The People of the State of New York by Eric T. Schneiderman,, Respondent,v.Maurice R. Greenberg, et al., Appellants.

Brief

N.Y.May 3, 2016

To be Argued: FOR MAURICE R. GREENBERG BY DAVID BOIES BOIES, SCHILLER & FLEXNER LLP (Time Requested: 30 Minutes) FOR HOWARD I. SMITH BY VINCENT A. SAMA KAYE SCHOLER LLP (Time Requested: 30 Minutes) APL-2015-00172 New York County Clerk’s Index No. 401720/05 Court of Appeals of the State of New York THE PEOPLE OF THE STATE OF NEW YORK by Eric T. Schneiderman, Attorney General of the State of New York, Plaintiff-Respondent, – against – MAURICE R. GREENBERG and HOWARD I. SMITH, Defendants-Appellants. JOINT BRIEF FOR DEFENDANTS-APPELLANTS SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP Four Times Square New York, New York 10036 Tel.: (212) 735-3000 Fax: (212) 735-2000 CHARLES FRIED, ESQ. 1545 Massachusetts Avenue Cambridge, Massachusetts 02138 Tel.: (617) 495-4636 Fax: (617) 496-4865 BOIES, SCHILLER & FLEXNER LLP 333 Main Street Armonk, New York 10504 Tel.: (914) 749-8200 Fax: (914) 749-8300 – and – 575 Lexington Avenue New York, New York 10022 Tel.: (212) 446-2300 Fax: (212) 446-2350 Attorneys for Defendant-Appellant Maurice R. Greenberg (For Continuation of Appearances See Inside Cover) Date Completed: August 21, 2015 KAYE SCHOLER LLP 250 West 55th Street New York, New York 10019 Tel.: (212) 836-8000 Fax: (212) 836-8689 – and – ANDREW M. LAWLER, P.C. 641 Lexington Avenue, 27th Floor New York, New York 10022 Tel.: (212) 832-3160 Fax: (212) 832-3158 Attorneys for Defendant-Appellant Howard I. Smith i TABLE OF CONTENTS PRELIMINARY STATEMENT .................................................................... 1 STANDARD OF REVIEW ............................................................................ 6 ISSUES PRESENTED ................................................................................... 6 STATEMENT OF JURISDICTION .............................................................. 9 STATEMENT OF THE CASE .................................................................... 10 PARTIES. ...................................................................................... 10 I. PROCEDURAL HISTORY OF THE ACTION. .......................... 11 II. The Original Complaint. .............................................................. 11 A. The Evolution Of NYAG’s Claims. ............................................. 11 B. Prior Proceedings Before This Court. .......................................... 14 C. ALL INTERESTED PARTIES SETTLED THEIR III. CLAIMS AGAINST APPELLANTS. .......................................... 16 The SEC Settled With Appellants. ............................................... 16 A. AIG’sShareholders Released Appellants From All Claims B. Arising Out Of Or Relating To The Gen Re And CAPCO Transactions. ................................................................................. 17 AIG And Appellants Entered Into Mutual General Releases C. Resolving All Litigation Between Them. .................................... 18 AIG’s Shareholders Released All Derivative Claims D. Against Appellants, Including Those Relating To The Gen Re And CAPCO Transactions That Had Not Been Assumed By AIG. ........................................................................ 19 APPELLANTS’ 2013 SUMMARY JUDGMENT MOTION. ..... 19 IV. The Motion Court’s May 28, 2014 Order. ................................... 24 A. ii The Appellate Division’s April 16, 2015 Order. ......................... 26 B. ARGUMENT ................................................................................................ 28 SUMMARY JUDGMENT STANDARD. .................................... 28 I. DISGORGEMENT IS NOT AUTHORIZED BY THE II. MARTIN ACT OR EXECUTIVE LAW § 63(12). ...................... 29 A. Nothing In The Language Of The Martin Act Or Executive Law § 63(12) Authorizes NYAG To Seek Disgorgement. .................. 31 The Statutory History Of The Martin Act And Executive Law B. § 63(12) Confirms That The Legislature Did Not Authorize Disgorgement. .............................................................................. 34 1. The Martin Act. .............................................................. 35 2. Executive Law § 63(12). ................................................ 37 The Court Should Reject The Appellate Division’s Analysis Of C. The Availability Of Disgorgement As A Remedy Under Executive Law § 63(12) In Ernst & Young. .................................................. 38 1. Applied Card Does Not Authorize Disgorgement Under The Martin Act Or Executive Law § 63(12). ................ 40 2. Whether To Include Disgorgement As A Remedy Under The Statutes Is A Question For The New York Legislature To Determine. ............................................. 42 3. The Ernst &Young Court’s Reliance, In Part, On Federal Authority Merely Highlights That Disgorgment Is Not An Available Remedy Here. .......................................... 43 4. Ernst & Young Ignores Principles Of Separation Of Powers. ........................................................................... 44 NYAG’S CLAIM FOR DISGORGEMENT IS EITHER A III. PROHIBITED ATTEMPT TO SEEK REMEDIES BARRED BY APPLIED CARD OR AN ATTEMPT TO OBTAIN AN IMPERMISSIBLE PENALTY. .................................................... 45 A. NYAG’s Claim For Disgorgement Is Barred By This Court’s Decision In Applied Card. ............................................................ 45 iii B. NYAG’s Claim For Disgorgement Is Either A Request For Punitive Damages Or A Request For An Impermissible Penalty. ................................................................. 46 EVEN IF DISGORGEMENT WERE AN AVAILABLE IV. REMEDY UNDER THE MARTIN ACT AND EXECUTIVE LAW, IT IS NOT AVAILABLE UNDER THE FACTS OF THIS CASE. .................................................................................. 48 NYAG’s Disgorgement Claim Is Barred By Appellants’ A. Direct And Derivative Settlements With AIG And Its Shareholders. ........................................................................... 48 Disgorgement Is Not Appropriate Where Appellants B. Did Not Receive Compensation From The State Or Public Investors. ........................................................................... 51 NYAG Failed To Submit Any Evidence Supporting A C. But-For Causal Link Between Appellants’ Bonuses And The Transactions At Issue. .......................................................... 54 NYAG’s Belated Attempt To Pursue Disgorgement Violates D. Principles Of Due Process. ........................................................... 56 NYAG IS NOT ENTITLED TO THE TYPE OF V. PERMANENT INJUNCTIVE RELIEF IT SEEKS UNDER NEW YORK LAW OR THE FACTS OF THIS CASE. .................................................................................. 57 The Injunctive Relief NYAG Seeks Is Not Authorized A. By The Martin Act Or Executive Law § 63(12). ......................... 58 The Injunctive Relief Sought By NYAG Constitutes An B. Impermissible Penalty. ................................................................. 61 NYAG Is Not Entitled To An Injunction Based On The C. Undisputed Facts Of This Case. ................................................... 63 iv NYAG’S CLAIMS FOR DISGORGEMENT AND VI. INJUNCTIVE RELIEF ARE BARRED BY THE SUPREMACY CLAUSE OF THE UNITED STATES CONSTITUTION. ......................................................................... 68 If This Case Is Brought To Benefit AIG Or Its Shareholders, A. NYAG’s Claim For Disgorgement Is Impliedly Preempted By Federal Law Because It Frustrates Federal Objectives For National Standards Governing Securities Law Actions. .............. 69 NYAG’s Claim For Injunctive Relief Is Preempted By The B. Supremacy Clause Of The United States Constitution. ............... 72 THE COURTS BELOW ERRED BY FAILING TO VII. RECOGNIZE THAT THE BURDEN OF PROOF HAD SHIFTED FROM APPELLANTS TO NYAG, WHO AS PLAINTIFF WILL HAVE THE BURDEN OF PROOF AT TRIAL. .................................................................................... 75 Although Appellants Demonstrated The Absence Of Any A. Issues Of Material Fact Concerning NYAG’s Disgorgement Claim, The Appellate Division Incorrectly Concluded That The Burden Had Not Shifted To NYAG. ..................................... 75 Although Appellants Demonstrated The Absence Of Any B. Issues Of Material Fact Concerning The Availability Of Injunctive Relief, The Appellate Division Incorrectly Concluded That The Burden Had Not Shifted To NYAG. .......... 81 CONCLUSION ............................................................................................. 84 v TABLE OF AUTHORITIES Cases Air Transport Ass’n of America v. Cuomo, 520 F.3d 218 (2d Cir. 2008) ..................................................................... 68 Alfred L. Snapp & Son, Inc. v. Puerto Rico, 458 U.S. 592 (1982) .................................................................................. 72 Alvarez v. Prospect Hospital, 68 N.Y.2d 320 (1986) ............................................................. 28, 75, 77, 82 Andre v. Pomeroy, 35 N.Y.2d 361 (1974) ............................................................................... 79 Andrea v. Arnone, Hedin, Casker, Kennedy & Drake, Architects & Landscape Architects, P.C., 5 N.Y.3d 514 (2005) ................................................................................... 6 Andrew Greenberg, Inc. v. Svane, Inc., 36 A.D.3d 1094 (3d Dep’t 2007) .............................................................. 50 Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc., 18 N.Y.3d 341 (2011) ................................................................... 30, 35, 64 Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc., 80 A.D.3d 293 (1st Dep’t 2010) ............................................................... 35 Baldwin Union Free School District v. County of Nassau, 22 N.Y.3d 606 (2014) ............................................................................... 44 In re Baldwin-United Corp., 770 F.2d 328 (2d Cir. 1985) ..................................................................... 72 Betz v. Blatt, 116 A.D.3d 813 (2d Dep’t) ....................................................................... 49 In re Matter of Blumenthal (Kingsford), 32 A.D.3d 767 (1st Dep’t 2006) ............................................................... 43 vi Booth v. 3669 Delaware, 92 N.Y.2d 934 (1998) ............................................................................... 48 Brandy B. v. Eden Central School District, 15 N.Y.3d 297 (2010) ............................................................................... 77 Breytman v. Olinville Realty, LLC, 46 A.D.3d 484 (1st Dep’t 2007) ............................................................... 82 CFTC v. British American Commodity Options Corp., 788 F.2d 92 (2d Cir. 1986) ....................................................................... 55 Charter Oak Fire Insurance Co. v. Borrelli, 273 A.D.2d 797 (4th Dep’t 2000) ............................................................. 50 Chew Wah Bing v. Sun Wei Ass’n, 205 A.D.2d 355 (1st Dep’t 1994) ............................................................. 48 Colarossi v. University of Rochester, 2 N.Y.3d 773 (2004) ................................................................................. 29 Diamond v. Oreamuno, 24 N.Y.2d 494 (1969) ............................................................................... 54 Dickinson v. Springer, 246 N.Y. 203 (1927) ................................................................................. 64 Ellen v. Lauer, 210 A.D.2d 87 (1st Dep’t 1994) ............................................................... 65 Environmental Conservation Organization v. City of Dallas, 529 F.3d 519 (5th Cir. 2008) .................................................................... 62 Espinal v. Trezechahn 1065 Avenue of the Americas, LLC, 94 A.D.3d 611 (1st Dep’t 2012) ............................................................... 65 Excelsior 57th Corp. v. Lerner, 160 A.D.2d 407 (1st Dep’t 1990) ............................................................. 43 In re Exxon Valdez, 1993 WL 735037 (D. Alaska, July 8, 1993) ............................................. 72 vii Ferluckaj v. Goldman Sachs & Co., 12 N.Y.3d 316 (2009) ......................................................................... 78, 80 First Energy Leasing Corp. v. Attorney-General of the State of New York, 68 N.Y.2d 59 (1986) ................................................................................. 37 Fumarelli v. Marsam Development, Inc., 92 N.Y.2d 298 (1998) ......................................................................... 33, 42 Gabelli v. SEC, 133 S. Ct. 1216 (2013) .............................................................................. 47 Global Minerals & Metals Corp. v. Holme, 35 A.D.3d 93 (1st Dep’t 2006) ................................................................. 48 GTF Marketing, Inc. v. Colonial Aluminum Sales, Inc., 66 N.Y.2d 965 (1985) ......................................................................... 75, 82 Guariglia v. Price Chopper Operating Co. Inc., 38 A.D.3d 1043 (3d Dep’t 2007) .............................................................. 47 Guice v. Charles Schwab & Co., 89 N.Y.2d 31 (1996) ................................................................................. 71 Hawaii v. Standard Oil Co. of California, 405 U.S. 251 (1972) .................................................................................. 63 Hillsborough County, Florida v. Automated Medical Laboratories, Inc., 471 U.S. 707 (1985) .................................................................................. 68 Hunt v. Bankers & Shippers Insurance Co. of New York, 50 N.Y.2d 938 (1980) ................................................................................. 6 I.L.F.Y. Co. v. City Rent & Rehabilitation Administration, 11 N.Y.2d 480 (1962) ............................................................................... 42 IDX Capital, LLC v. Phoenix Partners Group LLC, 19 N.Y.3d 850 (2012) ............................................................................... 77 J.P. Morgan Securities, Inc. v. Vigilant Insurance Co., 91 A.D.3d 226 (1st Dep’t 2011) ............................................................... 30 viii Janos v. Peck, 21 A.D.2d 969 (1st Dep’t 1964) ............................................................... 79 Jim Beam Brands Co. v. Tequila Cuervo La Rojena S.A. de C.V., No. 600122/2008, 2011 N.Y. Slip Op. 34181(U) (Sup. Ct. N.Y. County July 12, 2011) ......................................................................... 54, 55 Khatibi v. Weill, 8 A.D.3d 485 (2d Dep’t 2004) .................................................................. 18 Klostermann v. Cuomo, 61 N.Y.2d 525 (1984) ............................................................................... 42 Lander v. Hartford Life & Annuity Insurance Co., 251 F.3d 101 (2d Cir. 2001) ..................................................................... 69 Lee v. Tetra Tech Inc., 14 Misc. 3d 1235(A), 2007 NY Slip Op. 50312(U) (Sup. Ct. Monroe County 2007) ............................................................................... 66 Louisiana ex. rel. Caldwell v. Allstate Insurance Co., 536 F.3d 418 (5th Cir. 2008) .................................................................... 72 Mallinckrodt v. Barnes, 272 A.D.2d 651 (3d Dep’t 2000) .............................................................. 81 Mangini v. McClurg, 24 N.Y.2d 556 (1969) ......................................................................... 48, 49 Martinez v. Hunts Point Cooperative Market, Inc., 79 A.D.3d 569 (1st Dep’t 2010) ............................................................... 78 Martino v. Stolzman, 18 N.Y.3d 905 (2012) ................................................................................. 6 Matter of Mayfield v. Evans, 93 A.D.3d 98 (1st Dep’t 2012) ................................................................. 33 May’s Furs & Ready-to-Wear, Inc. v. Bauer, 282 N.Y. 331 (1940) ................................................................................. 61 Meghrig v. KFC Western, Inc., 516 U.S. 479 (1996) .................................................................................. 32 ix Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2009) ........................................................................ 69, 70, 71 Miller v. Jetblue Airways Corp., 24 Misc. 3d 1237(A), N.Y. Slip Op. 51780(U) (Sup. Ct. N.Y. County 2009) ............................................................................................ 51 Morales v. County of Nassau, 94 N.Y.2d 218 (1999) ......................................................................... 34, 42 Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950) .................................................................................. 56 National Railroad Passenger Corp. v. National Ass’n of Railroad Passengers, 414 U.S. 453 (1974) .................................................................................. 32 New York v. Seneci, 817 F.2d 1015 (2d Cir. 1987) ....................................................... 52, 53, 72 New York Bankers Ass’n v. City of New York, No. 1:15-cv-04001-KPF, 2015 WL 4726880 (S.D.N.Y. Aug. 7, 2015) ......................................................................................................... 71 New York Public Interest Research Group v. Carey, 42 N.Y.2d 527 (1977) ............................................................................... 66 Ohio v. GMAC Mortgage, LLC, 760 F. Supp. 2d 741 (N.D. Ohio 2011) .................................................... 72 Parochial Business Systems, Inc. v. Board of Education of the City of New York, 60 N.Y.2d 539 (1983) ............................................................................... 34 Pennsylvania v. Mid-Atlantic Toyota Distributors, Inc., 704 F.2d 125 (4th Cir. 1983) .................................................................... 72 Pennsylvania v. New Jersey, 426 U.S. 660 (1976) .................................................................................. 72 People v. Albany & Susquehanna Railroad Co., 57 N.Y. 161 (1874) ................................................................................... 52 x People v. Alexanders Dep’t Store, Inc., 42 A.D.2d 532 (1st Dep’t 1973) ............................................................... 66 People v. Applied Card Systems, Inc., 11 N.Y.3d 105 (2008) ........................................................................ passim People v. Coventry First LLC, 13 N.Y.3d 108 (2009) ............................................................................... 41 People v. Direct Revenue LLC, 19 Misc. 3d 1124(A), 2008 Slip Op. 50845(U) (Sup. Ct. N. Y. County Mar. 12, 2008) ........................................................................ 38, 39 People v. Ernst & Young LLP, 114 A.D.3d 569 (1st Dep’t 2014) ...................................................... passim People v. Federated Radio Corp., 244 N.Y. 33 (1926) ................................................................................... 36 People v. Grasso, 11 N.Y.3d 64 (2008) ........................................................................... 33, 34 People v. Grasso, 54 A.D.3d 180 (1st Dep’t 2008) ......................................................... 52, 68 People v. Greenberg, 21 N.Y.3d 439 (2013) .................................................................... 4, 16, 57 People v. Greenberg, 95 A.D.3d 474 (1st Dep’t 2012) .......................................................... 14, 53 People v. Greenberg, Index No. 401720/05, 2010 WL 4732745 (Sup. Ct. N.Y. County Oct. 21, 2010) ........................................................................................... 13 People v. Ingersoll, 58 N.Y. 1 (1874) ....................................................................................... 51 People v. Lexington Sixty-First Associates, 38 N.Y.2d 588 (1976) ............................................................. 36, 61, 63, 73 People v. Litto, 8 N.Y.3d 692 (2007) ................................................................................. 37 xi People v. Lowe, 117 N.Y. 175 (1889) ................................................................................. 51 People v. McCann, 3 N.Y.2d 797 (1957) ............................................................... 26, 60, 61, 65 People v. Michael Glenn Realty Corp., 106 Misc. 2d 46 (Sup. Ct. N.Y. County 1980) ......................................... 32 People v. Riley, 188 Misc. 969 (Sup. Ct. N.Y. County 1946) ............................................ 61 People v. Volkswagen of America, Inc., 47 A.D.2d 868 (1st Dep’t 1975) ............................................................... 66 Prospect Plaza Tenant Ass’n v. New York City Housing Authority, 11 A.D.3d 400 (1st Dep’t 2004) ............................................................... 77 Ramos v. Howard Industries, Inc., 10 N.Y.3d 218 (2008) ........................................................................ 75, 77 SEC v. Brown, 878 F. Supp. 2d 109 (D.D.C. 2012) .......................................................... 