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Last November, this Blog wrote about an announcement Michael D. Granston (“Granston”), Director of the DOJ Commercial Litigation Branch, Fraud Section, made at a health care conference concerning the DOJ’s intention to seek dismissal of meritless qui tam cases. ( Here .) Since the speech was not accompanied by a policy memorandum, there was skepticism within the False Claims Act (“FCA”) bar that there would be any material change in policy. That skepticism was met last month with a memo, titled “Factors for Evaluating Dismissal Pursuant to 31 USC 3170(c)(2)(A),” that Granston sent to all attorneys in the Fraud Section and all Assistant U.S. Attorneys handling FCA cases that encourage the DOJ to “seek[ ] dismissal” of non-intervened qui tam cases that “lack substantial merit” and discusses the factors that should guide the exercise of dismissal discretion (the “Granston Memo”).  A copy of the Granston Memo can be found here . Under the FCA, whistleblowers, also known as relators, can sue persons or entities believed to have engaged in a fraud against the government. A relator can recover a reward equaling up to 35% of the damages and penalties (up to $21,916 per fraudulent filing) recovered by the government. Such an economic benefit serves as a powerful incentive for whistleblowers to come forward and report fraud on the government.  Critics (and the FCA defense bar) claim, however, that this economic incentive too often results in the filing of costly, meritless qui tam actions. When a qui tam action is commenced, the complaint is filed under seal, to provide the Department of Justice (“DOJ” or “Department”) with time to investigate the allegations and decide whether to intervene and join the lawsuit. The FCA also provides that if the government determines its interests are not served by the lawsuit, it may seek dismissal, over the relator’s objections, provided the relator has an opportunity to be heard. 31 U.S.C. § 3730(c)(2)(A). “Historically,” the DOJ has used Section 3730(c)(2)(A) “sparingly,” in large part because the FCA permits relators to pursue their claims even when the government declines to intervene in the action. And, because declination can be based on factors other than the merit of the claim, the government has been “circumspect” in its use of Section 3730(c)(2)(A). Nevertheless, in order to fulfill its “gatekeeper role in protecting the False Claims Act,” and “to advance the government’s interests, preserve limited resources, and avoid adverse precedent,” the Granston Memo encourages Department attorneys to exercise their “authority to dismiss cases” under certain circumstances. The memo identifies a number of factors, gleaned from cases in which the government has sought dismissal, that Department attorneys should consider in determining “whether the government’s interests are served” by the qui tam action. These factors, which are intended to “ensure consistency across the Department,” and “serve as a basis for evaluating whether to seek to dismiss future matters,” include: (1) “curbing meritless cases,” “where a qui tam complaint is facially lacking in merit-either because relator’s legal theory is inherently defective, or the relator’s factual allegations are frivolous”; (2) “preventing parasitic or opportunistic qui tam actions,” where the relator only provides the government with “duplicative information” or “adds no useful information to the investigation”; (3) “preventing interference with agency policies and programs,” “where an agency has determined that a qui tam action threatens to interfere with an agency’s policies or the administration of its programs and has recommended dismissal to avoid these effects”; (4) “controlling litigation” and “avoid the risk of unfavorable precedent,” “to protect the Department’s litigation prerogatives,” such as to “avoid interference with the government’s ability to litigate the intervened claims”; (5) “safeguarding classified information and national security interests,” “particularly” in cases “involving intelligence agencies or military procurement contracts”; (6) “preserving government resources” in cases “when the government’s expected costs are likely to exceed any expected gains”; and (7) addressing “procedural errors” by relators, when they “frustrate the government’s efforts to conduct a proper investigation.” The Granston Memo notes that “the factors identified above are not mutually-exclusive,” and are not “intended to constitute an exhaustive list.”  Indeed, “there may be other reasons for concluding that the government’s interests are best served by the dismissal of a qui tam action.” Having said that, the Granston Memo contains an important qualifier, noting that “to maximize its resources” the DOJ typically only investigates a whistleblower action to the point needed to decide whether to decline intervention. Since that level of investigation “may not equate to a conclusion that no fraud occurred,” the relator should be afforded “an opportunity to further develop the case” before dismissal is considered. Of the foregoing factors, perhaps the most interesting for defendants is the third – “preventing interference with agency policies and programs.” In discussing this factor, the Granston Memo recognizes that weak qui tam actions can be costly to entities that do business with the government: “ here may be instances where an action is both lacking in merit and raises the risk of significant economic harm that could cause a critical supplier to exit the government program or industry.” In support, the memo cites to a recent decision coming out of the Fifth Circuit, United States ex rel. Harman v. Trinity Industries , 872 F.3d 645 (5th 2017), in which the court reversed a $680 million judgment because the government agency had decided that the relator’s purported violations were not material to the government’s decision to pay. The memo’s citation to Harman suggests that the DOJ would be more inclined to dismiss cases where liability hinges on a minor contractual or regulatory violation that would not pass muster under   Universal Health Services, Inc. v. United States ex rel. Escobar , 136 S. Ct. 1989 (2016), but which could cost significant resources to defend in a qui tam action. Under Escobar , an alleged false certification must be material to a federal agency’s decision to pay the claim for the claim to become an FCA violation. escobar.> escobar.> This Blog has written about Escobar and its progeny here , here , here , here , here , here and here . In a nod toward allowing relators the opportunity to decide whether to proceed with a qui tam action, the Granston Memo recommends that “to the extent possible,” Department attorneys should “consider advising relators of perceived deficiencies in their cases as well as the prospect of dismissal so that relators may make an informed decision regarding whether to proceed with the action.” Such information can save time and resources, especially when the agency affected by the qui tam action opines on “whether dismissal is warranted.” As noted in the memo, “ n many cases, relators … choose to voluntarily dismiss their actions, particularly if the government has advised the relator that it is considering seeking dismissal under section 3730(c)(2)(A).” Takeaway “Of the more than $3.7 billion in FCA settlements and judgements reported by the Department in 2017, $3.4 billion came from cases initiated by whistleblowers, who received nearly $393 million in whistleblower rewards.” ( Here .)  In light of these statistics, this Blog remains skeptical that the Granston Memo will result in a material departure from past Department practice. Indeed, this Blog expects government attorneys to remain resistant to aggressively dismissing qui tam actions. Notwithstanding, the Granston Memo provides useful guidance for relators and defendants to consider in cases in which the strength of the action is in question – guidance that can save the parties, and the government, significant costs in prosecuting or defending the action. For defendants, it is reasonable to expect they will use the Granston Memo to persuade the DOJ that the qui tam complaint in which they are the subject lacks merit and should be dismissed following the initial meeting with the DOJ while the case remains under seal. For relators, it means that, while the case is under seal, they should be given the opportunity to use the factors to further develop their claims before the government acts – either by declination or a motion to dismiss. In any event, whether the Granston Memo portends a sea change in Department policy or is simply a reminder for government attorneys to exercise their statutory authority to dismiss a qui tam action remains to be seen.  One thing is certain, however, even a small shift in the DOJ’s willingness to exercise its dismissal authority would be welcome by FCA defendants.

