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The coronavirus (“COVID-19”) has impacted the public and private sectors in so many ways – many of which are unprecedented and beyond the scope of this article. The Securities Exchange Commission (“SEC” or the “Commission”), the Financial Industry Regulatory Authority, Inc. (“FINRA”), other governmental authorities have worked to ensure that the markets have functioned and will function in an open, orderly and transparent fashion. In today’s article, we consider some of these efforts.   The SEC: Division of Enforcement Since the COVID-19 outbreak, the SEC has emphasized the importance of maintaining market integrity and following corporate controls and procedures. Like the rest of the agency, the Division of Enforcement (the “Division” or “Enforcement”) and the Office of Compliance Inspections and Examinations (“OCIE”) have continued to execute on their mission of protecting investors during the COVID-19 crisis. The Division is actively monitoring the markets for frauds, illicit schemes and other misconduct – and as circumstances warrant, will issue trading suspensions and use enforcement tools as appropriate. On March 23, 2020, the Co-Directors of Enforcement released a statement ( here ) highlighting market participants’ obligations with respect to material non-public information, including the importance of maintaining controls and procedures to keep material nonpublic information confidential unless and until it is appropriately disclosed. The statement emphasized the need for market participants to be mindful of the prohibitions on illegal securities trading, and to follow related controls and procedures, especially during the COVID-19 outbreak where material nonpublic information may be more prevalent and arise in less common contexts. The statement also discussed the Division’s commitment to Main Street investors and its focus on those who seek to prey on them during the COVID-19 health crisis. OCIE remains fully operational and, with adjustments to take into account health and safety measures, business continuity plans, firm-specific operational matters and other factors, continues to execute on its investor protection mission. OCIE has moved to conducting examinations off-site through correspondence, unless it is absolutely necessary to be on-site. OCIE is working with registrants to address the timing of its requests, availability of registrant personnel, and other matters to minimize disruption.  OCIE’s statement on its operations and examinations can be found here . The Commission is implementing numerous COVID-19 initiatives ( see here ) so that it can continue its regular operations. The SEC has continued to advance rulemaking initiatives, conduct risk-based inspections, bring enforcement actions, and review and comment on issuer and fund filings. In sum, the SEC has remained fully operational and committed to its tripartite mission to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.  FINRA FINRA remains fully operational, albeit remotely, and continues to carry out its regulatory responsibilities to protect investors and market integrity. In this regard, FINRA continues to perform its risk monitoring, market surveillance and enforcement programs, prioritizing matters that present the most risk during the COVID-19 crisis. In addition, FINRA is focusing on monitoring for fraud, illicit schemes, and other manipulative activities by those who seek to take advantage of the tumultuous conditions created by COVID-19 and ongoing market volatility. As such, FINRA is reviewing, investigating and addressing situations where it suspects, detects or is made aware of potential investor or market harm. FINRA is providing temporary relief for member firms from certain rules and requirements ( here ). The relief provided (discussed, in part, below) does not extend beyond the rules and requirements set forth in the FINRA’s regulatory notice. As COVID-19-related risks decrease, member firms should expect to return to meeting any regulatory obligations for which relief has been provided. When appropriate, FINRA said it will publish a regulatory notice announcing a termination date for the regulatory relief that will provide member firms with time to make necessary operational adjustments. Remote Offices or Telework Arrangements : As discussed in Regulatory Notice 20-08 ( here ), a member may consider employing methods such as social distancing, travel restrictions, revised sick leave policies, special pandemic leave time, or specialized seating plans for densely populated floors or buildings. These methods may also involve remote offices or telework arrangements ( e.g. , working from home or a backup or recovery location) for a broad range of employees.  Since FINRA is permitting the use of remote offices or telework arrangements, members are, nonetheless, required to supervise their associated persons who change their work locations or arrangements during the pandemic. As such, members are expected to establish and maintain a supervisory system that is reasonably designed to supervise the activities of each associated person while working from an alternative or remote location, and to document any changes to their current written supervisory procedures.  With respect to oversight obligations, a member’s scheduled on-site inspections of branch offices may need to be temporarily postponed during the pandemic. If this happens, FINRA said that it would re-evaluate the member’s ability to complete its annual regulatory obligation in light of the duration and severity of the pandemic.  Temporary Relocation :  As discussed in Regulatory Notice 20-08 ( here ), if a member relocates personnel to a temporary location that is not currently registered as a branch office or identified as a regular non-branch location, the firm should use its best efforts to provide written notification to its FINRA Risk Monitoring Analyst as soon as possible after establishing a new temporary office or space-sharing arrangement. The notification should also indicate whether the member’s personnel will be sharing space with another entity, and if so, the type of business in which it is engaged ( e.g. , an affiliated investment adviser or an organization in the securities business). While the pandemic may create exigent circumstances that result in emergency relocations, firms are reminded to take into account the risks associated with sharing office space with another entity ( e.g. , customer privacy, information security or recordkeeping considerations) and take steps to mitigate the risks during the emergency relocation. Notably, FINRA does not expect to receive written notification regarding each associated person’s location ( e.g. , the person’s home residence if working from home) or if another person ( e.g. , a spouse or another immediate family member) is also teleworking in the same residence as the associated person.  In addition, where a non-branch location or branch office has been relocated, or customer calls are being rerouted to another office, members are required to exercise diligence in validating the identity of the customer ( e.g. , when accepting orders and request for disbursement of funds) as well as provide heightened supervision of the affected customer accounts. Best Execution Rule : Under Rule 5310, firms must exercise “reasonable diligence” to ascertain the best market for the security and buy or sell in that market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.  Evaluating a broker-dealer’s satisfaction of its duty of best execution necessarily requires a “facts and circumstances” or case-by-case analysis.  While broker-dealers are not relieved of their best execution obligations during the pandemic, the best execution obligation is being assessed in the context of the security involved and market conditions, including price, volatility, relative liquidity, and pressure on available communications.   Inquiries and Investigations :  As discussed in Regulatory Notice 20-08, members may have difficulty making timely regulatory filings and responding to regulatory inquiries or investigations. Unless FINRA has otherwise provided relief to all member firms, members that require extra time to respond to open inquiries, investigations or upcoming filings should contact their Risk Monitoring Analysts or the relevant FINRA department to seek extensions. FINRA said it may waive any late fees incurred by a member based on the member’s particular circumstance. In addition, if any data communications are disrupted, members should retain the relevant data until it can be transmitted to FINRA. Arbitration and Mediation :  On March 31, 2020, FINRA administratively postponed all in-person arbitration and mediation proceedings scheduled through May 31, 2020 ( here ). Parties with in-person hearing or mediation sessions scheduled through this date will be contacted by FINRA staff to reschedule or discuss remote scheduling options. All case deadlines will continue to apply and must be timely met unless the parties jointly agree otherwise.  Further, FINRA will waive postponement fees when parties stipulate to adjourn in-person hearing dates scheduled from June 1 through September 4, 2020. To avoid postponement fees, parties must provide written notice of the stipulation to adjourn more than 20 days prior to the first scheduled hearing date. Parties stipulating to adjourn in-person hearing dates should also consider stipulating to changing other case deadlines. If the parties wish to proceed virtually, and the panel agrees to proceed in that manner, FINRA is providing virtual hearing services (via Zoom and teleconference). FINRA is encouraging the parties and its panels to avail themselves of these virtual technologies as an alternative to postponing existing hearing dates.  The Blog’s Message We understand that the operations of the SEC and FINRA are not a priority of our readers at this difficult time. But, for those who are concerned about, among other things, the integrity of the markets, the enforcement efforts of market regulators and the viability of initiating an arbitration or mediation or continuing one of these forms of dispute resolution, we hope that this article provides you with some information.  As we noted in our last article about the operations of the New York State Courts ( here ), we want you to know that nothing is more important to us than the health and safety of our families, friends, readers, clients, colleagues and communities. We therefore hope that all are healthy and safe and remain so during this public health crisis.

It is said that justice never sleeps. This is true, even as we adjust to life during the coronavirus pandemic. Although state and federal courts around the country have limited the business they handle, they nonetheless remain open. But what does this mean?  The Lower Courts The State of New York has answered this question through several recent court orders. These orders make clear that the courts are, as Chief Judge Janet DiFiore stated in a recent online message, “up and running” so as “to provide access for all essential and emergency matters during the coronavirus outbreak.” ( Here .) On March 22, 2020, Chief Administrative Judge Lawrence Marks issued administrative order AO/78/20 ( here ), which markedly curtailed the receipt of papers filed in the Uniform Court System (“UCS”) and by county clerks in litigation matters. The order applies to both paper and electronic filings and extends to all trial courts. Chief Administrative Judge Marks issued the order in light of the public health concerns of the coronavirus, and to comport with Governor Cuomo’s recent Executive Order, which suspended and tolled the statutes of limitations for the commencement or filing of legal actions, as well as the time limits governing all actions and proceedings in the State’s criminal, family, civil, surrogate’s and appellate courts. ( See Executive Order 202.8, here .)  The order makes clear that the courts will accept filings only in matters deemed to be “essential.” Arraignments and emergency proceedings, such as (a) mental hygiene applications, civil commitments and guardianships, (b) child protection proceedings, juvenile delinquency proceedings, family offenses, emergency support orders, and (c) landlord lockouts, serious code violations, repair orders and post-eviction relief, fall into the definition of “essential”. A complete list of essential matters is attached to the order. In addition, judges may deem any individual matter to be “essential” as circumstances require. This catch-all provision is intended “to address the very rare case[] where individual facts necessitate an immediate hearing notwithstanding current public health concerns.” However, the catch-all provision “will be interpreted restrictively.” It is important to note that the order concerns legal papers relating to litigation matters filed in the UCS. It does not pertain to filings with the County Clerk acting other than as a clerk of the court – including matters set forth in CPLR § 8021. Moreover, the order does not address discovery in pending matters, which remains governed by a prior administrative order and relies on the agreement of the parties to the fullest extent possible. In the event that discovery disputes and conduct require judicial intervention, the courts will address them at a later date. Finally, the order addresses only the filing of documents and does not address service of process. As Chief Judge DiFiore explained in her recent message, “in light of the filing prohibition and the Governor’s extension of statutes of limitation, service of (unfiled) process should and will be suspended by parties in non-essential matters.”  As to preliminary, compliance and status conferences, Chief Administrative Judge Marks severely limited their occurrence in a prior administrative order ( here ). However, since that order on March 13, 2020, judges have been adjourning such conferences without a new date.  On March 25 and 26, 2020, two courts went virtual. On March 25, 2020, the New York City Criminal Court initiated its second phase of videoconferencing arraignments. Under this phase, all parties will participate in court proceedings by videoconferencing using Skype for Business. All arraignments will be virtual, with the judge, prosecution and defense attorney and defendant appearing from remote locations. On March 26, 2020, the New York City Family Court started virtually hearing the following matters: child-protective intake cases involving removal applications, newly-filed juvenile delinquency intake cases involving remand applications, emergency family offense petitions and writ applications where there is a court order of custody or parenting time. The Appellate Courts The State’s four appellate divisions have their own rules to deal with the coronavirus health emergency.  In the First Department ( here ), the Court maintained the filing deadlines for its May and June Terms, but suspended the deadlines to perfect, file, or otherwise comply with the rules of court until further order of the Court, except where mandated by statute. As of the date of this post, the Court adjourned all arguments scheduled for the April Term; these arguments will be re-scheduled at a later date. Notably, the Court said that all filings made in connection with appeals subject to mandatory e-filing must be filed via NYSCEF in a timely manner and in accordance with the procedural and electronic rules of the Court. However, the Court suspended the requirement that the hard copy filing must follow the e-filing. In fact, the Court is not permitting the filing of hard copy documents.  The Court will also consider emergency applications and attorney grievance committee matters. In the Second Department, the Court has essentially closed its physical doors to the public, but not its virtual ones, at least for emergency matters. Pursuant to a recent notice and order ( here , here ), the Court will entertain emergency applications only. While litigants may continue to make electronic filings on the NYSCEF portal, the filings will not be reviewed as the Clerk’s Office will not be staffed to do so until further notice.  Like the First Department, all deadlines to perfect, file, or otherwise comply with the rules of court are suspended until further order of the Court. The Court will continue to process its calendars through April 2, 2020. Thus, for litigants with an appeal on one of the Court’s calendars, that appeal will be taken on submission unless the litigant contacts the Court by email to request an argument via Skype. The Court will also entertain emergency applications and attorney grievance committee matters. In the Third Department ( here , here ), the Court is considering all appeals from the March Term on submission only and adjourning all appeals for the April Term. The Court will re-calendar all April Term matters for a later term. Any appeal deemed to be an emergency by the parties may be treated as urgent.  Like the First and Second Departments, all deadlines to perfect, file, or otherwise comply with the rules of court are suspended pending further order of the Court, except where mandated by statute.  The Third Department is open with limited staff to accept NYSCEF filings and paper submissions where the parties choose to continue to file. The Court will entertain only emergency applications.  In the Fourth Department ( here , here , here , here and here ), all matters calendared for the March/April 2020 Term will be considered on submission only, without oral argument. All matters currently scheduled for the May 2020 Term have been adjourned and will be re-calendared for a later term. For matters scheduled during the March/April 2020 Term or the May 2020 Term that the parties deem to be urgent, an application may be made in writing, on notice to all parties, to request that the Court consider the matter on an expedited basis. Such notification must be made by email no later than April 9, 2020.  The Court will entertain only emergency applications brought by order to show cause.  Such emergency applications are to be filed by email. The Fourth Department is accepting digital filings through NYSCEF for appropriate cases and through its digital portal in other cases. The Court suspended the requirement of hard copy submissions until further order of the Court. In fact, the Court is not permitting the filing of hard copy documents.  Similar to its sister departments, all deadlines to perfect, file, or otherwise comply with the rules of court are suspended pending further order of the Court, except where mandated by statute. In the New York State Court of Appeals ( here ), all filing deadlines and filing procedures remain in place, except that no in-person filings are permitted without prior arrangements made upon telephonic consultation with the Clerk’s Office. The Court has adjourned oral arguments for the remainder of the March Term. The Court is considering changes to the April/May oral argument sessions and will notify parties directly as to how it will proceed. The Court will continue to consider cases that have been submitted. The Blog’s Message We understand that questions concerning the State’s court system are not high on the list of questions our readers have been asking about the coronavirus. But, for those who are thinking of starting an action, or who have a pending one, we hope that this post provides you with some answers.  While we will continue to post articles on this Blog about substantive legal issues, we want you to know that nothing is more important to us than the health and safety of our families, friends, readers, clients, colleagues and communities. We therefore hope that all are healthy and safe and remain so during this public health crisis.

