Articles Posted in Investment litigation

In today’s business climate we cannot seem to go a few weeks without the next big company fraud that has been foisted upon the public. The current scandal du jour is Volkswagen and tomorrow it will be who knows. At some point however, either as a result of a whistleblower or anonymous tip, a corporation will conduct an internal investigation to (1) uncover the facts surrounding the current problem and (2) advise management, including the board of directors, of the potential liability and suggest a course of action. It is a “best practice” that when conducting an internal investigation, that a company retain an outside law firm specifically for the investigation to show that the directors of the company are zealously discharging their fiduciary duties to investigate suspected wrongdoing. While these outside attorneys will undoubtedly have access to all company documents and emails, including servers, a large part of the investigation will center upon these attorneys and their interviews with company employees.

If you find yourself in the situation where you are about to be interviewed in connection with a company investigation you need to ask yourself two questions. Do I need a lawyer? Who pays? If you truly played no role in what the company is investigating you don’t need a lawyer. However, if you are a key insider who has information that will shed important details on what transpired you certainly would want to retain your own lawyer. There are many reasons why and I will address them below.

First, consider that earlier this year the Department of Justice set forth a Memorandum that identified that it would go after the individuals responsible for corporate wrongdoing and work its way inward towards the corporate hub. In addition, Justice conditioned any corporate cooperation credit that a corporation could hope to receive would be conditioned upon the disclosure of all corporate wrongdoings and all of the individuals that performed them. Think about this for a second. If the company you are working for is the subject of an investigation and wants in effect what is leniency in its “corporate sentence,” it must turn you over to Justice.

Second, before any interview begins, you must understand that the lawyer is NOT YOUR LAWYER. The lawyer is the company lawyer and therefore there is no guarantee that what you say will remain confidential. To avoid an employee raising an allegation that the interviewing attorney has a conflict of interest because the employee believed that the attorney was also representing him, all interviews begin with the Upjohn Warning.

The Upjohn Warning originated from a case before the United States Supreme Court. The Court found that while there is an attorney client privilege covering communications between counsel and the employee, the privilege belongs to the employer and not the employee. Therefore, the employees or key insiders always run the risk that the company will waive the privilege and share the results of the interview with government investigators and/or prosecutors. In fact, based upon the recent DOJ Memo discussed above, you can almost be certain that what you say will be turned over to the appropriate authorities.

In 2009 the ABA White Collar Crime Committee produced a sample Upjohn Warning. It reads as follows:

I am a lawyer for or from Corporation A. I represent only Corporation A, and I do not represent you personally.

I am conducting this interview to gather facts in order to provide legal advice for Corporation A. This interview is part of an investigation to determine the facts and circumstances of X in order to advise Corporation A how best to proceed.

Your communications with me are protected by the attorney-client privilege. But the attorney–client privilege belongs solely to Corporation A, not you. That means that Corporation A alone may elect to waive the attorney-client privilege and reveal our discussion to third parties. Corporation A alone may decide to waive the privilege and disclose this discussion to such third parties as federal or state agencies, at its sole discretion, and without notifying you.

In order for this discussion to be subject to the privilege, it must be kept in confidence. In other words, with the exception of your own attorney, you may not disclose the substance of this interview to any third party, including other employees or anyone outside of the company. You may discuss the facts of what happened but you may not discuss this discussion.

Do you have any questions?

Are you willing to proceed?

Now, very simply put, if you are a key employee and receive this warning placed in front of you and are asked to sign it, don’t you think you might want your own attorney present during this interview?

Obviously retaining your own independent lawyer can be expensive. However, in certain instances the company may or even be required to advance you the attorneys’ fees you incur. For instance, the company by-laws might require the advancement of your legal fees if you are an officer or director subject to repayment if it is found that you committed fraud. Other times such advancement of legal fees might be required under your employment agreement. Understandably it is certainly better to have an advancement of legal fees subject to repayment rather than a reimbursement of legal fees after a determination that you did not commit fraud. Whether or not you have one outcome or the other may very well depend on if you had competent counsel assisting you at the times these documents were created.

There are countless more issues to consider that are beyond the scope of this short article. If you should find yourself in the situation where you are going to be interviewed in connection with a company investigation, please feel free to call Doug Leavitt at Danziger Shapiro & Leavitt, P.C. We would be happy to discuss your situation and develop a plan to minimize your exposure.