Directors and officers of publicly traded companies have a fiduciary duty to their shareholders. In the face of corporate misconduct, executives are often reluctant to take legal action against their peers. However, shareholders may bring a derivative lawsuit against the board of directors and other responsible parties. The goal is to compel the board to remedy the damages sustained by company and to protect the interests of investors. Nonetheless, a successful claim depends on the skills of an attorney with experience handling complex litigation. What is a derivative lawsuit? A shareholder derivative lawsuit may arise when a company’s value is diminished because of mismanagement or unlawful conduct by directors and officers. A derivative lawsuit is filed by an investor, or a class of investors, for the benefit of both the corporation and the shareholders. The plaintiffs are not seeking compensation. Instead, the objective is to protect their investment by imposing management changes and corporate governance reforms. Any proceeds of a successful action are awarded to the corporation, not the shareholders. Before filing a lawsuit, a shareholder must demand that the board take legal action. If the board rejects the demand or refuses to act, then the lawsuit is permitted to proceed. Shareholders may file lawsuits to remedy all types of corporate misconduct, including: Breach of Duty of Care - Directors and officers have a duty of care to act responsibly, and in good faith, when managing the company’s affairs. Examples of breaches include a director or officer not exercising rational judgment, acting in bad faith, or not being reasonably informed when making a decision. Breach of Duty of Loyalty - Directors and officers cannot profit at the expense of the corporation and have a duty to put the financial interests of the shareholders first. A breach this duty may involve self-dealing, misuse or waste of corporate assets, or abuse of corporate privileges, such as using a corporate jet for personal travel. Accounting Malpractice - Financial statements must be prepared in accordance with generally accepted accounting principles (GAAP). Corporate executives are prohibited from using aggressive accounting techniques and overstating or manipulating earnings. A derivative lawsuit can be brought to remove the directors and officers who had knowledge of any improprieties. Shareholders may also seek to compel the company to establish stricter governance measures that will prevent similar activities in the future. Improper Mergers and Acquisitions - Shareholders can also pursue legal action to challenge proposed mergers or acquisitions. If the directors and officers approve a deal that fails to maximize shareholder value, a breach of fiduciary duty may have occurred. Other Misconduct - A derivative lawsuit can also be filed if a company’s executives fail to address violations of environmental regulations, wage and hour laws, workplace safety guidelines, or other state and federal regulations. The Takeaway A successful shareholder derivative lawsuit can result in corporate governance reforms, prevent future wrongdoing, and increase shareholder value. In some cases, the court may also approve an incentive reward to compensate the plaintiffs for the time and inconvenience associated with pursuing a legal action. In the end derivative lawsuits and class actions give shareholders power legal recourse to protect their interests.

On January 31, 2018, the Second Department decided 159 MP Corp. v. Redbridge Bedford, LLC.   The Court in 159 MP , recognized that the “appeal raises an issue of first impression in the appellate courts of New York…” to the extent that it “address the question of whether written leases negotiated at arm’s length by commercial tenants may include a waiver of the right to declarative relief that is enforceable at law or, alternatively, whether such a waiver is void and unenforceable as a matter of public policy.” The plaintiffs in 159 MP are related entities that leased from the defendant landlord commercial retail and storage space in Brooklyn for use as a supermarket and related purposes.  The commercial leases executed by the parties contained provisions that reads as follows: waives its right to bring a declaratory judgment action with respect to any provision of this Lease or with respect to any notice sent pursuant to the provisions of this Lease.  Any breach of this paragraph shall constitute a breach of substantial obligations of the tenancy, and shall be grounds for the immediate termination of this Lease.  It is further agreed that in the event injunctive relief is sought by Tenant and such relief shall be denied, the Owner shall be entitled to recover the costs of opposing such an application, or action, including its attorney’s fees actually incurred, it is the intention of the parties hereto that their disputes be adjudicated via summary proceeding <(the “waiver provisions”)> .  Four years into a twenty-year lease (with an additional ten-year renewal option), tenants received from landlord a “Ten (10) Day Notice to Cure Violations” (the “Notice”).  In response, and prior to the cure period in the Notice (the “Cure Period”), tenants commenced an action in the Supreme Court for declaratory and injunctive relief and for breach of contract.  Also before the end of the Cure Period, tenants moved by order to show cause for a Yellowstone injunction staying and tolling the Cure Period and enjoining defendant landlord from terminating the leases.  ( Yellowstone injunctions are fully discussed in Freiberger Haber LLP’s December 1, 2017 Blog Post: “Commercial Tenants Must Remain Aware of Yellowstone Injunctions” .) Defendant landlord answered the complaint and, inter alia , asserted an affirmative defense that plaintiff tenants’ right to seek injunctive relief was contractually waived.  Landlord also cross-moved for summary judgment dismissing the complaint based on the Waiver Provision. The Supreme Court denied tenants’ request for a Yellowstone injunction finding “that all the plaintiffs’ claims were actual or disguised causes of action for declaratory relief…”, and granted landlord’s cross-motion for summary judgment. A divided Appellate Division, Second Department, affirmed the Supreme Court’s decision.  First, the Court held that tenants timely obtained Yellowstone injunctive relief.  However, in finding that such relief was unavailable to tenants in 159 MP, the Court stated that: By nature and definition, a Yellowstone injunction is inextricably intertwined with the court’s role in resolving whether a tenant has breached provisions of the lease and, if so, whether any such breach shall be cured.  As here, a tenant’s preemptive action to have the court determine that the lease has not been breached is in the nature of declaratory judgment.  (Citations omitted.) The Court rejected tenants’ argument that there was a distinction between the declaratory relief prohibited by the Waiver Provision and permissible Yellowstone relief because “ y nature and definition, a Yellowstone injunction springs from the declaratory judgment action that gives rise to it.”  Because “plaintiffs expressly waived both declaratory and Yellowstone relief pursuant to the ”, the Court held that the Supreme Court properly denied the Yellowstone relief sought by tenants and granted landlord’s cross-motion for summary judgment dismissing the causes of action seeking declaratory relief. Although tenants’ argument that the Waiver Provisions were void as against public policy was raised for the first time on appeal, the Court nonetheless addressed those arguments because “where a contract provision is arguably void as against public policy, that issue may be raised for the first time at the Appellate Division by a party, or by the court on its own motion.”  (Citation omitted.)  Upon consideration, the Court determined that the Waiver Provisions were not void.  Among other things, the Court relied on the fact that “ bedrock principle of our jurisprudence is the right of parties to freely enter into contracts” and that “our jurisprudence provides citizens with the freedom and opportunity to abandon rights and privileges.”  The Court also stated that while “ aivers of rights should not lightly be presumed,” the “parties were sophisticated entities that negotiated at arm’s length and entered into lengthy and detailed leases defining each party’s rights and obligations with great apparent care and specificity.” The plain language of the Waiver Provisions were found to “reflect[] the parties’ mutual intent to adjudicate disputes by means of summary proceedings.” Ultimately, the Court held that “ eclaratory and Yellowstone remedies are rights private to the plaintiffs that they could freely, voluntarily, and knowingly waive.” The Court, in issuing its ruling, considered that notwithstanding the subject waivers plaintiffs had other remedies available to them to protect their interests.  For example, plaintiffs could have cured the breaches that were the subject of the Notice and sued landlord for breach of contract or otherwise.  Also, plaintiffs could have asserted defenses in any summary proceeding brought against them by landlord and, if successful, they would remain in possession. In a lengthy dissent, Justice Connolly urged that the Waiver Provisions were void as against public policy and, therefore, unenforceable because their “enforcement…would deprive the plaintiffs of any meaningful means of accessing the courts….”