Historically, an individual was required to appear, in person, before the notary public acknowledging his/her signature.  See In re Napolis , 169 A.D. 469, 471 (1 st Dep’t 1915) (“The court again wishes to express its condemnation of the acts of notaries taking acknowledgments or affidavits without the presence of the party whose acknowledgment is taken or the affiant, and that it will treat as serious professional misconduct the act of any notary thus violating his official duty.”); Ambulatory Surgery Center of Brooklyn v. Helpers of God’s Precious Infants, Inc. , 283 A.D.2d 528, 529 - 530 (2 nd Dep’t 2001) (finding that counsel’s false representation that affiants signed affidavits in his presence was “wholly improper” and “had no probative value”).  Similarly, the Notary Public License Law New=">New" York="York" Secretary="Secretary" of="of" State="State" Website="Website"> , relying in part on In re Napolis , provides that the: se of the office of notary in other than the specific, step-by-step procedure required is viewed as a serious offense by the Secretary of State. The practice of taking acknowledgments and affidavits over the telephone, or otherwise, without the actual, personal appearance of the individual making the acknowledgment or affidavit before the officiating notary, is illegal. Indeed, a notary public that commits “fraud or deceit” in performing his/her duties “is guilty of a misdemeanor.”  New York Executive Law § 135-a (2) . Similarly, the Uniform forms of certificates of acknowledgement or proof within ( see RPL § 309-a ) and without ( see RPL § 309-b ) the state of New York recites that the affiant “personally appeared” before the notary public taking the acknowledgment. Recognizing the difficulty and the dangers of requiring in person meetings for notaries due to the coronavirus pandemic, on March 19, 2020, Governor Andrew Cuomo issued an Executive Order temporarily relaxing the notary public laws to permit the completion of notary services “utilizing audio-visual means.”  Thus, the operative provisions of Executive Order 202.7 provide: Any notarial act that is required under New York State law is authorized to be performed utilizing audio-video technology provided that the following conditions are met:  The person seeking the Notary's services, if not personally known to the Notary, must present valid photo ID to the Notary during the video conference, not merely transmit it prior to or after;  The video conference must allow for direct interaction between the person and the Notary (e.g. no pre-recorded videos of the person signing); The person must affirmatively represent that he or she is physically situated in the State of New York;  The person must transmit by fax or electronic means a legible copy of the signed document directly to the Notary on the same date it was signed;  The Notary may notarize the transmitted copy of the document and transmit the same back to the person; and,  The Notary may repeat the notarization of the original signed document as of the date of execution provided the Notary receives such original signed document together with the electronically notarized copy within thirty days after the date of execution. The ability for the general public to have their signatures (whether on an acknowledgment, an affidavit or otherwise) notarized through the use of audio/video means will further the objectives of the stay-at-home and social distancing rules established to lessen the impact of the coronavirus pandemic.

On March 24, 2020, the New York Court of Appeals decided Plavin v. Group Health Inc. , 2020 N.Y. Slip Op. 02025 (Mar. 24, 2020) ( here ), a case in which the Court was asked by the United States Court of Appeals for the Third Circuit to decide whether an insurance company’s alleged misstatements and omissions about its insurance plan, made to over 600,000 current and former New York City employees and retirees, sufficed to satisfy the consumer-oriented element of a claim under General Business Law §§ 349 and 350. As discussed below, the Court found that the claim did not involve a contract dispute between the parties over policy coverage; instead, the claim concerned consumer-oriented conduct. Consequently, the Court answered the certified questions in the affirmative. A Primer on General Business Law §§ 349 and 350 In 1970, the New York Legislature enacted General Business Law § 349, which made unlawful any “ eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state.” GBL § 349 (a). Seven years earlier, the New York Legislature enacted GBL § 350, which made unlawful “ alse advertising in the conduct of any business, trade or commerce or in the furnishing of any service in this state.” These consumer protection statutes were enacted to “strik down all forms of deceptive acts and practices.” Slip Op. at *6 (internal quotation marks and citations omitted).  Initially, only the Attorney General could sue to enforce these laws. However, the Legislature subsequently amended both Section 349 and Section 350 to add a private right of action for “any person who has been injured by reason of any violation of th section ,” allowing injunctive relief and damages, as well as reasonable attorney’s fees. GBL § 349(h) and GBL § 350-e(3). To state a claim under GBL §§ 349 and 350, “a plaintiff must allege that a defendant has engaged in (1) consumer-oriented conduct, that is (2) materially misleading, and that (3) the plaintiff suffered injury as a result of the allegedly deceptive act or practice. Koch v. Acker, Merrall & Condit Co. , 18 N.Y.3d 940, 941 (2012); see Goshen v. Mutual Life Ins. Co. of N.Y. , 98 N.Y.2d 314, 324 n.1 (2002). A claim under these statutes does not lie when the plaintiff alleges only “a private contract dispute over policy coverage and the processing of a claim which is unique to the[] parties, not conduct which affects the consuming public at large.” New York Univ. v Continental Ins. Co. , 87 N.Y.2d 308, 321 (1995) (internal quotation marks omitted). Thus, a plaintiff claiming the benefit of either Section 349 or Section 350 “must charge conduct of the defendant that is consumer-oriented” or, stated differently, “demonstrate that the acts or practices have a broader impact on consumers at large.” Oswego Laborers' Local 214 Pension Fund v. Marine Midland Bank , 85 N.Y.2d 20, 25 (1995).  Notably, the deceptive practice does not have to rise to “the level of common-law fraud to be actionable under section 349.” Boule v. Hutton , 328 F.3d 84, 94 (2d Cir. 2003) (citing Gaidon v. Guardian Life Ins. Co. , 94 N.Y.2d 330, 343 (1999)). In fact, “ lthough General Business Law § 349 claims have been aptly characterized as similar to fraud claims, they are critically different.” Gaidon , 94 N.Y.2d at 343. For example, while reliance is an element of a fraud claim, it is not an element of a GBL § 349 claim. Stutman v. Chemical Bank , 95 N.Y.2d 24, 29 (2000); Small v. Lorillard Tobacco Co. , 94 N.Y.2d 43, 55-56 (1999). In addition, a plaintiff must prove “actual” injury to recover under the statutes, though not necessarily pecuniary harm. Stuntman , 95 N.Y.2d at 29; Oswego , 85 N.Y.2d at 26. And, the plaintiff must prove the deceptive act caused the injury. Id. ; Oswego , 85 N.Y.2d at 26. Plavin v. Group Health Inc. Background Plaintiff is a retired New York City police officer, who received health insurance coverage through the health care plan of defendant Group Health Incorporated (“GHI”). GHI offered City employees a “Comprehensive Benefits Plan,” which provided in-network coverage and partial reimbursement for out-of-network services (the “GHI Plan” or “Plan”). Plaintiff alleged that the GHI Plan was among 11 plans the City offered to approximately 600,000 employees and retirees on an annual or biannual basis. The terms of these plans were negotiated between the City, the insurance vendors, and the New York City Municipal Labor Committee, which was comprised of various employee unions.  Prior to an open enrollment period, the New York City Office of Labor Relations, on behalf of the City, assembled and distributed to employees and retirees a summary program description, which contained health plan descriptions prepared by each insurer. Plaintiff alleged that this document was the only one distributed to City employees and retirees regarding the GHI Plan before they were required to select a plan. In addition, GHI created its own online summary of benefits and coverage, which was available on its website. If an employee or retiree selected the GHI Plan, the City sponsored and paid the entire cost of the premiums therefor. Plaintiff alleged that the summary program description and online summary (collectively, the “summary materials”) represented the GHI Plan as furnishing its members with extensive out-of-network coverage subject to deductibles and coinsurance, and “the freedom to choose any provider worldwide.” Further, the summary materials stated that the GHI Plan contained “additional Catastrophic Coverage” for “100% of the Catastrophic Allowed Charge as determined by GHI” if a member’s out-of-network expenses for predominantly in-hospital care exceeded $1,500, and also represented that the Plan offered its members an optional rider, at an additional cost, that would provide enhanced coverage for certain services, increasing out-of-network reimbursements “on average, by 75%.”  Plaintiff further alleged that, beginning in 1984, he annually selected the GHI Plan and optional rider as his family’s health insurance plan. From 2014 through 2015, plaintiff’s wife received numerous medical services, which GHI determined were out-of-network. As a result, contrary to plaintiff’s expectations based on the summary materials provided or available to him, GHI covered only a modicum of the medical claims, leaving plaintiff responsible for payment of the balance.  The Federal Court Proceedings Plaintiff commenced the action in the United States District Court for the Middle District of Pennsylvania claiming, among other things, violations of GBL §§ 349 and 350 based on GHI’s allegedly misleading representations to City employees and retirees about the terms of its Plan. Plaintiff alleged that GHI made misleading statements and omissions in its summary materials regarding the Plan’s out-of-network reimbursement rates, how often the reimbursement rate schedule was updated, the catastrophic coverage reimbursement rate, and the breadth of coverage of the optional rider – in order to induce plaintiff, and others similarly situated, to select the GHI Plan.  GHI moved to dismiss the complaint for failure to state a claim. The District Court concluded that plaintiff did not adequately allege that, among other things, GHI’s conduct was consumer oriented. See 323 F. Supp. 3d 684, 695-698 (M.D. Pa. 2018).  