By: Jeffrey M. Haber This Blog has written numerous articles about Ponzi schemes and the enforcement proceedings that resulted from them. See, e.g., here, here, here and here. In a Ponzi scheme, the operator creates an investment program in which “profits” are paid to earlier investors with money taken from later investors. The “profits” are, therefore, fictitious instead of returns on investment. Ultimately, Ponzi schemes collapse under their own weight, taking investors, many of whom are the later ones in the scheme, down with them. Many Ponzi schemes share common characteristics. These include, among others: high returns with little or no risk – i.e., “guaranteed” investment opportunities; overly consistent returns – i.e., investments that consistently generate positive returns regardless of overall market conditions; unregistered investments – i.e., investments that are not registered with the SEC or with state regulators; unlicensed sellers – i.e., investment professionals and firms that are not licensed or registered with state and federal regulators; secretive, complex strategies – i.e., investment strategies that are locked away in a black box or are the operator’s “secret sauce”; and difficulty receiving payments – i.e., difficulty cashing out or obtaining redemptions. Older investors are particularly vulnerable to the Ponzi operator. Research shows that as people grow older, they become too trusting and fail to recognize false or misleading claims, suspicious intentions and evidence of risky behavior. Shutting down Ponzi schemes and holding the operators accountable for such frauds is an important part of the SEC’s enforcement mission. Recently, in SEC v. Woods (here), the SEC brought an emergency action against a Ponzi scheme organizer allegedly responsible for fleecing investors, including retirees and seniors, out of millions of dollars. The SEC announced the action on August 25, 2021 (here). According to the SEC, Defendant, John Woods, has been running a massive Ponzi scheme for over a decade. By the end of July 2021, more than 400 people had invested money in Horizon Private Equity, III, LLC (“Horizon”) (i.e., the investment vehicle used in the Ponzi scheme). According to the SEC, investors are owed over $110,000,000 in principal. Many victims of the alleged Ponzi scheme are elderly and retirees who were preyed upon by investment advisers at Livingston Group Asset Management Company d/b/a Southport Capital (“Southport”), a registered investment adviser firm that Defendant owned and controlled. Defendant and other investment advisers at Southport allegedly told investors that they would receive returns of 6-7% interest, guaranteed for two to three years, for non-specific investments in a fund called “Horizon Private Equity.” Defendant and his associates at Southport allegedly told investors that their investments were safe, Horizon would earn a return by investing their money in, for example, government bonds, stocks, or small real estate projects and could get their principal back without penalty after a short waiting period. Investors were not, however, told that their money would or could be used to pay returns to earlier investors. But, said the SEC, that is exactly what Defendants did. According to the SEC, Horizon has not earned any significant profits from legitimate investments; instead, a large percentage of purported “returns” to earlier investors were simply paid out of new investor money. The SEC noted that the assets owned by Defendant and the entities under his control, including Southport and Horizon, are worth far too little for there to be any prospect that existing investors would receive their principal, let alone the promised returns. According to the SEC, Defendant and the Southport investment advisers working with him cultivated relationships of trust with Southport’s clients. Many investors had long-standing relationships with their individual adviser before being pitched the Horizon investment. These investors felt comfortable investing in Horizon in large part because of the trust they placed in their individual investment advisers at Southport. Playing on the trust reposed in them, Defendant and his cohorts verbally induced clients to invest their money in Horizon. As noted by the SEC, most investors were not given any written materials setting forth the terms of their Horizon investments. The SEC alleged that Defendant made the following misrepresentations, among others: (a) returns would be paid from profits of Horizon’s investments; (b) investments had a guaranteed rate of return; (c) investments carried little risk and were extremely safe and conservative; (d) there was no possibility of losing the principal investment in Horizon; (e) the Horizon investment was an annuity; (f) the risk of loss was minimal because Horizon had a very diversified investment portfolio; and (g) the Horizon investment was sponsored or offered by an Institutional Investment Adviser. According to the SEC, it is not yet clear whether investors will be able to recover their money. Defendant had raised only $600,000 per month in new investments during the months for which the SEC has been able to obtain bank records. And, according to the SEC, millions of dollars’ worth of investor funds are unaccounted for because of the duration of the scheme, and because Defendant did not use any of the typical recordkeeping practices expected from a legitimate investment fund. In addition to the scheme and its implementation, Defendant allegedly concealed his affiliation with Horizon. For example, during a 2018 examination of Southport, Defendant failed to disclose his involvement in Horizon. “In fact,” alleged the SEC, “Woods minimized his role in Horizon … even though he maintained control over the entity.” In 2021, the SEC conducted another examination of Southport. During the 2021 examination, said the SEC, Defendant and Southport misleadingly downplayed their relationship with Horizon. On August 24, 2021, the United States District Court for the Northern District of Georgia granted a temporary restraining order and asset freeze with respect to Defendants Woods and Horizon and ordered expedited discovery with respect to Southport, among other relief. The SEC charged Defendants with violating the antifraud provisions of the federal securities laws. The complaint seeks preliminary and permanent injunctions, disgorgement, prejudgment interest, civil penalties, an asset freeze, and the appointment of a receiver. “Investors felt comfortable investing in Horizon in large part because of their relationships with advisers at Southport,” said Nekia Hackworth Jones, Director of the SEC’s Atlanta Regional Office. “As alleged in the complaint, Woods and Southport preyed upon their clients’ fears of losing their hard-earned savings and convinced them to place millions of dollars into a Ponzi scheme by falsely promising them a safe investment with steady returns.” Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger The New York City Council promulgated rules to, inter alia , protect consumers from debt collection agencies ( see Title 20, Chapter 2, Subchapter 30 of the New York City Administrative Code (the “Code”). Indeed, the Code’s “legislative declaration” ( §20-488 ) recognizes that some debt collection agencies are “unscrupulous” and employ “abusive tactics”.   The Code, at §20-489(a) , defines “debt collection agency” as: a person engaged in business the principal purpose of which is to regularly collect or attempt to collect debts owed or due or asserted to be owed or due to another and shall also include a buyer of delinquent debt who seeks to collect such debt either directly or through the services of another by, including but not limited to, initiating or using legal processes or other means to collect or attempt to collect such debt…. Section 20-490 of the Code , which requires “debt collection agencies” to be licensed, provides: §20-490 License required. It shall be unlawful for any person to act as a debt collection agency without first having obtained a license in accordance with the provisions of this subchapter, and without first being in compliance with all other applicable law, rules and regulations. The issue of whether a foreclosing lender is a “debt collection agency” requiring a license under the New York City Administrative Code was decided on September 1, 2021, by the Appellate Division, Second Department, in Citibank, N.A. v. Wu .  In Citibank , defendant borrowers borrowed money from Approved Funding Corp. and executed a promissory note to evidence their repayment obligations.  To secure their repayment obligations, borrowers executed a mortgage on real property.  Borrowers defaulted under the note and mortgage (the “Default”).  