81 SEC v. Citigroup Global Markets, Inc., 827 F. Supp. 2d 328 (S.D.N.Y. 2011) ...................................................... 62 SEC v. Commonwealth Chemical Securities, Inc., 574 F.2d 90 (2d Cir. 1978) ....................................................................... 43 SEC v. Jones, 476 F. Supp. 2d 374, 384 (S.D.N.Y. 2007) .............................................. 67 SEC v. Monarch Fund, 608 F.2d 938 (2d Cir. 1979) ..................................................................... 67 SEC v. National Student Marketing Corp., 360 F. Supp. 284 (D.D.C. 1973) ............................................................... 67 SEC v. Razmilovic, 738 F.3d 14 (2d Cir. 2013) ....................................................................... 55 xii Sheehy v. Big Flats Community Day, Inc., 73 N.Y.2d 629 (1989) ......................................................................... 33, 42 State v. Carvel Corp., No. 42126/79, 1979 WL 3896 (Sup. Ct. N.Y. County Dec. 24, 1979) ......................................................................................................... 66 State v. Fine, 72 N.Y.2d 967 (1988) ............................................................................... 63 State v. Grecco, 21 A.D.3d 470 (2d Dep’t 2005) ................................................................ 66 State v. Holiday Inns, Inc., 656 F. Supp. 675 (W.D.N.Y. 1984) .......................................................... 62 State v. Hotel Waldorf Astoria Corp., 67 Misc. 2d 90 (Sup. Ct. N. Y. County 1971) ......................................... 47 State v. Magley, 105 A.D.2d 208 (3d Dep’t 1984) .............................................................. 64 State v. New York City Conciliation & Appeals Board, 123 Misc. 2d 47 (Sup. Ct. N.Y. County 1984) ......................................... 81 State v. Operation Rescue National, 80 F.3d 64 (2d Cir. 2012) ........................................................................ 72 State v. Solil Management Corp., 128 Misc. 2d 767 (Sup. Ct. N.Y. County 1985) ................................. 30, 47 State Farm Mutual Auto Insurance Co. v. Campbell, 538 U.S. 408 (2003) .................................................................................. 47 Steinberg v. Steinberg, 46 A.D.2d 684 (2d Dep’t 1974) ................................................................ 33 Strowman v. Great Atlantic & Pacific Tea Co., Inc., 252 A.D.2d 384 (1st Dep’t 1998) ............................................................. 78 Sutton Madison, Inc. v. 27 E. 65th St. Owners Corp., 68 A.D.3d 512 (1st Dep’t 2009) ............................................................... 68 xiii Theurer v. Trustees of Columbia University in the City of New York, 59 A.D.2d 196 (3d Dep’t 1977) ................................................................ 36 Thoreson v. Penthouse International, Ltd., Inc., 80 N.Y.2d 490 (1992) ............................................................................... 32 Travelers’ Insurance Co. v. Pomerantz, 246 N.Y. 63 (1927) ................................................................................... 83 Tull v. United States, 481 U.S. 412 (1987) .................................................................................. 47 William J. Jenack Estate Appraisers & Auctioneers, Inc. v. Rabizadeh, 22 N.Y.3d 470 (2013) ......................................................................... 78, 79 Statutes and Constitutional Provisions 15 U.S.C. § 7243(a) ...................................................................................... 51 15 U.S.C. § 7246 ........................................................................................... 69 15 U.S.C. § 77p(a) ........................................................................................ 43 15 U.S.C. § 77p(e) ........................................................................................ 72 15 U.S.C. § 77q ............................................................................................. 74 15 U.S.C. § 77r(a)(3) .................................................................................... 73 15 U.S.C. § 77r(c)(1) .................................................................................... 71 15 U.S.C. § 77t(e) ......................................................................................... 74 15 U.S.C. § 78bb(a)(2) .................................................................................. 43 15 U.S.C. § 78bb(f)(5)(B)(i)(I)-(II) .............................................................. 72 15 U.S.C. § 78j(b) ......................................................................................... 74 15 U.S.C. § 78j-4(b) ..................................................................................... 51 15 U.S.C. § 78u(d)(2) ....................................................................... 59, 73, 74 15 U.S.C. § 78u(d)(3)(A)-(B) ....................................................................... 69 xiv 15 U.S.C. § 78u-2(e) ..................................................................................... 69 15 U.S.C. § 78u-6(4) ..................................................................................... 69 CPLR 104 ...................................................................................................... 79 CPLR 3212(b) ............................................................................................... 28 CPLR 5501(b) ................................................................................................. 6 CPLR 5602(b)(1) ............................................................................................ 9 CPLR 8303(6) ............................................................................................... 48 N.Y. Arts & Cult. Aff. Law § 34.07(2) ........................................................ 34 N.Y. Const. art. VI, § 3(a) .............................................................................. 5 N.Y. Gen. Bus. Law. §§ 352-359 ................................................................... 2 N.Y. Gen. Bus. Law § 353(1) ................................................................ passim N.Y. Gen. Bus. Law § 353(3) ...................................................................... 31 N.Y. Gen. Bus. Law § 359-g(3) ................................................................... 67 N.Y. Lab. Law § 220(3)(d)(iii) ..................................................................... 34 N.Y. Stat. § 92......................................................................................... 34, 44 N.Y. Stat. § 240 ................................................................................ 31, 32, 33 N.Y. Exec. Law § 63(12) ....................................................................... passim Responsible Banking Act .............................................................................. 71 Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), Pub. L. No. 105-353, 112 Stat. 3227 ........................................................ 72 U.S. Const. art. VI, cl. 2 ................................................................................ 74 Other Authorities 19A N.Y. Jur. 2d Compromise, Accord, and Release § 97 (2010) .............. 50 xv 55 N.Y. Jur. 2d Equity § 18 (2015) ............................................................... 42 67A N.Y. Jur. 2d Injunctions § 45 (2010) .............................................. 63, 64 28 N.Y. Practice, Contract Law § 4:21 (2015) ............................................ 30 David P. Currie, Thoughts on Directed Verdicts and Summary Judgments, 45 Univ. Chi. L. Rev. 72, 29 (1977) ...................................... 80 Arthur Karger, The Powers of the New York Court of Appeals § 13.1 at 447-48 (rev. 3d ed. 2005) ........................................................................ 6 Antonin Scalia & Bryan A. Garner, Reading Law § 10 (2012) ................... 32 H.R. Rep. No. 104-622 ................................................................................. 70 Restatement (Third) of Restitution and Unjust Enrichment § 51(4) (2011) ........................................................................................................ 54 S. Rep. No. 105-182 ...................................................................................... 70 Rules 17 C.F.R. pt. 229 (2013) ............................................................................... 74 17 C.F.R. § 229.40 (2013) ............................................................................ 74 17 C.F.R. § 240.10b-5(c) (2013) .................................................................. 62 1 Defendants-Appellants Maurice R. Greenberg and Howard I. Smith (“Appellants”) respectfully submit this Memorandum of Law in support of their appeal from the April 16, 2015 Decision and Order of the Appellate Division, First Department affirming the May 28, 2014 Decision and Order of the Supreme Court, New York County (Ramos, J.) (the “motion court”) denying Appellants’ July 26, 2013 motion for summary judgment. PRELIMINARY STATEMENT The Complaint filed in this action on May 26, 2005 alleged that improper accounting for numerous transactions had improperly inflated the net income for American International Group, Inc. (“AIG”) by $907 million and shareholder equity for AIG by $2.029 billion. The only claims that remain today relate to two transactions, neither of which had any effect on AIG’s shareholder equity or net income. For the first eight years of this litigation, Plaintiff-Respondent Attorney General of the State of New York (“NYAG” or “Respondent”) only pursued claims for damages, which it characterized as a “pursuit of compensation for the injured AIG shareholders.” (R. 176.) However, after Appellants participated in settlements with and obtained general releases from AIG and AIG’s shareholders, those damages claims were voluntarily 2 dismissed pursuant to this Court’s decision in People v. Applied Card Systems, Inc., 11 N.Y.3d 105 (2008) (“Applied Card”). At this point, rather than accept that the case was over, NYAG added new claims for disgorgement and injunctive relief even though:  Neither disgorgement nor injunctive relief of the type sought by NYAG is available under the two statutes on which NYAG’s claims are based – the Martin Act, N.Y. Gen. Bus. Law §§ 352-359, and Executive Law § 63(12).  NYAG’s attempt to seek disgorgement is a transparent effort to obtain damages that either are barred under Applied Card or would constitute an impermissible penalty.  The bonuses that NYAG seeks to disgorge from Appellants were paid by AIG, not by the State or public investors, and AIG and its shareholders have released any and all claims that they might have had against Appellants.  Appellants entered into consent judgments with the SEC, agreed to the entry of injunctive relief against them, and paid disgorgement to the SEC regarding issues that included the two transactions remaining at issue. 3  NYAG had not presented any evidence showing any causal link between the alleged wrongful conduct and the alleged ill-gotten gains.  The entry of injunctive relief against Appellants would constitute an impermissible penalty where the alleged violation occurred fifteen years ago and NYAG has not alleged that any violations have occurred since then; Appellants (who are ninety and seventy years old, respectively) have not been employed in any capacity by a public company for over ten years; and during the ten years in which this action has been pending, no preliminary injunctive relief was ever sought and no evidence was presented of any risk of imminent or irreparable harm.  Appellant Smith has already served a now-expired, voluntary three-year ban on service as an officer or director of a public company pursuant to the SEC consent judgment referred to above, which covered the only two transactions remaining at issue in this case.  NYAG’s claims for disgorgement and injunctive relief are barred by the Supremacy Clause of the United States Constitution, particularly where Appellants have entered into consent judgments with the SEC agreeing to injunctive relief and paying disgorgement. 4  NYAG did not take any discovery on those two claims for relief, even though all relevant discovery was completed, and the trial of this action has not been bifurcated into liability and remedies phases. Appellants submitted evidence on their motions for summary judgment that established a prima facie case regarding each of these evidentiary points, and NYAG failed to present any evidence rebutting Appellants’ prima facie showing. The courts below failed to address most of these issues, and erroneously analyzed the issues that were addressed. This case previously was before this Court on appeal from the denial of Appellants’ motions for summary judgment regarding NYAG’s damages claims. Between the briefing and argument of that appeal, NYAG dropped its damages claims and asserted claims for disgorgement and injunctive relief that had not been considered by the courts below. Appellants argued that, with the dismissal of NYAG’s damages claims, this Court should dismiss the case in its entirety. However, this Court remanded with directions that the courts below decide “in the first instance” “the availability of any other equitable relief,” People v. Greenberg (Greenberg II), 21 N.Y.3d 439, 447-48 (2013), and determine whether Appellants’ summary judgment motion should be granted. 5 On remand, the motion court erroneously held that the availability of disgorgement and the injunctive relief now claimed by NYAG had already been decided by this Court, and that this Court had instructed that the case proceed to trial on the question of injunctive relief. But there is a difference between a lower court deciding a question “in the first instance” – which can include addressing the issue through a motion to dismiss or a motion for summary judgment – and an instruction to conduct a trial on the merits. The motion court misread this Court’s carefully circumscribed remand order, and – unless reversed – the result will be an unnecessary trial in a case that should have been resolved on summary judgment. The Appellate Division took no issue with that holding. This Court should reverse the decisions below, grant summary judgment in Appellants’ favor and dismiss the action because NYAG cannot succeed on its claims for relief. In the alternative, this Court should reverse the decisions below and remand the action to the motion court with a direction to follow the procedure set forth in this Court’s June 25, 2013 Order by reviewing the evidence submitted on summary judgment and issuing a new decision considering that evidence. 6 STANDARD OF REVIEW The Court of Appeals is generally “limited to the review of questions of law.” N.Y. Const. art. VI, § 3(a); Hunt v. Bankers & Shippers Ins. Co. of N.Y., 50 N.Y.2d 938, 940 (1980). See also CPLR 5501(b); Arthur Karger, The Powers of the New York Court of Appeals § 13.1 at 447-48 (rev. 3d ed. 2005). Review is de novo and the Court “need not defer to Supreme Court’s judgment” on questions of law, Andrea v. Arnone, Hedin, Casker, Kennedy & Drake, Architects & Landscape Architects, P.C., 5 N.Y.3d 514, 521 (2005), including whether an order denying a motion for summary judgment should have been granted. See, e.g., Martino v. Stolzman, 18 N.Y.3d 905, 908-09 (2012) (reversing denial of summary judgment and dismissing complaint). ISSUES PRESENTED 1. Is disgorgement an available remedy under the Martin Act and New York Executive Law § 63(12), where those statutes do not provide for disgorgement as a remedy? 2. Is disgorgement an available remedy under the Martin Act and New York Executive Law § 63(12), where Respondent’s request for “disgorgement” constitutes an attempt to seek damages barred by People v. 7 Applied Card, 11 N.Y.3d 105 (2008), or an attempt to seek an impermissible penalty? 3. If disgorgement is an available remedy, did the courts below nevertheless err in refusing to grant Appellants’ motion for summary judgment where it is undisputed that the entity that paid the amounts sought to be disgorged (AIG) already settled any and all claims it had against the Appellants and: a. Appellants did not receive compensation from the State or public investors; b. Appellants paid disgorgement in connection with their respective SEC consent judgments dated August 7, 2009; c. On November 25, 2009, Appellants received general releases from AIG, the entity that paid Appellants the bonuses sought to be disgorged; and d. On April 11, 2013, a federal court approved a settlement of a federal securities class action lawsuit against Appellants concerning the same transactions that are at issue in this litigation? 4. If disgorgement is an available remedy and the releases and judgments do not bar the remedy as a matter of law, did the courts below nevertheless err when refusing to grant summary judgment to Appellants 8 where Respondent did not present any evidence at the summary judgment stage of this action showing any causal link between the alleged wrongful conduct and the alleged illicit gains such that there is no material issue in dispute for trial? 5. Is it proper on a motion for summary judgment to shift the burden of proof away from Respondent, who is the plaintiff in this action, onto Appellants, who are the defendants in this action, and who will not have the burden at trial? 6. Is injunctive relief that would bar Appellants from serving as officers or directors of a public company, or from participating in the securities industry, available: a. Under the Martin Act or Executive Law § 63(12), where neither statute provides for those remedies? b. In a Martin Act or Executive Law § 63(12) action where such relief constitutes an impermissible penalty? c. In a Martin Act or Executive Law § 63(12) action where: i. The alleged violations occurred fifteen years ago; ii. There has been no alleged violation in the last fifteen years; iii. Appellants have not been employed in any capacity in a public company for over ten years; 9 iv. Mr. Greenberg is over ninety years old and Mr. Smith is over seventy years old; v. The action has been ongoing for more than ten years; vi. No preliminary injunction was ever moved for; vii. Mr. Smith has already served a now-expired, voluntary three-year ban on service as an officer or director of a public company pursuant to an SEC consent judgment that covered the only two transactions remaining at issue in this case; and viii. No evidence was presented of any risk of imminent or irreparable harm? 7. Is Respondent’s attempt to seek disgorgement and injunctive relief under the Martin Act and New York Executive Law § 63(12) barred by the Supremacy Clause of the United States Constitution? STATEMENT OF JURISDICTION This Court has jurisdiction on this appeal pursuant to CPLR 5602(b)(1). This action is pending in the Commercial Division of the Supreme Court, New York County, before Justice Charles E. Ramos. On May 28, 2014, that court entered its decision and order denying Appellants’ motion for summary judgment. (R. 18-23.) Appellants timely appealed to the Appellate Division, First Department. (R. 13-15.) On April 16, 2015, 10 the Appellate Division affirmed the denial of Appellants’ motion for summary judgment. (R. 587-89.) Appellants moved the Appellate Division for leave to appeal to this Court on April 21, 2015.1 The Appellate Division granted Appellants’ motion for leave to appeal on June 18, 2015. (R. 586.) STATEMENT OF THE CASE PARTIES. I. Mr. Greenberg served as AIG’s President and Chief Executive Officer from 1968 to 1989, as its Chairman and Chief Executive Officer from 1989 until his retirement in 2005, and as a member of its Board of Directors from 1967 to 2005. Under the leadership of Mr. Greenberg, AIG grew to become the largest insurance company in the world. Mr. Smith, formerly a Partner at the accounting and auditing firm of Coopers & Lybrand LLP, served as AIG’s Vice President and Comptroller from 1984 to 1996, as AIG’s Chief Financial Officer, Executive Vice President, and Comptroller from 1996 to 2005, and as a Director of AIG from 1997 to 2005. 1 See Notice of Defendants-Appellants’ Motion for Leave to Appeal to the Court of Appeals, or in the Alternative, for Reargument, People v. Greenberg, Index No. 401720/05 (1st Dep’t Apr. 21, 2015). 11 PROCEDURAL HISTORY OF THE ACTION. II. The Original Complaint. A. On May 26, 2005, shortly after Mr. Greenberg publicly criticized the then-New York Attorney General for bringing prosecutions that turned “foot faults into murder charges” (R. 493), NYAG and the Superintendent of Insurance of the State of New York filed their original complaint against AIG, Mr. Greenberg and Mr. Smith alleging violations of Executive Law § 63(12), the Martin Act, and common law fraud, in connection with nine transactions entered into, or accounting entries made, by AIG while Appellants Greenberg and Smith were CEO and CFO. See Complaint at 35- 36, People v. Greenberg, Index No. 401720/05 (Sup. Ct. N.Y. County May 26, 2005) ( “Original Complaint”). The “Wherefore” clause of the Original Complaint included a boilerplate demand for equitable relief in the forms of disgorgement and injunctive relief. Id. at 36-37. The Evolution Of NYAG’s Claims. B. On September 5, 2006, NYAG filed an Amended Complaint against Appellants that (a) dropped the allegations in the Original Complaint with respect to five of the nine transactions or accounting entries, and (b) dropped all common law fraud claims against Appellants. (See generally R. 119-41.) 