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

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

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

By:  Jeffrey M. Haber This Blog has written about Ponzi schemes on numerous occasions. A Ponzi scheme is a type of investment fraud where returns to earlier investors are paid using investment capital from new or existing investors, rather than from legitimate profits earned through the enterprise’s business activities. Ponzi schemes persist by exploiting trust, promising high returns with little risk, and using money from new or existing investors to pay “profits” to earlier ones. In today’s article, we examine an enforcement action brought by the SEC against David J. Bradford (“Defendant B”) and Gerardo L. Linarducci (“Defendant L” and together with Defendant B, the “Defendants”). The SEC brought the action Defendant B, the former Chief Operating Officer of Drive Planning, LLC (“Drive Planning”), and Defendant L, the former Managing Partner of Drive Planning and head of its Indiana branch office, for their roles in an alleged $300 million Ponzi scheme related to Drive Planning’s “Real Estate Acceleration Loans” program. The SEC previously obtained a preliminary injunction, asset freeze, and other emergency relief pursuant to an emergency action against Drive Planning and its founder and CEO, Russell Todd Burkhalter, in connection with the alleged scheme. Without admitting or denying the allegations in the complaint, Defendant B consented to the entry of a final judgment, subject to court approval. According to the SEC, from 2020 through at least June 2024, Burkhalter ran a Ponzi scheme through Drive Planning, selling unregistered securities in the form of “Real Estate Acceleration Loans” (“REAL”), which Burkhalter described in promotional materials as a “bridge loan opportunity promising 10% in 3 months.”  Defendants allegedly encouraged people to tap their savings, their IRAs, and even lines of credit, to invest in REAL. According to the SEC, as of early May 2024, the alleged scheme was receiving applications for over one million dollars every day, driven by an organization of more than 100 sales agents.   According to the SEC, Defendants and the sales agents they trained falsely told REAL investors that Drive Planning pooled REAL investments and loaned that money out to property developers and/or used it to enter joint ventures with property developers, thereby earning the profits necessary to pay returns to REAL investors.   In fact, said the SEC, Drive Planning did not have a legitimate profitable enterprise capable of generating the sums necessary to pay the promised 10 percent returns every three months.  Instead, the SEC alleged that, “in classic Ponzi fashion, Burkhalter used money from new investors to pay the supposed ‘returns’ to existing investors and to maintain a luxurious lifestyle.” As of August 2024, when the SEC obtained emergency relief from the Court to stop the alleged fraud, over 2,000 investors had invested more than $300 million in the alleged scheme. According to the SEC, each Defendant played a crucial role in perpetrating the alleged Ponzi scheme. Each Defendant served as a senior executive in Drive Planning’s Indiana branch office, along with Burkhalter. In furtherance of the alleged Ponzi scheme, among other things, Defendants solicited investors in REAL; managed teams of sales agents who sold the investment; appeared in videos and social media posts promoting Drive Planning’s business; and conducted training sessions for agents to boost investments in REAL. In connection with their sales of REAL, Defendants allegedly told investors, among other things, that the promised 10% rate of return was guaranteed; investors held an interest in underlying collateral as part of their investment; Drive Planning partnered with real estate developers in profit-sharing agreements; and profits from those partnerships funded the promised return to REAL investors. According to the SEC, these representations were false. The SEC claimed that Defendants allegedly knew they were false or were, at least, severely reckless in making the statements. The SEC alleged that, in truth, Drive Planning did not generate significant profits from real estate deals. Instead, said the SEC, the company used most of the investor funds to pay fictitious returns to other investors, support Burkhalter’s extravagant lifestyle, and pay millions of dollars in compensation to Defendants and the sales agents they oversaw. According to the SEC’s complaint , each Defendant played an integral role in fueling the alleged REAL fraud. The SEC alleged that Drive Planning’s records showed that (a) Defendant B sold more than $35 million in REAL investments and his sales team sold more than $100 million, and (b) Defendant L sold more than $13 million in REAL investments and his sales team sold more than $30 million. The SEC said that Defendants received millions of dollars in compensation for selling REAL investments. Between 2020 and 2024, Drive Planning paid Defendant B approximately $26 million in total compensation. Between 2022 and 2024, Drive Planning paid Defendant L $7.5 million in total compensation. By engaging in the conduct described in the complaint , the SEC alleged that Defendants violated Sections 5(a), 5(c), 17(a)(l), 17(a)(2), and 17(a)(3) of the Securities Act of 1933 (“Securities Act”) <15 u.s.c. §§ 77e(a), 77e(c), 77q(a)(l), 77q(a)(2), and 77q(a)(3)> ; Sections l0(b) and 15(a) of the Securities Exchange Act of 1934 (“Exchange Act”) <15 u.s.c. §§ 78j(b), 78o(a)> ; and Rules 10b-5(a), (b), and (c) thereunder <17 c.f.r. §§ 240.10b-5(a), (b), and (c)> . The SEC also alleged that Defendant L aided and abetted Burkhalter’s and Drive Planning’s alleged violations of Section 17(a) of the Securities Act <15 u.s.c. § 77q(a)> , Section l0(b) of the Exchange Act <15 u.s.c. § 78j(b)> , and Rules 10b-5(a), (b), and (c) thereunder <17 c.f.r. § 240.10b-5(a), (b), and (c)> . The SEC seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties against Defendants. Without admitting or denying the allegations in the complaint, Defendant B consented to the entry of a final judgment, subject to court approval, in which he agreed to be permanently enjoined from violating the charged provisions of the federal securities law and from participating in the issuance, purchase, offer, or sale of any security, except for purchases or sales in his personal accounts, and agreed that that court will order him to pay disgorgement with prejudgment interest and a civil penalty in an amount to be determined by the court upon motion by the SEC. A copy of the litigation release announcing the filing of the complaint can be found here . _______________________________ 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. To find such articles, please visit the Blog tile on our website and search for “Ponzi schemes” or any SEC enforcement action issue that may be of interest to you.

By:   Jeffrey M. Haber On September 25, 2025, the Securities and Exchange Commission (“SEC”) announced ( here ) that it charged the co-founders of Retail Ecommerce Ventures LLC (“REV”), and REV’s Chief Operating Officer (collectively, “Defendants”), with conducting a series of fraudulent securities offerings, misusing investor funds, and making Ponzi-like payments to investors. According to the SEC’s  complaint , REV’s primary business was purchasing distressed retail companies with name brand recognition and converting them into e-commerce only businesses, and serving as the holding company and manager of the REV retailer brands.  From approximately April 2020 through November 2022, Defendants raised approximately $112 million from hundreds of investors through fraudulent offerings involving eight REV portfolio companies: Brahms LLC; Dress Barn Online, Inc.; Franklin Mint Online, LLC; Linens ‘N Things Online, Inc.; Modell’s Sporting Goods Online, Inc.; Pier 1 Imports Online, Inc.; RadioShack Online, LLC; and Stein Mart Online, Inc. (collectively, the “REV Retailer Brands”).   In the complaint, the SEC alleged that Defendants sold securities in the form of unsecured notes promising up to 25% annualized returns, as well as equity (membership units) with a monthly preferential dividend as high as 2.083%. The purported purpose of the offerings was to raise capital to acquire the predecessor of and raise additional operating capital for each particular REV Retailer Brand. According to the SEC, the co-founder defendants made material misstatements in connection with these offerings about the success and profitability of REV’s business model and the REV Retailer Brands, as well as the safety of investors’ investments. The SEC further alleged that Defendants transferred at least $5.9 million in investor proceeds directly between portfolio companies, contrary to the written and oral representations made to investors about the use of proceeds; that at least $5.9 million of the returns distributed to investors were, in reality, Ponzi-like payments funded by other investors; and that defendants misappropriated approximately $16.1 million in investor funds for the co-founder defendants’ personal use. The SEC filed its complaint in the U.S. District Court for the Southern District of Florida. The SEC charged the co-founder defendants with violations of Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. The SEC also charged a company officer with violations of Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c) thereunder. Finally, the SEC charged the same defendant with aiding and abetting the co-founder defendants’ violations of Section 17(a)(2) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder.  The SEC seeks permanent injunctions, civil penalties, and officer-and-director bars as to each defendant. In addition, the SEC seeks disgorgement and prejudgment interest as to the co-founder defendants.   ________________________________ 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. Securities and Exchange Commission v. Lopez, et al. , Case 1:25-cv-24356 (S.D. Fla.).

