By Jeffrey M. Haber An investment adviser is a fiduciary, and as such is held to the highest standard of conduct and must act in the best interest of his/her client.1 This means, among other things, that an investment adviser has an affirmative duty of utmost good faith and full and fair disclosure of all material facts.2 An investment adviser’s fiduciary duties are made enforceable under Section 206 of the Investment Advisers Act of 1940 – the Act’s anti-fraud provisions.3 Though Section 206 is an antifraud provision, unlike Section 10(b) of the Securities Exchange Act of 1940 (the “Exchange Act”), it is not limited to fraud in connection with the purchase or sale of a security.4 It is much broader – it extends “to all services undertaken on behalf of the client.”5 In the context of fraud, an investment adviser has an affirmative duty to make full and fair disclosure of all material facts, as well as a duty to avoid misleading his/her clients.6 Accordingly, an investment adviser is obligated to refrain from engaging in fraudulent conduct, whether that conduct encompasses the making of false statements or the failure to disclose material facts when such failure would operate as a fraud or deceit upon a client. In addition to the foregoing, investment advisers, like other professionals charged with caretaking another person’s money, cannot misappropriate a client’s assets or property. Misappropriation occurs when a person uses another person’s money without authorization. It mirrors the crime of embezzlement, which is committed by a person having a relationship of trust or fiduciary duty to another person and who steals that person’s money or property for his/her own personal gain. Both the Securities and Exchange Commission (“SEC”) and FINRA have numerous rules governing how corporate actors and financial professionals must act to safeguard and protect the handling of investor and customers monies. Unfortunately, many victims of the foregoing are seniors and vulnerable adults. This was so in the SEC enforcement action we examine below. SEC v. Mueller On August 20, 2021, the SEC announced (here) that it filed an action against a San Antonio, Texas-based investment adviser for operating a years-long fraudulent scheme that raised approximately $58 million from nearly 300 investors in two investment funds – the deeproot 575 Fund, LLC (the “575 Fund”) and the deeproot Growth Runs Deep Fund, LLC (the “dGRD Fund”) (collectively, “the Funds”). According to the complaint filed by the SEC (here), Robert J. Mueller and his company deeproot Funds, LLC (“deeproot”) persuaded investors, many of whom were retirees, to cash out the annuities and individual retirement accounts they held with other investment companies and invest in the Funds. Defendants allegedly told investors the Funds would invest in life insurance policies and deeproot-related businesses to provide relatively safe returns to investors. Defendants allegedly told investors that the 575 Fund would invest the majority of its assets in life insurance policies. In reality, said the SEC, the 575 Fund purchased interests in life insurance policies indirectly, by investing in the dGRD Fund, which itself invested the majority of its assets in life insurance policies purchased for the Funds by another company owned by the individual defendant. According to the SEC, defendants commingled the money raised from investors in affiliated bank accounts and spent less than $10 million to purchase life insurance policies for the Funds. They also purported to include life insurance policies as assets of the Funds that defendants had purchased for the individual defendant’s earlier investment funds. Notably, alleged the SEC, defendants purchased no new insurance policies for the Funds after September 2017, despite raising approximately $43 million for the Funds after that time. The SEC alleged that defendants used the vast majority of the Funds’ assets – virtually all of which came from investors in the 575 Fund and the dGRD Fund – to fund the individual defendant’s deeproot-affiliated businesses. “Indeed,” said the SEC, the individual defendant “funneled more than $30 million of the Funds’ assets to the Relief Defendants in non-arms-length transactions whenever he determined the Relief Defendant businesses had expenses that needed to be paid, and he did so without any analysis as to whether such transfers constituted suitable investments for his client Funds.” Further, alleged the SEC, the individual defendant “made these transfers to Relief Defendants without obtaining anything of substance in return for the Funds and without memorializing the transactions in any way.” According to the SEC, since 2015, neither the life insurance policies nor the “capital” investments in affiliated businesses have yielded significant revenue or cash flow for defendants or the Funds. This caused the individual defendant and one of his entities “to default on the purchase of one $10 million face value life insurance policy, losing nearly $3.5 million of the Funds’ money in the process,” the SEC claimed. It also allegedly caused defendants to make more than $820,000 of Ponzi-like payments to earlier investors in the Funds using money raised from new investors and make at least $177,000 in payments from money borrowed on a short-term basis using the life insurance policies as collateral. Despite making statements suggesting he took no compensation from the Funds, the SEC alleged that the individual defendant commingled assets of the Funds in affiliated bank accounts and used them to make ad hoc salary payments to himself whenever investor money was available, totaling roughly $1.6 million from 2016 through 2020. The individual defendant also allegedly misappropriated more than $1.5 million of the Funds’ assets to pay hundreds of personal expenses. The SEC filed its complaint in federal district court in San Antonio. The SEC charged the investment adviser and his company with violating the antifraud provisions of Sections 206(1), (2), and (4) of the Act and Rule 206(4)-8 promulgated thereunder, Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. The SEC charged another defendant with violating the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act, and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) promulgated thereunder. The SEC is seeking civil penalties, disgorgement of ill-gotten gains with interest, and permanent injunctions. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963). Transamerica Mortg Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979). Id. SEC v. Lauer, 2008 WL 4372896, at *24 (S.D. Fla. Sept. 24, 2008). Proxy Voting by Investment Advisers, Adv. Act Rel. No. 2106 (Jan. 31, 2003). See Arleen W. Hughes, Exchange Act Rel. No. 4048 (Feb 18, 1948), aff’d. sub. nom., Hughes v. SEC, 174 F.2d 969 (May 9, 1949).

