By: Jeffrey M. Haber Material misrepresentations, omissions, and misuse of investor funds can give rise to securities fraud liability, regardless of the industry in which the offering occurs. In Securities and Exchange Commission v. Thomas J. Moore, III, the SEC alleged that the founder of a Mississippi medical cannabis company raised approximately $4.94 million from investors by representing that their capital would be used to develop cultivation and processing operations, while allegedly diverting nearly $2 million for personal expenses, making unsupported promises of investor distributions, and failing to disclose prior investor lawsuits when soliciting additional investments. As discussed below, the case highlights the importance of truthful disclosures, proper use of investor proceeds, and the disclosure of material adverse information during the fundraising process. The Enforcement Action On September 30, 2026, the Securities and Exchange Commission announced that it filed a civil enforcement action against a D’Iberville, Mississippi man, alleging that he defrauded investors through Mississippi Green Oil, LLC, a medical cannabis company he founded and controlled.[1] Securities and Exchange Commission v. Thomas J. Moore, III, No. 1:26-cv-00286-LG-BWR (S.D. Miss. filed Sept. 30, 2026). According to the SEC, defendant raised approximately $4.94 million from roughly 20 investors nationwide by offering equity interests in the company and promising that investor capital would be used to develop a medical marijuana cultivation and processing operation in Mississippi. The action arose against the backdrop of Mississippi’s emerging medical cannabis industry. After voters approved a medical marijuana initiative in 2020 and the Mississippi Legislature later enacted the Mississippi Medical Cannabis Act in 2022, Mississippi Green positioned itself as a business poised to capitalize on the newly legalized market. Defendant allegedly promoted the company as a medical marijuana cultivator, processor, and business-to-business service provider, distributing materials that projected annual revenues ranging from approximately $40 million to as high as $64 million. According to the SEC, investors were offered ownership interests in Mississippi Green in exchange for capital contributions, typically paying approximately $300,000 for a one-percent equity stake. Investors were told their funds would be used to build and improve cultivation facilities, purchase equipment, acquire cannabis plants, and otherwise expand company operations. The SEC alleged that defendant emphasized that investor money would serve as the “seed capital” needed to launch and grow the business. At the center of the SEC’s complaint is the allegation that defendant diverted a substantial portion of investor funds for personal use. While the SEC acknowledged that some investor money was spent on legitimate business expenses, the SEC alleged that defendant misappropriated approximately $1.94 million, representing roughly 40 percent of the total funds raised, comprised of nearly $880,000 in cash withdrawals and transfers to family members, approximately $514,000 spent on travel, lodging, restaurants, groceries, and department store purchases, and more than $120,000 spent on clothing, jewelry, and private-school tuition. The SEC contended that defendant failed to disclose these personal expenditures to investors while continuing to solicit additional investment capital. The complaint further alleged that defendant often withdrew or spent investor money shortly after receiving it. In one example cited by the SEC, defendant allegedly spent more than $21,000 on travel, lodging, restaurants, and entertainment within days of receiving a $100,000 investor contribution. The SEC also alleged that defendant induced investors to participate by promising relatively quick returns in the form of quarterly profit distributions. According to the complaint, defendant represented to various investors that distributions would begin anywhere from 30 days to nine months after they invested. The SEC claimed that these promises were particularly important to certain investors, some of whom allegedly borrowed against their homes in order to participate in the investment opportunity. Yet despite repeated assurances that payments were imminent, the SEC alleged that no investor ever received a distribution. According to the SEC, defendant continued making promises regarding future distributions even as Mississippi Green experienced significant operational setbacks. The complaint pointed to licensing delays, cultivation problems, equipment issues, electrical challenges, and crop-quality concerns. Mississippi Green allegedly did not receive its cultivation license until June 2023 and did not plant its first crop until October 2023. The SEC further alleged that the initial harvest failed to meet quality standards and was ultimately sold at a substantial discount. Despite those difficulties, the complaint alleged that defendant continued to reassure investors that payments were forthcoming. The SEC cited numerous examples of communications in which defendant allegedly promised that distributions would soon begin. Those payments allegedly never materialized. Another significant component of the SEC’s case involved defendant’s alleged failure to disclose lawsuits filed by existing investors. According to the complaint, investors began filing lawsuits as early as January 2023 after allegedly failing to receive promised distributions or repayment of principal. The SEC alleged that despite becoming aware of those claims, defendant continued to solicit new investments without informing prospective investors that prior investors had already sued him and Mississippi Green over similar allegations. The complaint further alleged that defendant raised additional funds even after multiple lawsuits had been filed and that he affirmatively denied being served legal papers when questioned by at least one investor. The SEC contended that a reasonable investor would consider information about prior lawsuits alleging nonpayment of distributions and failure to return invested capital important when deciding whether to invest. Based on these allegations, the SEC alleged that defendant violated the anti-fraud provisions of the federal securities laws. Specifically, the complaint charged defendant with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The SEC is seeking a permanent injunction, a conduct-based injunction, disgorgement of allegedly ill-gotten gains together with prejudgment interest, and civil monetary penalties. Takeaway The key takeaway from the SEC’s enforcement action is that the same disclosure and anti-fraud obligations that govern established industries apply equally to emerging sectors like medical cannabis. According to the complaint, the case turns not on the viability of the cannabis industry, but on whether investors were provided accurate information, whether their funds were used as represented, and whether material facts were concealed during the fundraising process. The SEC alleged that investors were told their capital would be used to develop Mississippi Green’s cultivation and processing operations, while a substantial portion of those funds was instead diverted to personal expenses. If proven, the case serves as a reminder that representations regarding the use of investor proceeds are often among the most important disclosures in a private offering and can form the basis of fraud claims when they are materially inaccurate or incomplete. The action also highlights the risks associated with promising future returns. According to the SEC, investors were repeatedly assured that quarterly distributions would begin within relatively short timeframes, despite ongoing operational setbacks, licensing delays, and cultivation challenges. The allegations reflect the SEC’s continued focus on whether statements about future profitability and investor returns have a reasonable basis when made. In addition, the SEC alleged that prospective investors were not informed about prior lawsuits filed by existing investors seeking the return of principal or promised distributions. The case therefore illustrates the significance of disclosing adverse information that a reasonable investor might consider important when deciding whether to invest. Pending litigation, prior litigation, settlements, judgments, and allegations that an issuer or its principals failed to repay investors, honor distribution commitments, or comply with investment terms may bear directly on the risks of an investment and, depending on the circumstances, can be material to a reasonable investor’s decision to make, maintain, or increase an investment. Consistent with that principle, the SEC alleged that investors who invested after earlier lawsuits were filed were not informed that existing investors had already asserted claims based on the alleged failure to repay principal or make promised distributions. Knowledge that prior investors were already alleging nonpayment of principal or promised returns could materially affect a reasonable investor’s assessment of management credibility, the likelihood of receiving future distributions, the company’s financial condition, and the overall risk of the investment. Finally, the action serves as a reminder that private offerings, even those made to friends, family members, and personal acquaintances, remain subject to the federal securities laws. According to the SEC, raising capital through informal conversations, text messages, and personal relationships does not diminish an issuer’s obligation to provide accurate information and refrain from misleading investors. __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice. Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. __________________________________ [1] As with all SEC enforcement actions, the allegations in the complaint are unproven unless and until established in court. Defendant will have the opportunity to contest the SEC’s allegations during the litigation.

