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Prosecuting a mortgage foreclosure action in New York can be an arduous and time-consuming process.  This is particularly so for residential mortgage foreclosures since the promulgation of a host of rules by the New York State Legislature stemming from the mortgage crisis of the late 2000s.  Some of the new rules have been addressed previously in this Blog (“ Appellate Division, Second Department Tells Foreclosing Residential Lender to ‘SHOW ME THE EVIDENCE,’” “ The Second Department Denies Summary Judgment to Another Foreclosing Mortgagee Due to the Insufficiency of Evidence Presented on the Motion ” and “ The Second Department Reverses Another Grant Of Summary Judgment To A Foreclosing Lender On A Home Loan Due To The Insufficiency Of Proof Of Mailing Statutorily Required Notices To The Borrower ”). The Supreme Court of the State of New York, Suffolk County, has recently (November 27, 2017), promulgated “ Rules for Expedited Proceedings in Certain Foreclosure Actions ” to streamline the foreclosure process in eligible residential mortgage foreclosure actions (the “Program”).  (Other courts may have instituted similar programs and practitioners with cases pending in other jurisdictions should check for the availability of similar programs.)  While the Program will be discussed further herein, as an introductory matter, a very general discussion of some, but not all, of the steps necessary to maintain a foreclosure action follows. Generally, there are numerous steps that must be followed in order to prosecute a mortgage foreclosure action; some of which are discussed herein.  The action is commenced by the filing of the Summons and Complaint.  In certain residential foreclosure actions, and under certain circumstances, at or about the time the action is commenced, the attorney for the foreclosing mortgagee must file a “Certificate of Merit” certifying that, inter alia , after reviewing the facts and related documents and after speaking with representatives of the lender, there is a good faith basis to proceed with the foreclosure.  ( See CPLR § 3012-b .)  Thereafter, the defendants are served with process and are afforded time to answer.  In many instances, however, defendants in residential foreclosure actions default in appearing and/or answering. In certain residential foreclosure actions, at the time the affidavits of service are filed, the foreclosing mortgagee must file a Request for Judicial Intervention to trigger the scheduling by the court of a foreclosure settlement conference (the “Conference”).  ( See CPLR  § 3408 and the §202.12-a of the Uniform Rules of New York State Trial Courts .) At the Conference, the mortgagee and mortgagor, both with and without a referee, attempt to negotiate a resolution of the matter through loan modification or otherwise.  “A defendant who appears at the but who failed to file a timely answer…shall be presumed to have a reasonable excuse for the default and shall be permitted to serve and file an answer, without any substantive defenses deemed to have been waived within thirty days of initial appearance at the ” and “ he default shall be deemed vacated upon service and filing of an answer”.  ( See CPLR § 3408(m).) If the mortgagor defaults in appearing at the Conference, the mortgagor would not receive the benefit of the additional time to answer if they were previously in default.  (While any defendant could appear at the Conference, if an appearance is made, it is typically by the mortgagor.) After the time for all of the defendants to answer the complaint has expired (whether or not a Conference was necessary), the foreclosing mortgagee would then move, inter alia : for summary judgment (to the extent that an answer was interposed by one or more of the defendants), a default judgment (to the extent that some or all of the defendants failed to appear and/or answer) and for the appointment of a referee to compute the sums due to the mortgagee under the note and mortgage being foreclosed (collectively, the “S/J Motion”).  After the S/J Motion is submitted to the court, the parties await a decision, which, in many situations, could take between two and ten months. If the S/J Motion is denied, the parties may have to go to trial.  More typically, however, the S/J Motion is granted, and the court appoints a referee to ascertain and compute the amounts due to the mortgagee.  ( See RPAPL § 1321 .)  While the referee is supposed to conduct a hearing to determine the amounts owed to the mortgagee, the hearing is typically waived (if any of the defendants have appeared) or otherwise determined without a hearing (if the defendants defaulted).  The “Report” of the referee (the “Referee’s Report”) and the related calculations are typically prepared by the mortgagee’s counsel and submitted to the referee for review, comment and signature.  A draft copy of the Referee’s Report can be circulated to the appearing defendants for review, along with a stipulation waiving the calculation hearing.  Depending on the Judge, the Referee’s Report may also contain a calculation of attorney’s fees and expenses due to the mortgagee under the note and/or mortgage if the mortgagee is so entitled.  Sometimes, the court itself undertakes the determination of attorney’s fees and expenses through a separate hearing and/or based on the submission of papers. Once the Referee’s Report is signed by the Referee and returned to the mortgagee’s counsel, the mortgagee must then make a motion: to confirm the Referee’s Report and for a Judgment of Foreclosure and Sale (the “JF&S Motion”).  After the JF&S Motion is submitted to the court, the parties await a decision, which, again, could take between two and ten months.  Among other things, the Judgment of Foreclosure and Sale is the document that fixes the amounts due to the mortgagee, permits the subject property to be sold at public auction, and “cuts-off” any interest that subordinate lienors (named as defendants in the foreclosure action) that may previously have held in the property being foreclosed.  ( See RPAPL § 1351 .) The foreclosure sale of the property is supposed to take place within ninety days of the date of the Judgment of Foreclosure and Sale.  ( See RPAPL § 1351.)  Public advertising of the sale in a publication set forth by the court in the Judgment of Foreclosure and Sale must take place.  Depending on the manner in which the sale is advertised, the auction can take place between twenty-one and thirty-five days after the sale notice is first published.   ( See RPAPL § 231 .) There are additional proceedings that may need to take place, including, but not limited to, motion practice to: confirm the referee’ report of sale; obtain a deficiency judgment against the mortgagor (if the proceeds of the foreclosure sale are insufficient to satisfy the mortgagor’s obligations to the mortgagee); and, to distribute any surplus monies that may become available (if the proceeds of the foreclosure sale are more than sufficient to satisfy the mortgagor’s obligations to the mortgagee). THE PROGRAM A foreclosure action is eligible for the Program, where: (1) it involves residential property (but does not relate to a reverse mortgage); (2)the mortgagor failed to answer or move with respect to the complaint and, therefore, is in default; (3) the mortgagor failed to appear at the first scheduled conference in the Settlement Conference Part and the case was released to an IAS Part; (4) there is no pending loan modification application pending with the foreclosing mortgagee; (5) PLAINTIFF WAIVES THE RIGHT TO PURSUE A DEFICIENCY JUDGMENT; (6) an answer filed by any other defendant does not contain a request for relief other than protecting its position in surplus money proceedings or being notified of a sale; (7) foreclosing mortgagee “must meet all legal requirements and proof required for a default pursuant to CPLR § 3215, RPAPL § 1321 and for a judgment of foreclosure and sale pursuant to RPAPL § 1351, including but not limited to proof of service of the summons, complaint, notice of pendency and other statutory required; and the filing of any affirmation/affidavit required by statute (CPLR 3012-b) or Administrative Order”; and (8) the application to participate in the Program is made within 180 days after release from the Settlement Foreclosure Part. Participation in the Program would permit the foreclosing mortgagee to combine the S/J motion and the JF&S motion into a single (the “Combined Motion”).  Also, the need for a referee to calculate the sums due to the mortgagee would be rendered moot because, as part of the Combined Motion, the court itself, and not a referee, would ascertain and determine, inter alia , the amounts due.  Voluntary participation in the Program would eliminate one of the two main motions that must be made during a residential mortgage foreclosure proceeding and, accordingly, would result in a significant saving of time in the overall process.  One of the drawbacks is that the mortgagee, to participate in the Program, would have to waive the right to obtain a deficiency judgment against the mortgagor.  Quinlan-Expedited-Proceedings-1

Last month, the Commodity Futures Trading Commission (“CFTC” or the “Commission”) announced that it had paid whistleblowers more than $45 million in awards.  In one case, the CFTC awarded approximately $30 million to a whistleblower ( here ), the largest amount ever awarded by the CFTC, and in the other, the CFTC awarded more than $70,000 to a whistleblower living in a foreign country, the first of its kind under the CFTC Whistleblower Program ( here ). The awards reflect the recent success of the CFTC’s Whistleblower Program. “Today’s substantial Whistleblower awards mark another significant step in what has been a transformative year for the CFTC’s Whistleblower Program and the Division of Enforcement,” said James McDonald, Director of the CFTC’s Division of Enforcement.  “Whistleblowers have added significant value to our enforcement program by enabling the Commission to swiftly identify misconduct and hold wrongdoers accountable.  I expect this trend to continue as the Commission continues to receive increasing numbers of high-quality whistleblower tips.” “The Commodity Futures Trading Commission is committed to creating a level playing field for all market participants, and the Whistleblower Program is helping us achieve this goal,” said CFTC Chairman, J. Christopher Giancarlo.  “I hope that today’s awards encourage anyone with knowledge of violations of the Commodity Exchange Act to come forward and become a whistleblower.” Previously, the highest award paid by the CFTC to a whistleblower was in March 2016.  In that case, the whistleblower received an award of more than $10 million ( here ). The CFTC did not identify the recipients of the awards or the conduct that was the subject of the awards. Media reports, however, have linked the $30 million award to an investigation conducted by the Securities and Exchange Commission (“SEC”) and the CFTC into investment products offered by JPMorgan Chase. ( Here and here .) The CFTC is generally prohibited from disclosing information that “could reasonably be expected to reveal the identity of a whistleblower.” 7 U.S.C.A. § 26(h)(2); 17 C.F.R. § 165.4.  Consistent with this confidentiality requirement, the CFTC will not disclose the name of the enforcement action in which the whistleblower provided information, the award percentage granted to the whistleblower, and the exact dollar amount of the award granted. All whistleblower awards are paid from the CFTC Customer Protection Fund established by Congress and financed entirely through monetary sanctions paid to the CFTC by violators of the Commodity Exchange Act (“CEA”).  No money is taken or withheld from harmed investors to fund the program. The CFTC Whistleblower Program The CFTC Whistleblower Program, like the SEC Whistleblower Program, was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Act”). Pub. L. No. 111-203, § 748, 124 Stat. 1376 (2010); 7 U.S.C. § 26.  here.=">here."