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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.

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 .

Family-run businesses are very common in the commercial world. In fact, according to recent studies, more than one-half of all U.S. companies are family operated.  Think of mom and pop stores and Walmart. The stress of running a family business can ruin a relationship. One need only look at Nissim Kassab (“Nissim”) and Avraham Kasab (“Avraham” and together with Nissim the “Brothers”), brothers and owners of Mall 92-30 Associates LLC (“Mall”). The Brothers have been in litigation over Mall and a related entity, Corner 160 Associates, Inc. (“Corner”), for a number of years in both the Supreme Court, Queens County and the Appellate Division, Second Department. The latest installment in their continuing litigation was filed in November 2017. Background Both Corner and Mall are real-estate holding companies. Together, the entities owned three adjacent, unimproved parcels of land in Jamaica, Queens. Corner owned Lots 79 and 130 of Block 10101, and Mall owned Lot 24 of the same block. Corner was incorporated in 1992. The Brothers jointly incorporated Corner and purchased the first property lot in Corner’s name. The Brothers subsequently bought a second plot in Corner’s name. In 2002, pursuant to an option agreement, Avraham became a 75% shareholder in Corner. Mall was formed in 2001. Mall purchased a lot adjacent to the two lots owned by Corner. Mall had an operating agreement, dated March 13, 2001, that each brother signed. The agreement lists the Brothers as the two members of Mall, along with their respective percentage of ownership (Avraham 75% and Nissim 25%). The operating agreement also provided that “the business and affairs of the Company be managed by the Members.” The Brothers operated a parking lot, as well as a flea market, on the three lots. Nissim took the primary role managing the properties on a day-to-day basis. The parking lot and the flea market are the only sources of income for Corner and Mall. The parking lot is a cash business. The parking lot is open five days a week, all year round except for snow days. The flea market operates on weekends during good weather, primarily during spring, summer and fall, and is also a cash business only. The property can accommodate 130 or 140 cars. In early 2017, Nissim charged Avraham with under-reporting the number of vehicles utilizing the parking lot, and consequently, the amount of income the lot produced. A similar charge was made with regard to the income from the flea market. In November 2017, Nissim filed a hybrid special proceeding and action seeking to, among other things, judicially dissolve Mall. Avraham moved to dismiss the petition. As to the cause of action seeking a judicial dissolution, the Court granted the motion. Matter of Kassab v. Kasab (2018 N.Y. Slip Op. 50934(U)) ( here ). The Law Under Section 702 of New York’s Limited Liability Company Law (“LLCL”), a court sitting in the judicial district in which the office of the company is located may dissolve the company “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” LLCL § 702. (This Blog addressed Section 702 here , here , and here .) To successfully petition for the dissolution of a limited liability company under LLCL § 702, the petitioning member must demonstrate the following: 1) the management of the company is unable or unwilling to reasonably permit or promote the stated purpose of the company to be realized or achieved; or 2) continuing the company is financially unfeasible. Matter of 1545 Ocean Avenue, LLC v. Crown Royal Ventures, LLC , 72 A.D.3d 121 (2d Dept. 2010); Doyle v. Icon, LLC , 103 A.D.3d 440 (1st Dept. 2013). Therefore, where the purposes for which the LLC was formed are being achieved and its finances remain feasible, dissolution pursuant to LLCL § 702 will be denied. Matter of Eight of Swords, LLC , 96 A.D.3d 839, 840 (2d Dept. 2012). Disputes between members, by themselves, are generally insufficient to dissolve an LLC that operates in a manner within the contemplation of its purposes and objectives as defined in its articles of organization and/or operating agreement. See e.g. , Matter of Natanel v. Cohen , 43 Misc.3d 1217(A) (Sup. Ct. Kings Co. 2014). It is only where discord and disputes by and among the members are shown to be inimical to achieving the purpose of the LLC will dissolution be considered an available remedy to the petitioner. Matter of 1545 Ocean , 72 A.D.3d at 130-132. The Court’s Decision In dismissing the claim for judicial dissolution, the court found that Nissim “failed to state a cause of action.…” First, the Court found that Avraham’s management of the corporation did not thwart the purpose of Mall: Mall’s Operating Agreement, dated March 13, 2001, and signed by both Nissim and Avraham, states that its purpose is “engaging in any lawful act or activity for which limited liabilities companies may be formed under the LLCL and engaging in any and all activities necessary or incidental to the foregoing.” Nissim and Avraham did not execute a subsequent Operating Agreement.… Mall continues to hold a license to operate a parking lot.… It is undisputed that Mall is a real estate holding company and that it owns a unimproved parcel of real property (Block 10101, Lot 24). Petitioner does not allege that Mall is unable to pay its expenses related to the ownership of its real property, and, therefore, it continues to be a viable real estate holding company. Petitioner’s allegations, thus, are insufficient to demonstrate that “the management of Mall is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved” or that “continuing the entity is financially unfeasible.” Second, the Court rejected Nissim’s “allegations of oppressive conduct and efforts to exclude from the management of the LLC,” as sufficient to support judicial dissolution. In doing so, the Court found that the discord between the Brothers was not an impediment to achieving the purpose of Mall: The Court further finds that the petitioner’s allegations are insufficient to demonstrate that the discord and disputes between himself and Avraham are inimical to achieving Mall’s purpose. The fact that Avraham has excluded Nissim from participating in the operation of Mall, and that in the past they have had different views regarding business opportunities related to the real property owned by Corner and Mall, is insufficient to warrant a dissolution of the subject limited liability company. Accordingly, the Court granted Avraham’s motion to dismiss the petition as it pertained to the dissolution of Mall. Takeaway Breaking up is hard to do, especially for brothers who have been in litigation with each other for a number of years. Kassab is another example of the difficulties an LLC member faces in seeking judicial dissolution of the LLC.