Why Corporate Governance Matters Today, it is essential for directors and officers of public companies to have an understanding of corporate governance. Essentially, this involves adhering to state and federal rules and regulations, meeting fiduciary obligations and establishing and implementing internal controls. Ultimately, an attorney with experience in internal investigations and corporate governance can provide guidance on these critical responsibilities. Sarbanes-Oxley Compliance The Sarbanes-Oxley Act of 2002 is designed to foster transparency in corporate governance and financial reporting. The law created a formal system of internal checks and balances designed to ensure the accuracy of corporate financial statements and balance sheets. It is worth noting that the law imposes penalties for noncompliance, including fines and potential delisting of a company from public stock exchanges. In addition, chief executive officers and chief financial officers who knowingly submit incorrect certifications of financial statements can be held legally liable, risking fines and imprisonment. What is good corporate governance? There are a variety of concerns that executives must consider, such as governance structure and oversight, director and officer indemnification and insurance, risk management, and shareholder demands. Because boards of directors are tasked with running corporate affairs, every board member must have a thorough understanding of corporate governance. Moreover, each member should be held accountable for his/her decisions. Boards must also work closely with senior management, conduct self-evaluations of their governance policies, and develop training programs for managers related to internal controls. There is a wide range of other governance concerns, including best practices, codes of ethics, fiduciary duties, conflicts of interest, management succession plans and issues related to mergers and acquisitions and other corporate transactions. Finally, it is essential to establish training programs for employees at all levels of an organization. Director Liability Directors and officers can be held personally liable if a criminal proceeding or enforcement action causes significant financial losses for a company or a decline in its stock value. In addition, executives may also be held legally responsible for the unlawful actions of employees under their supervision. The Takeaway Corporate governance is more than a system of checks and balances. It is the ethical foundation of a business. At the same time, having proper internal controls can mitigate the risk of a regulatory enforcement action, shareholder disputes or civil litigation. Ultimately, establishing a governance structure requires the advice and counsel of an experienced attorney.

Alternative dispute resolution (“ADR”) has been gaining momentum as an alternative to litigation over the past decade. Most major corporations insist on it, in one form or another, in every contract they execute. ADR can take on many forms, including negotiation, mediation and arbitration. All ADR methods have pros and cons that should be considered before making them a part of a company’s legal process. Independent Negotiation This is the least formal ADR tactic available and the most common. Most disputes begin with negotiations, in an attempt by the parties to avoid ill-will and court costs. ●      Inexpensive ●      Faster than any other means of resolution ●      More private than court ●      Flexible ●      Risk-Free – parties can always escalate ●      Potential for continued working relationship : ●      Can be a stalling tactic ●      No guarantee of a resolution ●      Power imbalances may go unchecked ●      No guarantee of good faith ●      Lack of neutral 3rd party reduces chance of agreement of complex, multi-party disputes Mediation Mediation is sometimes required by contract and is occasionally a mandatory pre-litigation step in some jurisdictions. Mediation is an informal process wherein the parties meet in front of one or more mediators, also known as “neutrals,” in an attempt to sort out the needs and desires of the parties and reach a resolution. Mediation may be either binding, or nonbinding. In binding mediation, the recommendation of the mediator or agreement of the parties is binding on all parties. In non-binding mediation, if the parties do not reach a resolution or do not agree with a mediator’s recommendation, they may escalate the matter to the courts or to arbitration. ●      Confidential ●      Generally less expensive than trial ●      Faster resolution, compared to going to court ●      Parties may choose a mediator with substantive knowledge of the dispute ●      3rd party neutral can help overcome impasses and alleviate emotional situations ●      If claim could be settled in small claims court, mediation may be prohibitively expensive ●      Incompetent mediators may hinder resolution ●      All parties’ rights may not be adequately protected ●      Legal precedents not created Arbitration Arbitration is typically binding in nature, though not always. This is set in contractual negotiations. However, given the expense of arbitration proceedings, it is generally futile to agree to non-binding arbitration when either party may decide to litigate anyway after going through the time and expense of arbitration. ●      Private ●      Faster than litigation ●      Parties can design the process ●      Sometimes less expensive than trial ●      Confidential Process ●      More formal process than mediation – compels decorum ●      Parties can choose substantive expert(s) to serve as arbitrator(s) ●      Successful outcome may be dependent on quality of mediator ●      Unsatisfactory outcomes may not be addressed by a judge ●      Lack of cooperation by a party may extend time and expense ●      Lack of legal precedents in matters that should be addressed once and for all Takeaway For decades, there has been significant interest in finding ways to resolve business and commercial disputes through methods other than litigation. Some ADR techniques that individuals and businesses have turned to are somewhat new, while others have been used for many years. All methods, however, have a common objective: the resolution of disputes in less time, at less cost and with less emotional turmoil and hostility than typically results from litigation. Independent negotiation, mediation and arbitration offer efficient and effective alternatives to litigation. All three methods may significantly reduce the cost of achieving a resolution of a dispute, and may be conducted at any time, at any location and at the convenience of the parties.

