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On March 20, 2018, the United States Supreme Court decided Cyan, Inc. v. Beaver County Employees Retirement Fund , 138 S. Ct. 1061, 1069 (2018), in which it unanimously held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) does not strip state courts of subject-matter jurisdiction over class actions involving claims exclusively brought under the Securities Act of 1933 (the “1933 Act”), and does not allow for the removal of those cases to federal court. This Blog wrote about the decision here . Among the issues we discussed that could arise in the wake of the decision was the possibility that defendants would be subject to parallel securities litigation in federal court: Class action plaintiffs asserting claims only under the 1933 Act will most likely file their complaints exclusively in state court. After Cyan , such exclusivity could subject defendants to litigating 1933 Act cases in state court while at the same time litigating in federal court Exchange Act claims arising under substantially the same facts and circumstances as the 1933 Act claims. At the time of the article, we noted that Cornerstone Research had found that this phenomenon had already been happening, albeit on a small scale. < Here =">Here" (noting="(noting" that="that" there="there" were="were" seven="seven" Act="Act" actions="actions" pending="pending" in="in" state="state" court="court" since="since" 2014,="2014," all="all" of="of" which="which" had="had" parallel="parallel" federal="federal" court).="court)."> One year later, parallel 1933 Act litigation has materially increased. According to a study by Stanford Securities Litigation Analytics, at the request of Professional Liability Underwriting Society, titled “State Section 11 Litigation in the Post- Cyan Environment” (the “White Paper”) ( here ), “ n the year since Cyan was decided, 26 Section 11 cases have been filed in state courts, compared to 10 cases filed in the prior year.” Of those cases, “48% … have been filed in both federal and state courts—meaning 48% of defendants have faced litigation for the same alleged violations in both state and federal court simultaneously.” Id . In the three years prior to Cyan , defendants only faced parallel litigation in 16% of the cases. Id . Recently, Justice Barry R. Ostrager of the Supreme Court, New York, Commercial Division, was faced with a motion to stay an action arising under Section 11 of the 1933 Act “in favor of a subsequently filed and unquestionably more comprehensive federal action” involving “broader issues and multiple classes of shareholders.” Hoffman v. AT&T Inc. , 2019 N.Y. Slip Op. 31811(U), at **1, 3 (Sup. Ct. N.Y. County, June 21, 2019) ( here ). As discussed below, the Court denied the motion. Hoffman v. AT&T Inc. Background Hoffman is a securities class action brought on behalf of the former shareholders of Time Warner Inc. (“Time Warner”), who alleged violations of the 1933 Act in connection with AT&T Inc.’s (“AT&T”) June 2018 acquisition of Time Warner (the “Acquisition”). Slip Op. at *1. In order to acquire Time Warner, AT&T issued the putative class 1.185 billion shares of new AT&T stock pursuant to a registration statement and prospectus (collectively, the ‘Registration Statement’) that, Plaintiff alleged, failed to disclose material deterioration in AT&T’s DirecTV and DirecTV Now business. Id . On February 7, 2019, Plaintiff, Robert Hoffman (“Hoffman”), filed a complaint in New York Supreme Court asserting claims under Sections 11, 12(a)(2), and 15 of the 1933 Act “on behalf of all persons who acquired AT&T common stock pursuant or traceable to the issued in connection with” the Acquisition. Plaintiff alleged that the “Registration Statement touted yearly and quarterly growth trends in AT&T’s Entertainment Group segment, particularly Video Entertainment, including quarterly subscriber gains in its DirecTV Now service sufficient to offset any decrease in traditional satellite DirecTV subscribers, such that AT&T was experiencing an ongoing trend of total video subscriber ‘Net Additions’”, but that, “by the time of the Acquisition, AT&T’s reported ‘Net Additions’ growth trend was already reversing into a severe ‘Net Loss’”. Plaintiff requested that the Court certify a class action, award damages and reasonable costs and expenses, and order “such other equitable or injunctive relief as deemed appropriate by the Court.” On April 10, 2019, “the Court granted on consent a motion to designate” lead counsel “for the proposed class.” Slip Op. at *2. On May 7, 2019, lead counsel filed a First Amended Class Action Complaint, together with discovery requests. Id . On April 1, 2019, plaintiff, Melvin Gross (“Gross”), filed a complaint in the United States District Court for the Southern District of New York, alleging violations of both the 1933 Act and the Securities Exchange Act of 1934 (the “1934 Act”), Gross v. AT&T Inc. , No. 19 Civ. 2892 (S.D.N.Y.) (Caproni, J.) (the “Federal Action”). Like the Hoffman action, the Gross action asserted claims under Sections 11, 12(a)(2), and 15 of the 1933 Act against the same defendants, on behalf of the same putative class, based on the same allegations of wrongdoing ( i.e. , that the “Registration Statement touted . . . that AT&T was experiencing an ongoing trend of total video subscriber ‘Net Additions’”, but that “by the time of the Acquisition, AT&T’s reported ‘Net Additions’ growth trend was already reversing into a severe ‘Net Loss’”), and seeking the same relief ( i.e. , certification as a class action, an award of damages and reasonable costs and expenses, and “such other and further relief as th Court may deem just and proper”). In addition, Gross asserted claims under Sections 10(b) and 20(a) of the 1934 Act on behalf of an additional class of persons who “purchased or acquired AT&T securities between October 22, 2016 and October 24, 2018”, and alleged additional misstatements and omissions not in the Registration Statement.  Thus, the Federal Action asserted “broader claims on behalf of classes of variously situated Time Warner and AT&T shareholders.” Pursuant to the Private Securities Litigation Reform Act (“PSLRA”), the federal court is considering motions by at least five sets of plaintiffs to be appointed lead or co-lead plaintiff. The Court’s Decision Justice Ostrager noted that prior to the establishment of the Commercial Division, courts evaluating a motion to stay securities litigation often placed great weight on the action that would provide the most comprehensive disposition – most generally the parallel federal action. Slip Op. at *2, citing Barron v. Bluhdorn , 68 A.D.2d 809 (1st Dept. 1979). The Court observed that this was so even when the first-filed action was in the Supreme Court. Id .   Justice Ostrager explained that the rationale behind “ Barron and its progeny is that where there is a substantial overlap between the parties and issues and relief sought in both state and federal courts, staying the state court case would avoid the waste of judicial resources, potential inconsistent rulings, and duplication of effort.” Id . This was especially so given the perception that the federal courts “have a greater familiarity with securities law.” Id . That changed, held the Court, with the creation of the Commercial Division and the United States Supreme Court’s decision in Cyan . No longer should the reasoning of Barron and its progeny be “mechanically applied<,> ” said the Court. Id . at *3. [Ed. Note: CPLR § 2201 provides that, “ xcept where otherwise prescribed by law, the court in which an action is pending may grant a stay of proceedings in a proper case, upon such terms as may be just.”  Despite its apparent broad scope, CPLR § 2201 “has been limited by decision.” Hope’s Windows v. Albro Metal Prods. Corp. , 93 A.D.2d 711, 712 (1st Dept. 1983). Thus, “ is appropriate to stay an action in deference to another only where the determination in the other will resolve all of the issues in the stayed action and the judgment on one trial will dispose of the controversy in both actions. The possibility or actuality of two trials is of no importance.” Mt. McKinley Ins. Co. v. Corning Inc. , 33 A.D.3d 51, 58-59 (1st Dept. 2006). In considering a motion for a stay under CPLR § 2201, courts consider the following factors: (i) whether there is substantial overlap between the parties, issues, and relief requested; (ii) where a more complete disposition may be obtained; (iii) which court has greater familiarity with the issues; (iv) whether a stay will avoid waste of judicial resources, the potential for inconsistent rulings, and duplication of effort; (v) whether plaintiffs have demonstrated that they would be prejudiced by a stay; and (vi) which action was commenced first and whether discovery has been completed. Asher v. Abbot Labs. , 307 A.D.2d 211, 211-12 (1st Dept. 2003). In addition, New York courts consider whether to apply the first-filed rule – that is “the court which has first taken jurisdiction is the one in which the matter should be determined and it is a violation of the rules of comity to interfere.” In re Topps Co., Inc. S’holder Litig. , 2007 WL 5018882, at *3 (Sup. Ct., N.Y. County June 8, 2007).] Free of the mechanical application of Barron and its progeny, Justice Ostrager held that it was not appropriate to stay the Hoffman action in favor of the Gross action: Here, a New York plaintiff has initiated discrete claims on behalf of Time Warner shareholders that can be well on the way to judicial resolution while five sets of plaintiffs lawyers jockey for control of a federal court action that includes claims on behalf of individuals who are not members of the state court class as well as the members of the state court class. The liability issues in a 1933 Act case are, if anything, less complex than issues the Commercial Division resolves every week. Defendants are free to test the merits of plaintiff<’> s claims before this Court, which is familiar with the issues in this case, and there is no reason to believe that the merits of plaintiff<’> s claims cannot be resolved as efficiently and, perhaps, more expeditiously than the 1933 Act claims asserted in the federal action because the likelihood is that more than one set of counsel will be appointed to represent differently situated shareholders in the federal action and the pleadings in the federal court may not be fixed for an extended period of time. Slip Op. at *3. The Court also floated the possibility that Judge Caproni could stay litigation of the 1933 Act claims in the Gross action under the Colorado River Abstention Doctrine: “because the federal action involve broader issues and multiple classes of shareholders, the federal court may consider staying the 1933 Act claims in the federal action in favor of this earlier filed action.” Id. , citing Krieger v. Atheros Communications, Inc. , 776 F. Supp. 2d 1053, 1057-63 (N.D. Cal. 2011) (staying state law claims under the Colorado River Doctrine while allowing 1934 Act claims to proceed). [Ed. Note: Under the Colorado River Abstention Doctrine, a federal court may abstain from exercising its jurisdiction in favor of parallel state proceedings where doing so would serve the interests of “ ise judicial administration, giving regard to the conservation of judicial resources and comprehensive disposition of litigation.” Colorado River Water Conservation Dist. v. United States , 424 U.S. 800, 818 (1976). Colorado River and its progeny set forth seven factors, that, although not exclusive, are relevant to determining whether it is appropriate to stay proceedings: (1) whether the state court first assumed jurisdiction over property; (2) inconvenience of the federal forum; (3) the desirability of avoiding piecemeal litigation; (4) the order in which jurisdiction was obtained by the concurrent forums; (5) whether federal law or state law provides the rule of decision on the merits; (6) whether the state court proceedings are inadequate to protect the federal litigant's rights; and (7) whether exercising jurisdiction would promote forum shopping. Id . at 870; Krieger , 776 F. Supp. 2d at 1057. “Exact parallelism” between the state and federal actions is not required; it is enough if the two actions are “substantially similar.” Krieger , 776 F. Supp. 2d at 1057, quoting Nakash v. Marciano , 882 F.2d 1411, 1416 (9th Cir. 1989). “These factors should be weighed in a ‘pragmatic, flexible manner with a view to the realities of the case at hand’ and ‘with the balance heavily weighted in favor of the exercise of jurisdiction.’”   