By:  Jeffrey M. Haber On November 18, 2025, the Securities and Exchange Commission (“SEC” or “Commission”) announced that, on October 16, 2025, it charged Joshua Wander (“Defendant A”), Steven Pasko (“Defendant B”), and two companies that they founded, co-managed, and controlled—777 Partners LLC and 600 Partners LLC—with defrauding investors while raising approximately $237 million. The Commission also charged Damien Alfalla (“Defendant C”), the companies’ former Chief Financial Officer, for his role in the alleged fraud. According to the SEC’s complaint , between January 2021 and May 2024, Defendants misled investors about the companies’ financial condition, and fraudulently induced investments in a $237 million preferred equity offering, by falsely representing that the companies were earning, and would continue to earn, substantial positive net income sufficient to pay investors a 10% annual dividend. In fact, as alleged by the SEC, the companies were in a severe and worsening liquidity crisis and had no realistic prospects of earning net income sufficient to pay the dividend. According to the SEC, Defendants A and C misused a credit facility, resulting in a $300 million overdraw that damaged the companies’ financial prospects. As alleged, these Defendants made false and misleading representations to investors about the companies’ prospects and ability to pay dividends, while concealing the $300 million overdraw and its causes. The SEC further alleged that Defendant B signed all investor subscription agreements, which incorporated false and misleading representations about the companies’ financial prospects, even though he allegedly knew or should have known of the credit facility overdraw and its negative effects on the companies’ financial prospects. As alleged, Defendant A also misled investors when he represented that the proceeds of the offering would be used for general corporate purposes, when, in fact, said the SEC, Defendant A caused the companies to divert approximately $33 million of investor funds to himself and Defendant B personally. By March 2023, the alleged scheme began to unravel. One of the firm’s lenders confronted Defendant A about allegations of double-pledged assets. Defendant A allegedly claimed (falsely) that there had been an error caused by 777 Partners’ antiquated computer system. A few days later, Defendant A again allegedly assured the lender (falsely), among other things, that the double-pledging had been inadvertent. The SEC alleged these representations and assurances were false. In October 2024, the High Court in London issued a winding-up order, formally declaring 777 Partners bankrupt. According to the SEC, 777 Partners still owes its lenders hundreds of millions of dollars. The SEC filed its complaint in the U.S. District Court for the Southern District of New York. In the complaint, the SEC charged Defendant A, 777 Partners, and 600 Partners with violating Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933 (the “Securities Act”). The SEC charged Defendant C with violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 17(a)(1) and 17(a)(3) of the Securities Act. The SEC charged Defendant B with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act. The SEC seeks injunctive relief, disgorgement plus prejudgment interest, and civil penalties. In parallel actions, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Defendants A and C on the same day as the SEC action. The U.S. Attorney charged Defendant A with conspiracy to commit wire fraud, wire fraud, conspiracy to commit securities fraud, and securities fraud. Defendant C previously pled guilty to an information before U.S. District Judge Arun Subramanian on October 14, 2025, in connection with his participation in the alleged fraudulent scheme at 777 Partners. Defendant C is cooperating with the government. “As alleged, used his investment firm, 777 Partners, to cheat private lenders and investors out of hundreds of millions of dollars by pledging assets that his firm did not own, falsifying bank statements, and making other material misrepresentations about 777’s financial condition,” said U.S. Attorney Jay Clayton. “When financial firms lie to their lenders, they do not merely breach contracts. They undermine the integrity and stability of our credit markets and our financial system more broadly.” FBI Assistant Director in Charge Christopher G. Raia also commented on the charges: “ and , the cofounder and CFO respectively of the 777 Partners investment firm, allegedly stole more than $500 million from his company’s lenders and investors through fabricated lies of success and doctored financial records. The defendants’ alleged deceit targeted the wallets of his trusting stakeholders to obfuscate the failing fiscal ventures of the business.” Takeaway As discussed, the alleged scheme to defraud involved raising $237 million through a preferred equity offering while concealing a severe liquidity crisis and misusing a $300 million credit facility. Such a large-scale alleged fraud demonstrates how complex financial structures can be exploited to mislead investors and lenders. The complexity of the alleged fraud also underscores the multiple layers of purported deception. Defendants allegedly falsified financial statements, misrepresented dividend sustainability, and diverted $33 million for personal use. Additionally, the alleged scheme highlights the problem of internal financial governance failures that are not readily discernible to investors. The involvement of, and apparent manual override by, top executives—including the co-founder and CFO—highlights systemic governance breakdowns that can occur in an alleged complex scheme to defraud. ____________________________________ 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. It must be remembered that an indictment merely alleges that crimes have been committed. Like all defendants, defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

By:  Jeffrey M. Haber Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b‑5 promulgated thereunder prohibit trading securities on the basis of material nonpublic information through any deceptive device, scheme, or act. Insider trading liability arises under either the classical theory, where corporate insiders owe duties to shareholders, or the misappropriation theory, where those entrusted with confidential information owe duties to the information’s source. In today’s article, we examine an SEC enforcement action against a biostatistician and his company for insider trading involving C4 Therapeutics, Inc., a clinical-stage biopharmaceutical company, under the misappropriation theory of liability. A Primer on Insider Trading Section 10(b) of the Exchange Act makes it “unlawful for any person ... o use or employ, in connection with the purchase or sale of any security<,> ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe.” Rule 10b-5, which implements Section 10(b), prohibits the use of “any device, scheme, or artifice to defraud” or “any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person ... in connection with the purchase or sale of any security.” “Insider trading—unlawful trading in securities based on material non-public information—is well established as a violation of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.” “There are two theories of insider trading<.> ”  First, “ nder the classical theory of insider trading, a corporate insider is prohibited from trading shares of that corporation based on material non-public information in violation of the duty of trust and confidence insiders owe to shareholders.”  “A second theory, grounded in misappropriation, targets persons who are not corporate insiders but to whom material non-public information has been entrusted in confidence and who breach a fiduciary duty to the source of the information to gain personal profit in the securities market.”  “The core difference between the two theories is the source of the duty. Under the classical theory, the duty is owed to the corporation; under the misappropriation theory, the duty is owed to the source of the information.” “Under both theories, the fiduciary duty of trust and confidence requires the person who knows material nonpublic information either to abstain from trading on the information or to make a disclosure before trading.”   With respect to the classical theory, “ n insider can avoid liability by disclosing the relevant information publicly so that she is not at a trading advantage over the corporation's shareholders.” As for the misappropriation theory, “  misappropriator can avoid liability by disclosing” to her source “the fact that she will be trading on confidential information ...; by doing so, the misappropriator is no longer deceiving her source, and thus she is not violating § 10(b).” “Both theories extend liability to ‘tippees’: a person who did not themselves owe a duty to anyone but traded based on an insider tip from someone else.”   “A tippee is liable only if (1) the tipper themselves breached a duty by tipping, and (2) the tippee knew or should have known of that breach.” The test for whether the tipper breached a duty by tipping “is whether the personally will benefit, directly or indirectly, from his disclosure” of confidential information to the tippee.   The United States Supreme Court has “defined personal benefit broadly.” In Dirks , the Court identified numerous examples of personal benefits that prove the tipper’s breach. These include: a “pecuniary gain,” a “reputational benefit that will translate into future earning,” a “relationship between the insider and the recipient that suggests a  quid pro quo  from the latter,” the tipper’s “intention to benefit the particular recipient,” and a “gift of confidential information to a trading relative or friend” where “ he tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient.”   As the foregoing examples show, the tipper’s personal benefit need not be pecuniary in nature. While the insider who personally benefits from disclosing confidential information breaches their duty, “the insider who discloses for a legitimate corporate purpose does not.” Under both theories of liability, scienter is required.   Scienter is “a mental state embracing intent to deceive, manipulate, or defraud.”  “In every insider trading case, at the moment of tipping or trading, just as in securities fraud cases across the board, the unlawful actor must know or be reckless in not knowing that conduct deceptive.” Pursuant to the misappropriation theory, to prove liability, a plaintiff must “establish (1) that the defendant possessed material, nonpublic information; (2) which he had a duty to keep confidential; and (3) that the defendant breached his duty by acting on or revealing the information in question.” Insider trading claims are subject to Rule 9(b) of the Federal Rules of Civil Procedure, which requires that circumstances constituting fraud be stated “with particularity.”  “But because insider tips are typically passed on in secret, Rule 9(b) is somewhat relaxed, allowing plaintiff to plead certain facts on information and belief.”   Specifically, plaintiffs may plead facts that imply the content and circumstances of an insider tip if those facts are peculiarly within the knowledge of defendant or the tipper.  Nevertheless, “ hile the rule is relaxed as to matters peculiarly within the adverse parties’ knowledge, [] allegations must then be accompanied by a statement of the facts upon which the belief is founded.” With the foregoing legal principles in mind, we examine Securities and Exchange Commission v. Hong (John) Wang and Precision Clinical Consulting, LLC , No. 26-civ-10140 (D. Mass. filed Jan. 14, 2026). Securities and Exchange Commission v. Hong (John) Wang and Precision Clinical Consulting, LLC The SEC announced the enforcement action on January 14, 2026. In the press release, the SEC stated that it charged New Jersey resident Hong (John) Wang (“Defendant”) and his company, Precision Clinical Consulting LLC (“Precision” and, collectively with Wang, the “Defendants”), with insider trading in the stock of C4 Therapeutics, Inc. (“C4”), a clinical stage biopharmaceutical company headquartered in Watertown, Massachusetts. According to the SEC’s complaint , filed in the U.S. District Court of Massachusetts, Defendant allegedly became aware of positive clinical trial results for C4’s flagship multiple myeloma and non-Hodgkin lymphoma drug while he was performing biostatistical consulting work for the company and had access to the drug’s clinical trial data. The complaint alleged that Defendant’s consulting contract required him, among other things, to conduct biostatistical analysis on the clinical trial data related to this drug. The SEC alleged that Defendant purchased C4 shares between November 20, 2023 and December 12, 2023, while aware of material nonpublic information relating to the clinical trial. The SEC further alleged that after C4 announced positive results concerning one of its cancer-treating drugs on December 12, 2023, Defendant made $489,739 in realized and unrealized profits from his position. The SEC maintained that Defendant purchased the C4 shares through four separate brokerage accounts, one of which was held in Precision’s name. The SEC charged Defendants with violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC seeks disgorgement plus prejudgment interest thereon against Defendants, and permanent injunctive relief and civil penalties against Defendant. In a parallel action, on January 14, 2026, the U.S. Attorney’s Office for the District of Massachusetts announced criminal charges against Defendant. In that regard, Defendant was charged in an indictment with three counts of securities fraud. Takeaway The misappropriation theory of insider trading targets individuals who are not corporate insiders but who obtain confidential, material information through a relationship of trust. Under this theory, liability arises when a person entrusted with such information—like Defendant, who allegedly accessed confidential clinical‑trial data through his biostatistics consulting work—breaches a duty owed to the source by secretly trading on that information for personal gain. As discussed, defendant’s consulting role required him to maintain the confidentiality of C4’s drug‑trial results, yet he allegedly exploited this access by purchasing shares before the positive data became public. Defendant’s actions, if proven, demonstrate the core basis of the misappropriation theory: using material, non-public information while concealing the intent to trade from the information’s source. The SEC’s enforcement action, along with the parallel criminal charges, highlights how alleged violations of the misappropriation theory can lead to material consequences, reinforcing the duty of professionals and consultants to safeguard confidential information and abstain from trading on it. ___________________________________ 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. 15 U.S.C. § 78j. 17 C.F.R. § 240.10b-5. S.E.C. v. Obus , 693 F.3d 276, 284 (2d Cir. 2012);  In re Nat’l Instruments Corp. Sec. Litig.,  No. 23 Civ. 10488 (DLC), 2024 WL 4108011, at *5 (S.D.N.Y. Sept. 6, 2024) (quoting  United States v. Chow , 993 F.3d 125, 136 (2d Cir. 2021));  United States v. Cusimano , 123 F.3d 83, 87 (2d Cir. 1997) (citing  United States v. O’Hagan , 521 U.S. 642, 650-52 (1997)). United States v. Rajaratnam , 719 F.3d 139, 158 (2d Cir. 2013);  see also  S.E.C. v. Watson , 659 F. Supp. 3d 409, 415 (S.D.N.Y. 2023). Obus , 693 F.3d at 284. Id. Watson , 659 F. Supp. 3d at 415. S.E.C. v. One or More Unknown Traders in Sec. of Onyx Pharms., Inc. , No. 13 Civ. 4645 (JPO), 2014 WL 5026153, at *5 (S.D.N.Y. Sept. 29, 2014) (citing  Dirks v. SEC , 463 U.S. 646, 654 (1983) (classical theory), and  O’Hagan , 521 U.S. at 655 (misappropriation theory));  see also  Chow , 993 F.3d at 137. Onyx,  2014 WL 5026153, at *5 (citing  Dirks,  463 U.S. at 654). Id. Watson , 659 F. Supp. 3d at 415 (citing Dirks,  463 U.S. at 660). Id. (citing id. at 660 & n.19). Id. (citing id. at 662);  see also  United States v. Martoma , 894 F.3d 64, 73-74 (2d Cir. 2017). Martoma , 894 F.3d at 73. Dirks , 463 U.S. at 663-64. Watson , 659 F. Supp. 3d at 415 (citing Salman v. United States , 580 U.S. 39 (2016)). Martoma , 894 F.3d at 416;  United States v. Pinto-Thomaz , 352 F. Supp. 3d 287, 298 (S.D.N.Y. 2018) (a personal benefit is “grounded in using company information for personal advantage, as opposed to a corporate or otherwise permissible purpose (such as whistleblowing)”). See  Obus , 693 F.3d at 286;  see also United States v. Newman,  No. 12 Cr. 121 (RJS), 2013 WL 1943342, at *2 (S.D.N.Y. May 7, 2013). Id. at 286 (quoting  Ernst & Ernst v. Hochfelder , 425 U.S. 185, 193 & n.12 (1976)). Id. Veleron Holding, B.V. v. Morgan Stanley , 117 F. Supp. 3d 404, 430 (S.D.N.Y. 2015) (quoting  S.E.C. v. Lyon , 605 F. Supp. 2d 531, 541 (S.D.N.Y. 2009). S.E.C. v. One or More Unknown Traders in Sec. of Onyx Pharm., Inc. , 296 F.R.D. 241, 248 (S.D.N.Y. 2013). Sec. & Exch. Comm’n v. Yin,  No. 17-CV-972 (JPO), 2018 WL 1582649, at *2 (S.D.N.Y. Mar. 27, 2018). Onyx,  26 F.R.D. at 248. Yin,  2018 WL 1582649, at *2 (quoting  Segal v. Gordon , 467 F.2d 602, 608 (2d Cir. 1972)). It must be remembered that the details contained in the charging document are allegations only. Defendant is presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law.