Like many things in life, operating a business with another person, or many persons, is a risk. There is always the possibility that your business associates may act for their own benefit, rather than for the benefit of the business. The law recognizes this risk and assigns special obligations of fidelity to business partners. These obligations are commonly known as fiduciary duties, which require business partners (including officers, directors and managing shareholders of corporations) to act in a trustworthy manner, with honesty, and with the best interests of the company in mind. Unfortunately, these obligations do not always encourage good behavior. Countless claims of breach of fiduciary duty have been brought in commercial litigation over the years. What is a Fiduciary Duty? There are two types of fiduciary relationships: 1) those created by law ( e.g. , statute) or contract; and 2) those that arise from the circumstances underlying the relationship between the parties and the nature of the transactions at issue. While courts generally look to a statute or contractual arrangement to determine the nature of the parties’ relationship ( e.g. , the first type of fiduciary relationship), the existence of a fiduciary relationship is not dependent solely upon a statute or contractual relation. See EBC I, Inc. v. Goldman, Sachs & Co. , 5 N.Y.3d 11, 20 (2005). Rather, the actual relationship between the parties determines the existence of a fiduciary duty ( e.g. , the second type of fiduciary relationship). Id . In Meinhard v. Salmon , 164 N.E. 545, 546 (N.Y. 1928), Justice Cardozo provided the “classic formulation” of a fiduciary duty: Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this, there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the ‘disintegrating erosion’ of particular exceptions. Only thus has the level of conduct for fiduciaries been kept at a higher level than that trodden by the crowd. In more modern times, the New York Court of Appeals has described the duty as arising from a relationship “‘between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation.’” See EBC I , 5 N.Y.3d at 19, quoting Restatement (Second) of Torts § 874, Comment a. The circumstances under which a fiduciary relationship can arise have no limit. Nevertheless, there are certain persons who are often found to be fiduciaries: lawyers; bankers; business partners; corporate directors; corporate officers; managing shareholders; personal representatives (executors and administrators); trustees; and investment advisors. There are three forms of fiduciary duties (often referred to as the “triad” duties): due care; loyalty; and candor Any disinterested and independent decision that is made by a fiduciary, especially a corporate fiduciary, is analyzed under the business judgment rule. The business judgment rule is based on the premise that a court should not be entitled to Monday-morning quarterback decisions made by fully informed individuals who are free from conflicts of interest. Auerbach v. Bennett , 47 N.Y.2d 619 (1979). Thus, the courts will not second-guess the decisions made by fiduciaries and will not hold them personally liable even if the decision turns out to be the wrong one. Duty of Care The duty of care, quite simply, is the duty to act as a reasonable and prudent person in a similar circumstance would act. Duty of Candor A fiduciary must act, not only with honesty, they must fully disclose information that may harm the business or individual that is owed the duty. Duty of Loyalty The duty of loyalty requires that fiduciaries act in good faith and with the best interests of the business or corporation in mind, putting the interests of the business or corporation above their own personal interests. As one court observed: The reasons for the loyalty rule are evident. A man cannot serve two masters. He cannot fairly act for his interest and the interest of others in the same transaction. Consciously or unconsciously, he will favor one side or the other, and where placed in this position of temptation, there is always the danger that he will yield to the call of self-interest. Wachovia Bank & Trust Co. v. Johnston , 269 N.C. 701, 715, 153 S.E.2d 449, 459-60 (1967). See also Birnbaum v. Birnbaum , 73 N.Y.2d 461, 466 (1989) (“it is elemental that a fiduciary owes a duty of undivided and undiluted loyalty to those whose interests the fiduciary is to protect. This is a sensitive and ‘inflexible’ rule of fidelity, barring not only blatant self-dealing, but also requiring avoidance of situations in which a fiduciary’s personal interest possibly conflicts with the interest of those owed a fiduciary duty.”) (citations omitted). Included under the umbrella of loyalty is the duty of good faith and fair dealing, which obligates fiduciaries to act with honesty and in the best interests of the corporation. Examples of a breach of the duty of loyalty include: usurping a corporate opportunity; acting with a conflict of interest; competing with the corporation; and misappropriating assets of the corporation. If a fiduciary has the consent of other disinterested fiduciaries, such as a corporate director, that person may undertake the first three bullet points. If a fiduciary breaches the duty of loyalty, the business judgment rule does not apply, and the fiduciary may be held personally liable for their actions. Burden of Proof A plaintiff making a claim against another for breach of fiduciary duty must prove certain factors, depending upon whom the fiduciary is. Fiduciary is a partner, agent, trustee or non-statutory fiduciary – a plaintiff must prove: (a) the existence of a fiduciary duty, (b) the defendant breached that fiduciary duty, and (b) the plaintiff was damaged directly by the breach. Baldeo v. Majeed , 150 A.D.3d 942 (2d Dep’t 2017). Fiduciary is a director or officer – the plaintiff must first overcome the business judgment rule – that is, the presumption that the defendant acted on an informed basis, in good faith, and with the best interests of the company taken into account. In some cases, the court will apply an enhanced scrutiny standard, which shifts the burden to the defendants to show that: (a) the decision-making process was adequate (the reasonableness test), and (2) reasonable in light of the existing circumstances (the proportionality test). Takeaway A breach of fiduciary duty claim is generally no different from other tort claims. Therefore, a breach of fiduciary duty claim should be approached in much the same way as any other tort claim. In this regard, plaintiffs should be mindful of their burden of proof. In New York, a breach of fiduciary duty claim must be pleaded with particularity. Litvinoff v. Wright , 150 AD 3d 714, 715 (2d Dep’t 2017). And, if the plaintiff asserts a contract claim, s/he should be mindful that the claims do not overlap. Under New York law, a breach of fiduciary duty claim that is premised on the same facts and seeks the same relief as a breach of contract claim is duplicative of the contract claim and subject to dismissal. Gawrych v. Astoria Federal Savings & Loan , 148 A.D.3d 681, 684 (2d Dep’t 2017). Finally, where the claim arises in the corporate context, attention should be given to the business judgment rule and the presumption that attaches to it.