12 On July 15, 2009 and January 21, 2011, NYAG dropped its allegations relating to two of the remaining four transactions or accounting entries, leaving only two transactions at issue: (i) a finite risk reinsurance transaction entered into by a subsidiary of AIG in the last quarter of 2000 and the first quarter of 2001 (the “Gen Re Transaction”), and (ii) a reinsurance transaction entered into by a subsidiary of AIG in the third quarter of 2000 (the “CAPCO Transaction”). During the first eight years of this action, the only relief NYAG pursued was for money damages, which are expressly authorized under the Executive Law. (R. 176.) NYAG never sought any preliminary injunctive relief against Appellants or any discovery concerning injunctive relief or disgorgement. Although NYAG did not delete those remedies from the “Wherefore” clause of the Amended Complaint it filed in 2006, after dropping its common law fraud claim (R. 140-41), NYAG did not pursue any such claim until the Spring of 2013. Moreover, the boilerplate “Wherefore” clause of the Amended Complaint does not include the injunctive relief currently sought.2 Id. 2 The Amended Complaint contained a boilerplate request for an injunction “[e]njoining and restraining defendants” “from engaging in any conduct, conspiracy, contract, or agreement, and from adopting any practice, plan, program, scheme, artifice or device similar to, or having a purpose and effect similar to, the conduct complained above.” (R. 140.) Notably, the Amended Complaint did not seek (a) an officer or director bar; or (b) a ban from participation in the securities industry – the permanent 13 On the contrary, at an April 26, 2007 hearing, NYAG (a) did not dispute Justice Ramos’ statement: “It’s not alleged that he [Mr. Greenberg] made any particular money himself from these transactions” (R. 289); and (b) in response to the motion court’s statement that “we are not looking at disgorgement here,” acknowledged that it was pursuing a “damages” case based on “a fraud on the market” theory. (R. 290.) In September 2009, after over four years of extensive discovery and motion practice, the parties cross-moved for summary judgment concerning the two remaining transactions. On October 21, 2010, the motion court denied Appellants’ summary judgment motions, granted NYAG’s summary judgment motion regarding liability on the CAPCO Transaction, and denied NYAG’s summary judgment motion regarding the Gen Re Transaction. See People v. Greenberg, Index No. 401720/05, 2010 WL 4732745, at *83 (Sup. Ct. N.Y. County Oct. 21, 2010). Shortly thereafter, on January 20, 2011, NYAG filed a Note of Issue that included claims for damages and injunctive relief but that did not include a claim for disgorgement. (R. 167-70.) NYAG represented in the Note of Issue that all discovery “now known to be necessary” was complete. (R. 168.) injunctive relief NYAG announced it would pursue after abandoning its damages claim in April 2013. (R. 197-98.) 14 On May 8, 2012, the Appellate Division, First Department, reversed the motion court’s grant of summary judgment in favor of NYAG regarding liability on the CAPCO Transaction and affirmed in all other respects. People v. Greenberg (Greenberg I), 95 A.D.3d 474, 484-85 (1st Dep’t 2012). The Appellate Division then granted Appellants leave to appeal that ruling to this Court. (R. 5.) Prior Proceedings Before This Court. C. On that appeal to this Court, the parties briefed, inter alia, the issue of whether NYAG could seek damages on behalf of AIG’s shareholders in light of Appellants’ August 10, 2009 settlement of a federal class action brought by AIG’s shareholders and this Court’s decision in Applied Card. On April 25, 2013, while the appeal was pending before this Court, and two weeks after the final approval of the settlement of that federal class action (R. 153),3 NYAG withdrew its damages claim. (R. 197-98.) Rather than voluntarily terminate its action at that point, NYAG announced for the first time that it intended “to pursue vigorously” a permanent injunction 3 The federal court’s final approval of Appellants’ settlement with AIG’s shareholders was not obtained until April 11, 2013 (R. 153-66), in part because the settlement was contingent on final approval of AIG’s settlement with the same class and in part because of NYAG’s unsuccessful attempts to oppose that settlement. (R. 171-96.) See In re Am. Int’l Grp., Inc. Sec. Litig., No. 1:04-cv-08141-DAB (S.D.N.Y.), ECF Nos. 650-53, 657- 61, 665, 670 (“In re AIG”). 15 barring Appellants from becoming officers or directors of a publicly traded company and from participating in the securities industry. (R. 197.) Notably, NYAG’s April 25, 2013 letter to this Court (the “April 25 Letter”) did not mention disgorgement. (R. 197-98.) However, at oral argument before this Court one month later, NYAG informed the Court and Appellants for the first time that it was “looking into” pursuing disgorgement (R. 221-22), even though the Solicitor General conceded NYAG had not taken discovery on disgorgement, and therefore could not offer evidence of any potentially disgorgeable gains made by Appellants as a result of the Gen Re or CAPCO Transactions. (R. 223-24.) This Court questioned NYAG’s sudden change of course and uncertainty about the availability of remedies NYAG was considering seeking eight years into this action. (R. 219-27.) However, as NYAG stated in its April 25 Letter, the availability of “non-damages remedies” was “not properly before the Court,” and because the injunctive relief “claim has never been squarely raised in or addressed by any court in this matter,” it “should be addressed, in the first instance, by the trial court rather than by this Court.” (R. 198.) Agreeing with NYAG, this Court then directed the lower courts to determine, “in the first instance,” whether NYAG’s newly suggested 16 remedies (permanent injunctive relief banning Appellants from serving as officers or directors of a public company or participating in the securities industry and, possibly, disgorgment about which NYAG was non- committal) could be granted on the facts of this case: “On the merits, we cannot say as a matter of law that no equitable relief may be awarded. There is no doubt room for argument about whether the lifetime bans that the Attorney General proposes would be a justifiable exercise of a court’s discretion; but that question [i.e., the question of the availability of permanent injunctive relief of the type sought here], as well as the availability of any other equitable relief that the Attorney General may seek, must be decided by the lower courts in the first instance.” Greenberg II, 21 N.Y.3d at 447-48 (emphasis added). ALL INTERESTED PARTIES SETTLED THEIR CLAIMS III. AGAINST APPELLANTS. During the discovery and original summary judgment process in this litigation, all parties with any legitimate interest in the transactions at issue here settled their claims and released Appellants. The SEC Settled With Appellants. A. On August 7, 2009, Appellants received releases related to the Gen Re and CAPCO Transactions when they separately settled with the SEC. (R. 86-97, 102-16.) Mr. Greenberg (as a control person) and Mr. Smith also consented to the entry of federal injunctions barring them from “any act, practice, or course of business which operates or would operate as a fraud or 17 deceit upon any person” in connection with the purchase or sale of securities. (R. 86-87, 102-03.) With one exception, those injunctions remain in force.4 (R. 86-89, 102-08.) Appellants have complied fully with those consent judgments. (R. 36-37, 99.) There has been no allegation by the SEC that either Mr. Greenberg or Mr. Smith has violated the consent judgments or otherwise engaged in wrongful or unlawful conduct since they consented to the injunctions. (R. 37, 99.) AIG’s Shareholders Released Appellants From All Claims B. Arising Out Of Or Relating To The Gen Re And CAPCO Transactions. On August 10, 2009, AIG’s common shareholders agreed to release all their claims against Appellants. That settlement received federal court approval on April 11, 2013 and an Order and Final Judgment was later entered in a securities class action brought by those stockholders. (R. 153- 66). NYAG had urged the federal court not to approve the settlement on the grounds that such approval would end NYAG’s case against Appellants here. (R. 171-96.) The settlement was approved over NYAG’s objections and a final order of approval was duly entered. (R. 153-66.) 4 Mr. Smith voluntarily consented to a bar on serving as an officer or director of a public company for a three-year period commencing on August 7, 2009 and ending on August 7, 2012 – over three years ago. (R. 99-100, 107-08.) The SEC did not seek an officer or director bar against Mr. Greenberg. (R. 36.) 18 AIG And Appellants Entered Into Mutual General Releases C. Resolving All Litigation Between Them. On November 25, 2009, AIG and Appellants entered into a settlement in which, among other things, AIG expressly released any and all claims it had against Appellants, including all of its claims in an action then pending in the Delaware Chancery Court, captioned American International Group, Inc. Consolidated Derivative Litigation, No. 769-VCS (Del. Ch.), filed Oct. 29, 2003 (“Delaware Derivative Action”). (R. 142-152.) The Delaware Derivative Action had been commenced by certain AIG stockholders as a derivative action, which alleged, among other things, that Appellants had damaged AIG in connection with the Gen Re and CAPCO Transactions.5 AIG later assumed direct control over a part of the Delaware Derivative Action against Appellants, including claims relating to the Gen Re and CAPCO Transactions. As part of the global settlement between AIG and Appellants, AIG released Appellants from any and all claims it had against Appellants. That release expressly encompassed any claims AIG had or could have had 5 See the First Amended Combined Complaint filed in the Delaware Derivative Action on April 14, 2008 (D.E. 23350684) at ¶¶ 1-6, 18-24, 41-47 (allegations relating to the Gen Re and CAPCO Transactions). That complaint also alleged injury to AIG resulting from other transactions. This Court may take judicial notice of publicly filed court documents in other cases, such as the First Amended Combined Complaint. See Khatibi v. Weill, 8 A.D.3d 485, 485 (2d Dep’t 2004). 19 against Appellants arising out of or related to the Gen Re or CAPCO Transactions. (R. 142-52.) This necessarily included any claims for disgorgement. AIG later dismissed those claims with prejudice.6 AIG’s Shareholders Released All Derivative Claims Against D. Appellants, Including Those Relating To The Gen Re And CAPCO Transactions That Had Not Been Assumed By AIG. AIG also provided a similar release to Appellants on January 25, 2011, as part of the court-approved settlement of that part of the Delaware Derivative Action that had not been assumed directly by AIG. See Order and Final Judgment, Am. Int’l Grp., Inc. Consol. Derivative Litig., No. 769- VCS, 2011 WL 244179 (Del. Ch. Jan. 25. 2011). APPELLANTS’ 2013 SUMMARY JUDGMENT MOTION. IV. On July 26, 2013, after all the settlements and releases were finalized, and after this Court’s remittur, Appellants moved for summary judgment regarding NYAG’s newly asserted claims for relief – the only claims for relief remaining in this case. (R. 24-25.) In support of their summary judgment motion, Appellants made a prima facie showing that NYAG could not seek disgorgement because: 6 See Delaware Derivative Action, Stipulation and Notice of Voluntary Dismissal With Prejudice, Doc. No. 2046, Trans. ID 37047854 (Feb. 5, 2010). 20  On May 28, 2013, NYAG acknowledged to this Court that despite the close of discovery, it lacked the evidence necessary to establish a case for disgorgement.7 (R. 222-23.)  At the same time, NYAG admitted that it had never taken discovery on disgorgement,8 even though discovery had been completed.9  NYAG did not dispute the motion court’s observation at a conference on April 26, 2007 that disgorgement was not among the remedies sought. (See R. 290 (“The Court: We are not looking at disgorgement here of any insider trading or anything like that”).)  NYAG did not include disgorgement as a remedy sought in its January 20, 2011 Note of Issue, and represented that all discovery “now known to be necessary” was complete, despite having taken no discovery regarding disgorgement. (R. 167-69.) 7 “We’re saying we are looking – I can’t promise we will be able to establish it. We are entitled to attempt to determine – to find performance based compensation, that’s what disgorgement would be, performance based compensation that was effected by these frauds . . . not the damages they inflicted . . . .” (R. 222) (emphasis added); see also id. at 223 (“Judge Pigott: And how much is that? Ms. Underwood: We don’t --- I can’t put a finger on it now, but we are entitled to pursue that.”) (emphasis added). 8 “Judge Pigott: . . . Has there been discovery as to how much you would be seeking in terms of disgorgement? Ms. Underwood: No. I think that it’s – I don’t believe so....” (R. 223-24.) 9 Pre-trial discovery is complete with the exception of the reopening of the deposition of one fact witness and the deposition of one previously undeposed fact witness. Neither of those witnesses is relevant to NYAG’s claims for disgorgement or injunctive relief. Because the motion court has not bifurcated the trial into liabilities and remedies phases (see R. 566-67), NYAG cannot defer proving disgorgeable gains until a subsequent (non- existent) remedies phase of the trial. 21  Appellants did not receive any compensation from public investors or from the State of New York during the many years they served as officers of AIG. (R. 38, 101.) NYAG did not submit any evidence to rebut Appellants’ prima facie case that NYAG could not seek disgorgement. Appellants also demonstrated as a legal matter that: (a) disgorgement is not an available remedy under the Martin Act and Executive Law § 63(12); (b) NYAG’s attempt to seek disgorgement against Appellants was prohibited by this Court’s decision in Applied Card, or was an impermissible penalty; (c) disgorgement was prohibited by the general releases provided by AIG and its shareholders in settlements of other litigations and by the prior disgorgements of funds by Appellants as part of consent judgments they entered into with the SEC (R. 86-97, 102-16, 142-52, 153-66); (d) NYAG lacked standing to pursue disgorgement in this case; and (e) NYAG’s attempt to seek disgorgement against Appellants was prohibited by the Supremacy Clause of the U.S. Constitution. Regarding NYAG’s claim for a permanent injunction, Appellants submitted affidavits in support of their motion for summary judgment demonstrating that: 22  Appellants have not served as officers or directors of a public company since 2005 and have no intention of doing so in the future. (R. 36, 99.) Mr. Greenberg is the Chairman, CEO and a member of the Board of Directors of C.V. Starr & Co., Inc. (“C.V. Starr”) and Starr International Company, Inc. (“Starr International”), which are privately- held corporations, and Mr. Smith is a Director and the Vice Chairman of Finance of each of these private corporations. (R. 35-36, 98-99.)  Appellants do not personally engage in the sale or offering of securities or rendering advice to the public within or from the State of New York or elsewhere, nor have they ever done so. (R. 37, 100.)  Neither Appellant has a license to act as an investment adviser or as a broker-dealer in the purchase, offering or sale of securities to the public within or from the State of New York or otherwise.10 Id. Appellants also submitted evidence that:  Appellants are beyond the age at which they could reasonably be expected to engage in the activities that NYAG seeks to enjoin, since 10 C.V. Starr owns Starr Investment Holdings, Inc. (“SIH”), a limited liability company which is registered with the SEC as an investment adviser under the Investment Company Act of 1940. (R. 37, 100.) Starr International is the indirect 100% owner of Starr Strategic Partners, LLC (“SSP”), which is broker-dealer registered with the SEC. Neither Mr. Greenberg nor Mr. Smith is personally involved in the solicitation of investments or investment advice rendered to third parties by SIH or SSP. Id. 23 Mr. Greenberg is ninety years old and Mr. Smith is seventy years old. (R. 36, 99.)  There have been no allegations or evidence that either Appellant has engaged in any misconduct in the decade since this action was filed, and the activities discussed in NYAG’s Amended Complaint occurred nearly fifteen years ago.11 (R. 35-37, 99-100.)  Mr. Greenberg (as a control person) and Mr. Smith entered into federal court-approved consent judgments enjoining them from participating in “any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person” (R. 87, 103) and there is no allegation that Appellants have failed to comply with those injunctions. (R. 36, 99).  Mr. Smith has already served a three-year bar of service as an officer or director of a public company under the August 7, 2009 consent judgment with the SEC. (R. 99, 107-108.) This evidence constituted a prima facie showing that no likelihood of irreparable harm or recurrent illegality exists to justify a permanent 11 The insurance companies owned and operated by Starr International are regulated by various state and international insurance departments. None of the many insurance departments and other regulators who regulate these insurance companies has accused either Appellant of any misconduct or unlawful activity concerning the activities they have engaged in since leaving AIG more than a decade ago. (R. 37, 100.) 24 injunction against Appellants. In response, NYAG did not submit any admissible evidence, and instead submitted only an affirmation by NYAG’s trial counsel containing speculation about Appellants’ possible future conduct. (R. 332-35.) Appellants also argued that: (a) director and officer bars and prohibitions on participation in the securities industry are not remedies authorized by the Martin Act and Executive Law § 63(12); (b) NYAG had no sovereign interest in pursuing a permanent injunction and therefore lacks standing to try this case; and (c) NYAG’s attempt to seek the type of permanent injunctive relief it now seeks against Appellants is prohibited by the Supremacy and Due Process Clauses of the U.S. Constitution. (R. 8-9, 21-22, 550-51, 568-69.) The Motion Court’s May 28, 2014 Order. A. On May 28, 2014, the motion court denied Appellants’ summary judgment motion. (R. 16-23.) The motion court misinterpreted the prior mandate of this Court, which directed the lower courts to consider “in the first instance” the legal availability of NYAG’s newly advanced demands for equitable relief, and instead concluded that “[t]he guidance from the Court of Appeals could not be more clear that [NYAG] may proceed to trial seeking equitable relief.” (R. 21 (emphasis added).) This holding 25 misconstrued the language from this Court’s ruling that “on the present record” available to this Court at that time, NYAG was not barred “as a matter of law from obtaining any equitable relief.” (R. 21.) This Court’s June 25, 2013 ruling did not conclude that the relief was available, but rather – consistent with NYAG’s suggestion to this Court on April 25, 2013 (see supra Statement of the Case II.C) – that the courts below would have to determine “in the first instance” whether those claims could be tried. The motion court also erred in summarily rejecting Appellants’ argument that disgorgement is not a remedy authorized by the Martin Act and Executive Law § 63(12). In holding that NYAG “may also seek disgorgement under the Martin Act as an equitable remedy” (R. 22), the motion court relied solely upon the Appellate Division’s then-recent decision in People v. Ernst & Young LLP, 114 A.D.3d 569 (1st Dep’t 2014) (“Ernst & Young”) – a decision of state-wide importance that has not been reviewed by this Court – and did not address any of Appellants’ arguments regarding disgorgement or NYAG’s failure to rebut Appellants’ prima facie showing on that issue. The motion court also erroneously and summarily found that NYAG was entitled to proceed to trial with its claim for permanent injunctive relief. Although the motion court acknowledged that Appellants had argued that 26 NYAG lacked standing to pursue injunctive relief under the facts of this case (R. 20), the motion court did not rule on that argument (see R. 19-23). The motion court found that the injunctive relief sought by NYAG was proper under the Martin Act because that Act permits injunctions barring a defendant from “selling or offering for sale to the public . . . as principal, broker or agent, or otherwise, any securities issued or to be issued” (R. 21- 22) (internal quotation marks omitted), even though Appellants demonstrated that they have never engaged in those activities and have no intention of doing so. The motion court further relied on this Court’s opinion in People v. McCann, 3 N.Y.2d 797 (1957), to hold that the Martin Act permits NYAG to seek officer and director bars (R. 422), even though McCann did not address that question. The Appellate Division’s April 16, 2015 Order. B. Appellants timely appealed to the Appellate Division, which on April 16, 2015, affirmed the decision of the motion court in its three-page Decision. (R. 587-89.) The Appellate Division erred in summarily affirming the motion court’s erroneous decision:  The Appellate Division erred in concluding that disgorgement claims may be brought under the Martin Act and Executive Law 27 § 63(12), relying solely on its own recent decision in Ernst & Young. (R. 587.)  