Citibank (“Lender”), which acquired the note and mortgage from Approved Funding subsequent to the Default, commenced action to foreclose the mortgage in which it did not seek a deficiency judgment against borrowers.  Among other defenses in borrowers’ answer, was that Lender “failed to allege that it had obtained a license to act as a ‘debt collection agency’ pursuant to Administrative Code §20-490.” Lender moved for summary judgment on the complaint and to strike borrowers’ answer.  Borrowers cross-moved, inter alia , “in effect pursuant to CPLR 3211(a)(7) to dismiss the complaint insofar as asserted against them for failure to allege that had obtained the aforementioned license ( see CPLR 3015 <, which requires that a complaint alleges proper licensure under certain circumstances set forth therein> ).”  (Hyperlink added.)  Supreme court granted Lender’s motion and denied borrowers’ cross-motion.   On borrowers’ appeal, the Second Department affirmed supreme court’s order for a variety of reasons.  First, the Court determined that Lender was not required to be licensed pursuant to §20-490 of the Code and, therefore, rejected borrowers’ argument that “the foreclosing plaintiff in this case meets the … definition of ‘debt collection agency’” under the Code.  The Court noted that RPAPL Article 13 (which governs mortgage foreclosure actions) “distinguishes between an action to recover any part of the mortgage debt and an action to foreclose the mortgage ( see RPAPL 1301 ).”  (Hyperlink added.)  [Ed. Note: this Blog has addressed issues related to RPAPL 1301 < here =">here"> , < here =">here"> and < here =">here"> .]  Thus, a mortgage foreclosure action “is not an action to recover the mortgage debt from the mortgagor personally, but to collect it out of the land by enforcing the lien of the mortgage.”  (Citations and internal quotation marks omitted.)  This is particularly so where the lender does not seek a deficiency judgment against the borrower. Even if a mortgage foreclosure action constituted debt collection, the Court continued, the Lender “was not a ‘debt collection agency’ under the Code because to be characterized as such the debt collection efforts must be made on behalf of “another.”  Since the Lender held the note, it was acting on its own behalf and not on behalf of “another.” Further, notwithstanding that a “debt collection agency” includes “a buyer of delinquent debt who seeks to collect such debt,” Lender still did not qualify as a “debt collection agency” even though it acquired the underlying note from Approved Funding.  First, the Court stated: the language of Administrative Code § 20-489(a) is ambiguous in the sense that it is unclear whether the requirement that the "principal purpose" of the business be the collection of debt is intended to apply to the entire, expanded definition of "debt collection agency," or only to the first part of the definition pertaining to the collection of debts owed to another. To the extent the "principal purpose" requirement also applies to the expanded definition of "a buyer of delinquent debt who seeks to collect such debt," the did not show, or even attempt to argue, that it is the "principal purpose" of to buy and collect delinquent debt. Thus, to the extent that the "principal purpose" requirement modifies the entire definition of "debt collection agency," the plaintiff would not fit within that definition. Second, even if the “literal language of the expanded definition of ‘debt collection agency’ covered an owner of a note acquired after default, who is pursuing judicial mortgage foreclosure,” the Court concluded that such a literal interpretation is inconsistent with the legislative intent of the Code.  The Court reasoned that the abusive tactics that the Code was designed to protect against are not present in judicial foreclosures.  Indeed, the statutory scheme for judicial foreclosures “operates to protect homeowners and ensures fairness in the process, in a far more comprehensive manner and in ways that might not be entirely consistent with the .”  For example, the notice requirements of RPAPL 1303 and 1304 are designed to protect mortgagors.  [Ed. Note: this Blog has addressed issues related to RPAPL 1303 and 1304 < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .]  Similarly, CPLR 3012-b(a) , requires that residential foreclosure actions involving a “home loan,” include an attorney certification that the pleading and the underlying facts alleged therein have been reviewed by an attorney and that “there is a reasonable basis for the commencement of such action and that the plaintiff is currently the creditor entitled to enforce rights” under the loan documents.  (Citations and internal quotation marks omitted.)  Further, in residential mortgage foreclosure actions involving a “home loan,” CPLR 3408(a)(1) requires that the court hold a settlement conference to address a variety of issues. Thus, the Court stated that “ n light of these and other specific state statutory requirements enacted to protect homeowners in residential foreclosure, we conclude that the City Council did not intend to include a plaintiff pursuing a judicial foreclosure action such as this one within the definition of ‘debt collection agency’ set forth in the Administrative Code.” As fully discussed in its decision, the Second Department noted that its conclusion is “supported by the interpretation of the United States Supreme Court of provisions of the Fair Debt Collection Practices Act (15 USC § 1692 et seq….), which are similar to the subject … Code provisions ( see Obduskey v McCarthy & Holthus LLP , ___ US ___, 139 S Ct 1029 <(2019)> ; see also Eric M. Berman, P.C. v City of New York , 25 NY3d <684> at 691 <2015> ).”  (Hyperlinks and some brackets added.) Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By   Jeffrey M. Haber Generally, whether a claim is subject to arbitration is a decision for the court, not the arbitrator. 1 Notwithstanding, the U.S. Supreme Court has held that “parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability.’” 2 Such “delegation clauses” are enforceable where “there is ‘clea and unmistakabl ’ evidence” that the parties intended to arbitrate arbitrability issues. 3 “When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally . . . should apply ordinary state-law principles that govern the formation of contracts.” 4 Courts in New York follow the foregoing principles and will not take the issue of arbitrability away from the arbitrator when the parties specifically provide as such. 5 This approach reflects the “overarching principle of law ‘that arbitration is a matter of contract’” and that “courts must rigorously enforce arbitration agreements according to their terms.” 6 Thus, where a contract contains a valid delegation to the arbitrator of the power to determine arbitrability, such a clause will be enforced absent a specific challenge to the delegation clause by the party resisting arbitration. 7 The question then is what is a valid delegation clause? That question was answered in Bromberg & Liebowitz v. O’Brien , 2021 N.Y. Slip Op. 50813(U) (Sup. Ct., Suffolk County Aug. 24, 2021) ( here ).  here,=">here," >here=">here" and="and" >here.=">here."> Bromberg involved the purchase of defendant’s accounting practice by plaintiff. The agreement between the parties provided, in pertinent part, that in the event of a dispute between the parties, the dispute would be submitted to arbitration for resolution: Any controversy or claim arising out of or relative to this AGREEMENT, or the breach thereof, shall be submitted to arbitration before a single arbitrator, subject to the commercial arbitration rules of the American Arbitration Association. Under the Commercial Arbitration Rules of the American Arbitration Association (“AAA”), the power to decide whether an issue is arbitrable rests with the arbitrator:  The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.  The agreement was signed by plaintiff and one of the defendants; the other defendant did not sign the agreement. Plaintiff commenced the action alleging that, between September 2016 and June 2020, defendants diverted client fees from the practice to themselves. The complaint contained nine causes of action including, inter alia , breach of contract, fraud, conversion, and unjust enrichment.  Defendants moved to dismiss the complaint or to stay the action and compel plaintiff to proceed to arbitration if the complaint was not dismissed. In opposition, plaintiff maintained that the scope of the arbitration clause did not include the misconduct alleged in the complaint and that it could not be compelled to arbitrate with the defendants who did not sign the agreement. The Court granted the motion. The Court held that by incorporating the rules of the AAA, the parties intended the arbitrator to be the gatekeeper of questions of arbitrability: 8 Here, the agreement incorporates the rules of the AAA and provides that “any controversy or claim arising out of or relative to” the agreement shall be submitted to arbitration. Thus, the scope of the parties’ arbitration agreement, including issues of arbitrability, are for the arbitrator to determine. The Court noted that the term “ uestions of arbitrability” is a term of art that addresses disputes “about (1) whether the parties are bound by a given arbitration clause, as well as disagreements about (2) whether an arbitration clause in a concededly binding contract applies to a particular controversy.” 