In P. Zaccaro, Co., Inc., et al. v. DHA Capital, LLC, et al. (1st Dep’t January 25, 2018) , the First Department affirmed the dismissal of plaintiffs’ action seeking a significant brokerage commission on the sale of real property in lower Manhattan (the “Premises”) for in excess of $50,000,000.00 because the plaintiff brokers failed to disclose that they represented both the buyer and the seller. According to decisions in the underlying action, the facts as alleged in the complaint are as follows. Plaintiffs are licensed real estate brokers. Defendant Sentry Operating Corp. (“Sentry”) was the owner of the Premises. In 2014, the principal of plaintiff P. Zaccaro, Co., Inc. (“Zaccaro”), met with Sentry’s principal to discuss the sale of the Premises. The meeting resulted in a brokerage agreement pursuant to which Zaccaro was to procure a “ready, willing and able” purchaser for the Premises. Thereafter, Zaccaro contacted plaintiff New Golden Age Realty, Inc. (“Golden”), a Century 21 franchisee, to assist it in finding a buyer. David Shargani (“Shargani”) is a licensed broker with Century 21. Zaccaro and Golden determined that defendant DHA Capital LLC (“DHA”) would be a good candidate to purchase the Premises, but DHA had already engaged defendant Nest Seekers, LLC (“Nest”). Believing that Nest Seekers did not have a real purchaser, Sentry refused to deal with it. Thereafter, Nest Seekers contacted Shargani and advised of DHA’s interest in the Premises. Shargani advised Nest Seekers of his connection with the Premises through Zaccaro. Thereafter, Nest advised Zaccaro and Golden that DHA would pay a 3% brokers commission for the sale. Nest, Golden and Zaccaro entered into an agreement to equally split the 3% commission amongst themselves. Representatives of Nest and DHA and Shargani discussed the terms of the transaction and, thereafter, Shargani made clear to DHA that Nest, Zaccaro and Golden would split a 3% commission. DHA’s representative verbally agreed to the commission split. The Premises were sold by Sentry to DHA due to the efforts of Golden and Zaccaro. As a result of their oral agreement with the representative of DHA, Golden and Zaccaro claimed they were each entitled to a commission equal to 1% of the sale price of the Premises. DHA moved (motion Sequence 3) to dismiss the Complaint pursuant to CPLR §3211(a)(7) for failure to state a claim arguing that its failure to consent to Zaccaro acting as a dual agent on behalf of the buyer and the seller in the transaction “warrants forfeiture of the right to collect any commission and dismissal of the amended complaint.” That motion was granted, and the complaint was dismissed as against DHA. In that regard, Supreme Court held that: Real estate brokers have a fiduciary relationship with their client and an affirmative duty not to act for a party with adverse interests unless consent is obtained from the principal after being provided with full knowledge of the facts. A broker, cannot act as agent for both seller and purchaser of the property. A real estate broker forfeits the right to a commission regardless of the damages incurred if the fiduciary duty is breached. (Internal quotation marks and citations omitted.) The underlying action was not dismissed as to the remaining defendants, and, therefore, continued to proceed, as against them. Thereafter, plaintiffs moved (motion sequence 4) for a default judgment and discovery related relief against Sentry for its failure to answer the amended complaint and to respond to discovery demands. Sentry cross-moved for, inter alia, an order dismissing the complaint as against them for the same reasons that resulted in the dismissal of DHA. By Order dated April 4, 2017 (the “April Order”), Supreme Court denied plaintiffs’ motion in its entirety and granted Sentry’s motion to dismiss the amended complaint as against them. Relying on the “law of the case” doctrine, Supreme Court held that because plaintiffs acted in a dual agency capacity without notice to Sentry, this time, plaintiffs’ forfeited their right to a commission from it. Supreme Court rejected Plaintiffs’ argument that “they simply introduced DHA…to Sentry, without being called upon to do anything more, and thus acted as a traditional finder and not a fiduciary.” In so holding, Supreme Court relied on the allegations in the amended complaint that plaintiffs were acting as DHA’s broker as well as Sentry’s broker. Plaintiffs appealed to the First Department. In unanimously affirming Supreme Court’s April Order, with costs, the First Department found that plaintiffs “engaged in an impermissible dual agency without full disclosure.” (Citation omitted.) Plaintiffs’ argument that it was merely a finder, as opposed to a broker, was also rejected, by the First Department, which held: A finder has no obligation to negotiate the real estate transaction in order to obtain its fee. Here, the amended complaint indicates that plaintiffs were obligated to negotiate the sale of the premises. (Citations omitted.) As a result of the dismissal of the complaint as against DHA and Sentry, the plaintiffs lost millions of dollars in commissions. TAKEAWAY Real estate brokers should be mindful of their role in the transactions in which they participate. If called upon to act in numerous capacities for different parties, full disclosure to all parties should be made and express written consent should be obtained.

The Financial Industry Regulatory Authority (“FINRA”) recently released its 2018 Regulatory and Examination Priorities Letter (the “Priorities Letter”) ( here ). here .=">here."> The Priorities Letter identifies the areas that FINRA intends to focus on in the coming year. “The coming year will bring both continuity and change in FINRA’s programs,” FINRA President and CEO, Robert Cook (“Cook”), wrote in a note accompanying the letter. FINRA’S 2018 Priorities at a Glance The Priorities Letter describes areas that are designed to improve the compliance, supervisory and risk management procedures of member firms. Similar to the self-regulatory organization’s priorities in 2017, retail fraud and high-risk brokers top the list. “Fraud is always a major area of focus for FINRA,” said Cook. Noting that FINRA “made hundreds of referrals to the U.S. Securities and Exchange Commission (SEC) for potential insider trading and other fraudulent activities involving individuals or entities outside FINRA’s jurisdiction,” Cook said that the self-regulator “will continue to pursue our investigations in these areas aggressively.” “ top priority for FINRA” in the coming year, will be “identifying high-risk firms and individual brokers and mitigating the potential risks that they can pose to investors.” In particular, there will be an emphasis on broker recommendations to unsophisticated, vulnerable investors - particularly the elderly. For example, FINRA intends to “focus on recommendations for speculative or complex products by high-risk brokers to investors who may not have the necessary sophistication, experience or investment objectives.” The self-regulatory organization “will also review situations where registered representatives have control of investors’ finances as power-of-attorney or trustee on customer accounts, or have future rights to customer assets as a named beneficiary on customer accounts.” here=">here" and="and" >here.=">here."> Protection of customer assets and the accuracy of member firms’ financial data also will be a FINRA priority. According to the Priorities Letter, “FINRA will continue to focus on firms’ liquidity planning, compare strengths and weaknesses across firms’ liquidity plans and share effective practices.” In particular, “FINRA will evaluate whether a firm’s liquidity planning is appropriate for the firm’s business and customers, and whether it includes scenarios that are consistent with its collateral resources and client activity.” FINRA will continue its efforts to stop bad actors, promote fair and transparent sales practices, and identify and halt abusive market activities. The self-regulator will focus on high-risk brokers with new rulemaking initiatives and examinations. In addition, other areas of focus will be on operation and financial risks, particularly technology governance and cybersecurity, as well as market regulation, the protection of which Cook stated “must remain a top priority for firms.” Cook also noted that the Priorities Letter, coupled with FINRA’s 2017 Examination Findings Report ( here ), “serves as a resource for broker-dealers to enhance their compliance, supervisory and risk management programs and to prepare for their FINRA examination.” here.=">here."> The self-regulator also plans to roll out a revamped exam program. FINRA will implement a risk-based framework aimed at aligning exam resources with the risk profiles of member firms. In this regard, FINRA plans to add or enhance information sharing measures during exams as well as to improve examiner training. Above all, FINRA will continue to work to ensure market integrity, including best execution, protection against manipulation across markets and products, and fixed income data integrity. The Takeaway Although FINRA’s mission will continue to be protecting investors and promoting market integrity, there will be changes in how FINRA accomplishes its mission. In this regard, there will be ongoing changes to the structure of FINRA’s advisory committee, based on input from member participants. The effectiveness of these changes and priorities remain to be seen. As noted by the self-regulatory organization, “FINRA will update its view on risks throughout the year, as well as provide observations on both concerns and effective practices relevant to some of these areas.”