Id ., quoting Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp. , 460 U.S. 1, 16, 21 (1983). Courts have cautioned that the existence of a substantial doubt as to whether the state proceedings will resolve the federal action generally precludes the granting of a stay pursuant to Colorado River . Krieger , 776 F. Supp. 2d at 1058, citing Intel Corp. v. Advanced Micro Devices, Inc. , 12 F.3d 908, 913 (9th Cir.1993).] “In short,” concluded the Court, “the ‘first filed’ rule must have some vitality in a post- Cyan world. Otherwise, 1933 Act cases could never proceed in state court whenever a subsequently filed federal court action asserts claims in addition to 1933 Act claims.” Takeaway In the wake of Cyan , there has been an uptick in the number of cases in which defendants face parallel actions involving the same or substantially the same subject matter and requested relief. In New York, motions to stay a state court securities action in favor of a substantially similar federal securities action have been met with mixed results. Compare Hoffman with Reaves v. Kessler , 2017 WL 2482948, at *5 (Sup. Ct., N.Y. County June 8, 2017) (in a pre- Cyan case, the court stayed the state action, holding “Because the federal court has exclusive jurisdiction over the … claims under the Exchange Act, the federal court will provide a more complete disposition of the claims. A stay avoids the risk of inconsistent rulings, duplication of effort, and waste of judicial resources.”), and In re Qudian Sec. Litig. , 2018 WL 6067209, at *2 (Sup. Ct., N.Y. County 2018) (post Cyan , staying 1933 Act class action pending resolution of federal securities action). In addition to a stay motion, defendants can seek to enjoin the state action in federal court under the All Writs Act and the Anti-Injunction Act. See White Paper at 15. However, the likelihood of success seems dubious. Two such motions were made prior to Cyan . Id . Both were denied. Id . and id . at n.30 (explaining the injunctive relief under both acts). Defendants can also seek abstention under the Colorado River Abstention Doctrine, as suggested by Justice Ostrager, though it seems unlikely defendants would avail themselves of this option. While Justice Ostrager left the door open to revisit the decision if developments in the federal action “provide sufficient cause”, it is unclear to what developments the Court is referring. Perhaps he is referring to the possibility that settlement discussions involving all claims could begin in the federal action, requiring a stay of the state action during such discussions.  Or, that it becomes apparent the putative class in the state action will be prejudiced by having two sets of lead plaintiffs and lead counsel litigating their claims – e.g. , the class representative in the state action is found to be conflicted or has some other disabling reason for not being able to adequately represent the putative class, plaintiffs in both actions incur excessive and duplicative fees that reduce any class recovery, and two sets of putative class representatives advancing materially inconsistent case strategies. In any event, it remains to be seen whether “developments in the federal action provide sufficient cause for Court to revisit the disposition of motion to stay proceedings in action.…” Slip Op. at *4. This Blog will continue to monitor the developments in the Hoffman

Since the early 20th century, a plaintiff alleging fraud in New York can recover only the actual pecuniary loss sustained as a result of the misrepresentation or omission, i.e. , the plaintiff’s out-of-pocket damages. Reno v. Bull , 226 N.Y. 546 (1919); see also Continental Cas. Co. v. PricewaterhouseCoopers, LLP , 15 N.Y.3d 264 (2010). The damages recoverable under the out-of-pocket rule are intended to compensate plaintiffs for what they lost because of the fraud, not for what they might have gained. See Lama Holding v. Smith Barney , 88 N.Y.2d 413, 421 (1996); Clearview Corp. v. Gherardi , 88 A.D.2d 461, 468 (2d Dept. 1982) (“the defrauded party is entitled solely to recovery of the sum necessary for restoration to the position occupied before the commission of the fraud”) (citations omitted). The rule not only prohibits the recovery of lost profits or lost business or investment opportunities ( see Foster v. Di Paolo , 236 N.Y. 132, 134 (1923)), but also pain and suffering damages that are often sought in other tort actions. Williams v. Mann , 143 A.D.3d 813 (2d Dep’t 2016). Notably, however, “out of pocket considerations do not … prevent recovery of other consequential damages proximately caused by reliance upon the misrepresentation.” Clearview , 88 A.D.2d at 468 (citations omitted). Therefore, a plaintiff may recover “expenditures which would not otherwise have been incurred” had s/he not relied on the false information. Id . When the misrepresentation or omission is willful, wanton, or malicious, a plaintiff may be entitled to punitive damages. Chase Manhattan v. Perla , 65 A.D.2d 207, 211 (4th Dept. 1978). However, to recover such damages, the plaintiff must demonstrate that the purpose of seeking punitive damages is to “not only … punish the defendant but to deter him, as well as others who might otherwise be so prompted, from indulging in similar conduct in the future.” Walker v. Sheldon , 10 N.Y.2d 401,404 (1961). On June 27, 2019, the Appellate Division, First Department, affirmed the dismissal of fraud-based claims because the plaintiff failed to allege an “actual pecuniary loss” resulting from the alleged fraud. Sapienza v. Becker & Poliakoff , 2019 N.Y. Slip Op. 05218 (1st Dept. June 27, 2019). A copy of the decision can be found here . Background Sapienza involved allegations of, among other things, legal malpractice and fraud. The case arose from the Defendant law firm’s representation of Total Office Planning Services, Inc. (“TOPS”) in connection with the wind down of the business by its two equal shareholders, Francis Sapienza (“Sapienza”) and James Fenimore (“Fenimore”). In addition to TOPS, Sapienza and Fenimore were the sole and equal members of F&J Realty Enterprises LLC (“F&J”), a realty holding company that acquired an office cooperative unit in Manhattan. In or about 2014, Sapienza’s health began to deteriorate. According to the amended complaint, as Sapienza’s health worsened in 2014, Fenimore and his son, James Fenimore Jr., formed Office Solutions Group LLC (“OSG”) and Office Solutions Installation LLC (“OSI”) with the assistance of the Defendant law firm, Becker & Poliakoff (“B&P”). Plaintiff maintained that shortly after their formation, OSI and OSO generated approximately $4.4 million dollars in revenues; by the end of 2015, that number increased to $22 million dollars. Plaintiff alleged that the revenues were generated from customers who were diverted to OSI and OSO from TOPS. Relevant to the First Department’s decision, Plaintiff alleged that B&P failed to disclose the details of the work that it performed for Fenimore prior to and/or after Sapienza retained B&P, including, but not limited to, the formation of OSI and OSG. Plaintiff maintained that the omission was a material and ongoing fraud with the intent of inducing Sapienza to retain B&P and sign a letter of intent that defined the relationship between Fenimore and Sapienza in advance of a formal Plan of Dissolution in which TOPS’s assets would be accounted for and distributed. Plaintiff further maintained that B&P’s alleged fraud provided Fenimore with an opportunity to direct clients to OSI and OSG and allowed him the ability to divide TOPS’s and F&J’s assets for his benefit. Finally, Plaintiff alleged that as a consequence of the alleged fraud, Plaintiff sustained millions of dollars in lost business opportunities and surreptitiously transferred client assets. Defendants moved to dismiss the amended complaint, which the motion court granted. Plaintiff appealed. The First Department’s Decision In a short decision, the First Department held that the motion court properly dismissed the amended complaint because, among other reasons, Plaintiff failed to plead out-of-pocket damages. In that regard, the Court found that “ he alleged ‘lost opportunity’ damages too speculative to support a recovery, since a plaintiff cannot be compensated under a fraud cause of action ‘for what might have gained.’” Slip Op. at *1, quoting Connaughton v. Chipotle Mexican Grill, Inc. , 29 N.Y.3d 137, 142 (2017) (internal quotation marks omitted). Takeaway In Connaughton , relied upon by the Sapienza court, the Court of Appeals explained that under the out-of-pocket damages rule, damages should compensate the plaintiff “for what lost because of the fraud,” not “what might have gained.” 29 N.Y.3d at 142. Consequently, “there can be no recovery of profits which would have been realized in the absence of fraud.” Id . (citations omitted). The Court underscored this point by noting that it had “consistent refus to allow damages for fraud based on the loss of a contractual bargain, the extent, and, indeed, … the very existence of which is completely undeterminable and speculative.” Id . at 142-143, quoting Dress Shirt Sales v. Hotel Martinique Assoc. , 12 N.Y.2d 339, 344 (1963). In following Connaughton , the Sapienza Court made it clear that a plaintiff alleging fraud cannot recover lost opportunity damages. Such damages are too speculative to be quantified. Thus, the plaintiff in Sapienza could only recover for what she lost because of the alleged fraud, not for what she might have gained ( i.e. , lost opportunity damages).

Arbitration is an alternative form of dispute resolution where the parties voluntarily agree that a neutral, private person will resolve any legal disputes between them, instead of a judge or jury in a court of law. Rent-A-Ctr., W, Inc. v. Jackson , 561 U.S. 63, 67 (2010) (noting that “arbitration is a matter of contract”). In business and commercial transactions, arbitration is the preferred means of resolving disputes. It is encouraged and recognized as the public policy of the State of New York. Matter of Smith Barney Shearson v. Sacharow , 91 N.Y.2d 39, 49 (1997) (citations and quotation marks omitted). Id . Consequently, courts will interfere as little as possible with the agreement of consenting parties to submit their disputes to arbitration. Id . at 49-50. (citations omitted). Since arbitration is a “creature of contract” ( Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc. , 252 F.3d 218, 224 (2d Cir. 2001)), only signatories to a contract containing an arbitration agreement can be compelled to arbitrate. TBA Global, LLC v. Fidus Partners, LLC , 132 A.D.3d 195, 202 (1st Dept. 2015). Consequently, “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. Communications Workers of Am. , 475 U.S. 643, 648 (1986) (quoting Steelworkers v. Warrior & Gulf Nav. Co. , 363 U.S. 574, 582 (1960)). Not surprisingly, whether the parties are bound by an arbitration agreement and whether they agreed to submit their dispute to arbitration are hotly contested questions. The person(s) who will resolve these questions is dependent upon the agreement at issue. As a general matter, questions of arbitrability are decided by a court. However, the parties to an arbitration agreement can agree to delegate questions of arbitrability to an arbitrator. MetLife v. Buscek , 919 F.3d 184, 189 (2d Cir. 2019) (“In general, what is determinative for deciding whether the arbitrability of a dispute is to be resolved by the court or by the arbitrator is the arbitration agreement”).  When the parties agree to delegate the question of arbitrability to an arbitrator, the parties must clearly and unmistakably express their intent to do so. Howsam v. Dean Witter Reynolds, Inc. , 537 U.S. 79, 83 (2002). In the absence of such a clear and unmistakable expression of intent, the presumption favors the courts deciding arbitrability. First Options of Chicago, Inc. v. Kaplan , 514 U.S. 938 (1995). Recently, the United States Supreme Court held that, when the parties have agreed to submit the question of the arbitrability to an arbitrator, the courts must respect and enforce that contractual agreement. Henry Schein Inc. v. Archer & White Sales, Inc. , 139 S.Ct. 524 (2019). Consistent with this holding, the Second Circuit recently observed that “parties are free to enter into a binding contract by which either party can compel the other to have every aspect of a future dispute between them, including its arbitrability, determined by arbitrators.”   