> The Act directs the CFTC to pay awards to whistleblowers who voluntarily provide the CFTC with original information that leads to an enforcement action resulting in monetary sanctions exceeding $1 million. Id . Under the Whistleblower Program, relators are eligible to receive an award of between 10 percent and 30 percent of the monetary sanctions collected. 7 U.S.C. § 26(b)(1); 17 C.F.R. § 165.8. The CFTC has broad discretion in determining the amount of the award.  In exercising this discretion, the CFTC is guided by certain factors, including 1) the significance of the information provided by the whistleblower, i.e. , whether the information is reliable and complete such that it conserves the CFTC’s resources; 2) the assistance provided by the whistleblower and his/her attorney, including (i) the degree of cooperation and assistance provided to the CFTC staff; (ii) the timeliness of the whistleblower’s initial disclosure; (iii) the efforts undertaken by the whistleblower to remediate the harm caused by the alleged violation; and (iv) any unique hardships experienced by the whistleblower as a result of reporting the violations; 3) the degree to which an award enhances the CFTC’s ability to enforce the commodity laws; and 4) the extent to which the whistleblower participated in internal compliance systems, such as reporting the violations of the commodities laws internally before, or at the same time as, reporting them to the CFTC and assisting in an internal investigation or inquiry. 17 C.F.R. § 165.9.  The CFTC can pay awards not only on CFTC enforcement actions, but also related actions brought by foreign futures authorities if certain conditions are met. In the six-and-a-half years since the inception of the CFTC Whistleblower Program, the Commission has paid whistleblowers an award on only four occasions: a $240,000 award in May 2014; a $290,000 award in September 2015; the $10 million award referenced above; and a $50,000 award in July 2016.  By contrast, the SEC has issued awards in excess of $266 million to 55 whistleblowers under its Whistleblower Program. ( Here and here .) The SEC has also issued awards to seven individual whistleblowers of more than $10 million each, with the largest award totaling $50 million. Amendments to the CFTC Whistleblower Program In May 2017, the CFTC approved amendments to its Whistleblower Rules that significantly expanded whistleblower eligibility requirements and strengthened anti-retaliation provisions. ( Here .) Among other things, the CFTC or the whistleblower may now bring an action against an employer for retaliation against a whistleblower, and employers are prohibited from taking steps to impede a would-be whistleblower from communicating directly with CFTC staff about a possible violation of the CEA by using a confidentiality, pre-dispute arbitration or similar agreement. These amendments, along with the impact of the Supreme Court’s recent decision in Digital Realty Trust, Inc. v. Somers , should lead to increased whistleblower tips.  In Digital Realty , the Court held that the anti-retaliation provisions of the Act apply only to employees who report potential securities law violations directly to the SEC, and not only through internal company means. Digital="Digital" Realty="Realty" decision="decision" here.=">here.">  In 2017, the CFTC received a record number of whistleblower reports, nearly twice as many as in any other year. According to the CFTC, 2018 is on track to receive nearly twice as many tips as in 2017. ( Here .) Takeaway The awards, and the amendments to the Program, highlight the CFTC’s recent emphasis on the role of the whistleblower in fulfilling its regulatory mission. In the wake of these events, it is likely that the number of whistleblower tips will continue to rise.  For whistleblowers, these events should serve to encourage the disclosure of information about the potential violation of the commodities laws.  For companies, these awards should serve as a reminder to 1) adopt and implement policies and procedures to prevent and detect misconduct, including internal reporting mechanisms for individuals to report potential misconduct; 2) investigate allegations of wrongdoing reported by whistleblowers and remediate any misconduct found by investigators; and 3) avoid taking any retaliatory actions against whistleblowers for coming forward with information about potential misconduct.

Fraud Claim Dismissed on Statute of Limitations Grounds: Plaintiff Unable to Use The Discovery Rule to Save His Claims Under New York law, an action based upon fraud must be commenced within six years of the date the cause of action accrued, or within two years of the time the plaintiff discovered or could have discovered the fraud with reasonable diligence, whichever is greater. C.P.L.R. § 213(8). See also Sargiss v. Magarelli , 12 N.Y.3d 527, 532 (2009); Carbon Capital Mgmt., LLC v. Am. Express Co. , 88 A.D.3d 933, 939 (2d Dep’t 2011). The cause of action accrues when “every element of the claim, including injury, can truthfully be alleged” ( Carbon Capital Mgmt. , 88 A.D.3d at 939 (citation and alterations omitted)), “even though the injured party may be ignorant of the existence of the wrong or injury.” Schmidt v. Merchants Despatch Transp. Co. , 270 N.Y. 287, 300 (1936). While the foregoing statement of the law seems simple enough, its application is more complicated. Determining when accrual occurs is not easy and often contested. Also, hotly contested is the determination of when the plaintiff discovered or could have discovered the fraud. In New York, “plaintiffs will be held to have discovered the fraud when it is established that they were possessed of knowledge of facts from which it could be reasonably inferred, that is, inferred from facts which indicate the alleged fraud.” Erbe v. Lincoln Rochester Trust Co. , 3 N.Y.2d 321, 326 (1957). “ ere suspicion will not constitute a sufficient substitute” for knowledge of the fraud. Id . “Where it does not conclusively appear that a plaintiff had knowledge of facts from which the fraud could reasonably be inferred, a complaint should not be dismissed on motion and the question should be left to the trier of the facts.” Trepuk v. Frank , 44 N.Y.2d 723, 725 (1978). Moreover, where the circumstances suggest to a person of ordinary intelligence the probability that s/he has been defrauded, a duty of inquiry arises, and if s/he fails to undertake that inquiry when it would have developed the truth, and shuts his/her eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him/her.  Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011).  The test as to when fraud should with reasonable diligence have been discovered is an objective one. Id . (citation and internal quotation marks omitted). Thus, while it is true that New York courts will not grant a motion to dismiss a fraud claim where the plaintiff’s knowledge is disputed, courts will dismiss a fraud claim when the alleged facts establish that a duty of inquiry existed and that an inquiry was not pursued. See Shalik v. Hewlett Assocs., L.P. , 93 A.D.3d 777, 778 (2d Dept. 2012) (“The two-year period begins to run when the circumstances reasonably would suggest to the plaintiff that he or she may have been defrauded, so as to trigger a duty to inquire on his or her part”) (citation omitted) (affirming dismissal because “the defendants established, prima facie, that the plaintiffs possessed information regarding the questionable authenticity of the decedent’s signature on the Amendment more than two years before they filed the complaint.”). “The burden of establishing that the fraud could not have been discovered before the two-year period prior to the commencement of the action rests on the plaintiff, who seeks the benefit of the exception.” Celestin v. Simpson , 153 A.D. 3d 656, 657 (2d Dept. 2017). On July 23, 2018, Justice Platkin of the New York Supreme Court, Albany County, Commercial Division, issued a decision in Essepian v. United Group of Companies, Inc. , 2018 N.Y. Slip Op. 51153(U) ( here ), in which he dismissed fraud-based claims on the grounds that they were untimely under CPLR 213(8), even under the two-year discovery rule. The plaintiff, John P. Essepian (“Plaintiff” or Essepian”) brought suit to recover for injuries allegedly sustained as a result of investments he made in the DCG/UGOC Income Fund, LLC (“Income Fund” or “Fund”). The Income Fund was established, managed and operated to secure financing for various projects undertaken by defendant United Group of Companies, Inc. (“UGOC”). Among the initiatives undertaken by UGOC was the 2008 development of student housing projects near State University of New York (“SUNY”) campuses in Plattsburgh, Brockport and Cortland. Because of the 2008 financial crisis, UGOC had difficulty raising the necessary bank financing to build the student housing projects. UGOC eventually secured $50 million in financing from TIAA-CREF, but the loan was conditioned upon UGOC raising $18 million in equity. The United Defendants established the Income Fund in August 2008 as a vehicle to raise such funds from individual investors and issued a private placement memorandum (“PPM”) for the sale of $20 million in membership interests in the Fund. On the recommendation of his investment advisor, Edgar Page (“Page”), the chief executive of PageOne, an SEC-registered investment advisory firm, Plaintiff made two investments of $375,000 in the Income Fund in July 2010. Prior to making the recommendation, Page was aware that the United Defendants were investing the Income Fund’s assets into student housing projects that faced significant problems, rendering the investments highly risky. Various construction and occupancy issues associated with the projects, which were not disclosed to potential investors by the United Defendants in any communications associated with the Income Fund, eventually caused the projects to default and become subject to foreclosure and/or bankruptcy proceedings. In soliciting Essepian’s investment, Page represented that student housing projects “were a sound and conservative investment which would generate an internal rate of return of investment of not less than 9% annually and as much as 20-25% or more.” Page also claimed that “the United Defendants guaranteed that would generate a return on investment of not less than 9% each year.” Relying on Page’s advice, Essepian executed subscription agreements for the purchase of membership interests in the Fund. Simultaneously therewith, Essepian executed the operating agreement for the Fund and paid $750,000. By the time these transactions took place, defendant MCM refrained from “performing compliance and supervisory activity regarding sale of securities in the Income Fund.” In August 2014, the SEC initiated proceedings against Page and PageOne and issued an Order Making Findings (“SEC Order”) in March 2015. The SEC found that Page and his firm had “willfully violated” the Investment Advisers Act of 1940. The SEC Order found that Page had failed to disclose an arrangement with UGOC to clients – UGOC had agreed to purchase PageOne in exchange for Page’s commitment to buy $18.3 million worth of UGOC preferred stock using the assets of PageOne’s clients. The SEC also found that Page knew that UGOC “did not have sufficient liquidity . . . to complete the acquisition of PageOne” and was “selling personal assets to keep business going.” The SEC ultimately concluded that PageOne’s clients “invested between approximately $13 and $15 million” and that UGOC had paid Page approximately $2.7 million during the same period. Essepian commenced the action on July 12, 2016. Essepian allegeed causes of action for common law fraud, breach of fiduciary duty and/or aiding and abetting in a breach of fiduciary duty, negligent misrepresentation and unjust enrichment against the United Defendants, as well as a claim of aiding and abetting against the MCM Defendants. Essepian alleged that the United Defendants, together with Page as their agent, made factual misrepresentations in soliciting his investments. Specifically, Essepian alleged that the United Defendants falsely claimed that the Fund would invest in secured debt instruments backed by real estate assets that could quickly be converted to cash and would generate a high annual rate of return for investors, whereas the United Defendants allegedly knew that the troubled student-housing projects faced significant problems that made these returns highly unlikely and created a substantial risk of default. Plaintiff also alleged that the United Defendants misrepresented UGOC’s financial problems and its history of poor performance on similar projects.  