9 In other words, said the Court, the question of arbitrability “involve the arbitration agreement’s scope.” 10 In Bromberg , the Court concluded that “whether the arbitration clause applies to the plaintiff’s claims an issue to be resolved by the arbitrator and not the court.” 11 The Court rejected plaintiff’s argument that it should be permitted to litigate its claims in court against the non-signatories to the agreement. 12 In that regard, the Court held that “as a signatory to a contract containing an arbitration clause incorporating by reference the AAA rules, the plaintiff disown its agreed-to obligation to arbitrate ‘any controversy or claim arising out of or relative to’ the agreement, including the question of arbitrability with .” 13 The Court explained that “ signatory to an arbitration agreement is estopped from avoiding arbitration with a non-signatory when (i) there is a close relationship between the parties and controversies involved and (ii) the signatory’s claims against the non-signatory are intimately founded in and intertwined with the underlying agreement containing the arbitration clause.” 14 The Court found that those requirements had been met. 15 Accordingly, the Court stayed the action and directed the parties to proceed to arbitration. here.=">here."> Takeaway Like many jurisdictions, New York “favors and encourages arbitration” because it “conserv the time and resources of the courts and the contracting parties.” 16 And, because “arbitration is a matter of contract,” the “courts rigorously enforce arbitration agreements according to their terms.” 17 Consequently, the courts will rarely interfere with the parties’ agreement to submit their dispute to arbitration, and will enforce their decision to abide by the rules of the governing forum, including having the arbitrator decide issues of arbitrability. 18 In other words, as in Bromberg , courts will enforce broadly worded arbitration clauses, which incorporate a set of arbitration rules and confers upon the arbitrator the power to determine his/her own jurisdiction, according to their terms.  Moreover, courts will stay the judicial proceeding pending completion of the arbitration where, as in Bromberg , arbitrable and non-arbitrable claims are intertwined. This is especially so where the merits of an issue between the parties is bound up with a contract binding one party and containing an arbitration clause.  Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes See Primex Int’l Corp. v. Wal-Mart Stores, Inc. , 89 N.Y.2d 594, 598 (1997) (affirming trial court ruling that “whether there is a clear, unequivocal and extant agreement to arbitrate the claims, is for the court and not the arbitrator to determine”); Smith Barney Shearson Inc. v. Sacharow , 91 N.Y.2d 39, 45-46 (1997) (noting “well-settled proposition that the question of arbitrability is an issue generally for judicial determination in the first instance”) (citing cases). Rent-A-Center, West, Inc. v. Jackson , 561 U.S. 63, 68-9 (2010). For a discussion of Rent-A-Center , see here . First Options of Chicago, Inc. v. Kaplan , 514 U.S. 938, 943, 944 (1995) (quoting AT&T Technologies, Inc. v. Communications Workers , 475 U.S. 643, 649 (1986)). Id. at 944. Monarch Consulting, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA , 26 N.Y.3d 659, 676-677 (2016); Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s , 66 A.D.3d 495, 495 (1st Dept. 2009). Monarch Consulting , 26 N.Y.3d at 675 (quoting American Express Co. v. Italian Colors Restaurant , 133 S.Ct. 2304, 2309 (2013)). Id. at 675-76. Slip Op. at *1 (citation omitted.) Id. (citing Cartagena Enter., Inc. v J. Walter Thompson Co. , 2013 WL 5664992 at *2 (S.D.N.Y. Feb. 6, 2016)). Id. (citing id .). Id. Slip Op. at *1 (citing Lapina v. Men Women NY Model Mgt. Inc. , 86 F. Supp. 3d 277, 283-284 (S.D.N.Y. 2015)). Id. (citing Contec Corp. v. Remote Solution Co., Ltd. , 398 F.3d 205, 208 (2d Cir. 2005)). Id. (citing Birmingham Assoc. Ltd. v. Abbott Labs. , 547 F. Supp. 2d 295, 301 (S.D.N.Y. 2008), aff’d , 328 Fed. Appx. 42 (2d Cir. 2009). “Claims are intertwined where the merits of an issue between the parties is bound up with a contract binding one party and containing an arbitration clause.” Birmingham , 547 F. Supp. 2d at 301 (internal bracket and quotation marks omitted). Slip Op. at *1. Life Receivables , 66 A.D.3d at 495.   Monarch Consulting , 26 N.Y.3d at 675. Id.

By Jonathan H. Freiberger Last week this Blog examined WFE Ventures, Inc. v. GBD Lake Placid, LLC , decided on August 12, 2021, by the Appellate Division, Third Department, which addressed numerous construction litigation issues < here =">here"> .  Last week’s article focused on issues related to flood damage resulting from an underlying construction project; this week we will address other issues presented in the Court’s Memorandum and Order.  Knowledge of the facts as set forth in last week’s article are presumed, but will be summarized below, with additional facts germane to today’s discussion. In WFE , the defendant owner (“Owner”) built a Marriot hotel in Lake Placid.  Owner hired an architectural firm (“Architect”) to obtain site plan (“Plan”) approval (“Approval”) from the applicable municipal review board (“JRB”) and an engineer (“Engineer”) to prepare a stormwater management plan.  The Plan included grading details that called for a retaining wall around the entire property.  The general contractor subcontracted the site-work to a site work subcontractor (the “Site Contractor”).  Architect’s contract with Owner contained a stormwater management exclusion (the “Stormwater Exclusion”). After encountering certain field conditions, preliminary sketches were prepared to substitute the approved retaining wall with an extended slope made from a large volume of fill.  This change, however, was not submitted to JRB for approval. The WFE plaintiff developed a nearby plot of land with four buildings - each containing multiple townhouses (the “Development”).  The Development was plagued by flooding over a two-year period, which may have been caused by Owner’s unapproved grading plan. Ultimately, plaintiff successfully addressed the flooding by taking remedial actions after Owner ignored Plaintiff’s requests to address the problem.   The underlying action was commenced by plaintiff against Owner, who, in response, inter alia , brought third-party actions against the Site Contractor and Architect.  The parties made various motions for summary judgment.  Among other things, Owner argued that “the actions undertaken on behalf were performed by its contractor, not at direction, and, therefore, cannot be held vicariously liable for the contractor’s conduct – however wrongful or negligent it might have been.”  Supreme court rejected Owner’s argument and the Third Department agreed.  Issues of fact exist as to the “extent of ’s control over the construction project.”  The Court, citing several Court of Appeals cases, noted that, in general: a party who retains an independent contractor, as distinguished from a mere employee or servant, is not liable for the independent contractor’s negligent acts. Although several justifications have been offered in support of this rule, the most commonly accepted rationale is based on the premise that one who employs an independent contractor has no right to control the manner in which the work is to be done and, thus, the risk of loss is more sensibly placed on the contractor.  <(citations and internal quotation marks omitted.)> Here, Owner argued that Architect and Site Contractor were independent contractors retained to “perform the day-to-day construction tasks” and, therefore, it was not liable in damages to plaintiff.  The Court, however, found that the evidence adduced during discovery (as set forth in the decision), indicating that, inter alia , Owner was “hands-on,” created an issue of fact “regarding the degree of control and oversight exercised by defendant over the work performed, particularly with respect to the decision to use fill to affect a slope change, as opposed to approved use of a wall.” The Court also found that Architect’s motion for summary judgment as related to the Stormwater Exclusion was properly denied.  