By Jeffrey M. Haber When a party releases another from claims or the threat of claims, he/she is giving up the right to sue the other in connection with the subject of the release. 1 A release effectively eliminates all claims against another that are possessed by the party giving the release. It does not matter whether the releasor knew of the claims at the time that he/she gave the release, so long as “the parties so intend and the agreement is ‘fairly and knowingly made.’” 2 If “the language of a release is clear and unambiguous, the signing of a release is a ‘jural act’ binding on the parties.” 3 Thus, a release may not be invalidated unless the challenging party can demonstrate any of “the traditional bases for setting aside written agreements, namely, duress, illegality, fraud, or mutual mistake.” 4 “Although a defendant has the initial burden of establishing that it has been released from any claims, a signed release ‘shifts the burden of going forward … to the to show that there has been fraud, duress or some other fact which will be sufficient to void the release.’” 5 “A plaintiff seeking to invalidate a release due to fraudulent inducement must ‘establish the basic elements of fraud, namely a representation of material fact, the falsity of that representation, knowledge by the party who made the representation that it was false when made, justifiable reliance by the plaintiff, and resulting injury.’” 6 When a party releases a fraud claim, he/she may later challenge that release as fraudulently induced only if he/she can identify a separate fraud from the subject of the release. 7 As the Court of Appeals observed in Centro , “ ere this not the case, no party could ever settle a fraud claim with any finality.” 8 The foregoing principles were highlighted in Ivasyuk v. Raglan , 2021 N.Y. Slip Op. 04706 (2d Dept. Aug. 18, 2021) ( here ). Ivasyuk involved a personal injury action in which the plaintiff allegedly fell from a six-foot ladder while performing work at a property that was being renovated. Plaintiff allegedly injured himself when he fell from the ladder. Plaintiff, and his wife suing derivatively, commenced the action against defendants, asserting causes of action for, inter alia , violations of Labor Law §§ 240(1), 241(6), and 200, and common-law negligence. One of the defendants moved for, among other things, summary judgment dismissing the complaint insofar as asserted against it. In part, defendant argued that it was entitled to judgment as a matter of law on the basis that, prior to the commencement of the action, plaintiff executed a release in favor of defendant for all claims arising out of the subject accident. The motion court, inter alia , denied the motion.  On appeal, the Appellate Division, Second Department reversed and granted summary judgment in favor of defendant. The Court found that defendant established its entitlement to judgment by demonstrating that the plaintiff released it from any claims made by the plaintiff with regard to, inter alia , the accident. 9 Among other proof, said the Court, defendant provided a copy of the release, “which clearly and unambiguously stated that was releasing from, inter alia , all actions, causes of action, and suits. 10 The Court rejected plaintiff’s argument that he did not understand the terms of the release because it was in English. “A person who does not understand the English language is not automatically excused from complying with the terms of a signed agreement, since such person must make a reasonable effort to have the agreement made clear to him or her,” said the Court. 11 The Court found that deposition testimony demonstrated that before signing the release, the terms of the release were explained to plaintiff. 12 Takeaway A “release is … a species of contract” that “is governed by the same principles of law applicable to other contracts.” 13 In Ivasyuk , the facts showed that the terms of the release were clear and unambiguous. Under the principles of contract interpretation , the release was found to be binding on the plaintiff. Also, since the plaintiff was unable to demonstrate duress, illegality, fraud, or mutual mistake, the Court declined to set aside the release. 14 Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V. , 17 N.Y.3d 269, 276 (2011) (“Generally, a valid release constitutes a complete bar to an action on a claim which is the subject of the release.”). Id. ,quoting Mangini , 24 N.Y.2d at 566-567. Booth v. 3669 Delaware , 92 N.Y.2d 934, 935 (1998), quoting Mangini v McClurg , 24 N.Y.2d 556, 563 (1969). Mangini , 24 N.Y.2d at 563. Centro , 17. N.Y.3d at 276, quoting Fleming v. Ponziani , 24 N.Y.2d 105, 111 (1969). Id. , quoting Global Mins. & Metals Corp. v. Holme , 35 A.D.3d 93, 98 (1st Dept. 2006). Bellefonte Re Ins. Co. v. Argonaut Ins. Co. , 757 F.2d 523, 527-28 (2d. Cir. 1985). 17 N.Y.3d at 276. Slip Op. at *2. Id. Id. (citations omitted). Id. (citation omitted). Schuman v. Gallet, Dreyer & Berkey, L.L.P. , 180 Misc. 2d 485, 487 (N.Y. Co. 1999), aff’d , 280 A.D.2d 310 (1st Dept. 2001). Toledo v. W. Farms Neighborhood Hous. Dev. Fund Co., Inc. , 34 A.D.3d 228, 229 (1 st Dept. 2006).

By Jonathan H. Freiberger On August 12, 2021, the Appellate Division, Third Department, decided WFE Ventures, Inc. v. GBD Lake Placid, LLC , a multi-faceted construction litigation.  Today’s article, however, will focus on flood damage resulting from the underlying construction project. In WFE , the defendant owner (“Owner”) built a Marriot hotel in Lake Placid.  Owner hired an architectural firm (“Architect”) to obtain site plan (“Plan”) approval (“Approval”) from the applicable municipal review board (“JRB”) and an engineer (“Engineer”) to prepare a stormwater management plan (“Plan”).  The Plan included grading details that called for a retaining wall around the entire property.  The Plan was approved and, inter alia , contained a condition requiring prior written approval from the JRB before any engineering modifications or design changes could be made.  In this regard, Owner’s site work contractor (the “Site Contractor”) requested, and received, from JRB approval to change the materials from which the retaining wall would be built. After encountering certain field conditions, however, the site work contractor “submitted preliminary sketches to the local inspector/code enforcement officer … to see whether … JRB would consider replacing the bulk of the wall with earthen fill that would extend the slope of the land approximately 25 to 30 feet into the neighboring .”  No evidence was submitted that JRB approved the substitution of the retaining wall for the slope extension.   Nonetheless, the substitution did occur.  After the hotel was completed, a certificate of occupancy was issued. The WFE plaintiff was a was a developer that acquired a nearby plot of land on which it intended to develop four buildings -- each containing multiple townhouses (the “Development”).  Shortly after one of the buildings was completed, and over a two-year period thereafter, it experienced flooding which damaged all three townhouses therein.  After the first flood, plaintiff’s president complained to the JRB that the flooding was caused by Owner’s construction project -- in particular, the removal of a retention pond on neighboring property as a result of slope extension efforts once the approved retaining walls were eliminated from the project.  Ultimately, plaintiff addressed the flooding by taking remedial actions itself after Owner ignored Plaintiff’s requests to address the problem directly.  Plaintiff’s actions were successful and the flooding stopped. Thereafter, plaintiff commenced action against Owner “asserting causes of action sounding in negligence and nuisance and claiming that through the slope extension and related construction – undertaken without JRB approval – defendant wrongfully diverted surface water that resulted in flooding to .”  In response, Owner, inter alia , brought third-party actions against the Site Contractor and Architect.   Among other motions, Owner moved for summary judgment dismissing plaintiff’s complaint and plaintiff cross-moved for summary judgment against Owner on the issues of liability and proximate cause.  As relates to this article, supreme court denied plaintiff’s cross-motion finding issues of fact regarding, among other things, whether Owner’s actions diverted water onto plaintiff’s property by artificial means, thereby precluding summary judgment on this issue and plaintiff appealed. In supreme court, plaintiff’s experts opined that Owner’s construction “particularly its decision to use fill as opposed to the JRB approved use of a wall” caused the flooding.  Owner relied on the opinion of municipalities’ expert, who concluded that “not only did the hotel construction fail to cause the flooding, but the building of the hotel actually alleviated some surface water flow onto plaintiff’s property by redirecting some surface water that had previously flowed across the property.”  The Court agreed with supreme court that “ n light of the conflicting expert opinions and “recognizing that disagreement between experts generally presents a credibility determination to be resolved by the trier of fact and the cause of the flooding cannot be resolved on a motion for summary judgment.”  (Citations and internal quotation marks omitted.) Among others, the Court rejected Owner’s, argument that, “regardless of whether the construction of the hotel was the root cause of the flooding of plaintiff’s property, defendant bears no responsibility in this regard surface water was not diverted onto plaintiff’s land by artificial means….”  Indeed, the Court agreed with supreme court that issues of fact existed as to whether “artificial means” were used to divert water from Owner’s property.  Citing a litany of cases, the Court stated that a “landowner will not be liable for damages caused by the runoff of surface water onto a neighbor’s land as long as it was the result of an improvement to the landowner’s property undertaken in a good faith effort to enhance the usefulness of the property and, of more significance here, no artificial means, such as pipes and drains, are used to divert the water thereon. (Citations and internal quotation marks omitted.)  See also, Biaglow v. Elite Property Holdings, LLC , 140 A.D.3d 814, 815 (2 nd Dep’t 2016).  The Court found that the first element was “clearly satisfied by the construction of a new hotel where vacant land and/or an abandoned building once stood.”   The Court disagreed with Owner’s argument that the second element was satisfied because “there is no evidence that pipes or drains were used or installed” by Owner.  