By Jeffrey M. Haber In an article entitled “Why You Won’t Get Your Day in Court” appearing in The New York Review of Books, Judge Jed S. Rakoff of the United States District Court for the Southern District of New York, tried to explain why this is so. According to Judge Rakoff, there are several reasons for this occurrence. These include: the “cost of hiring a lawyer”; “the increased expense, apart from legal fees, that a litigant must pay to pursue a lawsuit to conclusion”; the “increased unwillingness of lawyers to take a case on a contingent-fee basis when the anticipated monetary award is modest”; “the decline of unions and other institutions that provide their members with free legal representation”; “the imposition of mandatory arbitration”; “judicial hostility to class action suits”; “the increasing diversion of legal disputes to regulatory agencies”; and “in criminal cases, … the … increased risk of a heavy penalty in going to trial.” Judge Rakoff observed that there are a number of “disturbing trends” that illustrate the consequences of these factors. For example, “as many as two thirds of all individual civil litigants in state trial courts are representing themselves, without a lawyer,” including “people of moderate means” who “cannot afford a lawyer.” As Judge Rakoff noted, this trend has had a negative impact on such litigants because “[i]ndividuals not represented by lawyers lose cases at a considerably higher rate than similar individuals who are represented by counsel, … even when the judge tries to compensate for counsel’s absence.” The inability to afford a lawyer goes beyond simply affording attorney’s fees. It goes to the costs of litigation, which have “proved to be excessively expensive.” As Judge Rakoff observed, these costs “not only place[] impecunious parties at a disadvantage but, again, also discourage[] ordinary people from bringing meritorious lawsuits in the first place.” Even the contingent-fee arrangement does not adequately cure the problem, according to Judge Rakoff. For starters, “contingent-fee arrangements only benefit those … who are suing rather than being sued.” Under most state rules of professional responsibility, the plaintiff who has a contingent-fee arrangement “is still personally responsible for paying for the costs of the lawsuit,” which “frequently amount to thousands of dollars.” “Most importantly,” said Judge Rakoff, “the time-consuming nature of modern litigation means that most contingent-fee lawyers will simply refuse to take on a case that does not promise an award or settlement of at least several hundred thousand dollars, leaving those tort victims who cannot sue for large amounts unable to have a day in court.” If the fees and expenses don’t impede access to the courts, then “one-sided contracts” requiring arbitration will, said Judge Rakoff. These agreements, drafted by counsel for employers and the seller of goods and services, require disputes to be decided in arbitration rather than in court. Even though these agreements are rightly called “contracts of adhesion”, “i.e., one-sided contracts imposed on weaker parties who have no realistic ability to negotiate, let alone contest the terms,” they nevertheless have been upheld and enforced by the courts, including the United States Supreme Court. So, What Is the Solution? Judge Rakoff offered a few suggestions to open the courthouse doors to ordinary Americans. These solutions, which Judge Rakoff believes will not “come easily”, include legislative responses, “state-sponsored legal insurance”, “a guarantee of counsel to indigent civil litigants” and a “lawyer-subsidized provision of cheaper legal services.” Perhaps the most immediate solutions, said Judge Rakoff, should come from the courts: But while the larger solutions to this denial of access must await a change in the legislative climate, there is, I am convinced, no reason short of ignorance or ideology for judges to continue to give their approval to devices that effectively deny Americans access to their courts…. And lower court judges, state and federal, could take a harder look at some of the practices described here that have the same effect. This would require a considerable change of thought on the part of many judges. Indeed, it is hardly surprising that judges who often have substantial dockets tend to look favorably on arrangements that will lessen their work burden, whether by mandatory arbitration, denial of jurisdiction, reliance on prosecutors and administrators, or similar measures. Too often, however, such relief morphs into an effective reduction of judicial responsibility, with dire consequences for the long-term ability of the courts to serve as an effective check on the power of the legislature and the executive. Arguably even worse, the situation I’ve described reinforces the belief of citizens that the courts are not an institution to which they can turn for justice, but are simply a remote and expensive luxury reserved for the rich and powerful. If the judges themselves do not take steps to counter this insidious trend, who will? The Takeaway Judge Rakoff makes several strong points, especially with regard to the costs of litigation. For this reason, Freiberger Haber LLP (the “Firm”) has been dedicated to making litigation and consultation services efficient and affordable. The Firm understands that clients are concerned about cost certainty. Therefore, the Firm uses flexible fee arrangements to deliver value to its clients for all types of legal matters, from the routine to the complex. At Freiberger Haber LLP, we work with our clients to develop risk-sharing solutions and alternative fee arrangements to help them address their business and litigation challenges. Whether through hourly fees, fixed fees, collared fees, contingent fees, success fees/holdbacks, or any combination of approaches, the Firm crafts fee arrangements that reduce overall costs, improve predictability, share risks and align incentives. In this way, the Firm can provide the best value and result to its clients. This article was written by Jeffrey M. Haber, a partner at 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 In Delgado v. 27-51 Jackson Ave. LLC, 2026 N.Y. Slip Op. 05593 (1st Dept. Oct. 1, 2026), the Appellate Division, First Department reaffirmed that fraud claims must be based on particularized facts, not suspicion, guilt by association, or allegations from other lawsuits. The Court held that unproven accusations against a plaintiff’s medical providers in separate actions were insufficient to establish that the plaintiff made any misrepresentation, particularly where the plaintiff was neither a defendant nor even referenced in those cases. The Court also rejected efforts to infer fraud from circumstantial associations, such as a shared address with other claimants. Delgado v. 27-51 Jackson Ave. LLC Delgado concerned an action arising under New York’s Labor Law involving an alleged construction site accident that later evolved into a dispute that also implicated allegations of fraud. Plaintiff commenced the action against defendants 27-51 Jackson Ave LLC (“27-51”) and DHC Contracting Inc. (“DHC”) (collectively, the “defendants”), seeking damages for personal injuries allegedly sustained while performing construction-related work at a project site. Plaintiff asserted causes of action for common-law negligence and violations of Labor Law §§ 200, 240(1), and 241(6). According to the complaint, plaintiff was engaged in work protected by the Labor Law when he was injured after either tripping over a hazardous condition at the worksite or falling from an elevation due to defendants’ alleged failure to provide adequate safety devices and protections. The litigation proceeded in the ordinary course through the exchange of pleadings and the assertion of third-party claims among entities involved in the construction project. Defendants answered the complaint and denied liability. Thereafter, defendants commenced a third-party action against All State 12 General Contracting Corp. (“All State”), asserting claims for contractual indemnification, common law indemnification and contribution, and breach of contract based on an alleged failure to procure and maintain insurance. All State answered and asserted counterclaims against defendants. All State subsequently commenced a second third-party action against Gama Construction Corp. (“Gama”), a subcontractor, asserting indemnification, contribution, and insurance-related claims. As a result, the action expanded beyond plaintiff’s underlying Labor Law claims to include disputes among the various contractors and subcontractors concerning responsibility for any potential liability and the parties’ respective contractual and insurance obligations. While the action was pending, several separate lawsuits were filed in state and federal courts alleging fraudulent conduct in connection with personal injury litigation and medical treatment. Those actions named various combinations of law firms, attorneys, litigation funding entities, and healthcare providers and generally alleged that certain defendants participated in schemes involving fraudulent or unnecessary medical treatment and diagnoses to support personal injury and workers’ compensation claims. Against that backdrop, third-party defendant/second third-party plaintiff, All State, sought leave to amend its answer to assert a counterclaim for fraud against plaintiff. The proposed amended pleading alleged that plaintiff fabricated or exaggerated the injuries claimed in the action and caused false information concerning those injuries to be presented in support of his claims. Specifically, the proposed counterclaim alleged that plaintiff caused written documents containing false statements regarding his alleged injuries and treatment to be submitted to the court and provided to defendants during the litigation. Defendants further alleged that they were required to investigate and defend against those allegedly false claims and representations, resulting in substantial litigation expenses and other damages. In opposition, plaintiff argued that All State’s proposed affirmative defense of fraud and counterclaim were speculative and unparticularized. Plaintiff maintained that All State could not identify any statement that plaintiff made to All State. Plaintiff further argued that All State failed to allege that it detrimentally relied on any such statements. The motion court agreed with plaintiff and denied the motion, holding that the proposed affirmative defense and counterclaim did “not meet the particularized pleading requirement for fraud.”