SEC v. Goldman Sachs: Read the Complaint

The big financial news the past few days has been the civil securities fraud suit filed by the Securities and Exchange Commission against Goldman Sachs in the United States District Court for the Southern District of New York.

The heart of a securities fraud suit is the claim that there was a "material" misstatement of fact or a "material" omission of fact. I have no opinion whether Goldman Sachs is liable, but I do think the press has made a simple situation appear to be oh-so-complicated.

The background is simple. In 2007 a hedge fund Paulson & Co. Inc. wanted to make a bet that the subprime residential mortgage market would collapse. It put together a portfolio of subprime residential mortgage market securities it believed would lose value and it asked Goldman Sachs to, in effect, find investors who would bet that the value of the securities would rise. The bet would be made by using a "synthetic collateralized debt obligation" (CDO)--the sophisticated financial instrument touted in the press.

The SEC claims that in marketing the bet Goldman Sachs did not disclose that Paulson was deeply involved in selecting the securities in the portfolio, and that Goldman took steps to conceal Paulson's involvement by having it appear that an impartial third party had independently selected the securities for the bet. The value of the portfolio did fall. Paulson made about $1 billion while those on the other side of the bet lost that amount.

Paulson's economic interests were, of course, adverse to those who would bet that the value of the securities would rise. In the SEC's view Goldman is guilty of a material omission of fact because it did not disclose to those betting the securities would rise that the portfolio was selected with the deep participation of the party who would bet that the value of the portfolio would decline. Whether Goldman was required to make this disclosure, and whether this failure to disclose is a material omission, will doubtless be the cause of multiple court filings by the SEC and Goldman's attorneys.

It has already been the source of endless press comment by academics and securities attorneys. But all the discussion regarding whether disclosure of the identity of the party on the other side of this "sophisticated" bet was required, has, in my opinion, obscured the SEC's second claim: Goldman affirmatively misled the parties by misstating Paulson's role in the transaction to suggest that Paulson had an economic interest in seeing the portfolio value rise.

Thus, for all the trumpeting in the press about an impenetrable, sophisticated transaction, in the end it boils down to a claim of a garden variety fraud: Goldman misstated the true nature of Paulson's involvement, thereby misleading those who bet the value of the securities would rise. Paragraphs 44 through 51 of the SEC complaint are, in my opinion, the practical heart of the matter. The complaint can be found here.

Goldman will undoubtedly deny it misled anyone. But it is one thing to argue to a jury that a party had no obligation to disclose certain information. It is an altogether different matter to acknowledge that one did say something, but it was not misleading. Juries understand the difference, and if the case goes to trial the outcome will turn on whether a jury believes Goldman affirmatively misled those who lost the bet.

Arguing Another Attorney's Appeal

Last month I reported that I had again orally argued an appeal in which I did not draft the briefs. In a serious personal injury matter, the defendant appealed the denial of summary judgment by Supreme Court, New York County.

Plaintiff's counsel asked me to appear for oral argument before the Appellate Division, First Department. I did so, and I am pleased to report that in Tomaino v. 209 East 84th Street Corp. the Appellate Division affirmed the denial of summary judgment. The opinion can be found here.

While there are those who may disagree, I continue to believe that oral argument is important. It is the only opportunity counsel has to answer questions judges may have after reading the briefs and the record. After reading the briefs judges go on the bench inclined to decide a case a particular way. Different appellate judges have told me that oral argument has changed their minds 5% to 15% of the time. This is not an opportunity to pass up.

Supreme Court: Effective Assistance of Counsel and Deportation

In a much awaited decision, the United States Supreme Court ruled yesterday that the constitutional right to the effective assistance of counsel in criminal cases requires that defense counsel advise a noncitizen defendant that if he pleads guilty the plea carries the risk of deportation from the United States. The decision, Padilla v. Kentucky, can be found here.

In the past, many courts across the country had taken the view that because the deportation consequence of a guilty plea is a matter "collateral" and not directly related to the criminal case, defense counsel had no obligation to advise his client of the possibility, or in many instances, the certainty, of deportation.

Padilla concludes, however, that because deportation is an "integral part" of the penalty a defendant who pleads guilty faces, and because deportation is "intimately related to the criminal process,'' the collateral versus direct distinction is not appropriate in the deportation context.