The Appellate Division erred in ruling that “The State’s disgorgement claim was legally viable, despite the settlement of actions brought by American International Group, Inc. shareholders and the corporation, and the accompanying releases.” Id.  The Appellate Division erred in ruling that Appellants “failed to carry their prima facie burden of demonstrating the lack of incentive compensation paid to defendants as a result of the sham transactions . . . .” (R. 587-88.) The Appellate Division did not acknowledge or even discuss the evidence presented by Appellants that carried their burden, nor did it acknowledge NYAG’s failure to present any evidence of a causal link between the bonuses paid to Appellants and the transactions at issue, particularly in light of NYAG’s previous acknowledgement that it had no evidence of and was not pursuing disgorgement. (R. 587-89.)  The Appellate Division erred in holding that NYAG is entitled to seek permanent injunctions barring Appellants from serving as public company officers and directors or participating in the securities industry, without analyzing whether such relief is available under the Martin Act 28 or Executive Law § 63(12), and if so, how that is constitutionally permissible relief. (R. 588-89.)  The Appellate Division erred in holding that Appellants failed to “demonstrate conclusively” that an injunction was not warranted “under the circumstances, which at least raised issues of fact as to the imminence of harm” without discussing the evidence presented by Appellants and NYAG’s failure to present any contradictory evidence. (R. 588.) Appellants timely moved the Appellate Division for leave to appeal on April 21, 2015, which motion was granted on June 18, 2015. (R. 586.) ARGUMENT SUMMARY JUDGMENT STANDARD. I. Summary judgment “shall be granted if . . . [the] defense shall be established sufficiently to warrant the court as a matter of law in directing judgment in favor of any party.” CPLR 3212(b). If the movant makes a prima facie showing of entitlement to judgment as a matter of law, “the burden shifts to the party opposing the motion for summary judgment to produce evidentiary proof in admissible form sufficient to establish the existence of material issues of fact which require a trial of the action.” Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 324 (1986) (citations omitted). 29 Failure to tender admissible, competent evidence in opposition to a defendant’s prima facie showing requires dismissal of plaintiff’s complaint. See Colarossi v. Univ. of Rochester, 2 N.Y.3d 773, 774 (2004) (holding that summary judgment dismissing complaint was properly granted where “[i]n opposition to defendant’s prima facie showing of entitlement to summary judgment, plaintiff presented no evidence other than ‘[m]ere conclusions, expressions of hope or unsubstantiated allegations.’” (second alteration in original)). DISGORGEMENT IS NOT AUTHORIZED BY THE MARTIN II. ACT OR EXECUTIVE LAW § 63(12). The plain language and the statutory history of the Martin Act and Executive Law § 63(12) demonstrate that the New York Legislature never authorized NYAG to seek disgorgement under either statute. When analyzing the statutory language and history in this case, it is important to recognize the differences between “disgorgement,” “restitution,” and “damages.” Each of these three distinct remedies serves a different purpose. The Legislature’s decision not to include disgorgement is therefore a deliberate choice about the nature of the remedial schemes of those statutes. Restitution is intended to make injured parties whole. It is tied to the harm that victims have suffered. Thus, when NYAG seeks restitution under 30 the Martin Act, NYAG “seek[s] monetary restitution on behalf of investors who were the victims of fraudulent activity.” Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Mgmt. Inc. (Assured Guaranty II), 18 N.Y.3d 341, 350 (2011). Like restitution, damages under Executive Law § 63(12) serve a compensatory purpose – they are intended to make whole those harmed by an alleged fraud. See State v. Solil Mgmt. Corp., 128 Misc. 2d 767, 773 (Sup. Ct. N.Y. County 1985) (holding that under Executive Law § 63(12), NYAG “is limited to obtaining restitution or compensatory damages on behalf of the injured” victims (emphasis added)). In contrast, disgorgement is “an equitable remedy distinct from restitution.” Applied Card, 11 N.Y.3d at 125. Disgorgement is focused on the gains received by alleged wrongdoers. It is “aimed at ‘forcing a defendant to give up the amount by which he was unjustly enriched.’” J.P. Morgan Secs., Inc. v. Vigilant Ins. Co., 91 A.D.3d 226, 230 (1st Dep’t 2011), rev’d on other grounds, 21 N.Y.2d 324 (2013). In other words, a “claim for restitution seeks to restore what was wrongfully taken while a disgorgement remedy requires the wrongdoer to turn over any gains it generated as a result of its wrongdoing.” 28 N.Y. Practice, Contract Law § 4:21 (2015). 31 A. Nothing In The Language Of The Martin Act Or Executive Law § 63(12) Authorizes NYAG To Seek Disgorgement. The Martin Act specifies that NYAG may seek four remedies: (a) an injunction against “continuing such fraudulent practices,” N.Y. Gen. Bus. Law § 353(1); (b) a permanent injunction against “selling or offering for sale to the public within this state, as principal, broker or agent, or otherwise, any securities issued or to be issued,” id.; (c) “restitution of any moneys or property obtained directly or indirectly by any such fraudulent practice,” id. § 353(3); and (d) “a sum not in excess of two thousand dollars as an additional allowance,” id. § 353(1). None of these statutory provisions authorizes disgorgement. Similarly, Executive Law § 63(12) specifies that NYAG may seek the following remedies: (a) “an order enjoining the continuance of [fraudulent or illegal] business activity or of any fraudulent or illegal acts”; (b) an order directing “restitution and damages”; and (c) an order revoking the ability to do business in New York as a partnership or under an alias. N.Y. Exec. Law § 63(12). None of these statutory provisions authorizes disgorgement either. New York law recognizes the “expressio unius” doctrine by providing that where “a law expressly describes a particular act, thing or person to which it shall apply, an irrefutable inference must be drawn that what is omitted or not included was intended to be omitted or excluded.” N.Y. Stat. 32 § 240 (emphasis added). See also Antonin Scalia & Bryan A. Garner, Reading Law § 10, at 107 (2012) (“[T]he principle that specification of the one implies exclusion of the other validly describes how people express themselves and understand verbal expression.”). “[I]t is an elemental canon of statutory construction that where a statute expressly provides a particular remedy or remedies, a court must be chary of reading others into it.” Meghrig v. KFC W., Inc., 516 U.S. 479, 488 (1996) (alteration in original) (internal quotation marks omitted). This Court has recognized that canon’s binding effect in interpreting statutory language. See Thoreson v. Penthouse Int’l, Ltd., Inc., 80 N.Y.2d 490, 499 (1992) (“The logical inference, of course, from the Legislature’s action in expressly permitting punitive damages in housing cases is that such damages were not then recoverable for discrimination in other areas including employment.”) (citing N.Y. Stat. Law § 240). See also Nat’l R.R. Passenger Corp. v. Nat’l Ass’n of R.R. Passengers, 414 U.S. 453, 458 (1974) (invoking expressio unius canon to conclude that “when legislation expressly provides a particular remedy or remedies, courts should not expand the coverage of the statute to subsume other remedies.”). New York courts have applied this doctrine to both the Martin Act and Executive Law. See People v. Michael Glenn Realty Corp., 106 Misc. 2d 46, 47 (Sup. Ct. N.Y. County 1980) 33 (Martin Act’s specific reference to “public offerings” suggests private offerings are not regulated); see also Matter of Mayfield v. Evans, 93 A.D.3d 98, 106 (1st Dep’t 2012) (the enumerated list of dispositions in the Executive Law warrants an irrefutable inference that omitted items were intentionally excluded). Even if disgorgement is an equitable remedy available in common law actions, it is not authorized by the plain language of the statutes at issue here, the Martin Act and Executive Law, which control the relief that NYAG may seek. See Fumarelli v. Marsam Dev., Inc., 92 N.Y.2d 298, 305 (1998) (common-law remedies and substantive common-law requirements are displaced by statutory scheme); see also, e.g., Sheehy v. Big Flats Cmty. Day, Inc., 73 N.Y.2d 629, 636 (1989) (finding no private right of action where legislature has “made express provision for civil remedy”); Steinberg v. Steinberg, 46 A.D.2d 684, 684 (2d Dep’t 1974) (holding that in “an area comprehensively covered by the legislature, the courts may not fashion remedies not provided by statute”). Thus, because disgorgement is not included in the remedies identified in the Martin Act and Executive Law, there is “an irrefutable inference” that the New York Legislature deliberately excluded disgorgement from the remedies that can be sought under those statutes. See N.Y. Stat. § 240. This result does not change when NYAG is the plaintiff. See People v. Grasso, 34 11 N.Y.3d 64, 70 (2008) (“That the plaintiff here is the Attorney General as opposed to a private party does not preclude application of these decisions;” NYAG must enforce statutes “while maintaining the integrity of calculated legislative policy judgments”). NYAG cannot seek and the courts cannot order disgorgement in the absence of legislative authorization to do so because “[t]he statute ‘must be read and given effect as it is written by the Legislature.’” Parochial Bus Sys., Inc. v. Bd. of Educ. of the City of N.Y., 60 N.Y.2d 539, 548-49 (1983) (citations omitted). As this Court observed in Morales v. Cnty. of Nassau: “Where the Legislature has spoken, indicating its policy preferences, it is not for courts to superimpose their own.” 94 N.Y.2d 218, 224 (1999); see also N.Y. Stat. § 92 (“The primary consideration of the courts in the construction of statutes is to ascertain and give effect to the intention of the Legislature.”). The Statutory History Of The Martin Act And Executive B. Law § 63(12) Confirms That The Legislature Did Not Authorize Disgorgement. The statutory history of these statutes further confirms that the New York Legislature did not intend to authorize disgorgement as a remedy.12 If 12 The New York Legislature understands how to include the remedy of disgorgement where desired. See, e.g., N.Y. Arts & Cult. Aff. Law § 34.07(2); N.Y. Lab. Law § 220(3)(d)(iii). 35 all equitable remedies, including disgorgement, were available under the Martin Act and the Executive Law, then the statutory language would be rendered superfluous, and previous legislative amendments to those statutes would have been unnecessary and meaningless. 1. The Martin Act. The only remedy that could be sought under the Martin Act when it was originally enacted in 1921 was an injunction against continuing acts. Assured Guaranty II, 18 N.Y.3d at 350; see also Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Mgmt. Inc. (Assured Guaranty I), 80 A.D.3d 293, 298-99 (1st Dep’t 2010). The New York Legislature has amended the Martin Act to add other specific remedies. First, in 1923, the Legislature authorized NYAG to seek to enjoin completed frauds in addition to frauds that were contemplated or ongoing. N.Y. Gen. Bus. Law §353. Assured Guaranty I, 80 A.D.3d at 299. Second, in 1976, the Legislature authorized NYAG to seek restitution “on behalf of investors who were the victims of fraudulent activities.” Assured Guaranty II, 18 N.Y.3d at 341, 350.13 13 The Martin Act also was amended in 1925 to permit NYAG to seek receiverships, Assured Guaranty I, 80 A.D.3d at 299, and in 1955 to authorize NYAG to bring criminal proceedings, Assured Guaranty II, 18 N.Y.3d at 350. 36 Those amendments did not authorize NYAG to seek disgorgement under the Martin Act.14 The absence of disgorgement from the enumerated remedies available under the Martin Act reflects the Legislature’s specific choice not to include disgorgement as a remedy available under that statute. See Theurer v. Trs. of Columbia Univ. in the City of N.Y., 59 A.D.2d 196, 198 (3d Dep’t 1977) (stating that courts may assume that the Legislature “knew how to draft a bill to effectuate their objectives”). Moreover, the Legislature’s choice to include restitution but not disgorgement is consistent with the overall purpose of the Martin Act. The statute is not primarily a punitive statute. “Martin Act injunctions are granted, not as punishment to the individual but as protection to the public . . . .” People v. Lexington Sixty-First Assocs., 38 N.Y.2d 588, 597 (1976) (internal quotation marks omitted). This Court has recognized that, although the statute has a remedial purpose and should be construed broadly, it achieves that purpose through specific authorizations to the Attorney General. People v. Federated Radio Corp., 244 N.Y. 33, 37-38 (1926) 14 Nor is disgorgement authorized by the language of § 353-a of the Martin Act, which provides that “the court may grant such other further relief as may be proper.” N.Y. Gen. Bus. Law § 353-a . That language appears only in the section of the Martin Act pertaining to the appointment of a receiver to manage funds seized by NYAG, and does not appear in the portion of the Martin Act that grants NYAG power to pursue specific remedies. See id. § 353. It thus is limited to the scope of the court’s powers with regard to the appropriate functioning of the receiver. 37 (enumerating powers granted to NYAG to implement remedial nature of Martin Act). But the broad remedial purpose of the Martin Act provides “no sanction to ignore the plain language of” the statute. First Energy Leasing Corp. v. Attorney-Gen. of the State of N.Y., 68 N.Y.2d 59, 63-64 (1986). See also People v. Litto, 8 N.Y.3d 692, 705 (2007) (“[T]he implementation of an action should not be judicially sanctioned if it is incompatible with the enforcement mechanism chosen by the Legislature or with some other aspect of the over-all statutory scheme.” (internal quotation marks omitted)). 2. Executive Law § 63(12). As with the Martin Act, the New York Legislature initially authorized only a single remedy under Executive Law § 63(12) – injunctive relief. In 1970, the Legislature added restitution – but not disgorgement – as an additional remedy available under the statute. N.Y. Exec. Law § 63(12) (amended 1970). In 1977, the New York Legislature further amended Executive Law § 63(12) to permit the recovery of “damages,” but again did not add disgorgement as a remedy. N.Y. Exec. Law § 63(12) (amended 1977). Courts must acknowledge that the Legislature did not add disgorgement as a remedy in either the 1970 or 1977 amendments to Executive Law § 63(12). That the statute was amended twice – once to allow for restitution and once to allow for damages in certain circumstances 38 – shows that the Legislature had two opportunities to add disgorgement as a remedy, but did not do so. The absence of the remedy of disgorgement from both amendments underscores that it is not an intended remedy under Executive Law § 63(12). The Court Should Reject The Appellate Division’s Analysis C. Of The Availability Of Disgorgement As A Remedy Under Executive Law § 63(12) In Ernst & Young. Both the motion court and Appellate Division relied on Ernst & Young to hold that disgorgement is a permissible remedy under the Martin Act and Executive Law. (R. 22, 587.) This Court should reject those determinations and clarify that Ernst & Young was erroneously decided. Prior to the Appellate Division’s 2014 decision in Ernst & Young, New York courts had held that disgorgement was not a remedy under the Martin Act and Executive Law § 63(12). For example, in People v. Direct Revenue LLC, 19 Misc. 3d 1124(A), 2008 Slip Op. 50845(U) at *8 (Sup. Ct. N.Y. County Mar. 12, 2008), the court rejected NYAG’s effort to seek disgorgement under Executive Law § 63(12) and General Business Law §§ 349-350, holding that “while the Executive Law and the GBL permit monetary relief in the form of restitution and damages to consumers, the statutes do not authorize the general disgorgement of profits received from sources other than the public.” Id. (emphasis added). The Direct Revenue 39 court also determined that disgorgement of profits to the State where the State had no direct monetary interest would constitute “punitive damages not authorized by statute.” Id. The motion court in Ernst & Young properly determined that disgorgement was not available under the Martin Act and Executive Law. The court explained that disgorgement of funds not paid to the defendant by consumers was “a penalty. It becomes punitive.” Ernst & Young Tr. at 31.15 The Appellate Division’s reversal relied on four erroneous propositions. First, it incorrectly assumed that this Court’s statement in Applied Card, that disgorgement “might” be an available remedy to NYAG in that case, 11 N.Y.3d at 125-26, meant that disgorgement is a universally available remedy under the Martin Act and Executive Law § 63(12). See Ernst & Young, 114 A.D.3d at 569-70 (citing Applied Card, 11 N.Y.3d at 125-26). Second, it erroneously concluded that disgorgement is an available remedy under Executive Law § 63(12) because “maintaining disgorgement as a remedy within the court’s equitable powers is crucial, particularly where 15 “Ernst & Young Tr.” refers to the December 12, 2012 Hearing Tr. in People v. Ernst & Young LLP, Index No. 451586/2010 (Sup. Ct. N.Y. County), available at: https://iapps.courts.state.ny.us/webcivil/FCASMain, Doc. No. 34. NYAG conceded before the motion court in Ernst & Young that the cases it relied on to support its position that disgorgement is an available remedy under the Martin Act and Executive Law involved funds that were either paid by investors or by the state. Ernst & Young Tr. at 11. The funds that NYAG seeks here, by contrast, were paid as bonuses to Appellants by a private company (AIG) that has released any claim to recover those funds. 40 the Attorney General may be precluded from seeking restitution and damages if defendant settled the private class action against it.” Id. at 570. Third, it improperly relied on federal case law interpreting federal statutes, that, in contrast to the Martin Act and Executive Law § 63(12), expressly empower the SEC to seek broad equitable relief. Fourth, it ignored principles of separation of powers by impermissibly empowering NYAG to seek remedies beyond those authorized by the Legislature.16 1. Applied Card Does Not Authorize Disgorgement Under The Martin Act Or Executive Law § 63(12). Plainly, Applied Card does not hold that disgorgement is available under the Martin Act, which was not even at issue in that case. Nor does Applied Card hold that disgorgement is available under Executive Law § 63(12). In Applied Card, this Court held only that res judicata barred NYAG from seeking restitution under a consumer protection statute for consumers who participated in the settlement of a nationwide class action venued in 16 Even if disgorgement were an available remedy under the Executive Law, disgorgement may not be obtained in the case at bar. Unlike Ernst & Young, which was decided at the motion to dismiss stage, here, after years of discovery (and where all relevant discovery is now closed), NYAG has not offered any evidence linking the alleged “ill-gotten gains” (bonuses that AIG paid Appellants from 2000 to 2005) to the two transactions remaining at issue. See infra Argument Section VII.A. In addition, unlike the case at bar, there was nothing in the record in Ernst & Young indicating that the entity that made the payments sought to be disgorged had released the payees of all claims relating to those funds. 