[1] The motion court also held that All State could not base its fraud allegations on unproven allegations from a separate lawsuit, particularly where those allegations did not implicate the plaintiff. As the court explained: The allegations in the RICO action upon which All State relies are unproven and do not constitute “facts” sufficient to support the proposed amendments. Further, though the RICO allegations are directed to certain of Plaintiffs medical providers; there is nothing in the federal action implicating or involving Plaintiff. The vague and entirely speculative fraud allegations against Plaintiff in All State’s proposed amended pleading are, therefore, rejected. All State appealed. The First Department unanimously affirmed. The Court rejected All State’s attempt to bootstrap fraud allegations from unrelated lawsuits to satisfy the falsity element of its fraud claim, emphasizing that unproven accusations against third parties is insufficient to establish that a plaintiff made a false representation: “The existence of other lawsuits alleging fraud against plaintiff’s medical providers, but where fraud is unproven to date, is insufficient to establish that plaintiff made a misrepresentation of fact.”[2] This was “especially true where … plaintiff is neither a defendant nor otherwise referenced in the other lawsuits on which All State relie[d].”[3] The Court also rejected All State’s attempt to infer fraud from plaintiff’s association with others, emphasizing that shared addresses and similar connections do not, standing alone, demonstrate that plaintiff’s claims were fraudulent: “that plaintiff shares and has shared an address with many other workers’ compensation claimants and personal injury plaintiffs does not in and of itself establish that plaintiff’s specific claims in this case are fraudulent.”[4] Takeaway Delgado underscores a basic principle of fraud litigation: fraud must be pleaded with particularity under CPLR 3016(b), and litigants cannot substitute suspicion, association, or allegations from other lawsuits for well-pleaded facts. Consistent with that principle, the First Department reaffirmed that the falsity element of fraud must be established through allegations directed to the plaintiff’s own conduct, not by reference to accusations lodged against other actors in separate proceedings. The decision also serves as a reminder that allegations in other lawsuits are just that: allegations. Allegations in other lawsuits do not constitute evidence that a plaintiff’s claims are fraudulent. The Court emphasized that unproven allegations from unrelated litigation cannot be bootstrapped into a new fraud claim, particularly where the plaintiff was neither a defendant nor even mentioned in the other actions. Closely related to the foregoing principle, Delgado rejects guilt-by-association pleading. The fact that a plaintiff may have been treated by providers who have been accused of misconduct elsewhere, or may have some connection to individuals involved in other claims, does not permit an inference that the plaintiff’s own claims are fraudulent. The Court made clear that a litigant cannot bridge the gap between suspicion and fraud by pointing to associations, relationships, or circumstances that do not specifically tie the plaintiff to wrongdoing. __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice. Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. __________________________________ [1] Citing, Dashdevs LLC v. Capital Mkts. Placement, Inc., 210 A.D.3d 525. 526 (1st Dept. 2022); CPLR 3016(b). [2] Slip Op. at *1, citing Anguisaca-Morales v. St. Paul & St. Andrew United Methodist Church, 238 A.D.3d 439, 440 (1st Dept. 2025); Linares v. City of New York, 233 A.D.3d 479, 480 (1st Dept. 2024). [3] Id., citing Carranza-Rafael v. LRC Constr. LLC, 250 A.D.3d 507, 509 (1st Dept. 2026). [4] Id., citing Santacruz v. 58 Gerry St. LLC, 246 A.D.3d 600, 600 (1st Dept. 2026).

The Securities and Exchange Commission (“SEC”) will tell anyone who listens that reporting violations of the securities laws is an important part of its anti-fraud/anti-corruption whistleblower program. This is especially so when the violations are difficult to detect. For this reason, among others, the SEC has encouraged company insiders with knowledge of wrongdoing to come forward with information about the violations. The carrot used to encourage such whistleblowing is the reward mechanism provided under the SEC program. Over the year, this Blog has written about awards given to whistleblowers under the SEC and CFTC whistleblower programs – the anti-fraud/anti-corruption programs created under the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). See here, here, here, and here. Yesterday, the SEC issued another award to a whistleblower. On December 5, 2016, the SEC announced that it awarded $3.5 million to a whistleblower who came forward with information that led to a successful SEC enforcement action. The whistleblower is the 36th relator to receive an award under the SEC whistleblower program. In total, since 2011, the SEC has paid approximately $135 million to whistleblowers who provided information resulting in the collection of monetary sanctions against violators of the securities laws. To date, the SEC has recovered $874 million from enforcement actions resulting from whistleblower tips. The SEC declined to identify the whistleblower or the wrongdoers. By law, the SEC protects the confidentiality of whistleblowers and does not release information that might directly or indirectly reveal the whistleblower’s identity. Commenting on the award, Jane Norberg, Chief of the SEC’s Office of the Whistleblower, stated: “Whistleblowers do a tremendous service to the investing public and we will continue to reward those who come forward with valuable tips that help us bring successful cases against those who violate the securities laws.” Under the program, whistleblowers are eligible for an award if they voluntarily provide the SEC with original information that leads to a successful enforcement action that exceeds $1 million. The award can range from 10 percent to 30 percent of the money collected. All payments come from an investor protection fund established by Congress that is financed through monetary sanctions paid to the SEC by securities law violators. No money is taken or withheld from harmed investors to pay whistleblower awards. Takeaway The SEC’s whistleblower program is, by all accounts, a success. Announcements like this one serve as important reminders to potential whistleblowers that they will be rewarded if they come forward and provide information that results in a successful enforcement action. This Blog hopes that whistleblowers will heed these reminders, especially since the program is under the microscope of the new administration (discussed by this Blog here). This article was written by Jeffrey M. Haber, a partner at 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 This blog previously wrote about Universal Health Services, Inc. v. United States ex rel. Escobar, a Medicaid case involving the “implied certification” theory of liability under the False Claims Act (“FCA”). In Escobar, the Court held that implied certification liability under the FCA may exist where the following two conditions are satisfied: (1) the defendant does not merely request payment, but also makes specific representations about the goods or services provided; and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading. Since the Supreme Court decided Escobar, the district courts have been split on whether satisfaction of the two-part test is the only basis on which a relator can establish implied certification liability. Some courts have determined that the two-part test is the exclusive means of establishing implied certification liability, while other courts and the Department of Justice (“DOJ”) have argued that liability under the implied certification theory may be found, under certain circumstances, without satisfying the first part of the test – that is, without establishing “specific misrepresentations” about the goods or services provided. The courts that have found the two-part test to be the exclusive means of establishing implied certification liability left no room for debate. Each court found that the plaintiff “must” allege the two conditions set forth in Escobar. See, e.g., United States ex rel. Handal v. Ctr. for Emp’t Training, No. 2:13-cv-01697-KJMKJN, 2016 U.S. Dist. LEXIS 105158, at *12 (E.D. Cal. Aug. 8, 2016) (“To establish implied false certification, a plaintiff must show [Escobar’s two conditions].”); United States ex rel. Doe v. Health First, Inc., No. 6:14-cv-501-Orl-37DAB, 2016 U.S. Dist. LEXIS 95987, at *8 (M.D. Fla. July 22, 2016) (“[Escobar’s] two conditions must exist to impose liability . . . .”); United States ex rel. Creighton v. Beauty Basics Inc., No. 2:13-CV-1989-VEH, 2016 U.S. Dist. LEXIS 83573, at *9 (N.D. Ala. June 28, 2016) (“[T]he plaintiff must allege [Escobar’s two conditions].”). The courts that have found that the two-part test is not the exclusive means of establishing implied certification liability argue for a more expansive view of the Supreme Court’s holding. For example, last month, in United States ex rel. Panarello v. Kaplan Early Learning Co., No. 11-cv-00353 (W.D.N.Y. Nov. 14, 2016), the court held that “Escobar cannot be read to impose the ‘specific representations’ requirement in every case.” Slip op. at 8. The court reasoned that the Supreme Court merely identified “‘some’ of the circumstances” that create implied certification liability, thereby “suggest[ing] that compliance with the conditions it discussed is not necessarily a prerequisite to implied false certification liability in every case.” Id. at 9. Consequently, the court permitted the implied certification claim to proceed even though the defendant did “not use payment codes” or “contain specific representations about the goods or services provided.” Id. at *8. In permitting the claim to proceed, the Panarello court relied on the court’s decision in Rose v. Stephens Institute, No. 9-cv-05966-PJH, 2016 U.S. Dist. LEXIS 128269 (N.D. Cal. 2016), which reached the same conclusion. There, the court rejected the defendant’s exclusivity argument “as a matter of law”, finding that “Escobar . . . does not purport to set out, as an absolute requirement, that implied false certification liability can attach only when these two conditions are met.” It should be noted that both courts recognized that their decision was contrary to that of other courts. Consequently, the Rose court certified the issue to the Ninth Circuit, and the Panarello court recommended certification to the Second Circuit. The DOJ, for its part, has argued that the two-part test is not the exclusive means of establishing implied certification liability under Escobar. In statements of interest filed throughout the country, the DOJ has relied on the portion of the Supreme Court’s decision in which it expressly declined to decide whether a claim for payment could itself constitute an implicit representation of entitlement to payment. In that regard, the DOJ has relied on the Court’s refusal to “resolve whether all claims for payment implicitly represent that the billing party is legally entitled to payment,” noting that the claim before the Court contained “specific representations” that were “misleading half-truths.” Universal Health Services, Inc. v. United States and Massachusetts, ex rel. Julio Escobar and Carmen Correa, 579 U.S.