This entry is presented for informational purposes only and is not intended to constitute legal advice.



Last month a friend reached out and in passing told me things were going great with the technology he was developing. He also mentioned that he was in the process of raising $5M in exchange for an equity interest in his company. “Great”, I said and casually asked if he had filed anything with the Securities and Exchange Commission (SEC). My friend told me, “No, this is a private placement so I don’t need to register.” I then asked him how he found the investor. The response- “I used a consultant and he gets a small percentage of the money raised.”

This short conversation raises two of the most common mistakes made by early stage companies when they try and raise money. First, a company may not offer or sell its securities to third parties unless the securities have first been registered with both the SEC or there is an exemption from registration that applies. If you don’t make the required filings, you are exposing yourself to serious consequences that include not only an investor’s right to rescission (get their money back) but also fines, penalties and criminal actions against you on an individual basis. Most start-up or early stage companies can avoid this by making the appropriate filing under Section 4(2) of the Securities Act of 1993 and the corresponding safe harbor provisions under Regulation D. There are also corresponding state law security filings too under state “Blue Sky” laws. The point here is that the security laws are complicated and you should not play “security lawyer.”

The second problem mentioned in the scenario described above is that my friend paid a finders’ fee to an unregistered broker-dealer. If the “consultant” was a registered broker-dealer and my friend otherwise made the appropriate Reg D filings he would have been fine. However, by providing compensation to an unregistered broker-dealer, my friend was also violating Section 29 of the Exchange Act which also provides for among other things, the right of rescission. Paying finders’ fees to unregistered broker-dealers has been a recent hot topic for the SEC and the Reg D form filing was updated in 2008 to specifically request information directly to this point (See Item 12 of Form D).

The take away here is that raising capital requires compliance with complicated securities laws. Entrepreneurs can avoid running into these issues by focusing on what they know best, their company, and allowing their lawyers to assist them so they do not make mistakes that are all too common in the capital raising world. If you have any questions regarding this or any other aspect affecting your business, please feel free to contact Doug Leavitt at Danziger Shapiro & Leavitt.

This entry is presented for informational purposes only and is not intended to constitute legal advice.

Bank of New York Mellon recently learned the hard way that doing a favor for a client can run afoul of the Foreign Corrupt Practices Act (“FCPA”). How hard was the lesson? The SEC entered an Order that imposed, among other sanctions, a 14.8 million dollar fine merely for the bank hiring three interns who were relatives of foreign officials. In a nut shell, two unnamed officials of a foreign wealth fund put pressure on BNY Mellon to hire three interns who were not otherwise qualified for the BNY Mellon intern program. The bank understood that if they failed to hire these interns, the fund’s investments with the bank would be at risk. It apparently did not matter that the interns did not otherwise meet the requirements for the internship or that they were paid more than the other more qualified interns.

While this may be common practice stateside to grant a favor to a valuable customer by employing his son or daughter, to do so when a foreign official is involved violates the FCPA. The FCPA does not allow a company to influence a foreign official by giving the official “anything of value”. Value is broadly defined and includes cash, gifts, favors and apparently, internships too. While at first blush, this may seem to be a “small favor”. However, the FCPA does not distinguish between “small” or “large” favors only that anything of value were given. In addition, the broadly written FCPA covers any “department, agency or instrumentality” of a foreign government. The foreign wealth fund identified above fell under the “agency or instrumentality” rubric because it was controlled by a foreign government notwithstanding that it operated like any other investment company.

Once again this shows the importance that it is not enough just to have Code of Conduct Policy or an Anti-Corruption Policy without the proper training of the right people in your organization. Training needs to focus not only on the basics but also on the hidden dangers. For example, do changes to the employment application process need to be made? Should an applicant certify that he or she has not been employed as a foreign official or that they do not have a relative or a close personal friend who is a foreign official? If the answer to the foregoing is yes, a strong anti-corruption policy will flag the applicant for further in house review (or legal department) to make the correct determination. This is not a question of discrimination against certain applicants but rather that the correct questions or sensitivities are being looked into so your company does not run afoul of the FCPA. In any event, the point is that your employees need to be trained to look between the trees and make the right determinations when a more nuanced review is needed. The cost of failing to do this is too high and the SEC is bringing the heat.