Significantly, Padilla rejects the established New York view that because deportation is a "collateral" consequence of a guilty plea, defense counsel is under no obligation to inform the defendant of the possibility of deportation. That view, expressed in People v. Ford, 86 N.Y.2d 397 (1995), cannot survive Padilla. In my opinion, the Supreme Court has gotten it exactly right.

Filing a Timely Notice of Appeal

One of the fundamental rules of appellate practice is that the timely filing of a notice of appeal is a jurisdictional requirement: if the notice of appeal is filed late, an appellate court has no jurisdiction over the matter, and the appeal will be dismissed.

On Monday, the United States Court of Appeals for the Second Circuit reminded us of the basic rule when it dismissed the appeal in Napoli v. Town of New Windsor. The decision can be found here.

For appeals in the New York State courts the time to file the notice of appeal is laid out in CPLR § 5513. The time frame for appeals in federal court is stated in Rule 4 of the Federal Rules of Appellate Practice. Note that Rule 4(a) states the time for civil appeals, while Rule 4(b) states a different time for criminal appeals.

In federal court a problem arises when the a judgment is entered and later amended. Does the filing of an amended judgment reset the clock for filing the notice of appeal? See e.g., Rezzonico v. H & R Block, Inc., 182 F.2d 144 (2nd Cir. 1999).

In the Napoli decision on Monday, the Second Circuit stated that because rulings a district judge made after issuing an order subject to an interlocutory appeal did not reset the clock for appealing the order, the notice of appeal was late and the appeal would be dismissed.

Appeals should be decided on their merits: file a timely notice of appeal.

Second Circuit: N.Y. Persistent Felony Offender Law Unconstitutional

In a major ruling today, the Second Circuit has determined in Besser v. Walsh that New York's persistent felony offender law, N.Y. Penal Law § 70.10, violates a defendant's constitutional right to trial by jury by permitting a judge, rather than a jury, to make critical fact findings in violation of Blakely v. Washington, 542 U.S. 296 (2004). The decision can be found here.

Constitutional challenges to the statute have been repeatedly rejected by the New York State courts, including most recently by the New York Court of Appeals in People v. Quinones, 12 N.Y.3d 116 (2009). The Second Circuit ruling is a stunning rebuke of the state courts in a matter of critical importance to the state's criminal justice system. Because of the importance of the case to the State of New York, I anticipate that it will either seek en banc review in the Second Circuit, or file a certiorari petition in the Supreme Court.

Arguing Another Attorney's Appeal

Last August I discussed an appeal in the United States Court of Appeals for the Second Circuit which I orally argued for the appellees although I did not write the brief and I did not know anything about the case until appellees' counsel asked me to argue.

In response to some comments I explained that some lawyers are uncomfortable at oral argument so they prefer that someone else appear. In other instances the lawyer who appeared at the trial writes the appellate brief, and something he did (or did not do) at trial becomes an important matter on appeal. It may, therefore, be awkward for the lawyer to appear at oral argument and defend his own action (or inaction). He may also be concerned that his oral argument will smack too much of self-justification, and detract from the client's case. He, therefore, has another lawyer argue the case.

Earlier this month it happened again: a law firm which successfully represented a plaintiff in defeating a motion for summary judgment and then drafted the respondent's appellate brief, asked me to argue the case before the Appellate Division, First Department. It is an important case for the firm, and it opted for someone with considerable appellate experience.

I see a growing awareness that oral argument of an appeal is important. It is the only time in the appellate process when an attorney can answer the questions which are on a judge's mind. After reading the briefs and pertinent parts of the record, appellate judges obviously go on the bench inclined to decide a case a particular way. Different appellate judges have told me that oral argument changes their mind from 5% to 15% of the time. That is not an opportunity any attorney should pass up.

Suggested Reading: Justice Stevens

United States Supreme Court watchers are in a flutter over rumors that Justice John Paul Stevens will retire at the end of the Court's current Term in June.

The Justice will be 90 years old in April, and the rumors began with reports that he hired only one law clerk for next year (the allotment for a retired Justice) instead of four (the allotment for sitting Justices). As the rumors persisted, short lists of potential nominees to the Court have circulated, as well as speculation on what effect, if any, his retirement will have on voting patterns on the Court.

The New Yorker magazine dated March 22, 2010, which is out this week, has a fine profile of the Justice, "After Stevens," by Jeffrey Toobin. The Justice tells Toobin that he will decide in April whether to retire. As for the number of law clerks: he has received assurances from three of his current four clerks that they will stay on for another year if he does not retire.