Initially, the court rejected plaintiff’s argument that GHI’s alleged misconduct was consumer-oriented simply because it affected numerous City employees and retirees, reasoning that “the fact that a large class of members is affected not automatically transform the plan into something that has a broader impact on consumers at large.” Id. at 696 (quoting Oswego , 85 N.Y.2d at 25 (internal quotations omitted)). The court opined that “the alleged deception out of a private contract negotiated between” GHI and the City – “two sophisticated institutions” ( id. ) – and, comparing the case to NYU , supra. , concluded that plaintiff was “not a mere consumer of the public” because the City had contracted with GHI on behalf of its employees and, therefore, “ he contract was aimed to benefit only a circumscribed class of individuals.” Id. Thus, the court held that “ ecause there is no indication in the omplaint that the plan would have been available to anyone who was not an employee of the City of New York, and because it is undisputed that receipt of benefits from arises from a contractual policy, claims fail to plead consumer-oriented conduct.” Id. at 698. Plaintiff appealed. The Third Circuit determined that the dispositive issue was whether GHI had engaged in consumer-oriented conduct. Because, in its view, existing New York law did not clearly dictate the outcome of the issue, the Third Circuit certified the following questions: Where a contract of insurance is negotiated by sophisticated parties such as the City of New York and an insurance company, and where hundreds of thousands of City employees and retirees are third-party beneficiaries of that contract, and where the insurance company’s policy created pursuant to the contract is one of several health insurance policies from which employees and retirees can select, has the insurance company engaged in consumer-oriented conduct under the GBL when:   (1) The insurance company drafts summary plan information that allegedly contains materially misleading misrepresentations and/or omissions about the coverage and benefits of the insurance policy and sends these summary materials to the City, and the City does not check or edit these materials before sending them on to the City employees and retirees; OR  (2) The insurance company directs City employees and retirees to information on the insurance company’s website that allegedly contains materially misleading misrepresentations and/or omissions about the coverage and benefits of the insurance policy? The Court accepted the foregoing questions (33 N.Y.3d 998 (2019), and, as noted, answered them in the affirmative. The Court’s Decision The Court noted that although there was an underlying insurance contract negotiated by sophisticated entities neither plaintiff, nor any of the other hundreds of thousands of employees and retirees who participated in the GHI Plan, were participants in its negotiation. Slip Op. at *8. “ ritically,” said the Court, “that negotiation was followed by an open enrollment period, which exposed City employees and retirees to marketing resembling a traditional consumer sales environment.” Id. It was during the enrollment period that City employees and retirees were exposed to GHI’s alleged misstatements and omissions. Id. Thus, “it was the allegedly misleading summary materials” that plaintiff complained about, “not the contract between the City and GHI, which purportedly was never provided to City employees and retirees.” Id. The Court explained that the conduct of which plaintiff complained was the type that the GBL was “intended to address.” Plaintiff alleged that GHI created misleading benefit and coverage summaries, which it published on its website and caused to be distributed by the City to all similarly situated employees and retirees, and that this marketing was critical to GHI’s effort to induce City employees and retirees to select its Plan. Plaintiff asserted that GHI collected premiums only for its Plan, and it was, therefore, in GHI's financial interest for individual City employees and retirees to choose its Plan over the other available options. Simply put, plaintiff alleged that GHI was incentivized by the competition created during the open enrollment period to leverage its information advantage in order to gain the business of the employees and retirees over other insurers. In that manner, the open enrollment period resembles the sort of sales marketplace – characterized by groups of similarly-situated consumers subjected to the competitive tactics of a relatively more powerful business – that GBL claims were intended to address. Id. To underscore the consumer-oriented nature of the complaint, the Court explained that plaintiff’s claims “arose from the allegedly deceptive marketing materials distributed to plaintiff and the other City employees in order to induce them to select the GHI Plan over the other options available to them, as well as to pay additional premiums for the allegedly worthless out-of-network rider.” Id. at *8-*9. Such information, disseminated to hundreds of thousands of City employees “in order to solicit their selection of its plan ‘is precisely the sort of consumer-oriented conduct that is targeted by General Business Law §§ 349 and 350.’” Id. at *9 (quoting Karlin , 93 N.Y.2d at 293). Thus, “ nder these circumstances, ‘plaintiff[] ha satisfied the threshold test’ by alleging that marketing actions ‘are consumer-oriented in the sense that they potentially affect similarly situated consumers.’” Id. (quoting Oswego , 85 NY2d at 26-27.  Finally, and perhaps most significantly, the Court explained that “the General Business Law provisions at issue do not impose a requirement that consumer-oriented conduct be directed to all members of the public.” Slip Op. at *9 (orig’l emphasis). Indeed, said the Court, “we have never implied that such a requirement exists.” Id. It is enough that the conduct reach consumers as whole.  Takeaway GBL §§ 349 and 350 are broad in scope and prohibit deceptive and misleading business practices. To state a cognizable claim under Section 349 and Section 350, a plaintiff must identify consumer-oriented misconduct, which is deceptive and materially misleading to a reasonable consumer, and which causes actual damages. In many cases, the plaintiff fails to satisfy one or more of the elements of the claim because the conduct is not deceptive or not recurring. In Plavin , however, the claim at issue had all the attributes of a GBL §§ 349 and 350 cause of action: it had deceptive conduct, which was consumer oriented. Plavin is important because of its clarification about who must be the target of consumer-oriented conduct. In this regard, the Court made it clear that “the General Business Law provisions at issue do not impose a requirement that consumer-oriented conduct be directed to all members of the public.” Slip Op. at *9 (orig’l emphasis). It is sufficient for the conduct to be directed to some members of the public, or, as in Plavin , a discrete group of consumers ( i.e. , 600,000 employees and retirees of the City of New York). See Oswego , 85 N.Y.2d at 25 (the conduct must have an “impact on consumers at large.”).

Sometimes this Blog gets to address numerous issues in its examination of a case. In MDK Hijos Trust v. Nordlicht , 2020 N.Y. Slip Op. 30793(U) (Sup. Ct., N.Y. County Mar. 10, 2020) ( here ), we get the opportunity to do so again. MDK Hijos Trust v. Nordlicht Background Plaintiff, MDK Hijos Trust (“Plaintiff” or “MDK”), sought damages for, among other claims, fraudulent inducement and breach of fiduciary duty in connection with investments by the Katz family (Marcos Katz and Adela Kenner de Katz) in Platinum Partners Value Arbitrage Fund International Ltd. (“PPVA” or “Platinum”). PPVA was managed by Platinum Management LLC (“Management”), whose principals were defendants Mark Nordlicht (“Nordlicht”), Murray Huberfeld (“Huberfeld”), David Bodner (“Bodner”), Bernard Fuchs (“Fuchs”) and Gilad Kalter (“Kalter” and together with Nordlicht, Huberfeld, Bodner and Fuchs, “Defendants”). MDK is a trust and the assignee of the claims of the Katz family, which invested approximately $39 million in PPVA. Though managed by Management, PPVA was managed by Huberfeld, Bodner and Nordlicht, who were the alleged “primary principals and decision-makers” of Management.  According to Plaintiff, Defendants repeatedly represented that PPVA had more than a decade of positive returns, averaging 17% between 2003 and 2015, and that PPVA was liquid, thereby permitting investors to redeem their investments on 60 or 90 days’ notice and receive payment of 90% of their redemption requests within 30 days thereafter. As a result, between 2006 and May 1, 2015, the Katz family invested approximately $39.9 million in PPVA. Plaintiff alleged that unbeknownst to investors, PPVA faced a material liquidity crisis. According to Plaintiff, PPVA’s concentration of illiquid assets made it increasingly difficult for Management to pay investor redemptions as requested. Indeed, said Plaintiff, as early as November 2012, redemption requests overwhelmed PPVA, a phenomenon Defendants described as “daunting” and “relentless.” Nevertheless, claimed Plaintiff, Defendants kept investors in the dark about PPVA’s liquidity crisis, while Management continued to market the fund’s flexible redemption terms even as it struggled to pay redemptions. According to Plaintiff, Defendants repeatedly represented that PPVA was liquid, had sufficient assets to permit withdrawals and was structurally sound. Plaintiffs alleged that Defendants knew these statements were false, given the extent of PPVA’s illiquidity problems and the amount of redemption requests, which far exceeded PPVA’s overstated assets. In June 2016, the United States Attorney’s Office for the United States District Court for the Southern District of New York brought criminal charges against Huberfeld in connection with a bribery scheme in which he was alleged to have paid “kickbacks” to a union official to obtain the union’s retirement fund investments in PPVA when it was experiencing liquidity problems. Nordlicht and other members of Management were indicted for fraud, and the SEC sued Management, Nordlicht and others for violating the federal securities laws.  The Complaint alleged that prior to June 2016, the Katzes were unaware and could not have been aware that Defendants, Management and PPVA were part of a fraudulent scheme, and that Defendants’ statements were knowingly false, given their positions within Management and PPVA and their access to inside information. Plaintiff alleged that it was owed at least $39 million. Each of the Defendants moved to dismiss, among other claims, the breach of fiduciary duty and fraudulent inducement causes of action. The Court denied the motions. The Court’s Decision The Breach of Fiduciary Duty Claim To state a claim for breach of fiduciary duty, a plaintiff must allege the existence of a fiduciary duty owed by the defendant, a breach of that duty and resulting damages. Jones v. Voskresenskaya , 125 A.D.3d 532, 533 (1st Dept. 2015). Defendants claimed that Plaintiff failed to satisfy the first element of the claim, arguing that a fiduciary duty “will not be found to exist where the complaint only alleges an arms-length business relationship involving sophisticated business people or where the parties are adversaries,” or where the gravamen of the claim is “advice alone”. EBC I, Inc. v. Goldman Sachs & Co. , 91 A.D.3d 211, 214-215 (1st Dept. 2011). Defendants (other than Fuchs (the “Other Defendants”)) also contended that the Complaint failed to allege sufficient facts to show that each of them was a fiduciary to the Katzes; that even though Management was a registered investment advisor, there were no allegations that each of them served as an advisor to the Katzes; that a fiduciary duty cannot be imposed unilaterally; that the losses sustained by the Katzes were due to the underperformance of their investments, which is inadequate to sustain a breach of fiduciary duty claim; and that MDK failed to plead the claim with specificity as required by CPLR § 3016(b). The Court found Defendants’ arguments and reliance on EBC to be “unpersuasive”. Slip Op. at *12. The Court explained that “until the lawsuit was filed, the Katzes and Fuchs were not adversaries, and Fuchs not allege otherwise.” Id. More significantly, noted the Court, there was no fiduciary relationship in EBC – the case involved an underwriter and an issuer of stock working at arm’s length; no fiduciary duty arose from “the underwriting agreement alone”. Id. (citing EBC , 91 A.D.3d at 214). By contrast, observed the Court, a fiduciary relationship existed between the Katzes and Defendants due to Defendants’ failure “to disclose to the Katzes that PPVA had liquidity issues and that the value of PPVA’s assets were grossly overstated,” and Defendants’ “superior expertise or knowledge regarding the operations of Management and PPVA,” upon which “the Katzes relied … when making their investments.” Id. at **12-13. In other words, held the Court, “the breach of fiduciary duty claim not based on a written agreement with Defendants.” Id. at *12. Thus, concluded the Court, “ EBC’s holding and rationale” was “inapplicable”. Id. The Fraudulent Inducement Claim To state a claim for fraudulent inducement, “there must be a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed , 17 N.Y.3d 782 (2011). See also Wyle Inc. v. ITT Corp. , 130 A.D.3d 438, 439–41 (1st Dept. 2015); MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , 87 A.D.3d 287, 294 (1st Dept. 2011). A plaintiff alleging fraudulent inducement must satisfy each element in order to prevail, whether it be on a motion or at trial. Menaco v. New York Univ. Med. Ctr. , 213 A.D.2d 167 (1st Dept. 1995). The failure to satisfy any one element will, therefore, result in the dismissal of the action. Gregor v. Rossi , 120 A.D.3d 447 (1st Dept. 2014). In addition, the allegations must be stated with particularity to satisfy CPLR § 3016(b). Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 558 (2009). Thus, the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Id. at 559-60. Conclusory allegations will not suffice. Id . Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). Although, CPLR § 3016(b) provides that “the circumstances constituting the shall be stated in detail,” the New York Court of Appeals has “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Pludeman v. Northern Leasing, Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (internal quotation marks and citations omitted). Thus, where the facts “are peculiarly within the knowledge of the party charged with the fraud,” and “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” dismissal should be denied. Id. at 491-92 (internal quotation marks and citations omitted). See also CPC Intl. v. McKesson Corp. , 70 N.Y.2d 268, 285-286 (1987). Fuchs argued that the fraudulent inducement claim should be dismissed because it was based on “information and belief” and otherwise failed to allege that Defendants knew their statements were false when made and intended to induce the Katzes to invest and keep such investments in PPVA. The Court found these arguments to be “unavailing”. Slip Op. at *14.  The Court explained that “CPLR 3016 (b) simply require that a complaint allege ‘the basic facts’ to establish a fraud claim, which is met when the alleged facts are ‘sufficient to permit a reasonable inference of the alleged conduct.’” Id. (citing Sargiss v. Magarelli , 12 N.Y.3d 527, 530-531 (2009), quoting Pludeman , 10 N.Y.3d at 491-492). Notably, the Court warned that the particularity requirement “should not be confused with unassailable proof of fraud.” Id. (citing id. ) Against these principles, the Court found that the Complaint contained a rational basis for “inferring that the alleged misrepresentation was knowingly made because allege that Defendants, including Fuchs, made misrepresentations when PPVA was in fact suffering a liquidity crisis and was unable to pay redemptions.” Id. (citing Houbigant, Inc. v. Deloitte & Touche, LLP , 303 A.D.2d 92, 98 (1st Dept. 2003) (complaint did not need not to prove scienter; sufficient that it contained “some rational basis for inferring that the alleged misrepresentation was knowingly made”)). The Court rejected Defendants’ argument that Plaintiff failed to plead justifiable reliance because it could have discovered the truth in connection with the many roadblocks encountered in trying to redeem its investment. Slip Op. at *15, *27. The Court held that the “argument insufficient.” Slip Op. at *15. The Court reasoned that “ hile it is true that a heightened degree of diligence is needed when a party to whom a misrepresentation is made has hints of its falsity, ‘the question of what constitutes reasonable reliance is not generally a question to be resolved as a matter of law on a motion to dismiss.’” Id. (quoting ACA Fin. Guar. , 25 N.Y.3d at 1045, and citing Allenby, LLC v. Credit Suisse, AG , 134 A.D.3d 577, 580-581 (1st Dept. 2015)). The Other Defendants argued that these claims should be dismissed because they were actually breach of contract claims. In response, Plaintiff argued that it was not seeking contract damages because the Other Defendants “were not parties to any enforcement contract with the Katzes.” Slip Op. at *29. The Court agreed with Plaintiff. In doing so, the Court explained that the PPVA was not a defendant in the action and no breach of contract claim was asserted against it or the Other Defendants. Therefore, concluded the Court, “the fraud and misrepresentation claims not ‘duplicative’ of the non-asserted breach of contract claim.” Id. at **29-30. In addition, the Court held that Defendants as principals and officers of a corporation or other business entity could be held personally liable for their own fraudulent misconduct or other tortious acts. Id. at *30 (citing Espinosa v. Rand , 24 A.D.3d 102, 102 (1st Dept. 2005) (corporate officer who participated in the commission of a tort may be held individually liable regardless of whether he acted on behalf of the corporation and regardless of whether the corporate veil is pierced); American Express Travel Related Servs. Co. v. North Atl. Resources, Inc. , 261 A.D.2d 310, 311 (1st Dept. 1999) (same)).  Finally, the Court rejected Bodner’s argument that the Complaint failed to meet the particularity requirement of CPLR § 3016(b), because the Complaint suffered from “group pleading”. In that regard, the Court noted that group pleading “is permissible in some circumstances, and that CPLR 3016 (b) only requires that a complaint alleges the ‘basic facts,’ which is met when the alleged facts are ‘sufficient to permit’ a reasonable inference of the alleged conduct.” Slip Op. at *30 (citing, among other cases, Pludeman ).  The Statute of Limitations and The Continuing Wrong Doctrine  The statute of limitations for a fraudulent inducement claim is the greater of (a) six years from the date when the cause of action accrued or (b) two years from the time plaintiff discovered the fraud or could with reasonable diligence have discovered the fraud. CPLR § 213(8). The cause of action accrues when “every element of the claim, including injury, can truthfully be alleged” ( Carbon Capital Mgmt., LLC v. Am. Express Co. , 88 A.D.3d 933, 939 (2d Dept. 2011) (citation and alterations omitted)), “even though the injured party may be ignorant of the existence of the wrong or injury.” Schmidt v. Merchants Despatch Transp. Co. , 270 N.Y. 287, 300 (1936). The two-year discovery rule requires an inquiry into “whether a person of ordinary intelligence possessed knowledge of facts from which the fraud could be reasonably inferred.” Kaufman v. Cohen , 307 A.D.2d 113, 123 (1st Dept. 2003) (internal quotation marks and citation omitted); see also Erbe v. Lincoln Rochester Trust Co. , 3 N.Y.2d 321, 326 (1957). “ ere suspicion will not constitute a sufficient substitute” for knowledge of the fraud. Eberle , 3 N.Y.2d at 326. “Where it does not conclusively appear that a plaintiff had knowledge of facts from which the fraud could reasonably be inferred, a complaint should not be dismissed on motion and the question should be left to the trier of the facts.” Trepuk v. Frank , 44 N.Y.2d 723, 725 (1978). Moreover, “where an allegation of fraud is essential to a breach of fiduciary duty claim, courts a six-year statute of limitations under CPLR 213 (8).” IDT Corp. v. Morgan Stanley Dean Witter & Co. , 12 N.Y.3d 132, 139 (2009). Huberfeld argued that, of the $39 million invested by the Katzes, $26.5 million was invested prior to May 1, 2011 (allegedly induced by fraud and misrepresentation). Thus, the claims related to the $26.5 million portion of the investments were time-barred as they accrued more than six years before commencement of the action in September 2018. Huberfeld also argued that Plaintiff’s fraudulent inducement claim was time-barred under the discovery rule. In that regard, Huberfeld maintained that the remaining investments were made between August 2014 and May 2015, more than three years before commencement of the action and more than two years after the fraudulent scheme was allegedly discovered by the Katzes in June 2016, when the government brought criminal charges against Nordlicht and other members of Management in connection with the bribery scheme and the securities laws violation.  In opposition, Plaintiff contended that the continuing wrong doctrine applied to toll the statute of limitations. Plaintiff maintained that, because the last actionable act occurred in May 2016, when the Other Defendants met with the Katzes and misrepresented the liquidity of PPVA and its ability to pay redemption requests, its fraudulent inducement and misrepresentation claims accrued within six years and, therefore, were timely.  Under the continuing wrong doctrine, “where there is a series of continuing wrongs,” the statute of limitations will be tolled to the last date on which a wrongful act is committed. Henry v. Bank of Am. , 147 A.D.3d 599, 601 (1st Dept. 2017).  The application of the continuing wrong doctrine must “be predicated on continuing unlawful acts and not on the continuing effects of earlier unlawful conduct.” Id. The doctrine is inapplicable where there is one tortious act and “continuing consequential damages” that arise therefrom. Town of Oyster Bay v. Lizza Indus., Inc. , 22 N.Y.3d 1024, 1032 (2013). The Court agreed with Plaintiff, finding that subsequent to May 2011 (after the Katzes made their $26.5 million investment), “the Other Defendants continued to defraud the Katzes by, among other things, misrepresenting the asset values of PPVA, concealing or failing to disclose its liquidity problems, and misleadingly representing that PPVA had sufficient assets to honor their redemption requests.” Slip Op. at *24. The Court explained that “ lthough the continuing wrong doctrine must be narrowly applied, the Complaint adequately alleges that the Other Defendants continued to defraud the Katzes and made misrepresentations to them, which caused them to maintain their investment in PPVA, invest more money, and sustain additional losses.” Id. “Because these claims are premised upon ‘continuing unlawful acts and not on the continuing effects of earlier unlawful conduct,’” said the Court, “the continuing wrong doctrine is applicable to claims that accrued earlier in May 2011, so long as the Complaint also adequately alleges that the ‘last actionable act’ of the Other Defendants occurred in May 2016, as Plaintiff contends.” Id. The Court also rejected Huberfeld’s reliance on the discovery rule, holding that “even though the Katzes admittedly discovered the alleged fraud in June 2016, more than two years before this action was commenced, that allegation has no adverse effect because the limitations period is the greater of six years from when the claim accrued or two years from when the fraud was discovered.” Id. Finally, the Court held that “the fraud claim essential to the breach of fiduciary duty claim,” and, therefore, the six-year limitations period was applicable to the breach of fiduciary duty claim. Id. at *25. As such, the claim was “timely, even in the context of a May 1, 2015 claim accrual date.…” Id. Accordingly, the Court concluded that the fraudulent inducement, misrepresentation and breach of fiduciary duty claims were not time-barred. Takeaway As the title of this post indicates, MDK involved several claims and related principles of law. Aside from the number of issues addressed by the Court, MDK reveals a reluctance by the Court to dismiss a fraud- and fiduciary duty-based complaint at the early stages of the litigation – presumably because many of the issues are traditionally ones that are infused with factual disputes that are not ripe for determination on a pre-answer motion to dismiss. This reluctance is consistent with the New York Court of Appeals’ warning that courts should not, in determining a motion to dismiss, consider whether the plaintiff can “ultimately establish its allegations.” J P. Morgan Sec. Inc. v Vigilant Ins. Co. , 21 N.Y.3d 324, 334 (2013) (internal quotation marks and citation omitted).