By:  Jeffrey M. Haber As we have noted in prior articles, New York has a “long and strong public policy favoring arbitration”. Indeed, New York “favors and encourages arbitration as a means of conserving the time and resources of the courts and the contracting parties.” “Therefore, New York courts interfere as little as possible with the freedom of consenting parties to submit disputes to arbitration.”   “Nonetheless, ‘ ike contract rights generally, a right to arbitration may be modified, waived or abandoned.’” “Accordingly, a litigant may not compel arbitration when its use of the courts is ‘clearly inconsistent with later claim that the parties were obligated to settle their differences by arbitration.’” “The crucial question ... is what degree of participation by the defendant in the action will create a waiver of a right to stay the action.” “In the absence of unreasonable delay, so long as the defendant’s actions are consistent with an assertion of the right to arbitrate, there is no waiver.” “However, where the defendant’s participation in the lawsuit manifests an affirmative acceptance of the judicial forum, with whatever advantages it may offer in the particular case, his actions are then inconsistent with a later claim that only the arbitral forum is satisfactory.” Further, “ ot every foray into the courthouse effects a waiver of the right to arbitrate.... here urgent need to preserve the status quo requires some immediate action which cannot await the appointment of arbitrators, waiver will not occur.” In Tomaselli v. Malagese , 2025 N.Y. Slip Op. 05399 (4th Dept. Oct. 3, 2025 ( here ), the Appellate Division, Fourth Department, addressed the foregoing principles. Tomaselli stemmed from an arbitration award for nonpayment of services, confirmed after plaintiff commenced an action in Supreme Court on those same issues. Plaintiff commenced the action seeking damages for breach of contract based upon defendants’ alleged failure to pay for architectural services rendered by plaintiff. Although plaintiff subsequently moved to compel arbitration pursuant to the purported contract following nearly two years of litigation, plaintiff withdrew that motion after defendants voluntarily agreed to resolve the dispute by arbitration. Following an arbitration proceeding before an arbitrator selected by the parties, the arbitrator rendered an award in favor of plaintiff. Supreme Court granted plaintiff’s motion to confirm the arbitration award and denied defendants’ cross-motion to vacate the arbitration award. Defendant appealed. The Fourth Department affirmed. Defendants contended that they were entitled to vacatur of the arbitration award on the ground that the arbitrator lacked authority to conduct the arbitration because plaintiff had previously waived the right to arbitrate by commencing the action. The Court held that “defendants waived their challenge to the arbitration award.” The Court explained that “ laintiff’s commencement of the action and participation in the litigation for nearly two years ‘in effect g ve[ defendants] a choice of forums’ by which they could either ‘insist on arbitration or ignore arbitration and litigate.’”   “Defendants,” said the Court, “cannot have things both ways by agreeing to and fully participating in arbitration instead of litigation while thereafter resisting the arbitration award on the ground that very commencement of court action waived .” “Indeed,” explained the Court, “where, as here, a party participates in an arbitration proceeding, without availing of all reasonable judicial remedies, . . . not . . . allowed thereafter to upset the remedy emanating from that alternative dispute resolution forum.” The Court also rejected defendants’ “forum-hedging” strategy, stating: “Defendants made a strategic and knowing decision to proceed with case in the arbitral forum and cannot now seek to cancel the outcome of the very arbitration in which voluntarily and fully participated because allowing such unilateral advantage and forum-hedging would undermine arbitration principles and policies.” Takeaway New York law strongly favors arbitration as a preferred method of dispute resolution. However, this form of dispute resolution is not without limits—it can be waived if a party engages in litigation in a manner inconsistent with arbitration. In Tomaselli , plaintiff initiated a lawsuit and participated in litigation for nearly two years before moving to compel arbitration. Although defendants agreed to arbitrate, they nevertheless attempted to vacate the arbitration award, arguing that plaintiff had waived the right to arbitrate by initially suing. The Court rejected this argument, emphasizing that defendants had voluntarily chosen to arbitrate and fully participated in the process. Their attempt to challenge the award post-arbitration was deemed, among other things, “forum-hedging,” which undermines the integrity of arbitration. The Court’s ruling reinforces the principle that parties cannot exploit both litigation and arbitration forums to gain a strategic advantage. Once a party elects to arbitrate and participates fully, they are bound by the outcome and cannot later claim the process was invalid due to prior litigation conduct. Stated differently, as the Court noted, the party cannot have it both ways. ____________________________ 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. Matter of Smith Barney Shearson v. Sacharow , 91 N.Y.2d 39, 49 (1997); see also Stark v. Molod Spitz DeSantis & Stark ,  P.C. , 9 N.Y.3d 59, 66 (2007). Stark , 9 N.Y.3d at 66. Smith Barney , 91 N.Y.2d at 49-50 (citations and internal quotation marks omitted); Stark , 9 N.Y.3d at 66. Stark , 9 N.Y.3d at 66 (quoting Sherrill v. Grayco Bldrs. , 64 N.Y.2d 261, 272 (1985)). Id. (quoting Flores v Lower E. Side Serv. Ctr., Inc. , 4 N.Y.3d 363, 372 (2005) (citations and internal quotation marks omitted) (assuming arbitration clause in contract applied to dispute, party seeking its benefit did not assert arbitration as defense in answer or move to compel, electing instead to participate in litigation for 16 months through discovery and filing of note of issue)). Stark , 9 N.Y.3d at 66 (quoting De Sapio v. Kohlmeyer , 35 N.Y.2d 402, 405 (1974) (internal quotation marks omitted)); see also Singer v. Jefferies & Co. , 78 N.Y.2d 76, 85 (1991) (under the Federal Arbitration Act, moving to dismiss before moving to compel arbitration “should not be considered a waiver unless the opposing party demonstrates prejudice”). Id. (quoting id. ). Id. at 66-67 (quoting id. ). Id. at 67 (quoting Sherrill , 64 N.Y.2d at 273, citing Preiss/Breismeister Architects v Westin Hotel Co.-Plaza Hotel Div. , 56 N.Y.2d 787, 789 (1982)). The Court noted that defendants raised this argument for the first time on appeal and failed to preserve the argument because they did not raise it in opposition to the motion to confirm or in support of the cross-motion to vacate. Slip Op. at *1. (citations omitted). Nevertheless, as discussed, the Court considered the argument and rejected it. Id. at *2. Id. (citation and internal quotation marks omitted). Id. (citations and internal quotation marks omitted). Id. (citation and internal quotation marks omitted). Id. (citations and internal quotation marks omitted).