___, 136 S. Ct. 1989, 1999-2001 (2016). Takeaway: This blog will continue to follow this post-Escobar debate. One thing is for certain, there is a split of opinion that will make its way through the circuit courts, and perhaps even the Supreme Court. Stay tuned. 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 Past consideration is generally no consideration under New York law, and a promise based solely on prior acts or transactions is unenforceable unless it falls within a recognized exception. In Hakim v. Hakim, 2026 N.Y. Slip Op. 05598 (1st Dept. Oct. 1, 2026), the Appellate Division, First Department applied that principle to affirm dismissal of a counterclaim seeking to enforce a 1998 promissory note between brothers involved in a long-standing real estate investment relationship. The Court held that the note was premised on alleged transactions occurring decades earlier and therefore rested on past consideration. The note’s generic recital of “value received” failed to satisfy General Obligations Law § 5-1105, which requires a specific written description of the past consideration. The Court also rejected reliance on UCC § 3-408, deferring to the trial court’s credibility determination that the evidence did not establish the antecedent debt alleged by the noteholder. Hakim v. Hakim Hakim grew out of a decades-long family investment arrangement among three brothers, Said, Kamran, and Masud Hakim. The brothers left Iran and eventually settled in the United States around the time of the 1979 Iranian Revolution. According to the trial record, they had agreed years earlier to acquire New York real estate together as long-term investments, including a building located at 536 East 89th Street in Manhattan (the “Property”). Kamran first acquired the Property in 1969. In 1973, a company he controlled transferred ownership of the Property to the three brothers as tenants in common. The deed for the Property was recorded that year. Among the disputes between the brothers was a disagreement over a promissory note signed by Said in 1998. Kamran maintained that the note reflected money owed to him arising from a business-related transaction dating back to the late 1970s. Kamran said that he helped Said with efforts to purchase certain products and, in doing so, committed significant funds to secure a letter of credit. Kamran later contended that he suffered a substantial loss when the underlying obligation was not repaid. Said acknowledged signing the note but disputed Kamran’s account of the events that led to it. At trial, the brothers offered different explanations regarding the purpose of the note and whether it reflected an actual debt. Correspondence exchanged between them in 1998 referenced the earlier transaction, but the parties disagreed about what the documents showed and whether any obligation remained outstanding. After hearing testimony and reviewing the evidence, the trial concluded that the record did not establish a sufficient basis for recovery on the promissory note. As a result, Kamran’s counterclaim relating to the note was dismissed. On appeal, the First Department affirmed, holding that “[t]he trial court properly dismissed Kamran’s fourth counterclaim against Said seeking recovery under the 1998 promissory note” because “it was improperly premised on past consideration.”[1] To form an enforceable contract, the plaintiff must establish an offer, acceptance of the offer, consideration, mutual assent, and an intent to be bound.[2] “An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.”[3] Acceptance of an offer is effective if it clearly, unambiguously and unequivocally complies with the terms of the offer.[4] Consideration requires “a performance or a return promise [that is] bargained for” by the defendant’s promise to fulfill the terms of the agreement.[5] Mutual assent requires an agreement as to the essential terms and conditions of the agreement, and intent to be bound requires that such assent be sufficiently definite to assure that the parties are truly in agreement with respect to all material terms.[6] At issue in Hakim was the consideration element of contract formation. The First Department held that Kamran “was not required to demonstrate that there was adequate consideration for the note.”[7] Rather, “[i]t was . . . [Said]’s burden to demonstrate a lack of consideration.”[8] The Court held that Said met his burden.[9] As result, the burden “shifted back to Kamran to demonstrate an exception to the general rule, which he failed to do.”[10] The Court found that “the note was for past consideration” and that under New York law, “the general rule is [that] past consideration is no consideration.”[11] There are two exceptions to the general rule. “First, the note may be enforceable where it expressly recites the nature of the past consideration in writing.”[12] “The writing must be explicit and not vague or imprecise.”[13] Second, under Uniform Commercial Code § 3-408, “no consideration is necessary for an instrument . . . given in payment of . . . an antecedent obligation of any kind.” As to the first exception, the Court found that “the note provide[d] no details about consideration, stating merely that the promise [was] for value received, which [was] insufficient.”[14] As to the second exception, the Court rejected Kamran’s argument that it applied because Said agreed to “sign the note to repay Kamran for Kamran’s 1970’s deposit of $600,000 for a letter of credit.[15] “Although Said admitted that his signature appeared on the note,” said the Court, “he said it pertained to a proposed real estate transaction that never came to fruition.”[16] Since the “trial court did not credit Kamran’s testimony regarding the purpose of the note,” “even if Kamran’s allegations would provide a basis to enforce the note under UCC 3-408,” said the Court, it would not disturb “the [trial] court’s credibility determination,” which “[was] entitled to deference.”[17] Takeaway The principal takeaway from Hakim is that a signed promissory note is not automatically enforceable merely because it memorializes a claimed obligation. While a promissory note ordinarily carries a presumption of consideration, that presumption can be overcome where the maker demonstrates a lack of consideration, including that the note was based on past consideration. Once that showing is made, the burden shifts back to the noteholder to establish that an exception to the general rule applies. Hakim illustrates New York’s rule that “past consideration is no consideration.” As discussed, Kamran attempted to enforce a 1998 promissory note by tying it to financial assistance he allegedly provided Said more than twenty years earlier in connection with a letter of credit. The Court concluded that the note was premised on events that had already occurred and therefore lacked bargained-for consideration supporting a new contractual obligation. The decision underscores that a promise made years after the underlying conduct cannot be enforced simply because the parties later reduced it to writing. A second key lesson is the importance of specificity when relying on General Obligations Law § 5-1105, which permits enforcement of some promises supported by past consideration. To invoke that exception, the writing itself must expressly and clearly describe the prior consideration. General language such as “for value received”, as in Hakim, is not enough. The writing must identify the past consideration with sufficient detail so that the basis for the promise is evident from the document itself. In Hakim, the note’s generic recital of “for value received” failed to satisfy that requirement. Hakim also highlights the limits of UCC § 3-408’s antecedent-obligation exception. A promissory note may be enforceable even without new consideration if it was given to satisfy a preexisting debt or obligation. However, the threshold question is whether such an antecedent obligation actually existed. In Hakim, the brothers offered conflicting accounts of the note’s purpose. Because the trial court credited Said’s testimony and rejected Kamran’s explanation, the antecedent-obligation exception could not save the note. __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice. Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. __________________________________ [1] Slip Op. at *1. [2] 22 N.Y. Jur. 2d, Contracts Section 9. [3] Restatement (Second) of Contracts § 24. [4] King v. King, 208 A.D.2d 1143, 1143-1144 (3d Dept. 1994), citing 21 N.Y. Jur. 2d, Contracts § 53 at 470 (1982), and 2 Williston on Contracts § 6:10 at 68 (4th ed. 1990). [5] See Restatement (Second) of Contracts §71. See also Kolchins v. Evolution Markets, Inc., 128 A.D.3d 47, 59-60 (1st Dept. 2015). [6] Joseph Martin, Jr., Delicatessen v. Schumacher, 52 N.Y.2d 105, 109 (1981); Matter of Express Indus. & Term. Corp. v. New York State Dept. of Transp., 93 N.Y.2d 584, 589 (1999). [7] Slip Op. at *1, quoting Carlin v. Jemal, 68 A.D.3d 655, 656 (1st Dept. 2009) (internal quotation marks omitted); and citing, Neo Universe Inc. v. Ito, 147 A.D.3d 682, 682-683 (1st Dept. 2017). [8] Id., quoting Neo Universe, 147 A.D.3d at 682; and citing Navon v. Zackson, 191 A.D.3d 578, 578 (1st Dept. 2021); Carlin, 68 A.D.3d at 656). [9] Id. [10] Id. [11] Mann v. Green, 159 A.D.3d 545, 545 (1st Dept. 2018) (internal quotation marks omitted). [12] Slip Op. at *1. [13] Id., quoting Korff v. Corbett, 155 A.D.3d 405, 408 (1st Dept. 2017) (internal quotation marks omitted), lv. denied, 31 N.Y.3d 912 (2018); see General Obligations Law § 5-1105 (providing: “A promise in writing and signed by the promisor or by his agent shall not be denied effect as a valid contractual obligation on the ground that consideration for the promise is past or executed, if the consideration is expressed in the writing and is proved to have been given or performed and would be a valid consideration but for the time when it was given or performed.”). [14] Id., quoting Mann, 159 A.D.3d at 546 (internal quotation marks omitted); and citing Korff, 155 A.D.3d at 408. [15] Id. at *2. [16] Id. [17] Id., citing Hemmings v. Sutton, 151 A.D.3d 457, 458 (1st Dept. 2017).