“Spoofing is a type of scam in which criminals attempt to obtain someone’s personal information by pretending to be a legitimate business, a neighbor, or some other innocent party.” See Julia Kagan, Spoofing , Investopedia (updated Jan. 29, 2020) (“ Spoofing ”) ( here ). Spoofing can occur in any form of online communication, including emails, text messages, telephone calls, and websites. Id . Although spoofing comes in many forms, the goal of spoofing is the same: to deceive people into divulging personal and/or financial information that the scammers can exploit for their personal gain. Common Spoofing Scams Email Spoofing Also known as “phishing”, email spoofing involves the transmission of emails having a falsified “From:” line. The point of the email is to trick the recipient into believing that the message comes from a legitimate source, such as a friend, a bank, or some other known business or entity.  Text Message Spoofing Also known as “smishing”, text message spoofing is like email spoofing. The recipient receives a text message that appears to come from a legitimate source, such as a friend or the recipient’s bank, credit card company or phone company. The message typically requests the recipient to call a certain phone number or click on a link within the message, with the goal of inducing the recipient to divulge personal information. Caller ID Spoofing With Caller ID spoofing, the scammer falsifies the phone number from which he/she is calling to get the victim to take the call. The victim’s caller ID will show that the call is coming from a legitimate business or government agency, such as the Internal Revenue Service. As with other forms of spoofing, the goal of the scam is to induce the victim to divulge personal and/or financial information. URL Spoofing URL spoofing occurs when scammers create a fraudulent website to obtain information from victims or to install malware on their computers. For instance, victims might be directed to a website that appears to belong to their bank or credit card company and be asked to log in using their user ID and password. If the person falls for the request and logs in, the scammer has the victim’s information to log into the website of the legitimate entity or government agency and access the victim’s accounts. See Spoofing , supra . URL spoofing is the subject of an enforcement proceeding commenced by the Securities and Exchange Commission (“SEC” or “Commission”) against Denis Georgiyevich Sotnikov (“Sotnikov”), a Florida resident and Russian national, and entities he controlled for allegedly participating in a fraudulent scheme to lure U.S. investors into buying fictitious Certificates of Deposit (“CDs”) promoted through internet advertising and spoofed websites. The March 13, 2020 press release announcing the charges can be found here .  In addition to commencing enforcement proceedings, such as Sotnikov , the SEC has issued an investor bulletin to educate investors about detecting URL spoofing and buying CDs from websites that “that mimic the actual sites of legitimate financial institutions.” ( Here .) Aside from warning investors about the fraud, the bulletin identifies a number of red flags indicating the presence of fraud. These include, among others: (a) posting interest rates higher than one could find at any other financial institution, with no penalties for early withdrawals; (b) offering CDs only, instead of a full panoply of financial products, such as banking or brokerage accounts, loans, or commercial banking services; (c) requiring a high minimum deposit, often more than $200,000; (d) directing potential investors to wire funds to an account located outside the U.S., or to a U.S.-based account having a different name than the financial institution claiming to sell the CD; (e) claiming that the spoofed financial institution is a member of the Federal Deposit Insurance Corporation (“FDIC”) and that deposits are FDIC-insured; and (f) identifying “clearing partners” who are purportedly registered with the SEC.  Some of the foregoing red flags were at issue in the SEC’s enforcement action against Sotnikov and his co-defendants. SEC v. Sotnikov here).=">here)."> Sotnikov concerned an alleged fraudulent scheme in which U.S investors – many of whom are older and using their retirement savings – were lured to websites offering fictitious CDs at above-market rates. Some of the websites spoofed actual U.S.-based financial institutions, while others offered CDs from fake financial firms. The CDs offered by Sotnikov were allegedly fictitious instruments not issued by a legitimate U.S. bank, and, therefore, were not subject to the protections offered by U.S. banking laws. Notwithstanding, said the SEC, to convince investors that the CDs were real, the fictitious CDs mimicked legitimate CDs by purporting to have a fixed maturity and promising a specific and above-market-rate of return. The CDs were offered to the general public and marketed as legitimate securities, alleged the SEC.  According to the SEC, the spoofed websites used domain names similar to the domain names of actual financial institutions or that sounded like real financial firms. The SEC maintained that the spoofed websites falsely claimed that the firms offering the CDs to investors were FDIC, FINRA, SIPC, or New York Stock Exchange members, and that the deposits were FDIC-insured. The SEC claimed that the spoofed websites were advertised in search results provided by the two leading internet search and advertising companies. As a result, the spoofed websites appeared at the top of investors’ search results when conducting searches for CDs with high rates of return. Potential investors who visited a spoofed website were allegedly directed to call a telephone number on the website. Believing that they were dealing with a legitimate U.S.-based financial institution offering legitimate CDs, potential investors who called the number on a spoofed website spoke with an individual purporting to be an “account executive” of the firm identified on the website. According to the SEC, potential investors provided an email address, after which they were contacted via email by the fake account executive, who often impersonated a real broker or sales representative of a spoofed financial firm. Investors were allegedly instructed by the fake account executives to wire funds to bank accounts opened on behalf of purported “clearing firms” identified in the emails. Once the funds were received by the purported “clearing firm,” said the SEC, they were quickly transferred to different bank accounts, both domestic and foreign, making it difficult or impossible for investors to regain their funds. Since November 2014, defendants allegedly created websites spoofing at least 24 legitimate financial firms and 8 fictitious financial firms, resulting in over $26 million in known investor losses. As described in the SEC’s Complaint, Sotnikov and the entities he allegedly controls were directly linked to 7 of the spoofed websites, through which investors lost over $1.8 million. According to the SEC, Sotnikov’s participation was essential to the scheme to defraud. He allegedly organized and/or controlled the corporate entities named as defendants (the “Defendant LLCs”), each of which had been represented to investors as “clearing” or “offering” the CDs of a spoofed or fictitious financial firm and received investor funds. The SEC maintained that the Defendant LLCs were not clearing firms and did not offer or sell legitimate CDs or other securities. Instead, alleged the SEC, the Defendant LLCs were created by Sotnikov to serve as conduits to receive wire transfers from defrauded investors in furtherance of the scheme set forth in the SEC’s Complaint. None of the victims received a CD after wiring the funds. “As alleged in our complaint, investors were swindled out of millions of dollars through a web of fake websites and concealed identities,” said SEC Enforcement Division Co-Director Steven Peikin. “Today’s action shows the SEC’s commitment to exposing sophisticated cyber fraud schemes that pose an ever-present risk to Main Street investors.” “Investors should be wary of investment opportunities from websites found only through internet searches,” added SEC Enforcement Division Co-Director Stephanie Avakian.  “Online investments that sound too good to be true are red flags of fraud.” In a parallel action, the U.S. Attorney’s Office for the United States District Court for the District of New Jersey announced ( here ) that it filed related criminal charges and is pursuing asset seizures. Takeaway As this Blog has observed in many posts, retirees and the elderly are particularly vulnerable to financial fraud. Often too trusting or hesitant to ask questions or express skepticism, this demographic easily falls prey to schemes to defraud. Spoofing is another form of fraud that exploits these tendencies. But, as the SEC warned in its bulletin, to protect against spoofing related to CDs, it is important for these investors to overcome the proclivity towards trust and hesitancy to ask questions.  Therefore, investors should be skeptical. They should conduct internet searches about the financial institution to see if results appear other than the website that was initially identified and call the financial institution using a telephone number found from another source to determine the legitimacy of the investment opportunity. Moreover, investors should avail themselves of the publicly available resources (whether government, trade or private sector) to verify the claims made in suspicious websites. See SEC Bulletin, Beware of Spoofed Websites Offering Phony Certificates of Deposit – Investor Alert (Oct. 23, 2019) ( here ).

As a general matter, business entities ( e.g. , for-profit and not-for-profit corporations, limited liability companies, and limited partnerships) formed outside the State of New York (whether in another state or a foreign country) may not do business within the State unless they receive authority to do so. See generally , Business Corporation Law (“BCL”) §§ 1301-1320 (corporations), Limited Liability Company Law (“LLCL”) §§ 801-809 (limited liability companies), Not-for-Profit Corporation Law §§ 1301-1321 (not-for-profit corporations), and Partnership Law §§ 121-901 – 121-908 (limited partnerships).  The failure to receive such authority deprives the foreign entity of the ability to affirmatively access the courts of New York and subjects any action commenced by the foreign entity to dismissal. See United Envtl. Techniques, Inc. v. State Dep’t of Health , 88 N.Y.2d 824, 825 (1996) (finding that foreign corporation was not registered to do business in New York and therefore lacked capacity to sue). Under BCL § 1312(a), also known as the “door-closing statute” ( Netherlands Shipmortgage Corp. v. Madias , 717 F.2d 731, 735 (2d Cir. 1983)),  a foreign corporation doing business in this state without authority shall not maintain any action or special proceeding in this state unless and until such corporation has been authorized to do business in this state and it has paid to the state all fees and taxes imposed under the tax law or any related statute ….  The purpose of BCL § 1312 is to regulate foreign companies that are conducting business within New York State so that they are not doing business under more advantageous terms than “those allowed a corporation of this State.” Von Arx, A.G. v. Breitenstein , 52 A.D.2d 1049, 1050 (4th Dept. 1976); see also National Lighting Co. v. Bridge Metal Indus., LLC , 601 F. Supp. 2d 556, 566 (S.D.N.Y. 2009) (additional citation omitted). The statute is not intended to permit foreign companies from avoiding their contractual obligations. Id. When applying BCL § 1312(a), the relevant inquiry is whether the foreign entity is “doing business” in the State. Whether a company is “doing business” in New York “depends upon the particular facts of each case with inquiry into the type of business activities being conducted.” Von Arx , 52 A.D.2d at 1050. Notably, “not all business activity engaged in by a foreign corporation constitutes doing business in New York.” Netherlands Shipmortgage , 717 F.2d at 735-36. A foreign corporation is permitted to transact “some kinds of business within the state without procuring a certificate” authorizing it to conduct business in New York. Globaltex Group, Ltd. v. Trends Sportswear, Ltd. , No. 09-CV-235, 2009 WL 1270002, at *3 (E.D.N.Y. May 6, 2009) (quoting Int’l Fuel & Iron v. Donner Steel , 242 N.Y. 224, 229 (1926)).  In order for a foreign corporation to be doing business in New York within the context of BCL § 1312, “the intrastate activity of the foreign corporation be permanent, continuous, and regular.” Manney v. Intergroove Tontrager Vertriebs GMBH , No. 10 Civ. 4493, 2011 WL 6026507, at *8 (E.D.N.Y. Nov. 30, 2011) (quoting Netherlands Shipmortgage , 717 F.2d at 736) (alteration in original). The entity’s activities cannot be “merely casual or occasional.