The Court noted its prior holdings that “the definition of artificial means should not be read so narrowly, as other, more esthetically pleasing means of water diversion – such as the construction of a swale or a berm – have been held to potentially constitute artificial means sufficient to form the basis for liability.”  (Citations omitted.)  Thus, the Court stated that “ he diversion of water by artificial means is not strictly limited to the use of pipes, drains and ditches and may otherwise be established where it is demonstrated that the net effect of the defendant’s improvements so changed, channeled or increased the flow of surface water onto the plaintiff’s land as to proximately cause damage to the property.”  (Citations, internal quotation marks, ellipses and brackets omitted.) Considering the calculations of plaintiff’s expert that almost 60,000 cubic feet of fill was used by Owner to extend the slope of the property, a jury “might well conclude that the use of such a volume of fill to change the natural slope of the land could be deemed an artificial, as opposed to a natural, means of water diversion.”  Put another way, “as with the building of a swale or a berm, the issue of whether the extended slope so changed, channeled or increased the flow of surface water onto plaintiff’s land as to proximately cause damage to the property cannot be determined on a motion for summary judgment.”  (Citations and internal quotation marks omitted.) Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber Cybersecurity disclosures are important for a number of constituencies. For example, consumers have a right to know if their data has been compromised at the company in which they do (or have done) business. Investors have a right to know if the company in which they have invested, or will invest, is the victim of a data breach and how such a breach has impacted (or will impact) the company’s business and operations. As cybersecurity breaches become more common, the Securities and Exchange Commission (“SEC”) has made the disclosure of such matters an important focus of its work. In this regard, the Commission has ordered companies to cease and desist from making false and misleading statements about their cybersecurity efforts and their efforts to address any data breaches. Two days ago, on August 16, 2021, the SEC announced (here) that it settled charges against Pearson plc, a London-based public company that provides educational publishing and other services to schools and universities, for allegedly misleading investors about a 2018 data breach involving the theft of millions of student records, including dates of births and email addresses (the “2018 Data Breach”). In the order (here), the SEC found that Pearson made misleading statements and omissions about the 2018 Data Breach – an intrusion that involved the theft of student data and administrator log-in credentials of 13,000 school, district and university customer accounts. According to the SEC, in its semi-annual report, filed in July 2019, Pearson referred to a data privacy incident as a hypothetical risk, when, in fact, said the SEC, the 2018 Data Breach had already occurred. In addition, alleged the SEC, in a July 2019 media statement issued after the company had been contacted by a media outlet about the data intrusion, Pearson stated that (a) the breach may include dates of births and email addresses, when, in fact, it knew that such records were stolen, and (b) Pearson had “strict protections” in place, when, in fact, it failed to patch the critical vulnerability for six months after it was notified. The media statement also allegedly omitted that millions of rows of student data and usernames and hashed passwords were stolen. Finally, the SEC found that Pearson’s disclosure controls and procedures were not designed to ensure that those responsible for making disclosure determinations were informed of certain information about the circumstances surrounding the breach. “As the order finds, Pearson opted not to disclose this breach to investors until it was contacted by the media, and even then Pearson understated the nature and scope of the incident, and overstated the company’s data protections,” said Kristina Littman, Chief of the SEC Enforcement Division’s Cyber Unit. “As public companies face the growing threat of cyber intrusions, they must provide accurate information to investors about material cyber incidents.” According to the SEC, Pearson violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Section 13(a) of the Exchange Act of 1934 and Rules 12b-20, 13a-15(a), and 13a-16 thereunder. Without admitting or denying the SEC’s findings, Pearson agreed to cease and desist from committing violations of these provisions and to pay a $1 million civil penalty. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber A confession of judgment is an agreement whereby a defendant or debtor agrees to the entry of judgment against him/her in an amount certain. It is a procedural device whereby the plaintiff or creditor can bypass the commencement of a lawsuit to obtain the amount “confessed.”  Confessions of judgment are used in a variety of circumstances. For example, parties to a litigation may use a confession of judgment as part of a settlement whereby the defendant agrees to pay the plaintiff money. In that situation, the defendant agrees to the confession of judgment until he/she satisfies the payment obligations under the settlement agreement. If the defendant fails to make the agreed-upon payment(s), then the plaintiff, who typically holds the confession of judgment in escrow, can file the confession of judgment with a county clerk without having to commence an action for breach of the settlement agreement.  Sometimes, parties to a dispute who wish to avoid the costs and burdens of litigation, will use a confession of judgment to ensure the payment(s) required by their out-of-court settlement. In New York, confessions of judgment are governed by Section 3218 of the Civil Practice Law and Rules (“CPLR”). Under CPLR § 3218(a),  a judgment by confession may be entered, without an action, either for money due or to become due, or to secure the plaintiff against a contingent liability in behalf of the defendant, or both, upon an affidavit executed by the defendant; 1. stating the sum for which judgment may be entered, authorizing the entry of judgment, and stating the county where the defendant resides; 2. if the judgment to be confessed is for money due or to become due, stating concisely the facts out of which the debt arose and showing that the sum confessed is justly due or to become due; and 3. if the judgment to be confessed is for the purpose of securing the plaintiff against a contingent liability, stating concisely the facts constituting the liability and showing that the sum confessed does not exceed the amount of the liability.  However, the plaintiff or creditor cannot enter judgment against the defendant or debtor if (1) more than three years has elapsed since the defendant or the debtor signed the confession, or (2) the defendant or debtor is deceased. 1 When an amount certain is confessed, the affidavit required under CPLR § 3218(a) must state the facts from which the debt arose as to demonstrate that the confessed amount is just. 2 In doing so, the statute requires the affiant to “concisely” state “the facts out of which the debt arose and showing that the sum confessed is justly due or to become due.” 3 This means that “there must be sufficient genuine detail to enable other creditors to investigate the claim and ascertain its validity ….” 4 As the courts have noted, CPLR § 3218 “is designed for the protection of third persons who might be prejudiced in the event that a collusively confessed judgment is entered ….” 5 It is “not for the protection of the defendant.” 6 Notwithstanding, defendants and debtors have tried to vacate confessions of judgment on the grounds that the specificity requirements of CPLR § 3218(a)(2) were not satisfied. Such was the case in Balahtsis v. Shakola , 2021 N.Y. Slip Op. 04653 (2d Dept. Aug. 11, 2021) ( here ). Balahtsis involved a money judgment that was entered in August 2018 in favor of the plaintiff and against the defendant. The judgment was entered pursuant to a confession of judgment, which was supported by an affidavit dated in March 2018. According to the plaintiff, the defendant signed the confession of judgment in connection with the legal fees that the defendant owed to the plaintiff.  In July 2019, defendant moved to, among other things, vacate the judgment. In an order dated November 15, 2019, Supreme Court denied the motion. Defendant appealed, claiming the affidavit on which the confession of judgment was based did not satisfy the specificity requirements of CPLR § 3218(a)(2). The Appellate Division, Second Department, affirmed. In a pithy decision, the Court ruled that defendant “was foreclosed” from challenging the confession of judgment on specificity grounds. 7 The Court explained that defendant was foreclosed from challenging the confession of judgment because CPLR § 3218(a)(2) “is designed to protect innocent third parties who might be prejudiced in the event that a collusively confessed judgment is entered, not the party who signed the confession of judgment.” 8 Takeaway Like anything in life, there are advantages and disadvantages with the confession of judgment.  From the plaintiff’s perspective, the confession of judgment provides certainty that he/she will (a) receive the monies owed by the defendant or debtor, or (b) have the means to enforce a judgment against the defendant or debtor without delay.  From the defendant’s perspective, a confession of judgment can streamline a costly legal process in which the inevitable is virtually certain – i.e. , that the defendant owes (or will owe) the plaintiff or creditor the amount sought – thereby saving the defendant or debtor legal fees, costs and expenses. Of course, the downside to a confession of judgment for the defendant or debtor is the admission that the debt is due and owing. And, in giving a confession of judgment, the defendant or debtor is handing the plaintiff or creditor a powerful tool to collect the monies owed.  In the end, regardless of the side in which one finds himself/herself, it is important to remember that a confession of judgment is binding and absent certain circumstances, not present in Balahtsis , it is difficult to vacate a “confessed” judgment.  Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes CPLR § 3218(b). 2. CPLR § 3218(a)(2). 3. Id. 4. Princeton Bank & Trust Co. v. Berley , 57 A.D.2d 348, 354 (2d Dep. 1977) (citations omitted). 5. Mall Commercial Corp. v. Chrisa Rest. , 85 Misc. 2d 613, 614 (Sup. Ct., App. Term, 1st Dept. 1976). 6. Id. 7. Slip Op. at *1. 8. Id.