By: Jeffrey M. Haber In Franco v. Berger, 2026 N.Y. Slip Op. 05472 (1st Dept. Sept. 29, 2026), the plaintiff sought to recover for the death of Coco, a 3.8-pound Yorkshire Terrier who allegedly underwent a dental procedure only after defendants made specific representations concerning who would perform the surgery, who would administer anesthesia, and the safety precautions that would be employed. Plaintiff alleged that those representations were false, that Coco suffered cardiac arrest during the procedure and later died, and that defendants subsequently altered medical records to conceal what had occurred. The motion court dismissed the fraudulent-inducement claim as duplicative of the veterinary malpractice claim, and the First Department affirmed. Although the alleged fraud preceded the procedure and the alleged record falsification occurred afterward, the Court held that “the damages allegedly caused by these misrepresentations are identical to the damages alleged to have arisen from defendant’s professional negligence which resulted in Coco’s death.” The Court further concluded that there were “no damages alleged to have arisen from defendant’s alleged falsification of Coco’s records after her death.” Accordingly, the fraudulent inducement claim was dismissed because it sought to recover for the same injury as the malpractice claim and failed to plead any separate damages attributable to the alleged fraud. Franco v. Berger Franco arose from the death of Coco, an eight-year-old Yorkshire Terrier weighing 3.8 pounds, following a dental procedure performed at a veterinary hospital in January 2025.[1] According to the complaint, Coco suffered from severe tracheal collapse and other conditions that allegedly made anesthesia particularly risky. Because of those risks, defendant, Coco’s primary veterinarian, had previously advised against surgery. During a January 10, 2025 appointment, however, defendant informed plaintiff that an infected molar required extraction and recommended dental surgery. Plaintiff allegedly agreed to the procedure only after receiving a series of specific assurances from defendant. According to plaintiff, defendant represented that he would personally administer Coco’s anesthesia, that an experienced veterinarian would perform the extraction, that a very small endotracheal tube would be used because of Coco’s size and airway condition, and that the anesthesia time would be kept under two hours. Plaintiff alleged that defendant emphasized his decades of experience and reassured her that Coco would be safe despite the known risks associated with his breed, size, and medical history. Relying on those representations, plaintiff scheduled the procedure for January 15, 2025. Plaintiff alleged that the procedure was not performed as represented. When plaintiff arrived at the hospital on January 15, defendant was not present. Plaintiff maintained that she was not told that defendant would be absent. Instead, the surgery was performed by a recently licensed veterinarian whom plaintiff had never met and who allegedly lacked board certification or specialized training in dentistry. Plaintiff alleged that anesthesia was not administered or monitored by defendant or a licensed veterinary technician, but rather by a veterinary assistant who allegedly had no veterinary license and no specialized training in anesthesia. Plaintiff alleged that defendants departed from the surgical plan that had been discussed with her. Although plaintiff allegedly agreed that extractions would be divided between two procedures in order to minimize anesthesia exposure, defendants extracted sixteen teeth during a single operation. The procedure allegedly lasted approximately two and one-half hours, exceeding the time period that had been represented before surgery. On January 15, plaintiff received a telephone call from the clinic informing her that Coco had suffered cardiac arrest during the procedure and had been clinically dead for nearly six minutes. Coco was subsequently transferred for emergency treatment but ultimately died. Beyond the allegations of veterinary malpractice, the complaint asserted that the representations made before surgery were knowingly false and were intended to induce plaintiff’s consent to the procedure. The complaint further alleged that, after Coco’s death, defendants attempted to conceal what occurred by altering, supplementing, or otherwise modifying portions of Coco’s medical records. As framed by the complaint, the alleged misconduct occurred in three stages: preoperative misrepresentations that induced consent to the procedure, negligent conduct during the procedure itself, and post-procedure efforts to obscure the true circumstances of Coco’s treatment and death. The motion court dismissed plaintiff’s fraudulent inducement cause of action, concluding that plaintiff’s fraud claim was “fatally duplicative of her malpractice claim, as it [was] based on the same facts and [sought] the same damages.”[2] Under New York law, a fraud claim, which “ar[ises] from the same facts, s[eeks] identical damages and d[oes] not allege a breach of any duty collateral to or independent of the parties’ agreements[,] is subject to dismissal as redundant of the [non-fraud] claim.”[3] Where all the damages are remedied through another claim, the fraud claim is deemed duplicative and must be dismissed.[4] This is so even where the plaintiff sufficiently alleges breach of an independent duty owed separate and apart from the other duty, such as a contractual duty.[5] On appeal, the First Department affirmed. The Court held that “[t]he motion court correctly dismissed plaintiff’s fraud claim as duplicative.”[6] The Court explained that “the damages allegedly caused by [defendant’s] misrepresentations [were] identical to the damages alleged to have arisen from defendant’s professional negligence which resulted in Coco’s death.”[7] Thus, even if there were an independent duty (which the Court seemed to suggest), the Court held that the damages overlapped making the fraud claim duplicative of the malpractice claim. “Moreover,” held the Court, “there are no damages alleged to have arisen from defendant’s alleged falsification of Coco’s records after her death.”[8] Takeaway Franco underscores that, under New York’s duplication doctrine, the critical inquiry is often not whether the alleged fraud is distinct from the underlying misconduct, but whether it caused a distinct injury. Plaintiff alleged three separate categories of wrongdoing: pre-procedure misrepresentations that induced consent to the surgery, negligent conduct during the procedure itself, and post-procedure alteration of medical records. Nevertheless, the First Department held that the fraudulent inducement claim could not survive because the damages resulting from the misrepresentations were the same damages sought under the veterinary malpractice claim, namely Coco’s injury and death. The decision also highlights that alleging an independent duty is not, by itself, sufficient to avoid dismissal. Even assuming that the alleged preoperative representations and post-death record falsifications implicated duties separate from defendants’ professional obligations, the fraud claim still failed because the complaint did not identify any damages attributable solely to the alleged fraud. Plaintiff’s loss flowed from the same injury that formed the basis of the malpractice claim. Therefore, Franco reinforces the principle that separate damages remain the touchstone of a viable fraud claim when accompanying another cause of action. Where a plaintiff seeks recovery for the same injury under multiple legal theories, courts will look past differences in labels, timing, and alleged duties and focus on whether the fraud produced an additional, non-overlapping harm. Absent such damages, the fraud claim is vulnerable to dismissal as duplicative, even where the alleged misrepresentations preceded the underlying wrongdoing or the defendant allegedly engaged in subsequent concealment efforts. __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice. Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. __________________________________ [1] The discussion of the facts is based on the parties’ briefing on appeal. [2] Citing, Valentina v. Beckerman, 241 A.D.3d 751 (2d Dept. 2025); Heisler v. Advanced Dermatology of New York P.C., 233 A.D.3d 445 (1st Dept. 2024). [3] Cronos Grp. v. XComIP, LLC, 156 A.D.3d 54, 63 (1st Dept. 2017), quoting Havell Capital Enhanced Mun. Income Fund, L.P. v. Citibank, N.A., 84 A.D.3d 588, 589 (1st Dept. 2011) (internal quotation marks omitted). [4] MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC, 165 A.D.3d 108, 114 (1st Dept. 2018). [5] Salamone v. EIP Global Fund LLC, 2021 N.Y. Slip Op. 02372 (1st Dept. Apr. 20, 2021) (here); Chowaiki & Co. Fine Art Ltd. v. Lacher, 115 A.D.3d 600, 600-601 (1st Dept. 2014) (dismissing fraud claim seeking duplicative damages even where the plaintiff sufficiently alleged a breach of duty independent of the contract). [6] Slip Op. at *1, citing Abbondandolo v. Hitzig, 282 A.D.2d 224, 225 (1st Dept. 2001). [7] Id., citing Simcuski v. Saeli, 44 N.Y.2d 442, 451-452 (1978). [8] Id.