41 California that included New York consumers regarding the same transactions. Id. at 125. The Court nonetheless observed that, in the specific circumstances of that case, NYAG “might be able to obtain disgorgement – an equitable remedy distinct from restitution – of profits that respondents derived from all New York consumers.” Id. (emphasis added). This non- committal observation on an issue not before the Court does not equate to a holding that disgorgement is a generally available remedy under Executive Law § 63(12). The Applied Card parties did not argue, and this Court did not decide, whether disgorgement was authorized by Executive Law § 63(12).17 In all events, this Court’s dicta in Applied Card provides no support for the Appellate Division’s decisions in Ernst & Young and this case. That dicta supports only the conclusion that, even if disgorgement were available under Executive Law § 63(12), it would be limited to NYAG seeking “disgorgement . . . of profits that respondents derived from all New York consumers.” Id. (emphasis added). Here, NYAG does not seek such profits, but rests its case entirely on seeking disgorgement of monies received by 17 Since Applied Card, this Court has referred to the remedies available under Executive Law § 63(12) without mentioning disgorgement. See, e.g., People v. Coventry First LLC, 13 N.Y.3d 108, 111 (2009) (noting that NYAG is “authorized by statute” to seek “an order enjoining the continuance of such business activity or of any fraudulent or illegal acts, [and] directing restitution and damages” (alteration in original) (internal quotation marks omitted)). 42 Appellants from AIG. Applied Card thus closes rather than opens a door for NYAG’s disgorgement claim in this case. 2. Whether To Include Disgorgement As A Remedy Under The Statutes Is A Question For The New York Legislature To Determine. Although the Appellate Division in Ernst & Young may have considered it “crucial” for NYAG to invoke disgorgement as a remedy, 114 A.D.3d at 570, as discussed supra Argument Section II.A & B, that question is for the New York Legislature – not the courts – to decide. See Morales, 94 N.Y.2d at 224-25; Sheehy, 73 N.Y.2d at 636. See also Klostermann v. Cuomo, 61 N.Y.2d 525, 541 (1984) (“The activity that the courts must be careful to avoid is the fashioning of orders or judgments that go beyond any mandatory directives of existing statutes and regulations and intrude upon the policy-making and discretionary decisions that are reserved to the legislative and executive branches”); I.L.F.Y. Co. v. City Rent & Rehab. Admin., 11 N.Y.2d 480, 489-90 (1962) (“[T]he courts may not dictate to the legislative body the choice of remedy to be selected; questions as to wisdom, need or appropriateness are for the Legislature.”). Moreover, there is an adequate remedy at law – the legislatively determined set of remedies under the Martin Act and Executive Law § 63(12). See Fumarelli, 92 N.Y.2d at 305; 55 N.Y. Jur. 2d Equity § 18 43 (2015) (“equity will not entertain jurisdiction when there is an adequate remedy at law”). 3. The Ernst &Young Court’s Reliance, In Part, On Federal Authority Merely Highlights That Disgorgment Is Not An Available Remedy Here. In addition to Applied Card, the Appellate Division in Ernst & Young, 114 A.D.3d. at 569-70, relied on SEC v. Commonwealth Chemical Securities, Inc., 574 F.2d 90, 102 (2d Cir. 1978), which interpreted federal securities laws. The Appellate Division’s reliance on Commonwealth was erroneous because it failed to take into account that, unlike the Martin Act and Executive Law, the federal securities laws contain explicit catch-all provisions empowering the SEC to seek broad forms of equitable relief, including “all other rights and remedies that may exist at law or in equity.” 15 U.S.C. § 77p(a); 15 U.S.C. § 78bb(a)(2). Neither the Martin Act nor the Executive Law authorizes NYAG to seek broad equitable relief.18 18 The Appellate Division relied on two other New York cases, neither of which relates to what relief NYAG may seek under the Martin Act or Executive Law. Excelsior 57th Corp. v. Lerner, 160 A.D.2d 407 (1st Dep’t 1990), and In re Matter of Blumenthal (Kingsford), 32 A.D.3d 767 (1st Dep’t 2006), address purely private lawsuits: the former was a breach of fiduciary duty action brought by a cooperative corporation against an attorney and others and the latter involved an action by an estate against its former executor. 44 4. Ernst & Young Ignores Principles Of Separation Of Powers. The reasoning in Ernst & Young that disgorgement furthers the “deterrence” purpose of the Martin Act, see 114 A.D.3d at 569-70, provides no basis for reading a remedy into the Martin Act where the Legislature has had ample opportunity to include the remedy and has not done so. Inferring additional remedies, such as disgorgement, creates the risk of adding impermissibly punitive judicial remedies beyond what the Legislature intended as the proper scope of deterrence under the Martin Act. That interpretation violates the fundamental role of the courts in statutory interpretation, which is “to ascertain and give effect to the intention of the Legislature.” N.Y. Stat. § 92. Just last year, this Court unanimously reaffirmed that fundamental principle of separation of powers when it ruled that state bodies may act only within the powers granted to them by statutory authority. See Baldwin Union Free Sch. Dist. v. Cty. of Nassau, 22 N.Y.3d 606, 611 (2014) (“Beyond its constitutional authority, neither a county nor the State can act, regardless of the perceived wisdom of its conduct or the nobility of its aims.”). If NYAG believes that the remedy of disgorgement is needed to effectuate the goals of the Martin Act and Executive Law § 63(12), it should petition the Legislature to add that remedy to those statutes. Id. at 628 45 (“With respect to any policy concerns, ‘appeal lies to the ballot and to the legislative processes of democratic government, not to the courts.’”). But there has been no such amendment and the legislative intent is manifest in the existing statutory language that NYAG is not empowered to seek disgorgement as a remedy for a violation of the Martin Act or Executive Law § 63(12). NYAG’S CLAIM FOR DISGORGEMENT IS EITHER A III. PROHIBITED ATTEMPT TO SEEK REMEDIES BARRED BY APPLIED CARD OR AN ATTEMPT TO OBTAIN AN IMPERMISSIBLE PENALTY. A. NYAG’s Claim For Disgorgement Is Barred By This Court’s Decision In Applied Card. AIG voluntarily settled and released any existing and potential claims it had against Appellants (R. 146), including any claims for restitution or disgorgement, and paid Appellants $150 million. (R. 147.) NYAG has never raised any issues concerning the adequacy of AIG’s settlement with Appellants, but now seeks disgorgement of Appellants’ bonuses19 even though the principles of res judicata, as they were explained in Applied 19 NYAG did not identify what it sought to disgorge during the briefing on the summary judgment motion either in the motion court or on appeal, clarifying the issue only in its January 29, 2015 pretrial memorandum. Plaintiff’s Pre-Trial Memorandum, People v. Greenberg, Index No. 401720/05 (Sup. Ct. N.Y. County Jan. 29, 2015) at 33, n.23 (“[T]he State has limited its disgorgement claim to the cash bonuses defendants were paid.”); id. at 3 (“Greenberg and Smith received $24,500,000 million and $3,065,000 million, respectively, in bonuses for the years 2000 through 2004 (and in Smith’s case, for early 2005), to which they are not entitled in light of the frauds they engineered.”). 46 Card, bar any such claims.20 See Applied Card, 11 N.Y.3d at 122 (“In New York, res judicata, or claim preclusion, bars successive litigation based upon the ‘same transaction or series of connected transactions.’”). Permitting NYAG to attempt to disgorge from Appellants the bonuses paid by AIG would “destroy or impair rights” created in Appellants’ previous settlements with AIG and its shareholders. Cf. Applied Card, 11 N.Y.3d at 124 (“Permitting the Attorney General to seek additional restitution on behalf of the Allec settlement class members would undoubtedly ‘destroy or impair rights’ conclusively established in the Allec case.”). B. NYAG’s Claim For Disgorgement Is Either A Request For Punitive Damages Or A Request For An Impermissible Penalty. During the May 28, 2013 oral argument before this Court on the prior appeal in this case, the Solicitor General explained that NYAG might pursue a disgorgement claim because “we’re looking for a deterrent effect for these people and for people who engage in comparable activities.” (R. 225.) Because deterrence is precisely the purpose of punitive or other exemplary damages, which NYAG cannot seek under the Martin Act, there is no basis 20 Similarly, NYAG never expressed any concern for the adequacy of Appellants’ August 7, 2009 settlement with the SEC in which Appellants disgorged $8.25 million to the SEC in connection with the entry of consent judgments. (R. 89, 108.) 47 for inferring disgorgement as a deterrent remedy either. See Solil Mgmt. Corp., 128 Misc. 2d at 773 (rejecting NYAG claims for punitive and treble damages as not specified under the language of Executive Law § 63(12)); State v. Hotel Waldorf Astoria Corp., 67 Misc. 2d 90, 92 (Sup. Ct. N.Y. County 1971) (treble damages not available under Executive Law § 63(12)). See also State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 416 (2003) (“[P]unitive damages serve a broader function; they are aimed at deterrence and retribution.”); Guariglia v. Price Chopper Operating Co. Inc., 38 A.D.3d 1043, 1043 (3d Dep’t 2007) (“The purpose of punitive damages goes beyond simply punishing the perpetrator for the morally culpable act committed, but is also intended to deter repetition of such acts.” (emphasis added) (citation omitted)). If NYAG’s disgorgement claim does not amount to impermissible punitive damages, then it is an attempt to impermissibly impose a penalty on Appellants. The hallmark of penalties is that they are “intended to punish culpable individuals,” not “to extract compensation or restore the status quo.” See Tull v. United States, 481 U.S. 412, 422 (1987). See also Gabelli v. SEC, 133 S. Ct. 1216, 1223 (2013) (“In a civil penalty action, the Government is not only a different kind of plaintiff, it seeks a different kind 48 of relief,” namely, “penalties, which go beyond compensation, are intended to punish, and label defendants wrongdoers”). However, the Martin Act allows only for remuneration in “a sum not in excess of two thousand dollars,” N.Y. Gen. Bus. Law § 353(1), and the CPLR only allows the court to award “a sum not exceeding two thousand dollars against each defendant” in actions brought by NYAG under either the Martin Act or Executive Law § 63(12). CPLR 8303(6). Thus, NYAG’s attempt to disgorge the bonuses Appellants received from AIG from 2000 to 2005 is not authorized by those statutes. See, e.g., Chew Wah Bing v. Sun Wei Ass’n, 205 A.D.2d 355, 356 (1st Dep’t 1994) (error to impose fines that exceeded statutory allowance). EVEN IF DISGORGEMENT WERE AN AVAILABLE IV. REMEDY UNDER THE MARTIN ACT AND EXECUTIVE LAW, IT IS NOT AVAILABLE UNDER THE FACTS OF THIS CASE. NYAG’s Disgorgement Claim Is Barred By Appellants’ A. Direct And Derivative Settlements With AIG And Its Shareholders. NYAG’s disgorgement claim also fails in this case because of AIG’s settlement with Appellants. “[A] valid release constitutes a complete bar to an action on a claim which is the subject of the release.” Global Mins. & Metals Corp. v. Holme, 35 A.D.3d 93, 98 (1st Dep’t 2006); see also Booth v. 3669 Delaware, 92 N.Y.2d 934, 935 (1998) (citing Mangini v. McClurg, 24 49 N.Y.2d 556, 563 (1969)). Here, AIG agreed to release “any claims” against Appellants “that could have been brought, arising in whole or in part prior to” November 25, 2009, the date of the settlement. (R. 146.) Those claims included any claims regarding bonuses paid to Appellants by AIG from 2000 to 2005. This unambiguous release extinguishes AIG’s right to disgorgement, and prevents NYAG from seeking to disgorge those same funds. See Applied Card, 11 N.Y.3d at 124 n.16 (“[T]he members of the Allec settlement class, on whose behalf the Attorney General sues, have already had their ‘day in court.’”). Moreover, the settlement of AIG’s claims against Appellants in the Delaware Derivative Action and the settlement of the claims of AIG’s shareholders against Appellants in the federal class action further bar NYAG’s effort to seek disgorgement here. See supra Statement of the Case III.B-D. See also Betz v. Blatt, 116 A.D.3d 813, 816-17 (2d Dep’t) (affirming dismissal of disgorgement claim as duplicative where the claim was “based on the same facts” as other causes of action for money damages and therefore “did not allege distinct causes of action”), appeal dismissed, 23 N.Y.3d 1028 (2014). Under established res judicata principles, “successive litigation based upon the same transaction or series of connected transactions” is barred “if 50 (i) there is a judgment on the merits rendered by a court of competent jurisdiction, and (ii) the party against whom the doctrine is invoked was a party to the previous action or in privity with a party who was.” Applied Card, 11 N.Y.3d at 122. These elements are met here because the transactions at issue were also at issue in those actions and final judgment was entered in each action, thereby resolving all claims against Appellants. See, e.g., Order and Final Judgment at 3-4, Am. Int’l Grp., Inc. Consol. Derivative Litig., No. 769-VCS (Del. Ch. Jan. 25, 2011), 2011 WL 244179; see also R. 153-62 (judgment in In re AIG). The requirement of privity is met because NYAG here seeks to stand in AIG’s shoes to obtain disgorgement of Appellants’ bonuses, thus putting NYAG in privity with AIG for purposes of res judicata. Applied Card, 11 N.Y.3d at 122-24. See also 19A N.Y. Jur. 2d Compromise, Accord, and Release § 97 at 158 (2010) (although a release “cannot be held to bar the claim of a person who did not sign it, the nonsigner’s claims will be delimited by the covenant insofar as they are derivative from the claims of one who did sign the agreement”); Andrew Greenberg, Inc. v. Svane, Inc., 36 A.D.3d 1094, 1096-97 (3d Dep’t 2007) (subsequent derivative claims were barred where corporation had settled the claims); Charter Oak Fire Ins. Co. v. Borrelli, 273 A.D.2d 797, 798-99 (4th Dep’t 2000) (interpleader action should have been dismissed 51 where plaintiff had already settled with and obtained releases from defendants); Miller v. Jetblue Airways Corp., 24 Misc. 3d 1237(A), N.Y. Slip Op. 51780(U) at *1-2 (Sup. Ct. N.Y. County 2009) (derivative claim barred where injured party had released the underlying claim).21 Disgorgement Is Not Appropriate Where Appellants Did B. Not Receive Compensation From The State Or Public Investors. It is a longstanding principle that “[t]he State cannot, any more than an individual, have a civil action for the recovery of money . . . except upon proof of title or ownership.” People v. Ingersoll, 58 N.Y. 1, 13-14 (1874). “It is not sufficient for the People to show that wrong has been done to someone; the wrong must appear to be done to the People in order to support an action by the People for its redress.” People v. Lowe, 117 N.Y. 175, 192 (1889) (emphasis added). That is because there is no public interest where private parties “have ample remedies to redress their wrongs by proceedings in their own names.” Id. at 195. NYAG must show that it sues to remedy an injury to one of its quasi-sovereign interests, Ingersoll, 58 N.Y. at 14, which it cannot do here. 21 Even in federal securities enforcement cases, where the SEC is expressly authorized by statute to seek disgorgement, the ability to obtain disgorgement is not limitless. Clawbacks of executive bonuses under the Dodd-Frank and Sarbanes-Oxley laws are returned to the issuer. See 15 U.S.C. § 78j-4(b) (Dodd-Frank Act § 954); 15 U.S.C. § 7243(a) (Sarbanes-Oxley Act § 304). In this action, NYAG has not suggested that it will return the money to AIG or its shareholders. 52 Where “wrongs are wrongs to individual citizens and not to the State,” they “are remediable at the suit of the parties injured only,” even where a case is “presented to the court as one of equitable consideration.” People v. Albany & Susquehanna R.R. Co., 57 N.Y. 161, 168, 170 (1874) (emphasis added); see New York v. Seneci, 817 F.2d 1015, 1017 (2d Cir. 1987) (dismissing suit under Executive Law § 63(12) and RICO for lack of standing because the “state cannot merely litigate as a volunteer the personal claims of its competent citizens”). As explained by the Appellate Division, a “for-profit entity” (such as AIG here) possesses “unquestionably . . . powerful financial incentives to prosecute an action” without the assistance of NYAG, and in such cases NYAG must point to an applicable public interest to show its “authority to prosecute” the action. People v. Grasso, 54 A.D.3d 180, 194 (1st Dep’t 2008). Otherwise, the action “vindicates no public purpose” and raises “serious constitutional questions” in light of the New York State Constitution’s prohibition against spending public funds to aid private entities. Id. at 196-97. Similarly, in Seneci, the Second Circuit rejected NYAG’s attempt to shoehorn a civil RICO claim on behalf of private parties into a parens patriae action: 53 “The state cannot merely litigate as a volunteer the personal claims of its competent citizens. Where the complaint only seeks to recover money damages for injuries suffered by individuals, the award of money damages will not compensate the state for any harm done to its quasi-sovereign interests. Thus, the state as parens patriae lacks standing to prosecute such a suit.” 817 F.2d at 1017 (citations omitted). Here, NYAG does not seek to recover funds purportedly lost by the State or public investors. Rather, NYAG seeks only to recover funds paid by AIG to Appellants as bonuses when they were officers of AIG. This new “disgorgement” remedy is nothing more than a thinly veiled attempt to circumvent the prohibitions on NYAG’s withdrawn claim for money damages.22 NYAG does not allege it seeks funds to which the State has legal entitlement. See Greenberg I, 95 A.D.3d at 492 (Catterson, J., dissenting in part and concurring in part) (“[P]rivate shareholders who have cause to complain have no need of NYAG to protect their rights. There is simply no wrong committed ‘directly against the State or the people of the State’ as required by Ingersoll, Lowe and Grasso.”). Accordingly, NYAG 22 In Ernst & Young, NYAG acknowledged that it brought its disgorgement claim only as a work-around to Applied Card. See Ernst & Young Tr. at 16 (the effect of Applied Card was that NYAG “cannot get money for the victims who have been satisfied and given relief”); id. at 24 (“Over in the federal court, you can’t, under Applied Card, now get damages for the people except for a few people might opt out. All right. That’s part of the life. That’s what the Applied Card case was about. But it is for that reason, among others, among others, that our ability to get disgorgement of some or all of the fees that they received in doing a non-audit, an improper audit, that we have that power and that right.” (emphasis added)). 54 cannot maintain its disgorgement claim because it fails to allege the requisite direct injury. NYAG Failed To Submit Any Evidence Supporting A But-C. For Causal Link Between Appellants’ Bonuses And The Transactions At Issue. NYAG failed to submit evidence supporting a causal relationship between the alleged wrongdoing and the amounts it seeks to disgorge. Such a causal link is required because disgorgement aims to “eliminate profit from wrongdoing while avoiding . . . the imposition of a penalty.” Restatement (Third) of Restitution and Unjust Enrichment § 51(4) (2011); id. § 51 cmt. i (“Disgorgement does not impose a general forfeiture: defendant’s liability in restitution is not the whole of the gain from a tainted transaction, but the amount of the gain that is attributable to the underlying wrong.” (emphasis added)); id. (“If the claimant’s evidence will not yield even a reasonable approximation, the claim of unjust enrichment is merely speculative, and disgorgement will not be allowed.”). The requirement of a causal link between targeted funds and wrongdoing ensures that only wrongful benefits are disgorged. See Diamond v. Oreamuno, 24 N.Y.2d 494, 498-99 (1969) (disgorgement targets only “profits which . . . [defendants] derived solely from exploiting” their positions). See also Jim Beam Brands Co. v. Tequila Cuervo La Rojena S.A. de C.V., No. 600122/2008, 2011 N.Y. Slip Op. 55 34181(U), at *7 (Sup. Ct. N.Y. County July 12, 2011) (“Jim Beam’s expert’s reliance on a disgorgement theory also fails because there is no causal link between any increase in profits during the period of the breach, which is still continuing.” (emphasis added)).23 Against this clear legal backdrop, NYAG conceded at oral argument on summary judgment that it must prove a causal nexus between Appellants’ alleged wrongdoing and the funds to be disgorged (R. 527) (“So basically, what we will have to establish . . . is that there is a nexus between the frauds that Mr. Greenberg and Mr. Smith committed on behalf of AIG or AIG committed at their direction, and a segment of the bonuses they received.”). Nevertheless, and despite its acknowledgement of its burden, NYAG did not even attempt to meet these causation requirements in opposing Appellants’ summary judgment motion. There simply is no evidence in the record to suggest that any part of Appellants’ bonuses resulted from their alleged participation in the two transactions remaining at issue. To the contrary, there is affirmative evidence that Appellants did not receive any funds as a result of the two allegedly wrongful transactions: AIG never 23 The Second Circuit has also held that disgorgement can be “ordered only with respect to those [profits] that were illegally derived.” SEC v. Razmilovic, 738 F.3d 14, 31 (2d Cir. 2013); CFTC v. British Am. Commodity Options Corp., 788 F.2d 92, 93 (2d Cir. 1986) (“Generally, where benefits result from both lawful and unlawful conduct, the party seeking disgorgement must distinguish between the legally and illegally derived profits.”). 