “unduly narrow.” Id . at 11. A copy of the court’s opinion can be found  here . Takeaway: The court’s decision is consistent with Rule 26(b) of the Federal Rules of Civil Procedure, which provides, in pertinent part, that the scope of discovery in a civil action encompasses “any nonprivileged matter that is relevant to any party’s claim or defense . . . .” Fed. R. Civ. P. 26(b). Whether the DOJ received information to put it on notice of the claims asserted against KBR sufficient to trigger the FCA’s statute of limitations cannot be determined in a vacuum. A court should be provided all information received by the DOJ material to the alleged claims in considering when the FCA statute of limitations was triggered. As the KBR court noted, it would be “unduly narrow” to limit the inquiry to only publicly-available information. It remains to be seen whether other federal courts will adopt the holding and rationale of the KBR court. However, reason and fairness dictate that a defendant should be able to inquire whether the Attorney General and his/her designees received material information from other government agencies that would put it on notice of the claim being asserted.

On September 29, 2016, the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) announced that Och-Ziff Capital Management Group LLC (“Och-Ziff”), a New York-based alternative investment and hedge fund manager, and OZ Africa Management GP LLC (“OZ Africa”), its wholly-owned subsidiary, agreed to pay more than $400 million to settle charges that they used intermediaries and business partners to bribe officials of various African governments. The SEC will receive nearly $200 million to settle civil charges that Och-Ziff violated the Foreign Corrupt Practices Act (“FCPA”) and the DOJ will receive more than $213 million to settle criminal charges that Och Ziff and Och Africa bribed officials in the Democratic Republic of Congo (“DRC”) and Libya. The settlement amount represents one of the largest criminal penalties levied on a U.S. hedge fund. As part of the settlement, Och-Ziff Chief Executive Officer, Daniel Och (“Och”), agreed to pay $2.2 million to settle charges that he “caused certain violations” of the FCPA.  Joel Frank (“Frank”), Och-Ziff Chief Financial Officer, also settled SEC charges for ignoring red flags, though his penalty is to be determined. In addition to the monetary payments, OZ Africa pleaded guilty to one count of conspiracy – an unusual violation for a hedge fund since the law at issue is aimed at preventing bribery of foreign officials – and Och-Ziff entered into a deferred prosecution agreement, in which the charges related to misconduct in Congo, Libya, Chad and Niger would be dropped after three years if it complies with the terms of the deal. The Scheme: Beginning in February 2007, Och-Ziff retained a third-party to secure an investment from the Libyan Investment Authority (“LIA”), Libya’s $67 billion sovereign wealth fund, knowing that the “agent would need to pay bribes to Libyan officials.”  By late November 2007, the LIA invested $300 million in Och-Ziff hedge funds.  Och-Ziff paid the agent “a ‘finder’s fee’ of $3.75 million, knowing that all or a portion of the fees would be paid to Libyan officials in return for their assistance in obtaining the LIA’s investment.”  To conceal and disguise the bribes, Och-Ziff “falsified its books and records” “by paying the ‘finder’s fee’ through a sham consulting agreement.” “Och-Ziff engaged in complicated, far-reaching schemes to get special access and secure significant deals and profits through corruption,” said Andrew Ceresney, director of the SEC’s enforcement division. “Senior executives cannot turn a blind eye to the acts of their employees or agents when they aware of suspicious transactions with high-risk partners in foreign countries.” Separately, in late 2007, Och-Ziff employees began discussions with a businessman operating in the DRC “about entering into a partnership based on special access to lucrative investment opportunities in the DRC involving the country’s diamond and mining sectors.”  Och-Ziff knew that the businessman (later identified as Dan Gertler, an Israeli businessman with close ties to high-level Congolese officials) made corrupt payments to senior DRC officials to gain access to these investment opportunities.  As explained in the plea agreement, Och-Ziff entered into several DRC-related transactions in conjunction with the businessman, understanding that Och-Ziff’s funds would be used, in part, to bribe high-ranking DRC officials to secure access to, and preference for, the investment opportunities.  In late 2008, Och-Ziff tried to cover-up these payments in connection with an audit of the businessman’s records.  According to the DOJ, the cover-up occurred “after an Och-Ziff employee was alerted that an audit of the businessman’s records revealed payments to DRC officials.” In response, the Och-Ziff employee “instructed that any references to those payments be removed from a final report of the audit.”  According to DOJ press release, “the businessman paid tens of millions of dollars in bribes to DRC officials in exchange for investment opportunities that resulted in more than $90 million in profits for Och-Ziff.” The Settlement: In settlement of the DOJ’s allegations – i.e., two counts of conspiracy to violate the anti-bribery provisions of the FCPA, one count of falsifying its books and records and one count of failing to implement adequate internal controls – Och-Ziff agreed to pay a total criminal penalty of $213,055,689.  Och-Ziff also agreed to implement numerous internal controls, retain a compliance monitor for three years and cooperate with the DOJ’s ongoing investigation, including its investigation of individuals. The criminal charges will be dismissed if the company complies with the terms of the deferred­prosecution agreement and does not violate any other laws over the next three years. OZ Africa pleaded guilty to conspiracy to violate the anti-bribery provisions of the FCPA.  Sentencing has been scheduled for March 29, 2017. “This case marks the first time a hedge fund has been held to account for violating the Foreign Corrupt Practices Act,” said Principal Deputy Assistant Attorney General Bitkower.  “In its pursuit of profits, Och-Ziff and its agents paid millions in bribes to high-level officials across Africa.  By exposing corruption in this industry, the Criminal Division’s Fraud Section continues to root out wrongdoing of all types in the financial sector.” In settlement of the SEC’s allegations, Och-Ziff and OZ Management agreed to pay $173,186,178 in disgorgement, plus $25,858,989 in interest, for a total of $199,045,167.  Och agreed to pay $1.9 million in disgorgement and $273,718 in interest to settle the charges that he caused two illegal transactions in the DRC.  Frank agreed to pay a penalty that will be assessed at a future date for causing illegal transactions in Libya and the DRC. Och and Frank consented to the SEC’s order without admitting or denying the findings. “Och-Ziff falsely recorded the bribe payments and failed to devise and maintain proper internal controls,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.  “Firms will be held accountable for their misconduct no matter how they might structure complex transactions or attempt to insulate themselves from the conduct of their employees or agents.” The cases are pending in the U.S. District Court, Eastern District of New York: U.S. v. OZ Africa Management GP LLC , No. 16-cr-00515 (NGG), and U.S. v. Och-Ziff Capital Management Group LLC , No. 16-cr-00516 (NGG). Links: DOJ Press Release Och-Ziff Deferred Prosecution Agreement Oz Africa Plea Agreement and Statement of Fact Press SEC Press Release SEC Order