This month, Freiberger Haber LLP is celebrating its four-year anniversary. To say that we are excited to celebrate this milestone is an understatement. We know the firm could not have reached this achievement without the trust and support of our clients, friends, and colleagues.  Since our founding, we have provided the sophistication and counsel of a large national law firm with the economy, flexibility, commitment, and personal attention of a small firm. As we move forward, we remain dedicated to offering this level of service to our clients – i.e. , corporations, small businesses, partnerships and individuals.  As we commemorate this milestone, we are focused on enhancing the things that have brought us to this point. One of them is our blog.  Over the past four years, our subscribership has grown, reflecting an increasing interest in the information that we post. To make the blog interactive, we are adding a “byline”. In this way, when readers come across an article of interest, they can reach out directly to the author to ask questions or discuss how the article may pertain to their circumstances. Although this change is small, we believe that it will enhance the experience our readers have with the articles that the firm posts.  As we move forward, we intend to make additional changes, both large and small, to position us for continued growth and success. We believe that implementing changes, whatever they may be, will allow us to meet the needs of our clients.  We look forward to the future. Most importantly, we look forward to bringing our dedication, hard work and values to our clients in resolving their legal, business and commercial disputes.  __________________________ About Freiberger Haber LLP Located in New York City and Melville, Long Island, Freiberger Haber LLP is dedicated to representing corporations, small businesses, partnerships and individuals in a broad range of complex business, construction and commercial litigation matters. Founded by Jonathan H. Freiberger and Jeffrey M. Haber, Freiberger Haber leverages more than 60 years of combined experience to deliver sophisticated and creative representation to its clients. The firm’s approach is results oriented and client-centric, providing clients with the sophisticated counsel expected from larger firms with the flexibility and agility of a small firm. ATTORNEY ADVERTISING. © 2021 Freiberger Haber LLP. The law firm responsible for this advertisement is Freiberger Haber LLP, 425 Broadhollow Road, Suite 416, Melville, New York 11747, (631) 282-8985. Prior results do not guarantee or predict a similar outcome with respect to any future matter.

“Pumping a few squirts of vanilla hazelnut syrup into your latte—nothing wrong with that. Pumping up a coffee stock with hype and false statements? That’s illegal, and the Securities and Exchange Commission (SEC) recently announced fraud charges against alleged perpetrators of just such a scheme:” a long-running international securities fraud scheme in which the promoters and their associates allegedly sold millions of shares in multiple microcap—or “penny”—stock companies using pump-and-dump schemes, generating at least tens of millions of dollars in illicit proceeds. Wake="“Wake" Up="Up" and="and" Smell="Smell" Pump-and-Dump”,="Pump-and-Dump”," FINRA="FINRA" posted="posted" on="on" its="its" website="website" (here).=">here)." In="In" provides="provides" important="important" information="information" how="how" investors="investors" can="can" avoid="avoid" being="being" victim="victim" of="of" a="a" pump-and-dump="pump-and-dump" scheme.="scheme."> In prior posts, we have examined “pump-and-dump” schemes (e.g., here and here). In a “pump-and-dump” scheme, promoters “pump” up, or increase, the stock price of a company by spreading positive, but often false, rumors. These rumors cause many investors to purchase the stock. Thereafter, the promoters or others working with them quickly “dump” their own shares before the hype ends. Typically, after the promoters profit from their sales, the stock price drops, and the remaining investors lose most of their money (here). Notably, microcap companies are particularly vulnerable to pump-and-dump schemes because there is often limited publicly available information about the companies. On August 9, 2021, the SEC announced (here) that it filed an emergency action charging nine individuals, including a public company chairman, for their participation in long-running fraudulent schemes that collectively generated hundreds of millions of dollars from unlawful stock sales and caused significant harm to retail investors in the United States and around the world. The SEC obtained emergency relief in court, including an order to freeze the defendants’ assets. According to the SEC’s complaint (here), Frederick L. Sharp, a Canadian resident, developed and implemented a complex scheme from 2011 to 2019 in which he and his associates, also Canadian residents, enabled control persons of microcap companies whose stock was publicly traded in the U.S. securities markets to conceal their control and ownership of huge amounts of penny stock. The SEC alleged that they surreptitiously dumped the stock into the U.S. markets in violation of federal securities laws. The services Sharp and his associates allegedly provided included furnishing networks of offshore shell companies to conceal stock ownership, arranging stock transfers and money transmittals, and providing encrypted accounting and communications systems. According to the SEC, Sharp and his associates facilitated over a billion dollars in gross sales in hundreds of penny stock companies. The SEC alleged that one group of control persons, comprised of Canadian residents, frequently collaborated with Sharp to dump huge stock positions while hiding their control positions and stock promotional activities from the investing public. The complaint further alleged that a California resident, who chaired the boards of directors of four of the public companies whose stocks were fraudulently sold during the schemes, reaped millions of dollars in illicit proceeds from those illegal sales. According to the complaint, a Maryland resident worked as a promoter and allegedly touted stocks that some of the defendants simultaneously planned to sell, while concealing their roles. In a related action, the SEC charged a Mexican resident with engaging in deceptive penny stock schemes that generated more than $75 million from the fraudulent sales of multiple microcap companies’ stock. “The SEC is committed to rooting out fraudulent attacks on our financial markets by bad actors in the United States and around the world,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “Those who scheme to defraud retail investors, as we allege these defendants did, should know that they cannot hide behind sophisticated structures or international borders.” “We charge that the defendants created a network that enabled them to engage in multiple fraudulent schemes, making millions of dollars in unlawful profits at the expense of retail investors,” said Paul Levenson, Regional Director of the SEC’s Boston Regional Office. “Among other things, the emergency relief we have obtained will preserve assets to potentially be returned to harmed investors.” The SEC’s complaint, which was filed in federal district court in Boston, charged the defendants with violating the antifraud and registration provisions of the federal securities laws. In addition to the asset freeze and other temporary relief obtained, the SEC is seeking permanent injunctions, conduct based injunctions, disgorgement of allegedly ill-gotten gains plus interest, civil penalties, penny stock bars, and an officer and director bar against one of the defendants. In a parallel action, the U.S. Attorney’s Office for the District of Massachusetts announced (here) the filing of criminal charges against four of the promoters. “My office uses securities laws and regulations to preserve market integrity, in other words: to protect investors from getting ripped off by crooks,” said Acting United States Attorney Nathaniel R. Mendell. “Investigating and prosecuting people who illegally manipulate our markets protects all investors, particularly when the illegal activity is sophisticated and done on a large scale.” Defendants “are accused of executing a sophisticated, global con that allegedly bilked unsuspecting investors out of tens of millions of dollars. Investor confidence is essential to keeping our financial markets afloat and actions like the ones these individuals are charged with today chip away at the faith investors place in the process,” said Joseph R. Bonavolonta, Special Agent in Charge of the Federal Bureau of Investigation, Boston Division. “The FBI and our partners take securities fraud very seriously and we will do everything we can to hold accountable those who steal from American investors. We urge the public to use caution when researching investment opportunities and to contact us immediately if they become a victim of financial fraud.”