MetLife , 919 F.3d at 190, citing Rent-A-Ctr. , , 561 U.S. at 66, 69 (finding that an arbitration agreement giving the arbitrators “exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this contract” empowered the arbitrators to resolve arbitrability of an unconscionability claim). The foregoing rules were intended to guard against “the risk of forcing parties to arbitrate a matter that they may well not have agreed to arbitrate.” Howsam , 537 U.S. at 83-84. “Were the courts to cede to arbitrators resolution of the arbitrability of the dispute (absent the clear and unmistakable agreement of the parties to that effect), this would incur an unacceptable risk that parties might be compelled to surrender their right to court adjudication, without their having consented.” MetLife , 919 F.3d at 190, citing First Options , 514 U.S. at 945. Accordingly, in the absence of an arbitration agreement that clearly and unmistakably provides for the issue of arbitrability to be decided by the arbitrator, the question whether the dispute is subject to an arbitration agreement “is typically an issue for judicial determination.” Id. , quoting Granite Rock Co. v. Int’l Bhd. of Teamsters , 561 U.S. 287, 296 (2010) (internal citation and quotation marks omitted). Recently, Justice Joel M. Cohen of the Supreme Court, New County, Commercial Division, addressed the foregoing principles in deciding to stay a FINRA arbitration. Lek Sec. Corp. v. Elek , 2019 N.Y. Slip Op. 31770(U) (Sup. Ct., N.Y. County June 14, 2019) ( here ). Background On March 22, 2019, Respondent, Istvan Elek (“Elek”), commenced an arbitration before FINRA against LekUS, Lek Holdings Limited, Charles Lek and Samuel Lek. Elek sought, among other things, compensatory damages, punitive damages and attorney’s fees in connection with his claim that LekUS improperly froze his account and deducted fees therefrom pursuant to a contractual right of indemnification. The dispute arose in July 2014, when Elek opened a brokerage account with Lek Securities UK Limited (“LekUK”). Elek used the account to trade microcap securities. His relationship with LekUK was governed by LekUK’s Client Agreement Form and Terms of Business (“Terms of Business Agreement”). The Terms of Business Agreement contained an indemnity provision that required Elek to indemnify and hold LekUK harmless from any losses, claims or expenses incurred by virtue of LekUK’s performance of services on Elek’s behalf. Between May 2015 and December 2016, Elek engaged in 11 microcap transactions with shares of Cannabis Science, Inc. (“CBIS”). Elek acquired his CBIS shares on his own and purchased the shares pursuant to stock purchase agreements that he prepared. He did not use LekUK or LekUS to negotiate these transactions. Upon the deposit of the CBIS shares in his account at LekUK, Elek indicated that the shares were not registered with the Securities and Exchange Commission (“SEC”) and that he nevertheless wanted to sell his stock in the United States. LekUK then indicated to LekUS that LekUS could anticipate an order (from LekUK) to sell unregistered securities in the United States. Once LekUS satisfied itself that the stock could be sold pursuant to a valid exemption from registration, LekUS deposited the stock in its account at Depository Trust & Clearing Corporation and credited the account of LekUK. Upon receiving the credit from LekUS, LekUK credited Elek’s account and the stock was reflected in his LekUK account statement. On or about October 31, 2018, Elek contacted Charles Lek at LekUK and requested that his account be closed. Thereafter, on November 26, 2018, FINRA filed an enforcement action against LekUS and Samuel Lek (the “FINRA Action”). The FINRA Action alleged, in pertinent part, that LekUS failed to investigate suspicious activity with regard to CBIS trading, including (1) failing to investigate trades involving shares obtained from the conversion of debt instruments, which FINRA alleged did not contain stock conversion features; (2) failing to conduct an inquiry to determine whether the shares qualified for a resale exemption pursuant to SEC Rule 144; and (3) failing to determine whether the holding period relied on by the customer could relate back to the date the debt at issue was acquired.   The FINRA Action related to transactions that occurred from July 17, 2015 to June 30, 2016, a time period in which Elek was actively trading CBIS shares through his account at LekUK. All of Elek’s trades allegedly fit the pattern of activity identified by FINRA as suspicious – i.e. , they involved conversions of debt to CBIS stock and relied on SEC Rule 144 resale exemptions. On November 26, 2018, Charles Lek notified Elek that LekUK intended to enforce the indemnity provision of the Terms of Business Agreement to cover LekUK’s anticipated expenses and obligations to LekUS stemming from the FINRA Action and from an allegation that Elek failed to abide by the Applicable Rules. Based on these indemnity claims, LekUK had frozen Elek’s account and notified Elek of its intent to deduct applicable costs and counsel fees. Petitioners initiated the action, pursuant to CPLR § 7503(b) and the Federal Arbitration Act (9 U.S.C. § 1 et seq.), seeking to stay the FINRA arbitration that was commenced on March 22, 2019. Respondent cross-moved to compel arbitration. The Court granted the motion to stay and denied the motion to compel arbitration. The Court’s Decision The Court held that on the facts, “the evidence clearly show dispute not subject to mandatory FINRA arbitration.” Slip Op. at *2. The Court found that “the record demonstrate convincingly that the parties did not agree to arbitrate the claims asserted by Respondent.” Id . The Court explained that “ he only tether to FINRA arbitration is the assertion by Respondent that he is suing as a customer of LekUS, which is a member of FINRA. The record show that is not the case.” Id .  The Court went on to say that “Respondent’s customer relationship clearly was with Lek Securities UK Limited …, not with Petitioner Lek Securities Corporation …. Respondent’s attempt to shoehorn this into a customer dispute with Lek US is unavailing.” Id . Takeaway Lek is notable for its adherence to the proposition that the facts triggering mandatory arbitration before a FINRA arbitration panel must be clear and unmistakable. The fact that a broker-dealer is a FINRA member does not mean that there must be an arbitration before FINRA. The person against whom arbitration is sought to be compelled must be a “customer” within the meaning of FINRA’s Code of Arbitration Procedure for Customer Disputes.  Under FINRA Rule 12200, a customer is one who either purchases a good or service from a FINRA member or has an account with a FINRA member. Citigroup Glob. Market Inc. v. Abbar , 761 F.3d 268, 275 (2d Cir. 2014).  In Lek , Elek was not a customer of LekUS or the individual petitioners Charles Lek and Samuel Lek within the foregoing definition. The Lek Court found Citigroup to be “directly on point.”  There, the defendant purchased, through his private banker, complex options from a Citigroup affiliate in the United Kingdom. Although Citigroup personnel in New York provided advice to their UK counterpart ( e.g. , supporting risk management and due diligence services), the securities were held in the United Kingdom by the U.K. affiliate. The defendant maintained complete oversight over the funds and assets held in the options. When the value of the options declined, the defendant commenced a FINRA arbitration against the U.S.-based Citigroup. The Second Circuit held that the defendant was not a customer of Citigroup and stayed the arbitration before FINRA. Id . at 275. In so holding, the court found that the defendant never held an account with Citigroup in New York, and the services it purchased were from the U.K. affiliate. Id . at 276. Like the defendant in Citigroup , Elek opened his account with LekUK, not with LekUS. Slip Op. at *3. There was no evidence that Elek purchased any services from LekUS. Id . Instead, the record indicated “that the services performed by Lek US were on behalf of Lek UK, which paid for those services in a manner that was not based on transaction volume and thus not tied to Respondent’s trading.” Id . Thus, as in Citigroup , Lek stands for the proposition that unless the evidence demonstrates that the parties clearly and unmistakably intended to arbitrate their dispute, the presence of a mandatory arbitration requirement will not necessarily send the parties to arbitration. In the FINRA world, this means that customers of a broker-dealer must be a “customer” of that firm – i.e. , the person opened an account with the FINRA member; or the person purchased services from the FINRA member. As Lek teaches, in the absence of the foregoing, arbitration will not be triggered.

On June 17, 2019, the Securities and Exchange Commission (“SEC” or the “Commission”) announced ( here ) that KPMG LLP (“KPMG”) agreed to settle charges that it altered prior audit work after receiving information about inspections of the firm by the Public Company Accounting Oversight Board (“PCAOB”).  In connection with the settlement, KPMG agreed to pay a $50 million penalty and comply with a set of remedial measures to prevent the conduct at issue, including retaining an independent consultant to review and assess the firm’s ethics and integrity controls and its compliance with various undertakings. “High-quality financial statements prepared and reviewed in accordance with applicable accounting principles and professional standards are the bedrock of our capital markets.  KPMG’s ethical failures are simply unacceptable,” said SEC Chairman Jay Clayton.  “The resolution the Enforcement Division has reached holds KPMG accountable for its past failures and provides for continuing, heightened oversight to protect our markets and our investors.” “The breadth and seriousness of the misconduct at issue here is, frankly, astonishing,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “This settlement reflects the need to severely punish this sort of wrongdoing while putting in place measures designed to prevent its recurrence.” “This conduct was particularly troubling because of the unique position of trust that audit professionals hold,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. “Investors and other market professionals rely on these gatekeepers to fulfill a critical role in our capital markets.” Last year, the SEC alleged that former senior members of KPMG’s Audit Quality and Professional Practice Group – which is responsible for the firm’s system of quality control – improperly obtained and used confidential data and information belonging to the PCAOB to detect audit deficiencies at the firm.  The data and information obtained included lists of the specific audit engagements the PCAOB planned to inspect, the criteria the PCAOB used to select engagements for inspection, and the focus areas of the inspections. According to the SEC, those now-former partners sought and obtained the PCAOB data and information to address KPMG’s high rate of audit deficiency findings in prior inspections. Armed with the information and data, those partners oversaw a program to review and revise certain audit work papers after the audit reports had been issued to reduce the likelihood of deficiencies being found during inspections. here.=">here."> In addition, the SEC announced that numerous KPMG audit professionals were found to have cheated on internal training exams by improperly sharing answers and manipulating test results. The exams at issue related to continuing professional education and training mandated by a prior SEC order finding audit failures.  According to the SEC, those professionals, which included engagement partners, not only sent exam answers to other partners, but also solicited answers from and sent answers to their subordinates. After discovering the training-related misconduct, KPMG reported the matter to Commission staff and appointed a Special Committee of its Board of Directors to oversee an internal investigation. The Special Committee retained an outside law firm to investigate the extent of such conduct within the past three years and recommend employment actions to KPMG management as appropriate. Further, the SEC found that certain KPMG audit professionals manipulated an internal server hosting training exam to lower the score required for passing.  By changing a number embedded in a hyperlink, those professionals manually selected the minimum passing scores required for exams.  According to the SEC, at times, audit professionals achieved passing scores while answering less than 25 percent of the questions correctly. “The sanctions will protect our markets by promoting an ethical culture at KPMG,” said Melissa Hodgman, Associate Director of the SEC’s Enforcement Division.  “To that end, KPMG will take additional remedial steps to address the misconduct and further strengthen its quality controls, all of which will be reviewed and assessed by an independent consultant.” In addition to paying a $50 million penalty, KPMG is required to evaluate its quality controls relating to ethics and integrity, identify audit professionals who violated ethics and integrity requirements in connection with training examinations within the past three years, and comply with a cease-and-desist order.  The SEC’s order requires KPMG to retain an independent consultant to review and assess the firm’s ethics and integrity controls and its investigation. Notably, KPMG admitted the facts in the SEC’s order. It also acknowledged that its conduct violated a PCAOB rule requiring the firm to maintain integrity in the performance of a professional service and provides a basis for the SEC to impose remedies against the firm pursuant to Sections 4C(a)(2) and (a)(3) of the Securities Exchange Act of 1934 and Rules 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice. A copy of the SEC Order can be found here .