By:  Jeffrey M. Haber In Allen v. Fidelity Brokerage Servs. LLC , 2025 N.Y. Slip Op. 34169(U) (Sup. Ct., N.Y. County Oct. 30, 2025), plaintiff, the representative of her son’s estate, sought to vacate a FINRA arbitration award after claims alleging negligent oversight of speculative options trading were denied. The arbitration panel imposed $25,000 in sanctions for violating FINRA Rule 12209 by filing a parallel court action. Plaintiff argued the panel exceeded its authority and manifestly disregarded FINRA Rule 2360 by ignoring unrebutted expert testimony. The motion court rejected these arguments, emphasizing the narrow grounds for vacating arbitration awards and confirming the panel’s authority to sanction rule violations. The award was upheld, reinforcing arbitration finality and compliance with FINRA rules. Allen arose after William Tyler Allen passed away in September 2021. His mother, acting as fiduciary of his estate, initiated a FINRA arbitration in August 2022, alleging that the respondent brokerage firms failed to properly assess the suitability of speculative options trading in the decedent’s account in violation of FINRA Rule 2360 , which plaintiff claimed contributed to the decedent taking his own life. Plaintiff later filed the action in September 2023, arguing that the FINRA arbitration could not adequately address wrongful death claims. In April 2025, the arbitration panel conducted a hearing at which the parties introduced documentary and testimonial evidence. Relevant to the motion before the court, plaintiff introduced the testimony of her proposed expert regarding the application of Rule 2360. While defendants introduced their own experts, as well as fact and witness testimony going to Rule 2360, they did not introduce expert testimony relating to Rule 2360. Following the close of proceedings, the arbitration panel issued an award, denying plaintiff’s claims and awarding sanctions against plaintiff in the form of $25,000 of attorneys’ fees for violating FINRA rules (the “Award”). The basis for this portion of the Award was that during the course of the arbitration, defendants had sought an order from the arbitration panel directing plaintiff to withdraw the court action as a violation of FINRA Rule 12209 (which bars the bringing of court proceedings that would resolve any matters raised in arbitration), with sanctions to be awarded if plaintiff failed to dismiss the action. The arbitration panel granted the motion for sanctions in a non-final order. The Award confirmed the sanctions and awarded defendants a combined $25,000 for their legal fees in the proceeding. Plaintiff moved to vacate the Award, and defendants cross-moved to confirm the Award. Pursuant to CPLR 7511(b)(1)(iii) , an arbitration award may be vacated if “an arbitrator, or agency or person making the award exceeded his power.” An arbitration award may also be vacated under federal law pursuant to the “severely limited doctrine” of manifest disregard, meaning that the award “exhibits a manifest disregard of law.” But the judicial review of arbitration awards is “extremely limited.” Plaintiff raised two main issues with the Award as a basis for vacatur. First, she argued that the arbitration panel exceeded its authority by issuing sanctions for bringing the action and by directing her to drop the court action. Second, Plaintiff argued that the arbitration panel manifestly disregarded the law by failing to accept unrebutted expert testimony regarding Rule 2360 provided by plaintiff in the arbitration. Defendants opposed the motion to vacate and separately (although largely for similar reasons) cross-moved to confirm the Award. The motion court denied plaintiff’s motion and granted defendants’ cross-motions to confirm the Award. Addressing the first point raised by plaintiff – whether the arbitration panel exceeded its power in imposing sanctions or ordering plaintiff to drop the court proceeding – the motion court held that the panel did not do so. Plaintiff argued that because federal courts lack the discretionary authority under the Federal Arbitration Act (“FAA”) to dismiss a case subject to arbitration, the arbitration panel could not tell her to drop a case or be subject to sanctions pursuant to FINRA Rule 12209. Plaintiff also argued that by issuing such an order, the arbitration panel became biased against her when she failed to comply. The motion court rejected the arguments. The motion court found that “it apparent that Plaintiff in fact violated FINRA Rule 12209, and that the arbitration panel was therefore empowered to issue sanctions in response to such a violation.” Any “‘limitation of an arbitrator’s power must be contained, explicitly or by reference, in the arbitration clause itself’ in order for a court to find that an arbitration panel exceeded their power,” said the motion court. Accordingly, concluded the motion court, “ he Arbitration Panel was clearly allowed to issue sanctions for the rule violation here,” especially since “Plaintiff not establish[ ] that directing her to cure the violation or to face sanctions as a result violated any explicit or referenced power held by the arbitration panel.” Turning to the second argument – whether the arbitration panel manifestly disregarded FINRA Rule 2360 – the motion court held that it did not do so. Plaintiff argued that the arbitration panel manifestly disregarded FINRA Rule 2360 because defendants did not provide expert testimony to match that provided by plaintiff. To vacate an award on the grounds of manifest disregard of the law, “a court must find both (1) that the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.” The motion court rejected plaintiff’s argument that, because defendants did not provide expert testimony on Rule 2360, the conclusion of their witness regarding the application of Rule 2360 to the facts of the matter, would have required the arbitration panel to adopt those conclusions. “Such a reasoning,” said the motion court, “is not supported by the case law, nor is it sufficient to meet the heavy burden required to vacate an arbitration award.” “Because Defendants provided testimony and facts to support their position that they had complied with the FINRA rule in question,” concluded the motion court, “it cannot be said that the arbitration panel must have ignored FINRA Rule 2360 altogether.” Finally, the motion court addressed defendants’ cross-motion to confirm the Award. A court is required to confirm an arbitration award unless it is vacated or modified pursuant to one of the grounds listed in CPLR 7511(b). Because plaintiff did not meet “her heavy burden in establishing that the Award should be vacated,” the motion court held that it must confirm the Award. Takeaway Allen underscores several important principles concerning arbitration and the awards that are issued in them. First, judicial review of arbitration awards is extremely limited under both New York law and the FAA. Courts will only vacate an award if the petitioner can satisfy any of the enumerated bases under Section 10 of the FAA and CPLR 7511(b) or acted with manifest disregard of the law, a doctrine that, as the Allen court reiterated, is applied narrowly. Under that doctrine, even errors or misinterpretations of law are insufficient grounds for vacatur. Second, Allen reinforces the authority of arbitrators to enforce the alternative dispute resolution organization’s rules. As discussed, the Allen court confirmed that arbitrators have the authority to impose sanctions—including attorneys’ fees—when such rules are violated, provided that the arbitration agreement does not expressly limit this power. In Allen , the rule at issue was Rule 12209, which prohibits parties from pursuing parallel court actions on issues already before an arbitration panel. Third, Allen highlights the informality of arbitral proceedings. As shown in the background discussion of the case, arbitrators exercise broad discretion in accepting and weighing evidence. Thus, as discussed, the absence of opposing expert evidence did not compel the arbitration panel to adopt plaintiff’s interpretation of Rule 2360. Fourth, the decision illustrates that courts will confirm arbitration awards unless statutory grounds for vacatur are met. This promotes finality and efficiency in arbitration, thereby showing litigants that vacating an adverse award is an uphill battle. _______________________________ 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. In Rule 2360 , FINRA established a regulatory framework for the conduct of member firms involved in options trading. The rule governs all aspects of options activity, including account approvals, supervision, position limits, reporting, disclosures, and settlement.   Defendants challenged the witness’s admission as an expert, and the arbitration panel reserved decision on the matter and permitted the witness to testify. On many occasions, this Blog has examined the grounds upon which an arbitration award may be vacated under the FAA, CPLR 7511(b), and the manifest disregard of the law doctrine. To find such articles, please see the Blog tile on our website and search for “FAA”, “CPLR 7511”, “vacatur”, and “manifest disregard of the law” or any other issue that may be of interest to you. Wien & Malkin LLP v. Helmsley-Spear, Inc. , 6 N.Y.3d 471, 480 (2006). Id. at 479. We have examined the vacatur of arbitral awards under CPLR 7511(b)(1)(iii) on numerous occasions. E.g. , Scope of Court Proceedings Limited By Parties’ Agreement , Arbitration Award Confirmed in the Absence of Proof That Arbitrator Exceeded His Authority , Court Finds Performance of an Accounting Within the Scope of the Arbitrator’s Authority , First Department Finds Arbitrator Exceeded Authority By Awarding Relief Not Demanded , and Fourth Department Vacates Portion of Arbitral Award Because Arbitrator Exceeded His Authority . We have examined the vacatur of arbitral awards under the manifest disregard of the law doctrine on numerous occasions. E.g. , Manifest Disregard of The Law and Class Arbitrations , Manifest Disregard of the Law and the Arbitrability of Class Claims , Fourth Department Rejects Violation of Public Policy and Manifest Disregard of the Law as Bases To Vacate Arbitral Award , Saying One Thing When You Mean Another , and Irrationality, Manifest Disregard of The Law and The Contractual Obligation to Arbitrate Disputes . See Smith v. Spizzirri , 601 U.S. 472, 477 (2024). Slip Op. at *3. Id. , quoting Brown & Williamson Tobacco Corp. v. Chesley , 7 A.D.3d 368, 372 (1st Dept. 2004). Id. Id. at *3-*4. Wien , at 481. Slip Op. at *4. Id. , citing Transparent Value, LLC v. Johnson , 93 A.D.3d 599, 601 (1st Dept. 2012) (holding that even an error or misunderstanding of the relevant law is not sufficient to support vacatur). Matter of Bernstein Family Ltd. P’ship v. Sovereign Partners, L.P. , 66 A.D.3d 1, 3 (1st Dept. 2009). Slip Op. at *4-*5.