The Court noted that while Architect’s role was initially limited to assisting “Owner in connection with its responsibility for filing documents required for the approval of governmental authorities prior to construction<, d> uring construction undertook various responsibilities over the work”.  (Internal quotation marks and brackets omitted.)  Owner’s contract with Architect “included an indemnification provision by which assumed liability for property damage to the extent caused by the negligent acts or omissions of .”  However, Architect’s “motion – insofar as potential liability to defendant for indemnification is concerned – is, in essence, predicated upon .”  The Court explained that: a contractual indemnification provision must be strictly construed to avoid reading into it a duty which the parties did not intend to be assumed. The promise to indemnify should not be found unless it can be clearly implied from the language and purpose of the entire agreement and the surrounding facts and circumstances.  <(citations, internal quotation marks and brackets omitted.)> Supreme court found, and the Court agreed, that there were factual issues as to whether Architect acted negligently “in connection with its contract administration duties, leaving extant the issue of whether would be obligated to indemnify defendant.”  Architect “insinuated itself” into the aspects of the project related to stormwater management and “certified the construction as substantially complete in April 2007 – even though it was apparently not in conformity with the JRB approved plans because the JRB never formally approved the slope change.”  Further, Architect was “unaware that the slope had been extended until well after the hotel project had been completed when, in March 2009, it was informed of the first flooding event.”  Thus, the Court concluded, “it was for the jury to determine whether Architect’s “actions – or failures to act – can be characterized as negligent conduct that, in turn, caused damage to defendant so as to trigger the indemnification clause of the underlying contract”.  (Citation omitted.) Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber An investment adviser is a fiduciary, and as such is held to the highest standard of conduct and must act in the best interest of his/her client.1 This means, among other things, that an investment adviser has an affirmative duty of utmost good faith and full and fair disclosure of all material facts.2 An investment adviser’s fiduciary duties are made enforceable under Section 206 of the Investment Advisers Act of 1940 – the Act’s anti-fraud provisions.3 Though Section 206 is an antifraud provision, unlike Section 10(b) of the Securities Exchange Act of 1940 (the “Exchange Act”), it is not limited to fraud in connection with the purchase or sale of a security.4 It is much broader – it extends “to all services undertaken on behalf of the client.”5 In the context of fraud, an investment adviser has an affirmative duty to make full and fair disclosure of all material facts, as well as a duty to avoid misleading his/her clients.6 Accordingly, an investment adviser is obligated to refrain from engaging in fraudulent conduct, whether that conduct encompasses the making of false statements or the failure to disclose material facts when such failure would operate as a fraud or deceit upon a client. In addition to the foregoing, investment advisers, like other professionals charged with caretaking another person’s money, cannot misappropriate a client’s assets or property. Misappropriation occurs when a person uses another person’s money without authorization. It mirrors the crime of embezzlement, which is committed by a person having a relationship of trust or fiduciary duty to another person and who steals that person’s money or property for his/her own personal gain. Both the Securities and Exchange Commission (“SEC”) and FINRA have numerous rules governing how corporate actors and financial professionals must act to safeguard and protect the handling of investor and customers monies. Unfortunately, many victims of the foregoing are seniors and vulnerable adults. This was so in the SEC enforcement action we examine below. SEC v. Mueller On August 20, 2021, the SEC announced (here) that it filed an action against a San Antonio, Texas-based investment adviser for operating a years-long fraudulent scheme that raised approximately $58 million from nearly 300 investors in two investment funds – the deeproot 575 Fund, LLC (the “575 Fund”) and the deeproot Growth Runs Deep Fund, LLC (the “dGRD Fund”) (collectively, “the Funds”). According to the complaint filed by the SEC (here), Robert J. Mueller and his company deeproot Funds, LLC (“deeproot”) persuaded investors, many of whom were retirees, to cash out the annuities and individual retirement accounts they held with other investment companies and invest in the Funds. Defendants allegedly told investors the Funds would invest in life insurance policies and deeproot-related businesses to provide relatively safe returns to investors. Defendants allegedly told investors that the 575 Fund would invest the majority of its assets in life insurance policies. In reality, said the SEC, the 575 Fund purchased interests in life insurance policies indirectly, by investing in the dGRD Fund, which itself invested the majority of its assets in life insurance policies purchased for the Funds by another company owned by the individual defendant. According to the SEC, defendants commingled the money raised from investors in affiliated bank accounts and spent less than $10 million to purchase life insurance policies for the Funds. They also purported to include life insurance policies as assets of the Funds that defendants had purchased for the individual defendant’s earlier investment funds. Notably, alleged the SEC, defendants purchased no new insurance policies for the Funds after September 2017, despite raising approximately $43 million for the Funds after that time. The SEC alleged that defendants used the vast majority of the Funds’ assets – virtually all of which came from investors in the 575 Fund and the dGRD Fund – to fund the individual defendant’s deeproot-affiliated businesses. “Indeed,” said the SEC, the individual defendant “funneled more than $30 million of the Funds’ assets to the Relief Defendants in non-arms-length transactions whenever he determined the Relief Defendant businesses had expenses that needed to be paid, and he did so without any analysis as to whether such transfers constituted suitable investments for his client Funds.” Further, alleged the SEC, the individual defendant “made these transfers to Relief Defendants without obtaining anything of substance in return for the Funds and without memorializing the transactions in any way.” According to the SEC, since 2015, neither the life insurance policies nor the “capital” investments in affiliated businesses have yielded significant revenue or cash flow for defendants or the Funds. This caused the individual defendant and one of his entities “to default on the purchase of one $10 million face value life insurance policy, losing nearly $3.5 million of the Funds’ money in the process,” the SEC claimed. It also allegedly caused defendants to make more than $820,000 of Ponzi-like payments to earlier investors in the Funds using money raised from new investors and make at least $177,000 in payments from money borrowed on a short-term basis using the life insurance policies as collateral. Despite making statements suggesting he took no compensation from the Funds, the SEC alleged that the individual defendant commingled assets of the Funds in affiliated bank accounts and used them to make ad hoc salary payments to himself whenever investor money was available, totaling roughly $1.6 million from 2016 through 2020. The individual defendant also allegedly misappropriated more than $1.5 million of the Funds’ assets to pay hundreds of personal expenses. The SEC filed its complaint in federal district court in San Antonio. The SEC charged the investment adviser and his company with violating the antifraud provisions of Sections 206(1), (2), and (4) of the Act and Rule 206(4)-8 promulgated thereunder, Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. The SEC charged another defendant with violating the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act, and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) promulgated thereunder. The SEC is seeking civil penalties, disgorgement of ill-gotten gains with interest, and permanent injunctions. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963). Transamerica Mortg Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979). Id. SEC v. Lauer, 2008 WL 4372896, at *24 (S.D. Fla. Sept. 24, 2008). Proxy Voting by Investment Advisers, Adv. Act Rel. No. 2106 (Jan. 31, 2003). See Arleen W. Hughes, Exchange Act Rel. No. 4048 (Feb 18, 1948), aff’d. sub. nom., Hughes v. SEC, 174 F.2d 969 (May 9, 1949).