The Public Company Accounting Oversight Board (“PCAOB” or the “Board”) is a nonprofit corporation established by Congress to oversee the audits of public companies. The Board was created as part of the Sarbanes-Oxley Act of 2002 in response to the accounting scandals at Enron Corp. and WorldCom Inc. – scandals that cost investors billions of dollars. Prior to the creation of the Board, the profession was self-regulated. The PCAOB protects investors by promoting informative, accurate, and independent audit reports. It does so by, among other things, inspecting the audits of public companies conducted by registered public accounting firms. Through these inspections, the PCAOB assesses the audit firms’ compliance with the statutes, regulations, and professional standards governing the accounting profession. The PCAOB selects the audit engagements it will inspect based on confidential internal analysis and thereafter notifies the firms of the audits it will inspect. The PCAOB typically issues inspection reports, only parts of which are made public, after all the inspections for a firm are complete. To ensure the integrity of the inspection process, the PCAOB closely guards the confidentiality of both its inspection targets prior to firm notification and its methodology for selecting those targets. All PCAOB employees must certify that they are complying with PCAOB Ethics Rules, which prohibit employees from using confidential PCAOB information for private gain (or even merely creating the appearance that they are) and that bar them from making unauthorized disclosures of confidential information obtained during their employment. These prohibitions apply even after employment with the Board has ended. The Securities and Exchange Commission (“SEC” or the “Commission”) has oversight authority over the PCAOB, including the approval of the Board’s rules, standards, and budget. (For more information about the PCAOB, click here .) Recently, a group of former senior partners at one of the Big Four accounting firms was charged with obtaining confidential information on planned audit inspections and used it to avoid negative assessments of the firm’s work. On January 22, 2018, the SEC announced ( here ) that it brought charges against six certified public accountants – including former staffers at the PCAOB and former senior officials at KPMG LLP – arising from their participation in a scheme to misappropriate and use confidential information relating to the PCAOB’s planned inspections of the accounting firm. In two separate orders, the SEC’s Division of Enforcement and Office of the Chief Accountant (“OCA”) alleged that the former PCAOB officials made unauthorized disclosures of PCAOB plans for inspections of KPMG audits, enabling the former KPMG partners to analyze and revise audit workpapers in an effort to avoid negative findings by the Board. Two of the former PCAOB officials had left the Board to work at KPMG. The SEC alleged that the third official leaked PCAOB data at the time he was seeking employment with KPMG. According to the SEC, the misconduct began in 2015 and continued until February 2017. Soon after the conduct was discovered, the six accountants were terminated, resigned or placed on leave before separating from KPMG and the PCAOB, respectively. “As alleged, these accountants engaged in shocking misconduct – literally stealing the exam – in an effort to interfere with the PCAOB’s ability to detect audit deficiencies at KPMG,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “The PCAOB inspections program is meant to assess whether firms are cutting corners, compromising their independence, or otherwise falling short in their responsibilities. The SEC cannot tolerate any scheme to subvert that important process.” In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced the commencement of criminal charges against the six accountants. ( Here .) As set forth in the orders instituting public administrative and cease-and-desist proceedings ( here and here ), the Enforcement Division and OCA alleged that while preparing to leave his supervisory position at the PCAOB for a job at KPMG, Brian Sweet (“Sweet”) downloaded confidential and sensitive inspection-related materials that he believed might help him at KPMG. KPMG had recruited him to join the firm at a time when it had a high rate of audit deficiencies. According to the SEC, nearly half of the KPMG audits that the PCAOB inspected in 2013 were found deficient. After leaving the PCAOB, Sweet allegedly continued to gain access to confidential PCAOB materials through Cynthia Holder (“Holder”), a PCAOB inspector. After Holder joined Sweet at KPMG, a third PCAOB employee, Jeffrey Wada (“Wada”), allegedly leaked confidential information about planned PCAOB inspections of KPMG to Holder. According to the SEC, Wada leaked this information while he was seeking employment at KPMG. The SEC alleged that upon his arrival at KPMG, Sweet told his supervisors that he had taken confidential materials from the PCAOB and revealed, for example, the KPMG audit clients that the PCAOB intended to inspect that year. According to the SEC, Sweet’s supervisors – David Middendorf, KPMG’s then-national managing partner for audit quality and professional practice and Thomas Whittle, KPMG’s then-national partner-in-charge for inspections and another high-level partner at the firm, David Britt, KPMG’s banking and capital markets group co-leader – encouraged him to divulge the stolen information to them and others at the firm. The Enforcement Division and OCA alleged that Middendorf, Whittle, Sweet, Holder, and Britt worked together to review the audit workpapers for at least seven banks they were told the PCAOB would inspect in an effort to minimize the risk that the PCAOB would find deficiencies in those audits. Middendorf and Whittle allegedly instructed that no one disclose that they had confidential PCAOB information. Sweet agreed to settle to a Commission Order requiring that he cease-and-desist from violating PCAOB Ethics Rules and barring him from appearing or practicing before the Commission as an accountant based on findings that he, among other things, violated PCAOB Ethics Rules regarding confidentiality and lacks integrity. In a statement, the PCAOB said it cooperated with investigators and when it learned of the alleged misconduct it reviewed and reinforced the safeguards against improper disclosure of confidential information. “The new PCAOB Board will conduct an ongoing review of the organization’s information technology and security controls, as well as its compliance and ethics protocols, to assess their effectiveness,” PCAOB Chairman William Duhnke said in a statement. A KPMG spokesman said that the firm has been cooperating with the government investigation. “KPMG took swift and decisive action, including the engagement of outside legal counsel to conduct a detailed investigation and the separation of involved individuals from the Firm.” Takeaway: Audited financial statements are at the heart of the SEC’s disclosure-based regulatory regime: a company’s financial statements provide investors with a wealth of information, and independent audits give investors confidence that those statements can be trusted. Conduct that undermines this regime is inimical to the efficiency and effectiveness of the capital markets. It is important therefore for the Board to enhance its controls and compliance protocols to restore the public trust in the audits of the financial statements of public companies.