Rule 3213 of the CPLR – which permits a litigant to move for summary judgment in lieu of filing a complaint to streamline litigation in situations where the statute is applicable – provides: When an action is based upon an instrument for the payment of money only or upon any judgment, the plaintiff may serve with the summons a notice of motion for summary judgment and the supporting papers in lieu of a complaint. The summons served with such motion papers shall require the defendant to submit answering papers on the motion within the time provided in the notice of motion. The minimum time such motion shall be noticed to be heard shall be as provided by subdivision (a) of rule 320 for making an appearance, depending upon the method of service. If the plaintiff sets the hearing date of the motion later than the minimum time therefor, he may require the defendant to serve a copy of his answering papers upon him within such extended period of time, not exceeding ten days, prior to such hearing date. No default judgment may be entered pursuant to subdivision (a) of section 3215 prior to the hearing date of the motion. If the motion is denied, the moving and answering papers shall be deemed the complaint and answer, respectively, unless the court orders otherwise.  The Court of Appeals has described CPLR 3213 as a procedural device that “for the limited matters within its embrace, melded pleading and motion practice into one step, allowing a summary judgment motion to be made before issue was joined.”  Weissman v. Sinorm Deli, Inc. , 88 N.Y.2d 437, 443 (1996) .  The provision is “intended to provide a speedy and effective means of securing a judgment on claims presumptively meritorious … a formal complaint is superfluous and even the delay incident upon waiting for an answer and then moving for summary judgment is needless.”  Interman Indus. Products, Ltd. v. R.S.M. Electron Power, Inc ., 37 N.Y.2d 151, 154 (1975) (citations and internal quotation marks omitted).  “CPLR 3213 begins with the seemingly straightforward – though stringent – requirement that the action be based on an instrument for the payment of money only or a judgment … he prototypical example of an instrument within the ambit of the statute is of course a negotiable instrument for the payment of money – an unconditional promise to pay a sum certain, signed by the maker and due on demand or at a definite time.”  Weissman , 88 N.Y.2d at 443 – 44 (citations, internal quotation marks and footnote omitted). While CPLR 3213 is designed to simplify litigation, courts and commentators have noted that the application of CPLR 3213 could be problematic.  See Interman Indus. , 37 N.Y.2d at 155 (listing cases in which CPLR 3213 was accepted and rejected).  The Court of Appeals, in Interman Indus. noted: However, in order to qualify for CPLR 3213 treatment, it is incumbent upon the appellant to show that the accounts stated, on which its action is based, ‘(are) instruments for the payment of money only.’ The question of what constitutes an ‘instrument for the payment of money only’ may appear to be a vexing problem (4 Weinstein-Korn-Miller, NYCivPrac, par 3213.02a), and, according to one commentator, there is already a plethora of irreconcilable case law on this subject (Siegel, Practice Commentaries, McKinney's Cons.Laws of N.Y., Book 7B, CPLR 3213:3, p. 829). The Advisory Committee's reports do not define what is meant by ‘an instrument for the payment of money only’ nor is case law prior to the enactment of the CPLR informative, since CPLR 3213 had no earlier counterpart (4 Weinstein-Korn-Miller, NYCivPrac, par 3213.02a). Interman Indus. , 37 N.Y.2d at 154.  In Interman Indus. the Court of Appeals affirmed the ruling of the Appellate Division that “an account stated does not constitute an instrument of the payment of money only, and … that appellant may not avail itself of the procedure provided in CPLR 3213.”  Interman Indus. , 37 N.Y.2d at 152.  In Weissman , the Court of Appeals reversed the Appellate Division and determined that the indemnification agreement at issue “falls far short of satisfying the 3213 threshold requirement.”  Weissman , 88 N.Y.2d at 444. On June 18, 2019, the Appellate Division, First Department, decided SpringPrince, LLC v. Elie Tahari, Ltd. , and determined that the guaranty in defendant’s commercial lease fell within the purview of CPLR 3213.  The SpringPrince Court found that there was “no dispute that defendant guaranteed the payment of the tenant’s rent obligations, and that the tenant ceased making rent payments thereunder defendant is obligated under the guaranty for the tenant’s default under the lease.”  The Court rejected defendant’s argument that its obligations under the guaranty were “relieved” because “subsequent to the signing of the lease and guaranty, the tenant and the landlord signed an agreement to reduce the tenant’s rent obligation for a period of time, to which defendant alleges it did not consent.” The SpringPrince Court found that the “subsequent agreement between the tenant and the landlord reducing the tenant’s obligations did not discharge defendant’s obligations under the guaranty as it merely constituted leniency on the part of the landlord and did not create a new contract between the parties.” TAKEAWAY CPLR 3213 can be a useful device to streamline the duration and cost of litigation when used appropriately.  A significant amount of litigation, however, has resulted from plaintiffs that attempt to utilize CPLR 3213 in situations where the instrument sued upon was not the type contemplated by the statute.

Lawyers should be mindful that the signed writing aspect of CPLR 2104 can be satisfied by e-mails exchanged between counsel.  CPLR 2104 provides, in relevant part that: An agreement between parties or their attorneys relating to any matter in an action, other than one made between counsel in open court, is not binding upon a party unless it is in a writing subscribed by him or his attorney or reduced to the form of an order and entered. One of the first cases in New York to thoroughly analyze whether e-mails could satisfy the requirements of CPLR 2104 was Forcelli v. Gelco Corp. , 109 A.D.3d 244 (2 nd Dep’t 2013).  The Forcelli plaintiff sued defendant for damages after an auto accident.  After discovery, plaintiff moved for summary judgment and defendant cross-moved for summary judgment dismissing the Complaint.  On the same day as the motions were submitted, the parties appeared for mediation.  While a settlement was not reached at mediation, the discussions continued between plaintiff’s counsel and the adjuster for defendant’s insurance carrier.  In a phone conversation, plaintiff’s counsel orally agreed to accept a settlement offer made by the adjuster.  In a subsequent e-mail to plaintiff’s counsel, the adjuster memorialized the settlement, which required the insurer to make a payment of $230,000 in exchange for a release from plaintiff prepared by plaintiff’s counsel.  At the end of her e-mail the adjuster wrote “Thanks Brenda Greene.” On May 4, 2011, the Forcelli plaintiff executed a release.  On May 11, 2011, supreme court granted defendant’s cross-motion to dismiss the complaint.  The same day, defendant’s counsel served on plaintiff the order with notice of entry and plaintiff’s counsel, by fax and certified mail, sent defendant’s counsel the release and a signed stipulation of discontinuance.  The adjuster received the “settlement documents” and forwarded them to defendant’s counsel, who promptly “rejected” the release and stipulation of discontinuance.  Counsel asserted that a “settlement consummated under CPLR 2104 between the parties” and that defendant considered the matter dismissed by court’s order resolving the cross-motion. The Forcelli plaintiff moved to vacate the order dismissing the case arguing that the adjuster’s e-mail “constituted a binding written settlement agreement pursuant to CPLR 2104,” Forcelli, 109 A.D.3d at 247, and, in opposition, defendant argued that it did not.  The Forcelli defendant appealed from supreme court’s granting of plaintiff’s motion. In affirming the Forcelli supreme court, the Second Department noted that “ tipulations of settlement are judicially favored, will not lightly be set aside and are enforced with rigor and without a searching examination into their substance as long as they are clear, final and the product of mutual accord.”  Forcelli , 109 A.D.3d at 247-48 (citations and internal quotation marks omitted).  The Court then recognized that the settlement “must conform to the criteria set forth in CPLR 2104” and, since it was not made in open court, the settlement “must be in writing, signed by the party (or attorney) to be bound.”   Forcelli , 109 A.D.3d at 248 (citations and internal quotation marks omitted).  In addition, the Forcelli Court noted that “settlement agreements are subject to the principles of contract law for an enforceable agreement to exist, all material terms must be set forth and there must be a manifestation of mutual assent.” Forcelli , 109 A.D.3d at 248 (citations and internal quotation marks omitted). With that in mind, the Forcelli Court found that the adjuster’s e-mail set forth the material terms of the parties’ settlement.  The Forcelli Court, in rejecting defendant’s argument that the settlement agreement was invalid because neither defendant nor its counsel executed same, held that the adjuster was an agent with apparent authority to settle the case.  “A party will be bound by the acts of its agent in settlement negotiations and an agreement will be binding where the agent has either actual or apparent authority.  Forcelli , 109 A.D.3d at 248 (citations omitted). As to the “subscription” requirement, the Forcelli Court noted that while e-mails cannot be signed in the traditional sense, “the lack of ‘subscription’ in the form of a handwritten signature has not prevented other courts from concluding that an e-mail message, which is otherwise valid as a stipulation between parties, can be enforced pursuant to CPLR 2104.”  Forcelli , 109 A.D.3d at 248.  In reaching its decision, the Forcelli Court also recognized the “widespread use of e-mail” and how “unreasonable” it would be to determine that, due to the absence of a traditional signature, an e-mail could not conform to CPLR 2104.  The Court also noted that the adjuster purposely added her name at the end of the e-mail and that it was not automatically generated by the e-mail software.   Forcelli , 109 A.D.3d at 251. On May 29, 2019, the Second Department decided Herz v. Transamerica Life Ins. Co. , a case in which the Court enforced a settlement agreement based on e-mail exchanges between counsel.  Plaintiff in Herz brought an action against the insurance company that insured her late husband’s life.  After several months of negotiations, plaintiff’s counsel accepted an offer to settle the case for $12,500.  Plaintiff was to sign a stipulation prepared by her counsel and defendant was to prepare a release.  Plaintiff’s counsel, after some modifications, approved the release.  The following day, however, plaintiff’s counsel emailed defendant’s counsel and requested additional changes to the release that were not acceptable to defendant. Thereafter, the Herz plaintiff obtained new counsel, who advised defendant’s counsel that plaintiff would not execute a release and stipulation of discontinuance.  In opposition to defendant’s motion to enforce the settlement, plaintiff’s new counsel argued that there was no settlement between the parties.  The Herz Court affirmed supreme court’s finding that “the settlement, made via email exchanges entered into by counsel and the plaintiff’s prior counsel, was valid and enforceable” as was the direction “to execute the release exchanged between counsel and file a stipulation of discontinuance.” The Herz Court, relying largely on Forcelli found that: Here, the emails were subscribed by counsel, set forth the material terms of the agreement—the acceptance by the plaintiff's counsel of an offer in the sum of $12,500 to settle the case in exchange for a release in favor of Transamerica—and contained an expression of mutual assent. Contrary to the plaintiff's contention, the settlement was not conditioned on any further occurrence, such as the formal execution of the release and settlement. Therefore, the plaintiff's subsequent refusal to execute the release did not invalidate the agreement.  (Citations omitted.)