56 sought to claw back Appellants’ bonuses after their departure, and released any such claims on November 25, 2009, when AIG settled with Appellants and AIG paid Appellants $150 million. See supra Sections III. A, IV.A; (R. 142-52). NYAG’s Belated Attempt To Pursue Disgorgement Violates D. Principles Of Due Process. Foundational federal and state due process principles prevent the State from threatening the livelihood and reputation of a citizen by pursuing a suit on one theory of liability and remedy, and years into the litigation, altering that theory. See Mullane v. Cent. Hanover Bank & Tr. Co., 339 U.S. 306, 314-15 (1950). Yet, as discussed above, only in May 2013 (eight years after this action was commenced and after discovery was completed) did NYAG begin to consider whether it had a claim for disgorgement after NYAG was compelled to withdraw its claim for money damages as a result of Appellants’ settlement of a federal securities class action. See supra Statement of the Case II.C; (R. 221-22). This Court should reaffirm the constitutional limitations on the State’s power to arbitrarily determine and then impose penalties on its citizens, and reject NYAG’s attempt to revive its long-abandoned disgorgement claim to evade the impact of Applied Card on this action. 57 NYAG IS NOT ENTITLED TO THE TYPE OF PERMANENT V. INJUNCTIVE RELIEF IT SEEKS UNDER NEW YORK LAW OR THE FACTS OF THIS CASE. During the May 28, 2013 oral argument on the prior appeal in this action, the Solicitor General told this Court that NYAG seeks a sweeping injunction preventing Appellants from participating in the securities industry or “serving as officers and directors of public companies.” (R. 220.) The demand thus significantly expands upon the injunctive relief sought in NYAG’s Amended Complaint, which requests only a prohibition against ongoing or future fraudulent conduct. (R. 140.) In its June 25, 2013 Opinion, this Court expressed skepticism about the possibility of NYAG obtaining the permanent injunctive relief it now seeks, and expressly stated that “there is no doubt room for argument about whether the lifetime bans that the Attorney General proposes would be a justifiable exercise of a court’s discretion,” but directed the lower courts to consider “in the first instance” whether NYAG could proceed with this expanded demand for injunctive relief. Greenberg II, 21 N.Y.3d at 448. Contrary to this Court’s directive, neither of the courts below analyzed: (a) whether the injunctive relief sought was authorized by the Martin Act or the Executive Law; (b) whether NYAG could obtain a permanent injunction against Appellants in the absence of a genuine threat of irreparable harm or a 58 reasonable expectation that the alleged wrong will reoccur; or (c) whether the “lifetime bans” sought by NYAG were “a justifiable exercise” of discretion. See id. The courts below should have dismissed NYAG’s claims for permanent injunctive relief on the grounds that the relief sought is not authorized by the Martin Act or Executive Law § 63(12) and is not appropriate under the undisputed facts of this case. The Injunctive Relief NYAG Seeks Is Not Authorized By A. The Martin Act Or Executive Law § 63(12). Neither the Martin Act nor Executive Law § 63(12) authorizes NYAG to seek: (1) an unlimited injunction against service as an officer or director of a public company; or (2) a lifetime ban on participation in the securities industry. N.Y. Gen. Bus. Law § 353(1); N.Y. Exec. Law § 63(12). To the contrary, the Martin Act expressly limits available injunctive relief to a prohibition against selling or offering securities within or from New York State: “[I]f the attorney-general should believe from such evidence that such person, partnership, corporation, company, trust or association actually has or is engaged in any such fraudulent practice, he may include in such action an application to enjoin permanently such person, partnership, corporation, company, trust or association, and such other person or persons as may have been or may be concerned with or in any way participating in such fraudulent practice, from selling or offering for sale to 59 the public within this state, as principal, broker or agent, or otherwise, any securities issued or to be issued.” N.Y. Gen. Bus. Law § 353(1) (emphasis added). Similarly, Executive Law § 63(12) authorizes injunctions only against future fraudulent or illegal actions, and does not authorize restrictions on a defendant’s otherwise legal business activities: “Whenever any person shall engage in repeated fraudulent or illegal acts or otherwise demonstrate persistent fraud or illegality in the carrying on, conducting or transaction of business, the attorney general may apply, . . . for an order enjoining the continuance of such business activity or of any fraudulent or illegal acts, directing restitution and damages and, in an appropriate case, cancelling any certificate filed under and by virtue of the provisions of section four hundred forty of the former penal law or section one hundred thirty of the general business law, and the court may award the relief applied for or so much thereof as it may deem proper.” N.Y. Exec. Law § 63(12) (emphasis added).24 As discussed fully in Argument Section II.B, supra, the New York Legislature’s decision to include certain remedies but not others in the Martin Act and Executive Law § 63(12) is a conclusive indication that 24 In contrast, the federal securities laws, such as the Securities Exchange Act of 1934, expressly authorize federal courts to bar individuals from serving as officers or directors of a publicly traded company upon application by the SEC. See 15 U.S.C. § 78u(d)(2). With respect to Appellants, who entered into consent judgments with the SEC, dated August 7, 2009, the SEC did not pursue such a bar against Mr. Greenberg, and only sought a three-year bar against Mr. Smith. Those choices, made under statutory authorization as part of a comprehensive nationwide regulatory scheme governing the national securities markets, should not be disturbed by a state court proceeding by NYAG or any of the other 49 state attorneys general, let alone under statutes which do not permit NYAG to seek such relief. 60 NYAG cannot pursue the injunctive relief it seeks in this case. Neither the Martin Act nor the Executive Law provides a basis for NYAG’s attempt to obtain a permanent injunction enjoining Appellants from participating in the securities industry or from acting as officers and directors of a public company. The bar on service as an officer or director of a publicly traded company is not authorized by the language of the Martin Act, which only permits injunctions “from selling or offering for sale to the public” “any securities issued or to be issued.” N.Y. Gen. Bus. Law § 353(1). Nor is an officer or director bar authorized by Executive Law § 63(12), which permits only injunctions of “fraudulent or illegal acts.” N.Y. Exec. Law § 63(12). In permitting NYAG to proceed with its pursuit of injunctive relief not authorized by those statutes, the motion court purported to rely on this Court’s decision in People v. McCann, 3 N.Y.2d 797 (1957). But McCann – which has not been cited or discussed in any reported decision in the more than half century since it was decided, and was merely an affirmance25 – does not hold that officer and director bars are permissible under the Martin 25 McCann does not contain any analysis of the issue and simply states “Judgment affirmed.” Id. at 800. Likewise, the Fourth Department decision was a mere affirmance and similarly devoid of written analysis. See People v. McCann, 2 A.D.2d 644 (4th Dep’t 1956). And the unreported decision of the Erie Equity Term affirmed by the Fourth Department merely recited an order and did not analyze the legal issues. See People v. McCann, No. B60296, slip op. (Sup. Ct. Erie County June 23, 1955). 61 Act.26 The decision did not examine the statutory language of the Martin Act, but instead merely rejected the argument that a prohibition on participating in the New York securities industry unconstitutionally denied the appellant the right to work. 3 N.Y.2d at 797-98. The McCann parties do not appear to have raised the question of whether the relief at issue was statutorily authorized, and the Court did not decide that issue. The Injunctive Relief Sought By NYAG Constitutes An B. Impermissible Penalty. Injunctive relief is not available in a Martin Act or Executive Law action where such relief constitutes an impermissible penalty. The “only legitimate aim” of a Martin Act injunction “is to secure the investing public against injury through possible future fraudulent practices on the part of the defendant.” People v. Riley, 188 Misc. 969, 972 (Sup. Ct. N.Y. County 1946) (emphasis added). “Martin Act injunctions are granted, not as punishment to the individual but as a protection to the public . . . .” Lexington Sixty-First Assocs., 38 N.Y.2d at 597. 26 The three dissenting judges in McCann suggested that the majority erred by not explicitly examining the statutory framework of the Martin Act, objecting that “the appellant should have been restrained from engaging in fraudulent practices,” and that the injunction at issue was so “universal in scope that it seems to us that it should not be approved by this court without modification.” 3 N.Y.2d at 798 (emphasis added). The dissent further observed that the injunction at issue was improper because it was so “sweeping” that it failed to “‘clearly inform a defendant of the acts he is forbidden to commit’” and “‘the injunction forbids defendant to engage in activities which are altogether lawful.’” Id. at 799 (quoting May’s Furs & Ready-to-Wear, Inc. v. Bauer, 282 N.Y. 331, 343 (1940)). 62 NYAG’s requested injunction would constitute an improper penalty because it is superfluous. The SEC has already sought and obtained the relief requested by NYAG in the form of consent judgments entered into between the SEC and each Appellant.27 See supra Statement of the Case III.A; (R.102-116). NYAG has not presented any evidence of past or threatened non-compliance by Appellants with the federal injunctions. Because the existing injunctions address any legitimate sovereign interest in precluding “any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,” see 17 C.F.R. § 240.10b-5(c) (2013), further injunctive relief is wholly unnecessary and would not serve any valid public purpose. See State v. Holiday Inns, Inc., 656 F. Supp. 675, 678 (W.D.N.Y. 1984) (NYAG lacks a valid sovereign interest where “broad injunctive relief” covering same subject matter was sought by private litigants); cf. Envtl. Conservation Org. v. City of Dallas, 529 F.3d 519, 523-24, 529-30 (5th Cir. 2008). As the United States Supreme Court has noted, “one injunction is as effective as 100” and 27 The Appellate Division’s decision stated that the “existence of a federal consent judgment imposing a similar but more lenient injunctions, and not providing for any acknowledgment of guilt does not preclude the injunction sought here by the State.” (R. 588) (internal citations omitted). In support, the court cited SEC v. Citigroup Global Markets, Inc., 827 F. Supp. 2d 328 (S.D.N.Y. 2011), vacated and remanded, 752 F.3d 285 (2d Cir. 2014), a decision that was overturned by the Second Circuit and did not discuss the propriety of overlapping state and federal injunctions. 63 “100 injunctions are no more effective than one.” Hawaii v. Standard Oil Co. of Cal., 405 U.S. 251, 261 (1972). Because Mr. Greenberg (as a control person) and Mr. Smith are already bound by federal injunctions that fully address any plausible sovereign interest (R. 86-97, 102-116), and NYAG has not proffered any admissible evidence establishing the elements necessary to obtain injunctive relief, the only conceivable purpose for the continued pursuit of permanent injunctive relief would be to punish Appellants, which as this Court held in Lexington Sixty-First Associates, 38 N.Y.2d at 597, is not a permissible goal of a Martin Act proceeding. NYAG Is Not Entitled To An Injunction Based On The C. Undisputed Facts Of This Case. It is hornbook New York law that the party seeking a permanent injunction must show “that there is a danger of irreparable injury unless the injunction is entered and that there is an inadequacy of other remedies to afford just and equitable relief, and it is a cardinal rule of equity that without these factors a permanent injunction will not be issued.” 67A N.Y. Jur. 2d Injunctions § 45 (2010) (emphasis added) (footnotes omitted). These settled rules of equity apply to NYAG’s claims under the Martin Act and Executive Law. See State v. Fine, 72 N.Y.2d 967, 968-69 (1988) (the Martin Act did 64 not supplant longstanding requirements for injunctive relief because the Martin Act does not specify differing standards). Moreover, in determining whether to grant a permanent injunction, the court looks to the facts as they exist at the time of trial, not as they are alleged to have existed when the complaint was filed. Dickinson v. Springer, 246 N.Y. 203, 211 (1927) (“The courts of this State . . . would deny injunctive relief if it appeared that though a basis for injunctive relief may have existed at the time the suit was begun, it no longer existed at the time of the trial.”); accord, 67A N.Y. Jur. 2d Injunctions § 45 (2010) (“[A] court will deny such relief, even though it appears that a basis for such relief may have existed at the time the action began, if it no longer exists at the time of trial.”). In support of their motion for summary judgment, Appellants submitted sworn statements making a prima facie showing that no such likelihood of irreparable harm or recurrent illegality exists.28 See supra 28 In fact, the conduct that NYAG seeks to enjoin – serving as an officer or director of a publicly traded company and participating in the securities industry – is not even illegal conduct. NYAG lacks any sovereign interest in protecting New York State residents from legal conduct. See State v. Magley, 105 A.D.2d 208, 210 (3d Dep’t 1984) (affirming denial of injunction under Executive Law § 63(12) because “[s]ubdivision 12 of section 63 was intended to prevent the perpetration of ongoing fraud or illegality, but where the act sought to be enjoined is not a violation of law, subdivision 12 of section 63 does not confer the required authority for an inquiry as to such act”); see Assured Guaranty II, 18 N.Y.3d 341, 349 (the Martin Act “authorizes the Attorney General to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other 65 Statement of the Case IV; infra Argument Section VII.B. In response, NYAG trial counsel provided only rank speculation from a news article regarding Appellants’ possible future conduct. (R. 332-35.) Such speculation cannot create a triable issue of fact sufficient to defeat summary judgment. See, e.g., Espinal v. Trezechahn 1065 Ave. of the Ams., LLC, 94 A.D.3d 611, 613 (1st Dep’t 2012); Ellen v. Lauer, 210 A.D.2d 87, 90 (1st Dep’t 1994). Despite this failure by NYAG, the motion court nonetheless concluded that “the scope and nature of the permanent injunction” “pose issues of fact, including the credibility of defendants, which are not appropriate for summary resolution.” (R. 22.) In so doing, the motion court relied on inapposite federal cases involving credibility determinations concerning whether defendants would violate the securities laws in the future. Here, the relevant facts (Appellants’ ages, the scope of the existing federal injunctions, and the nature of their activities over the past decade) do not require any credibility determinations. (R. 35-36, 86-89, 98-101, 102- 16.) Moreover, nearly fifteen years have passed since AIG entered into the securities within or from New York” (internal quotation marks omitted)); McCann, 3 N.Y.2d at 799 (Van Voorhis, J., dissenting) (arguing that the Martin Act injunction was improper because “the injunction forbids defendant to engage in activities which are altogether lawful” (internal quotation marks omitted)). 66 two transactions remaining at issue in this case took place (R. 125-28, 130- 35), and there is no allegation of any misconduct involving either Appellant in the ensuing period (R. 37, 99-100). This lengthy interlude without additional incident further demonstrates that there is no reasonable likelihood of future harm.29 See Lee v. Tetra Tech, Inc., 14 Misc. 3d 1235(A), 2007 NY Slip Op. 50312(U), at *10 (Sup. Ct. Monroe County 2007) (denying permanent injunction when “in view of the passage of [time] after the commencement of the action without evidence of further incident,” there is no actual or imminent threat sufficient to sustain a claim for permanent injunctive relief).30 29 It also renders NYAG’s claim for permanent injunctive relief moot. See State v. Carvel Corp., No. 42126/79, 1979 WL 3896, at *2 (Sup. Ct. N.Y. County Dec. 24, 1979) (summary judgment granted dismissing NYAG’s request for an injunction due to lack of an “imminent” injury); see also State v. Grecco, 21 A.D.3d 470, 478 (2d Dep’t 2005) (dismissing Executive Law § 63(12) cause of action that did not allege “‘repeated fraudulent or illegal acts’” or “‘persistent fraud or illegality in the carrying on, conducting or transaction of business’”); People v. Volkswagen of Am., Inc., 47 A.D.2d 868, 868 (1st Dep’t 1975) (injunctive relief not granted “in view of the immediate correction of the advertisement and the passage of almost three years without repetition of the offense”). People v. Alexanders Dep’t Store, Inc., 42 A.D.2d 532, 532 (1st Dep’t 1973) (rejecting claim for injunction where the violation to be enjoined was “a single offense unlikely to be repeated by the respondent” and the claim for an injunction “was not commenced until seven months after the offending conduct” and “in the absence of any indication of threatened or probable repetition, no useful purpose will be served by granting injunctive relief.”). Under established law, then, NYAG should not be permitted to proceed with its claim for permanent injunctive relief, because no remedy is available and the matter is moot, Absent a remedy, any judicial decision “can have no immediate effect and may never resolve anything.” N.Y. Pub. Interest Research Grp. v. Carey, 42 N.Y.2d 527, 531 (1977) (internal quotation marks omitted). 30 Notably, even when a permanent injunction is warranted, New York law expressly contemplates dissolution of the injunction after five years in the absence of evidence of 67 Significantly, NYAG has never sought any preliminary injunctive relief since commencing this action over a decade ago, effectively conceding that there is no genuine threat of irreparable harm or likelihood of future harm. Cf. SEC v. Monarch Fund, 608 F.2d 938, 943-44 (2d Cir. 1979) (reversing injunction, in part, because “judgment below was not entered until more than seven years after the alleged violations” and “the SEC conceded that at no time during those seven years did it attempt to expedite the requested injunctive relief”). Considered together, these factors establish that NYAG’s claim for injunctive relief should be dismissed. See, e.g., SEC v. Jones, 476 F. Supp. 2d 374, 384 (S.D.N.Y. 2007) (dismissing SEC’s request for injunction where “the Commission has adduced no positive proof aside from Defendants’ past alleged wrongdoing to suggest ‘some cognizable danger of recurrent violation,’” and several incident-free years had passed since defendants’ alleged misconduct); see also SEC v. Nat’l Student Mktg. Corp., 360 F. Supp. 284, 300 (D.D.C. 1973) (granting summary judgment to certain defendants on SEC’s request for injunction because, even assuming defendants had violated securities laws, “there is no reasonable likelihood of misconduct. See N.Y. Gen. Bus. Law § 359-g(3). Here, nearly three times the statutorily mandated five-year period has passed since the transactions at issue took place, and there is no allegation or evidence in this case of any misconduct or threat of imminent irreparable harm during that period. 68 a similar violation since these defendants are not, and are not expected to be directors or insiders of any public company”). These cases comport with New York State law, which supports dismissal of claims seeking declaratory relief where the relief requested concerns circumstances that may never occur. See Sutton Madison, Inc. v. 27 E. 65th St. Owners Corp., 68 A.D.3d 512, 512-13 (1st Dep’t 2009).31 NYAG’S CLAIMS FOR DISGORGEMENT AND VI. INJUNCTIVE RELIEF ARE BARRED BY THE SUPREMACY CLAUSE OF THE UNITED STATES CONSTITUTION. The Supremacy Clause of the United States Constitution “invalidates state laws that ‘interfere with or are contrary to’ federal law.” Hillsborough Cty., Fla. v. Automated Med. Labs., Inc., 471 U.S. 707, 712 (1985); Air Transp. Ass’n of Am. v. Cuomo, 520 F.3d 218, 220 (2d Cir. 2008) (preempting New York statute that conflicted with federal statutory scheme). Congress can preempt state laws either by express terms or through implication where the federal scheme is comprehensive and leaves no room for state regulation. Air Transp. Ass’n, 520 F.3d at 220-21. 