Essepian further alleged that the United Defendants and Page failed to disclose facts that were material to his decision to invest in the Income Fund. On September 19, 2016, the United Defendants and MCM Defendants moved to dismiss the complaint for, among other things, failure to state a claim. After the motion was fully briefed, the moving defendants discovered that the complaint contained a material irregularity bearing on the timeliness of Essepian’s claims. The complaint alleged that Essepian entered into subscription agreements for the purchase of interests in the Income Fund on July 13, 2010 and July 14, 2010, respectively. However, review of the actual subscription agreements showed that Essepian signed the documents on June 18, 2010. Upon making the discovery, the moving defendants alerted Essepian’s counsel and asserted that all of his claims were time-barred. In response, Essepian’s counsel confirmed that the allegations of the complaint were incorrect and that Plaintiff had “signed the Subscription Agreements reflecting his interest in the Income Fund on June 18, 2010.” Counsel further indicated that a similar statute-of-limitations issue was pending in a virtually identical case brought by a group of Fund investors against the same defendants in the U.S. District Court for the Northern District of New York in Grasso v. United Group of Companies, Inc. , Case No. 1:16-cv-00965-GLS-CFH (N.D.N.Y.) (“Grasso”). On February 16, 2017, the parties agreed to stay the action pending a ruling on the statute-of-limitations issue in Grasso . On March 26, 2018, the court issued a decision and order in Grasso that dismissed the majority of the plaintiffs’ claims as time-barred. Grasso v. United Group of Companies, Inc. , No. 1:16-cv-965 (GLS/CFH), 2018 WL 1472579 (N.D.N.Y. Mar. 26, 2018), opinion amended and superseded , No. 1:16-cv-965 (GLS/CFH), 2018 WL 1737619 (N.D.N.Y. Apr. 9, 2018). The Court granted the moving defendants’ motion. Since the subscription agreements were signed in June 2010, a fact to which there was no dispute, the Court easily found that the six-year statute of limitations had run. There is no dispute that plaintiff executed and delivered the Subscription Agreements, and Management II accepted them, on June 18, 2010. Thus, for purposes of the six-year limitations period, the fraud-based claims accrued on June 18, 2010, at which point plaintiff became legally bound to the Income Fund in alleged reliance on the United Defendants’ fraudulent misrepresentations and concealments. As such, there can be “no serious dispute” that the fraud-based claims are untimely under the six-year limitations period. Citations omitted. Turning to the two-year discovery rule, the Court found that Essepian was on notice of the claim as early as 2012, when he received “statements, letters and other correspondence” regarding his investment, including the Fund’s 2012 and 2013 Audited Financial Statements. The Court agreed with the Grasso court “that the Fund’s 2012 and 2013 financial statements plainly ‘raised red flags that would have made a reasonable investor of ordinary intelligence aware of the probability that he had been defrauded.’” Quoting Grasso , 2018 WL 1737619 at *8. The Court observed that the 2013 Financial Statement, which Essepian received no later than May 30, 2014, advised investors that the student housing projects at SUNY Plattsburgh, Brockport and Cortland “continue to have occupancy issues” and informed him that “the lender commenced a foreclosure action against the project .”  The same financial statement, which included the report of the Fund’s independent auditor, also cautioned investors “in several places” that “‘the Fund is substantially invested in debt investments with an entity that is in foreclosure proceedings. The outcome of these proceedings is unknown; however, the proceedings raise substantial doubt about the Fund’s ability to continue as a going concern.’” In addition, noted the Court, the 2013 Financial Statement advised investors that “‘debt investments make up 55% of the Fund’s total assets.’” Both the 2012 and 2013 financial statements alerted investors that the Fund had invested in classes of assets that Essepian believed to have been improper and contrary to the representations made to him to induce his execution of the subscription agreements. The Court held that “ hese disclosures go to the heart of plaintiff’s fraud-based allegations regarding the struggling SUNY housing projects and the manner in which the Fund invested the capital it had raised from plaintiff and other investors.” “In fact,” said the Court, “plaintiff admits in his Complaint that the 2012 and 2013 financial statements ‘created uncertainty regarding the Income Fund’s ability to continue as a going concern . . . affected the debt instruments . . . of . . . student housing projects developed by UGOC and represented . . . as the primary investments to be financed using the assets of the .’”  Thus, concluded the Court, “‘the knowledge gleaned from the information contained within the 2012 and 2013 inancial tatements completely at odds with the representations that plaintiff[] allegedly relied upon’ in deciding to invest in the Income Fund.” Quoting Grasso , 2018 WL 1737619 at *8. The Court rejected Essepian’s argument that the financial statements were themselves materially false, and therefore “no duty of inquiry arose in 2014,” because the 2012 and 2013 Financial Statements informed investors that the Fund’s performance was improving year after year. Citing to the Court’s decision in Grasso , Justice Platkin noted that “the issue is not whether the 2012 and 2013 financial statements revealed the full and complete extent of the Moving Defendants’ alleged fraud, but rather whether the circumstances disclosed in the financial statements reasonably suggested that plaintiff may have been defrauded, so as to trigger a duty to inquire.” (Citations and quotation marks omitted).  For that reason, Essepian “misse the mark.” Quoting Grasso , 2018 WL 1737619 at *8. In light of the auditor’s warning that the Fund’s major investments were in default and/or foreclosure and that there were substantial doubts about the Fund's ability to continue as a going concern, the fact that the Fund’s management offered a vague reassurance regarding a ‘plan’ for increasing student occupancy is not the type of reassurance that would — or should — put a reasonable investor's mind at ease. In other words: o reasonable investor would look at the serious warnings set out by the auditor — warnings that the Income Fund’s future was in jeopardy — and rely on vague, unspecified hopes for a turnaround. Instead, the financial statements raised red flags that would have made a reasonable investor of ordinary intelligence aware of the probability that he had been defrauded. Citations omitted. The Court concluded that “the Financial Statements for 2012 and 2013 placed an objective investor in the Fund on notice of the substantial prospect that he or she had been defrauded.” Accordingly, the Court imputed knowledge of the fraud to Essepian as of the date the duty to investigate arose, which occurred no later than May 30, 2014, by which time plaintiff had received both the 2012 and 2013 Financial Statements. Thus, since Essepian “failed to commence th action within two years of being put on inquiry notice, fraud-based claims are not saved by application of the discovery rule. Accordingly, the fraud-based claims must be dismissed as barred by the expiration of the statute of limitations.” Takeaway Essepian highlights the need for litigants to act on facts and circumstances from which it could be reasonably inferred that they were the victims of a fraud. The failure to bring suit when the facts suggest fraud will result in dismissal. Thus, even though the discovery rule allows the victim of fraud to bring suit when the very nature of the fraud prevents him/her from knowing that he/she was defrauded, the courthouse doors will, nevertheless, close on the litigant who sits on his/her rights when the facts indicate that a wrong has be done.

Over the past year, the Centers for Disease Control and its parent agency, the Department of Health and Human Services (HHS), made several decisions that undermined the rights of whistleblowers . In December, for example, the CDC recommended that employees avoid using certain words (including “diversity” and “entitlement”) when preparing budget documents for Congress. Under Federal law, the government is prohibited from restricting the free speech of its employees without clarifying that those restrictions do not impair their right to disclose any illegal activity.  Action by an Alliance An alliance of organizations, including the Office of Special Counsel (OSC), an independent agency, which enforces the free speech rights of government employees, and the Government Accountability Project, launched an investigation into the HHS/CDC word ban and other gag orders. In a May 14 letter, the OSC reported that although this specific CDC/HHS policy did not violate any laws, it could incorrectly make employees believe that they do not have the right to voluntarily blow the whistle on wrongdoing. However, the OSC did report that since January 2017, the HHS explicitly violated the Whistleblower Protection Enhancement Act, including bans on unapproved communication with members of Congress and the media. (This Blog wrote about the Whistleblower Protection Act and the Whistleblower Protection Enhancement Act  here .) Now, the HHS and the Justice Department, which was also caught in violation of whistleblower laws, have both agreed to rewrite their gag-order policies, as well as advise their employees of their rights through an agency-wide email. An Epidemic? The HHS and the Justice Department are not the only agencies to have implemented policies that restrict employee speech. Through Freedom of Information Act requests, the OSC has found that many others,  including the Energy Department, the Department of Housing and Urban Development, the Agriculture Department, and the Drug Enforcement Administration, have also implemented policies without outlining their employees’ whistleblower protections. This is important because very few federal employees are even aware of their whistleblower rights and protections, and the policies only add to influence them to believe that exercising their legal rights violates their agency’s rules. Not only are agencies restricting whistleblower rights, but in March reported that the Department of Education was planning something that could restrict whistleblower protections during union contract negotiations.  The Department of Education tried to eliminate a guarantee against retaliation for employees who brought up grievances.  Anti-retaliation measures are an important part of whistleblower protection and a critical factor for whistleblowers who decide to come forward with information about wrongdoing or illegal activity. Despite the clear direction coming from the OSC and Congress to inform employees of their whistleblower rights, it seems as though it has not had much of an effect on the government's numerous agencies. The Benefit of Exposure The OSC has already held two major departments responsible for restricting whistleblower rights. This is an important step because stopping agencies from implementing policies that undermine whistleblower rights will encourage federal civil servants to voluntarily report wrongdoing without fear of retaliatory action. Ultimately, this exposure and open communication will benefit the public by creating a more efficient and effective government.