On November 18, 2018, this Blog wrote about Brown v. Cerebus Capital Management, LP , 2018 N.Y. Slip Op. 32782 (Sup. Ct., N.Y. County Oct. 30, 2018) ( here ). Brown involved the grant of employment compensation that plaintiffs claimed, among other things, was part of a fraudulent scheme to deprive them of their benefits. The gravamen of the article pertained to the difference between the standards for pleading fraud with particularity under the Civil Practice Law and Rules (“CPLR) and federal law ( e.g. , the Federal Rules of Civil Procedure and the securities laws) and the estoppel effect dismissal of a fraud claim under the latter has on a fraud claim brought pursuant to the former. On June 13, 2019, the Appellate Division, First Department, 2019 N.Y. Slip Op. 04772 (1st Dept. June 13, 2019) ( here ), affirmed the motion court’s decision on this point, holding that the claims arising from the dismissal of plaintiffs’ prior federal action were not collaterally estopped due to the differences between pleading fraud under the CPLR, on the one hand, and the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995, on the other hand: The claims that require scienter are not barred by collateral estoppel arising from the dismissal of plaintiffs’ prior federal action, because the standard for pleading scienter for federal securities fraud claims is more stringent than the standard for pleading scienter in New York state court ( see Williams v Citigroup, Inc. , 104 AD3d 521, 522 <1st dept 2013> ). Slip Op. at *1. The First Department also addressed the motion court’s holding that Brown’s claims were barred by a general release in the Repurchase Agreement. here).=">here)."> That document contained a provision in which Brown allegedly released all claims “arising from, on account of, related to or in connection with” defendants or her Profits Interests. The motion court held that Brown “completely, clearly, and unambiguously discharged all of the claims Brown … purport to assert against defendants.” The First Department reversed, holding that the release was not effective since defendants had not signed the agreement (as modified by Brown) in which the release was contained: Contrary to defendants’ contention, Brown did not release her claims. The purported release appears in a Repurchase Agreement that defendants Covis Pharmaceuticals, Inc. (CPI), Covis Management Investors US LLC (Management Investors US), and Covis US Holdings, LLC (Covis US) sent Brown. These defendants had not yet signed it when they sent it to her. Brown signed it but made a handwritten change. Hence, the document that she returned was a counteroffer and a rejection of the offer made by these defendants. None of the defendants signed the Repurchase Agreement as modified by Brown, so it was not a binding contract. Id . (citation omitted). The Court affirmed the motion court’s denial of defendants’ motion to dismiss the fraud claims. Slip Op. at *2. The Court noted that the claims were not based on a mere failure to perform under the agreements but, rather, were predicated on “specific misrepresentations of fact.” Id . at *1. Moreover, the Court rejected the argument that the merger clause barred the fraud claims. The Court found that the clause at issue was mere “boilerplate” and, therefore, not sufficiently specific to preclude a claim of fraudulent inducement. Id . citing Laduzinski v Alvarez & Marsal Taxand LLC , 132 A.D.3d 164, 169 (1st Dept. 2015). here=">here" and="and" >here.=">here."> Brown v. Cerebus Capital Management, L.P. , 2018 N.Y. Slip Op. 32782 (Sup. Ct., N.Y. County Oct. 30, 2018), can be found here . General Release, Contract, Fraud, Fraudulent Inducement, Merger Clause, Pleading Fraud with Particularity, CPLR, Federal Rules of Civil Procedure, Commercial Litigation, Business Litigation

Litigations often get settled before trial. When parties decide to settle their disputes, they typically agree to exchange mutual releases – i.e. , they agree to give up any claims they have, and may have, against each other.  By exchanging releases, the parties to a settlement are, therefore, securing for themselves, and those bound by the release, complete peace from future litigation involving the same subject matter in their dispute. Generally, a “release constitutes a complete bar to an action on a claim which is the subject of the release.” Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. de C.V. , 17 N.Y.3d 269, 276 (2011) (internal quotation marks and citation omitted). In fact, “a release may encompass unknown claims, including unknown fraud claims, if the parties so intend and the agreement is ‘fairly and knowingly made.’” Centro Empresarial Cempresa , 17 N.Y.3d at 276, quoting Mangini , 24 N.Y.2d at 566-567.  Thus, “if ‘the language of a release is clear and unambiguous, the signing of a release is a “jural act” binding on the parties.’” Id. , quoting Booth v. 3669 Delaware , 92 N.Y.2d 934, 935 (1998), quoting Mangini v. McClurg , 24 N.Y.2d 556, 563 (1969). “Although a defendant has the initial burden of establishing that it has been released from any claims, a signed release ‘shifts the burden of going forward . . . to the to show that there has been fraud, duress or some other fact which will be sufficient to void the release.’” Centro Empresarial Cempresa , 17 N.Y.3d at 276 (“A release may be invalidated, however, for any of the traditional bases for setting aside written agreements, namely, duress, illegality, fraud, or mutual mistake”) (internal quotation marks and citation omitted), quoting Fleming v. Ponziani , 24 N.Y.2d 105, 111 (1969). “A plaintiff seeking to invalidate a release due to fraudulent inducement must ‘establish the basic elements of fraud, namely a representation of material fact, the falsity of that representation, knowledge by the party who made the representation that it was false when made, justifiable reliance by the plaintiff, and resulting injury.’” Id. , quoting Global Mins. & Metals Corp. v Holme , 35 A.D.3d 93, 98 (1st Dept. 2006). A party that releases “a fraud claim may later challenge that release as fraudulently induced only if it can identify a separate fraud from the subject of the release.” Id . (citation omitted). “Were this not the case,” observed the Court of Appeals, “no party could ever settle a fraud claim with any finality.” Id . In Frenk v. Solomon , 2019 N.Y. Slip Op. 04654 (1st Dept. June 11, 2019) ( here ), the Appellate Division, First Department, applied the foregoing principles to affirm the dismissal of an action to recover certain art allegedly stolen during the Holocaust. Frenk v. Solomon Background here).=">here)."> Frenk involved the art collection of the Paul Westheim (“Westheim”), a Jewish art critic, who specialized in German expressionist art. In particular, the action involved five pieces in Westheim’s collection: Paul Klee’s Opus 18; Otto Mueller’s Drei Akte (also known as The Bathers); Max Pechstein’s Portrait of Paul Westheim (also known as Portrait of a Standing Man); Edgar Jene’s Plastische Imagination; and Erich Heckel’s The Violinist (collectively, “Five Works”). In 1933, Westheim fled Nazi Germany for Paris and left his collection with Charlotte Weidler (“Weidler”), an art dealer in Berlin. During World War II, Westheim fled from France to Spain, then Portugal. Ultimately, he settled in Mexico in 1941, where he met and was later married to Marianna Westheim-Frenk, plaintiff’s mother. He also corresponded extensively, and in code, with Weidler during the war; however, those communications terminated after the war when Westheim inquired about the whereabouts of his art collection. Westheim died in 1963. In 1973, Westheim-Frenk learned that Weidler had sold a painting from Westheim’s collection, the Portrait of Dr. Robert Freund, to a gallery in New York City. Westheim-Frenk commenced an action in the Supreme Court, New York County, against Weidler and others for damages and for “possession of all items of art collection” in Weidler’s custody (“1973 Action”). Westheim-Frenk also sought an accounting of Westheim’s art collection and “whatever sums of money found to be due . . . on the basis of said account.” Weidler filed a pre-answer motion to dismiss. Before the motion was decided or any discovery was exchanged, the parties agreed to discontinue the action “with prejudice” by stipulation, dated March 21, 1974. In connection with the settlement, Westheim-Frenk executed a broad release (“Release”) discharging Weidler, among others, of any claims that she had and may have had with respect to the art collection. The Release also specified that it could not be amended orally. No other documents set forth the terms of the settlement of the 1973 Action. In consideration for the Release, Westheim-Frenk received $7,500. In the current action, plaintiff, Westheim-Frenk’s daughter, alleged that, in August 2010, defendants admitted that they possessed (or, in the case of The Violinist, had possessed before its sale at auction in 1998) the Five Works. Plaintiff initiated the action in January 2013 seeking a judgment declaring her rightful ownership of the Five Works, replevin, and an accounting, as well as damages for unjust enrichment, conversion, and violation of both a bailment and a constructive trust. In December 2013, defendants filed a pre-answer motion to dismiss, which the motion court denied, except to the extent that plaintiff’s claim for breach of warranty of title was dismissed without prejudice. The First Department affirmed that decision, stating that “ iven plaintiff’s allegation raising the inference that the stipulation of discontinuance with prejudice and the general release of claims in were not intended to encompass the instant claims, and her allegations of fraudulent inducement raising equitable considerations,” dismissal without discovery would be premature. Frenk v. Solomon , 123 A.D.3d 416, 416 (1st Dept. 2014) ( here ). After discovery, defendants moved for summary judgment. The motion court granted the motion, holding, in part, that the Release barred the action. Here, the doctrines of contractual release and res judicata apply to the Release and 1974 stipulation of discontinuance. After filing a lawsuit involving “all items of art collection,” Ms. Westheim-Frenk chose to settle and discontinue the 1973 Action “with prejudice” on the advice of her New York counsel. Ms. Westheim-Frenk also contemporaneously executed the Release, supported by consideration, which bars “all manner of actions” against Ms. Weidler and Ms. Weidler's “successors and assigns.” By its terms, the Release applies to all actions Ms. Westheim-Frenk’s “heirs . . . can, shall or may have” involving “any matter, cause or thing whatsoever from the beginning of the world to the day of the date of these presents.” The motion court also rejected plaintiff’s contention that the Release applied to only one painting, the Kokoschka painting, Portrait of Dr. Robert Freund. The court found that the argument was not supported by sufficient admissible evidence. The motion court further rejected plaintiff’s argument that the Release was procured by fraud – i.e. , that there were no other pieces of artwork from Westheim’s collection. In this regard, the court held that the “alleged fraudulent misrepresentation was precisely the subject of the terminated 1973 Action: whether there were more artworks from Mr. Westheim’s collection” and, thus, insufficient to state a claim for a fraud separate from the release. Plaintiff appealed. The First Department unanimously affirmed. The First Department’s Decision The Court held that the “motion court correctly found that action … barred by the general elease and stipulation of discontinuance in the 1973 Action….” Slip Op. at *1. Like the motion court, the First Department found that “Plaintiff failed to present evidence that intended to release claims with regard to one single painting only.” Id . The Court explained that, “on its face, the elease encompasse all claims of any kind whatsoever, and the 1973 lawsuit sought the return of any and all works of art alleged to have been formerly owned by Westheim.” Id . The Court also held that “ laintiff failed to present evidence” demonstrating that the Release was procured by a fraud separate from the Release. Id . Lying about the whereabouts of the artwork was the subject of the complaint in the 1973 Action. Therefore, concluded the Court, the facts supporting the Release were the same as those that supported the alleged fraud: The claim of fraudulent inducement is supported by the allegations that Charlotte Weidler, Westheim’s former colleague, friend, and lover, had converted art entrusted to her by Westheim and lied about its whereabouts in the years after the Second World War. These allegations do not establish a fraud separate from the subject of the release but are the same facts as those alleged in the 1973 complaint. Id . (citations omitted). Moreover, the Court held that even if plaintiff did allege a fraud separate from the Release, her claims would still fail.  Plaintiff could not satisfy the reasonable reliance element of a fraud claim: “plaintiff cannot establish reasonable reliance upon any statements allegedly given by Weidler to Frenk-Westheim that Weidler had no other knowledge of the Westheim art collection, in view of the fact that Weidler had advised Frenk-Westheim’s counsel that she had additional works, but they were all either gifts from Westheim or purchased from him.” Id . (citation omitted). Takeaway General releases are viewed as any other contract provision. When they are clear and unambiguous, the courts will enforce them according to their terms. In Frenk , the Release was broad and encompassed any and all claims, known and unknown, concerning the 1973 Action. In light of the broad scope of the Release, Frenk serves as a reminder (and a warning) to practitioners to tailor their releases to the subject matter intended by the parties. Otherwise, a party challenging the release may find that it covered more than what was thought or intended.