…” United Arab Shipping Co. (S.A.G.) v. Al-Hashim , 176 A.D.2d 569, 570 (1st Dept. 1991); see also Maro Leather Co. v Aerolineas Argentinas , 161 Misc. 2d 920, 923 (Sup. Ct., App. Term 1st Dept. 1994) (“where a corporation’s activities within New York are merely incidental to its business in interstate and international commerce, BCL § 1312(a) is not applicable.”); Schwarz Supply Source v. Redi Bag USA, LLC , 64 A.D.3d 696, 696-97 (2d Dept. 2009) (same); Paper Mfrs. Co. v. Ris Paper Co., Inc. , 86 Misc. 2d 95, 98 (Civ. Ct., N.Y. Cty. 1976) (noting that if a “foreign corporation is engaged in local business on more than an isolated or accidental basis, it must comply with the statute” and obtain authorization before bringing suit). New York courts consider a number of factors, both quantitative and qualitative, when considering the entity’s activity in the State. Netherlands Shipmortgage , 717 F.2d at 738. Among the factors the courts consider are: (a) whether the entity maintains a physical presence or has employees located within the State ( Uribe v. Merchants Bank of New York , 266 A.D.2d 21, 21 (1st Dept. 1999) (Plaintiff was not doing business where it maintained no office or telephone listing, owned no real property and had no employees in the State); (b) the frequency and regularity of activities within the State ( G.P. Exports v. Tribeca Design , 147 A.D.3d 655, 656 (1st Dept. 2017) (a single business transaction within the State did not warrant the application of BCL § 1312(a)); and (c) the volume and nature of the activities within the State ( United Arab Shipping Company v. Al-Hashim , 176 A.D.2d 569 (1st Dept. 1991) (Plaintiff was doing business within the State where its New York office employed approximately 17 full-time employees, actively solicited business, conducted sales activities, negotiated and executed contracts, and generated substantial in-state revenue).  Merely entering into a single contract, engaging in an isolated piece of business, or engaging in an occasional undertaking will not suffice to invoke application of BCL § 1312. Netherlands Shipmortgage , 717 F.2d at 738; Von Arx , 52 A.D.2d at 1049 (the shipment of goods into New York from a foreign country for further shipment within or without the state is considered incidental to interstate and international commerce); Airline Exch., Inc. v. Bag , 266 A.D.2d 414, 415 (2d Dept. 1999) (having a bank account, occasionally using an office in the State, and engaging in three transactions in the State, did not support a finding that the business activity was so systematic and regular and essential to its corporate activities as to constitute doing business in New York); 8430985 Canada Inc. v. United Realty Advisors LP , 148 A.D.3d 428 (1st Dept. 2017) (an investment vehicle not subject to the registration requirements of BCL § 1312(a)). Similarly, “the solicitation of business and facilitation of the sale and delivery of merchandise incidental to business in interstate and/or international commerce is typically not the type of activity that constitutes doing business in the state within the contemplation of section 1312 (a).” Digital Ctr., S.L. v. Apple Indus., Inc. , 94 A.D.3d 571, 572 (1st Dept. 2012) (citation omitted). However, regularly and continuously entering the State to solicit, complete and manage sales to customers in New York may constitute doing business in the State. Highfill, Inc. v. Bruce & Iris, Inc. , 50 A.D.3d 742, 744 (2d Dept. 2008) (corporation was doing business where its regional vice president regularly sent employees to New York to manage “special sales,” and made approximately $6,600,000 in New York sales over several years). The party seeking dismissal under BCL § 1312(a) must show that the business activities within the State were so systematic and regular as to manifest continuity of activity. Maro Leather , 161 Misc. 2d at 923). Absent sufficient evidence to establish that a plaintiff is doing business in the State, “the presumption is that the plaintiff is doing business in its State of incorporation ... and not in New York.” Cadle Co. v. Hoffman , 237 A.D.2d 555 (2d Dept. 1997); see also Highfill , 50 A.D.3d at 744.  “ hether was doing business in New York” is determined by looking “at the time the action was commenced.” Remsen Partners, Ltd. v. Southern Mgmt. Corp. , No. 01 Civ. 4427, 2004 WL 2210254, at *3 (S.D.N.Y. 2004) (citation and internal quotation marks omitted) (alteration in original). Finally, if the foreign business entity is found to have been continuously and regularly conducting business in the State, the courts often refrain from dismissing the action. Tri-Term. Corp. v. CITC Indus., Inc. , 78 A.D.2d 609 (1st Dept. 1980). Instead, the courts conditionally grant the dismissal motion and provide the plaintiff with a reasonable time period to cure its deficiency under BCL § 1320. E.g. , Showcase Limousine, Inc. v Carey , 269 A.D.2d 133, 134 (1st Dept. 2000), mod in part , 273 A.D.2d 20 (1st Dept. 2000); Uribe , 266 A.D.2d at 22 (“In any event, the failure of plaintiff to obtain a certificate pursuant to BCL 1312 may be cured prior to the resolution of the action.); Credit Suisse Int’l v. URBI, Desarrollos Urbanos, S.A.B. de C.V. , 41 Misc. 3d 601, 604 (Sup. Ct., N.Y. County 2013) (ordering plaintiff to comply with BCL § 1312 within 60 days or face dismissal of its complaint). here.=">here."> On March 11, 2020, Justice Louis L. Nock of the Supreme Court, New York County issued a decision in Bilcare GCS, Inc. v. Spring Bio Solutions, Ltd. , 2020 NY Slip Op 30772(U) (Sup. Ct., N.Y. County Mar. 11, 2020) ( here ), in which the Court denied a motion to dismiss under BCL § 1312(a) on the grounds that the plaintiff was not “doing business” in New York.  Bilcare GCS, Inc. v. Spring Bio Solutions, Ltd. Background Bilcare arose from a dispute between two foreign corporations that were both in the business of procurement and supply of rare or difficult to obtain pharmaceutical goods. Plaintiff, Bilcare GCS, Inc. (“Bilcare”), is a Delaware corporation with its principle place of business in Pune, India, and Defendant, Spring Bio Solutions, Ltd. (“Spring Bio”), is an English corporation with its principle place of business in the United Kingdom.  On or about July 7, 2016, Bilcare received an order from non-party Reliant Specialty LLC (“Reliant”) for a supply of certain difficult to obtain pharmaceutical goods, which it was to supply to Reliant in New Britain, Connecticut. By a purchase order dated January 24, 2017 (the “Purchase Order”), Bilcare ordered the pharmaceutical goods from Spring Bio for $990,000. Spring Bio was to deliver the goods to non-party PHSE, USA (“PHSE”) in Elmont, New York. As alleged, Spring Bio delivered or attempted to deliver goods to PHSE that did not conform with the Purchase Order.  Bilcare brought the action in November 2018 to recover the damages for the portion of the order that was unfulfilled or non-conforming. On April 26, 2019, Spring Bio filed a pre-answer motion, seeking dismissal of the action pursuant to CPLR § 3211(a)(3) and BCL § 1312(a) on the grounds that Bilcare lacked capacity to bring the action because it is a foreign corporation doing business in New York and had failed to register with the New York Secretary of State. The Court denied the motion. The Court’s Decision The Court held that Spring Bio failed demonstrate that Bilcare was doing business in New York. At most, said the Court, “Defendant … demonstrated that Plaintiff shipped a single sale involving a pharmaceutical to a New York address, utilized a New York bank account, and engaged the services of a third-party company located within New York to receive mail and provide administrative services on its behalf in order to facilitate its business activities.” Slip Op. at *4. “Plaintiff’s use of a New York bank account and engagement of a New York company to receive mail and provide administrative services on its behalf do not constitute ‘doing business’ within the state.” Id. at *5 (citation omitted).  The Court noted that Bilcare did “not own or lease real property in the state, maintain an office, have employees in New York, or conduct advertising or marketing activities in the state.” Id. at *5. Instead, Bilcare took minimal steps to facilitate a transaction “between two foreign corporations” that “took place outside the state.” Id. “ he mere shipment of goods purchased outside the state into New York does not constitute ‘doing business’ for the purposes of BCL § 1312,” said the Court. Id. (citation omitted). Finally, the Court rejected Spring Bio’s contention that because Bilcare’s business “include the purchase, sale, and shipment of pharmaceuticals … that the State[] normally regulates ... even de minimis activity … should constitute ‘doing business’ for the purposes of the statute.” Slip Op. at *6. Such an argument, held the Court was “supported by neither fact nor law.” Id.   In any event, noted Justice Nock, “ he question of Plaintiff’s compliance or non-compliance with relevant portions of governing the sale and distribution of pharmaceuticals is not before this court at this time.” Id. Without evidence and briefing on the issue, the Court held that it could not make a ruling on the argument, especially since the record consisted solely of “the description of a single transaction set forth in the pleadings.” Id. Takeaway Motions to dismiss on BCL § 1312(a) grounds are fact intensive. As Bilcare shows, courts will examine the facts and circumstances to determine whether the business activities of a foreign business entity in New York are “systematic and regular,” intrastate in nature, and essential to the plaintiff’s business. A finding that the entity is not “doing business” in New York, as in Bilcare , can save the case from dismissal under BCL § 1312(a).

Most (lay) people think that a breach of contract action involves nothing more than a failure to perform some requirement in a contract. One need look no further than Wikipedia for such a definition. ( Here (“Breach occurs when a party to a contract fails to fulfill its obligation(s) as described in the contract.…”).) But as today’s post shows, there can be more to a breach of contract action than a simple failure to perform. Schum v. Spatorico , 2020 N.Y. Slip Op. 01816 (4th Dept. Mar. 13, 2020) ( here ). Implied-in-Fact Contracts This Blog has often written about contract issues; in particular, the enforceability of a contract whether it be oral or written. Sometimes, however, a contract can be implied from the conduct of the parties. Are implied-in-fact contracts enforceable? An implied-in-fact contract is a “not really a contract at all, but rather a legal obligation imposed to prevent a party’s unjust enrichment.” Universal Constr. Resources, Inc. v. New York City Hous. Auth. , 2018 N.Y. Slip Op. 32846 (U) (Sup. Ct., N.Y. County 2018), citing Parsa v. State of New York , 64 N.Y.2d 143, 148 (1984). It is an agreement created by the conduct of the parties and the circumstances surrounding their relationship: “A contract implied in fact may result as an inference from the facts and circumstances of the case, although not formally stated in words, and is derived from the ‘presumed’ intention of the parties as indicated by their conduct.” Jemzura v. Jemzura , 36 N.Y.2d 496, 503-504 (1975) (internal citations omitted). The elements of an implied-in-fact contract are the same as those of an express contract: “consideration, mutual assent, legal capacity and legal subject matter.” Maas v. Cornell Univ. , 94 N.Y.2d 87, 93-94 (1999). Like an express contract, an implied-in-fact contract requires a showing that there was a meeting of the minds . I.G. Second Generation Partners, L.P. v. Duane Reade , 17 A.D.3d 206, 208 (1st Dept. 2005). A contract implied-in-fact “is just as binding as an express contract … since in the law there is no distinction between agreements made by words and those made by conduct.” Id . A cause of action for breach of an implied contract is not viable where this is an express contract covering the same subject matter, as “the theories of express contract and of contract implied in fact … are mutually exclusive.” Bowne of New York, Inc. v. International 800 Telecom Corp. , 178 A.D.2d 138, 138 (1st Dept. 1991). here.=">here."