In the first six months of 2018, securities class action lawsuits were filed at “near record levels,” according to Cornerstone Research (“Cornerstone”).  In a July 25, 2018 report, entitled “Securities Class Action Filings – 2018 Midyear Assessment” (the “Report”), Cornerstone found that plaintiffs had “filed more than 750 federal securities class actions since midyear 2016,” the “most prolific 24-month period” since the passage of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The Report can be found here . Cornerstone’s press release announcing its findings can be found here . According to the Report, plaintiffs filed 204 securities fraud class action lawsuits during the first six months of 2018, which was twice 1997-2017, semi-annual historical average of 102 filings since the enactment of the PSLRA. Only the first half of 2017 exceeded the average with 223 filings. The 204 filings represent almost an 8 percent increase from the 189 securities fraud class action lawsuits filed in the second half of 2017. Based upon the first-half filings, Cornerstone projects a year-end total of 408 securities class action lawsuit filings – a 101% increase over the 10-year (1997-2017) annual average of 203 filings. The projected year-end total of 408 filings is slightly lower than the total number of annual filings in 2017 of 412 securities class action lawsuits – approximately a 1% decrease. The 750 federal securities class action lawsuit filings since midyear 2016 constitutes the highest number of filings in a 24-month period since Congress passed the PSLRA. “Despite the relatively stable markets, filing activity remains strong,” said Sasha Aganin, a vice president at Cornerstone Research and one of the report’s authors. “The record number of filings last year was primarily due to medium and smaller size cases, while in the first half of 2018 cases tend to be larger—we are seeing a return of mega filings and relatively fewer small cases.” Breaking Down the Numbers The Report breaks down the filings by type of lawsuits, e.g. , merger and acquisition (“M&A”), securities fraud (“Core Filings”), and state court actions under the Securities Act of 1933 (“Securities Act”). Of the 204 filings, 93 were M&A objection lawsuits and 111 were Core Filings. The 111 Core Filings during the first half of 2018 represented a 28% increase over the number of filings in the second half of 2017: 111 Core Filings in the first-half of 2018 from 87 in the second half of 2017.  The number of first-half filings in 2018, however, fell below the 127 Core Filings in the first half of 2017. Cornerstone found that “the number of federal filings involving transactions decreased” during the first half of 2018 from 102 to 93. The 93 M&A lawsuits filed during the first-six months of 2018 represent 46% of all first-half filings. As noted, Cornerstone annualized the first half data to determine the number of securities class action lawsuits filed by year end. By doing so, Cornerstone concluded that 8.5% of companies listed on “major U.S. exchanges” may become the subject of a securities class action lawsuit. “This rate is significantly above the historical average and slightly above the annual 2017 rate of 8.4 percent.” The Report notes that if the trend continues throughout the year, “2018 will be the sixth consecutive year in which the likelihood of a company being the subject of a class action increases.” The Report notes that even if M&A lawsuits were removed from the first-half totals, the number of issuers that would be subject to Core Filings in 2018 would still be higher compared to historical levels. The 2018 annualized percentage of listed companies subject to securities fraud class action lawsuits is 4.6%, slightly above the annual rate of 4.2% for such lawsuits in 2017. Notably, both rates are well above the 1997-2017 annual average rate for Core Filings of 2.9%. During the first half of 2018, Core Flings against S&P 500 companies were at their highest annualized rate since 2002. “On an annualized basis, 9.6 percent of S&P 500 companies were defendants in a class action” lawsuit in the first six months of 2018. During the period 2001 to 2017, in comparison, approximately 5.2% of S&P 500 companies were the subject of a Core Filing. First half Core Filings against non-U.S. companies (defined as companies headquartered outside the United States) declined slightly below 2017 levels, representing 22% of all Core Filings, compared to 23% in 2017. The Report noted that “ ince declining from the wave of Chinese reverse merger filings in 2011, the percentage of core filings against non-U.S. issuers steadily increased between 2013 and 2017, before falling slightly in the first half of 2018.” The Report also examined whether there were any patterns related to the filing of Securities Act cases in the aftermath of Cyan, Inc. v. Beaver County Employees Retirement Fund .  In March 2018, the U.S. Supreme Court held that state courts retain concurrent jurisdiction over Securities Act claims and that such lawsuits filed in state court may not be removed to federal court. cyan decision here.> cyan decision here.> In the second quarter of 2018 (post Cyan ), there were seven new filings under the Securities Act, four in federal court and three in California state court. Based upon the small sample size, Cornerstone concluded “no pattern was yet evident.” Cornerstone also analyzed the Disclosure Dollar Loss (“DDL”) and the Maximum Dollar Loss (“MDL”) for Core Filings. DDL measures the dollar value change in a company’s market capitalization between the trading day immediately before the end of the class period and the trading day immediately after the close of the class period. MDL measures the dollar value change in a company’s market capitalization from the trading day with the highest market capitalization during the class period to the trading day following the close of the class period.  According to the Report, DDL increased 166% to $157 billion in the first half of 2018, from $59 billion in the second half of 2017, the second highest semiannual amount since 1997. DDL in the first half of 2018 is 162% greater than the 1997-2017 semiannual average of $60 billion, due, in large part, to the increase in the number of mega filings (which include securities class action filings with a DDL of at least $5 billion and an MDL of at least $10 billion). The MDL index of $643 billion in the first half of 2018 increased 180% from $230 billion recorded in the second half of 2017. MDL in the first half of the year was more than double the 1997-2017 semiannual historical average of $301 billion. Finally, by Circuit, Cornerstone found that the Ninth Circuit saw the most Core Filings – 42 in the first half of 2018, up from 13 in the second half of 2017.

Former Tesla, Inc. ("Tesla") (NASDAQ: TSLA) employee, Martin Tripp ("Tripp"), has been sued in Nevada federal court by the car behemoth for allegedly hacking into the company’s manufacturing system and sharing trade secrets, claiming that he had tried to sabotage the company. Tripp denies wrongdoing, contending that he was trying to alert the public about alleged improper practices that the company was engaging in, including using punctured batteries in cars, making excess waste, and participating in unsustainable practices and procedures.  Tripp said that he spoke out only because he saw “some really scary things” at Tesla.  An Employee Gone Rogue? Telsa claims that Tripp intentionally tried to injure the company, stating that his actions were “willful and malicious” and “done with the deliberate intent to injure Tesla’s business.” (The complaint can be found here ). The company alleged that Tripp had hacked its Manufacturing Operating System and transferred several gigabytes worth of confidential and proprietary data, including photos and a video of Tesla’s battery module production line, to outside entities. Tesla further alleged that Tripp had tried to recruit additional sources inside the company's Gigafactory 1 battery plant to share data outside the company. Tesla has requested access to Tripp’s computers, USB drives, and cloud accounts, in order to measure the extent to which trade secrets were taken. Tesla is suing Tripp for violations of the Defend Trade Secrets Act of 2016 (18 U.S.C. § 1836, et seq.), the Nevada Uniform Trade Secrets Act, and the Nevada Computer Crimes Law, as well as breach of contract and breach of fiduciary duty. Tesla claims to have suffered “cruel and unjust hardship,” including “lost business, lost profits, and damage to its goodwill.” Tesla is seeking unspecified compensatory and punitive damages. Tripp has denied tampering with any software and contends that he did not have the ability to make the changes in questions. He claims that he was simply whistleblowing ( i.e. , telling the public that,  among other things, Tesla knowingly manufactured batteries with punctured holes and used scrap and waste material in its vehicles).   During an interview with The , Tripp confirmed that he did, in fact, serve as an anonymous source for the June 4, 2018 article in  titled “Internal Documents Reveal Tesla is Blowing Through an Insane Amount of Raw Material and Cash to make Model 3s, and Production is Still a Nightmare.” Tesla has dismissed Tripp's contentions as false, maintaining that Tripp vastly exaggerated his claims in order to hurt the company.  To Tesla, Tripp is a disgruntled former employee who is lashing out because he was passed over for a promotion due to job performance problems and a tendency to be combative and disruptive towards colleagues.  Tripp argues otherwise, claiming that he was fired for whistleblowing. “I am being singled out for being a whistleblower . I didn’t hack into the system. The data I was collecting was so severe that I had to go to the media,” he told CNNMoney.  Tripp Files A Claim With The SEC On July 6, 2018, Tripp filed a whistleblower claim with the Securities and Exchange Commission ("SEC"), alleging that Tesla misled investors and put its customers at risk. In a statement issued by Tripp's lawyer about the filing, Tripp claims that Tesla knowingly manufactured batteries with punctured holes possibly impacting hundreds of cars on the road; misled the investing public as to the number of Model 3s actually being produced each week by as much as 44 percent; and lowered vehicle specifications and systemically used scrap and waste material in vehicles, all to meet production quotas. If his tip results in a successful enforcement action, Tripp would be eligible to receive an award from the SEC for his information. Under the SEC Whistleblower Program , whistleblowers who provide the SEC with original information that leads to a successful enforcement action in which the SEC recovers more than $1 million are eligible to receive an award that ranges between 10 percent to 30 percent of the money collected. Since the inception of its whistleblower program in 2011, the SEC has awarded more than $266 million to whistleblowers.