Virtual offices are all the rage nowadays. However, if you are admitted to practice in New York State, but reside outside of New York State, a virtual office is insufficient to satisfy the requirements of section 470 of New York’s Judiciary Law, which provides: A person, regularly admitted to practice as an attorney and counsellor, in the courts of record of this state, whose office for the transaction of law business is within the state, may practice as such attorney or counsellor, although he resides in an adjoining state. Section 470 requires that “non-resident attorneys must maintain an office within New York to practice in .”  ( Schoenefeld v. State, 25 N.Y.3d 22 (2015).)  Courts, however, have interpreted section to require a physical office. The ramifications for the failure to comply with section 470, which was initially enacted when Abraham Lincoln was president, can be significant. The history and significance of section 470 is illustrated in Schoenefeld.   The plaintiff in Schoenefeld was a member of the New York bar, practicing and residing in New Jersey.  While taking a New York CLE course, she learned about the requirements of section 470 and commenced an action in federal district court challenging the constitutionality of section 470 as violative of the Privileges and Immunities Clause of the United States Constitution. In support of her position she argued that: (1) she could not practice in New York because she did not maintain an office in New York despite having satisfied all of her admission requirements: and, (2) no substantial state interest was served by requiring an office in New York for non-residents, when such a requirement did not apply to resident attorneys.  The federal district court sided with Schoenefeld.  On appeal, however, the Second Circuit determined that “the constitutionality of the statute was dependent upon the interpretation of the law office requirement” observing that “the requirements that must be met by non-resident attorneys in order to practice law in New York reflect an important state interest and implicate significant policy issues”.  Accordingly, the Second Circuit certified the following question to the New York Court of Appeals: “Under New York Judiciary Law § 470, which mandates that a nonresident attorney maintain an ‘office for the transaction of law business’ within the state of New York, what are the minimum requirements necessary to satisfy that mandate.” In answering the certified question, the Schoenefeld Court of Appeals interpreted section 470 as requiring an attorney admitted to practice in New York State, but residing out of state, “to maintain a physical law office within the State.”  The Court found that the statute presupposed a residency requirement for the practice of law in New York State,” but made an exception “by allowing nonresidents attorneys practicing in New York to maintain a physical law office here.”  The Schoenefeld defendants urged that if the statute was interpreted to require a physical presence for the receipt of service (whether an address or an appointed agent), the “legislative purpose” of the statute could be fulfilled in a manner that would “withstand constitutional scrutiny”. The Schoenefeld Court of Appeals recognized that while section 470 is presently silent on the issue of service, when the statute was originally enacted in 1862, it required that “an attorney who maintained an office in New York, but lived in an adjoining state, could practice in this State’s courts and that service, which could ordinarily be made upon a New York Attorney at his residence, could be made upon the nonresident attorney through mail addressed to his office.”  In 1877, the provision was codified and in 1909 it was divided into two parts: (1) a service provision (which remained in the provision codified in 1877); and, (2) a law office requirement (which ultimately became section 470).  The Court of Appeals also noted that in Matter of Gordon , 48 N.Y.2d 266 (1979), it found that then CPLR 9406(2), which required that an applicant to the New York bar provide proof of residency in New York for “six months immediately preceding the submission of his application for admission to practice,” violated the Privileges and Immunities Clause of the U.S. Constitution and thereafter, numerous provisions of the Judiciary Law and the CPLR (but not section 470) were amended to conform to Gordon . Thus, it is clear that in New York a non-resident attorney admitted in New York must maintain an office in New York in order to practice in New York.  The failure to comply with section 470 could have significant ramifications for the non-compliant attorney and her client.  In Arrowhead Capital Finance v. Cheyne Specialty Finance Fund , 154 A.D.3d 523 (1 st Dep’t 2017), the Court affirmed the dismissal, without prejudice, of the action because it was commenced by a non-resident attorney without an office in New York and “ laintiff’s subsequent retention of co-counsel with an in-state office did not cure the violation since the commencement of the action in violation of Judiciary Law § 470 was a nullity.”  Upon reviewing the supreme court files in Arrowhead , it appears that the defendant’s counsel hired an investigator to investigate the office situation of plaintiff’s counsel and, thereafter, moved to dismiss the action based counsel’s failure to maintain an office in New York. Two recent cases hold that the requirement that a non-resident attorney maintain an office in New York is not satisfied if that attorney maintains a “virtual office”.  In Marina District Dev. Co. v. Taledano , 60 Misc.3d 1203A (NOR) (Sup. Ct., New York Co. June 18, 2018), plaintiff moved for summary judgment in lieu of complaint based on a New Jersey default judgment.  The court refused to reach the merits of the motion and, instead, dismissed the action because plaintiff’s counsel did not maintain a physical office in New York.  In rejecting counsel’s claim that his “virtual office at the New York City Bar” satisfied the requirements of Judiciary Law § 470, the court stated: By definition, a virtual office is not an actual office.  The court is not persuaded to the contrary by the affidavit the attorney provides from a person affiliated with the…organization .  That affidavit states that the organization will take telephone messages for a member and that it will forward mail to the member.  It also states that meeting rooms may be made available to that member.  However, the attorney’s own papers negate any possibility that he uses the City Bar’s facilities as his office and actually demonstrate that he does not use this as an office inter alia, he directs mail to his philadelphia address and lists his philadelphia phone number on his papers> inter alia, he directs mail to his philadelphia address and lists his philadelphia phone number on his papers>. Similarly, in Law Office of Angela Barker v. Broxton, ____ Misc.3d ____, 2018 Slip Op.2816 (App. Term 1 st Dep’t June 11, 2018), a case relied upon by the Marina District court, the court reversed the civil court of the City of New York and dismissed plaintiff’s complaint, and stated: Plaintiff’s counsel’s use of a “virtual office” at a specified New York City address, instead of maintaining a physical office for the practice of law within New York at the time the action was commenced, was a violation of Judiciary Law § 470, and requires dismissal of the underlying action.  The term “office” as contained in section 470 “implies more than just an address or an agent appointed to receive process… the statutory language that modifies “office” – “for the transaction of law business”—may further narrow the scope of permissible constructions”.  (Quoting Schonefeld, supra, (some citations omitted).) TAKEAWAY Technology has caused a sharp rise in the use of virtual offices by countless and varied professions and businesses.  Attorneys admitted in New York, however, are bound by, inter alia , the Judiciary Law and may have to consider the ramifications of section 470 (such as the running of applicable statutes of limitations in light of a dismissal, addressing incurred costs and legal fees after a dismissal and the potential for disciplinary proceedings or other ramifications for violations of the Judiciary Law) before relying on a virtual office to satisfy the “office” requirement contained therein.  Similar rules exist in some states and attorneys who are considering working in states in which they are admitted, but do not reside, might consider the looking into whether “virtual offices” satisfy any in-state office requirements that may exist. Also, bear in mind that this issue can be used as leverage by opposing counsel to pressure the violating attorney into recommending a resolution or a course of action that may not in the best interest of the client.