By Jeffrey M. Haber Arbitration is an alternative form of dispute resolution, meaning it is an alternative to a court proceeding. In arbitration, the parties have their dispute resolved by neutral persons (known as arbitrators) knowledgeable in the areas in dispute, rather than by a judge or jury. Arbitration has been a form of dispute resolution within the securities industry for many years, primarily because it is generally considered to be faster, inexpensive and less complex than litigation. Since 1987, investors with claims against their stockbroker or financial advisor have been required to assert them in an arbitration before the Financial Industry Regulatory Authority (“FINRA”) and its predecessors, the National Association of Securities Dealers and the New York Stock Exchange Regulation, Inc., the regulatory arm of the New York Stock Exchange. Thanks to the Supreme Court, investors who sign customer agreements containing an arbitration clause must bring their claims against their broker or financial advisor in an arbitration proceeding instead of a state or federal court. Shearson/American Express v. McMahon, 482 U.S. 220, 226 (1987). By agreeing to arbitrate, “a party does not forgo [the] substantive rights …; [it] only submits to their resolution in an arbitral, rather than a judicial, forum.” Id. at 229-230, 238 (citation omitted). For years after Shearson/American Express, investors and commentators criticized the securities arbitral process as unfair to individual investors, primarily because of a perceived bias towards broker/dealers. See, e.g., Susanne Craig, New York Times, Investors Opt for Arbitration Panels Without Ties to Wall Street (Oct. 27, 2011). This perceived bias was based, in part, on the fact that arbitral panels were comprised of members of the securities industry – that is, members of FINRA and its predecessors. Over the past several years, FINRA has tried to address the perception of unfairness by improving the efficiency and fairness in its arbitration program, from revising its rules on who is eligible to serve as a public arbitrator to expanding the number of potential arbitrators provided to parties during the panel selection process. Recently, FINRA took another step in its efforts to preserve the integrity and fairness of the arbitration process. FINRA Fines Oppenheimer for Discovery Abuse On November 17, 2016, FINRA announced that it had “fined Oppenheimer & Co. Inc. $1.575 million and ordered the firm to pay $1.85 million to customers for failing to report required information to FINRA, failing to produce documents in discovery to customers who filed arbitrations, and for not applying applicable sales charge waivers to customers.” In addition to identifying various sales practices, supervisory lapses, and CRD reporting violations, the release and the underlying Acceptance, Waiver & Consent (“AWC”) identified various discovery abuses engaged in by the firm in arbitrations involving a former Oppenheimer broker, Mark Hotton (“Hotton”). FINRA found that between 2010 and 2013, Oppenheimer failed to produce documents during discovery to seven sets of claimants who asserted claims against Oppenheimer for failing to supervise Hotton. In this regard, Oppenheimer failed to provide spreadsheets showing that Hotton had excessively traded multiple customer accounts. The spreadsheets also showed that in four accounts Hotton had churned the accounts – that is, the commissions charged exceeded the total account value – and in two accounts there were insufficient funds to execute trades causing Oppenheimer to place the accounts on ninety-day restrictions. According to the AWC, these spreadsheets were prepared in 2007 and 2008. In the seven arbitration proceedings, the claimants resolved their disputes through settlement or awards without the receipt of those documents. Incredibly, in March 2015, FINRA announced that it had fined Oppenheimer $2.5 million and ordered the firm to pay restitution of $1.25 million for failing to supervise Hotton, who stole money from his customers and excessively traded their brokerage accounts during the period 2005 through 2009. FINRA permanently barred Hotton from the securities industry in August 2013. In the recent AWC, FINRA censured Oppenheimer, fined the firm $1,575,000, and ordered remediation payments totaling $703,122 to be paid to the seven sets of claimants affected by the firm’s failure to supervise. Oppenheimer accepted and consented to FINRA’s findings, though it did so without admitting or denying them. The Takeaway Failure to comply with FINRA’s discovery rules hinders the efficient and cost-effective resolution of disputes and undermines the integrity and fairness of FINRA’s arbitral forum. FINRA’s action against Oppenheimer is an important step in ensuring those purposes are realized. This article was written by Jeffrey M. Haber, a partner at 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 Consider the following story. John Smith has worked for Jane Doe for 15 years. Doe runs a small, but profitable, media consulting business. Smith has been one of Doe’s most productive account executives, generating significant business over the 15 years of his employment. Though compensated well, Smith decides that he wants to open his own media consulting firm. Smith secretly advises Doe’s clients that he intends to strike out on his own and requests that they follow him. Shortly thereafter, Smith opens his business a few miles from Doe’s firm with a substantial number of Doe’s clients. Not surprisingly, Doe sues Smith. Unfortunately, this story is not uncommon. Employees misappropriate confidential, proprietary information and trade secrets all too often. Some use the information for profit; others do nothing with the information. When an employee uses misappropriated information, an employer has an arsenal of claims that he/she can assert against the employee, including, among others, the misappropriation of proprietary information and trade secrets, breach of contract, and breach of fiduciary duty. But, perhaps, the most potent weapon, at least in New York, is the faithless servant doctrine. The Faithless Servant Doctrine In New York: The doctrine first appeared in New York in the late nineteenth century as part of a one-two-punch adopted by the Court of Appeals to address employee misconduct. Grounded in contract and fiduciary duty, respectively, each claim could result in the forfeiture of compensation. Under the former, an employee guilty of violating his/her employment agreement could be ordered to forfeit his/her compensation if the violation was found to be substantial. See Turner v. Kouwenhoven, 100 N.Y. 115, 120 (1885). Under the latter (i.e., the faithless servant doctrine), an employee who acted adversely to the employer or failed to disclose any interest that conflicted with that of the employer (i.e., breaches a duty of loyalty or good faith) could be ordered to forfeit his/her compensation. See Murray v. Beard, 102 N.Y. 505, 508 (1886) (“[A]n agent is held to uberrima fides in his dealings with his principal, and if he acts adversely to his employer in any part of the transaction, or omits to disclose any interest which would naturally influence his conduct in dealing with the subject of the employment, it amounts to such a fraud upon the principal as to forfeit any right to compensation for services.”). The faithless servant doctrine, also known as equitable forfeiture, is based on agency principles, and has been applied to brokers, salaried employees, attorneys, arts and entertainment representatives, and executors of estates. The courts have applied the doctrine to a wide variety of misconduct, including, but not limited to, conflicts of interest, stealing money or goods, and secretly starting a competing business. Any act that can give rise to a claim for breach of fiduciary duty will trigger the doctrine. Violating the Doctrine Can Result in A Harsh Result: The penalty for violating the doctrine is harsh: the employee must forfeit all compensation earned since the first date of employment, even though the employee’s services may have otherwise benefitted the employer or the employer suffered no damages. Indeed, any value provided by the employee through loyal service is irrelevant. Thus, if an employee, even an otherwise valuable employee, is found to have been disloyal, then the employee will be required to disgorge all compensation even if the harm caused by the misconduct was minimal and the employee otherwise provided valuable service during the period of employment. Some recent decisions by the lower courts in New York, however, have relaxed the severity of the penalty by endorsing the principle that a faithless servant forfeits all compensation from the date of the first disloyal act. See, e.g., Herman v. Branch Motor Express Co., 67 Misc. 2d 444, 446 (N.Y. Civ. Ct. 1971) (finding that a faithless employee is deprived of his right to compensation “only for the period of his faithlessness”); Maritime Fish Products, Inc. v. World-Wide Fish Products, Inc., 100 A.D.2d 81, 91 (1st