Investing in the market or starting a business is hard. There are risks, of varying degrees, involved with such activities. Indeed, investors and entrepreneurs knowingly accept these risks in the hope of generating a high return on their investment. They do not, however, accept the risk that they are the victims of fraud. Unfortunately, anyone is susceptible to falling victim to a Ponzi scheme or a pyramid scheme. Ponzi schemes and pyramid schemes ensnare people of all ages and income levels, bilking investors/recruits out of their hard-earned money. For this reason, the Securities and Exchange Commission (“SEC” or “Commission”), the Federal Trade Commission and state Attorneys General actively seek to stop promoters of these fraudulent schemes. What is a Ponzi Scheme? “A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. With little or no legitimate earnings, Ponzi schemes require a constant flow of money from new investors to continue. Ponzi schemes inevitably collapse, most often when it becomes difficult to recruit new investors or when a large number of investors ask for their funds to be returned.” See SEC Spotlight, “SEC Enforcement Actions Against Ponzi Schemes” ( here ). Shutting down Ponzi schemes and holding the organizers accountable for such frauds is an important part of the SEC’s enforcement mission. In today’s post, this Blog looks at two SEC enforcement actions against Ponzi scheme organizers responsible for bilking investors out of tens of millions of dollars in collective losses. What is a Pyramid Scheme? A relative of the Ponzi scheme is the pyramid scheme. ( See Debra A. Valentine, “International Monetary Funds Seminar on Current Legal Issues Affecting Central Banks.” Here .)  A pyramid scheme differs from a Ponzi scheme in that “it revolves around continuous recruiting” to sustain itself, while a Ponzi scheme “has no product to sell and pays no commission to investors who recruit new ‘members.’” Id . As noted, in a Ponzi scheme, the promoter “collects payments from a stream of people, promising them all the same high rate of return on a short-term investment.” Id . The promoter “uses the money from new recruits to pay obligations owed to longer-standing members of the program.” Id . In effect, the Ponzi scheme operator is robbing Peter to pay Paul. Id . In contrast, “ pyramid scheme is an illegal investment scam based on a hierarchical setup.” ( See Investopedia.com here .)  In the classic pyramid scheme, “participants attempt to make money solely by recruiting new participants, usually where: he promoter promises a high return in a short period of time; o genuine product or service is actually sold; and he primary emphasis is on recruiting new participants.” ( See SEC.gov, here .) Promoters of a pyramid scheme often encourage investors to participate in the fraud through social media, company websites, group seminars, Internet advertising, YouTube videos, and other media. To lure recruits into the scheme, pyramid scheme promoters try very hard to make the operation look legitimate. But, as discussed below, they are not and ultimately collapse because the promoter cannot raise enough money from new investors to pay earlier ones. A pyramid scheme begins with an individual or a company who recruits investors, typically by promising high rates of return. As the earliest investors in the pyramid, these individuals typically receive high returns. These gains are paid for, however, by new recruits, not by a return on any real investment. Because returns are dependent upon investment by new recruits, ultimately the pyramid becomes too big for new recruits to fund returns for those at the top of the pyramid. For this reason, it is mathematically impossible for every investor in the pyramid to make money. For example, if each investor needs to recruit 10 people to recoup his/her initial investment, the bottom levels of the pyramid would have to recruit over one billion people to break even – i.e. , make back the money initially invested. See="See" N.Y.="N.Y." AG, “ Don’t="AG, “Don’t" Get="Get" Caught="Caught" in="in" a="a" Pyramid="Pyramid" Scheme .”="Scheme.”" Here.=">Here."> What is The Difference Between A Pyramid Scheme and A Multi-level Marketing Company? It is often difficult to tell the difference between a legitimate multi-level marketing program (“MLM”) and a pyramid scheme. Both share the same or similar business models of “multiple levels” of distributors and recruits. A legitimate MLM relies on a network of distributors and recruits who sell the company’s product. Think of companies like Amway, Tupperware, Herbalife, Avon, and Mary Kay. The only way to make money in a legitimate MLM is by selling the company’s product directly to the consumer or by managing a team of salespeople. Managers receive a percentage of the sales made by each recruit under their management and supervision. A legitimate MLM does not require the recruit to buy a starter kit from which the earlier investor receives a commission or a recruiting “bonus” or require mandatory training and a non-refundable membership fee. In short, a legitimate MLM does not require investors to recruit new ones to earn money; the business is focused on selling the company’s products. *          *          * Stopping pyramid schemes and holding their promoters accountable is also an important part of the SEC’s enforcement mission. In today’s post, this Blog looks at an SEC enforcement action against a pyramid scheme organizer responsible for bilking investors out of millions of dollars. SEC Seeks Injunctive Relief to Stop a Ponzi Scheme Run by a Recent College Graduate On June 3, 2019, the Securities and Exchange Commission (SEC) announced ( here ) that it filed an emergency action against a recent college graduate for operating a Ponzi scheme that targeted college students and young investors. The SEC is seeking, among other things, an asset freeze, a temporary restraining order, and preliminary and permanent injunctive relief. In its complaint ( here ), the SEC alleged that Syed Arham Arbab (“Arbab”) conducted a Ponzi scheme from a fraternity house near the University of Georgia campus in Athens, Georgia. Arbab allegedly offered investments in a purported hedge fund called “Artis Proficio Capital,” which he claimed had generated returns of as much as 56% in the prior year and for which investor funds were guaranteed up to $15,000. Arbab also allegedly sold “bond agreements”, which promised investors the return of their money along with a fixed rate of return. The SEC alleged that at least eight college students, recent graduates, or their family members invested more than $269,000 in these investments. According to the SEC, no hedge fund existed, Arbab’s claimed performance returns were fictitious, and he never invested the funds as represented. Instead, as money was raised, Arbab allegedly placed substantial portions of investor funds in his personal bank and brokerage accounts, which he used for his own benefit, including trips to Las Vegas, shopping, travel, and entertainment. Arbab also allegedly used portions of new investor money to pay earlier investors who had asked for their money back, the hallmark of a Ponzi scheme. Arbab even instructed some new investors to send their money – unwittingly – to existing investors through payment applications such as Venmo, Zelle, and Cash App, and misleadingly told them that the existing investors were either a “partner” or “manager” in the fund. “We allege that Mr. Arbab used his college affiliations to operate a Ponzi scheme that drained valuable resources from current and former students. This is a reminder that investors of all ages and experience levels—whether long-time investors or recent graduates investing funds from their first few paychecks—should carefully research investment opportunities and the people offering them,” said Richard R. Best, Regional Director of the SEC’s Atlanta Office. The SEC filed its complaint in the United States District Court for the Middle District of Georgia. The SEC charged Arbab, Artis Proficio Capital Investments LLC, and Artis Proficio Capital Management LLC, with violating the antifraud provisions of the federal securities laws. As noted, the SEC is seeking an order freezing certain assets of Arbab and his entities, as well as a temporary restraining order, preliminary and permanent injunctive relief, return of allegedly ill-gotten gains with prejudgment interest, and civil penalties. SEC Seeks Injunctive Relief to Stop Ponzi-Like Scheme by Real Estate Developer On May 23, 2019, the SEC announced ( here ) that it had filed an emergency action against Robert C. Morgan (“Morgan”), a New York residential and commercial real estate developer, and two of his entities, Morgan Mezzanine Fund Manager LLC and Morgan Acquisitions, LLC, with fraud for misappropriating investor funds. The SEC is seeking an asset freeze and other emergency relief. In its complaint ( here ), the SEC alleged that Morgan financed his development projects in different ways, including through sales of securities directly to more than 200 retail investors, many of whom invested through their retirement accounts. Morgan represented to investors that their money would be used to improve multifamily properties. Based on these representations, Morgan raised more than $80 million. As alleged in the SEC’s complaint, Morgan and his entities diverted investor funds to facilitate Ponzi scheme-like payments to earlier investors. In addition, the SEC alleged that Morgan improperly used more than $11 million in investor funds to repay an inflated, fraudulently obtained loan for an unrelated apartment complex. “In seeking this emergency relief, the SEC is acting to protect current and potential future victims of this elaborate scheme by halting Morgan’s fraud, which we allege involves the improper use of more than $25 million dollars in investor funds,” said Daniel Michael, Chief of the SEC's Division of Enforcement’s Complex Financial Instruments Unit. The SEC filed its complaint in the United States District Court for the Northern District of New York in Buffalo. The SEC charged Morgan and his two entities with violating the antifraud provisions of the federal securities laws. The SEC requested an order freezing Morgan’s assets and appointing a temporary receiver over the relevant funds. The SEC further sought permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, civil penalties, and a permanent receiver over the entities. here.=">here."> SEC Files Action Against an Alleged Pyramid Scheme Organizer Who Promised Investors High Returns in Cryptocurrency Fraud On the same day that the SEC announced the action against Morgan, the Commission announced ( here ) that it filed a civil injunctive action against Daniel Pacheco (“Pacheco”), a resident of San Clemente, California, and the alleged perpetrator of a multimillion-dollar pyramid scheme. In its complaint ( here ), the SEC alleged that from January 2017 through March 2018, Pacheco conducted a fraudulent, unregistered offering of securities through two California-based companies he controlled, IPro Solutions LLC and IPro Network LLC (collectively, “IPro”). IPro raised more than $26 million from investors by selling instructional packages that provided lessons on e-commerce. Investors also received “points” that could be converted into a digital asset known as PRO Currency. Investors who contributed additional funds could earn a mixture of cash commissions and additional convertible points by recruiting new investors into the IPro network. As alleged in the SEC’s complaint, however, IPro was a fraudulent pyramid scheme. IPro’s collapse was hastened by Pacheco’s fraudulent use of investor funds, which included, among other things, the all-cash purchase of a $2.5 million home and a Rolls Royce. Pacheco’s misappropriation accelerated the rate at which IPro became unable to pay the commissions and bonuses due its investors. The SEC further alleged that Pacheco’s offer and sale of IPro instructional packages constituted an unregistered sale of securities because the IPro instructional packages involved: (i) an investment in a pyramid scheme; and/or (ii) an investment in the PRO Currency digital assets, and therefore should have been registered with the SEC. Notably, alleged the SEC, no registration exemption applied to Pacheco’s offer and sale of IPro instructional packages. “We allege that Pacheco hid an old fraud under the guise of cutting-edge technology,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office. “He enticed investors by offering them the opportunity to speculate in cryptocurrency, when in fact he was simply operating a pyramid scheme.” The SEC’s complaint, filed in U.S. District Court for the Central District of California, charged Pacheco with violating Sections 5(a), 5(c), 17(a)(1) and 17(a)(3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and (c) thereunder.  The complaint also named seven relief defendants for the purpose of recovering investor proceeds in their possession. The SEC did not allege wrongdoing with respect to those relief defendants.

In Henry VI , William Shakespeare wrote, “ efer no time, delays have dangerous ends” - a quote apropos to a discussion of laches.  “The doctrine of laches is an equitable doctrine which bars the enforcement of a right where there has been an unreasonable and inexcusable delay that results in prejudice to a party.”  Skrodelis v. Norbergs , 272 A.D.2d 316 (2 nd Dep’t 2000). In Kverel v. Silverman (2 nd Dep’t May 29, 2019), the Appellate Division, Second Department, applied the doctrine of laches and dismissed plaintiff’s action in which he sought to enjoin the construction of a house being built on neighboring property. The simplified facts are as follows.  The plaintiff in Kverel owned property in Southampton.  The defendant was a contract vendee who ultimately purchased a lot (the “Defendant’s Lot”) on which he intended to construct a house that was situated between plaintiff’s house and the beach.  In 2010, defendant entered into a contract to purchase the Defendant’s Lot, which was undeveloped at the time.  Thereafter, plans for a house were prepared by an architect and defendant applied for a building permit.  Two months after the building permit was issued in May of 2012, plaintiff filed an administrative appeal with the Town Zoning Board of Appeals (the “ZBA”) in which the height of defendant’s proposed house was challenged. In August of 2012, in response to the appeal, defendant’s architect applied to amend the building permit and submitted revised building plans.  The application was approved.  In September of 2012, plaintiff withdrew his appeal to the ZBA because the revised plans and the amended building permit application “appear to be in substantial compliance with the Town Building and Zoning Code.”  The record reflected that despite the withdrawal of the ZBA appeal, defendant understood that plaintiff remained opposed to the construction and intended to urge that a restrictive covenant required plaintiff’s approval before a house could be constructed on Defendant’s Lot (the “Restrictive Covenants”). In December of 2012, defendant commenced an action in which he sought a declaratory judgment that plaintiff could not enforce the Restrictive Covenants.  The Restrictive Covenant action was resolved when the parties entered into a “so-ordered” stipulation (the “Stipulation”) in which the plaintiff consented to the entry of a judgment declaring that defendant is “entitled to build upon the Premises any single family residence for which obtained a building permit from the Town, whether the residence is the one currently planned by defendant or one larger and more extensive so long as it complied with Town law, ordinances, and regulations.”  (Internal brackets and ellipses omitted.) In April of 2013, defendant purchased the defendant’s lot from the contract vendor.  The building permit was amended several times thereafter. In August of 2014, after the parties could not agree on a deal to sell the Defendant’s Lot to the Plaintiff, construction began on the house.  In March of 2015, after another building permit amendment, plaintiff commenced an action to enjoin the construction of a home that plaintiff alleged violated Town Code.  Plaintiff also moved for a preliminary injunction preventing the construction of the top floor of the home.  Defendant cross-moved to dismiss the Complaint. Supreme court granted plaintiff’s motion for a preliminary injunction and denied defendant’s motion to dismiss and defendant appealed.  In reversing supreme court, the Second Department found that plaintiff’s actions were barred by the doctrine of laches.  The Court explained that: o establish laches, a party must show: (1) conduct by an offending party giving rise to the situation complained of, (2) delay by the complainant in asserting his or her claim for relief despite the opportunity to do so, (3) lack of knowledge or notice on the part of the offending party that the complainant would assert his or her claim for relief, and (4) injury or prejudice to the offending party in the event that relief is accorded the complainant.  The mere lapse of time without a showing of prejudice will not sustain a defense of laches. In addition, there must be a change in circumstances making it inequitable to grant the relief sought.  Moreover, as the effect of delay may be critical to an adverse party, delays of even less than one year have been sufficient to warrant the application of the defense. (Citations omitted.) The Second Department found that plaintiff’s action for injunctive relief was commenced almost three years after the first building permit was issued and defendant withdrew his ZBA appeal, two years after the Stipulation and six months after construction began on the home.  The Court also found that plaintiff had been aware since July of 2012 (and before the defendant purchased the property) that “defendant’s construction was in violation of the Town Code.”  The Court also found that while it was clear that plaintiff opposed the construction, he did not seek ZBA review or injunctive relief prior to the commencement of the underlying action.  The Court further found that subsequent to the plaintiff’s withdrawal of the ZBA appeal and the execution of the Stipulation, defendant knew that plaintiff would again urge that the construction was in violation of Town Code.  Finally, the Court found that defendant would be prejudiced by plaintiff’s “undue delay in challenging the construction.” In light of plaintiff’s delay in seeking to safeguard interests and failure to offer any viable reason for failure to act sooner, the doctrine of laches serves as a bar to this action.”  (Citations and internal quotation marks omitted.)