If you have any questions regarding this entry or the FCPA in general, please feel free to contact Doug Leavitt and the attorneys at Danziger Shapiro & Leavitt. We will be happy to discuss your concerns and assist you with this or any other matter affecting your business.

This entry is presented for informational purposes only and is not intended to constitute legal advice.

The Securities and Exchange Commission reported its first enforcement action earlier this month against a company that inserted restrictive language in an employee confidentiality agreement to impede the whistleblower reporting process. In this action, the SEC charged that engineering firm KBR, Inc. violated whistleblower protection rule 21F-17 under the Dodd-Frank Act. (Click here for Order).

The SEC uncovered certain employees who were subject to the internal investigation process were required to sign confidentiality agreements. Among other things, the agreements included language that required the employee to first discuss what they were going to say to the SEC with in-house counsel and that violation of the confidentiality agreement could result in termination of employment.

As a result of this agreement, the SEC imposed a relatively modest fine of only $130,000. The Director of Enforcement for the SEC stated that, “By requiring its employees and former employees to sign confidentiality agreements imposing pre-notification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us. SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision.”
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On November 13, 2014 the New Jersey Supreme Court added New Jersey to the growing number of states that have established complex business litigation programs. Effective January 1, 2015, designated judges in each county will provide individualized case management to complex commercial and construction cases that meet the required criteria. The Supreme Court of New Jersey will designate the specific judge who will participate in the program and these judges will receive extensive specialized training in areas that are specific to business litigation.

Attorneys will self-designate their case for this program on the civil case information statement or they may move for inclusion or removal from this program depending on what opposing counsel may or may have not selected. Case will have a minimum $200,000 threshold but in certain circumstances a case may be included in the program due to the complex nature of issues even if the amount in controversy is less than $200,000.

The result of the program will be a win for all parties involved. Consistency will be developed as fewer judges will be ruling on complex commercial disputes. This will help the attorneys provide better cost benefit advice to their client based upon what they can expect at trial.

Judges will benefit as well as they will gain more experience in handling complex business disputes and gain experience and insight into what works and does not work from the point of view from the bench. For example, the judges will see what impact their discovery ruling has at the trial stage and whether they would have liked more information on a particular topic. Now the judges will see what impact their discovery ruling has at trial. In the past, a discovery judge might limit an area of inquiry, but at trial you are faced with a different judge looking down at you with a perplexed look wondering why you did not develop this through further discovery.
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For those of us that actually read the bottom of their lawyer‘s email you probably noticed the arcane “IRS Circular 230 Disclosure” that stated the advice contained in this email is not intended and cannot be used for tax avoidance purposes etc… You then probably thought to yourself, but I was just confirming lunch, what the heck does this have to do with tax advice anyway? Perhaps a little perspective is in order.

Circular 230 was the IRS’s compilation of regulations regarding tax services provided by lawyers and other tax professionals with respect to the tax shelter abuses of the 1990s. Circular 230 set the minimum standard with respect to written tax advice and therefore wound up being placed on everything.

Thankfully the IRS issued new rules on June 12 (click here for PDF of rule) which included the following statement; “Treasury and the IRS expect these amendments will eliminate the use of a Circular 230 disclaimer in email and other writing.” Good riddance and where are we meeting for lunch again?
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The SEC’s Office of the Whistleblower (OWB) awarded individuals over $14 million in 2013 for their “significant and original contributions” to successful enforcement of the securities laws. The OWB is now in its 3rd full year and the number of tips and complaints is trending upward. OWB reports that it received 3,001 tips and complaint in 2012 and 3,238 in 2013. These numbers are certain to increase as the OWB continually expands the whistleblower laws.