On June 21, 2018, the United States Supreme Court resolved a split among the circuit courts over the constitutionality of administrative law judges (“ALJs”) appointed by the staff of the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”). In Lucia v. U.S. Securities and Exchange Commission , the Court held that the appointment of the SEC’s ALJs by members of the Commission’s staff, rather than the Commission itself, violated the Appointments Clause of the Constitution (U.S. Const., art. II, § 2, cl. 2.). Lucia et al. v. Sec. Exch. Comm’n , No. 17-130, 585 U.S. __ (2018) ( here ). In doing so, the Court reversed the Court of Appeals for the District of Columbia (the “D.C. Circuit”), which held that the ALJs were “mere employees” rather than “Officers of the United States” within the meaning of the Appointments Clause. Raymond J. Lucia Cos., Inc. v. Sec. Exch. Comm’n , 832 F.3d 277 (D.C. Cir. 2016) ( here ). This Blog previously addressed the case here . Background The case arose from an administrative proceeding brought by the SEC against Raymond J. Lucia and his investment company (collectively, “Lucia”).  Lucia marketed a wealth-management strategy, which they called “Buckets of Money,” under which retirement savings were divided among assets of different risk levels ( e.g. , bonds, fixed annuities, and stocks) and periodically reallocated as those assets changed in value.  The Commission instituted administrative proceedings against Lucia based on allegations that they had used misleading slideshow presentations to deceive prospective clients about how the Buckets of Money strategy would have performed under historical market conditions. The Commission charged Lucia with violating the Securities Exchange Act of 1934, the Investment Advisers Act of 1940 (“IAA”), and the Investment Company Act of 1940. An ALJ conducted the initial stages of the proceeding. During a nine-day hearing, the ALJ presided over witness testimony and cross-examinations, admitted documentary evidence, and ruled on objections.  After the hearing, the ALJ issued an initial decision finding that Lucia had made fraudulent misrepresentations related to one of their investment strategies.  After the Commission directed the ALJ to make additional factual findings with respect to other alleged misrepresentations, the ALJ issued a revised initial decision finding that Lucia had willfully and materially misled investors, in violation of the IAA. The ALJ ordered a variety of sanctions to be imposed on Lucia, including revocation of his registration as an investment adviser; a permanent bar on associating with investment advisers, brokers, or dealers; a cease-and-desist injunction against future violations; and $300,000 in civil penalties. Lucia appealed. On appeal, the Commission conducted “an independent review of the record, except with respect to those findings not challenged on appeal.”  Exchange Act Release No. 73,857, at 3, 2015 WL 5172953 (SEC Sept. 3, 2015) ( here ). The Commission determined that the ALJ had correctly found that Lucia had willfully made fraudulent statements and omissions in violation of the IAA. The Commission also largely “affirm ,” with limited exceptions, “the sanctions imposed” by the ALJ. Two Commissioners dissented with respect to one aspect of the Commission’s liability determination. Lucia argued before the Commission that the proceeding against him was unlawful because the ALJ who had conducted the hearing and issued the initial decision was an “Officer[ ] of the United States” within the meaning of the Appointments Clause. Id . at 28. As such, the ALJ had not been appointed, in accordance with that provision, “by the President, the head of a department, or a court of law.” Id . at 29. The Commission rejected Lucia’s argument. In the Commission’s view, its ALJs were mere employees rather than constitutional officers because they do not exercise “significant authority independent of the supervision.” Id . Among other things, the Commission explained, its ALJs “issue ‘initial decisions’ that are … not final”; a person aggrieved by an initial decision may seek review before the Commission, which “grant virtually all petitions for review”; the Commission may review any ALJ decision sua sponte; review of an ALJ’s decision is de novo; and under the Commission’s rules, “no initial decision becomes final simply on the lapse of time by operation of law,” but instead becomes final only upon “the Commission’s issuance of a finality order.” Id . at 30 (citation and internal quotation marks omitted). The Commission also distinguished the Supreme Court’s decision in Freytag v. Commissioner , 501 U. S. 868 (1991), finding that “ Freytag inapposite here.” Id . at 32. The D.C. Circuit affirmed the Commission’s decision. The court rejected Lucia’s Appointments Clause challenge, holding that the Commission’s ALJs are mere employees rather than officers under the Constitution because they do not exercise “significant authority pursuant to the laws of the United States.” Id . at 284. In so ruling, the court relied on its prior decision in Landry v. FDIC , 204 F.3d 1125, 1133-1134 (D.C. Cir.), cert. denied , 531 U.S. 924 (2000), in which it held that the ALJs used by the Federal Deposit Insurance Corporation (“FDIC”) were not officers of the United States because they could not issue final decisions on behalf of the agency – i.e. , they could not exercise significant authority to bind third parties, or the government itself, for the public benefit. Id . at 1333; see also Lucia , 832 F.3d at 285. The D.C. Circuit determined that an SEC ALJ’s initial decision is similarly non-final, and it rejected Lucia’s attempts to distinguish Landry . Lucia , 832 F.3d at 285. The court also rejected Lucia’s argument that the SEC’s ALJs “exercise greater authority than FDIC ALJs in view of differences in the scope of review of the ALJ’s decisions.” Id . at 288. The court acknowledged that “the Commission may sometimes defer to the credibility determinations of its ALJs,” but it concluded that “the Commission’s scope of review is no more deferential than that of the FDIC Board.” Id . The court further rejected Lucia’s attempt to equate the SEC’s ALJs with the special trial judges (“STJs”) of the Tax Court who were held to be officers in Freytag . In the court’s view, the STJs were distinguishable because, as “members of an Article I court,” they “could exercise the judicial power of the United States” and “issue final decisions in at least some cases.” Id . at 284-85.  The court also found STJs to be different than SEC ALJs because “the Tax Court in Freytag was required to defer to the special trial judge’s factual and credibility findings unless they were clearly erroneous.” Id . at 288 (citation and internal quotation marks omitted). The Commission, by contrast, “is not required to adopt the credibility determinations of an ALJ.” Id . Thereafter, Lucia sought a rehearing en banc . Before the entire D.C. Circuit heard the case, the Tenth Circuit determined that SEC ALJs were officers of the United States thereby creating a split among the circuits. See Bandimere v. SEC , 844 F. 3d 1168, 1179 (2016). Significantly, the Tenth Circuit read Freytag differently than the D.C. Circuit and, thus, ruled that the ALJs performed functions similar to judges of the Tax Court. After hearing argument, an evenly divided D.C. Circuit, sitting en banc , issued a per curiam order denying Lucia’s claim. See 868 F. 3d 1021 (2017). As a result, the D.C Circuit was in conflict with the Tenth Circuit. Lucia filed a petition for certiorari with the Supreme Court for its review. Thereafter, the government changed its position from defending the Commission’s finding that its ALJs are mere employees, to asserting that SEC ALJs were officers within the meaning of the Appointment Clause. Additionally, the day after the government changed its litigation position, the Commission issued an order ratifying the prior appointment of its ALJs. The Court’s Decision Justice Kagan’s Majority Opinion Justice Kagan wrote the opinion for a fractured six-justice majority. In concluding that SEC ALJs are officers rather than mere employees, Justice Kagan noted that the decision turned on whether the ALJs “exercise significant authority pursuant to the laws of the United States.” Slip op. at 6 (citing Buckley v. Valeo , 424 U.S. 1, 126 (1976)). In framing the focus of the inquiry “on the extent of power an individual wields in carrying out his assigned functions” ( id .), Justice Kagan found that “ Freytag says everything necessary to decide this case.” Id . at 8. “To begin,” Justice Kagan observed, “the Commission’s ALJs, like the Tax Court’s STJs, hold a continuing office established by law.” Id . “The Commission’s ALJs exercise the same ‘significant discretion’ when carrying out the same ‘important functions’ as STJs do.” Id . And, importantly, noted Justice Kagan, SEC ALJs possess “all the authority needed to ensure fair and orderly adversarial hearings—indeed, nearly all the tools of federal trial judges” ( id .), such as they “take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders” and “administer oaths,” “shape the administrative record,” may punish “contemptuous conduct” and, “at the close of those proceedings, ALJs issue decisions.” Slip op. at 8-9 (citations omitted). Thus, “point for point—straight from Freytag’s list—the Commission’s ALJs have equivalent duties and powers as STJs in conducting adversarial inquiries.” Id . at 9. Justice Kagan rejected the argument advanced by an amicus that the Tax Court judges in Freytag differed because (1) “they had authority to punish contempt” (including discovery violations) through fines or imprisonment” and (2) under the Tax Court rules, their findings of fact are “presumed correct.” She found those “distinctions no difference for officer status.” Slip op. at 10. She found the contempt distinction of no moment because SEC ALJs could “enforce their will through conventional weapons” by excluding the wrongdoer (whether a party or a lawyer) from the proceedings” or, if the “offender is an attorney,” “ ummarily suspend ” him from representing his client.