By:  Jeffrey M. Haber In Badme v. AECOM , 2025 N.Y. Slip Op. 06640, (1st Dept. Dec. 02, 2025), plaintiff sued for age discrimination after termination, arguing the arbitration clause in his employment contract expired when the contract ended. The motion court held that the arbitration agreement remained enforceable, citing the contract’s broad arbitration clause and survival clause. The Appellate Division, First Department, affirmed, emphasizing that the contract’s broad arbitration provision required the parties to arbitrate the dispute, though it held that it was up to the arbitrator —not the motion court—to resolve whether the expiration of the employment term within the contract affected the enforceability of the arbitration provision. Plaintiff was employed by defendant, a publicly traded, multinational infrastructure consulting firm that conducts business nationwide. Plaintiff alleged that he was demoted and subsequently fired by defendant because of his age. Plaintiff brought suit against defendant for age discrimination and retaliation pursuant to the New York State Human Rights Law, New York State Labor Law, and New York City Human Rights Law. The employment agreement contained an arbitration provision in which the parties agreed that “any dispute arising out of or relating to Agreement or the formation, breach, termination or validity thereof, be settled by binding arbitration by a panel of three arbitrators in accordance with the employment arbitration rules of the ”. Plaintiff argued that the foregoing arbitration clause expired when the employment agreement was terminated on December 31, 2022. Defendant moved to compel arbitration and to stay the action pending arbitration. The motion court granted the motion. As an initial matter, the motion court held that the parties had entered an enforceable arbitration agreement that contained a clear and unmistakable intent to delegate questions of arbitrability to the AAA. Since the parties agreed that the AAA rules governed, said the motion court, “questions concerning the scope and validity of the arbitration agreement, including issues of arbitrability, reserved for the arbitrators”. The motion court rejected plaintiff’s argument that the arbitration clause expired when the employment agreement was terminated on December 31, 2022, at which time plaintiff became an employee at will. The motion court held that this argument was contrary to rulings by the First Department, in which the Court directed the lower courts to “treat an agreement containing an arbitration clause as if there were two separate agreements – the substantive agreement between the parties, and the agreement to arbitration”. The motion court noted that the “survival” clause in the employment agreement manifested the parties’ intent that the arbitration provision would survive the termination of the agreement. That clause provided: The rights and obligations of the parties under the provisions of this Agreement that relate to post-termination obligations shall survive and remain binding and enforceable, notwithstanding the expiration of the term of this Agreement, the termination of Executive's employment with the Company for any reason or any settlement of the financial rights and obligations arising from Executive's employment hereunder, to the extent necessary to preserve the intended benefits of such provisions.   Therefore, concluded the motion court, “considering the above survival clause, and there being no clear manifestation to the contrary, the arbitration clause survived the termination of the Employment Contract.” “Because the dispute arose from the Employment Contract,” said the motion court, “the arbitration clause triggered” and “Defendant’s motion to compel arbitration is granted.” On appeal, the First Department unanimously affirmed. The Court found the “arbitration provision in the employment agreement between plaintiff and defendant” to be “broad” “requiring ‘all disputes arising out of or relating to the agreement’ to be referred to arbitration under AAA rules.” Under the AAA’s rule, noted the Court, the arbitration tribunal is “authorize … to rule on its own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” “Accordingly,” said the Court, “the issue as to whether the expiration of the employment term affects the enforceability of the arbitration provision is one of arbitrability, which is for the arbitrators to determine.” However, the Court held that “ hile the motion court properly recognized the effect of the broad arbitration provision and granted the motion to compel on that basis, the court should not have addressed the merits” – i.e. , whether the expiration of the employment term affected the enforceability of the arbitration provision. The Court found that the “complaint assert at least some claims that plainly within the scope of the employment agreement and would be subject to arbitration if the arbitrators determine that the arbitration obligation was not entirely extinguished by the expiration of the employment term.” Accordingly, the Court held that the motion “court properly stayed th action in its entirety pending the determination by the arbitrators on the arbitrability issues.” Takeaway Badme underscores that arbitration agreements can survive the termination of a contract, unless expressly negated. One reason is because courts treat an arbitration clause as a separate agreement from the substantive contract. As such, the enforceability of the arbitration agreement does not automatically end when the terms of the contract expire. Badme also reinforces the principle that where parties clearly and unambiguously delegate questions of arbitrability to an arbitral form, such as the American Arbitration Association, arbitrators—not the courts—decide whether the arbitration obligation continues post-termination. As shown in Badme , broad arbitration provisions, coupled with AAA rules granting arbitrators authority over jurisdictional issues, reinforce this principle. Additionally, as in Badme , survival clauses in contracts strongly indicate the parties’ intent for arbitration obligations to continue beyond termination. ________________________________ 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. We examined the issue of who decides arbitrability in numerous articles, including: Who Decides Whether A Binding Agreement to Arbitrate Exists? First Department Tackles This Threshold Question ; Who Decides “Gateway” Issues of Arbitrability? The Second Department Weighs In ; Who Decides Arbitrability? It Depends on The Agreement ; Gatekeepers of Arbitrability: Fraud, Mistake, and the Absence of Consideration ;  The Arbitrator, Not The Court, Decides Questions of Contract Validity ; and Who Decides Arbitrability? It Depends on The Agreement – Revisited. To find additional articles related to the arbitration, visit the “ Blog ” tile on our  website  and enter the search term “arbitration” or any other related search term in the “search” box. See Anima Group, LLC v. Emerald Expositions, LLC, 191 A.D.3d 572 (1st Dept. 2021). Flintlock Const. Services, LLC v. Weiss , 122 A.D.3d 51, 54 (1st Dept. 2014). O’Neill v. Krebs Communications Corp. , 16 A.D.3d 144, 144 (1st Dept. 2005) (citing Matter of Weinrott (Carp.) , 32 N.Y.2d 190 (1973)). Primex Int’l Corp. v. Wal-Mart Stores, Inc. , 89 N.Y.2d 594, 601-02 (1997). Slip Op. at *1. Id. (citing Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s , 66 A.D.3d 495, 496 (1st Dept. 2009),  aff’d , 14 N.Y.3d 850 (2010),  cert denied , 562 US 962 (2010)). Id.  (citing Life Receivables , 66 A.D.3d at 496;  Schindler v. Cellco P’ship , 200 A.D.3d 505, 506 (1st Dept. 2021);  Remco Maintenance, LLC v. CC Mgt. & Consulting, Inc. , 85 A.D.3d 477, 480 (1st Dept. 2011)). Id. (citing L&R Exploration Venture v. Grynberg , 22 A.D.3d 221, 222 (1st Dept. 2005),  lv. denied , 6 N.Y.3d 749 (2005);  Fairfield Towers Condominium. Assn. v. Fishman , 1 A.D.3d 252 (1st Dept. 2003)). Id. Id. (citing County Glass & Metal Installers, Inc. v. Pavarini McGovern, LLC , 65 A.D.3d 940, 940-941 (1st Dept. 2009)).