By Jeffrey M. Haber When a party releases another from claims or the threat of claims, he/she is giving up the right to sue the other in connection with the subject of the release. 1 A release effectively eliminates all claims against another that are possessed by the party giving the release. It does not matter whether the releasor knew of the claims at the time that he/she gave the release, so long as “the parties so intend and the agreement is ‘fairly and knowingly made.’” 2 If “the language of a release is clear and unambiguous, the signing of a release is a ‘jural act’ binding on the parties.” 3 Thus, a release may not be invalidated unless the challenging party can demonstrate any of “the traditional bases for setting aside written agreements, namely, duress, illegality, fraud, or mutual mistake.” 4 “Although a defendant has the initial burden of establishing that it has been released from any claims, a signed release ‘shifts the burden of going forward … to the to show that there has been fraud, duress or some other fact which will be sufficient to void the release.’” 5 “A plaintiff seeking to invalidate a release due to fraudulent inducement must ‘establish the basic elements of fraud, namely a representation of material fact, the falsity of that representation, knowledge by the party who made the representation that it was false when made, justifiable reliance by the plaintiff, and resulting injury.’” 6 When a party releases a fraud claim, he/she may later challenge that release as fraudulently induced only if he/she can identify a separate fraud from the subject of the release. 7 As the Court of Appeals observed in Centro , “ ere this not the case, no party could ever settle a fraud claim with any finality.” 8 The foregoing principles were highlighted in Ivasyuk v. Raglan , 2021 N.Y. Slip Op. 04706 (2d Dept. Aug. 18, 2021) ( here ). Ivasyuk involved a personal injury action in which the plaintiff allegedly fell from a six-foot ladder while performing work at a property that was being renovated. Plaintiff allegedly injured himself when he fell from the ladder. Plaintiff, and his wife suing derivatively, commenced the action against defendants, asserting causes of action for, inter alia , violations of Labor Law §§ 240(1), 241(6), and 200, and common-law negligence. One of the defendants moved for, among other things, summary judgment dismissing the complaint insofar as asserted against it. In part, defendant argued that it was entitled to judgment as a matter of law on the basis that, prior to the commencement of the action, plaintiff executed a release in favor of defendant for all claims arising out of the subject accident. The motion court, inter alia , denied the motion.  On appeal, the Appellate Division, Second Department reversed and granted summary judgment in favor of defendant. The Court found that defendant established its entitlement to judgment by demonstrating that the plaintiff released it from any claims made by the plaintiff with regard to, inter alia , the accident. 9 Among other proof, said the Court, defendant provided a copy of the release, “which clearly and unambiguously stated that was releasing from, inter alia , all actions, causes of action, and suits. 10 The Court rejected plaintiff’s argument that he did not understand the terms of the release because it was in English. “A person who does not understand the English language is not automatically excused from complying with the terms of a signed agreement, since such person must make a reasonable effort to have the agreement made clear to him or her,” said the Court. 11 The Court found that deposition testimony demonstrated that before signing the release, the terms of the release were explained to plaintiff. 12 Takeaway A “release is … a species of contract” that “is governed by the same principles of law applicable to other contracts.” 13 In Ivasyuk , the facts showed that the terms of the release were clear and unambiguous. Under the principles of contract interpretation , the release was found to be binding on the plaintiff. Also, since the plaintiff was unable to demonstrate duress, illegality, fraud, or mutual mistake, the Court declined to set aside the release. 14 Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V. , 17 N.Y.3d 269, 276 (2011) (“Generally, a valid release constitutes a complete bar to an action on a claim which is the subject of the release.”). Id. ,quoting Mangini , 24 N.Y.2d at 566-567. Booth v. 3669 Delaware , 92 N.Y.2d 934, 935 (1998), quoting Mangini v McClurg , 24 N.Y.2d 556, 563 (1969). Mangini , 24 N.Y.2d at 563. Centro , 17. N.Y.3d at 276, quoting Fleming v. Ponziani , 24 N.Y.2d 105, 111 (1969). Id. , quoting Global Mins. & Metals Corp. v. Holme , 35 A.D.3d 93, 98 (1st Dept. 2006). Bellefonte Re Ins. Co. v. Argonaut Ins. Co. , 757 F.2d 523, 527-28 (2d. Cir. 1985). 17 N.Y.3d at 276. Slip Op. at *2. Id. Id. (citations omitted). Id. (citation omitted). Schuman v. Gallet, Dreyer & Berkey, L.L.P. , 180 Misc. 2d 485, 487 (N.Y. Co. 1999), aff’d , 280 A.D.2d 310 (1st Dept. 2001). Toledo v. W. Farms Neighborhood Hous. Dev. Fund Co., Inc. , 34 A.D.3d 228, 229 (1 st Dept. 2006).