Whistleblowers play an important role in detecting and stopping securities laws violations. They do so often by risking their career and reputation. For this reason, whistleblowers may receive a monetary award for bringing to the attention of the SEC credible information about possible securities fraud and other violations of the securities laws, including the Foreign Corrupt Practices Act.  The SEC derives its authority to reward whistleblowers from the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Under the whistleblower program, the SEC can pay an award to any individual, or group of individuals, who provide “original information” about a violation of the federal securities laws. Both U.S. citizens and foreign nationals may file whistleblower claims and receive a reward. To be “original”, the information must be unknown to the SEC and derived from the whistleblower’s independent knowledge or analysis. Whistleblowers who provide “original information” that the SEC uses in furtherance of an enforcement action can recover a reward of between 10% – 30% of the total amount of money collected by the SEC when the monetary sanctions exceed $1 million.  As set forth in the Dodd-Frank Act, the SEC protects the confidentiality of whistleblowers and does not disclose information that could reveal a whistleblower’s identity. here )=">here)" and="and" SEC’s="SEC’s" >here).=">here).">  Since the start of this year’s summer, the SEC has awarded, in total, approximately $17.8 million to 14 whistleblowers. In today’s article, we look at the two most recent announcements of whistleblower awards. On August 2, 2021, the SEC announced ( here ) that it awarded more than $4 million to four whistleblowers who provided information and assistance in two separate enforcement proceedings. In the first order ( here ), the SEC awarded more than $2 million to a whistleblower who provided valuable information that resulted in the SEC initiating an investigation, as well as ongoing assistance that included participating in multiple interviews and identifying key individuals and entities. The SEC also awarded more than $150,000 to another whistleblower, whose information prompted the SEC to expand its investigation into other alleged conduct at the subject company. In the second order ( here ), the SEC awarded more than $1.1 million to a whistleblower who reported misconduct internally and was the first to alert the SEC to the violations. The SEC also awarded another whistleblower more than $500,000. While the second whistleblower’s information was considered important to the Commission, the first whistleblower’s information was deemed more significant as it was broader and more timely submitted. On August 6, 2021, the SEC announced ( here ) that it awarded more than $3.5 million to three individuals who provided information about violations of the securities laws in two separate enforcement proceedings. In the first order ( here ), the SEC awarded approximately $2 million to a whistleblower whose information and assistance led to a successful SEC enforcement action.  The whistleblower alerted the SEC to an ongoing fraud, prompting the opening of an investigation.  The whistleblower also participated in multiple voluntary interviews and provided documents and additional information that saved the SEC time and resources.  In the second order ( here ), the SEC awarded one whistleblower approximately $1 million and a second whistleblower approximately $500,000.  While both whistleblowers independently provided information that assisted the SEC in an existing investigation, the whistleblower receiving the larger award provided information and cooperation that was deemed to be more impactful to the overall success of the case.  Commenting on the awards announced on August 6, 2021, Emily Pasquinelli, Acting Chief of the SEC’s Office of the Whistleblower, said the following: “Whistleblowers can provide a wealth of information and ongoing assistance that helps the SEC bring enforcement actions quicker and more efficiently. Today’s whistleblowers not only stepped forward to report suspicious conduct, but also continued to provide critical additional assistance.” These comments aptly summarize the role of whistleblowers in the enforcement of the securities laws . Since issuing its first award in 2012, the SEC has awarded approximately $950 million to 193 whistleblowers. All whistleblower awards are paid from an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. Under the program, no money is taken or withheld from investors harmed by the violations of law to pay whistleblower awards.

Frequently in litigation, a plaintiff commences an action before the identity of all defendants are known.  For example, in mortgage foreclosure actions “John Does” and/or “Jane Does” are named as defendants because there may be unknown individuals or entities in possession of, inter alia , a leasehold contract with respect to, or hold some other interest in, the subject real property.  Indeed, RPAPL 1311 provides a list of “necessary defendants” in a mortgage foreclosure action.  Typically, a process server will inquire as to, and serve, tenants at the mortgaged premises.  Thereafter, and in due course, lender moves to substitute the “John Doe” denomination for the real deendant.   This procedure is governed by CPLR 1024 , which provides: A party who is ignorant, in whole or in part, of the name or identity of a person who may properly be made a party, may proceed against such person as an unknown party by designating so much of his name and identity as is known. If the name or remainder of the name becomes known all subsequent proceedings shall be taken under the true name and all prior proceedings shall be deemed amended accordingly. The purpose of CPLR 1024 “is to permit a cause of action known to exist to be brought against a person whose name only is unknown.”  Orchard Park Central School Dist. V. Orchard Park Teachers Ass’n , 50 A.D.2d 462 (4 th Dep’t 1976) (citation omitted).  Stated differently, CPLR 1024 permits “a party who is ignorant of the name or identity of one who may properly be made a party to proceed by designating so much of his identity as is known, a summons served in a ‘John Doe’ form is jurisdictionally sufficient only if the actual defendants are adequately described and would have known, from the description in the complaint, that they were the intended defendants”.  Lebowitz v. Fieldston Travel Bureau, Inc . , 181 A.D.2d 481 (1 st Dep’t 1992) (citations and internal quotation marks omitted).  The jurisdictional sufficiency of a summons is significant because a jurisdictionally sufficient summons “may serve to toll the statute of limitations and provide the plaintiff with the 60-day extension under CPLR 203 (b) (5) (i) .”  Lebowitz , 181 A.D.2d at 482 (citation omitted). In Lebowitz , a premises liability case, a summons with notice was served the day before the expiration of the applicable statute of limitations.  The summons, which listed all defendants as “John Does,” “misidentified” the location of the incident and was “silent as to the date of the accident.”  “Within sixty days, but after the expiration of the three-year statute of limitations, defendants were served with a corrected summons which contained their names,” and the correct location and date of the accident.  Lebowitz , 181 A.D.2d at 482.  The defendant’s motion to “amend her answer and to dismiss the complaint on the ground that the original summons was insufficient to toll the statute of limitations and that the action was therefore time-barred,” was denied by supreme court.  The First Department, recognizing the mistakes in the original summons, stated: This summons was therefore jurisdictionally defective and did not serve to toll the statute of limitations and provide plaintiff with the 60 day extension under CPLR 203(b)(5)(i).  The summons thereafter served upon defendants was thus untimely served. Accordingly, we grant defendant<‘s> motion to amend her answer to include the affirmative defense of statute of limitations and, on the basis of such defense, dismiss the action as to her as time-barred. Lebowitz , 181 A.D.2d at 483 (citation omitted). Moreover, a plaintiff moving to amend the caption of an action to substitute the “John Doe” designation for an actual defendant after the expiration of the statute of limitations, must demonstrate “that he conducted a diligent inquiry into the actual identities of the intended defendants before the expiration of the statutory period.”  Goldberg v. Boatmax://, Inc. , 41 A.D.3d 255, 256 (1 st Dep’t 2007) (citation omitted).  See also, Burbano v. New York City , 172 A.D.3d 575, 576 (1 st Dep’t 2019).   Further, “ hen an originally-named defendant and an unknown ‘Jane Doe’ or ‘John Doe’ party are united in interest, i.e. employer and employee, the later-identified party may, in some instances, be added to the suit after the statute of limitations has expired pursuant to the ‘relation-back’ doctrine of CPLR 203(f), based upon postlimitations disclosure of the unknown party’s identity.”  Holmes v. City of New York , 132 A.D.3d 952 (2 nd Dep’t 2015).  In Holmes , the plaintiff was injured by police during an arrest.  He brought a civil action against the officer that arrested him but named him as “John Doe”.  Holmes was found not guilty during a criminal trial and claims that he first learned the name of the arresting officer during the criminal trial.  