Dep’t 1984) (employer is entitled to return of compensation paid to employee “during the period of disloyalty”); St. James Plaza v. Notey, 95 A.D.2d 804, 806 (2d Dep’t 1983) (“an employee may forfeit his right to compensation for services rendered by him during such periods of disloyalty”). The Law in New York Since 1886: Notwithstanding the few decisions that apportion forfeiture relative to the period of disloyalty, the faithless servant doctrine has remained relatively unchanged in New York since its origin. In 1977, for example, the Court of Appeals reconfirmed the doctrine, noting that an employee “faithless in the performance of his services ... is not entitled to recover his compensation” even if “his services were beneficial to the principal” or the employer “suffered no provable damage as a result of the breach of fidelity by the agent.” Feiger v. Iral Jewelry, Ltd., 41 N.Y.2d 928, 929 (1977). On September 26, 2006, the First Department rejected attempts by the defendant to escape the harshness of the doctrine by trying to reverse the motion court’s ruling requiring complete forfeiture of his compensation, including that which was untainted by the disloyal acts. In Matter of Blumenthal, 32 A.D.3d 767, 768 (1st Dep’t 2006), the Court affirmed the motion court’s ruling, holding that “[i]n light of respondent’s repeated disloyalty throughout his tenure, there is no merit to his assertion that there should have been an apportionment of his salary or of Wise Acre commissions as to which disloyalty was not found.” In William Floyd Union Free School District v. Wright, 61 A.D.3d 856, 859 (2d Dep’t 2009), the Second Department reversed the decision of the motion court, finding that the lower court erred “in limiting the defendants’ forfeiture of insurance benefits to a period of 10 years.” In doing so, the Second Department made clear that “complete and permanent forfeiture of compensation, deferred or otherwise, is warranted under the faithless servant doctrine.” Beach v. Touradji Capital Management, LP – The Doctrine is Alive and Well: On November 22, 2016, the First Department had another opportunity to consider the doctrine. In Beach v. Touradji Capital Management, LP, 2016 NY Slip Op. 07852, the Court held that the faithless servant doctrine could be used to recover the compensation paid to the disloyal employees (former employees who formed a competing company), regardless of whether damages could otherwise be proven: Although plaintiffs were at-will employees, they could be found to have breached a fiduciary duty to their employer if they acted directly against the employer’s interests. Plaintiffs do not dispute that they were employed by TCM …. Plaintiffs contend that the breach of fiduciary duty counterclaim should have been dismissed in its entirety because TCM failed to show that their actions caused it damage. They submitted evidence that investors withdrew from TCM for reasons other than their actions. However, counterclaim defendants’ damages are not limited to the loss of investors. For example, under the faithless servant doctrine, TCM could seek to recover the compensation it paid to plaintiffs. Takeaway: Beach shows that the faithless servant doctrine is alive and well in New York and remains a potent weapon for employers faced with an employee who acts disloyal during his or her employment. The question, however, is whether the doctrine is fair? To be sure, a faithless servant should not benefit from his/her acts of disloyalty. But, should the employer benefit too by strict application of the doctrine? That is, should the employer recoup compensation paid to the employee for activities and contributions untainted by acts of disloyalty? That too seems to be unfair. Perhaps there is a middle ground, where the court could look at the nature of the employment relationship, the severity of the disloyal action engaged in and the benefits received by the employer from the employee during the period of disloyalty to determine the amount of forfeiture. Such an approach would still penalize an employee who is guilty of disloyal conduct, but it would also recognize his/her achievements or contributions to the employer. Notably, the Second Circuit has advanced this middle ground approach in applying New York law, at least under certain circumstances; namely: a) the employer and employee agree that the latter would be compensated on a “task-by-task basis”; the employee was disloyal as to only certain tasks; and the employee was otherwise loyal with regard to other tasks. See Design Strategy, Inc. v. Davis, 469 F.3d 284, 300-02 (2d Cir. 2006). Some lower courts in New York have applied the Second Circuit’s approach, finding that it comports with the Restatement (Second) of Agency, which calls for apportioning forfeitures when an agent’s compensation is allocated to periods of time or to the completion of specified items of work. E.g., G.K. Alan Assoc., Inc. v. Lazzari, 44 A.D.3d 95, 103-04 (2d Dep’t 2007). The Court of Appeals has not weighed in on the Second Circuit’s less draconian approach. Thus, until the Court reviews that approach, employers and employees are reminded that the faithless servant doctrine is alive and well. This article was written by Jeffrey M. Haber, a partner at 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 What is the amount of fines assessed by FINRA this year? Thus far, 2016 has been a banner year for the Financial Industry Regulatory Authority ("FINRA"). Buoyed in part by a handful of large penalties, the self-regulatory watchdog is on pace for a record year as fines could be up by 70 percent when all is said and done. In the first six months of this year, FINRA assessed $79.4 million in fines against member broker-dealers. For the similar period in 2015 that figure was $37.5 million. If this clip continues, FINRA could net $159 million in fines, a 69 percent spike over 2015. This is not without precedent, however, because the previous record was in 2014, when the total amount of fines assessed was $134 million. That said, this year's total could eclipse that mark by 19 percent. Large FINRA Fines in 2015 As we have previously reported in May, FINRA fined two units of Raymond James a total of $17 million over compliance breakdowns related to its anti-money laundering programs. At that time, FINRA also slapped MetLife with a $25 million fine, the second largest by the SRO, for misleading thousands of its variable annuity customers. We also reported on the $6 million penalty assessed to Deutsche Bank over blue sheet lapses. Combined, these fines account for more than 60 percent of the fines assessed in the first 6 months of 2016, in addition to 8 other supersized fines (those exceeding $1 million). However, there has been a slight decline in the total number of disciplinary actions taken by FINRA this year even though smaller fines on broker-dealers are having a cumulative effect. FINRA Sanctions Guidelines According to some observers, FINRA has taken a very aggressive approach since it published the 2015 sanctions guidelines, and is sending a message to the Street. However, FINRA has not been as busy on the restitution front so far. It is on pace to order a return of $28 million to customers, far less than the $96 million in restitution ordered in 2015. These figures are bound to change as FINRA is reportedly gearing up for larger restitution awards this year. While not offering specific details, there could also be a greater emphasis on variable annuity cases this year. It is unclear if these cases are connected to the efforts to step up enforcement activity with respect to elder financial abuse. The Takeaway Given that the Dodd-Frank regime has continued to unfold, the spike in fines assessed by FINRA this year should come as no surprise. At this juncture, it is unclear if and to what extent that regulatory framework will be scaled back under a new presidential administration. (This Blog recently discussed possible implications with respect to the SEC whistleblower program here.) In the meantime, broker-dealers and other member financial services providers should proceed with caution. This article was written by Jeffrey M. Haber, a partner at 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 The Financial Industry Regulatory Authority ("FINRA") recently announced that the new Capital Acquisition Broker ("CAB") Rules will become effective April 14, 2017. While CABs still must be registered with the Securities and Exchange Commission, they will be subjected to a reduced series of FINRA rules and compliance obligations. Capital Acquisition Brokers at a Glance Capital Acquisition Brokers are those involved in private placements and mergers and acquisitions involving institutional investors and qualified purchasers. CABs are barred from engaging in both proprietary trading and secondary sales and limited to the following activities: Advising companies on mergers and acquisitions Advising issuers on raising debt and equity capital in private placements Acting as placement agent Providing strategic and financial advisory services