By Jonathan H. Freiberger On August 12, 2021, the Appellate Division, Third Department, decided WFE Ventures, Inc. v. GBD Lake Placid, LLC , a multi-faceted construction litigation.  Today’s article, however, will focus on flood damage resulting from the underlying construction project. In WFE , the defendant owner (“Owner”) built a Marriot hotel in Lake Placid.  Owner hired an architectural firm (“Architect”) to obtain site plan (“Plan”) approval (“Approval”) from the applicable municipal review board (“JRB”) and an engineer (“Engineer”) to prepare a stormwater management plan (“Plan”).  The Plan included grading details that called for a retaining wall around the entire property.  The Plan was approved and, inter alia , contained a condition requiring prior written approval from the JRB before any engineering modifications or design changes could be made.  In this regard, Owner’s site work contractor (the “Site Contractor”) requested, and received, from JRB approval to change the materials from which the retaining wall would be built. After encountering certain field conditions, however, the site work contractor “submitted preliminary sketches to the local inspector/code enforcement officer … to see whether … JRB would consider replacing the bulk of the wall with earthen fill that would extend the slope of the land approximately 25 to 30 feet into the neighboring .”  No evidence was submitted that JRB approved the substitution of the retaining wall for the slope extension.   Nonetheless, the substitution did occur.  After the hotel was completed, a certificate of occupancy was issued. The WFE plaintiff was a was a developer that acquired a nearby plot of land on which it intended to develop four buildings -- each containing multiple townhouses (the “Development”).  Shortly after one of the buildings was completed, and over a two-year period thereafter, it experienced flooding which damaged all three townhouses therein.  After the first flood, plaintiff’s president complained to the JRB that the flooding was caused by Owner’s construction project -- in particular, the removal of a retention pond on neighboring property as a result of slope extension efforts once the approved retaining walls were eliminated from the project.  Ultimately, plaintiff addressed the flooding by taking remedial actions itself after Owner ignored Plaintiff’s requests to address the problem directly.  Plaintiff’s actions were successful and the flooding stopped. Thereafter, plaintiff commenced action against Owner “asserting causes of action sounding in negligence and nuisance and claiming that through the slope extension and related construction – undertaken without JRB approval – defendant wrongfully diverted surface water that resulted in flooding to .”  In response, Owner, inter alia , brought third-party actions against the Site Contractor and Architect.   Among other motions, Owner moved for summary judgment dismissing plaintiff’s complaint and plaintiff cross-moved for summary judgment against Owner on the issues of liability and proximate cause.  As relates to this article, supreme court denied plaintiff’s cross-motion finding issues of fact regarding, among other things, whether Owner’s actions diverted water onto plaintiff’s property by artificial means, thereby precluding summary judgment on this issue and plaintiff appealed. In supreme court, plaintiff’s experts opined that Owner’s construction “particularly its decision to use fill as opposed to the JRB approved use of a wall” caused the flooding.  Owner relied on the opinion of municipalities’ expert, who concluded that “not only did the hotel construction fail to cause the flooding, but the building of the hotel actually alleviated some surface water flow onto plaintiff’s property by redirecting some surface water that had previously flowed across the property.”  The Court agreed with supreme court that “ n light of the conflicting expert opinions and “recognizing that disagreement between experts generally presents a credibility determination to be resolved by the trier of fact and the cause of the flooding cannot be resolved on a motion for summary judgment.”  (Citations and internal quotation marks omitted.) Among others, the Court rejected Owner’s, argument that, “regardless of whether the construction of the hotel was the root cause of the flooding of plaintiff’s property, defendant bears no responsibility in this regard surface water was not diverted onto plaintiff’s land by artificial means….”  Indeed, the Court agreed with supreme court that issues of fact existed as to whether “artificial means” were used to divert water from Owner’s property.  Citing a litany of cases, the Court stated that a “landowner will not be liable for damages caused by the runoff of surface water onto a neighbor’s land as long as it was the result of an improvement to the landowner’s property undertaken in a good faith effort to enhance the usefulness of the property and, of more significance here, no artificial means, such as pipes and drains, are used to divert the water thereon. (Citations and internal quotation marks omitted.)  See also, Biaglow v. Elite Property Holdings, LLC , 140 A.D.3d 814, 815 (2 nd Dep’t 2016).  The Court found that the first element was “clearly satisfied by the construction of a new hotel where vacant land and/or an abandoned building once stood.”   The Court disagreed with Owner’s argument that the second element was satisfied because “there is no evidence that pipes or drains were used or installed” by Owner.  The Court noted its prior holdings that “the definition of artificial means should not be read so narrowly, as other, more esthetically pleasing means of water diversion – such as the construction of a swale or a berm – have been held to potentially constitute artificial means sufficient to form the basis for liability.”  (Citations omitted.)  Thus, the Court stated that “ he diversion of water by artificial means is not strictly limited to the use of pipes, drains and ditches and may otherwise be established where it is demonstrated that the net effect of the defendant’s improvements so changed, channeled or increased the flow of surface water onto the plaintiff’s land as to proximately cause damage to the property.”  (Citations, internal quotation marks, ellipses and brackets omitted.) Considering the calculations of plaintiff’s expert that almost 60,000 cubic feet of fill was used by Owner to extend the slope of the property, a jury “might well conclude that the use of such a volume of fill to change the natural slope of the land could be deemed an artificial, as opposed to a natural, means of water diversion.”  Put another way, “as with the building of a swale or a berm, the issue of whether the extended slope so changed, channeled or increased the flow of surface water onto plaintiff’s land as to proximately cause damage to the property cannot be determined on a motion for summary judgment.”  (Citations and internal quotation marks omitted.) Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber Cybersecurity disclosures are important for a number of constituencies. For example, consumers have a right to know if their data has been compromised at the company in which they do (or have done) business. Investors have a right to know if the company in which they have invested, or will invest, is the victim of a data breach and how such a breach has impacted (or will impact) the company’s business and operations. As cybersecurity breaches become more common, the Securities and Exchange Commission (“SEC”) has made the disclosure of such matters an important focus of its work. In this regard, the Commission has ordered companies to cease and desist from making false and misleading statements about their cybersecurity efforts and their efforts to address any data breaches. Two days ago, on August 16, 2021, the SEC announced (here) that it settled charges against Pearson plc, a London-based public company that provides educational publishing and other services to schools and universities, for allegedly misleading investors about a 2018 data breach involving the theft of millions of student records, including dates of births and email addresses (the “2018 Data Breach”). In the order (here), the SEC found that Pearson made misleading statements and omissions about the 2018 Data Breach – an intrusion that involved the theft of student data and administrator log-in credentials of 13,000 school, district and university customer accounts. According to the SEC, in its semi-annual report, filed in July 2019, Pearson referred to a data privacy incident as a hypothetical risk, when, in fact, said the SEC, the 2018 Data Breach had already occurred. In addition, alleged the SEC, in a July 2019 media statement issued after the company had been contacted by a media outlet about the data intrusion, Pearson stated that (a) the breach may include dates of births and email addresses, when, in fact, it knew that such records were stolen, and (b) Pearson had “strict protections” in place, when, in fact, it failed to patch the critical vulnerability for six months after it was notified. The media statement also allegedly omitted that millions of rows of student data and usernames and hashed passwords were stolen. Finally, the SEC found that Pearson’s disclosure controls and procedures were not designed to ensure that those responsible for making disclosure determinations were informed of certain information about the circumstances surrounding the breach. “As the order finds, Pearson opted not to disclose this breach to investors until it was contacted by the media, and even then Pearson understated the nature and scope of the incident, and overstated the company’s data protections,” said Kristina Littman, Chief of the SEC Enforcement Division’s Cyber Unit. “As public companies face the growing threat of cyber intrusions, they must provide accurate information to investors about material cyber incidents.” According to the SEC, Pearson violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Section 13(a) of the Exchange Act of 1934 and Rules 12b-20, 13a-15(a), and 13a-16 thereunder. Without admitting or denying the SEC’s findings, Pearson agreed to cease and desist from committing violations of these provisions and to pay a $1 million civil penalty. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber A confession of judgment is an agreement whereby a defendant or debtor agrees to the entry of judgment against him/her in an amount certain. It is a procedural device whereby the plaintiff or creditor can bypass the commencement of a lawsuit to obtain the amount “confessed.”  Confessions of judgment are used in a variety of circumstances. For example, parties to a litigation may use a confession of judgment as part of a settlement whereby the defendant agrees to pay the plaintiff money. In that situation, the defendant agrees to the confession of judgment until he/she satisfies the payment obligations under the settlement agreement. If the defendant fails to make the agreed-upon payment(s), then the plaintiff, who typically holds the confession of judgment in escrow, can file the confession of judgment with a county clerk without having to commence an action for breach of the settlement agreement.  Sometimes, parties to a dispute who wish to avoid the costs and burdens of litigation, will use a confession of judgment to ensure the payment(s) required by their out-of-court settlement. In New York, confessions of judgment are governed by Section 3218 of the Civil Practice Law and Rules (“CPLR”). Under CPLR § 3218(a),  a judgment by confession may be entered, without an action, either for money due or to become due, or to secure the plaintiff against a contingent liability in behalf of the defendant, or both, upon an affidavit executed by the defendant; 1. stating the sum for which judgment may be entered, authorizing the entry of judgment, and stating the county where the defendant resides; 2. if the judgment to be confessed is for money due or to become due, stating concisely the facts out of which the debt arose and showing that the sum confessed is justly due or to become due; and 3. if the judgment to be confessed is for the purpose of securing the plaintiff against a contingent liability, stating concisely the facts constituting the liability and showing that the sum confessed does not exceed the amount of the liability.  However, the plaintiff or creditor cannot enter judgment against the defendant or debtor if (1) more than three years has elapsed since the defendant or the debtor signed the confession, or (2) the defendant or debtor is deceased. 1 When an amount certain is confessed, the affidavit required under CPLR § 3218(a) must state the facts from which the debt arose as to demonstrate that the confessed amount is just. 2 In doing so, the statute requires the affiant to “concisely” state “the facts out of which the debt arose and showing that the sum confessed is justly due or to become due.” 3 This means that “there must be sufficient genuine detail to enable other creditors to investigate the claim and ascertain its validity ….” 4 As the courts have noted, CPLR § 3218 “is designed for the protection of third persons who might be prejudiced in the event that a collusively confessed judgment is entered ….” 5 It is “not for the protection of the defendant.” 6 Notwithstanding, defendants and debtors have tried to vacate confessions of judgment on the grounds that the specificity requirements of CPLR § 3218(a)(2) were not satisfied. Such was the case in Balahtsis v. Shakola , 2021 N.Y. Slip Op. 04653 (2d Dept. Aug. 11, 2021) ( here ). Balahtsis involved a money judgment that was entered in August 2018 in favor of the plaintiff and against the defendant. The judgment was entered pursuant to a confession of judgment, which was supported by an affidavit dated in March 2018. According to the plaintiff, the defendant signed the confession of judgment in connection with the legal fees that the defendant owed to the plaintiff.  In July 2019, defendant moved to, among other things, vacate the judgment. In an order dated November 15, 2019, Supreme Court denied the motion. Defendant appealed, claiming the affidavit on which the confession of judgment was based did not satisfy the specificity requirements of CPLR § 3218(a)(2). The Appellate Division, Second Department, affirmed. In a pithy decision, the Court ruled that defendant “was foreclosed” from challenging the confession of judgment on specificity grounds. 7 The Court explained that defendant was foreclosed from challenging the confession of judgment because CPLR § 3218(a)(2) “is designed to protect innocent third parties who might be prejudiced in the event that a collusively confessed judgment is entered, not the party who signed the confession of judgment.” 8 Takeaway Like anything in life, there are advantages and disadvantages with the confession of judgment.  From the plaintiff’s perspective, the confession of judgment provides certainty that he/she will (a) receive the monies owed by the defendant or debtor, or (b) have the means to enforce a judgment against the defendant or debtor without delay.  From the defendant’s perspective, a confession of judgment can streamline a costly legal process in which the inevitable is virtually certain – i.e. , that the defendant owes (or will owe) the plaintiff or creditor the amount sought – thereby saving the defendant or debtor legal fees, costs and expenses. Of course, the downside to a confession of judgment for the defendant or debtor is the admission that the debt is due and owing. And, in giving a confession of judgment, the defendant or debtor is handing the plaintiff or creditor a powerful tool to collect the monies owed.  In the end, regardless of the side in which one finds himself/herself, it is important to remember that a confession of judgment is binding and absent certain circumstances, not present in Balahtsis , it is difficult to vacate a “confessed” judgment.  Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes CPLR § 3218(b). 2. CPLR § 3218(a)(2). 3. Id. 4. Princeton Bank & Trust Co. v. Berley , 57 A.D.2d 348, 354 (2d Dep. 1977) (citations omitted). 5. Mall Commercial Corp. v. Chrisa Rest. , 85 Misc. 2d 613, 614 (Sup. Ct., App. Term, 1st Dept. 1976). 6. Id. 7. Slip Op. at *1. 8. Id.

This month, Freiberger Haber LLP is celebrating its four-year anniversary. To say that we are excited to celebrate this milestone is an understatement. We know the firm could not have reached this achievement without the trust and support of our clients, friends, and colleagues.  Since our founding, we have provided the sophistication and counsel of a large national law firm with the economy, flexibility, commitment, and personal attention of a small firm. As we move forward, we remain dedicated to offering this level of service to our clients – i.e. , corporations, small businesses, partnerships and individuals.  As we commemorate this milestone, we are focused on enhancing the things that have brought us to this point. One of them is our blog.  Over the past four years, our subscribership has grown, reflecting an increasing interest in the information that we post. To make the blog interactive, we are adding a “byline”. In this way, when readers come across an article of interest, they can reach out directly to the author to ask questions or discuss how the article may pertain to their circumstances. Although this change is small, we believe that it will enhance the experience our readers have with the articles that the firm posts.  As we move forward, we intend to make additional changes, both large and small, to position us for continued growth and success. We believe that implementing changes, whatever they may be, will allow us to meet the needs of our clients.  We look forward to the future. Most importantly, we look forward to bringing our dedication, hard work and values to our clients in resolving their legal, business and commercial disputes.  __________________________ About Freiberger Haber LLP Located in New York City and Melville, Long Island, Freiberger Haber LLP is dedicated to representing corporations, small businesses, partnerships and individuals in a broad range of complex business, construction and commercial litigation matters. Founded by Jonathan H. Freiberger and Jeffrey M. Haber, Freiberger Haber leverages more than 60 years of combined experience to deliver sophisticated and creative representation to its clients. The firm’s approach is results oriented and client-centric, providing clients with the sophisticated counsel expected from larger firms with the flexibility and agility of a small firm. ATTORNEY ADVERTISING. © 2021 Freiberger Haber LLP. The law firm responsible for this advertisement is Freiberger Haber LLP, 425 Broadhollow Road, Suite 416, Melville, New York 11747, (631) 282-8985. Prior results do not guarantee or predict a similar outcome with respect to any future matter.