After the criminal trial, and after the expiration of the one-year-and-ninety-day statute of limitations applicable to the arresting officer, Holmes moved to substitute the real name of the arresting officer.  The Second Department affirmed supreme court’s denial of the motion finding that Holmes failed to demonstrate the necessary diligence in attempting to ascertain the identity of the arresting officer prior to the expiration of the statute of limitation because, inter alia , “ here is no indication in the record that the plaintiffs engaged in any pre-action disclosure or made any Freedom of Information Law requests.”  Holmes , 132 A.D.3d at 954 (citations omitted). The application of CPLR 1024 was at issue in Wilmington Trust N.A. v. Shasho , decided by the Second Department on August 4, 2021.  Wilmington was a mortgage foreclosure action commenced by lender against Elliot and Esther Shasho.  Elliot, who was named in the summons, was duly served.  Esther, who was named as “John Doe” was also served.  Proof of service on Elliot and Esther were never filed.  Neither Elliot nor Esther answered the complaint.  Lender moved to amend the caption to substitute Esther for “John Doe,” to deem the proofs of service timely filed nunc pro tunc, for a default judgment and for an order of reference.  Elliot and Esther cross-moved pursuant to CPLR 3215(c) to dismiss the complaint or, alternatively, for leave to file an answer.  [Editor’s note – this Blog has addressed CPLR 3215(c) < here =">here"> , < here =">here"> , and < here =">here"> .]  Supreme court granted lender’s motion and denied the cross-motion.  As to the application of CPLR 1024, the Court reversed and stated: In order to employ the procedural "Jane Doe" or "John Doe" mechanism made available by CPLR 1024, a plaintiff must show that he or she made timely efforts to identify the correct party before the statute of limitations expired. Yet, parties are not to resort to the “Jane Doe” procedure unless they exercise due diligence, prior to the running of the statute of limitations, to identify the defendant by name and, despite such efforts, are unable to do so. Any failure to exercise due diligence to ascertain the “Jane Doe's” name subjects the complaint to dismissal as to that party. Here, the Supreme Court should not have granted that branch of the plaintiff's motion which was for leave to amend the caption to substitute Esther for the defendant "John Doe." The court erred in applying the "John Doe" designation authorized by CPLR 1024 and the relation-back doctrine of CPLR 203(c) to bar application of the statute of limitations, because the plaintiff failed to establish that it made diligent efforts to ascertain the unknown party's identity prior to the expiration of the statute of limitations Concomitantly, the court should have denied that branch of the plaintiff's motion which was for leave to enter a default judgment against Esther.  (Citations and internal quotation marks omitted.)

On July 27, 2021, the Securities and Exchange Commission’s (the “SEC” or the “Commission”) Office of Investor Education and Advocacy (“OIEA”) issued an investor alert ( here ) with the FBI Criminal Investigative Division about fraudsters who are posing as brokers or investment advisers (the “Alert”). According to the Alert, people looking to perpetrate a fraud on unsuspecting investors are, among other things, falsely claiming to be registered with the SEC, the Financial Industry Regulatory Authority (“FINRA”) or a state securities regulator. Sometimes, the fraudsters even impersonate a real investment professional who is actually registered with one of the foregoing organizations. In this regard, noted the OIEA, “ raudsters may misappropriate the name, address, registration number, logo, photo, or website likeness of a currently or previously registered firm or investment professional.” To trick investors into believing that the scammer is legitimate, said the OIEA, the fraudster uses several tactics, including the following: “Spoofing”. Spoofing generally occurs when someone or something pretends to be something else in an attempt to gain one’s confidence, get access to one’s systems, steal data, steal money, or spread malware. Spoofing attacks come in many forms, including, but not limited to, website and/or URL spoofing. The OIEA warned that fraudsters are using website and/or URL spoofing to scam unsuspecting investors. They do so by setting up websites using URL addresses or names similar to those of actual registered firms or investment professionals to trick investors into believing that the fraudster is registered or that the fraudster is affiliated with a registered firm or investment professional. Creating Fake Profiles on Social Media. Here, the fraudster impersonates an actual person. They do so by creating a profile on a popular social media platform that mirrors a registered investment professional. Once created, the fraudster messages investors to solicit their money. Cold Calling. Cold calling is a marketing technique in which a salesperson contacts an individual who has not previously expressed interest in the offered product or service. see="see" here.=">here."> According to the OIEA, a fraudster may set up boiler rooms with teams of people cold calling investors to solicit their money while claiming to be employees of registered firms. In fact, the fraudster may use technology to make it appear they are calling from the firm’s location. See="See" discussion="discussion" here.=">here." See="See" also ="also"> Misrepresenting or Falsifying Documents. Fraudsters often recruit investors by misrepresenting that their firm was registered with the SEC, including pointing to the firm’s Form D filings to support the misrepresentation. See OIEA Investor Alert here . Fraudsters may solicit investors by impersonating a registered investment professional and generating a fake version of a public report using the professional’s name and CRD number. See FINRA Investor Alert here . In the Alert, the OIEA provides a number of ways in which investors can protect themselves from the foregoing scams.  1.  Verify the Identity of the Person Offering an Investment. Investors should not blindly rely on the website or contact information provided by the person seeking one’s money. The OIEA says that investors should be skeptical and refrain from turning over one’s money if fraud is suspected: “If you suspect someone is falsely claiming to be registered with the SEC, do not give the person any money and do not share your personal information.”  Investors can visit Investor.gov to check if someone offering an investment is currently licensed or registered. Once confirmed, investors should verify whether the person they are dealing with is the actual person by using information obtained from independent sources. For example, investors should contact the seller using a phone number or website listed in the firm’s Client Relationship Summary (Form CRS) – rather than relying on contact information the scammer provides.  Investors can also visit FINRA’s BrokerCheck ( here ), a free online tool, to obtain information on brokers, investment advisers, and registered investment firms. As with Investor.gov, investors should pay attention to any inconsistences between what the investor is told and what is displayed in BrokerCheck.  2.  Look for Red Flags.              “A red flag is a warning or indicator, suggesting that there is a potential problem or threat with a company’s stock, financial statements, or news reports. Red flags may be any undesirable characteristic that stands out to an analyst or investor.” See here . “Red flags tend to vary.” Id. However, there are several red flags that are common to investment scams. These include: Guaranteed High Investment Returns. Scammers typically promise high investment returns, “often accompanied by a guarantee of little or no risk”. As noted by the OIEA, such promises are “classic sign of fraud.” With investing, there are no guarantees; every investment has risk.  Offers that Seem “Too Good to Be True. Investments offering returns that seem “too good to be true” are often “too good to be true.” Such offers, which are typically made through cold calls, are also a tell-tale sign of fraud.  Payment Methods for Investments. Credit Cards. Most licensed and registered investment firms do not allow their customers to use credit cards to invest. Digital Asset Wallets and “Cryptocurrencies.” Licensed and registered financial firms typically do not require their customers to use digital asset wallets or digital assets, including “cryptocurrencies,” to invest. Wire Transfers and Checks. Investors who pay for an investment by wire transfer or check, should be suspicious if they are asked to send, or to make, the payment to an individual or to a different firm, the address is suspicious (for example, an online search for the address suggests it is not an office building where the firm operates), or told to note that the payment is for a purpose unrelated to the investment (for example, medical expenses or a loan to a family member). The OIEA warned that sending money overseas carries additional risk because if the investment turns out to be a scam, the investor is unlikely to “see money again.”  The OIEA issued the Alert on the same day as a similar FINRA alert ( here ) about fraudsters impersonating brokers and fake SEC or FINRA registration documents.