For example, in July 2013, a new pilot program was put into place that protected federal grant workers from whistleblower retaliation. In a nutshell, the new program is designed to protect an employee from employment retaliation for reporting mismanagement of a federal grant or contract funding. An employee who claims to have been retaliated against must file a claim with the Inspector General of the agency involved. If no retaliation is found, the employee can then file a complaint in federal court. If successful, in addition to reinstatement and back pay, attorneys’ fees and costs will also be awarded
Last month I discussed the new path the Securities and Exchange Commission was embarking upon in its efforts to enforce the securities laws from the outside in with the use of deferred prosecution agreements. I noted this was a philosophical change made from the highest levels of the SEC to pursue companies that violate the securities law by targeting employees of suspected target companies. The questions you need to ask yourself as an employee of a company that is involved in fraud are; do I wait until the government agency contacts me as part of its investigation, or do I contact the government agency when I have knowledge of my employer’s widespread fraud? By contacting the government first, you may be entitled to a piece of the substantial awards discussed above. In addition, by taking preemptive action you can protect yourself from being brought down by fellow employees who allege you were part of the fraud.
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Late last year the Securities and Exchange Commission announced that it had entered into its first deferred prosecution agreement (DPA) with an individual who worked in an administrative capacity at a large hedge fund. The DPA allowed the SEC to successfully go after hedge fund manager Berton Hochfield who reportedly stole more than 1.5 million from his hedge fund and overstated the fund’s performance to investors.

A deferred prosecution agreement is a voluntary agreement between an individual and a government agency, in this case the SEC, where the agency will agree to lesser charge in exchange for the individual’s cooperation in connection with the investigation. In the Hochfield case, Scott Herckis voluntarily came to the SEC with concerns over certain accounting irregularities involving Hochfield’s hedge fund, Heppelwhite Fund, LP. Herckis produced a substantial number of documents and described in detail to the SEC how Hochfield perpetrated his fraud. Based upon the information Herckis provided, the SEC was able to take emergency action and freeze the fund’s assets within weeks of Herckis reaching out to the SEC. While Herckis did not get off “scot free” for his participation in the fraud scheme, he did receive a substantially reduced penalty. For example, instead of being unable to be a hedge fund administer for the remainder of his life, Herckis was only prohibited from being a fund administrator for 5 years. Herckis also had to disgorge the fees (approximately $50,000) he received in connection with the fraud.

This DPA is significant because it seems to support new SEC Chair Mary Jo White’s earlier statement that the SEC is going to strongly pursue individuals on the periphery to build its case against greedy insiders and their business entities. By adopting this outside in approach and offering DPAs to periphery individuals, the SEC is placing a significant carrot in front of those who were part of an overall fraud scheme but perhaps feel trapped and want out but do not know how to safely do so.
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For Immediate Release
Contact: Douglas M. Leavitt Danziger Shapiro & Leavitt, P.C.
Danziger Shapiro & Leavitt, P.C.
Announces Investigation of NQ Mobile, Inc.

PHILADELPHIA, PA, December 16, 2013- Danziger Shapiro & Leavitt, P.C., a Philadelphia based litigation law firm, ( is investigating securities fraud claims against NQ Mobile, Inc.. (NYSE: NQ). This inquiry centers on allegations that statements issued by NQ Mobile regarding its business operations and the company’s financial condition were deceptive and false.

NQ Mobile purports to provide security solutions for the mobile phone market. On October 24, 2013, a report issued by Muddy Waters states that NQ Mobile had engaged in fraudulent practices by, among other things, vastly overstating its market share in China by asserting it had a 55% share of the market when in fact it only had a 1.5% market share and that at least 72% of NQ Mobile’s alleged Chinese security revenue is fictitious. Upon the release of this news, in less than 36 hours, shares of NQ Mobile dropped approximately 56%, representing over $500 million in losses to investors
Individuals who purchased NQ Mobile shares between May 5, 2013 and October 24, 2013 who would like to learn more about this investigation, have an interest in joining a class-action lawsuit, or have any questions concerning this announcement and their rights, should on or before December 23, 2013, contact Douglas M. Leavitt, Esquire: (215) 545-4830 or visit: You may also email Mr. Leavitt at

This press release may be considered Attorney Advertising in some jurisdictions under the applicable law and ethical rules.
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Well this doesn’t happen every day – or does it? The SEC finds itself being investigated for improper financial holdings. According to a November 2013 Reuters post, federal prosecutors and the office of the inspector general of the SEC contacted employees in the SEC’s New York office about trading in companies that are under SEC investigation. This is a direct violation of internal SEC rules. While the report indicates that it does not appear to be a widespread issue, it is another black eye for the SEC that is still marred by the 2009 allegations regarding insider trading by SEC employees. Stay tuned to see how this plays out.
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