It is important to note that FINRA emphasized the word "solely" in its announcement, which means for all intents and purposes that a CAB may engage only in business activities related to the securities industry and not other businesses, such as insurance or real estate. Moreover, in its capacity as a placement agent, a CAB can make offerings only to institutional investors, including: Any bank, savings and loan association, insurance company or registered investment company Any governmental entity or subdivision of a governmental entity Certain employee benefit, stock bonus or profit-sharing plans Any individual or entity having total assets of at least $50 million Any “qualified purchaser” as defined under the Investment Company Act Broker-dealers that carry customer accounts, accept purchase and sale orders, hold or handle customer funds or that engage in a range of other activities specified in FINRA's rule do not meet the definition of a CAB. At the same time, CABs may engage in activities in the normal course of conducting business, such as opening bank accounts, renting or owning office space and entering into arrangements with third-party vendors. The Takeaway While the FINRA By-Laws and other core rules will still apply to CABs, certain other rules will be tailored to the specific activities, dealings and communications with institutional investors. For example, CABs will be permitted to provide forecasts and projections in offering materials and there is no requirement to file advertising or sales literature with FINRA. Lastly, CABs will have reduced supervisory requirements with respect to annual meetings and internal inspections. While the rule does not become effective until April 14, 2017, FINRA will begin accepting applications beginning January 3, 2017. If you have further questions about the CAB rules or need assistance with the application process, you should engage the services of an attorney with experience in FINRA rules and regulations. This article was written by Jeffrey M. Haber, a partner at 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 “recurring question” New York courts grapple with is whether the facts alleged in a complaint give rise to claims for both breach of contract and fraudulent inducement. Cronos Grp. v. XComIP, LLC, 156 A.D.3d 54, 56 (1st Dept. 2017). Readers of this Blog know that a fraud claim, which “ar[ises] from the same facts [as an accompanying contract claim], s[eeks] identical damages and d[oes] not allege a breach of any duty collateral to or independent of the parties’ agreements[,] is subject to dismissal as redundant of the contract claim.” Id. at 63 (quoting Havell Capital Enhanced Mun. Income Fund, L.P. v. Citibank, N.A., 84 A.D.3d 588, 589 (1st Dept. 2011) (internal quotation marks omitted). See also HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 206 (1st Dept. 2012). As the First Department noted in Cronos Group, “[t]here is no shortage of recent decisions by this Court holding to similar effect.” 156 A.D.3d at 63 & n.8 (citing cases). Sometimes, a plaintiff alleges a duty independent of the contract but, nevertheless, has his/her complaint dismissed because the damages sought are the same as those sought by the contract claim. The reason has to do with the purpose of the damages sought. MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC, 165 A.D.3d 108, 114 (1st Dept. 2018); Mañas v. VMS Assoc., LLC, 53 A.D.3d 451, 454 (1st Dept. 2008). Fraud damages are meant to redress a different harm than damages for breach of contract. The latter damages are meant to restore the nonbreaching party to as good a position as it would have been in had the contract been performed; the former damages are meant to indemnify losses suffered as a result of the fraud. MBIA, 165 A.D.3d at 114; Mañas, 53 A.D.3d at 454. Thus, where all the damages are remedied through the contract claim, the fraud claim is duplicative and must be dismissed. MBIA, 165 A.D.3d at 114. This is so even where the plaintiff sufficiently alleges breach of an independent duty owed them separate and apart from the contract. Id.; see also Salamone v. EIP Global Fund LLC, 2021 N.Y. Slip Op. 02372 (1st Dept. Apr. 20, 2021) (here); Chowaiki & Co. Fine Art Ltd. v. Lacher, 115 A.D.3d 600, 600-601 (1st Dept. 2014) (dismissing fraud claim seeking duplicative damages even where the plaintiff sufficiently alleged a breach of duty independent of the contract). [Ed Note: this Blog recently wrote about the foregoing scenario here and here.] In Salamone v. EIP Global Fund LLC, the Appellate Division, First Department recently affirmed the dismissal of a fraud claim because the damages alleged were the same of those sought by plaintiff’s breach of contract claim. Salamone concerned a loan by plaintiff Kenneth Salamone to defendants Sridhar Chityala (“Sridhar”) and EIP Global Fund, LLC (“EIP”) for $2,000,000. On October 10, 2019, Sridhar and EIP asked Salamone for an emergency loan of $5 million. Salamone offered a $2 million loan if he got certain information and assurances. Salamone made the loan on October 11, 2019, pursuant to a thirty-day demand note (the “Demand Note”), which Sridhar signed personally and on behalf of EIP. The Demand Note provided for 10% interest, with the principal to be paid back either on November 10, 2019, or on demand. The Demand Note was not paid. On November 11, 2019, Salamone made a written demand for repayment. Sridhar and EIP asked Salamone to forbear from taking further action, promising payment on November 21, 2019. Over the next weeks, payment was not tendered but promises were made about the availability of funds. On November 27, 2019, Salamone, Sridhar, and EIP entered into a Forbearance and Security Agreement (the “Forbearance Agreement”) by which Sridhar and EIP agreed to pay Salamone $2,369,918.50, plus interest on or before December 17, 2019, in exchange for Salamone agreeing to forbear exercising his rights under the Demand Note. Sridhar signed the Forbearance Agreement individually and on behalf of EIP. Salamone also received a security interest in Sridhar’s interests in EIP, Vedas Group, LLC (“Vedas”), and CKL Partners, LLC (“CKL”) (the “Membership Interests”), entities that were owned and managed by Sridhar and defendant Shreyas Chityala (“Shreyas”), pursuant to a Pledge Agreement dated November 22, 2019 (the “Pledge Agreement”). Sridhar and EIP did not pay the money required by the Forbearance Agreement on December 17, 2019. On December 18, 2019, Salamone notified Sridhar and EIP of the default and demanded payment and delivery of the Membership Interests. Neither was done. Plaintiff filed suit, asserting claims for, inter alia, breach of contract and fraudulent inducement. Pursuant to the former, plaintiff claimed that Sridhar and EIP breached the Demand Note and Forbearance Agreement by failing to repay the loan and the amount required by the Forbearance Agreement and by failing to deliver the Membership Interests, and pursuant to the latter, that Sridhar and Shreyas fraudulently induced Salamone to enter into the Demand Note and the Forbearance Agreement by making false statements about their need for the loan, the availability of funds to repay it, and their intent to do so. Defendants moved to dismiss (here). The motion court granted the motion with regard to the fraudulent inducement claim and the breach of contract claim only to the extent it sought damages for breach of the Forbearance Agreement. The Court denied the motion to dismiss the contract claim as it pertained to the Demand Note. With regard to the fraudulent inducement claim, the motion court found that it was “based on an undisclosed intent not to perform” and, therefore, was duplicative of plaintiff’s contract claim. On appeal, the First Department affirmed the motion court’s dismissal of the fraud claim, though for different reasons (i.e., modified on the law, but otherwise affirmed). Slip Op. at *1. The Court held that the fraudulent inducement claim was not based “merely on an undisclosed intention not to pay,” as the motion court found. Id. Instead, it was based “on false written statements by defendant [Sridhar] as to the imminent receipt of funds by the corporate borrower that would allow repayment of the loan.” Id. Notwithstanding the presence of a duty collateral to, or independent of, the contracts, the Court held that “the only damages plaintiff claim[ed] beyond those under the contracts [were] the opportunity costs of providing the funds to defendants for the loan.…” Id. Such damages, held the Court, “are not recoverable in fraud.” Id. (citing Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 422 (1996) (noting that in fraud, “[t]he true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong” or what is known as the “out-of-pocket” rule”) (citation and internal quotation marks omitted)). Thus, the Court concluded, “the fraud claim, which otherwise arose from the same facts as those on which the contract claim is based, is duplicative of the contract claim.” Id. (citing Halliwell v. Gordon, 61 A.D.3d 932, 934 (2d Dept. 2009).