…” Slip op. at 10-11 (internal quotation marks and citations omitted). She also found the “ amicus’s standard-of-review distinction” to “fare[] just as badly” because the Freytag Court never suggested that the deference given to STJs’ factual findings mattered to its Appointments Clause analysis.” Indeed, said Justice Kagan, “the relevant part of Freytag did not so much as mention the subject.” Slip op. at 11. In any event, “the Commission often accords a similar deference to its ALJs, even if not by regulation.” Id . Justice Kagan also rejected Justice Sotomayor’s argument that “significant authority” requires the ability for judges to enter final decisions in at least some instances. Noting that this was only a “back-up” rationale of Freytag , Justice Kagan found that “ Freytag has two parts, and its primary analysis explicitly rejects JUSTICE SOTOMAYOR’s theory that final decisionmaking authority is a sine qua non of officer status.” Slip op. at 8 n.4. Regardless, she noted that the Commission often defers to ALJ’s factual findings. Id . at 11 (“the Commission adopts credibility finding absent overwhelming evidence to the contrary.”) (citations and internal quotation marks omitted). Having found that Lucia timely challenged the appointment of the ALJ, Justice Kagan found that the only “appropriate” remedy available was to hold a new “hearing before a properly appointed” official,” though that official could not be the ALJ who presided over Lucia’s case. Slip op. at 12. She reasoned that the original ALJ could not “be expected to consider the matter as though he had not adjudicated it before” he was improperly appointed. Id .  Justice Kagan observed that such a remedy comported with the Court’s “Appointments Clause remedies,” thereby rejecting Justice Breyer’s structural purposes argument. Slip at 12 n.5. Finally, the Court passed on two issues raised by the parties. First, the Court declined to address the issue concerning the Commission’s attempt to ratify prior ALJ appointments. Slip op. at 13 n.6. Second, the Court declined to address the constitutionality of the statutory removal protections for ALJs, noting that it was premature to do so. Id . at 4 n.1. Justice Breyer’s Concurrence Justice Breyer with whom Justice Ginsburg and Justice Sotomayor joined in part, concurring in the judgment in part and dissenting in part, would have avoided the constitutional issue and found that the ALJs were wrongfully appointed under the Administrative Procedure Act (“APA”). Opinion of Breyer, J., concurring in the judgment and dissenting in part (“Concurring Opinion”), at 1. Justice Breyer reasoned that there was a question “embedded” in the “constitutional question,” which the majority left unanswered: “the constitutionality of the statutory ‘for cause’ removal protections that Congress provided for administrative law judges.” Id . Thus, if ALJs are officers under the Appointments Clause, then the statutory protection under the APA might be unconstitutional under the Court’s prior holding in another case that officers cannot have “multilevel protection from removal” by the President. Id . at 4-5 (citing Free Enterprise Fund v. Public Company Accounting Oversight Bd. , 561 U. S. 477 (2010)). Justice Breyer expressed concern that “ If the Free Enterprise Fund Court’s holding applies equally to the administrative law judges,” then the majority’s holding “would risk transforming administrative law judges from independent adjudicators into dependent decisionmakers, serving at the pleasure of the Commission,” and “threaten[] to change the nature of our merit-based civil service as it has existed from the time of President Chester Alan Arthur.” Concurring opinion at 6 (orig’l emphasis). Justice Thomas’ Concurrence Although Justice Thomas joined the majority in its conclusion, Justice Thomas, joined by Justice Gorsuch, would have decided the case “based on the original public meaning of ‘Officers of the United States.’” Thomas, J., concurring opinion at 1. Under the Founders’ interpretation of the Appointments Clause, the definition of “Officer” “encompassed all federal civil officials with responsibility for an ongoing statutory duty.” Id . at 2 (citations omitted and internal quotation marks omitted). Thus, according to Justice Thomas, an officer would likely include individuals who “performed only ministerial duties.” Id . at 3. For that reason, and “ ecause the Court reache the same conclusion by correctly applying Freytag , join its opinion.” Justice Sotomayor’s Dissent Justice Sotomayor, joined by Justice Ginsburg, agreed with the decision of the D.C. Circuit and the Commission – namely, that SEC ALJs are not officers within the meaning of the Appointments Clause because they cannot issue final, binding decisions on behalf of the government. Dissenting opinion at 2. Notably, Justice Sotomayor read Freytag as “consistent” with her conclusion that “a prerequisite to officer status is the authority, in at least some instances, to issue final decisions that bind the Government or third parties.” Id . at 5. Takeaway In granting certiorari, the Court resolved the question it agreed to consider.  However, it left many more questions unresolved. Indeed, given the varying reasons advanced by the Justices for reaching their conclusions, the path forward for other agencies and their administrative judges, who exercise differing levels of authority than SEC ALJs, may find it difficult to determine whether their ALJs are constitutionally appointed. For example, the various decisions do not explain the minimum amount of authority needed to consider an ALJ to be an officer within the meaning of the Appointments Clause. The absence of such guidance impacts the nearly 1,930 ALJs employed by the federal government in twenty-six agencies. See Brief for Federal Administrative Law Judges Conference, as Amici Curiae Supporting Neither Party, Lucia v. SEC , 585 U.S. __ (2018) (No. 17-130) ( here ). The Court’s decision leaves the issue up in the air for these agencies and the courts that will undoubtedly hear challenges on this ground. After Lucia , the constitutionality of the removal protections for ALJs remains open to legal challenge. The Court expressly declined to address the issue, noting that it “ordinarily await thorough lower court opinions to guide analysis of the merits.”  Slip op. at 4 n.1. Thus, parties in administrative proceedings will have a viable basis upon which to challenge rulings that are issued against them. More directly, Lucia should have an immediate impact on pending and resolved SEC proceedings. Since the Commission ratified the prior appointment of all five of its ALJs, the Commission will most likely contend that it has already satisfied the constitutional mandate that it appoint its ALJs. The Court did not address the challenge to the validity of the Commission’s ratification, thereby leaving open the possibility that administrative proceedings commenced after the ratification order ( i.e. , after November 30, 2017) may continue. To remove any doubt about the validity of the prior ratification, the Commission may proceed with a formal appointment process for its ALJs in which the Commission formally votes on the ALJs, administers oaths of office, and delivers commissions.  If the Commission were to pursue such action, going forward, it should reduce the possibility of later challenges to the Commission’s ALJs. Lucia is more likely to affect pending and resolved SEC administrative proceedings. Since the majority held that the remedy for a proceeding tainted by a violation of the Appointments Clause is a new hearing before a properly appointed official, pending and resolved SEC administrative proceedings may require the Commission to reassign (and possibly open resolved) cases to a constitutionally appointed officer.  Should that occur, respondents may have statute of limitations defenses. See , e.g. , 28 U.S.C. § 2462 (imposing five-year statute of limitations from the date “when the claim first accrued” on commencement of government “enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise”). In that event, respondents could challenge subsequent administrative orders instituting enforcement proceedings on those grounds. Given the uncertainties surrounding ratification and the constitutionality of pending and resolved cases presided over by a tainted or potentially tainted ALJ, the SEC may determine to litigate contested matters in federal court, rather than in administrative proceedings. Time will tell whether the Commission turns to federal court proceedings in the wake of Lucia . The Court’s decision can be found here .