> Causation and Damages Like any express contract, to prevail on a breach of an implied contract claim, the plaintiff must allege that his/her damages were proximately caused by the breach. JP Morgan Chase v. J.H. Elec. of N.Y., Inc. , 69 A.D.3d 802, 803 (2d Dept. 2010) (the elements of a breach of contract cause of action are “the existence of a contract, the plaintiff’s performance under the contract, the defendant’s breach of that contract, and resulting damages.”). In other words, the plaintiff must establish that the damages “were fairly within the contemplation of the parties when they entered into the contract.” Nitti v. Goodfellow , 256 A.D.2d 1082, 1083 (4th Dept. 1998). But what if the plaintiff demonstrates proximate causation but no monetary damages at the time of the breach? Can the plaintiff continue to pursue his/her breach of contract claim? In a word, yes. “A breach of contract accrues at the time of the breach even if no damage occurs until later.” Bratge v. Simons , 167 A.D.3d 1458, 1459-1460 (4th Dept. 2018) (internal quotation marks omitted); see also Ely-Cruikshank Co. v. Bank of Montreal , 81 N.Y.2d 399, 402 (1993). Moreover, since “ ominal damages are always available in breach of contract actions” ( Kronos, Inc. v. AVX Corp. , 81 N.Y.2d 90, 95 (1993) (citations omitted)), all the “elements necessary to maintain a lawsuit and obtain relief in court” are present at the time the claim accrues. Ely-Cruikshank , 81 N.Y.2d at 406 (dissenting op.). With these principles in mind, this Blog examines Schum v. Spatorico . Schum v. Spatorico Schum concerned a real estate transaction involving three pieces of property (“subject properties”). Plaintiff, an attorney, represented non-party Homestead NY Properties, Inc. (“Homestead”) in the transaction. The subject properties, as well as numerous other properties owned by Homestead, were encumbered by mortgages held by defendants’ client as well as a lien held by a third party. Defendants Derrick A. Spatorico and his law firm Pheterson Spatorico LLP represented the mortgagee. Homestead was separately represented with respect to the lien, as was the lienholder. When Homestead sought to sell the subject properties, the four attorneys entered into a series of negotiations, culminating in an agreement regarding the discharge of the mortgage and the release of the lien related to the subject properties. At the closing for the subject properties, plaintiff executed a guaranty providing that the lien on the subject properties would be released. Plaintiff thereafter forwarded to defendants two checks, one made out to defendant representing the money due to the mortgagee and one made out to the lienholder’s law firm in the amount of $1,500, i.e. , the amount due to the lienholder for the release of the lien. In the letter accompanying those checks, plaintiff wrote that he was enclosing them “in accordance with advice,” and asked that defendant forward to him the “completed discharge of mortgage” as well as “ he originals of the . . . release of judgment releasing the from the lien.” Defendant forwarded the relevant amount of money to the mortgagee and “caused the discharge to be filed.” With respect to the check to be forwarded to the lienholder, defendant let that check “s t on desk” because he believed a different agreement with respect to the lien release would ultimately be negotiated. Several weeks later, defendant, the attorney representing Homestead with respect to the lien and the attorney representing the lienholder reached a separate agreement related to the lien and all properties “owned by Homestead.” Defendant then approached plaintiff’s law partner and had that partner renegotiate the lien release check to make it payable to defendant’s law firm. Defendant later remitted those funds to his client, the mortgagee. The lien release was not recorded for the subject properties, presumably because the subsequent agreement did not release the lien on those properties. Maximum Income Partners, Inc. v. Webber , 158 A.D.3d 1090 (4th Dept. 2018), aff’g , 58 Misc. 3d 1218 , 2016 N.Y. Slip Op. 51903 (Sup. Ct., Monroe County 2016). Plaintiff, facing liability under the terms of his guaranty, commenced the action asserting causes of action for breach of contract, promissory estoppel and conversion. Defendants appealed from an order that, inter alia , denied their motion for summary judgment dismissing the complaint. The Fourth Department modified the order by granting defendants’ motion in part and dismissing the third cause of action (for conversion), and as modified affirmed the motion court’s order. The Court’s Ruling The Court held that defendants failed to establish their entitlement to judgment as a matter of law with respect to the breach of contract claim. The Court found that defendants’ “own submissions raise triable issues of fact whether there was an implied-in-fact contract between plaintiff and defendant requiring defendant to obtain the release for the properties.” Slip Op. at *1 (citation omitted).  The Court further held that “ efendants’ submissions also raise triable issues of fact as to “whether the damages alleged by plaintiff were proximately caused by defendant’s purported breach of the implied-in-fact contract.” Id . (citing Sirles v. Harvey , 256 A.D.2d 1227, 1228-1229 (4th Dept. 1998); Niagara Foods, Inc. v. Ferguson Elec. Serv. Co., Inc. , 111 A.D.3d 1374, 1376 (4th Dept. 2013), lv. denied , 22 N.Y.3d 864 (2014)). The Court observed that a supporting affidavit from the lienholder’s attorney explained that no release was given, in part, because the $1,500 fee was never received by the lienholder, thereby suggesting that more information was needed to decide the causation issue.   The Court rejected “defendants’ contention that the breach of contract cause of action be maintained due to the fact that plaintiff had not suffered any monetary damages at the time that he commenced this action.” Slip Op. at *1. In this regard, the Court noted that a breach of contract claim is viable “‘even if no damage occurs until later.’” Id. (quoting Bratge v. Simons , 167 A.D.3d 1458, 1459-1460 (4th Dept. 2018) (internal quotation marks omitted), and citing Ely-Cruikshank , 81 N.Y.2d at 402). The Court further noted that plaintiff “face liability under the guaranty for any damages sustained by the subsequent owners of the property as a result of the lien that remained on the property.” Id. Takeaway Although the Court’s decision and order is brief, it nonetheless highlights the tension between a contract manifested in writing and a contract manifested by the conduct of the parties. As Schum demonstrates, issues of fact often pervade the determination. For this reason, whether an implied-in-fact contract exists is determined on a case-by-case basis. Schum also highlights the contract principle that a breach of contract action can be viable even if the damages are not manifested until a later date. After all, “ ominal damages are always available in breach of contract actions” ( Kronos, Inc. v. AVX Corp. , 81 N.Y.2d 90, 95 (1993) (citations omitted)), as long as the “elements necessary to maintain a lawsuit and obtain relief in court” are present at the time the claim accrues. Ely-Cruikshank , 81 N.Y.2d at 406 (dissenting op.).

Limited liability companies afford their owners protection from personal liability and, therefore, are a common business form.  “In 1994, New York State enacted the Limited Liability Company Law (L 1994, ch 576, § 1). A limited liability company is an ‘unincorporated organization of one or more persons having limited liability for the contractual obligations and other liabilities of the business’ (Limited Liability Company Law § 102 ). Section 202 of the Limited Liability Company Law, enumerating the powers conferred on all limited liability companies, includes the right to sue and to access New York courts (Limited Liability Company Law § 202 ).”   Barklee Realty Co. v. Pataki , 309 A.D.2d 310 (1 st Dep’t 2003). Pursuant to Section 206 of the Limited Liability Company Law , within 120 days after a newly formed limited liability company’s initial articles of organization (“Articles”) become effective, the LLC must publish in two newspapers, a copy of those Articles or information similar to that contained within the Articles.  Limited Liability Company Law § 206(a); Barklee , 309 A.D.2d at 311.  “If within one hundred twenty days after its formation, proof of such publication, consisting of the certificate of publication of the limited liability company with the affidavits of publication of the newspapers annexed thereto has not been filed with the department of state, the authority of such limited liability company to carry on, conduct or transact any business in this state shall be suspended, effective as of the expiration of such one hundred twenty day period.”  Limited Liability Company Law § 206(a). As a result of the suspension, “the limited liability company will be precluded from ‘maintaining any action or special proceeding’ in any New York court ‘unless and until’ it complies with that requirement.” Barklee , 309 A.D.2d at 311.  However, such suspension “shall not limit or impair the validity of any contract or act of such limited liability company, or any right or remedy of any other party under or by virtue of any contract, act or omission of such limited liability company, or the right of any other party to maintain any action or special proceeding on any such contract, act or omission, or right of such limited liability company to defend any action or special proceeding in this state, or result in any member, manager or agent of such limited liability company becoming liable for the contractual obligations or other liabilities of the limited liability company.”  Limited Liability Company Law § 206(a). In Small Step Day Care v. Broadway Bushwick Builders, L.P. , 137 A.D.3d 1102 (2 nd Dep’t 2016), the Court affirmed the dismissal of the compliant pursuant to CPLR 3211(a)(3) (lack of capacity to sue), noting that “since the plaintiff failed to comply with the publication requirements of Limited Liability Company Law § 206, it is precluded from bringing this action.”   Small Step , 137 A.D.3d at 1103 (citations omitted). On March 6, 2020, the Supreme Court of the State of New York, New York County, decided One Stone Lending LLC v. Alta Operations, LLC .  The plaintiff in One Stone loaned defendant $499,000 secured by a mortgage.  Upon defendant’s default, plaintiff commenced a mortgage foreclosure action and moved for summary judgment.  Defendant opposed the motion for summary judgment and cross-moved to dismiss the complaint based on plaintiff’s failure to comply with the publication requirements of Limited Liability Company Law § 206(a).  Plaintiff first attempted to satisfy its publication requirement upon receipt of defendant’s cross-motion and claimed to have completed the publication process by the time that the motions were orally argued. The One Stone court rejected plaintiff’s argument that its failure to satisfy the publication requirements of Limited Liability Company Law § 206(a) prior to the commencement of its foreclosure action was “not a jurisdictional defect that warrant dismissal.”  The court answered in the negative the question of “whether it can overlook the fact that when plaintiff started this case, it had not complied with section 206.”   In so doing, the court noted that a “review of the most recent amendment to shows that the legislature increased the number of publication days from four to six and reduced the time frame for an LLC to publish from eighteen months to twelve months (New York Bill Jacket, 2006 S.B. 6831, Ch. 44).  (Emphasis in original.) The goal was to make information about LLC’s ‘available to the public in a manner which reinforces the public’s  right to know the entities with which they are dealing’ and ‘to the benefit of consumers and other persons who do business in this state’ (id.).”  In addressing the concerns with plaintiff LLC’s conduct, the court stated: Clearly, the legislature requires LLC’s to publish with the intent to provide the citizens of this state with potentially helpful information about the entities with which they might be dealing.  This Court finds that these technical and cumbersome requirements cannot be overlooked simply because plaintiff decided to comply with the law only after Defendants pointed out plaintiff’s failure to meet its obligations.  Under these circumstances, it would make a mockery of the statute to allow plaintiff to maintain its case by complying with the law after starting a lawsuit and after Defendants pointed out this glaring omission. The fact is that plaintiff started a case when it did not have the capacity to do so.  It does not matter that plaintiff later may have rectified this error. Simply put, what would be the purpose of the legislature creating strict statutory requirements for LLCs to publish only for the courts to give a plaintiff a chance to comply if and when a defendant raises it as a defense?  This court cannot condone the LLC’s practice of ignoring the statute, unless and until it is caught, and then pretending it shouldn’t make a difference. (Emphasis in original.)

As readers of this Blog know, we often write about the financial exploitation of America’s seniors and vulnerable adults. ( E.g. , here ,  here ,  here and here .) According to the U.S. Department of Justice, financial exploitation of senior adults is one of the most frequently reported forms of elder abuse. Indeed, a recent survey from the North American Securities Administrators Association (“NASAA”) found that three in 10 state securities regulators had reported an increase in complaints from victims of financial fraud and exploitation. ( Here .)  As the incidence of exploitation and abuse increase, so do the costs to its victims. An oft-cited study by the MetLife Mature Market Institute, the National Committee for the Prevention of Elder Abuse, and the Center for Gerontology at Virginia Polytechnic Institute and State University, titled “Broken Trust: Elders, Family & Finances,” estimates that about one million seniors lose approximately $2.6 billion annually from financial exploitation and abuse. ( Here .) In 2011, MetLife updated its estimate to at least $2.9 billion. Other, more recent studies estimate the losses to exceed $36 billion a year, 12 times the MetLife estimate. Recently, Jeffrey M. Haber , one of the Firm’s co-founding partners, sat down with Larry Heller, CFP®, CPA of Heller Wealth Management ( here ), to discuss the problem of financial exploitation and abuse of the elderly and vulnerable and the types of trusted individuals who commonly engage in such behavior. The discussion can be found on Mr. Heller’s podcast here .  Readers of this Blog may also be interested in reading Mr. Heller’s article on the subject, which covers a number of points Mr. Haber discussed during the podcast. ( Here .)