In March, the IRS and two whistleblowers reached a settlement to a long-pending dispute regarding the amount of money that an IRS whistleblower is entitled to receive for successfully reporting a tax fraud or other tax underpayment. Under the IRS Whistleblower Reward Program , the IRS rewards a whistleblower who provides information to the IRS concerning the underpayment of taxes by either an individual or business that leads to the recovery of money and meets certain other conditions. The whistleblower is entitled to an award between 15-30 percent of “the proceeds collected as a result of the action.” 26 U.S.C. § 7623(b)(1).  The IRS Whistleblower Tip that Started it all The dispute began in 2013 when two whistleblowers filed a tip with the IRS that led to the question about what money counts towards the “proceeds collected as a result of the action.” Eventually, their tip led to the recovery of $20 million in restitution and $54 million in criminal fines and civil forfeiture from a Swiss Bank that helped U.S. taxpayers evade their taxes. (The court seize the assets of the bank that were deemed to be involved in the crime(s).) Although there never existed an issue concerning the whistleblowers’ entitlement to a percentage of taxes that the IRS collected as a result of their tip, the whistleblowers argued that they were also entitled to a portion of the fines and assets that the government seized (civil forfeiture). The whistleblowers argued that the "proceeds collected" should include the criminal fines and civil forfeiture in addition to the $20 million restitution. The IRS disagreed. In 2015, the United States Tax Court held that under Section 7623(b)(1) of the Internal Revenue Code ("IRC"), the two whistleblowers could continue to pursue their awards based upon a percentage of the “proceeds collected.” Thereafter, the IRS and the whistleblowers reached a settlement in which the IRS agreed to pay the whistleblowers 24 percent of the unpaid taxes that resulted from the original tip.  Notwithstanding, both whistleblowers argued that the “proceeds collected” should include proceeds -- that is, the criminal fines and civil forfeiture in addition to the $20 million restitution. Court’s Definition of “Collected Proceeds” On August 3, 2016, the Tax Court ruled that the whistleblowers could recover a portion of the criminal fines and civil forfeiture monies recovered by the government. The Tax Court concluded that there was nothing in Title 26 of the IRC to limit the scope of the definition of "proceeds collected" to only those proceeds recovered under the IRC:  “We herein hold that the phrase ‘collected proceeds’ is sweeping in scope and is not limited to amounts assessed and collected under title 26.” The Court explained that Section 7623(b)(1) was created to incentivize would-be whistleblowers to come forward and report tax underpayments and create a more robust program “in response to the ineffectiveness of the prior, discretionary whistleblower program, now codified as section 7623(a).” Expanding Upon the Scope of IRS Whistleblower Award The IRS objected to the decision and appealed to the U.S. Court of Appeals for the District of Columbia. However, before the Court was able to hear the case, the IRS and the two whistleblowers reached a settlement.  The IRS agreed to dismiss the appeal and pay the whistleblowers an additional $12.9 million (24% of the criminal fines and civil forfeiture). Because the settlement was reached before the D.C. Circuit could hear the case, the Tax Court opinion remains in effect.  As such, the Tax Court's definition of “proceeds” under Section 7623(b)(1) includes all proceeds that the government receives, including criminal fines and assets seized through civil forfeiture. Takeaway As the Tax Court observed, the expansive definition of "proceeds collected" maintains the incentive to would-be whistleblowers to come forward and report tax fraud and other tax underpayments. This case, therefore, serves as the basis upon which IRS whistleblowers can receive a larger award when criminal fines and forfeitures are recovered, in addition to unpaid taxes, as a result of their tip.

Last year, this Blog wrote about the basic principles of contract interpretation under New York law. ( Here .) Much of that legal discussion sets the table for today’s article. When parties enter into a contract, each assumes that the language in their agreement accurately memorializes their understandings and intentions. For this reason, when a dispute arises, the courts in New York look to the intent of the parties as expressed by the language they chose to put into their writing. Ashwood Capital, Inc. v. OTG Mgt., Inc. , 99 A.D.3d 1 (1st Dept. 2012). A clear, complete document will be enforced according to its terms. Id . at 7. When the parties have a dispute over the meaning of their contract, the court first asks if the contract contains any ambiguity. Id .  Since New York is a textual jurisdiction (where the courts look to the agreement itself to determine the meaning of the agreement), whether there is ambiguity “is determined by looking within the four corners of the document, not to outside sources.” Kass v. Kass , 91 N.Y.2d 554, 566 (1998). Thus, courts will examine the parties’ intentions as set forth in the agreement and seek to afford the language an interpretation that is sensible, practical, fair, and reasonable. Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P., 13 N.Y.3d 398, 404 (2009); Abiele Contr. v. New York City School Constr. Auth. , 91 N.Y.2d 1, 9-10 (1997); Brown Bros. Elec. Contr. v. Beam Constr. Corp. , 41 N.Y.2d 397, 400 (1977). A contract is not ambiguous if, on its face, it is definite and precise and reasonably susceptible to only one meaning. White v. Continental Cas. Co. , 9 N.Y.3d 264, 267 (2007). The “parties cannot create ambiguity from whole cloth where none exists, because provisions are not ambiguous merely because the parties interpret them differently.” Universal Am. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. , 25 N.Y.3d 675, 680 (2015) (citation and internal quotation marks omitted). “Whether or not a writing is ambiguous is a question of law to be resolved by the courts.” WWW Assocs., Inc. v Giancontieri , 77 N.Y.2d 157, 162 (1990). “ xtrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face.” Id . at 163. This rule is especially applicable where the parties are commercially sophisticated, and their contract contains a merger clause. Schron v. Troutman Sanders LLP , 20 N.Y.3d 430, 436 (2013) (“where a contract contains a merger clause, a court is obliged to require full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to vary or contradict the terms of the writing.”) (citation and quotation marks omitted). Since a “contractual provision that is clear on its face must be enforced according to the plain meaning of its terms,” Bank of N.Y. Mellon v. WMC Mortg., LLC , 136 A.D.3d 1, 6 (1st Dept. 2015) (citation omitted), courts may not “add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.” Id . (citations omitted). This is especially so “in commercial contracts negotiated at arm’s length by sophisticated, counseled business people.” Id . These principles, along with those governing the enforceability of an oral agreement, were at play in Israel v. Signature Bank , 2018 N.Y. Slip Op. 31370 (Sup. Ct., N.Y. County June 26, 2018) ( here ). There, Justice Saliann Scarpulla ruled that the contract before her was clear, complete and unambiguous and, therefore, should have been enforced according to its terms. Israel v. Signature Bank Background The case arose from three loan agreements, whereby the Defendant, Signature Bank (“Signature”), agreed to loan the Plaintiff, Mosdot Shuva Israel (“MSI”), $23,000,000. The first loan was for $3,000,000, which was secured by MSI’s money market account with Signature (“$3 Million Loan”). The remaining two loans were for $15,000,000 (“$15 Million Note”) and $5,000,000 (“$5 Million Note”), which were memorialized in separate notes (collectively, “Notes”) and secured by separate mortgages (collectively, the “Mortgages”) (the Notes and Mortgages are collectively referred to as the “Mortgage Loans”). The Notes had a per annum interest rate of 6.5% and matured on March 17, 2014 (“Maturity Date”). The Notes provided MSI an opportunity to extend each Maturity Date for one additional five-year term (“Extension Option”), provided that MSI complied with various conditions set forth in the Notes. The Extension Option could only be exercised between November 17, 2013 and January 31, 2014. In early 2013, MSI allegedly approached Signature’s Chairman and Group Director of Real Estate and Vice President about exercising the Extension Option early and about refinancing the Mortgage Loans by lowering the interest rate.  The Defendants purportedly orally agreed and repeatedly reassured MSI that Signature would extend the terms and lower the interest rate to 4.5% from 6.5% if MSI: (1) made a $1,800,000 balloon payment on the $5 Million Note (“$1.8 Million Payment”); (2) paid the $3 Million Loan in its entirety (“$3 Million Payment”); and (3) made an additional $200,000 payment on the Mortgage Loans (“$200,000 Payment”).  MSI made a $3 Million Payment on March 1, 2013, and the $200,000 Payment on March 13, 2013. MSI also allegedly sold one of its properties in Israel to raise money for the $1.8 Million Payment. On March 25, 2013, the Defendants sent MSI a term sheet which stated that the Defendants were “willing to consider request to modify and extend” the terms of the Mortgage Loans based on certain conditions, including a paydown of the Loans’ principal amounts (the “Term Sheet”). The Term Sheet contained a provision that stated: “ t is expressly understood between the parties that this letter is not a commitment by or an agreement to approve the subject loan.” The Term Sheet provided that the closing on the Extension Option had to occur by June 30, 2013, and that it was subject to change if the Defendants did not receive the executed Term Sheet and applicable deposits and processing fees by April 22, 2013. A few months later, on or about July 12, 2013, MSI sent the Defendants an executed Term Sheet. The closing on the Extension Option never occurred. After MSI received the Term Sheet, it made the following three payments to Signature: (1) $500,000 on May 10, 2013; (2) $1,000,000 on May 28, 2013; and (3) $300,000 on July 1, 2013. After these payments were made, the Defendants allegedly orally stated that the agreement to extend the terms of the Mortgage Loans and lower the interest rate to 4.5% was granted and binding and that they would send over loan documents for MSI to sign. The Defendants never sent MSI the loan documents. Thereafter, Signature sold the Mortgage Loans to non-party 122 East 58th Funding LLC (“58th Funding”).  Because MSI failed to make the required payments under the Notes by the Maturity Date, 58th Funding commenced a commercial foreclosure proceeding against MSI. See 122 E. 58th Funding, LLC v. Mosdot Shuva Israel , Sup. Ct., N.Y. County, Index No. 650973/2014. By order dated December 14, 2017, the court granted the parties’ joint motion for approval of a forbearance agreement and entry of judgment of foreclosure and sale and directed a foreclosure sale by public auction be held, in addition to other, related relief. Meanwhile, MSI commenced an action in March 2016, asserting causes of action for: (1) fraudulent inducement against all Defendants; (2) promissory estoppel against Signature; (3) equitable estoppel against Signature; and (4) breach of contract and breach of the implied covenant of good faith and fair dealing against Signature. The Defendants moved to dismiss the complaint in its entirety pursuant to CPLR 3211(a)(1), (5), and (7). Previously, the Court dismissed the fraudulent inducement and estoppel claims. In moving to dismiss the complaint, the Defendants made the following arguments, among others: the alleged oral modification of the Mortgage Loan agreements is unenforceable under the terms thereof and the Statute of Frauds; and the Term Sheet is not an enforceable contract. The Court’s Decision The Court granted the Defendants’ motion. Noting that the agreements were unambiguous, the Court held that “MSI’s claim for breach of contract not legally cognizable because … MSI demonstrate the existence of a binding oral contract obligating Signature Bank to extend the Mortgage Loans’ maturity dates and to reduce the interest rates.”  The Court found that the language of the agreements was clear in prohibiting the oral modification of the Mortgage Loans.  