Most notable for baseball fans is that Justice Stevens' was at the famous 1932 game in which Bath Ruth is said to have pointed to center field and then hit a home run there. The Justice reports that he saw Ruth point. Is more proof needed than the testimony of a United States Supreme Court Justice?

Governor Paterson's Judicial Legacy

With Governor David Paterson's announcement that he will not seek reelection in the wake of claims that he was involved in efforts to persuade a woman not to press assault charges against one of the Governor's aides, it is worthwhile to take a step back from the political frenzy to examine the Governor's judicial legacy. The legacy is impressive.

First, there is the appointment of Jonathan Lippman as Chief Judge of the New York Court of Appeals to replace Chief Judge Judith Kaye. Shortly after the appointment, and soon after the new Chief Judge had participated in a few of the Court's rulings, I wrote in May, 2009, "The early signs suggest that he will be more liberal than Chief Judge Kaye, and not hesitant to dissent."

Time has borne out that early conclusion. A recent article in The New York Times, "Top Judge Sets Liberal Course for New York," provides a valuable analysis of Chief Judge Lippman's voting patterns over the past year in a wide range of civil and criminal cases. That article can be found here.

The Governor has also had a profound effect on the Appellate Division, First Department. Under the State Constitution positions on the Appellate Division are filled by a gubernatorial appointment from among persons elected to sit as trial judges on the state Supreme Court. By my count, Governor Paterson has made seven appointments to the First Department since April 2008. Anecdotal evidence from attorneys suggests that the First Department has become more liberal as a result of those appointments.

Two Appellate Wins in One Day

It is always nice to win an appeal, especially when representing the appellant. It is doubly nice to win two in one day.

First, the morning mail brought the news that I had prevailed in the Appellate Term, Second Department, in an unusual case, Sneddon v. Greene. In April, 2008, the trial judge had granted my motion that he recuse himself on the grounds there was an appearance he was not impartial. Four months later, however, the judge sua sponte vacated the order of recusal, put himself back in the case, and ordered a trial be held before him.

The Appellate Term granted my motion for a stay of the trial, and in the appellant's brief I argued that once the judge had recused himself he had no further jurisdiction or authority to participate in the case. The Appellate Term agreed.

There is little New York case law on the jurisdiction of a judge after he has recused himself. The Appellate Term decision in Sneddon v. Greene is in accord with the views of courts in other states which have addressed the question.

The second appellate success today came in the decision of the Appellate Division, First Department, regarding a fee dispute between attorney and client. I had been waiting for a ruling since I argued the case on March 10, 2009.

At the conclusion of a real estate transaction a law firm held in escrow approximately $310,000 which it claimed was the fee owed by the client. The client disputed the fee, and the matter went to arbitration under the Rules of the Chief Administrator of the Courts. See, 22 NYCRR § 137.0 et seq.

The arbitrators awarded the firm $280,000 without interest. But instead of paying itself the $280,000 from the escrow account and remitting the balance to the client, the firm persuaded Supreme Court, New York County, to grant it two years' interest on the fee award. It then entered judgment for the total amount, and with interest running on the judgment, the client was required to pay even more to satisfy the judgment.

I represented the appealing client, and the Appellate Division agreed that it was improper for a court to award the firm interest denied to it by the arbitrators. The Appellate Division also agreed that after the arbitrators' decision the firm should have paid itself the $280,000 from the funds in the escrow account and promptly remitted the balance to the client. Under the ruling the firm is directed to repay to the client, with interest, all sums received from the client above the $280,000 awarded by the arbitrators.

The Appellate Division ruling is also noteworthy because it cites provisions of the Rules of Professional Conduct to support its conclusion that the law firm acted improperly. The opinion offers useful guidance on the responsibility of attorneys involved in fee disputes with clients. The decision, Levin & Glasser v. Kenmore Property, LLC, can be found here.

It would be nice to say that having won two cases I can take the rest of the day off. But alas, there is always something else to do.

Interlocutory Appeals

Interlocutory appeals are a staple of civil appellate practice in the New York State courts. CPLR § 5701(a)(2)(v) gives a party the right to appeal to the Appellate Division from an interlocutory order which "affects a substantial right."

The New York courts have generously interpreted "affects a substantial right," so that there are few interlocutory orders which are not appealable as of right.