On February 27, 2020, the Securities and Exchange Commission (“SEC”) announced ( here ) that it settled charges against Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network (collectively, “Wells Fargo”) for failing to supervise investment advisers and registered representatives who recommended single-inverse ETF investments to retail investors, and for lacking adequate compliance policies and procedures with respect to the suitability of those recommendations. The SEC ordered Wells Fargo to pay a $35 million penalty, which will be distributed to harmed investors. Single-inverse exchange-traded funds (“single-inverse ETFs”) are complex financial instruments that seek investment results that are the opposite of the performance of an index for a stated trading period, typically one day. When held longer than a day, particularly in volatile markets, investors may experience large and unexpected losses – i.e. , single-inverse ETFs will lose money when the level of the index is flat. Even if the index performance is zero percent, the single-inverse ETF based on that index will lose money. Single-inverse ETFs can lose money even if the level of the index falls. For this reason, single-inverse ETFs may not be suitable for all investors and should be used only by knowledgeable investors who understand the risk.  In June 2009, FINRA issued Regulatory Notice 09-31 (the “Notice”), which Wells Fargo received, reminding securities firms of their sales practice obligations in connection with single-inverse and other non-traditional ETFs. Among other things, the notice provided that “recommendations to customers must be suitable and based on a full understanding of the terms and features of the product recommended” and that “firms must have adequate supervisory procedures in place to ensure that these obligations are met.” The notice also advised that most “inverse ETFs ‘reset’ daily, meaning that they are designed to achieve their stated objectives on a daily basis. Due to the effect of compounding, their performance over longer periods of time can differ significantly from the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time.” The notice cautioned, “inverse and leveraged ETFs typically are not suitable for retail clients who plan to hold them for more than one trading session, particularly in volatile markets.” The notice therefore advised firms to establish an appropriate supervisory system, and train registered persons on these products and the factors that would make such products suitable or unsuitable for certain investors. In August 2009, FINRA and the SEC issued a joint alert, which Wells Fargo also received, highlighting the risk associated with holding non-traditional ETFs, including single-inverse ETFs, for weeks, months or years. On April 13, 2012, Wells Fargo updated its compliance policies and procedures to include certain volatility and other ETFs. Wells Fargo’s 2012 policies and procedures provided that single-inverse ETFs are speculative trading vehicles and generally not suitable for investors who intend to hold them as long-term positions. Wells Fargo’s 2012 policies and procedures stated that non-traditional ETFs that reset daily typically should not be held more than one trading session or as a long-term investment. The policies and procedures subjected single-inverse ETFs to additional suitability requirements. Specifically, the policies and procedures required financial advisors to determine the suitability of the product for the client considering, among other things, the characteristics and risks of non-traditional ETFs; the client’s investment experience and familiarity with complex investment products; the client’s financial ability and willingness to absorb potentially significant losses; and the client’s ability and intent to actively monitor and manage the investment on a daily basis. The 2012 policies and procedures required financial advisors to have a reasonable belief that the client was capable of understanding the complexities of the product, including the consequences of seeking periodic inverse investment results, and that the single-inverse ETFs performance may not track the underlying index over periods longer than a day. The 2012 policies and procedures further provided that single-inverse ETFs may be appropriate as part of a sophisticated investment strategy but should be closely monitored by the financial advisor. In 2012, Wells Fargo received information indicating that its policies and procedures were not as robust as those of certain other large brokerage and investment advisory firms, which had procedures such as: reviewing products held long term; requiring financial advisors to complete training; and providing risk disclosure notices to investors.  At the time, Wells Fargo did not require training for its financial advisors and supervisors about single-inverse ETFs and Wells Fargo’s related policies and procedures nor did it adopt any other process to sufficiently educate them about the products and their risks. In May 2012, Wells Fargo Advisors, LLC, Wells Fargo FiNet, and Wells Fargo Investments, LLC, were sanctioned by FINRA and paid over $2.7 million in fines and restitution for conduct that occurred before July 2009. FINRA disciplined these Wells Fargo entities for (1) failing to establish a reasonable supervisory system and written procedures to monitor the sale of non-traditional ETFs; (2) failing to provide adequate formal training and guidance to registered representatives and supervisors regarding non-traditional ETFs; and (3) certain Wells Fargo registered representatives making unsuitable recommendations of non-traditional ETFs to certain customers with conservative risk tolerances. At the time of the settlement with FINRA, Wells Fargo publicly asserted it “ha enhanced its policies and procedures and s confident that it ha appropriate supervisory processes and training to meet regulatory responsibilities and clients’ investment needs.” However, as noted by the SEC, significant shortcomings remained with the firms’ policies and procedures relating to single-inverse ETFs. From April 2012 through September 2019, the SEC found that Wells Fargo’s policies and procedures were not reasonably designed to prevent and detect unsuitable recommendations of single-inverse ETFs ( here ). The SEC also found that Wells Fargo failed to supervise its employees’ recommendations regarding single-inverse ETFs and did not adequately train them concerning those products. The SEC further found that some Wells Fargo brokers and advisers did not fully understand the risk of losses these complex products posed when held long term. As a result, certain Wells Fargo investment advisers and registered representatives made unsuitable recommendations to certain clients to buy and hold single-inverse ETFs for months or years. According to the SEC, a number of these clients were senior citizens and retirees who had limited incomes and net worth, and conservative or moderate risk tolerances. “Firms must maintain effective compliance and supervisory programs to ensure that the securities they recommend are suitable for their clients,” said Antonia Chion, Associate Director of the SEC Enforcement Division. “As a result of Wells Fargo's failure to meet these important obligations, some of its employees recommended complex instruments to retail investors who did not understand the risks involved.” Without admitting or denying the findings, Wells Fargo agreed to pay a $35 million penalty and distribute the funds to certain clients who were recommended to buy single-inverse ETFs and suffered losses after holding the positions for longer periods. The SEC order also censured Wells Fargo and required Wells Fargo to cease and desist from committing or causing any future violations of the federal securities laws at issue in the proceeding. Takeaway “Inverse exchange-traded funds (ETFs) seek to deliver inverse returns of underlying indexes.” (Steven Nickolas, The Risks of Investing in Inverse ETFs , Investopedia (Aug. 29, 2019) ( here ).) “To achieve their investment results, inverse ETFs generally use derivative securities, such as swap agreements, forwards, futures contracts and options.” ( Id. ) “Inverse ETFs are designed for speculative traders and investors seeking tactical day trades against their respective underlying indexes.” ( Id. ) As shown by the SEC’s order in Wells Fargo, inverse ETFs are not suitable for investors having modest incomes and net worth, having conservative or moderate risk tolerances and lacking prior investing experience with complex products. Without proper training and supervision, these investors are susceptible to substantial losses to their portfolios – in many instances, losses to their life’s savings.

Endorsements from the rich and famous, such as movie and television stars, professional athletes, and musicians, can be found on TV, radio, and social media. Virtually any product or service can be endorsed by a celebrity. Sometimes the endorsement concerns investment opportunities. But, as the Securities and Exchange Commission (“SEC” or the “Commission”) has warned, “a celebrity endorsement does not mean that an investment is legitimate or that it is appropriate for all investors.” ( Here .)  For this reason, investors should not rely on celebrity endorsements when making an investment decision. Moreover, celebrity endorsements may be unlawful if they do not disclose the nature, source, and amount of compensation paid, directly or indirectly, by the company in exchange for the endorsement.  A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws.  Celebrities making such endorsements may also be liable for violations of the anti-fraud provisions of the federal securities laws, for participating in an unregistered offer and sale of securities, for making false and misleading statements in connection with the sale of securities, and for acting as unregistered brokers. Celebrity endorsements of initial coin offerings (“ICOs”), in which companies raise money by selling digital tokens instead of shares, have become increasingly common. The hype surrounding Bitcoin has caused the SEC to publicly warn that celebrity promotions could be unlawful if the compensation paid to the celebrity was not disclosed. In 2018, the SEC charged boxer Floyd Mayweather and music producer DJ Khaled with failing to disclose that they were compensated for promoting ICOs. ( Here .) Mayweather agreed to pay $300,000 in disgorgement, a $300,000 penalty, and $14,775 in prejudgment interest to settle the charges with the Commission. Khaled agreed to pay $50,000 in disgorgement, a $100,000 penalty, and $2,725 in prejudgment interest. In addition, Mayweather agreed not to promote any securities, digital or otherwise, for three years, and Khaled agreed to a similar ban for two years. These were the SEC’s first cases to charge touting violations involving ICOs. On February 27, 2020, the SEC announced (here) that it settled charges against the movie actor Steven Seagal (“Seagal”) for failing to disclose payments he received for promoting an investment in an ICO conducted by Bitcoiin2Gen (“B2G” or the “Company”), an international online company.  Seagal, who served as “brand ambassador” for B2G, agreed to pay $314,000 in disgorgement and penalties in connection with the settlement. From approximately February 12, 2018 through March 6, 2018 (the “Relevant Period”), Seagal promoted, on Twitter and Facebook, an ICO by B2G in which the Company offered and sold digital tokens (“B2G tokens”) on the Ethereum blockchain. At the time, Seagal had approximately 107,000 Twitter followers and 6.7 million Facebook followers. The Company described B2G tokens as “the next generation of Bitcoin.” According to B2G, the Company was conducting an ICO to raise capital to build an “ecosystem” that would allow users to trade B2G tokens, provide wallet staking, and trade altcoins and fiat currencies, all “on a secure, comprehensive platform.” Participants in the ICO invested Bitcoin, U.S. Dollars, Euros, or made payments via credit card in exchange for B2G tokens. B2G’s marketing materials contained numerous statements that the B2G tokens would rise in value as a result of the efforts of B2G and its agents, and that, at a minimum, investors would receive a guaranteed return each month. B2G’s marketing materials also highlighted that the Company and its agents would ensure a secondary trading market for B2G tokens after the ICO, noting the ability for investors to liquidate and trade B2G tokens on digital-asset platforms following the token sale, including its own secondary trading platform. B2G’s marketing materials further emphasized the purported expertise of B2G’s management. Pursuant to a contract between Seagal and the entity controlling B2G (the “Endorsement Agreement”), Seagal was promised $250,000 in cash and $750,000 worth of B2G tokens in exchange for his promotion of B2G. Consistent with the Endorsement Agreement, on February 12, 2018, B2G announced ( here ) that Seagal would endorse its ICO. The press release quoted Seagal as saying: “I endorse this opportunity wholeheartedly . . . I am excited about the management, and especially about the secure blockchain, underlying mining technology, and safeguards.” The press release did not disclose that Seagal was being paid for the promotion. Section 17(b) of the Securities Act of 1933 makes it unlawful for any person to promote a security without fully disclosing the receipt and amount of consideration paid for such promotion. Shortly thereafter, Seagal began promoting B2G’s ICO on social media by posting or authorizing his agents to post at least nine touts. The Company paid Seagal approximately $157,000 for these promotions. Seagal did not, however, disclose in his posts any information about the fact or amount of compensation he received, or was to receive, from B2G for making the promotions. Seagal’s promotion of the B2G ICO occurred more than six months after the SEC issued the DAO Report of Investigation indicating that virtual tokens or coins sold in ICOs may be securities, and thus, subject to the federal securities laws ( here ). Seagal’s promotion of the B2G ICO also occurred nearly four months after the SEC’s Division of Enforcement and Office of Compliance Inspections and Examinations issued a public statement reminding market participants that any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion, and that a failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws ( here ). In March 2018, the Company received a cease-and-desist order from the state of New Jersey for “fraudulently offering unregistered securities in violation of the Securities Law.” ( Here .) The order noted that B2G’s press release about Seagal did not disclose the nature, scope or amount of compensation paid to Seagal for his promotion of the investment. “ nvestors were entitled to know about payments Seagal received or was promised to endorse this investment so they could decide whether he may be biased,” said Kristina Littman, Chief of the SEC Enforcement Division’s Cyber Unit. “Celebrities are not allowed to use their social media influence to tout securities without appropriately disclosing their compensation.” Without admitting or denying the SEC’s findings, and to settle the charges, Seagal agreed to pay $157,000 in disgorgement, which represented his actual promotional payments, plus prejudgment interest, and a $157,000 penalty. In addition, Seagal agreed not to promote any securities, digital or otherwise, for three years. The SEC’s order can be found here . Takeaway Celebrity endorsements are a fact of life. Investors should be aware that the celebrity endorser is most likely being compensated for the endorsement, no matter how unbiased the pitch may appear.  For this reason, investment decisions should not be based solely on an endorsement by a famous person or other individual.  If an investor is relying, in whole or in part, on a particular endorsement or recommendation, he/she should learn more about the relationship between the celebrity and the company and consider whether the recommendation is independent or a paid promotion. Investors should be fully informed about the opportunity they are investing in. In short, investors should conduct their own research before making investments.