By: Jeffrey M. Haber In New York, foreign business entities – e.g. , corporations, limited liability companies, and partnerships authorized to do business in another jurisdiction or country – are required to register to do business with the Secretary of State. The failure to receive such authority deprives the foreign entity of the ability to affirmatively access the courts of New York and subjects any action commenced by the foreign entity to dismissal. The purpose of the registration requirement is to regulate foreign companies that are conducting business within New York State so that they are not doing business under more advantageous terms than “those allowed a corporation of this State.” When applying BCL § 1312(a), the subject of today’s article, the relevant inquiry is whether the foreign entity is “doing business” in the State. The test of doing business in New York for the purpose of BCL § 1312(a) “is not the same as that for jurisdictional purposes.” “Both raise constitutional questions, but the latter involves the due process clause while the former involves the interstate commerce clause.” In construing statutes which license foreign corporations to do business within New York State, the courts try to avoid any interference by the State with interstate commerce. Whether a company is “doing business” in New York “depends upon the particular facts of each case with inquiry into the type of business activities being conducted.” Moreover, “whether was doing business in New York” is determined by looking “at the time the action was commenced.” Notably, “not all business activity engaged in by a foreign corporation constitutes doing business in New York.” A foreign corporation is permitted to transact “some kinds of business within the state without procuring a certificate” authorizing it to conduct business in New York. In order for a foreign corporation to be doing business in New York within the context of BCL § 1312, “the intrastate activity of the foreign corporation be permanent, continuous, and regular.” The entity’s activities cannot be “merely casual or occasional.…” New York courts consider a number of factors, both quantitative and qualitative, when considering the entity’s activity in the State. Among the factors the courts consider are: (a) whether the entity maintains a physical presence or has employees located within the State; (b) the frequency and regularity of activities within the State; and (c) the volume and nature of the activities within the State. Merely entering into a single contract, engaging in an isolated piece of business, or engaging in an occasional undertaking will not suffice to invoke application of BCL § 1312. Similarly, “the solicitation of business and facilitation of the sale and delivery of merchandise incidental to business in interstate and/or international commerce is typically not the type of activity that constitutes doing business in the state within the contemplation of section 1312 (a).” However, regularly and continuously entering the State to solicit, complete and manage sales to customers in New York may constitute doing business in the State. The party seeking dismissal under BCL § 1312(a) must show that the business activities within the State were so systematic and regular as to manifest continuity of activity. Absent sufficient evidence to establish that a plaintiff is doing business in the State, “the presumption is that the plaintiff is doing business in its State of incorporation … and not in New York.” Finally, if the foreign business entity is found to have been continuously and regularly conducting business in the State, the courts often refrain from dismissing the action. Instead, the courts conditionally grant the dismissal motion and provide the plaintiff with a reasonable time period to cure its deficiency under BCL § 1320. In Forethought Life Ins. Co. v. 1442, LLC , 2025 N.Y. Slip Op. 07285 (2d Dept. Dec. 24, 2025), the Appellate Division, Second Department considered the foregoing principles in affirming the denial of a motion to dismiss on BCL § 1312(a) grounds. Forethought Life was commenced by Forethought Life Insurance Company on September 12, 2022, an Indiana corporation, to foreclose upon a mortgage Extension and Modification Agreement and associated loan documents executed by defendant Rochel Miriam Kassirer, as the sole member of 1442 LLC, on February 5, 2020. On May 22, 2023, defendants moved to dismiss the complaint pursuant to CPLR 3211(a)(3), arguing that plaintiff lacked legal capacity to sue. Plaintiff opposed the motion on several grounds, most notably that plaintiff was authorized to do business in New York pursuant to Section 590(1)(e) of the Banking Law. Plaintiff argued that it was registered with DFS and that such registration authorized it to service mortgage loans in the State of New York. The motion court denied the motion. The motion court found that plaintiff was “registered with DFS as an ‘exempt mortgage loan servicer.’” That filing, said the motion court, “allow Plaintiff to service loans within the state.” Accordingly, concluded the motion court, plaintiff “appear authorized to do business in New York.” Defendants appealed.   The Appellate Division, Second Department, unanimously affirmed, focusing on the requirement that the intrastate activity of the foreign corporation be permanent, continuous, and regular, rather than whether registration with the DFS sufficed to satisfy the BCL. The Court found that “ he defendants failed to establish, prima facie, that the plaintiff ‘conducted continuous activities in New York essential to its corporate business.’” “Therefore,” held the Court, “the presumption that the plaintiff does business not in New York but in its State of incorporation has not been overcome.” Takeaway Under BCL § 1312(a), a foreign corporation must register to do business in New York if its activities in the state are permanent, continuous, and regular. If it fails to register, it lacks capacity to sue in New York courts. However, the burden is on the defendant to prove that the plaintiff’s business activities in New York are so systematic and regular as to constitute “doing business” under the statute. Occasional or incidental activities, or activities related to interstate commerce, do not meet this threshold. If the defendant cannot show continuous and essential intrastate activity, the presumption remains that the plaintiff conducts business in its state of incorporation, not New York. In Forethought Life , the Court held that defendants failed to overcome this presumption. Registration with the DFS as an exempt mortgage loan servicer, by itself, did not demonstrate continuous business activity in New York. Therefore, plaintiff retained capacity to sue. _________________________________ 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. See , e.g. , BCL § 1312(a). This Blog examined BCL § 1312(a) in numerous articles, including: Foreign Corporation Not Engaged in Continuous and Systemic Business in New York Not Barred Under BCL § 1312(a) From Bringing Action , Failure to Demonstrate that Foreign Company Had Engaged in Systemic and Regular Activity in New York Results in Denial of Dismissal Motion Under BCL § 1312(a) , Fraud and The Alleged Failure to Register Under BCL § 1312(a) , and Dismissal of Complaint With Prejudice Due To Violation of BCL § 1312 Modified To Allow Unregistered Foreign Corporation To Register With The State . The legal discussion that appears in this article is reprinted from the foregoing articles. See United Envtl. Techniques, Inc. v. State Dept. of Health , 88 N.Y.2d 824, 825 (1996). Von Arx, A.G. v. Breitenstein , 52 A.D.2d 1049, 1050 (4th Dept. 1976); see also Central Care Solutions, LLC v. Grand Great Neck, LLC , 219 AD3d 1482, 1485 (2d Dept. 2023); National Lighting Co. v. Bridge Metal Indus., LLC , 601 F. Supp. 2d 556, 566 (S.D.N.Y. 2009) (additional citation omitted). Great White Whale Adver., Inc. v. First Festival Prods. , 81 A.D.2d 704, 706 (3d Dept. 1981). Id. Id. (citations omitted). Id. Remsen Partners, Ltd. v. Southern Mgmt. Corp. , No. 01 Civ. 4427, 2004 WL 2210254, at *3 (S.D.N.Y. 2004) (citation and internal quotation marks omitted) (alteration in original). Netherlands Shipmortgage Corp. v. Madias , 717 F.2d 731, 735-36 (2d Cir. 1983). Globaltex Group, Ltd. v. Trends Sportswear, Ltd. , No. 09-CV-235, 2009 WL 1270002, at *3 (E.D.N.Y. May 6, 2009) (quoting Int’l Fuel & Iron v. Donner Steel , 242 N.Y. 224, 229 (1926)). Manney v. Intergroove Tontrager Vertriebs GMBH , No. 10 Civ. 4493, 2011 WL 6026507, at *8 (E.D.N.Y. Nov. 30, 2011) (quoting Netherlands Shipmortgage , 717 F.2d at 736) (alteration in original)). United Arab Shipping Co. (S.A.G.) v. Al-Hashim , 176 A.D.2d 569, 570 (1st Dept. 1991); see also Maro Leather Co. v Aerolineas Argentinas , 161 Misc. 2d 920, 923 (Sup. Ct., App. Term 1st Dept. 1994); Schwarz Supply Source v. Redi Bag USA, LLC , 64 A.D.3d 696, 696-97 (2d Dept. 2009). Netherlands Shipmortgage , 717 F.2d at 738. Uribe v. Merchants Bank of New York , 266 A.D.2d 21, 21 (1st Dept. 1999). G.P. Exports v. Tribeca Design , 147 A.D.3d 655, 656 (1st Dept. 2017). United Arab Shipping , 176 A.D.2d at 570. Netherlands Shipmortgage , 717 F.2d at 738; Von Arx , 52 A.D.2d at 1049; Airline Exch., Inc. v. Bag , 266 A.D.2d 414, 415 (2d Dept. 1999); 8430985 Canada Inc. v. United Realty Advisors LP , 148 A.D.3d 428 (1st Dept. 2017). Digital Ctr., S.L. v. Apple Indus., Inc. , 94 A.D.3d 571, 572 (1st Dept. 2012) (citation omitted). Highfill, Inc. v. Bruce & Iris, Inc. , 50 A.D.3d 742, 744 (2d Dept. 2008). JPMorgan Chase Bank, N.A. v. Didato , 185 A.D.3d 801, 802-803 (2d Dept. 2020); Maro Leather , 161 Misc. 2d at 923. Cadle Co. v. Hoffman , 237 A.D.2d 555 (2d Dept. 1997); JPMorgan Chase , 185 A.D.3d at 803; Airline Exch. , 266 A.D.2d at 415. Tri-Term. Corp. v. CITC Indus., Inc. , 78 A.D.2d 609 (1st Dept. 1980). E.g. , Showcase Limousine, Inc. v. Carey , 269 A.D.2d 133, 134 (1st Dept. 2000), mod in part , 273 A.D.2d 20 (1st Dept. 2000); Uribe , 266 A.D.2d at 22 (noting that the failure of the plaintiff to register with the State may be cured prior to the resolution of the action); Credit Suisse Int’l v. URBI, Desarrollos Urbanos, S.A.B. de C.V. , 41 Misc. 3d 601, 604 (Sup. Ct., N.Y. County 2013) (ordering plaintiff to comply with BCL § 1312 within 60 days or face dismissal of its complaint). Section 590(2)(b)(1) of the Banking Law prohibits corporations (and others) from engaging in the business of servicing mortgage loans unless they have first registered with DFS or, if an organization is an “exempt organization,” as defined in Section 590(1)(e) of the Banking Law. Plaintiff maintained that it was an exempt organization under the Banking Law. Slip Op. at *1 (citing JPMorgan Chase , 185 A.D.3d at 803 (alteration and internal quotation marks omitted)). Id. (citing id. ; Construction Specialties v. Hartford Ins. Co. , 97 A.D.2d 808, 808 (2d Dept. 1983)).