Sometimes a decision goes in a direction that the reader does not expect. Bashian & Farber, LLP v. Syms , 2019 N.Y. Slip Op. 04348 (2d Dept. June 5, 2019) ( here ), is such a case. Bashian involved what appeared to be a straightforward case concerning an alleged fraud and fraudulent conveyance in the context of a fee dispute between a law firm and its former client. While the case involved the elements of those claims, its holding focused on the concept of scheme liability – that is, liability premised on the knowing participation in a scheme to defraud, even where the participation did not involve all of the elements of a fraud claim (such as the making of a statement). Since scheme liability is not typically alleged in a common law fraud and fraudulent conveyance action, this Blog will take a closer look at Bashian in today’s post.    A Quick Primer on the Applicable Law Common Law Fraud To state a claim for fraud, a plaintiff must allege a material misrepresentation of fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 558 (2009). Notably, “ iability for fraud may be premised on knowing participation in a scheme to defraud, even if that participation does not by itself suffice to constitute the fraud.” Danna v. Malco Realty, Inc. , 51 A.D.3d 621, 622 (2d Dept. 2008). See also see CPC Intl. v. McKesson Corp. , 70 N.Y.2d 268, 286 (1987). Fraud allegations must be stated with particularity to satisfy CPLR 3016(b). Id . 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). Fraudulent Conveyance: DCL § 276 Under Section 276 of the DCL, “ very conveyance made … with actual intent … to hinder, delay, or defraud either present or future creditors, is fraudulent.…” To plead a claim under DCL § 276, the plaintiff “must allege that (1) the thing transferred has value of which the creditor could have realized a portion of its claim; (2) that this thing was transferred or disposed of by the debtor and (3) that the transfer was done with actual intent to defraud.” Brunner v. Estate of Lax , 47 Misc. 3d 1206(A) (Sup. Ct., N.Y. County 2015), aff’d , 137 A.D.3d 553 (2d Dept. 2016). Like a common law fraud claim, a claim under DCL § 276 must be pleaded with particularity. Syllman v. Calleo Dev. Corp. , 290 A.D.2d 209, 210 (1st Dept. 2002). The burden of proving actual intent is on the party seeking to set aside the conveyance. Marine Midland Bank v. Murkoff , 120 A.D.2d 122, 126 (2d Dept. 1986); see also ACLI Gov’t Sec., Inc. v. Rhoades , 653 F. Supp. 1388, 1394 (S.D.N.Y. 1987). Actual intent to defraud must be proven by clear and convincing evidence. Marine Midland Bank , 120 A.D.2d at 128; ACLI Gov’t Sec. , 653 F. Supp. at 1394. Since it is rarely susceptible to direct proof, actual intent is typically established through circumstantial evidence surrounding the allegedly fraudulent act. Id . Consequently, courts allow creditors “to rely on badges of fraud to support his case, i.e. , circumstances so commonly associated with fraudulent transfers that their presence gives rise to an inference of intent.” Wall St. Assoc. v. Brodsky , 257 A.D.2d 526, 529 (1st Dept. 1999) (internal quotation marks and citations omitted). Among the circumstances considered are: secrecy and haste in making the transfers; “a close relationship between the parties to the alleged fraudulent transaction; a questionable transfer not in the usual course of business; inadequacy of the consideration; the transferor’s knowledge of the creditor’s claim and the inability to pay it; and retention of control of the property by the transferor after the conveyance.” Id . See also Dempster v. Overview Equities, Inc. , 4 A.D.3d 495, 498 (2d Dept. 2004); United Parcel Service v. Jay Norris Corp. , 102 Misc. 2d 231, 233 (Sup. Ct., Nassau County 1979) (inference raised from the relationship of the parties to the transaction and the secrecy of the sale); Gafco, Inc. v. H.D.S. Mercantile Corp. , 47 Misc. 2d 661, 664 (Sup. Ct., N.Y. County 1965) (“Inadequacy of consideration, secret or hurried transactions not in the usual mode of doing business, and the use of dummies or fictitious parties are common examples of ‘badges of fraud.’”). A conclusory allegation that the plaintiff has been defrauded is not sufficient. Syllman , 290 A.D.2d at 210. Bashian & Farber, LLP v. Syms Background Plaintiffs are the former attorneys of the defendant Richard Syms (“Richard”). Beginning in 2010, plaintiffs represented Richard in a sharply contested probate proceeding. Plaintiffs alleged that in mid-2012, Richard stopped paying plaintiffs’ legal fees. Richard allegedly told plaintiffs that he would sell certain real property owned by him to pay the outstanding legal fees. According to plaintiffs, instead of selling the property and paying his legal fees as promised, in August and December 2011, Richard and his wife, defendant Ineva Syms (“Ineva”), transferred to Ineva solely, for nominal or no consideration, three jointly owned unimproved properties located at 113 Depot Hill Road, Amenia, N.Y. (the “113 Depot Hill Property”); 108 Depot Hill Road, Amenia, N.Y. (the, “108 Depot Hill Property”); and 221 North Salem Road, Lewisboro, N.Y. (the “221 North Salem Property”). Plaintiffs further alleged that on July 22, 2013, Richard and Ineva sold the 221 North Salem Property to a third party for more than $1.2 million. At the time, Richard allegedly had outstanding legal fees of approximately $239,142.25, but failed to make any payments. In October 2013, Richard and Ineva listed for sale a property known as 3313 Route 343, Amenia, N.Y. In March 2014, Ineva transferred, allegedly for no valuable consideration, the 108 Depot Hill Property, a property known as 199 North Salem Road, Lewisboro, N.Y. (the “199 North Salem Property”), and the 113 Depot Hill Property from her name into the Syms Family Revocable Trust dated March 11, 2014 (the “Trust”), for which she and Richard served as trustees. At the time of the second transfer, Richard allegedly owed plaintiffs $329,068.90 in legal fees. The 199 North Salem Property was later transferred from the Trust to Ruth Merns, Richard’s mother, for $1.00. In July 2014, plaintiffs commenced the action to recover, inter alia , on an account stated for legal fees and pursuant to Debtor and Creditor Law article 10 against Richard and Ineva, both individually and as trustees of the Trust, and the Trust. According to plaintiffs, Richard and Ineva transferred the various properties with the intent and purpose to hinder, delay, and defraud plaintiffs from collecting the indebtedness owed by Richard, and were part of a common plan, scheme, or conspiracy to defraud plaintiffs. Plaintiffs later amended the complaint to include other defendants alleged to have been involved in the alleged scheme to defraud. Defendants moved for summary judgment to dismiss the third and fourth causes of action of the amended complaint, which alleged fraud and fraudulent conveyance, respectively, against Ineva, both individually and as trustee, the fifth cause of action, which alleged unjust enrichment, against Ineva individually, and the third and fourth causes of action against the Trust and Richard, as trustee. As discussed in the motion court’s decision, defendants argued that the fraud and fraudulent conveyance claims against Ineva and the Trust should be dismissed because there were assets sufficient to satisfy a judgment if plaintiffs were to prevail. Defendants claimed that the transfers did not involve any element of fraud; that Richard was current in his payment of the legal fees not only at the time of the transfers but for a significant period thereafter; that Richard did not make himself insolvent or judgment proof with the transfers; and that plaintiffs knew that Richard had assets to satisfy any judgment entered against him. Thus, defendants contended that the fraud and fraudulent conveyance claims were without merit and should be dismissed. As to Ineva, defendants maintained, among other things, that the fraud claim against her did not identify a single representation that she made and otherwise was not pleaded with the requisite particularity. Plaintiffs opposed the motion. Plaintiffs argued that Ineva essentially admitted at her deposition that she and Richard created the Trust in order to avoid creditors such as plaintiffs, thereby admitting that they were participants in the effort to defraud plaintiffs. Plaintiffs relied on Richard’s representation that he had sufficient assets in the form of real property, that once liquidated he would use to satisfy his current, as well as anticipated future debts to plaintiffs. Based on that representation, plaintiffs continued to provide legal services to Richard. The motion court denied the motion determining, inter alia , that triable issues of fact existed as to whether defendants engaged in a fraudulent scheme to defraud creditors, including plaintiffs. Defendants appealed. The Second Department’s Decision The Second Department affirmed the motion court’s decision and order. The Court held that “defendants failed to establish their prima facie entitlement to judgment as a matter of law dismissing the third and fourth causes of action, which alleged fraud and fraudulent conveyance, respectively, insofar as asserted against Ineva, both individually and as trustee, Richard as trustee, and the Trust.” Slip Op. at *2. The Court found that although there were badges of fraud indicating that defendants had engaged in fraud and fraudulent transfers, there were nevertheless questions of fact concerning whether Ineva and Richard participated in a scheme to defraud Richard’s creditors: Here, Ineva’s deposition testimony confirmed that the various properties were transferred out of her and Richard’s joint names into her name solely, and later into the Trust, in an effort to shield those properties from potential creditors. Furthermore, by transferring the properties into Ineva’s name solely and then into the Trust, for which Richard and Ineva were the trustees, Richard and Ineva retained control over those properties. Retention of control of properties after a conveyance is regarded as an indication that the conveyance was fraudulent. In addition, Richard and Ineva sold the 221 North Salem property in July 2013 for $1,232,000, but failed to pay the outstanding debt owed to the plaintiffs. Thus, a triable issue of fact exists as to whether Ineva, both individually and as trustee, Richard as trustee, and the Trust, acting in concert, participated in a scheme to defraud Richard’s creditors. Id . Takeaway Bashian is notable for its reliance on scheme liability to affirm the motion court’s decision and order – that is, liability premised on the knowing participation in a scheme to defraud, even when that participation does not by itself suffice to constitute the fraud. CPC Intl. v. McKesson Corp. , 70 N.Y.2d 268, 286 (1987); Danna , 51 A.D.3d at 622; Kuo Feng Corp. v. Ma , 248 A.D.2d 168, 168-69 (1st Dept. 1998). While there are many issues of fact involved in the case, such as those identified by the motion court ( e.g. , the nature of the transfers of the properties, whether there was fair consideration for the transfers, whether Richard was solvent or made insolvent by the transfers; whether Richard and Ineva had the ability to satisfy a judgment, and whether there was intent to defraud), the focus of the case is on the participation of Ineva and the Trust in the alleged fraud and fraudulent conveyance. Thus, the lesson of Bashian is clear: when a complaint “describes a scheme — involving all the defendants — devised and executed for the specific purpose of defrauding” the plaintiff, then all the “parties to the underlying fraudulent conspiracy, , nonetheless, be liable for independent actions done in furtherance of it.” CPC Intl. , 70 N.Y.2d at 286, citing Dewey v. Moyer , 72 N.Y. 70, 80 (1878).