31 For the same reason, NYAG lacks an ongoing sovereign interest in the injunctive relief it seeks and therefore has no standing to pursue it. See Grasso, 54 A.D.3d at 207 (describing “minimal constitutional standing requirements” that must be met for NYAG to continue prosecution of action as: “‘a distinct and palpable injury’ to the plaintiff ‘that is likely to be redressed if the requested relief is granted’”); see also id. at 194-95 (NYAG “no longer has the authority to prosecute” action where it would “vindicate only the interests of private parties, not any public interest”); id. at 192 n.7 (“[T]he Attorney General no longer has a legitimate interest in these causes of action.”). 69 Appellants in this case previously entered into consent judgments with the SEC (under statutes in which disgorgement is expressly authorized by Congress)32 to settle allegations that included the transactions remaining at issue in this action and disgorged a total of $8.25 million. (R. 86-97, 102- 16.) Thus, the federal securities regulator, the SEC, has already determined what disgorgement is appropriate for Appellants with respect to the transactions at issue here, and that judgment has been accepted by a court of competent jurisdiction. If This Case Is Brought To Benefit AIG Or Its A. Shareholders, NYAG’s Claim For Disgorgement Is Impliedly Preempted By Federal Law Because It Frustrates Federal Objectives For National Standards Governing Securities Law Actions. There is a paramount federal interest “in protecting the integrity and efficient operation of the market for nationally traded securities.” Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 78 (2009). To protect that interest, Congress enacted a framework of federal securities laws intended to provide uniform standards in that area. Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 111 (2d Cir. 2001) (Congress enacted “SLUSA, NSMIA, and PSLRA . . . to provide national, uniform standards 32 Unlike the Martin Act or Executive Law § 63(12), federal securities laws authorize disgorgement. See 15 U.S.C. § 78u(d)(3)(A)-(B); 15 U.S.C. § 78u-2(e); 15 U.S.C. § 78u- 6(4); 15 U.S.C. § 7246. 70 for the securities markets and nationally marketed securities”); see also Dabit, 547 U.S. at 87 (Congress intended to create “national standards for securities class action lawsuits involving nationally traded securities” (citation omitted) (internal quotation marks omitted)). Indeed, the legislative history of the federal securities laws demonstrates the congressional desire to designate the federal government as the “exclusive regulator” of the national securities markets. H.R. Rep. No. 104-622, at 16. Congress did this to eliminate the “dangers of maintaining differing federal and state standards of liability for nationally-traded securities.” S. Rep. No. 105-182, at 3 (noting that no single state should “impose the risks and costs of its peculiar litigation system on all national issuers” (internal quotation marks omitted)). As stated in the legislative history of the National Securities Markets Improvement Act of 1996 (“NSMIA”): “The legislation preempts authority that would allow the States to employ the regulatory authority they retain to reconstruct in a different form the regulatory regime for covered securities that Section 18 has preempted.” H. Rep. No. 104-622, at 34. Accordingly, NSMIA preempts state Blue Sky Laws, such as the Martin Act, except for 71 “enforcement actions” “with respect to fraud or deceit.” 15 U.S.C. § 77r(c)(1).33 NYAG here seeks to encroach on the federal securities regulatory framework and obstruct the Congressional intent by applying state law standards that are easier to overcome than federal law standards. (See R. 504) (“Simply put, the Attorney General brings these cases to recover damages suffered by many, sometimes tens of thousands or more, investors. The actions are not duplicative of similar class actions brought under different [federal] statutes imposing higher standards of proof.” (emphasis added)). The United States Supreme Court has specifically cautioned against parallel cases proceeding under different evidentiary standards. Dabit, 547 U.S. at 86-87 (“That prospect, which exists to some extent in this very case, squarely conflicts with the congressional preference for ‘national standards for securities class action lawsuits involving nationally traded securities.’” (footnote omitted) (emphasis added)); accord Guice v. Charles Schwab & Co., 89 N.Y.2d 31, 48 (1996). This Court should not permit 33 Earlier this month, a New York federal court struck down an attempt to improperly encroach into regulated areas. N.Y. Bankers Ass’n v. City of New York, No. 1:15-cv- 04001-KPF, 2015 WL 4726880 (S.D.N.Y. Aug. 7, 2015). In that decision, the court ruled that a law passed by the New York City Council in 2012 – The Responsible Banking Act (“RBA”) – infringed on state and federal regulatory powers and was preempted. The court found that the RBA’s authorization to collection data and information and use that information to influence the behavior of the banks was preempted as an impermissible attempt to regulate within an area already occupied by federal and state laws. Id. at *24, *29-32. 72 NYAG to pursue a case that would lead to such a federal-state conflict here.34 NYAG’s Claim For Injunctive Relief Is Preempted By The B. Supremacy Clause Of The United States Constitution. NYAG’s claim for injunctive relief also is preempted by federal law. Unlike the Martin Act or Executive Law § 63(12), the Securities Act of 1933 (“Securities Act”) and Securities Exchange Act of 1934 (“Exchange Act”) 34 To the extent that NYAG continues to pursue disgorgement as a proxy for money damages on behalf of the AIG investors that NYAG previously claimed to represent, the pursuit of those private interests directly conflicts with the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), Pub. L. No. 105-353, 112 Stat. 3227, which prohibits any lawsuit in which “damages are sought on behalf of more than 50 persons” or “one or more named parties seek to recover damages on a representative basis.” 15 U.S.C. § 78bb(f)(5)(B)(i)(I)-(II). The mere fact that NYAG is the nominal plaintiff would not inoculate the suit from preemption by SLUSA. When a State acts to “pursue the interests of a private party,” courts recognize that “the State is no more than a nominal party” and the private party or parties on whose behalf the State is suing is the “real party in interest.” Alfred L. Snapp & Son, Inc. v. Puerto Rico, 458 U.S. 592, 602 (1982); see also, e.g., In re Baldwin-United Corp., 770 F.2d 328, 340-42 (2d Cir. 1985) (the real parties in interest were the “plaintiffs-investors in the federal action,” not the state attorneys general); State v. Operation Rescue Nat’l, 80 F.3d 64, 71-72 (2d Cir. 2012); accord Pennsylvania v. New Jersey, 426 U.S. 660, 665-66 (1976). And where, as here, the real parties-in-interest may be the private beneficiaries of any recovery by the State, see supra Argument Section IV.B, courts apply the standards applicable to a suit directly litigated by those private parties. See Louisiana ex. rel. Caldwell v. Allstate Ins. Co., 536 F.3d 418, 428-29 (5th Cir. 2008); see also Ohio v. GMAC Mortgage, LLC, 760 F. Supp. 2d 741, 750 (N.D. Ohio 2011). If NYAG has no sovereign or quasi-sovereign interest in this action, but rather brought this action on behalf of private parties, who are the real parties in interest, then this suit is preempted. See Seneci, 817 F.2d at 1017; see also Pennsylvania v. Mid-Atl. Toyota Distrib., Inc., 704 F.2d 125, 129-30 (4th Cir. 1983). Nor would this suit fall within the SLUSA exclusion for state “enforcement” actions, 15 U.S.C. § 77p(e), as a suit advanced on behalf of private interests is not considered an enforcement action. See Seneci, 817 F.2d at 1017 (“Where the complaint only seeks to recover money damages for injuries suffered by individuals, the award of money damages will not compensate the state for any harm done to its quasi-sovereign interests”); cf. In re Exxon Valdez, 1993 WL 735037, at *2 (D. Alaska, July 8, 1993). 73 expressly authorize courts to bar offenders from serving as either officers or directors upon application by the SEC. See 15 U.S.C. § 78u(d)(2). The Acts further prevent enforcement of a state regulatory scheme that “directly or indirectly prohibit[s], limit[s] or impose[s] conditions” on the offer or sale of a covered security. 15 U.S.C. § 77r(a)(3). New York thus may not impose forward-looking injunctive relief that does not remedy past harm and that would burden issuers of securities. This Court’s prior decisions recognize this distinction. See Lexington Sixty-First Assocs., 38 N.Y.2d at 595. NYAG seeks a far-reaching permanent injunction with no nexus to the conduct alleged,35 a demand which would impose substantive state regulatory obligations on national issuers of public securities. This conflict with the federal securities regulatory scheme is particularly relevant where, as here, the SEC has considered these very Appellants and transactions and concluded that no director and officer bar was appropriate for Mr. Greenberg and that only a limited (and now-expired) bar was appropriate for Mr. Smith. (R. 36, 86-97, 99, 102-16.) 35 NYAG seeks a permanent injunction barring Appellants from: (a) serving as directors or officers of a public company, which they have not done for over a decade and have sworn they have no intention of doing; and (b) selling securities to members of the public, which they have never done and have sworn they have no intention of doing. (R. 37, 100.) 74 The federal securities regime also comprehensively addresses reporting requirements for public companies. See Regulation S-K, 17 C.F.R. pt. 229 (2013). In particular, federal regulations set out what information must be disclosed regarding executive officers and candidates for the board of directors of public companies, including disclosure of any involvement by those individuals in regulatory enforcement litigation. See id. § 229.401 (2013). In circumstances where the SEC concludes that disclosure is insufficient, because an individual is “unfit” to serve in such a capacity, the agency has the express legislative authority to seek a bar order forbidding an individual from serving as a director or officer. See 15 U.S.C. § 77t(e) (authorizing director and officer bar for violations of 15 U.S.C. § 77q(a)(1) (Section 17(a) of the Securities Act)); id. § 78u(d)(2) (authorizing director and officer bar for violations of 15 U.S.C. § 78j(b) (Section 10(b) of the Exchange Act) and rules promulgated thereunder). By seeking an order barring Appellants from serving as officers or directors of a public company or from participating in the securities industry, NYAG seeks to frustrate the carefully crafted scheme that Congress devised. Accordingly, the injunctive relief NYAG seeks in this action is barred by the Supremacy Clause of the United States Constitution. U.S. Const. art. VI, cl. 2. 75 THE COURTS BELOW ERRED BY FAILING TO VII. RECOGNIZE THAT THE BURDEN OF PROOF HAD SHIFTED FROM APPELLANTS TO NYAG, WHO AS PLAINTIFF WILL HAVE THE BURDEN OF PROOF AT TRIAL. While the movant has the initial burden of proof on a summary judgment motion, GTF Marketing, Inc. v. Colonial Aluminum Sales, Inc., 66 N.Y.2d 965, 967 (1985), after the initial burden is satisfied, the burden shifts, and the opponent of the motion must come forward with admissible evidence to rebut the prima facie showing that the claim has no merit. Ramos v. Howard Indus., Inc., 10 N.Y.3d 218, 224 (2008); Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 326-27 (1986). See supra Argument Section I. As shown below, the Appellate Division’s failure to find that Appellants made a prima facie showing of their right to summary judgment – thereby shifting the burden to NYAG – will, unless reversed, result in a lengthy and unnecessary trial in which NYAG cannot prevail on its claims for disgorgement and permanent injunctive relief. Although Appellants Demonstrated The Absence Of Any A. Issues Of Material Fact Concerning NYAG’s Disgorgement Claim, The Appellate Division Incorrectly Concluded That The Burden Had Not Shifted To NYAG. In their motion for summary judgment, Appellants demonstrated that NYAG cannot prevail on its claim for disgorgement because there is no 76 evidence to support a causal link between the two transactions remaining at issue in this litigation and any bonuses received by Appellants. See Statement of the Case III.A. In response, NYAG did not submit any evidence, but suggested instead that if NYAG establishes liability at trial, it should then be entitled to take discovery to establish a nexus between liability and its disgorgement claim. (R. 327.) But that argument fails because discovery in this matter closed long ago and the motion court denied NYAG’s application to bifurcate the trial. (R. 566-67.) The Appellate Division appeared to incorrectly assume that discovery was still open, noting that it would have been appropriate for the motion court to have granted a protective order precluding discovery relating to the disgorgement remedy “prior to an adjudication of liability.” (R. 588.) However, all discovery (with limited inapplicable exceptions) closed in 2009. The “Certificate of Readiness for Trial” filed by NYAG as part of its Note of Issue on January 20, 2011 expressly affirmed that “discovery proceedings now known to be necessary” had been completed (R. 168), and NYAG’s counsel affirmed in submitting the Note of Issue that “[a]ll applicable discovery orders have been complied with.” (R. 169.) 77 NYAG also argued that in order to prevail on summary judgment, Appellants were required to disprove that their bonuses resulted from the alleged fraudulent transactions. That is incorrect. NYAG had the burden to rebut Appellants’ prima facie showing by demonstrating the existence of an issue of fact as to the causal connection between the bonuses received by Appellants and the challenged conduct. See Prospect Plaza Tenant Ass’n v. N.Y.C. Hous. Auth., 11 A.D.3d 400, 401 (1st Dep’t 2004) (unjust enrichment claim failed on motion to dismiss where there was not “even a perfunctory showing as to what benefit was conferred upon defendant”). NYAG failed to meet its burden in this regard by failing to produce any evidence connecting Appellants’ bonuses to the allegedly improper conduct. NYAG’s failure to proffer evidence in opposition to Appellants’ summary judgment motion should have resulted in the entry of judgment dismissing the action. See Ramos, 10 N.Y.3d at 224; Alvarez, 68 N.Y.2d at 326-27; IDX Capital, LLC v. Phoenix Partners Grp. LLC, 19 N.Y.3d 850, 851-52 (2012) (affirming a grant of summary judgment because the opponent “failed ‘to produce evidentiary proof in admissible form sufficient to establish the existence of material issues of fact’”); Brandy B. v. Eden Cent. Sch. Dist., 15 N.Y.3d 297, 302 (2010) (“Summary judgment must be granted if the proponent makes ‘a prima facie showing of entitlement to 78 judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact,’ and the opponent fails to rebut that showing” (emphasis added)); Ferluckaj v. Goldman Sachs & Co., 12 N.Y.3d 316, 319 (2009) (granting summary judgment to defendants where “no evidence in the record” supported plaintiff’s theory). The Appellate Division erred in ruling that Appellants had failed to make a prima facie showing “demonstrating the lack of incentive compensation paid to defendants as a result of the sham transactions . . . .” (R. 587-88.) That holding improperly reversed the burden of proof on a summary judgment motion by ignoring NYAG’s admission that it had no evidence to support its disgorgement claim, thereby requiring Appellants to affirmatively prove a negative.36 The sole case relied on by the Appellate Division to support its holding that Appellants failed to satisfy their prima facie burden, William J. Jenack Estate Appraisers & Auctioneers, Inc. v. Rabizadeh, 22 N.Y.3d 470 36 The Appellate Division ignored its own precedent that a summary judgment movant does not have to prove a negative to make a prima facie showing on a motion for summary judgment. See, e.g., Martinez v. Hunts Point Coop. Mkt., Inc., 79 A.D.3d 569, 570-71 (1st Dep’t 2010) (“[O]ur jurisprudence does not ‘require a defendant [moving for summary judgment] to prove a negative on an issue as to which [it] does not bear the burden of proof.” (second and third alterations in original)); Strowman v. Great Atl. & Pac. Tea Co., Inc., 252 A.D.2d 384, 385 (1st Dep’t 1998) (“He is not, as the dissent holds, required ‘definitively [to] deny actual or constructive notice of the banana peel.’ Such a requirement would, in effect, require a defendant to prove a negative on an issue as to which he does not bear the burden of proof.” (alteration in original)). 79 (2013), actually supports a finding that Appellants did, in fact, meet their prima facie burden. In that case, this Court held that “To successfully establish his entitlement to summary judgment,” the movant “must show that the record is bereft of documentation” substantiating plaintiff’s claim. Id. at 475-76. Here, Appellants satisfied the Rabizadeh standard by demonstrating that the record is “bereft” of evidence establishing a causal connection between Appellants’ bonuses and the acts complained of. Moreover, shifting the trial burden on to Appellants defeats the goals of the summary judgment procedure. See Andre v. Pomeroy, 35 N.Y.2d 361, 364 (1974) (“[W]hen there is no genuine issue to be resolved at trial, the case should be summarily decided, and an unfounded reluctance to employ the remedy will only serve to swell the Trial Calendar and thus deny to other litigants the right to have their claims promptly adjudicated.”). Indeed, placing an elevated burden on a moving defendant at the summary judgment phase contravenes the goal of the CPLR “to secure the just, speedy and inexpensive determination” of actions. CPLR 104. Cf. Janos v. Peck, 21 A.D.2d 529, 531 (1st Dep’t 1964) (“Broad and liberal use of the partial summary judgment procedure is in furtherance of the general objectives of CPLR.”), aff’d, 15 N.Y.2d 509 (1964). As this Court has made clear: “The burden of a party moving for summary judgment is to ‘make a 80 prima facie showing of entitlement to judgment as a matter of law.’ The moving party need not specifically disprove every remotely possible state of facts on which its opponent might win the case.” Ferluckaj, 12 N.Y.3d at 320 (emphasis added) (citation omitted). The burden then shifts to the other party “to produce evidentiary proof . . . sufficient to establish the existence of material issues of fact.”37 Id. (omission in original) (internal quotation marks omitted). As defendants in this action, Appellants do not bear the burden at trial, and satisfied their prima facie burden by demonstrating that, after discovery had been closed and a Note of Issue was filed by NYAG certifying that all discovery “now known to be necessary” had been completed (R. 168), the Solicitor General acknowledged to this Court that NYAG had no evidence to support its claim for disgorgement. (R. 222-24.) The burden should then have shifted to NYAG to produce some evidence that its disgorgement claim can be sustained at trial, by demonstrating a causal connection between the two transactions at issue and the bonuses that NYAG seeks to disgorge. 37 Where a motion for summary judgment is made by the party without the burden of proof on the issue at trial, the motion “without more, [should put] an opposing party with the burden of proof to the task of producing evidence sufficient to sustain a favorable verdict.” David P. Currie, Thoughts on Directed Verdicts and Summary Judgments, 45 Univ. Chi. L. Rev. 72, 29 (1977). 