Traveling is an amazing way to see the world. New York is an amazing place in the world to see. As the global capital of fashion, art, finance, and more, it comes as no surprise that tourism has always accounted for a large amount of the state’s revenue. Individuals travel from all over the world to see the many things that New York has to offer. With all of the opportunity in New York and the amount of business conducted within the state, New York has become the second largest hub for technology in the country. That’s why a new proposed bill appears to threaten that very status as an industry leader and innovator. Recently, members of the City’s Council have proposed a bill that stands to threaten New York's economy by passing legislation that would punish and restrict technology home sharing platforms, such as Airbnb. The proposal would serve to regulate short-term rentals, with the potential to jeopardize the economic contribution of home sharing. As of now, a majority of City Council members support the bill, making it most likely to pass. The Purpose of the Bill The purpose of the bill is to crack down on illegal shadow hotels, rentals scheduled for under 30 days where the homeowner isn’t present. The concern is that these situations, if not regulated, would make housing more expensive, pushing out lower-income tenants. Abuse of the system has been experienced by certain rent-stabilized tenants, with prostitution rings and illegal sex clubs using the rentals for their own illegal purposes. The bill would require Airbnb to submit the names and addresses of its hosts or otherwise face a hefty fine. Airbnb, an app (and website) that allows for individuals to rent out the homes of others, acts to serve as a reliable source for supplemental income for the owners of those properties. These rentals also serve to help travelers and tourists save money while also immersing themselves in the city’s neighborhoods and culture, further adding to the local economy. The Downside of its Potential Passing The technology industry in New York City already accounts for more than 326,000 jobs, with the opportunity to only continue growing. However, if new legislation, such as the proposed bill, is implemented, growth within the industry is not a guarantee. Airbnb is in support of legislation that would safely regulate hosts to register with the state, limiting them to one property per state, and remitting taxes to the state. Although there is a concern that individuals may extort the opportunity to host their homes by instead of operating illegal hotels and other properties, the bill fails to differentiate between the two. What Might This Mean? Unlike New York, Connecticut, Vermont, and Pennsylvania have figured out a solution to this potential issue without compromising the ability of these housing technology companies to contribute to the economy in a safe way. These states have extended state taxes to home sharing. However, Council Speaker, Corey Johnson, contends that the bill would not be used as an abuse of power. “We’re not going to use it to go after every person. It’s to know if there are bad actors that are operating outside of the legitimate framework that’s in place.”

Given the spate of high-profile sexual harassment cases that have been reported in the media, employers must understand their rights and responsibilities under state and federal employment laws. In particular, business owners must establish policies and procedures that clarify relationships with employees. By enlisting the services of experienced attorneys, you can protect your business from civil lawsuits brought by employees -- here’s how. Employee Policies and Procedures Regardless of the size of your business, it's important to establish employee policies in a handbook that clarifies the expectations of all workers and the company’s code of conduct. In particular, policies that should be covered include: Anti-discrimination rules Equal opportunity employment guidelines Paid time off Medical and family leave procedures Social media and internet usage rules Employee Classification It is crucial to properly classify workers as exempt, non-exempt, or independent contractors. It is also necessary to establish compensation for hourly wages and overtime work in accordance with the Fair Labor Standards Act (FLSA). It is also important to consider any applicable state wage and hour laws. Protect Intellectual Property If you intend to bring new products to the market or your business holds other confidential information, it is essential to protect this valuable intellectual property. While it may be necessary to obtain patents and trademarks, employees can also be required to sign non-disclosure and non-compete agreements. A non-disclosure agreement (NDA) prevents an employee from disclosing confidential information to anyone outside of the company. In a non-compete agreement, the employee agrees not to work for a competitor for a certain period of time, within a specific geographic region, after his or her employment ends. In short, well-designed NDAs and non-compete agreements can help your business prevent the misappropriation of your IP and the resulting costly litigation. Business Insurance While you can protect your business with a general liability policy, there are different types of insurance that can protect a business from certain disputes. Directors and Officers Insurance (D&O), for example, indemnifies executives from claims that are brought against them individually in connection with business activity. Another type of insurance -- Employment Practices Liability Insurance (EPLI) -- covers legal costs that arise from employee lawsuits over claims of discrimination, harassment, retaliation and wrongful termination. Legal Representation Can Help Reduce The Risk of Litigation In the final analysis, employment-related disputes that rise to the level of civil litigation can be costly and have an adverse impact on your business’ reputation. Legal representation can help you mitigate the risk of litigation and ensure that business operations run smoothly. Contact us today for more information.

The U.S. Supreme Court has agreed to hear the appeal of an investment banker barred from the securities industry in a case concerning the scope of investor protection laws. ( Here .)  The high court will consider whether an individual who passed along false statements about a company’s financial condition can be found liable for engaging in securities fraud.  In particular, the Court  will consider whether the Securities Exchange Commission (SEC) can circumvent the requirements set forth in  Janus Capital Group, Inc. v. First Derivate Traders , 564 U.S. 135 (2011), for pleading and proving a claim under Section 10(b) of the Securities and Exchange Act of 1934 (Exchange Act) and Rule 10b-5 promulgated thereunder by recasting its claim as one for “scheme” liability. Lorenzo v. SEC , No. 17-1077 (certiorari granted June 18, 2018). The Backdrop In 2015, Francis V. Lorenzo (Lorenzo), a director of investment banking with Charles Vista, LLC (Charles Vista), was fined $15,000 and barred from the industry by an SEC Administrative Law Judge (ALJ) for participating in a scheme to defraud investors. The judge found that Lorenzo solicited investors through two emails that misrepresented the financial condition of a start-up energy company in 2009. The company, Waste2Energy Holdings Inc. (W2E), Charles Vista’s largest investment banking client, was seeking to develop technology that transformed solid waste into energy. In September 2009, W2E sought to raise about $15 million through the sale of 12% convertible debentures. Charles Vista was the exclusive placement agent. Lorenzo emailed two potential investors “several key points” about W2E’s debenture offering. The emails failed to disclose a recent devaluation of the company’s assets. Instead, the investors were told that there were “3 layers of protection.” One of the messages stated it had been sent at the request of the owner of the firm. The SEC issued an order charging Lorenzo, Gregg Lorenzo (the owner of Charles Vista) and Charles Vista with fraud in violation of Section 17(a)(1) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Exchange Act. ( Here .) Gregg Lorenzo and Charles Vista agreed to a disgorgement payment of $130,000 and prejudgment interest of $20,000. Additionally, Gregg Lorenzo and Charles Vista agreed to pay a civil penalty of $375,000 and $4,350,000, respectively, in settlement of the charges. Lorenzo did not settle. During the administrative proceedings, Lorenzo  testified that he sent the emails at the behest of his boss – he did not write them. Instead, Lorenzo cut and paste what was written. No other testimony was presented. In the Initial Decision, the ALJ found that Lorenzo did not read the text of the emails and had sent the emails “without thinking.” Importantly, the ALJ concluded that  emails were “staggering” in their falsity. As a result, the ALJ held that  Lorenzo had acted willfully with the intent to deceive, manipulate, or defraud  and had participated in a “deceptive scheme” in violation of the federal securities laws. The Commission affirmed. In its opinion, the agency concluded that Lorenzo was responsible for the emails and their content. Notably, the Commission did not accept all the findings of the ALJ. The SEC ordered Lorenzo to pay a $15,000 penalty and barred him for life from the securities industry. ( Here .) In a 2-1 decision, the D.C. Court of Appeals affirmed in part the Commission's decision; the matter was remanded for reconsideration of the sanctions. Lorenzo v. SEC , 872 F.3d 578 (D.C. Cir. 2017) ( here ). In an opinion written by Judge Srinivasan, joined by Judge Griffith, the court concluded that the Commission’s findings ( e.g. , that each e-mail was materially false and misleading, and that Lorenzo acted with scienter) were supported by the evidence.  Nevertheless, the majority concluded, citing Janus Capital , that “Lorenzo did not ‘make’ the false statements at issue for purposes of rule 10b-5(b) because Lorenzo’s boss, and not Lorenzo himself, retained ‘ultimate authority’ over the statements.” Lorenzo , 872 F.3d at 580. See also id . at 588. Consequently, Lorenzo could not be held liable for violating Rule 10b-5(b) as charged. However, the majority concluded that "Lorenzo's particular conduct . . . fits comfortably within the language of Rules 10b-5(a) and (c)"; namely, the scheme liability provisions of the law ( i.e. , Section 10b-5(a) and (c)). Lorenzo , 872 F.3d at 595. The court rejected the claim that such a holding would undermine the distinctions between primary and secondary ( i.e. , aider and abettor) liability on which Janus Capital  was based. Lorenzo , 872 F.3d at 590-91.  