The Financial Industry Regulatory Inc. ("FINRA") recently proposed establishing a roster of arbitrators specifically qualified to adjudicate expungement cases, a concept that was initially recommended by FINRA’s regulatory task force in December 2015. What is an expungement? The expungement process allows a customer complaint regarding a broker to be removed from FINRA’s online database known as BrokerCheck. By relying on arbitrators with the necessary background and training to oversee expungement cases, FINRA hopes to address concerns that the process grants expungement requests without considering the merits of a case. Critics contend that this alters a broker’s online profile and hides disciplinary problems. In particular, the Public Investors Arbitration Bar Association contends the FINRA arbitration system has granted expungement requests far too often. On the other hand, proponents of expungement say that it clears the record of a broker who has been accused of wrongdoing unfairly. FINRA’s New Expungement Panels Under the proposal, a three-person panel would be selected from the list of arbitrators to handle expungements of settled cases. The panel would also hear cases requested by a broker, provided the request for a hearing is made within one year of the close of an underlying case. Brokers would be required to appear at a hearing, and the panel must vote unanimously to grant the expungement. It is worth noting that in FINRA arbitration cases in which an award is granted, the panel that presided over the dispute would also hear the expungement case. Arbitrators from the special roster would hear matters that are settled by other means. "The proposals help address concerns related to arbitration panels granting expungement requests without hearing the full merits of the underlying case," Richard Berry, FINRA executive vice president and director of its Office of Dispute Resolution, said in a statement. Finra also believes the proposed changed will make it easier for customers to participate in expungement hearings and that information about underlying cases will be more readily available to the arbitration panels. The Takeaway Ultimately, the proposal is designed to provide more structure to the expungement process, regularize it, and make it more predictable. Previous FINRA guidance to arbitrators advises that  expungements should be granted only in “extraordinary circumstances.” Whether the proposed changes to the expungement process will provide enhanced safeguards to investors remains to be seen.  The proposal is open for public comment until Feb. 5. 2018.

In two recent blog posts entitled: “ Appellate Division, Second Department Tells Foreclosing Residential Lender to ‘SHOW ME THE EVIDENCE ’” and “ The Second Department Denies Summary Judgment to Another Foreclosing Mortgagee Due to the Insufficiency of Evidence Presented on the Motion ,” foreclosing mortgagees were cautioned that evidence in admissible form must be submitted to the court to demonstrate compliance with the many statutory provisions that must be followed to ensure a successful foreclosure action.  In Bank of New York Mellon v. Zavolunov (2 nd Dep’t January 17, 2018) , the Court once again reiterates the importance of the need for sufficient evidence when it comes to satisfying the burdens of a summary judgment movant in mortgage foreclosure actions.  While Zavolunov was a residential mortgage foreclosure action, the decision is instructive in all cases where proof of mailing is a necessary requisite to a parties’ prima facie case. As previously discussed on this Blog, RPAPL 1304(1) and (2) requires, inter alia , that at least ninety days prior to commencing a foreclosure action against a borrower with respect to a “home loan” (as defined in the relevant statutes (a “Home Loan”)), a lender must send written notice to the borrower by certified and regular mail that the loan is in default.  Such notice must: be sent to the borrower’s last known address and to the residence that is the subject of the foreclosure; provide a list of approved housing agencies that provide free or low-cost counseling; and, advise that legal action may be commenced after ninety days if no action is taken to resolve the matter. The lender in Zavolunov (the “Lender”) commenced an action to foreclose a mortgage on a Home Loan and alleged in its complaint that it served the required RPAPL 1304 notices.  The Zavolunov supreme court granted Lender’s motion for summary judgment and the borrower appealed. In reversing the supreme court on this issue, the Zavolunov Court recognized that “ roper service of RPAPL 1304 notice on the borrower or borrowers is a condition precedent to the commencement of a foreclosure action, and the plaintiff has the burden of establishing satisfaction of this condition.”  (Citations and internal quotation marks omitted.)  The Zavolunov Court also cautioned that a lender moving for summary judgment “must prove its allegations by tendering sufficient evidence demonstrating the absence of material issues as to its strict compliance with RPAPL 1304.” (Citations and internal quotation marks omitted.) In support of its motion for summary judgment, the Zavolunov plaintiff provided an affidavit from a representative of Lender’s loan servicer asserting that more than ninety days prior to the commencement of the foreclosure action “notice was sent to Defendant by certified mail and first class mail to the last known address of the Defendant and, if different, to the residence that is the subject of the mortgage.”  Annexed to the affidavit were copies of the 90-day notices “all of which contained a bar code with a 20-digit number below it”.  However, the Court noted that the notices contained no language “indicating that a mailing was done by first -class or certified mail, or even that a mailing was done by the U.S. Postal Service”.  Moreover, the Zavolunov Court also found that the Lender’s representative failed to make the “requisite showing that he was familiar with the plaintiff’s mailing practices and procedures, and therefore did not establish proof of a standard office practice and procedure designed to ensure that items are properly addressed and mailed.”  (Citations and internal quotation marks omitted.) Because the Zavolunov Court found that the Lender failed to establish that complied with the requirements of RPAPL 1304, it held that the supreme court should have denied the Lender’s summary judgment motion. TAKEAWAY Whether specifically related to RPAPL 1304 or otherwise, proof of compliance with statutory and/or contractual notice requirements is important.  It is also important that all evidence of required statutory and/or contractual compliance is submitted to the Court.  For example, a contemporaneous affidavit of mailing from the individual that actually mailed the notice indicating that he/she actually deposited the notice in a mailbox or delivered the notice to the post office, might have satisfied the Second Department.  It might also help to have had photocopies of the addressed envelopes with proper postage and, where applicable, the certified mail card affixed to the envelope.  The Second Department also suggests that it was looking for an indication on each of the respective notices as to how it was mailed (i.e., regular mail or certified mail).  If the evidence suggested here was presented, perhaps the Second Department would have found compliance with RPAPL 1304. Many times, it is difficult for a bank employee to undertake to actually place notices in a mail box or to personally deliver a notice to the post office.  In such situations, as suggested by the Second Department, proof of compliance with notice requirements can be satisfied by the submission of an affidavit by someone with knowledge, of the company’s standard office procedures regarding the mailing of notices and other documents explaining the nature of such procedures and attesting to the fact that all such procedures were followed in the given case.