In the federal courts, however, there are few interlocutory appeals as of right. See, 28 U.S.C. § 1292(a). They must be authorized by a district judge. 28 U.S.C. § 1292(b). Litigants must, therefore, ordinarily await final judgment before raising on appeal a district judge ruling earlier in the case. There are two recent reminders of the limits on interlocutory appeals in federal courts.

In Mohawk Industries, Inc. v. Carpentier, ___ U.S. ___, 130 S.Ct. 599 (2009), the Supreme Court ruled that an immediate appeal would not be permitted from a disclosure order of a district judge which arguably impinged on the attorney-client privilege. This was the first full opinion written by Justice Sonia Sotomayor. The opinion can be found here.

Earlier this week in In re Zyprexa Products Liability Litigation the United States Court of Appeals for the Second Circuit restated the limited availability of interlocutory appeals in the federal courts. The decision can be found here.

Appellate Practice: When is an Attorney "Aggrieved"?

One of the fundamentals of appellate practice is that only a party "aggrieved" by an order or judgment can appeal that determination. This is true in the federal courts, Deposit Guaranty National Bank v. Roper, 445 U.S. 326, 333 (1980)("only a party aggrieved by a judgment or order of a district court may exercise the statutory right to appeal therefrom"), and it is true in the New York State courts. CPLR § 5511 (an "aggrieved party" may appeal).

There is a vast, and sometimes arcane, body of case law on who is an aggrieved party. Generally speaking, a party is aggrieved when he does not prevail, as when an order or judgment is entered against him, or his motion for affirmative relief is denied.

Can an attorney representing a party be aggrieved? The question arises, for example, when an attorney moves to have a court sanction opposing counsel for frivolous or improper conduct during the litigation. Suppose the judge denies the motion to sanction the attorney but in the course of his opinion he makes comments critical of the attorney. Can the attorney appeal the order which did not sanction him because he objects that the judge's critical comments are unjustified?

Today in Keach v. County of Schenectady the United States Court of Appeals for the Second Circuit concludes that the criticized but unsanctioned attorney is not an aggrieved party and, therefore, the appellate court has no jurisdiction to hear his appeal. The opinion can be found here.

For an attorney to be aggrieved for purposes of appeal, says the Second Circuit, the attorney must have suffered an adverse decision. Critical words alone are not reviewable by an appellate court. On the other hand, an attorney is an aggrieved party if he is sanctioned by the court, or the court makes specific findings that the attorney violated a rule of professional conduct, or a court refers the attorney's alleged misconduct to a disciplinary committee. "An appellate court can reverse an order imposing a sanction or making a finding that an attorney has violated a rule of professional conduct; it has no power to reverse a judge's poor opinion of the skill or trustworthiness of a lawyer who has appeared before him or her. "

Appellate Courts and Stare Decisis

The most difficult task facing any appellate attorney is convincing an appeals court to overrule its own precedent.

Because stare decisis has identifiable benefits it has a strong pull on appellate courts. The doctrine promotes political and social stability, adds certainty to commercial transactions, and fosters public confidence in the legal system by suggesting that the law does not change simply because some judges on an appellate court have been replaced by other judges.

But everyone agrees that precedent can be overruled. The question is when and for what reason. That is the rub. Courts, for example, are slow to overrule precedent in matters affecting real property and contracts so as not to unsettle long established legal relationships and expectations. On the other hand, it is argued that stare decisis should have less significance in constitutional law: because the Constitution is so difficult to amend the United States Supreme Court for all practical purposes has the final word on what the document means, and, therefore, the Court should be more amenable to rethinking some prior ill-considered or time worn decision.

Last week's Supreme Court ruling in Citizens Union v. Federal Election Commission brings all of this to mind. The five Justices in the majority not only overrule two of the Court's decisions, one from 1990 and the other from 2003. They also reject the distinction the Court and the Congress have drawn for a century between speech by a natural person and speech by a corporation, and discard Congressional restrictions on corporate financial contributions to candidates for public office. What effect this will have on political campaigns will be the subject of debate well into the future.

For appellate attorneys, however, the concurring opinion of Chief Justice Roberts, and the dissenting opinion of Justice Stevens, are required reading. Part Two of each opinion is devoted to an extraordinary analysis of stare decisis, and each opinion lays out its own road map for when an appellate court should, or should not, overrule precedent. The opinions are essential for any attorney preparing to argue that a precedent should be overruled, and for any attorney maintaining precedent should be reaffirmed.