Since the penalty determination could have been impacted by the Commission’s determination on liability, the majority vacated the sanctions and remanded the matter to the SEC for further consideration. Id . at 595-96. Judge Kavanaugh dissented. While Judge Kavanaugh agreed with the majority's determination on Janus Capital , he nevertheless dissented, writing: “The good news is that the majority opinion vacates the lifetime suspension. The bad news is that the majority opinion – invoking a standard of deference that, as applied here, seems akin to a standard of ‘hold your nose to avoid the stink’—upholds much of the SEC’s decision on liability. I would vacate the SEC’s conclusions as to both sanctions and liability.”  Lorenzo , 872 F.3d at 597. Judge Kavanaugh based his dissent on three points. First, he questioned the "factual findings and legal conclusions" of the ALJ because they "do not square up." Lorenzo , 872 F.3d at 597. If Lorenzo did not draft the emails, did not think about their contents and sent them only at the behest of his boss, then he could not have acted "willfully".  The mens rea is missing, said the dissent. Id . ("If Lorenzo did not draft the emails, did not think about the contents of the emails, and sent the emails only at the behest of his boss, it is impossible to find that Lorenzo acted "willfully." That is Mens Rea 101.") Accordingly, Judge Kavanaugh concluded that the "administrative law judge’s decision . . . contravenes basic due process” and, therefore, made "a hash of the term 'willfully,' and of the deeply rooted principle that punishment must correspond to blameworthiness based on the defendant's mens rea." Id . at 598. Second, describing the Commission's actions as "Houdini-like," Judge Kavanaugh concluded that the Commission manufactured the facts to reach the desired conclusion: assessment of sanctions against Lorenzo: "The Commission's handiwork in this case is its own debacle. Faced with inconvenient factual findings that would make it hard to uphold the sanctions against Lorenzo, the Commission — without hearing any testimony — simply manufactured a new assessment of Lorenzo's credibility and rewrote the judge's factual findings. So much for a fair trial."  Lorenzo , 872 F.3d at 598-99. Finally, Judge Kavanaugh accused the majority of accepting the “alternative facts” used by the SEC, instead of those found by the ALJ -- the person in the best position to assess the credibility of Lorenzo, the only witness in the proceeding -- "that Lorenzo did not draft the emails, did not think about the contents of the emails, and sent the emails only at the behest of his boss." Lorenzo , 872 F.3d at 599. Judge Kavanaugh concluded that the Commission's "rewriting of the administrative law judge's findings of fact was utterly unreasonable and should not be sustained or countenanced by this Court." Id .  He found that "the SEC had no reasonable basis to run roughshod over the administrative law judge's findings of fact and credibility assessments." Therefore, he said, "the SEC's rewriting of the findings of fact deserves judicial repudiation, not judicial deference or respect." Id . at 600. Judge Kavanaugh noted that even if he was wrong, the majority nevertheless "create " an unnecessary "circuit split by holding that mere misstatements, standing alone, may constitute the basis for so-called scheme liability under the securities laws — that is, willful participation in a scheme to defraud — even if the defendant did not make the misstatements."   Lorenzo , 872 F.3d at 600.  Noting that no other circuit court had "concluded that scheme liability must be based on conduct that goes beyond a defendant's role in preparing mere misstatements or omissions made by others," Judge Kavanaugh observed that the majority opinion stood alone by allowing the SEC "to evade the important statutory distinction between primary liability and secondary (aiding and abetting) liability." Such a result, he said, is something "the SEC has tried to erase" " or decades" and the Supreme Court has "pushed back hard against" in cases such as Janus Capital .  Id . at 601. The majority opinion, he concluded, was an "end-run" around "the Supreme Court." Id . Lorenzo appealed. ( Here .) The Briefing Before the U.S. Supreme Court In his petition before the Supreme Court, Lorenzo presented the following question for review: “In J anus Capital Group, Inc. v. First Derivative Traders , 564 U.S. 135 (2011), this Court considered the elements of a fraudulent statement claim and held that only the 'maker' of a fraudulent statement may be held liable for that misstatement under Section 10(b). . . The question presented is whether a misstatement claim that does not meet the elements set forth in Janus can be repackaged and pursued as a fraudulent scheme claim.” Lorenzo answered the question in the negative. In seeking certiorari, Lorenzo relied on the fact that there was a split among the circuits, noting "The Second, Eighth and Ninth Circuits have held that a misstatement alone cannot be the basis of a fraudulent scheme claim, while the DC Circuit and the Eleventh Circuit have held that a misstatement standing alone can be the basis of a fraudulent scheme claim."  Petition at i. Lorenzo claimed that the majority view among the circuits is that "plaintiffs, including the SEC, cannot repackage Rule 10b-5(b) deceptive statement claims that fail to meet the Janus standards as fraudulent scheme claims under Section 17(a)(1) of the Securities Act or Rule 10b5(a) and (c)." Petition at 17. "The DC Circuit’s holding in this matter is contrary to th view." On the merits, Lorenzo argued that he was not the “maker” of the misstatements as defined by the Court in  Janus Capital .  Under Janus Capital , liability for a false statement can be imposed only on “the person or entity with ultimate authority on whether and how to communicate the statements . . . .” Thus, without control over the publication of the statement, Lorenzo could not be held liable. Petition at 14. The SEC opposed the petition for the writ of certiorari. (Here.) First, the agency claimed that the conduct involved fell “comfortably within” the ordinary understanding of the statutory language for Section 17(a)(1) and Section 10(b). Opp. Br. at 9. “Words and phrases like ‘fraud,’ ‘deceit,’ and ‘device, scheme or artifice’ provide a broad linguistic frame within which a large number of practices may fit,” said the Commission. Id . (internal quotation marks and citations omitted). Thus, " nowingly sending 'email messages containing false statements' about a company’s financial prospects 'directly to potential investors,' in order to induce recipients to participate in a debenture offering, is naturally described as employing a device, scheme, artifice, or act to defraud." Id . (citations omitted). Second, the SEC maintained that while the D.C. Circuit found that Lorenzo was not the “maker” of the statement and did not have “ultimate authority” over its publication, that did not mean he could not be liable. To the contrary “as the court of appeals explained, a non-maker of a statement can be liable under Section 17(a)(1) and Section 10(b), and subsections (a) and (c) of rule 10b-5 if he carries out a device, scheme, artifice, or act to defraud.” Opp. Br. at 13. "That conclusion," argued the SEC, "is compelled by the text, structure, history, and purpose of those provisions, and it is fully consistent with Janus , which did not address the scope of liability under any provision other than Rule 10b-5(b)." The Commission reasoned that “the decision below did not ‘erase[] the distinction between primary and secondary liability’” that the Court “emphasized in Janus and Central Bank of Denver ” because Lorenzo “was not found secondarily liable for aiding and abetting his boss’s making of a false statement under Rule 10b-5(b).” Opp. Br. at 14. Instead, Lorenzo “was found primarily liable for his ‘active role in producing and sending misstatements with an intent to deceive, and for thereby employing a deceptive device, act, or artifice to defraud for purposes of liability under Section 10(b), Rule 10b-5(a) and (c), and Section 17(a)(1).” Id . (internal quotation marks and citations omitted). Third, the SEC argued that there is no real circuit split. This is because “none of the decisions petitioner identifies as forming a ‘majority’ position . . . involved the kind of conduct at issue here – knowing dissemination of a false statement directly to investors with intent to induce a financial transaction. And all the cases that petitioner cites were initiated by private plaintiffs rather than by the Commission. That distinction is significant because different statutory and other standards govern private securities-fraud actions” such as the Private Securities Litigation Reform Act of 1995 (PSLRA). Opp. Br. at 17-18. Under the PSLRA, plaintiffs must meet heightened pleading standards with regard to allegedly false statements and omissions under Rule 10b-5(b). In contrast, some courts have held that those standards do not apply to subsections (a) and (c) of Rule 10b-5. Regardless, contended the Commission, there is no split of authority because " he statutory text does not distinguish between statements or omissions that are fraudulent under Rule 10b-5(b) and statements or omissions that constitute (or are used to carry out) a deceptive device, act, or artifice to defraud under Rule 10b-5(a) or (c). 15 U.S.C. 78u-4(b)(1)." Thus, " here is accordingly no need to exclude false-statement claims from Rule 10b-5(a) and (c) in order to prevent evasion of the PSLRA." Opp. Br. at 19. To underscore the point, the SEC noted that the cases relied upon by Lorenzo “rest on a concern that is wholly absent here, because the PSLRA does not apply to cases initiated by the Commission.” Opp. Br. at 19. "There is accordingly no reason to believe that any other circuit would reach a result different from the court below in an SEC enforcement proceeding. Indeed, the only other court of appeals that has addressed the question presented in a case to which the Commission was a party has reached the same conclusion as the court below." Id . (citing Big Apple Consulting , 783 F.3d at 795-796; SEC v. Monterosso, 756 F.3d 1326, 1334 (11th Cir. 2014)). *          *          * A decision is expected next term.