Depositions in real life are not the same as those depicted on television and in the movies. In Hollywood, counsel defending a deposition can say just about anything. As litigators know, the same cannot be said in real life.  Lawyers are governed by law and rules, which if not followed can result in sanctions from the court. That is what happened in Brightman v. Corizon, Inc. , 2021 N.Y. Slip Op. 50735(U) (Sup. Ct., N.Y. County July 29, 2021) (here). A Primer on the Law and Rules Governing Pretrial Depositions In New York, the conduct of counsel in a deposition is governed by CPLR § 3115 and the Uniform Rules for the Conduct of Depositions, 22 NYCRR Part 221. The Uniform Rules limit the scope of objections at a deposition. The Rules permit only those objections that would be waived under CPLR § 3115 (b)-(d) if not interposed—principally an objection to the form of a question. ( See 22 NYCRR § 221.1 (a); CPLR § 3115.) Ordinarily, therefore, it would not be proper to object to a question on the ground that the question has previously been asked and answered. Nor would it ordinarily be proper to object to a question merely to preserve the objection for the record, because the Uniform Rules themselves preserve all objections for the record except as they expressly provide otherwise. ( See Pedraza v. New York City Transit Auth. , 2016 N.Y. Slip Op. 30105(U), at *9 (Sup. Ct., N.Y. County 2016) (noting that objections that are not required to be made should not be made). Additionally, Section 221.1 provides that where an objection has been posed, “the answer shall be given<,> and the deposition shall proceed subject to the objections” and to any application for a protective order. 22 NYCRR § 221.1(a). That is, even when an objection by a deponent’s counsel is proper, the deponent may not ordinarily refuse to answer based on that objection. Section 221.2(c) similarly provides that a deponent’s counsel “shall not direct a deponent not to answer,” except as set forth in CPLR § 3115 and Section 221.2 itself. There are exceptions to the rule that the deponent must answer a question over an objection. In that regard, Section 221.2 identifies three narrowly circumscribed circumstances in which a deponent may refuse to answer or the deponent’s counsel may instruct him/her not to answer: (i) to “preserve a privilege or right of confidentiality”; (ii) to enforce a limitation set forth in a court order; and (iii) “when the question is plainly improper and would, if answered, cause significant prejudice to any person.” 22 NYCRR § 221.2 (a)-(c). Any refusal to answer or instruction not to answer must “be accompanied by a succinct and clear statement of the basis therefor.” Id. at Section 221.2 (c). The deponent’s counsel may not, therefore, direct the deponent not to answer a question yet decline to explain why pending a future discovery conference with the court. This is not to say that the deponent’s counsel is powerless to intervene against questioning that is badgering, harassing, or otherwise improper and prejudicial. Indeed, the Uniform Rules make clear that such interventions must be the exception, rather than the rule – and that a given intervention must be (i) uncommon, (ii) made only when plainly necessary, and (iii) no more than extensive than required to protect the witness against the improper line of questioning. Brightman v. Corizon, Inc. Brightman involved as claim of employment discrimination. The issue before the Court was “the conduct of plaintiff’s deposition.” Slip Op. at *1. In particular, whether plaintiff’s counsel engaged in obstructionist behavior by repeatedly interposing improper or speaking objections, directing plaintiff not to answer proper questions, and coaching plaintiff during a mid-deposition break.  Defendants sought an order (i) requiring plaintiff to answer several questions that plaintiff’s counsel instructed her not to answer during the deposition; (ii) directing the production of a note exchanged between plaintiff and her counsel during a mid-deposition break; (iii) appointing a discovery referee to oversee plaintiff’s continued deposition; and (iv) awarding defendants sanctions and attorney fees. Plaintiff opposed the motion, arguing that her counsel was simply protecting her client at the deposition from improper and harassing questions and that counsel’s conduct was appropriate, zealous advocacy. Id. The Court granted the motion in part and denied it in part. Counsel’s Objections and Instructions Not to Answer Defendants contended that plaintiff’s counsel repeatedly interposed improper objections, including lengthy speaking objections, and that counsel on multiple occasions instructed plaintiff not to answer questions that she was required to answer. The Court agreed with defendants. According to the Court, the transcripts and video recording of the depositions showed that “counsel made a large—and clearly excessive—number of objections, many of which were made on improper relevancy or asked-and-answered grounds, and many of which were speaking objections.” Slip Op. at *2. The Court said that the record also showed that “counsel repeatedly made other improper statements and interjections during the deposition, some of which included unnecessary personal commentary directed to the attorney taking the deposition.” Id. “And,” noted the Court, “several of improper speaking objections or comments … appeared—whether by intent or merely by effect—to guide the deponent’s ensuing answers.” Id. In other words, the objections appeared to coach the witness on how to answer. Id. Consequently, the Court held that “plaintiff's counsel’s objections frequently exceeded their proper bounds under the Uniform Rules.” Id. at *2. Defendants further contended that there were three instances in which plaintiff’s counsel improperly instructed her client not to answer questions. The first concerned plaintiff’s use of her son’s email address for work communications; the second addressed attempts by defendants to review plaintiff’s driver’s license while they still employed her; and the third involved questions about plaintiff’s understanding of certain staff requirements mandated by defendants’ contract with New York City. The Court held that the directions not to answer were improper and ordered plaintiff to answer the questions.  With respect to the first question, plaintiff contended that counsel’s instruction not to answer was proper because the question sought information that was both irrelevant and confidential. The Court noted that “relevancy is not a basis on which to instruct a witness not to answer.” Slip Op. at *3. Notwithstanding, the Court found that plaintiff’s stated occasional use of “her son’s email address for Corizon-related correspondence,” sufficed to make the email address relevant to the action. As to confidentiality, the Court held that the confidentiality agreement the parties had entered provided the protection allegedly need by the instruction. Id. (“Further, plaintiff does not dispute that the parties had entered into a confidentiality agreement that encompassed her deposition testimony.”). The Court rejected plaintiff’s argument that the email address was private, noting that although an email address might be “private” in the ordinary sense of the word, it did not mean that it is confidential for purposes of Section 221.2. Id. (citing Veloso v. Scaturro Bros., Inc. , 68 Misc. 3d 1024, 1028-1030) (Sup. Ct., N.Y. County 2020)). With respect to the second question, the Court held that the request was not a verbatim repeat of a prior request but, rather, a “somewhat different” one. Slip Op. at *3. “Additionally,” said the Court, “even if plaintiff’s counsel believed that defendants’ continuing to ask questions on this general topic was harassing and therefore patently improper,” the direction not answer was neither patently improper nor prejudicial: “Plaintiff has not demonstrated that she would have been prejudiced had she been required to answer the particular question at issue.” Id. at *3-*4. Indeed, observed the Court, any claim that defendants’ question had mischaracterized plaintiff’s prior testimony (as plaintiff contended), could have been corrected in plaintiff’s answer. Id. at *4. With respect to the third question, the Court found that the instruction not to answer was improperly based on “counsel’s view that the question at issue had already been asked and answered.” Id. (“An asked-and-answered objection is not a proper basis to instruct a witness not to answer.”). The Court was also of the view that “plaintiff had not yet fully answered the question at the time of the instruction not to answer; and that plaintiff's subsequent answer was difficult to understand and not responsive.” Id. The Consultation Between Plaintiff and Her Counsel During a Deposition Break In addition to the foregoing, the parties disputed whether plaintiff properly refused to turn over (or answer any questions about) a note she received from her counsel during a break in the deposition that plaintiff sought for health-related reasons with a question pending. The Court concluded that plaintiff had to answer questions about the communication. Plaintiff maintained that the communications at issue were privileged. Defendants, on the other hand, contended that the communications were not shielded by privilege because they occurred during a deposition break. See Section 221.3 of the Uniform Rules.  