Last month, the Second Circuit reinstated a securities class action against Alibaba Group Holding Ltd. (“Alibaba” or the “Company”) and four of its senior executives for making materially false and misleading statements and omissions in connection with the Company’s September 2014 initial public offering (“IPO”). In June 2016, Chief Judge Colleen McMahon of the U.S. District Court for the Southern District of New York dismissed the complaint because the plaintiffs failed to state a claim for which relief could be granted under the Securities Exchange Act of 1934 (the “Exchange Act”) ( Here .). In a summary order issued on December 5, 2017, the Second Circuit vacated the judgment and remanded the case for further proceedings ( here ), concluding, among other things, that Judge McMahon misapplied Rule 12(b)(6) in dismissing the plaintiffs’ claims. The Plaintiffs alleged that the Chinese e-commerce giant and several of its officers and directors knowingly or recklessly concealed that the Company was the subject of an “administrative proceeding” by a Chinese regulatory agency. According to the plaintiffs, the State Administration for Industry and Commerce (“SAIC”) warned the Company that it lacked appropriate internal controls, was operating in contravention of Chinese laws and regulations, and could be subject to substantial financial fines. The plaintiffs maintained that the defendants’ failure to disclose the pendency of the “administrative proceeding” rendered the Company’s registration statement, filed in connection with the IPO, materially false and misleading, despite its cautionary disclosures. According to the complaint, Chinese regulators summoned Alibaba executives to a secret meeting two months before the IPO in which they threatened to levy daily fines if the Company continued to host a marketplace for third parties to sell counterfeit goods. This information was not revealed until four months after the IPO, when the SAIC published on its website a white paper about the “guidance” it had provided to Alibaba.  Within two days of the publication of this information, the price of Alibaba’s stock dropped 13 percent, wiping out $33 billion in market capitalization. Notably, the white paper was later withdrawn. The plaintiffs alleged that the facts underlying the white paper were material to investors and that they should have been disclosed in Alibaba’s registration statement. The district court disagreed: Then there is the problem of the White Paper itself. Considering that the White Paper was posted on the SAIC’s website only briefly before being quickly withdrawn, Plaintiffs reliance on its contents is tenuous at best. Plaintiffs argue that the quick withdrawal of the White Paper suggests Alibaba’s sway over Chinese regulators; it also supports the equally, if not more, compelling inference that the posting was unauthorized and, hence, not to be trusted. That competing inference is lent further credence by the fact that the SAIC never subsequently initiated any formal enforcement action against Alibaba, and that the SEC, which investigated Alibaba’s compliance with US securities laws after the White Paper’s posting, never moved forward with a formal investigation or leveled any charges. Further, a principal basis alleged in the Consolidated Complaint for giving credit to the White Paper was that Alibaba “confirmed the authenticity of the White Paper and the harsh position taken by the SAIC.” In fact, that allegation is contradicted by the document to which the Consolidated Complaint refers — the press release issued by Alibaba immediately after the White Paper was posted. In that press release, the only thing Alibaba confirmed was the date of the Meeting. It not only denied the rest, but it announced that it had filed a complaint with the SAIC protesting the posting of the White Paper. But even assuming the White Paper were to be believed, nothing in it suggest that the July 16 Meeting constituted some sort of formal enforcement proceeding. It says that the meeting met SAIC’s “pre-set goal ” by making Alibaba “clearly aware of e-commerce regulatory agencies’ severe concern and censure as to the long existing misconduct on the platforms in Alibaba family,” cautioning it against self-congratulation, and prompting it “to pay great attention to the severity of the problems and to promptly take measures to redress the problem.” Making Alibaba aware of concerns and prompting it to pay attention to problems it had plainly disclosed is not tantamount to the institution of a formal regulatory proceeding. Citation omitted. The Second Circuit found that revelation of the information likely would have had a negative effect on Alibaba’s IPO. The Court criticized the district court for improperly discrediting “significant allegations” upon which the plaintiffs’ claims relied, such as the facts underlying the white paper. For example, the Court noted that the district court gave too much weight to Alibaba’s contention that the white paper was “unauthorized” and untrustworthy because the SAIC quickly withdrew the paper. Under Rule 12(b)(6), said the Court, the district court should have credited the plaintiffs’ “proffered reasonable inference that the withdrawal resulted from Alibaba’s influence over Chinese regulators.” Thus, “ ccepting Plaintiffs’ allegations as true,” the Court concluded that Alibaba “had a duty to disclose these facts, in a manner that accurately conveyed the seriousness of the problems Alibaba faced, so as not to render Defendants public disclosures ‘inaccurate, incomplete, or misleading.’” The Second Circuit also concluded that the plaintiffs alleged “strong circumstantial evidence” of scienter – that is, Alibaba acted with the requisite state of mind in withholding information about its secret meeting with the SAIC. The Court reasoned: “Considering the high-level nature of the meeting, the seniority of the attendees, its conduct in secret, and the huge potential impact of the SAIC’s threat made at the meeting on Alibaba and its imminent IPO, it is virtually inconceivable that this threat was not communicated to the senior level of Alibaba’s management, the individual Defendants.” Consequently, “Defendants’ subsequent failure to disclose the meeting concealed the true facts about the threat to the company that had been communicated by the” Chinese government, thus “powerfully support a strong inference that the Defendants acted with scienter.” The Court also found that the plaintiffs adequately alleged corporate scienter against Alibaba because they adequately alleged scienter against the individual defendants.