Dr. Grigory Rodchenkov, who was charged with libel for exposing the illegal doping scandal during the 2014 Sochi Olympics of Russian Olympic athletes, has now filed a motion to dismiss the charge, which his attorneys have portrayed as a ploy to find his whereabouts. “We have every confidence that this litigation was not started to vindicate the athlete, but to try to locate and identify Dr. Rodchenkov’s location,” said his attorney, Jim Walden. Rodchenkov has also filed a counterclaim under New York’s Anti-SLAPP (Strategic Lawsuits Against Public Participation) law. New York’s Anti-SLAPP law is designed for protecting whistleblowers who get sued for making libelous remarks. During the 2018 winter Olympics, Russia appealed 39 cases of performance-drug use, for which 28 were overturned on the insufficient evidence. Rodchenkov is accusing Mikhail Prokhorov, the Russian billionaire and majority owner of the Brooklyn Nets, who also ran Russia’s biathlon during the Sochi games of attempting to silence him through harassment and threats of violence. “With today’s filings the hunted becomes the hunter,” said Rodchenkov’s attorney, Jim Walden. “Russia and its puppets have been persistently attacking Dr. Rodchenkov for too long, most recently with this frivolous lawsuit that parrots the Kremlin’s slander.” A Doping Scandal Rodchenkov recently alleged that the laboratory, the Anti-Doping Center, was used to further a state-sponsored scheme to ply Russian athletes with performance-enhancing drugs. He admitted to his own part in the conspiracy of developing a combination of steroids and creating a system for swapping out “dirty” urine samples for that of the athletes’ prior to drug use. Russian Olympians took home 33 medals in the games. Once a German television station began to expose the scandal, Rodchenkov, afraid of taking the fall fled to the United States in 2015, before exposing the scandal himself. In November 2017, Olympics medals were stripped from three Russian biathletes: Olga Zaytseva, Yana Romanova, and Olga Vilukhina. They were also banned from performing in future games due to anti-doping violations. This past February, the three biathletes filed a joint libel suit against Rodchenkov in Manhattan Supreme Court, claiming that much of Rodchenkov’s story has been fabricated and that each is entitled to $10 million for their lifetime ban from the sport due to Rodchenkov. . Mikhail Prokhorov, who ran the Russian Biathlon Federation for the Sochi Games is helping to finance the case. So What is Next? Rodchenkov, who is currently in the witness protection program, to hide himself from Russian agents seeking retaliation, will provide any depositions remotely in order to maintain the secrecy of his location. In the months prior to publicly blowing the whistle, two high-level executives and friends of his suspiciously died unexpectedly. Rodchenkov has released a statement saying that he is “healthy, well and well-protected.” According to Sputnik news, a state-run Russian news agency, Kremlin officials have rejected Rodchenkov’s claims as lies, and would consider taking legal action. Prokhorov agrees and shared this sentiment with the media through his spokesperson. “We categorically deny the accusations in this suit, but instead of trading in rumors and baseless accusations by the media, we will await our fair hearing in the court of law where facts and evidence will their rightful place as the only means of determining the truth.”

On June 11, 2018, the United States Supreme Court held that the filing of a putative class action equitably tolls the limitations period for absent class members to file individual claims but does not toll the limitations period for the filing of a new class action involving the same or substantially the same claims. China Agritech, Inc. v. Resh , No. 17-432. ( Here .) Nearly 45 years ago, the Supreme Court decided American Pipe & Construction Co. v. Utah , 414 U.S. 538 (1974), the seminal case on equitable tolling and class action lawsuits. In American Pipe , the Court held that the filing of a class action lawsuit tolls the statute of limitations for members of the putative class. The Court held that if the trial court denied class certification, then members of the putative class could timely intervene as individual plaintiffs in the lawsuit or file new lawsuits in their individual capacities, even if the statute of limitations had run. Unless and until the trial court certified the class, the case was pending as an individual action.  Nine years later, the Court expanded American Pipe to allow putative class members to file their own lawsuits after the trial court denied class certification. Crown, Cork & Seal Co. v. Parker , 462 U.S. 345 (1983). Thus, putative class members could either intervene in the lawsuit or commence a new action in their individual capacity so long as they did so within the original limitation period extended by the tolling period under American Pipe . American Pipe did not, however, resolve the issue of whether putative class members could rely on American Pipe tolling to file a new class action that was based on the same claims as the original action. Not surprisingly, a circuit court split arose, with the Second and Fifth Circuits, among others, holding that successive class action lawsuits involving the same claims are not tolled, and the Ninth Circuit holding that the filing of successive class actions is tolled under American Pipe . The Court’s decision in China Agritech resolves this issue. Writing for an eight-justice majority in which Justice Sotomayor concurred, Justice Ginsburg held that “ American Pipe tolls the statute of limitations during the pendency of a putative class action, allowing unnamed class members to join the action individually or file individual claims if the class fails. But American Pipe does not permit the maintenance of a follow-on class action past expiration of the statute of limitations.” China Agritech , 584 U. S. ____ (2018) (Slip Op. at 2). Together with the Court’s decision in CalPERS v. ANZ Securities, Inc. (discussed by this Blog here ), in which the Court held that a putative class action does not toll the statute of repose, the Court has limited the time within which a plaintiff can file a follow-on class action lawsuit involving the same set of allegations. Background In 2011, shareholders of China Agritech filed a putative class action lawsuit under the federal securities laws against the company and certain of its officers and directors, alleging, among other things, that the defendants made materially false and misleading statements about China Agritech’s income and revenue, and that the disclosure of the truth caused the price of the company’s stock to decline. Slip op. at 2. After several months of discovery and deferral of a lead-plaintiff ruling (required under the Private Securities Litigation Reform Act of 1995 (“PSLRA”)), the district court denied class certification. The court determined that the plaintiff had failed to establish that China Agritech stock traded on an efficient market—a necessity for proving reliance on a class-wide basis. Slip op. at 3. Thereafter, in September 2012, the plaintiff settled his individual claims and the case was dismissed. See Resh v. China Agritech, Inc. , 857 F.3d 994, 998 (9th Cir. 2017). ( Here .) On October 4, 2012—within the two-year statute of limitations—a new set of shareholders filed a putative class action against many of the same defendants, alleging the identical set of facts and circumstances as the prior lawsuit but including “new efficient-market evidence.” Slip op. at 3-4. Once again, the district court denied class certification, “this time on typicality and adequacy grounds.” Id . at 4. Thereafter, the named plaintiffs settled their individual claims with the defendants and voluntarily dismissed their lawsuit. Id . On June 30, 2014, Michael Resh, who had not sought appointment as lead plaintiff in the other two actions, filed a putative class action, alleging the same allegations as the prior two complaints. The lawsuit was commenced a year and a half after the statute of limitations expired. The district court dismissed the class complaint as untimely, holding that the prior two actions did not toll the time to initiate class claims. Slip op. at 4. The Ninth Circuit reversed the district court’s dismissal, holding that American Pipe tolled all claims derivative of those asserted in the earlier actions, whether brought individually or on behalf of a putative class. Resh , 857 F.3d at 1004. In reversing the district court, the Ninth Circuit rejected the holding of its sister circuits, reasoning that allowing follow-on class actions “would advance the policy objectives that led the Supreme Court to permit tolling in the first place.” Id .  