A forum selection clause is contractual provision that sets forth the location designated by the parties for dispute resolution. Such clauses can be found in virtually every type of contract imaginable, e.g. , employment agreements, commercial contracts, and purchase and sale agreements. Parties require forum selection clauses to reduce litigation expenses, avoid adverse laws, and mitigate the risks associated with unknown foreign judges and/or juries. Under New York law, “a contractual forum selection clause is documentary evidence that may provide a proper basis for dismissal pursuant to CPLR 321l(a)(l).” Landmark Ventures, Inc. v. Birger , 147 A.D.3d 497, 497 (1st Dept. 2017); see Lifetime Brands, Inc. v. Garden Ridge, L.P. , 105 A.D.3d 1011, 1012 (2d Dept. 2013) (affirming dismissal “pursuant to CPLR 3211 (a) (1) on the ground that the forum selection clause precluded commencement of the action in New York”). It is “prima facie valid and enforceable” unless the challenging party can show the forum selection clause “to be unreasonable, unjust, in contravention of public policy, invalid due to fraud or overreaching,” or “that a trial in the selected forum would be so gravely difficult that the challenging party would, for all practical purposes, be deprived of its day in court.” Molino v. Sagamore , 105 A.D.3d 922, 923 (2d Dept. 2013) (citation and internal quotation omitted). Forum selection clauses can be mandatory or permissive. The former requires the dispute to be litigated only in the designated venue, while the latter permits litigation in a particular venue but does not prohibit it in another jurisdiction. In interpreting forum selection clauses, courts apply the principles of contract construction. Such construction can be challenging where, as in Lilis Energy, Inc. v. Blackwell , 2019 N.Y. Slip Op. 31523(U) (Sup. Ct., N.Y. County May 29, 2019) ( here ), there are related agreements with forum selection clauses that designate different venues for dispute resolution. Lilis Energy, Inc. v. Blackwell Background Lilis involved an effort by plaintiff, Lilis Energy, Inc. (“Lilis”), to claw back certain stock and stock options that it awarded to Seth Blackwell (“Blackwell”), a former employee of the company, on the grounds that Blackwell had been fired for cause and, therefore, was not entitled to retain the securities. Blackwell sued Lilis in Texas state court, asserting that Lilis breached an employment agreement it had with him because it required “any dispute that arises directly or indirectly from the relationship of the Parties evidenced by Agreement” to be litigated exclusively in Texas. Id . Lilis argued that “a nearly identical forum selection clause in the contracts governing Blackwell’s stock and stock option awards require that the dispute be heard in New York.” Id . Lilis is an independent oil and gas company headquartered in Houston, Texas. It hired Blackwell as its Executive Vice President of Land and Business Development on December 1, 2016. In connection with his hiring, Blackwell entered into an Executive Employment Agreement (the “Employment Agreement”), which outlined Lilis’s policies on, among other things, compensation, bonuses, and severance payments. Under the Employment Agreement, Blackwell was eligible to receive, among other incentives and benefits, bonuses and awards of equity and non-equity compensation from the company. The Employment Agreement also included detailed definitions of key terms related to Blackwell’s employment, including termination for “Cause.” In addition, the Employment Agreement contained a broadly worded forum selection clause which directed Lilis and Blackwell to litigate any disputes arising from the employment relationship in the State of Texas: For purposes of resolving any dispute that arises directly or indirectly from the relationship of the Parties evidenced by this Agreement, the Parties hereby submit to and consent to the exclusive jurisdiction of the State of Texas and agree that any related litigation shall be conducted solely in the courts of Harris County, Texas or the federal courts for the United States for the Southern District of Texas, where this Agreement is made and/or to be performed, and no other courts. Id . at *2. In accordance with the Employment Agreement, Lilis granted Blackwell a series of equity awards, documented in certain stock and stock option agreements (collectively, the “Award Agreements”). The Award Agreements provided that if Blackwell was fired by the company “for Cause,” his stock options would immediately expire, and his unvested stock would immediately be forfeited. If Blackwell left the company for other reasons, he could be entitled to keep some, if not all, of his stock options and unvested stock. The Award Agreements, like the Employment Agreement, contained a forum selection clause. The clause identified New York, not Texas, as the forum for any disputes related to the “relationship of the parties evidenced by the Award Agreement”: For purposes of resolving any dispute that arises directly or indirectly from the relationship of the parties evidenced by the Award Agreement, the Grantee hereby submits to and consents to the exclusive jurisdiction of the State of New York and agrees that any related litigation shall be conducted solely in the courts of New York County, New York or the federal courts for the United States for the Southern District of New York, where the Award Agreement is made and/or to be performed, and no other courts. Id . at *4. According to the complaint, Blackwell was fired from his employment at Lilis on April 3, 2018, in the wake of allegations of impropriety. The company claimed that Blackwell was fired “for Cause,” as defined in the Employment Agreement; Blackwell disagreed with that assertion. The “parties vigorously dispute the proper forum to hear th case.” Id .  According to Blackwell, the dispute should be litigated in Texas under the forum selection clause found in the Employment Agreement. To underscore this point, Blackwell filed a lawsuit in Texas state court on June 21, 2018, “alleg that Lilis breached the contract because he was not terminated for Cause under his Employment Agreement.” Id . A few weeks later, on July 10, 2018, Lilis filed the New York action, relying on the forum selection clause in the Award Agreements. Id . at **4-5. Lilis alleged that Blackwell breached his fiduciary duty to the company, and sought declaratory relief, which would amount to a ruling that Blackwell was terminated for Cause and thereby surrendered his rights to certain awards, bonuses, and severance payments. Blackwell moved to dismiss Lilis’s complaint on the ground that the forum selection clause in the Employment Agreement controlled, and thus Texas was the appropriate forum for the dispute. Alternatively, Blackwell argued, the action should be dismissed under the doctrine of forum non conveniens (CPLR § 327(a)(4)), or in light of the first-filed Texas action (CPLR § 321l(a)(4)). The Court’s Decision “The first order of business,” noted the Court, was “to decide which forum selection clause applie to Plaintiff’s claims.” Slip Op. at **5-6 (internal quotation marks omitted, quoting    Encompass Aviation, LLC v. Surf Air Inc. , No. 18 CIV. 5530 (CM), 2018 WL 6713138, at *7 (S.D.N.Y. Nov. 30, 2018)). See also DeSola Grp., Inc. v. Coors Brewing Co. , 199 A.D.2d 141, 141 (1st Dept. 1993) (“ orum selection clause is inapplicable since plaintiff’s complaint does not pertain to the Agreement”); Schmelkin v. Garfield , 85 A.D.3d 755, 755-56 (2d Dept. 2011) (holding that the defendant “failed to sustain his burden of establishing that the forum selection clause applies here, since the allegations in the complaint are not based on” the relevant agreement). The Court found that “Blackwell’s eligibility to receive any of the compensation at issue originate in the Employment Agreement.” Slip Op. at *6. Thus, held the Court, the dispute “hinge on the Employment Agreement, not the Award Agreements.” Id . To underscore this holding, the Court explained that the claims for declaratory relief largely depended “on whether Blackwell was validly fired ‘for Cause’ – a term defined in the Employment Agreement.” Id . Lilis’s breach of fiduciary duty claims also “stem directly from the Employment Agreement.” Indeed, noted the Court, Lilis acknowledged that Blackwell owed such duties only “by virtue of his role as an executive officer and employee of” the company, “a role defined by the Employment Agreement” and admitted that “whether Blackwell’s incentive stock options ... accelerated and became immediately exercisable or expired as of the date of Blackwell’s termination entirely dependent on whether or not he was terminated for ‘Cause,’ as solely defined in his Employment Agreement.” Id . at *7. In fact, Lilis even argued that there was “no dispute that Blackwell received the equity awards at issue solely as a result of his employment relationship with Lilis.” Id . The Court rejected Lilis’s argument “that the Award Agreements’ forum selection clause envelop all disputes relating to the Award Agreements as well as all disputes relating to an awardee’s Employment Agreement.” Id . Such a reading, noted the Court, constituted “a remarkable rewriting of the agreements, and as a matter of contract interpretation” was “untenable.” Id . The Court sharply criticized the company for advancing an interpretation that produced “impractical, if not absurd, results.” Id . Lilis’s Texas-based employees seeking to litigate disputes with the company about disability benefits, vacation days, or the non-compete policy – found in the Employment Agreement …, respectively – would be forced to do so in New York simply because they signed a separate agreement concerning an entirely different aspect of employment. Nothing in the text of the Award Agreements’ forum selection clause suggests such all-encompassing breadth. Id . at **8-9. The Court went on to say that “Lilis’s interpretation would read the forum selection clause out of the Employment Agreement altogether.” Slip Op. at *7. Such a result “runs afoul of the general rule that ‘ here interrelated agreements contain competing forum selection clauses, a Court must avoid interpretation[ ] that render a provision of either agreement superfluous.’” Id . at **7-8, quoting Adar Bays, LLC v. Aim Expl., Inc. , 251 F. Supp. 3d 704, 708 (S.D.N.Y. 2017) (internal quotation marks omitted). Yet, found the Court “Lilis’s reading exactly that.” Id . at *8. The Court also rejected Lilis’s argument that the Award Agreements superseded the Employment Agreement such that the forum selection clause in the former controlled the matter. Id . at *9. Although the Award Agreements were executed after the Employment Agreement, the substance of the agreements was different; thus, the forum selection clause in the Award Agreements could not control. Id. , citing Hyuncheol Hwang v. Mirae Asset Sec. (USA) Inc. , 165 A.D.3d 413, 413-14 (1st Dept. 2018); Kramer v. Danalis , 49 A.D.3d 263, 264 (1st Dept. 2008). Indeed, noted the Court, “the Employment Agreement addresse an employee’s entitlement to compensation, including the award of stock options, while the Award Agreements address the specifics of those options.” Id .  Since the “dispute between Blackwell and Lilis was about Blackwell’s entitlement to the incentive awards and other compensation, not about the specifics of the options” the forum selection clause in the Employment Agreement controlled. Accordingly, the Court granted Blackwell’s motion to dismiss and dismissed Lilis’s complaint. Takeaway As discussed above, Court determined that the dispute between the parties was about the Employment Agreement, not the Award Agreements. “Either Blackwell was fired for Cause under the Employment Agreement, or he was not. Once that fundamental determination is made, the consequences < e.g. , application of the forum selection clause> e.g., application of the forum selection clause> will then inexorably ripple out to the Award Agreements.” Slip Op. at *8. “In other words,” said the Court, “ t is the Employment Agreement, which will work its effect on the Award Agreements, not vice versa.” Id .   Lilis is, therefore, a good example of a court “ pplying well-worn canons of construction” to determine how two related agreements could be “read to govern separate, albeit related, areas of potential discord.” Slip Op. at *8.