Under New York law, “ written contract, ‘which contains a provision to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement of the change is sought or by his agent.’” Quoting General Obligations Law (“GOL”) § 15-301(1), and citing Centaur Props., LLC v. Farahdian , 29 A.D.3d 468, 469 (1st Dept. 2006). The Court rejected MSI’s argument that “the repayment of the $3 Million Loan and partial payment of the $5 Million” was “sufficient to show unequivocal part performance of an alleged oral agreement to refinance and extend the terms of the Mortgage Loans.” Although “part performance by one party of an alleged oral modification to a written agreement may be sufficient to demonstrate an enforceable oral modification, even where the original written agreement contains an express prohibition against such modification,” the Court found that MSI’s alleged part performance was not “unequivocally referable to the alleged newly modified agreement.” See Rose v. Spa Realty Assoc. , 42 N.Y.2d 338, 343-44 (1977); F. Garofalo Elec. Co. v. New York Univ. , 270 A.D.2d 76, 80 (1st Dept. 2000). See also Anostario v. Vicinanzo , 59 N.Y.2d 662, 664 (1983) (“It is not sufficient . . . that the oral agreement gives significance to plaintiff's actions. Rather, the actions alone must be unintelligible or at least extraordinary, explainable only with reference to the oral agreement.”) (internal quotation marks and citations omitted).  Rather, said the Court, the payments were readily “explainable as preparatory steps taken with a view toward consummation of an agreement in the future” (internal quotations omitted): Here, MSI’s tender and Signature’s acceptance of the payments of money indisputably owed by MSI under the Mortgage Loans demonstrate, at most, that MSI chose to early pay down the principal amount of the Mortgage Loans to induce MSI to agree to the possible future modification of the Mortgage Loans.  Indeed, the Term Sheet, which was executed by both Signature and MSI, provides that “Signature Bank is willing to consider your request . . . to modify and extend its above referenced credit facilities on the following terms,” including, among other, numerous conditions, a paydown of the loans’ principal amounts.  See  Term Sheet at 1, 3 (emphasis added). As expressly stated in the Term Sheet, the payments are readily “‘explainable as preparatory steps taken with a view toward consummation of an agreement in the future,’ that performance is not ‘unequivocally referable’ to the new contract.”  Nassau Beekman LLC v. Ann/Nassau Realty LLC , 105 A.D.3d 33, 39 (1st Dept. 2013), quoting Anostario , 59 N.Y.2d at 664. Finally, the Court rejected the Plaintiff’s argument that the Term Sheet was a binding agreement because it required further negotiation. The Court found that: he Term Sheet does not require Signature to extend the repayment periods and reduce the mortgage interest rates, but, by its terms, is simply an agreement to continue negotiating. * * * MSI’s contention that the parties agreed to be bound by an oral agreement prior to issuance and execution of the Term Sheet is unavailing and conclusively belied by the documentary evidence. While the Term Sheet does not include a merger clause, its express terms demonstrate that any discussions prior to its execution constituted nothing more than preliminary negotiations regarding the maturity dates and interest rates, rather than a meeting of the minds and an agreement to be bound. See StarVest Partners II, L.P. v. Emportal, Inc. , 101 A.D.3d 610, 613 (1st Dept. 2012) (“Where a term sheet . . . explicitly requires the execution of a further written agreement before any party is contractually bound, it is unreasonable as a matter of law for a party to rely upon the other party’s promises to proceed with the transaction in the absence of that further written agreement.”). (This Blog previously wrote about the enforceability of a term sheet and similar documents here and here .) Takeaway Most commercial contracts require amendments and modifications to be in writing. This requirement is often found in the “No Oral Modification” clause, or NOM clause. While such clauses are often included in commercial contracts as boilerplate, courts will nevertheless enforce them, as the court did in Israel , when the parties clearly and unambiguously require such a result. The takeaway of Israel , therefore, centers on basic contract interpretation. Where, as in Israel , the terms of the contract are clear and unambiguous, “the provisions of the contract delineating the rights of the parties prevail over” the parties’ arguments and allegations.

Several recent residential mortgage foreclosure actions are a good reminder of the importance of promptly moving for default judgments against non-appearing defendants. Rule 3215(c) of the New York Civil Practice Law and Rules provides, in pertinent part, that: If the plaintiff fails to take proceedings for the entry of judgment within one year after the default, the court shall not enter judgment but shall dismiss the complaint as abandoned, without costs, upon its own initiative or on motion, unless sufficient cause is shown why the complaint should not be dismissed…. Courts have noted that the language of CPLR 3215(c) is mandatory in the first instance unless plaintiff demonstrates “sufficient cause” for the failure to timely “take proceedings for the entry of judgment]”.  ( See, e.g., US Bank v. Onuoha (2 nd Dep’t June 27, 2018); Wells Fargo Bank v. Cafasso   (2 nd Dep’t February 28, 2018).  The Cafasso Court (quoting Giglio v. NTIMP, Inc. , 86 A.D.3d 301 (2 nd Dep’t 2011)), noted that “sufficient cause” “’requir both a reasonable excuse for the delay in timely moving for a default judgment, plus a demonstration that the cause of action is potentially meritorious.’”  The “reasonableness” of an excuse is within the sound discretion of the motion court. ( See, e.g., Onuoha and Cafasso .)  Finally, a default judgment need not be obtained within one year, as long as proceedings to obtain a default judgment have been initiated.  ( See Bank of America v. Lucido (2 nd Dep’t July 11, 2018).)  In mortgage foreclosure actions, the preliminary step of moving for an order of reference is deemed to be a sufficient “proceeding” toward the entry of judgment to satisfy the one-year time frame of CPLR 3215(c).  ( See, e.g., Deutsche Bank v. Delisser (2 nd Dep’t May 16, 2018); Lucido .) The facts of the relevant cases are important to the Court’s analysis. Onuoha In February of 2008 one and one-half years after executing her note and mortgage, the plaintiff in Onuoha defaulted in making her installment payments.  A default notice was sent to Onuoha in May of 2008.  US Bank commenced its mortgage foreclosure action in July of 2008 and Onuoha served a pro se answer by mail on September 15, 2008.  Claiming it was due on or before September 10, 2008, US Bank rejected the answer as untimely.  In July of 2011, Onuoha’s pro se notice of appearance was also rejected as untimely. In May of 2013, US Bank moved for an order of reference and for a default judgment against Onuoha.  Onuoha opposed the motion because, inter alia , the motion was made more than a year after her default.  In its reply papers US Bank argued that: (1) “upon information and belief” the matter was put “on hold” while Onuoha was being reviewed for “loss mitigation” and while loan modification possibilities were being considered; (2) for a little more than a year thereafter, US Bank was in litigation with a co-defendant that claimed the subject property was fraudulently conveyed to Onuoha; (3) US Bank’s original law firm closed and the matter was transferred to a new firm; and, (4) the matter was again put on hold because the property was in a Hurricane Sandy federal disaster area. The motion court granted US Bank’s motion for an order of reference.  The Second Department reversed, however, holding that: …the allegations of the plaintiff were conclusory and unsubstantiated.  The allegations with respect to why the plaintiff’s former attorney did not seek a default judgment against were not supported with evidence in admissible form by a person with personal knowledge of the facts.  Further, there is no explanation as to why the litigation with the codefendant was a ground to delay seeking a default judgment against , whose liability was based not only upon her alleged interest in the property, but also her obligation under the note, which did not involve the codefendant. Thus, the Second Department concluded that supreme court should have “dismissed the complaint as abandoned pursuant to CPLR 3215(c) insofar as asserted against .” Cafasso In Cafasso , Wells Fargo moved for an order of reference and to hold Cafasso in default more than four years after Cafasso failed to serve an answer and to appear at a settlement conference.  Notwithstanding Cafasso’s opposition based on CPLR 3215(c), supreme court granted Wells Fargo’s motion.  In reversing supreme court “on the law and in the exercise of discretion,” the Second Department dismissed Wells Fargo’s complaint and stated: Under the circumstances at bar, the Supreme Court improvidently exercised its discretion in finding that the plaintiff proffered a reasonable excuse for the delay, since the plaintiff’s conclusory and unsubstantiated assertions that unspecified periods of delay were attributable to the effects of Hurricane Sandy, compliance with a then newly enacted administrative order, and changes in loan servicers and counsel were insufficient for this purpose.” Seidner Similarly, in HSBC Bank v. Seidner (2 nd Dep’t March 28, 2018), Seidner was served with process in November of 2011 and failed to respond to the complaint.  In April of 2014, HSBC moved for an order of reference and Seidner cross-moved to dismiss the complaint as abandoned pursuant to CPLR 3215(c). Supreme court granted the motion and denied the cross-motion, reasoning that “the matter had been on the calendar of the settlement conference part until August 2014, and that ‘time on the calendar of the conference part should be considered sufficient cause within the meaning of CPLR 3215(c)’” (some internal quotation marks and brackets omitted). The Second Department in Seidner reversed, recognizing that HSBC failed to take steps to initiate proceedings for a default judgment for over two years after the default and failed to offer an excuse for its delay “other than the conclusory and unsubstantiated claims that ‘a significant portion’ of the delay was caused by ‘Hurricane Sandy.’” Such excuses were deemed to be insufficient.  In rejecting supreme court’s reliance on the matter’s pendency on the settlement conference calendar as the basis for “sufficient cause,” the Second Department reasoned that, while “the time to move for a default judgment is tolled while settlement conferences are pending  (see 22 NYCRR 202.12-a <7> …,” “it is undisputed that this action was not subject to mandatory settlement conferences and…the matter was not transferred to the settlement conference part until well after the deadline of CPLR 3215(c) had passed.” Hasis The Second Department found a reasonable excuse for delay in HSBC Bank USA v. Hasis (Nov. 29, 2017).  There, the foreclosure action was commenced in January of 2011.  On July 1, 2011, supreme court advised plaintiff of a settlement conference in August, but the defendant failed to appear.  Therefore, HSBC was directed to proceed by motion for an order of reference.  In December of 2011 plaintiff’s then counsel “ceased operations” and new counsel was substituted.  On September 10, 2012, defendant filed for bankruptcy and, in November of 2014, plaintiff moved for an order of reference after defendant received a discharge in bankruptcy. The Hasis supreme court granted HSBC’s motion for an order of reference and denied Hasis’ motion to dismiss the complaint pursuant to CPLR 3215(c).  The Second Department affirmed.  While approximately 13 months elapsed from the time the case was released from the residential foreclosure part until Hasis’ bankruptcy filing with no steps being taken in that time toward the entry of default, the Hasis Appellate Court found that the closure of HSBC’s initial law firm and the Chapter 7 bankruptcy filing were sufficient bases for the delay. TAKEAWAY It is good practice for foreclosing lenders to promptly take steps to enter default judgments against non-appearing defendants.  It is ill-advised for lenders to rely on the “sufficient cause” exception of CPLR 3211(c) because it is far from guaranteed that the complaint will be sustained.  It should be noted, however, that dismissals under CPLR 3215(c) are not “with prejudice” unless the court so rules.  ( See, e.g., EMC Mortgage Corp. v. Smith , 18 A.D.3d 602, 796 N.Y.S.2d 364 (2 nd Dep’t 2005); Shepard v.  St. Agnes Hosp., 86 A.D.2d 628, 446 N.Y.S.2d 350 (2 nd Dep’t 1982).)  Nonetheless, it makes eminent sense to timely move for a default judgment to avoid the uncertainty, time and costs of related motion practice and potential appeals.