“Pumping a few squirts of vanilla hazelnut syrup into your latte—nothing wrong with that. Pumping up a coffee stock with hype and false statements? That’s illegal, and the Securities and Exchange Commission (SEC) recently announced fraud charges against alleged perpetrators of just such a scheme:” a long-running international securities fraud scheme in which the promoters and their associates allegedly sold millions of shares in multiple microcap—or “penny”—stock companies using pump-and-dump schemes, generating at least tens of millions of dollars in illicit proceeds. Wake="“Wake" Up="Up" and="and" Smell="Smell" Pump-and-Dump”,="Pump-and-Dump”," FINRA="FINRA" posted="posted" on="on" its="its" website="website" (here).=">here)." In="In" provides="provides" important="important" information="information" how="how" investors="investors" can="can" avoid="avoid" being="being" victim="victim" of="of" a="a" pump-and-dump="pump-and-dump" scheme.="scheme."> In prior posts, we have examined “pump-and-dump” schemes (e.g., here and here). In a “pump-and-dump” scheme, promoters “pump” up, or increase, the stock price of a company by spreading positive, but often false, rumors. These rumors cause many investors to purchase the stock. Thereafter, the promoters or others working with them quickly “dump” their own shares before the hype ends. Typically, after the promoters profit from their sales, the stock price drops, and the remaining investors lose most of their money (here). Notably, microcap companies are particularly vulnerable to pump-and-dump schemes because there is often limited publicly available information about the companies. On August 9, 2021, the SEC announced (here) that it filed an emergency action charging nine individuals, including a public company chairman, for their participation in long-running fraudulent schemes that collectively generated hundreds of millions of dollars from unlawful stock sales and caused significant harm to retail investors in the United States and around the world. The SEC obtained emergency relief in court, including an order to freeze the defendants’ assets. According to the SEC’s complaint (here), Frederick L. Sharp, a Canadian resident, developed and implemented a complex scheme from 2011 to 2019 in which he and his associates, also Canadian residents, enabled control persons of microcap companies whose stock was publicly traded in the U.S. securities markets to conceal their control and ownership of huge amounts of penny stock. The SEC alleged that they surreptitiously dumped the stock into the U.S. markets in violation of federal securities laws. The services Sharp and his associates allegedly provided included furnishing networks of offshore shell companies to conceal stock ownership, arranging stock transfers and money transmittals, and providing encrypted accounting and communications systems. According to the SEC, Sharp and his associates facilitated over a billion dollars in gross sales in hundreds of penny stock companies. The SEC alleged that one group of control persons, comprised of Canadian residents, frequently collaborated with Sharp to dump huge stock positions while hiding their control positions and stock promotional activities from the investing public. The complaint further alleged that a California resident, who chaired the boards of directors of four of the public companies whose stocks were fraudulently sold during the schemes, reaped millions of dollars in illicit proceeds from those illegal sales. According to the complaint, a Maryland resident worked as a promoter and allegedly touted stocks that some of the defendants simultaneously planned to sell, while concealing their roles. In a related action, the SEC charged a Mexican resident with engaging in deceptive penny stock schemes that generated more than $75 million from the fraudulent sales of multiple microcap companies’ stock. “The SEC is committed to rooting out fraudulent attacks on our financial markets by bad actors in the United States and around the world,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “Those who scheme to defraud retail investors, as we allege these defendants did, should know that they cannot hide behind sophisticated structures or international borders.” “We charge that the defendants created a network that enabled them to engage in multiple fraudulent schemes, making millions of dollars in unlawful profits at the expense of retail investors,” said Paul Levenson, Regional Director of the SEC’s Boston Regional Office. “Among other things, the emergency relief we have obtained will preserve assets to potentially be returned to harmed investors.” The SEC’s complaint, which was filed in federal district court in Boston, charged the defendants with violating the antifraud and registration provisions of the federal securities laws. In addition to the asset freeze and other temporary relief obtained, the SEC is seeking permanent injunctions, conduct based injunctions, disgorgement of allegedly ill-gotten gains plus interest, civil penalties, penny stock bars, and an officer and director bar against one of the defendants. In a parallel action, the U.S. Attorney’s Office for the District of Massachusetts announced (here) the filing of criminal charges against four of the promoters. “My office uses securities laws and regulations to preserve market integrity, in other words: to protect investors from getting ripped off by crooks,” said Acting United States Attorney Nathaniel R. Mendell. “Investigating and prosecuting people who illegally manipulate our markets protects all investors, particularly when the illegal activity is sophisticated and done on a large scale.” Defendants “are accused of executing a sophisticated, global con that allegedly bilked unsuspecting investors out of tens of millions of dollars. Investor confidence is essential to keeping our financial markets afloat and actions like the ones these individuals are charged with today chip away at the faith investors place in the process,” said Joseph R. Bonavolonta, Special Agent in Charge of the Federal Bureau of Investigation, Boston Division. “The FBI and our partners take securities fraud very seriously and we will do everything we can to hold accountable those who steal from American investors. We urge the public to use caution when researching investment opportunities and to contact us immediately if they become a victim of financial fraud.”

Whistleblowers play an important role in detecting and stopping securities laws violations. They do so often by risking their career and reputation. For this reason, whistleblowers may receive a monetary award for bringing to the attention of the SEC credible information about possible securities fraud and other violations of the securities laws, including the Foreign Corrupt Practices Act.  The SEC derives its authority to reward whistleblowers from the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Under the whistleblower program, the SEC can pay an award to any individual, or group of individuals, who provide “original information” about a violation of the federal securities laws. Both U.S. citizens and foreign nationals may file whistleblower claims and receive a reward. To be “original”, the information must be unknown to the SEC and derived from the whistleblower’s independent knowledge or analysis. Whistleblowers who provide “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 when the monetary sanctions exceed $1 million.  As set forth in the Dodd-Frank Act, the SEC protects the confidentiality of whistleblowers and does not disclose information that could reveal a whistleblower’s identity. here )=">here)" and="and" SEC’s="SEC’s" >here).=">here).">  Since the start of this year’s summer, the SEC has awarded, in total, approximately $17.8 million to 14 whistleblowers. In today’s article, we look at the two most recent announcements of whistleblower awards. On August 2, 2021, the SEC announced ( here ) that it awarded more than $4 million to four whistleblowers who provided information and assistance in two separate enforcement proceedings. In the first order ( here ), the SEC awarded more than $2 million to a whistleblower who provided valuable information that resulted in the SEC initiating an investigation, as well as ongoing assistance that included participating in multiple interviews and identifying key individuals and entities. The SEC also awarded more than $150,000 to another whistleblower, whose information prompted the SEC to expand its investigation into other alleged conduct at the subject company. In the second order ( here ), the SEC awarded more than $1.1 million to a whistleblower who reported misconduct internally and was the first to alert the SEC to the violations. The SEC also awarded another whistleblower more than $500,000. While the second whistleblower’s information was considered important to the Commission, the first whistleblower’s information was deemed more significant as it was broader and more timely submitted. On August 6, 2021, the SEC announced ( here ) that it awarded more than $3.5 million to three individuals who provided information about violations of the securities laws in two separate enforcement proceedings. In the first order ( here ), the SEC awarded approximately $2 million to a whistleblower whose information and assistance led to a successful SEC enforcement action.  The whistleblower alerted the SEC to an ongoing fraud, prompting the opening of an investigation.  The whistleblower also participated in multiple voluntary interviews and provided documents and additional information that saved the SEC time and resources.  In the second order ( here ), the SEC awarded one whistleblower approximately $1 million and a second whistleblower approximately $500,000.  While both whistleblowers independently provided information that assisted the SEC in an existing investigation, the whistleblower receiving the larger award provided information and cooperation that was deemed to be more impactful to the overall success of the case.  Commenting on the awards announced on August 6, 2021, Emily Pasquinelli, Acting Chief of the SEC’s Office of the Whistleblower, said the following: “Whistleblowers can provide a wealth of information and ongoing assistance that helps the SEC bring enforcement actions quicker and more efficiently. Today’s whistleblowers not only stepped forward to report suspicious conduct, but also continued to provide critical additional assistance.” These comments aptly summarize the role of whistleblowers in the enforcement of the securities laws . Since issuing its first award in 2012, the SEC has awarded approximately $950 million to 193 whistleblowers. All whistleblower awards are paid from an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. Under the program, no money is taken or withheld from investors harmed by the violations of law to pay whistleblower awards.