The Court held that Section 221.3 did not support defendants’ contention. The Court noted that Section 221.3 only prohibited an attorney from interrupting a deposition “for the purpose of communicating with the deponent,” absent circumstances set forth in the rule. Slip Op. at *4. The Court found that none of those circumstances were present in the case. Id. More importantly, noted the Court, “it is undisputed (indeed indisputable) that the communication between deponent and counsel at issue here occurred during a break taken to accommodate the deponent’s physical limitations, rather than for the purpose of communication.” Id. “In short,” concluded the Court, “defendants have not shown that the communication at issue here between plaintiff and her counsel was impermissible. Nor, for that matter, have defendants provided authority for the proposition that otherwise-privileged communications between client and attorney lose that status merely by virtue of being ‘impermissible’ under the rules governing depositions.” Slip Op. at *5. Notwithstanding defendants’ failure to show that the communication was impermissible, the Court required plaintiff to answer the questions about the communication. Id. The Court held that plaintiff failed to explain the basis for her counsel’s claim that the answers were confidential. Id. Ultimately, what occurred here was that plaintiff’s counsel instructed her client not to answer questions posed during a deposition. In the circumstances of this exchange, that instruction would be permissible only to protect a privilege or right of confidentiality. At the deposition itself, plaintiff’s counsel asserted—without elaboration—that the instruction not to answer was on the basis of “ onfidentiality.” On this motion, plaintiff’s counsel suggests in conclusory fashion that defendants’ questions sought information about a “privileged communication.” But counsel has not established that the necessary elements of the attorney-client privilege were satisfied; nor articulated what right of confidentiality shielded plaintiff from questions about their communication. Id. (footnote and citations omitted). Defendants’ Request for Sanctions In addition to moving to compel further discovery, defendants asked the Court to impose sanctions for frivolous conduct under 22 NYCRR § 130-1.1, to enjoin plaintiff’s counsel from engaging in assertedly obstructive conduct during the deposition, and to appoint a special referee to oversee discovery. Slip Op. at *5. The Court agreed with defendants that many of plaintiff’s counsel’s objections, interjections, and instructions not to answer during the second deposition were improper. Id. Notwithstanding, the Court was “not persuaded that this conduct, although inappropriate, necessarily rose (or sank) to the level of warranting sanctions under § 130-1.1.” Id. Instead, the Court held that the appropriate mechanism for relief was CPLR § 3126. Id. CPLR § 3126 allows a court to impose sanctions for discovery abuse, such as the refusal to obey an order for disclosure or the willful failure to disclose information that ought to have been disclosed. Finally, the Court denied the request to appoint a discovery referee or issue an injunction against plaintiff or her counsel.

This Blog has frequently addressed evidentiary issues faced by foreclosing lenders.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> ,< here =">here"> . On July 21, 2021, the Appellate Division, Second Department, decided Deutsche Bank National Trust Co. v. Hossain , in which the Court addressed the sufficiency of a foreclosing lender’s evidence submitted in support of an application for a default judgment.  The lender in Deutsche Bank commenced an action to foreclose a mortgage.  The defendant borrowers answered the complaint; however, their answer was subsequently stricken because they failed to comply with discovery demands.  Lender moved for a default judgment and for an order of reference.  Borrowers’ opposition was based on “the plaintiff<‘s> fail to submit an ‘affidavit made by the party’ or ‘proof of the facts constituting the claim’” as required by CPLR 3215(f).  Supreme court granted lender’s motion.  Thereafter, lender moved for a judgment of foreclosure and sale, which motion supreme court granted without opposition.  The borrowers appealed from both the default order and the judgment of foreclosure of sale. The Second Department dismissed the appeal from the default order “because the right of a direct appeal therefrom terminated with the entry of the judgment of foreclosure and sale in the action.”  (Citation omitted.)  However, while “no appeal lies from a judgment entered upon the default of an appealing party, an appeal from such a judgment brings up for review those matters which were the subject of the contest before the Supreme Court.”  (Citations and internal quotation marks omitted.)  Thus, the Court reversed the judgment of foreclosure and sale after finding that the sufficiency of the evidence submitted by lender on its motion for a default judgment failed to satisfy the requirements of CPLR 3215(f), which provides, in pertinent part: Proof. On any application for judgment by default, the applicant shall file proof of service of the summons and the complaint, or a summons and notice served pursuant to subdivision (b) of rule 305 or subdivision (a) of rule 316 of this chapter, and proof of the facts constituting the claim, the default and the amount due by affidavit made by the party…. Where a verified complaint has been served, it may be used as the affidavit of the facts constituting the claim and the amount due; in such case, an affidavit as to the default shall be made by the party or the party’s attorney…. Thus, the Court held: Where, as here, a foreclosure complaint is not verified, CPLR 3215(f) states, among other things, that upon any application for a judgment by default, proof of the facts constituting the claim, the default, and the amount due are to be set forth in an affidavit made by the party.  Here, in support of its motion, the plaintiff submitted an affidavit of merit executed by a “Document Execution Specialist” who was employed by the plaintiff’s servicing agent. The affiant asserted that she had personal knowledge of the merits of the plaintiff’s cause of action based upon her review of various business records. However, as the defendants correctly contend, since the plaintiff failed to attach the business records upon which the affiant relied in her affidavit, her factual assertions based upon those records constituted inadmissible hearsay, and her affidavit was insufficient to demonstrate “proof of the facts constituting the claim.”  Accordingly, the Supreme Court should have denied those branches of the plaintiff’s motion which were for leave to enter a default judgment against the defendants and for an order of reference. (Citations and internal quotation marks omitted.) It should be noted that, consistent with CPLR 3215(f), CPLR 105(u) provides that “ ‘verified pleading’ may be utilized as an affidavit whenever the latter is required.”