On May 30, 2018, Minnesota became the most recent state to join the list of states filing lawsuits in whistleblower litigation against Arizona-based Insys Therapeutics, Inc. ("Insys") ( INSY.O ): Arizona, New Jersey, New York, and North Carolina. Previous cases have been settled by Oregon, New Hampshire, Illinois, and New Hampshire for $9.45 million. The Minnesota action, which was filed in Hennepin County District Court in Minneapolis, comes as state attorneys general are seeking to hold pharmaceutical companies responsible for the opioid epidemic sweeping the nation.   According to the U.S. Centers for Disease Control and Prevention, in 2016 opioids, including heroin and prescription painkillers, contributed to 42,249 deaths.  The Minnesota lawsuit accuses Insys of encouraging doctors to prescribe Subsys, the powerful fentanyl-based pain medication, which was approved by the FDA only for treating cancer patients who suffered from severe nerve pain. According to the complaint, internal emails showed that Insys encouraged its sales force to “camp out” in doctor’s offices to induce them into prescribing the drug. The company allegedly paid “bonuses” of up to $3,000 to increase sales and paid two physicians "speaker fees" totaling $43,000.  The complaint further alleges that the 36 speaking events at which they were paid were “shams” to bypass state laws prohibiting payments by drug companies to doctors. “I’ve see a lot of greedy conduct by pharmaceutical companies in this office,” Swanson said at a news conference. “This conduct in this case is as brazen as anything you could imagine a pharmaceutical company doing.” The Minnesota Board of Pharmacy, which joined in the Minnesota lawsuit, also commenced an administrative action seeking civil penalties. Swanson said her office is continuing to investigate other opioid manufacturers and distributors and their alleged misrepresentations about the safety of prescribing opioids to patients. “Stay tuned for that,” Swanson said. “We are knee-deep in that investigation.” On the same day that the Minnesota lawsuit was filed, Michelle Breitenbach, a former Insys sales representative, pleaded guilty in a superior court in New Jersey, to participating in a scheme to bribe physicians to prescribe Subsys.  Breitenbach faces up to five years in prison for a second-degree charge of conspiracy to commit commercial bribery. The Whistleblower Action In 2013, Maria Guzman, a former Insys sales representative, commenced a qui tam action in the United States District Court for the Central District of California (No. CV 13-5861), in which she alleged that the company was engaged in illegal sales and marketing practices of its opioid drug, Subsys.  The lawsuit was brought under the False Claims Act ("FCA"). The FCA allows private whistleblowers to sue on behalf of the government and share in any recovery. here.=">here."> Guzman contended that Insys engaged in a nationwide scheme to defraud Medicare and Medicaid by inducing doctors through kickbacks that ranged from cash to favors to sex, to prescribe large doses of Subsys for federally insured patients who never should have received the drug.  Using a mantra of “pain is pain,” Guzman alleged that Insys illegally pushed the prescription of Subsys for lesser off-label conditions, such as back pain and migraines. Guzman was fired in 2013 after objecting to the scheme to defraud. The U.S. Department of Justice ("DOJ")  subsequently intervened in Guzman's qui tam action, saying that it would take over part of the litigation, specifically the claims against Insys for kickbacks, off-label marketing, and false claims about patients’ conditions.  The Federal Charges The government intervention comes on the heels of related criminal cases against various former sales representatives, executives, and practitioners who were employed by Insys, as well as its billionaire founder, John Kapoor ("Kapoor").   Kapoor was arrested and charged with several counts of conspiracy; in particular, conspiracy to commit mail and wire fraud, RICO conspiracy, and conspiracy to violate the Anti-Kickback law. “In the midst of a nationwide opioid epidemic that has reached crisis proportions, Mr. Kapoor and his company stand accused of bribing doctors to overprescribe a potent opioid and committing fraud on insurance companies solely for profit,” acting U.S. Attorney William D. Weinreb said in a statement. “Today's arrest and charges reflect our ongoing efforts to attack the opioid crisis from all angles. We must hold the industry and its leadership accountable - just as we would the cartels or a street-level drug dealer.” The government charges stem from a superseding indictment that was unsealed by the U.S. Attorney's office in Massachusetts.  That office had arrested and charged six former company executives in December 2016 with, among other things, conspiracy to defraud health insurers.  The six former executives are: Michael Babich, Chief Executive Office; Alec Burlakoff, Vice President of Sales; Richard M. Simon, National Director of Sales; Sunrise Lee and Joseph A. Rowan, Regional Sales Directors; and Michael J. Gurry, Vice President of Managed Markets. The DOJ alleged that Kapoor and the six executives conspired to bribe doctors around the country to prescribe Subsys.  The indictment also alleged that the defendants conspired to defraud and mislead health insurance providers, who declined approval of payments when physicians prescribed Subsys for off-label conditions. “As alleged, these executives created a corporate culture at Insys that utilized deception and bribery as an acceptable business practice, deceiving patients, and conspiring with doctors and insurers,” Harold H. Shaw, special agent in charge of the Federal Bureau of Investigation, Boston field division, said in a statement. Insys is attempting to resolve the federal charges. The company, which is under new management and has claimed to have taken “necessary and appropriate steps to prevent past mistakes from happening in the future,” estimates that a resolution could cost at least $150 million. Doctors Get Swept Up In Criminal Charges Last month, a Florida doctor admitted that he received kickbacks from Insys. Dr. Michael Frey ("Frey") pleaded guilty to conspiring to receive kickbacks from a medical equipment provider and a pharmaceutical sales representative in exchange for writing prescriptions for Subsys. Frey admitted that Insys paid him kickbacks to participate in bogus speaking engagements to induce him to prescribe Subsys. "This was an alarming case of a physician who abused his position of trust for money," U.S. Attorney Chapa Lopez for the Middle District of Florida said in a statement. Frey agreed to cooperate with authorities and to pay $2.8 million as part of a related civil settlement.