By: Jonathan H. Freiberger In today’s BLOG article, we again discuss summary judgment in lieu of complaint pursuant to CPLR 3213, which provides, in relevant part: When an action is based upon an instrument for the payment of money only or upon any judgment, the plaintiff may serve with the summons a notice of motion for summary judgment and the supporting papers in lieu of a complaint. The summons served with such motion papers shall require the defendant to submit answering papers on the motion within the time provided in the notice of motion…. If the motion is denied, the moving and answering papers shall be deemed the complaint and answer, respectively, unless the court orders otherwise…. CPLR 3213 is a procedural device that “is intended to provide a speedy and effective means of securing a judgment on claims presumptively meritorious. In the actions to which it applies, a formal complaint is superfluous, and even the delay incident upon waiting for an answer and then moving for summary judgment is needless.” Interman Industrial Products, LTD v. R.S.M. Electron Power, Inc., 37 N.Y.2d 151, 154 (1975) (citation and internal quotation marks omitted); see alsoCounsel Financial II LLC v. Bortnick, 214 A.D.3d 1388, 1390 (4 th Dep’t 2023). As provided for in the statute, the procedural device is available when the suit is upon “an instrument for the payment of money only….” Kitchen Winners NY, Inc. v. Triptow, 226 A.D.3d 989, 990-91 (2 nd Dep’t 2024) (citations and internal quotation marks omitted). “Under the stringent requirement that the action be based upon an instrument for the payment of money only, a document comes within CPLR 3213 if a prima facie case would be made out by the instrument and a failure to make the payments called for by its terms.” Counsel Financial II LLC v. Bortnick, 214 A.D.3d 1388, 1390 (4 th Dep’t 2023) (citations and internal quotation marks omitted). Conversely, an instrument does not qualify if outside proof is needed, other than “simple proof of nonpayment or a mere de minimis deviation from the face of the document.” Kitchen Winners, 226 A.D.3d at 991 (citations, internal quotation marks and brackets omitted). For example, a guaranty generally qualifies for treatment under CPLR 3213 as an instrument for the payment of money only. See, e.g., Pearl River Campus, LLC v. ReadyScrip, LLC, 240 A.D.3d 610, 611 (2 nd Dep’t 2025); Museum Building Holdings, LLC v. Schreiber, 236 A.D.3d 526, 527 (1 st Dep’t 2025). In Pearl River, which involved a guaranty of a lease agreement, the Court found that CPRL 3213 relief was unavailable because “a determination of the defendant's obligations to the plaintiff under the guaranty requires review of outside proof that goes well beyond a mere de minimis deviation from the face of the guaranty.” Pearl River. 240 A.D.3d at 611-12 (citation and internal quotation marks omitted). The Pearl River Court noted that “to determine the existence and amount of the underlying debt asserted by the plaintiff, the Supreme Court would have been required to examine material outside the lease agreement and make calculations that were not shown by the plaintiff in the affidavit of its operations manager or supporting documents.” Id. at 612. Against this backdrop, we discuss NGS Med. Mgt. LLC v. Kornitzer , a case decided on December 3, 2025, by the Supreme Court of the State of New York, Kings County. The defendants in NGS are members of an entity that owns medical imaging practices (the “Imaging Business”). The defendants’ Imaging Business purchased an existing imaging practice owned by the plaintiff (the “Subject Business”). The Subject Business consisted of two interrelated parts: (1) an imaging office; and (2) a management services company. The sale was reflected in an asset purchase agreement. The sale transaction also involved entering into a lease agreement for the space from which the Subject Business operated. The landlord was an entity owned by one of the principals of the plaintiff. Part of the purchase price for the Subject Business was paid by a promissory note by which the defendants promised to pay the plaintiff $500,000.00. Upon the defendants’ alleged default, the plaintiff commenced an action to enforce the note by moving for summary judgment in lieu of complaint. In opposition to the motion, the defendants argued, inter alia , that the note and asset purchase agreement were “inextricably intertwined” and that the note was delivered as part of the consideration for the purchase of the Subject Business, which, due to alleged fraud, left the Subject Business without value. The court denied the plaintiff’s motion and converted the matter to a plenary action. While the court found that the plaintiff met its prima facie burden “by demonstrating the existence of the note, executed and delivered by the defendants, containing an unequivocal and unconditional obligation to repay, and the failure by defendants to pay in accordance with the terms of the note (citations omitted), the defendants “raised issues of fact as to whether they had valid defenses to the note, including failure of consideration” (citations omitted). The court stated that while “generally the breach of a related contract cannot defeat a motion for summary judgment on an instrument for money only, that rule does not apply where the contract and instrument are intertwined.” (Citation and internal quotation marks omitted.) As explained by the court, “where the note and the contract are inextricably intertwined as part of the same transaction, a breach of the related contract may create a defense to payment on the note.” (Citation and internal quotation marks omitted.) Thus, the court found that: Here, the note was executed and delivered contemporaneously with the and represented partial consideration for the integrated business purchased by defendants. The specifically referred to the note, and a copy of the note was attached thereto. Further and significantly, the note did not include any waiver of the right to an offset for counterclaims. Thus, defendants' defense on the was sufficiently intertwined with plaintiff's action to recover on the note. In addition, the court found that the defendants stated a valid defense of fraud in the inducement, which, if proved, could result in an inability to enforce the note. 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. This BLOG has written numerous of articles addressing summary judgment in lieu of complaint pursuant to CPLR 3213. To find such articles, please see the BLOG tile on our website and type “CPLR 3213” into the “search” box. Some of the background facts discussed herein was obtained from the underlying court records available on the NYSCEF system.