Improper Dismissal of Civil Claims: The Procedural Niceties

New York's civil law is filled with procedural niceties which can make or break a case. Two recent decisions by the Appellate Division, Second Department, and the United States Court of Appeals for the Second Circuit, illustrate the point.

Because an opening statement to the jury in a civil case is supposed to lay out what the plaintiff intends to prove, it is often said that the failure of counsel to refer in his opening to a particular cause of action will entitle the defendant to dismissal of the omitted cause of action.

But in Beshay v. Eberhart the Appellate Division clarifies that dismissal after the opening statement of plaintiff's counsel is limited to situations in which (1) the complaint fails to state a cause of action, (2) the opening statement admits as fact a defense which has been interposed, or (3) plaintiff's counsel makes an admission or statement which so completely compromises his or her case that the court is justified in awarding judgment as a matter of law to the defendant. The decision can be found here.

In Hanrahan v. Riverhead the Second Circuit addresses CPLR § 1003 which authorizes a New York trial court to dismiss a complaint for failure to join a necessary party. The court notes that § 1003 calls for dismissal without prejudice, which means it is not a dismissal on the merits.

After suffering a § 1003 dismissal, plaintiff Hanrahan brought suit in federal court instead of refiling in state court. Because the § 1003 dismissal was not on the merits, the Circuit Court concludes that the federal action is not barred by res judicata.

The Second Circuit does give a procedural warning: a dismissal by the New York courts on the grounds a suit is untimely is considered a dismissal on the merits by the New York Court of Appeals. A suit dismissed in the New York courts on statute of limitations grounds and later brought in federal court will, therefore, be dismissed in federal court on grounds of res judicata. The Second Circuit opinion can be found here.

Proof of Prior Criminal Conduct

One of the more knotty procedural issues at a criminal trial arises when a prosecutor seeks to place in evidence before a jury proof of a defendant's prior criminal conduct.

In the seminal case People v. Molineux, 168 N.Y. 264 (1901), the New York Court of Appeals concluded that evidence of a defendant's prior criminal conduct is admissible only when relevant to establish motive, intent, absence of mistake, a common scheme, or the identity of the person charged with the crime on trial.

In the federal courts the issue is addressed by Federal Rule of Evidence 404. While Article 45 of the CPLR covers many evidentiary matters, New York has not codified the Molineux rule. As a result, there is now an enormous body of case law, developed since 1901, interpreting Molineux.

The basic concern is one of policy: a person should not be convicted of a crime because of his "bad character" or because his prior conduct indicates he has a propensity to commit the crime for which he is now on trial. Guilt must be established solely by evidence which specifically shows the commission of the crime being tried. But as the vast body of case law indicates, applying the policy is not always a simple matter.

The latest addition to the case law is recommended reading: the opinion of Justice Steven W. Fisher for the Appellate Division, Second Department, in People v. Wilkinson . The decision contains an excellent survey of the application of the Molineux rule by New York's appellate courts. The decision can be found here.

Supreme Court: Effective Assistance of Counsel in Capital Cases

Since the current Term of the United States Supreme Court began in October, the Court has issued thirteen opinions.

A remarkable five of those opinions have addressed claims that a criminal defendant was denied his constitutional right to the effective assistance of counsel. All five of these cases are death penalty cases, and all five address the penalty phase of a capital case.

A capital trial is bifurcated: the jury must first determine whether the defendant is guilty of a capital offense. If the jury finds the defendant is guilty, a second trial is then conducted before the same jury at which the jurors must decide whether to impose the death penalty.

In many death penalty cases the evidence of guilt is overwhelming, so the strategy of defense counsel is to focus on phase two: trying to convince the jury to spare the defendant's life. The difficulties for defense counsel at the penalty phase are self-evident: the crime is horrific, and the defendant may not cut a very sympathetic figure.

Ineffective assistance of counsel claims are very fact specific. It is, therefore, unusual for the Court to address so many of them in such a short period of time. I think this does reflect a general uneasiness that all capital defendants are not being adequately represented at the trial level.

But I think the fact that all five cases address the sentencing phase of a capital case also reflects a message from the Court: in light of the difficult hand dealt to defense counsel at the penalty phase--trying to elicit a sympathetic response from a jury, or trying to find a redeeming or mitigating fact, for someone already convicted of a horrific crime--only so much can be constitutionally expected of defense counsel.