Investing in the market involves different degrees of risk. The reward for taking on risk is the potential for a greater investment return. The flip side, of course, is the potential to lose some or all of the money invested. Thus, when it comes to investing, there is no such thing as a sure thing. Nonetheless, there are people who promise no risk, no loss investing. They claim that they can place a person’s money into a “can’t miss” investment, where the risk of loss is minimal, if not non-existent, and the returns are above market. Sounds too good to be true. Not for the Ponzi scheme organizer. 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 https://www.sec.gov/spotlight/enf-actions-ponzi.shtml . Shutting down Ponzi schemes and holding the organizers accountable for such frauds is an important part of the SEC’s enforcement mission. Recently, the SEC announced action it had taken against Ponzi scheme organizers responsible for bilking investors out of $102 million. The SEC Files Charges and Obtains an Asset Freeze Against the Organizers Behind a $102 Million Ponzi Scheme On June 19, 2018, the SEC announced ( here ) that it had filed charges and obtained an asset freeze against the organizers of a Ponzi scheme that defrauded investors out of $102 million. According to the SEC, the defendants defrauded more than 600 investors across the U.S. through the sale of securities in companies they controlled, including First Nationle Solution LLC, United RL Capital Services, and Percipience Global Corp.  The SEC alleged that the defendants told investors that their funds would be used for the companies and that they would receive guaranteed dividends or double-digit returns.  However, alleged the SEC, the defendants spent at least $20 million to enrich themselves, paid $38.5 million in Ponzi-like payments, and transferred much of the remainder in transactions that were unrelated to the issuers’ purported businesses. The SEC charged Perry Santillo (“Santillo”) of Rochester, New York, Christopher Parris (“Parris”), also of Rochester, Paul LaRocco (“LaRocco”) of Ocala, Florida, John Piccarreto (“Piccarreto”) of San Antonio, and Thomas Brenner (“Brenner”) of Orville, Ohio, along with the three companies. “We allege that the defendants engaged in a massive fraud and swindled investors to line their pockets with ill-gotten gains,” said Marc P. Berger, Director of the SEC’s New York Office. “Investors should be on high alert whenever they are promised guaranteed returns.” The SEC charged Santillo, Parris, LaRocco, Piccarreto, Brenner, and the three issuers with violating the antifraud provisions of the federal securities laws.  The court granted the SEC’s request for an asset freeze and a temporary restraining order. The SEC’s complaint, which was filed in the United States District Court for the Southern District of New York, can be found here . Takeaway As noted in a prior Blog post ( here ), the SEC has warned investors to be vigilant in protecting themselves before they invest money. ( Here .) This means asking questions, many of which are based upon the common features of a Ponzi scheme, e.g. , high investment returns with little or no risk, overly consistent returns, unregistered investments, unlicensed sellers, secretive and/or complex strategies, issues with paperwork, and difficulty receiving payments. If these questions are not answered, investors should not be afraid to request more information. Any push-back or doublespeak should raise red flags. In addition to asking questions, investors should take other actions to protect themselves from Ponzi scheme organizers.  For example, investors should demand detailed reports – most perpetrators of Ponzi schemes send periodic reports to investors with limited information. Investors should also perform a background check on the financial professional (for example, through FINRA’s BrokerCheck ( here )) and research the investment product before investing their money. Investors should not rely on glossy brochures, sales pitches that play on emotions, and celebrity endorsements (just because a celebrity puts his/her name to an investment does not mean it is legitimate). In short, investors should be skeptical. After all, “if it sounds too good to be true, then it probably is.”

In today’s post, this Blog looks at SEC enforcement actions and/or settlements of potential enforcement actions, the focus of which is the protection of the retail investor. New York-Based Investment Firm and Two of its Managers Charged for Failing to Supervise Brokers Who Defrauded Customers On June 29, 2018, the SEC announced ( here ) that it had charged New York-based broker-dealer Alexander Capital L.P. (“Alexander Capital”) and two of its managers for failing to supervise three brokers who made unsuitable recommendations to investors, “ churned ” accounts, and made unauthorized trades that resulted in substantial losses to the firm’s customers while generating large commissions for the brokers. The SEC found that Alexander Capital failed to supervise William C. Gennity, Rocco Roveccio, and Laurence M. Torres, brokers who were previously charged with fraud in September 2017 ( here ).  According to the SEC, Alexander Capital lacked reasonable supervisory policies and procedures and systems to implement them, and had these systems been in place, Alexander Capital likely would have prevented and detected the brokers’ wrongdoing. In separate orders ( here ) and ( here ), the SEC found that Philip A. Noto II (“Noto”) and Barry T. Eisenberg (“Eisenberg”) ignored red flags indicating excessive trading and failed to supervise brokers with a view to preventing and detecting their securities-law violations. “Broker-dealers must protect their customers from excessive and unauthorized trading, as well as unsuitable recommendations,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “Alexander Capital’s supervisory system – and its personnel – failed its customers, and today’s actions reflect our continuing efforts to protect retail customers by holding firms and supervisors responsible for such failures.” Alexander Capital agreed to be censured and pay $193,775 of allegedly ill-gotten gains, $23,437 in interest, and a $193,775 penalty, which will be placed in a Fair Fund to be returned to harmed retail customers.  Alexander Capital also agreed to hire an independent consultant to review its policies and procedures and the systems to implement them.  Noto agreed to a permanent supervisory bar and a $20,000 penalty and Eisenberg agreed to a five-year supervisory bar and a $15,000 penalty.  The penalties are to be paid to harmed retail customers.  Alexander Capital, Noto and Eisenberg agreed to settle the charges without admitting or denying the findings in the SEC’s orders. A copy of the SEC’s Order Instituting Administrative Proceedings Pursuant To Section 15(b) of The Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions can be found here . Morgan Stanley Agrees to $3.6 Million Settlement in Connection With The Failure to Detect or Prevent Misappropriation of Client Funds On June 29, 2018, the SEC announced ( here ) that Morgan Stanley Smith Barney (“MSSB”) had agreed to pay a $3.6 million penalty and to accept certain undertakings in connection with its failure to protect against the misuse or misappropriation of funds from client accounts. According to the SEC, MSSB failed to have reasonably designed policies and procedures in place to prevent its advisory representatives from misusing or misappropriating funds from client accounts.  The SEC found that although MSSB’s policies provided for certain reviews of disbursement requests, the reviews were not reasonably designed to detect or prevent such potential misconduct. The SEC concluded that MSSB’s insufficient policies and procedures contributed to its failure to detect or prevent one of its advisory representatives, Barry F. Connell (“Cornell”), from misusing or misappropriating approximately $7 million out of four advisory clients’ accounts in approximately 110 unauthorized transactions occurring over a period of nearly a year. “Investment advisers must view the safeguarding of client assets from misappropriation or misuse by their personnel as a critical aspect of investor protection,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.  “Today’s order finds that Morgan Stanley fell short of its obligations in this regard.” Without admitting or denying the findings, MSSB consented to the SEC’s order, which includes a $3.6 million penalty, a censure, a cease-and-desist order, and undertakings related to the firm’s policies and procedures.  Morgan Stanley previously repaid the four advisory clients in full, plus interest. The SEC previously filed fraud charges against Connell ( here ), who was also criminally charged by the U.S. Attorney’s Office for the Southern District of New York.  Both sets of charges against Connell remain pending. A copy of the SEC’s Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Section 15(b) of The Securities Exchange Act of 1934 and Sections 203(e) and 203(k) of The Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order can be found here . Wells Fargo Advisors Settles Charges of Misconduct in The Sale of Financial Products to Retail Investors On June 25, 2018, the SEC announced ( here ) that Wells Fargo Advisors LLC (“Wells Fargo”) had agreed to settle charges of misconduct in the sale of financial products known as market-linked investments, or MLIs, to retail investors. The SEC found that Wells Fargo generated large fees by improperly encouraging retail customers to actively trade the products, which were intended to be held to maturity.  As described in the SEC’s order, the trading strategy – which involved selling the MLIs before maturity and investing the proceeds in new MLIs – generated substantial fees for Wells Fargo, which reduced the customers’ investment returns. The SEC found that the Wells Fargo representatives involved did not reasonably investigate or understand the significant costs of the recommendations.  The SEC further found that Wells Fargo supervisors routinely approved these transactions despite internal policies prohibiting short-term trading or “flipping” of the products. “It is important that brokers do their homework before they recommend that their retail customers buy or sell complex structured products,” said Daniel Michael, Chief of the Enforcement Division’s Complex Financial Instruments Unit.  “The products sold by Wells Fargo came with high fees and commissions, which Wells Fargo should have taken into account before advising retail customers to sell their investments and reinvest the proceeds in similar products.” Without admitting or denying the SEC’s findings, Wells Fargo agreed to return $930,377 of ill-gotten gains, plus $178,064 of interest, and to pay a $4 million penalty.  Wells Fargo also agreed to a censure and to cease and desist from committing or causing any violations and any future violations of certain antifraud provisions of the federal securities laws.  In imposing the foregoing sanctions, the SEC recognized that Wells Fargo took remedial steps to address the allegedly improper sales practices. A copy of the Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant To Section 8A of The Securities Act of 1933, Section 15(b) of The Securities Exchange Act of 1934, and Section 203(e) of The Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order can be found here . Merrill Lynch Agrees to Pay $42 Million to Settle Charges That it Mislead Customers about Trading Venues On June 19, 2018, the SEC announced ( here ) that it had charged Bank of America’s Merrill Lynch, Pierce, Fenner & Smith (“Merrill Lynch”) with misleading customers about how it handled their orders.  Merrill Lynch agreed to settle the charges, admit wrongdoing, and pay a $42 million penalty. The settlement with the SEC follows a similar resolution with the New York attorney general in a related investigation (discussed here ), under which Merrill Lynch admitted to engaging in a masking scheme and agreed to pay a $42 million fine. According to the SEC, Merrill Lynch falsely informed customers that it had executed millions of orders internally when it actually had routed them for execution at other broker-dealers, including proprietary trading firms and wholesale market makers.  Merrill Lynch called this practice “masking.” Masking entailed reprogramming Merrill Lynch’s systems to falsely report execution venues, altering records and reports, and providing misleading responses to customer inquiries.  By masking the broker-dealers who had executed customers’ orders, Merrill Lynch made itself appear to be a more active trading center and reduced access fees it typically paid to exchanges. After Merrill Lynch stopped masking in May 2013, it did not inform customers about its past practices, but instead took additional steps to hide its misconduct.  Altogether, the SEC found that Merrill Lynch falsely told customers that it executed more than 15 million “child” orders (portions of larger orders), comprising more than five billion shares, that actually were executed at third-party broker-dealers. “By misleading customers about where their trades were executed, Merrill Lynch deprived them of the ability to make informed decisions regarding their orders and broker-dealer relationships,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.  “Merrill Lynch, which admitted that it took steps to ensure that customers did not learn about this misconduct, fell far short of the standards expected of broker-dealers in our markets.” “Institutional traders often make careful choices about how and where their orders are sent out of a concern for information leakage,” said Joseph Sansone, Chief of the Enforcement Division’s Market Abuse Unit.  “Because of masking, customers who had instructed Merrill Lynch not to route their orders to third-party broker-dealers did not know that Merrill Lynch had disregarded their instructions.” The SEC censured Merrill Lynch and required it to pay a $42 million civil penalty. A copy of the Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant To Section 8a of The Securities Act of 1933, Section 15(b) of The Securities Exchange Act of  1934, and Section 203(e) of The Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order can be found here .