The Ninth Circuit added that applying American Pipe to successive, follow-on class actions would not cause unfair surprise to defendants and would promote economy and efficiency of litigation by reducing incentives for filing protective class suits during the pendency of an initial certification motion. Id . The Supreme Court granted certiorari to resolve the split among the circuits “over whether otherwise-untimely successive class claims may be salvaged by American Pipe tolling.” Slip op. at 4-5. The Court’s Decision In reversing the Ninth Circuit, the Court held that tolling under American Pipe does not apply to successive, follow-on class actions, as opposed to successive individual actions. Justice Ginsburg reasoned that the rationale underlying American Pipe did not permit a plaintiff to “wait[] out the statute of limitations” and “piggyback” class claims “on an earlier, timely filed class action.” Slip op. at 6 (“We hold that American Pipe does not permit a plaintiff who waits out the statute of limitations to piggyback on an earlier, timely filed class action.”). The Court explained that the goals of “efficiency and economy of litigation” are not advanced by allowing successive, follow-on class actions beyond the applicable statute of limitations. Id . (“The ‘efficiency and economy of litigation’ that support tolling of individual claims, American Pipe , 414 U. S., at 553, do not support maintenance of untimely successive class actions; any additional class filings should be made early on, soon after the commencement of the first action seeking class certification.”). In fact, explained Justice Ginsburg, economy and efficiency of litigation are increased by the timely filing of class action claims: “ f class treatment is appropriate, and all would-be representatives have come forward, the district court can select the best plaintiff with knowledge of the full array of potential class representatives and class counsel,” and “if the class mechanism is not a viable option for the claims, the decision denying certification will be made at the outset of the case, litigated once for all would-be class representatives.” Slip op. at 7. Justice Ginsburg explained that “Rule 23 evinces a preference for preclusion of untimely successive class actions by instructing that class certification should be resolved early on.” She noted that the amendment to Rule 23(c) (which governs when the motion for class certification is to be made) confirms this point by “allow greater leeway, more time for class discovery, and additional time to ‘explore designation of class counsel’ and consider ‘additional applications rather than deny class certification,’ thus ‘afford the best possible representation for the class.’” Slip op. at 7-8 (citations omitted). Justice Ginsburg observed that the PSLRA “evinces a similar preference … for grouping class-representative filings at the outset of litigation.” Id . The Court also observed that permitting successive, follow-on class action claims, unlike later individual claims, could result in “limitless” class action filings related to the same conduct, because the statute of limitations would be continuously tolled with each subsequent filing. Slip op. at 10 (“Respondents’ proposed reading would allow the statute of limitations to be extended time and again; as each class is denied certification, a new named plaintiff could file a class complaint that resuscitates the litigation.”) (citing Ewing Indus. Corp. v. Bob Wines Nursery, Inc. , 795 F. 3d 1324, 1326 (11th Cir. 2015) (tolling for successive class actions allows plaintiffs “limitless bites at the apple”)). Although Justice Ginsburg recognized that the statute of repose applicable to federal securities claims would eventually foreclose successive, follow-on filings, she noted that statutes of repose “are not ubiquitous” and that many claims under other state or federal laws are not subject to repose in the same manner. Slip op. at 10-11. Simply stated, “Endless tolling of a statute of limitations is not a result envisioned by American Pipe .” Finally, Justice Ginsburg addressed the prospect that plaintiffs would file “protective” class action lawsuits – i.e. , class action lawsuits filed solely for the purpose of protecting a plaintiff’s ability to bring a class action at a later date if class certification is denied in the initial class action – in the wake of the Court’s decision. In doing so, she expressed little concern, noting that such actions could be easily “manage ” by the district courts, which have “ample tools at their disposal …, including the ability to stay, consolidate, or transfer proceedings.” Slip op. at 14. Justice Sotomayor separately concurred in the judgment only. Justice Sotomayor agreed that American Pipe should not be available for successive class action lawsuits brought under the PSLRA, given its unique procedures. Concurrence, Slip op. at 2 (“The PSLRA imposes significant procedural requirements on securities class actions that do not apply to individual or traditionally joined securities claims.”). But Justice Sotomayor disagreed with the majority to the extent the Court did not limit its holding to other types of class actions brought under Rule 23, particularly because Rule 23 (unlike the PSLRA) does not provide for precertification notice to putative class members or a process for district courts to appoint the most adequate lead plaintiff. Instead, Justice Sotomayor suggested that, as to non-PSLRA class actions, lower courts could exercise their “comity” power “to mitigate the sometimes substantial costs of similar litigation brought by different plaintiffs.” Alternatively, said Justice Sotomayor, the Court could, “as a matter of equity,” prohibit tolling “for future class claims where class certification is denied for a reason that bears on the suitability of the claims for class treatment.” Slip op. at Id . at 5. “ y contrast,” however, “tolling would remain available” where “class certification is denied because of the deficiencies of the lead plaintiff as class representative, or because of some other nonsubstantive defect.” Such an approach, said Justice Sotomayor, would “ensure that in cases where the only problem with the first suit was the identity of the named plaintiff, a new and more adequate representative could file another suit to represent the class.” Id . at 6. Takeaway In this Blog’s consideration of ANZ , we wrote: “institutional investors will no longer be able to ‘wait and see’ whether to opt out of Securities Act class actions – that is, wait to see if there is a settlement that adequately recompenses the fund and its beneficiaries. Under ANZ Securities , the decision will have to be made within the repose period, which often occurs before there is any discovery or settlement.” This analysis also applies to China Agritech . Following China Agritech , institutional investors, as well as individual investors, will no longer be able to “wait and see” whether to opt out and file an individual action or file a class action on the basis of the allegations in the initial lawsuit. Now, the decision must be made with the statute of limitations in mind, as well as the statute of repose. Time will tell whether this results in an uptick in “protective” class action filings. While plaintiffs have to make their decision early in the process, defendants will enjoy certainty about the potential for future liability if they successfully defeat a motion for class certification, for whatever reason. With China Agritech , defendants will no longer be exposed to “endless” follow-on class action lawsuits arising from the same operative facts and circumstances if class certification fails in one lawsuit and the limitations period has expired.