81 Because NYAG failed to produce any such evidence, Appellants should have been granted summary judgment on NYAG’s claim for disgorgement. Although Appellants Demonstrated The Absence Of Any Issues B. Of Material Fact Concerning The Availability Of Injunctive Relief, The Appellate Division Incorrectly Concluded That The Burden Had Not Shifted To NYAG. As with disgorgement, Appellants made a prima facie showing that NYAG could not establish a claim for permanent injunctive relief. Under New York law, a claim for permanent injunctive relief is moot where there is no genuine threat of irreparable harm or reasonable expectation the alleged wrong will recur. See Mallinckrodt v. Barnes, 272 A.D.2d 651, 652- 53 (3d Dep’t 2000) (injunctive relief claim was moot where it was “entirely likely that these circumstances will not recur”) (Graffeo, J.); see also State v. N.Y.C. Conciliation & Appeals Bd., 123 Misc. 2d 47, 48 & n. 2 (Sup. Ct. N.Y. County 1984) (same). Appellants demonstrated on summary judgment that there is no likelihood of irreparable harm and no reasonable expectation that Appellants will engage in any future wrongdoing. See supra Statement of the Case Section IV. This evidence makes a prima facie showing that there is no reasonable possibility of harm that would justify a permanent injunction against Appellants. See supra Argument Section V.C. See also, e.g., SEC v. Brown, 878 F. Supp. 2d 109, 119 (D.D.C. 2012) (granting defendant summary 82 judgment on SEC’s motion for injunctive relief where SEC did not adduce any evidence defendant was “seeking employment in securities-related positions or that she [was] currently or prospectively capable of committing any securities violations”). NYAG has not produced any competent evidence contradicting Appellants’ evidence, let alone evidence sufficient to create a triable issue of material fact. NYAG submitted only a single affidavit by one of NYAG’s trial counsel that offered solely baseless press speculation about possible future conduct by Appellants. (R. 332-35.) Such speculation is insufficient to satisfy NYAG’s burden in opposing Appellants’ summary judgment motion. See Alvarez, 68 N.Y.2d at 327 (“neither is that burden met by the unsubstantiated assertions or speculations of plaintiff’s counsel that a defendant may have breached a possible duty of care”); GTF Mktg., 66 N.Y.2d at 967-68 (attorney affidavit insufficient to resist summary judgment); Breytman v. Olinville Realty, LLC, 46 A.D.3d 484, 486 (1st Dep’t 2007) (speculation not sufficient to raise a triable issue).38 38 Moreover, at oral argument in the motion court on Appellants’ summary judgment motion, NYAG effectively conceded it cannot meet the normal requirements for permanent injunctive relief. NYAG argued that a permanent injunction is necessary solely because Appellants have failed to show “contrition,” and not because NYAG has satisfied the traditional equitable grounds for a permanent injunction. (R. 557-59.) This unprecedented position is unsupported by New York law and is in tension with basic constitutional principles. 83 As with Appellants’ disgorgement claim, the Appellate Division held without analysis that Appellants failed to “demonstrate conclusively” that an injunction was not warranted “under the circumstances.” (R. 588.) The Appellate Division failed to recognize that the burden had shifted from Appellants to NYAG, and posited the existence of issues of fact as to the “imminence of harm,” even though NYAG had not submitted any evidence on that subject. (R. 588.) The Appellate Division thus again effectively shifted the burden of proof to Appellants to prove a negative, rather than requiring NYAG to provide evidence to support its case. In evaluating whether a movant has presented a prima facie case, this Court considers the proof each party is reasonably expected to produce at trial and counsels against demanding proof that cannot be provided. Travelers’ Ins. Co. v. Pomerantz, 246 N.Y. 63, 69 (1927). Appellants here have done all they can be expected to do, by presenting sworn affidavits that NYAG failed to rebut, thereby satisfying their burden of establishing a prima facie case. ADDENDUM FILED: NEW YORK COUNTY CLERK 12/14/2012 INDEX NO. 451586/2010 NYSCEF DOC. NO. 30 RECEIVED NYSCEF: 12/14/2012 FILED: NEW YORK COUNTY CLERK 01/10/2013 INDEX NO. 451586/2010 NYSCEF DOC. NO. 34 RECEIVED NYSCEF: 01/10/2013 1 2 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK : CIVIL TERM PART 48 3 - - - - - - - - - - - - - - - - - - - - - - X THE PEOPLE OF THE STATE OF NEW YORK by 4 ERIC T . SCHNEIDERMAN, Attorney General o f the State of New York, 5 Plaint i ff , 6 INDEX NUMBER: - against - 451586/10 7 ERNST & YOUNG LLP, 8 Defendant. 9 - - - - - - - - - - - - - - - - - - - - - X 10 11 1 2 13 14 BEFORE: 60 Centre Street New York , New York December 12, 2012 HONORABLE JEFFREY K. OING , J ustice . APPEARANCES: STATE OF NEW YORK OFFICE OF THE ATTORNEY GENERAL 15 ERI C T. SCHNEIDERMAN Attorney for t he Plaintiff 16 120 Broadway New York, New York 10271-0332 17 BY : DAVID ELLENHORN, ESQ. ARMEN MORIAN, ESQ . 18 TANYA TRAKHT, ESQ. 19 LATHAN & WATKINS LLP Attorneys for the Defendant 20 885 Third Avenue New York, New York 10022-4834 21 BY: MI LES N. ROTHBERG, ESQ . JAMES BRADT, ESQ . 22 JAMI E WINE, ESQ . 23 24 25 26 Margaret Baumann Official Court Reporter mb 1 Proceedings 1 2 THE COURT: Court has before it the matter of the 3 People of the State of New York versus Ernst & Young, Index 4 Number 451456 of 2012. 5 Thi s is defendant's Motion Sequence Number 2 which 6 is a mot ion, it 's a very limited motion . It is a mot ion 7 seeking to d ismiss that part of the p laintiff ' s damages 8 seeking disgorgement of profits as a result of the 9 underlying transaction heard in this case . 10 Parties, enter appearances for the record . 11 For the plaintiff . 2 12 MR . ELLENHORN: For the plaintiff , David Ellenhorn , 13 of the Attorney General's office , Mr . Morian , Ms . Trakht are 14 two of my colleagues with me . I wil l be arguing . 15 THE COURT : For the defendant. 16 MR. RUTHBERG: Mile s Ruthberg , for the defendant , 17 and also I have some of my colleagues here . 18 THE COURT : Terrific . 19 Okay . This is your motion to dismiss this 20 disgorgement c laim, and let me just get the complaint for 21 one second . 22 There are in this complaint four causes of action, 23 and just to set them out . 24 The first cause of action is under the Martin Act 25 Securities Fraud, General Business Law Sections 353 to 353 . 26 The s econd cause of action is also Mart in Act mb 3 1 Proceedings 2 Securities Fraud, General Business Law Section 352-c . 3 The thi rd cause of action is the Martin Act 4 Securities Fraud, General Business Law Section 352-c . 5 And the fourth cause of act ion is for Persistent 6 Fraud and Illegality, Executive Law Section 63. 7 And , the bone of contention here is in the 8 wherefor e clause where they are seeking disgorgement, right , 9 and you are l ooking to get rid of that branch of t he 10 damages. 11 So, tell me why I should d i smiss that . 12 MR. ROTHBERG : Yes , sir, thank you. 13 The complaint in this case, your Honor , attempts to 14 go beyond the ample remedies that are provided on t he face 15 of the Martin Act in the Execut i ve Law . Those statutes 16 expressly provide fo r i njunctive relief, damages and 17 restitution. And, the complaint here seeks all of those . 18 But , the complaint also goes beyond t hat and seeks 19 disgorgement , and that is not provided in t he statutes and 20 it should be d i smissed . 21 The resul t is compelled by t he New York Statutory 22 Construction Law. At some level this motion is actually 23 qui te simple, your Honor , and it would also be helpful to 24 your Honor, but we attempt ed to boil down the extensive 25 authorities that a r e cited, both sides , to this ver y small 26 notebook, which is the authorit i es ci t ed in the briefs t hat mb 4 1 Proceedings 2 we think are the most he l pful a n d dispos i t i ve . 3 THE COURT: Let me ask you a q uesti on . 4 They cla im in their complaint ther e, Ernst & Young , 5 in Paragraph 5, which reaped over $150 million in fees from 6 Lehman must be held account able f or i t s role in this fraud. 7 And , then they go on say in Paragraph 71 , E&Y 8 permitted Lehman to engage in a n accounting fraud whi le 9 reaping over $150 million in fees. Ernst & Young as a 10 purported independent a u d itor was obligated instead t o 11 insure that Lehman 's fi n a ncial statements d isc lose the Repo 12 105 transact ions. Financial statements said not a word 13 about Repo 105 falsely r epresented that Lehman was treating 14 al l Repo transact i ons as financing, and Ernst & Young 15 accordingly must be held accountabl e fo r t he consequences of 16 t his fraud. 17 Let me ask you a q uestion , that $150 million , where 18 did t h a t money come from? Was that, is it a fee for the 19 services you rendered, or was t hat par t of an investment 20 that you were sort of getti ng money as an investor o r some 21 sort of stakeholder? 22 MR. RUTHBERG: That's t h e key p oint, your Honor . 23 It came from Lehman . The a l leged foster . I t did not come 2 4 f r om consumers . It did not come from investors . 25 THE COURT : Or from the State . Did it come f r om 26 t h e State? mb 1 Proceedings 2 MR. RUTHBERG: It did no t come from the State . 3 THE COURT: You know where I'm going with this 4 question t hen? 5 MR . RUTHBERG: Yes, sir . 6 And so restitution does not fit here very easily, 7 and I t hink the Attorney General recognizes that, and has 8 sought damages, and has sought extensive damages, your 9 Honor . 10 11 THE COURT: Yes . MR. RUTHBERG: Very extens ive damages. So, it is 12 not a case where the Attor ney Gener al does not have a form 13 of relief provided by t he legislature whi ch is quit e 14 significant. 5 15 And , our point, your Honor, is t hat under the maxim 16 of expressio unius est exclusio alterius, the case is 17 actually quite s imple . 18 The leg islature has expressly provided for certa i n 19 remedies, i ncluding the equitable remedy of restitut ion by 20 the way expressly p rovided for that. 21 THE COURT: The biggest part is the inj unctive 22 relief aspect . 23 MR . RUTHBERG : Yes, sir . 24 THE COURT: But no where in the s t atute in the 25 General Bus iness Law that we're tal k ing about is there a 26 disgorgement provision. mb 6 1 Proceedings 2 However, the courts have held that disgorgement may 3 be possible in limited circumstances , and that is when the 4 consumers have put in money , investors have put in money or 5 t he State has put in money . That is where d isgorgement may 6 be probable or possible in those circums tan c es. Okay. 7 MR . ROTHBERG: Yes , sir . And, that's where it 8 overlaps with restitutionary principles, and that' s really 9 t h e thrust of t he statute on its face . 10 THE COURT : Got it . Thank you . Yes . 11 MR . ROTHBERG: I ' m sorry , your Honor? 12 13 THE COURT: I got it , great . Thank you . Is there anything else? 14 MR . ROTHBERG: I would just point your Honor to the 15 lang uage of the statute . Your Honor is already obviously 16 extremely well p r epared. I won ' t waste your time . 17 THE COURT: Thank yo u. 18 MR . ROTHBERG : And, perhaps , I s hould s it down at 19 this point . 20 THE COURT : If you want to respond , I will l et you 21 respond . 22 MR . ROTHBERG: Thank you , your Honor . 23 THE COURT : Counsel , I mean , the two c ases that I 24 am looking a t t hey are r eally compat ible because I know each 25 side cited the case separately . The one side cited 26 o ne case ; the other side cited the other case. When I read mb 7 1 Proceedings 2 it, they are compatible. 3 And, one of them is the People of the State of New 4 York by Elliot Spitzer vs . Direct Revenue, and that is 19 5 Misc . 3d 1124A, and then the other case , Matte r of People 6 vs. Applied Card System, 11 NY3d 105, by the Court of 7 Appeals in 2008 . The first case is by Just ice Cahn and that 8 was in 2008. 9 And they are really compatible because they're 10 saying -- although Justice Cahn said that there is no 11 disgorgement , he actually said why there was no 12 disgorgement . He said, disgorgement , there is no 13 allegations in the complaint that the respondent received 14 anything of value from the petitioner or consumers. 15 And that, and that he goes on -- excuse me . 16 The s t a t utes do not authorize gener a l disgorgement 17 of profits received from sources other t han the public . 18 And t he Court of Appeals basically said the same 19 thing when it said that the Martin Act protects consumers 20 and the State. It does not protect -- and if t he State is 21 sta rting to collect money or recover money , and Justice Cahn 22 says this : 23 If the State is trying to recover money , it becomes 24 punitive in a sense because there was no state money 25 involved, and any money you collect on a disgorgement 26 principle theory is punitive in t hat regard. mb 1 Pr o c eed ings 2 So , why s houldn ' t I grant this mot i o n to dismiss 3 t h e disgor gement clai m? 4 MR. ELLENHORN: You are r unning against centuri es 5 of law as as f o l lows . 6 7 8 THE COURT : Oh MR. ELLENHORN : As follows , as fol l ows : It is abs olute l y wel l es t a b lished t hat in a fra ud 9 case , wh ether i t' s a consumer f r a ud or security f r a ud or 10 whole r ange of other cases where t h e Court has the power t o 1 1 g r ant equitable rel i ef , wh ich it d oes here 1 2 THE COURT: Yes , n o doubt . 13 MR. ELLENHO RN : -- it has a n inherent power t o 1 4 cau se t he defendant to r eceive money that t h e defendant 15 received through f raudu l e n t p ract ices or for other reasons 8 1 6 or i ll-gotten gai ns t o d i s gorge that money to t h e Stat e or a 17 p l ain t i ff, a n d I have never seen a case t hat mad e t h e 18 d i st inct i ons o r imposed t h e k ind of limitations certainly , 1 9 no auth o r itat i ve case , cen t uries of othe r cases that you a r e 20 suggesting e xists . 21 Now l et me go on , p l ease . 22 THE COURT : Okay . 2 3 MR . ELLENHORN : Thi s i s very fundamental to t h e 24 powers of t his office . 25 THE COURT : I am not discount ing t hat . 26 MR . ELLENHORN : I u nder stand t hat , and I can' t mb 9 1 Proceedings 2 decide that case, but you shouldn ' t decide that case based 3 on one line in one decision that is against all t he law in 4 this State and the United States . 5 Disgorgement is not a penalty . The courts have 6 universally said that disgorgement is not -- J udge, please 7 let me make my argument. 8 THE COURT : I just have a q uest ion . 9 Go ahead, finish then . 10 MR. ELLENHORN: Go ahead , I'll answer your 11 question . 12 THE COURT : I was going to say what monies did the 13 State expend? What monies did Ernst & Young get from the 14 State? 15 MR . ELLENHORN: Didn ' t get any monies from the 16 State . 17 THE COURT : Okay. 18 MR . ELLENHORN: And that ' s completely irrelevant . 19 THE COURT: Okay. What monies did Lehman -- did 20 Ernst & Young get f r om consumers and the public? 21 MR. ELLENHORN : This is not a consumer fraud case . 22 It ' s a securities fraud case. 23 THE COURT: Isn't the Martin Act designed to 24 protect consumers and the public? 25 MR . ELLENHORN: The Martin Act is designed and , i n 26 fact , does protect the p ublic . It's an a nti-securities mb 10 1 Proceedings 2 fraud . It's a Blue Sky law , and it entitles the government 3 where there has been a securities fraud to obtain a variety 4 of forms of relief . 5 One is damages to the victims . The people who 6 invested in Lehman based on what we claim are false 7 financial statements, which were certified wrongly by the 8 defendant . That is one form of relief . 9 THE COURT : Damages to the victim, or damages to 10 the victims . 11 MR . ELLENHORN : Yes, damages to the victim . 12 One form - - let's leave aside injunctive relief. 13 Another form of relief is penalties , which are very 14 minimal or limited by statute. 15 THE COURT: Like $2,000 . 16 MR . ELLENHORN : It ' s not much. I t 's not what this 17 case is about . 18 THE COURT: It's a hand slap. 19 MR . ELLENHORN : It's not what the case is about . 20 And, the third, which is not listed in the statute 21 and clearly does not have to be , but for centuries courts 22 have issued disgorgement relief in federal court, state 23 court , securities cases, consumer where it is not listed in 24 the statute . 25 THE COURT: In t hose cases that you are relying on 26 centuries of cases -- mb Proceedings MR . ELLENHORN : Right . 11 1 2 3 THE COURT: where disgorgement was proper, and I 4 think I looked at it, those cases involve situations where 5 consumers actually suffered a loss , or they were actually 6 participating, or the state put in money and actually was 7 recovering money for t he state . 8 There is no cases that I saw tha t had a situation 9 where , in this complaint t hat you have here that I ' m looking 10 a t, where t here is no allegation where the money t ha t they 11 claimed to have gotten, Ernst & Young , the $150 million in 12 fees , was somehow tied to the investors putting money into 13 Lehman or some how tied to any other consumer putting money 14 into it because the allegations, and I read the complaint . 15 MR . ELLENHORN: What you ' re saying is correct . 16 THE COURT: Thank you . 17 MR. ELLENHORN : But , with all due r espect, you are 18 making the same -- you are possibly making the same error I 19 believe was made in the one case they are relying on, and 20 that is confusing . 21 THE COURT : So, the centuries of cases that you are 22 relying on , you 're saying that my reading of the facts are 23 pretty okay . 24 MR . ELLENHORN : I can ' t say every case you've read, 25 but what I'm saying is the following . 26 You are confusing, with all due r e spect , mb 12 1 Proceedings 2 restitutionary damages , which is designed to ma ke a victim 3 whole . People invested in Lehman stock. They wer e injured 4 they are entitled to damages . 5 THE COURT: But the State was not an investor . 6 MR. ELLENHORN : The State that has nothing to do 7 with it , with all due respect . Actually the St ate -- 8 THE COURT: Counsel, that phrase doesn ' t r eally 9 turn me on, with all due respect . 10 MR. ELLENHORN: I apologize . 11 The State may or may not have been an investor 12 t hrough a state pen sion p l an . 13 THE COURT: Okay . 14 MR . ELLENHORN : Disgorgement serves a different 15 purpose . It's clearly delineated. 16 THE COURT: I ' m glad you said that because I didn't 17 see that in t he papers here . If , in fact 18 MR . ELLENHORN : I think i t is . 19 THE COURT : If, in fact , there is a pension plan 20 that is involved here, you're saying that the State 21 invested, had a pension plan t hat invested in Lehman . 22 MR . ELLENHORN : I d o n' t know . It may have . 23 THE COURT: Don't say something you don ' t 24 MR . ELLENHORN : We're not relying on it. 25 THE COURT : Don ' t say that if you don ' t know . 26 That ' s a critical fact then that may change the dynamics of mb 1 2 3 4 5 6 this . think MR . THE MR . it 's a Proceedings ELLENHORN : I don't know . COURT : Okay . ELLENHORN : I believe it ' s likely. I don' t critical fact . I don ' t think it ' s r elevant . 7 If it ' s r e l e van t to your Honor , and it seems to b e, and we 8 need to determine wh ether the State was a vict im or an 9 investor , we will do so , but that is not t he theory of our 10 case . 11 We are not suing on behalf of the State to get 12 money for the State because it may have lost money in 13 Lehman . Disgorgement is a remedy that is designed to 14 prevent the wrongdoer from obtaining ill - gotten gains . 15 Please , that i s the purpose of it . 16 And the cases are clear , many of them a r e in the 17 federa l courts, under analogous laws , federal securi ties 18 law , which the courts have routinely issued disgorgement 19 orders even against Ernst & Young , and this goe s to your 13 20 points you r aised , the courts have said, that that money is 21 being disgorged . 22 23 THE COURT : All right . MR . ELLENHORN : That money is being disgorged if I 24 may , not , not to compensate the vict ims whether t hey be 25 whoever t hey may be , not to punish the defendant as a 26 statutory pena lty , but to , as an incentive to p revent people mb 1 2 from wrongdoing . Proceedings 3 In other words, you got money you shouldn ' t have 4 gotten . You are going to have to disgorge it . And , the 14 5 courts have laid out in case after case , mostly many federal 6 securities cases directly analogous here, and having said 7 that , where t hat money goes will be decided by the judge or 8 the SEC or the Attorney General ' s office . 9 THE COURT: You see, that ' s the problem. If you 10 get a disgorgement claim -- if I let it go forward and you 11 prevail and you get a disgorgement claim, you are asking the 12 Court to decide where the money goes . 13 What if, at the end of the day, it doesn't go 14 anywhere? 15 MR . ELLENHORN: Well, first of all -- 16 THE COURT: What happens then? 17 MR . ELLENHORN : It has to go somewhe re . 18 THE COURT: Wha t if at the end of t he day there is 19 a situation where we find out the consumers aren't effected 20 by what happened, these investors aren ' t effected by what 21 happened, and ultimately there is nobody to give the money 22 to. 23 24 25 MR . ELLENHORN: Yes, there is . THE COURT: Who then? MR. ELLENHORN: The State Treasurer. That's 26 exactly what I am saying. mb 15 1 Proceedings 2 It doesn't mean the State was a victim. 3 THE COURT: That becomes punitive . It 's not 4 disgorgement . 5 MR . ELLENHORN: That's not what the case law says. 6 THE COURT : You could take t hat pos i tion, fine . 7 MR. ELLENHORN: That's not what the case law says . 8 THE COURT : I 'm not going to argue about it . That 9 is fine. 10 MR . ELLENHORN : It isn ' t what the case law says. 11 The case law makes it very clear . I want to talk about 12 Applied Card for a moment . 13 Applied Card was an extremely important case to 14 this office . It was in the New York Court of Appeals , it 15 was litigated at great length, and that case dealt with the 16 powers of this office under the Martin Act and the Executive 1 7 Law. That is what the case was all about . 18 THE COURT : It was preemption case . 19 MR . ELLENHORN : It was many t hings . 20 THE COURT: It primarily -- 21 22 23 MR. ELLENHORN: It was -- THE COURT: a preemption case . MR . ELLENHORN: Well , this is the way we viewed the 24 case . What was important about that case was this, we deal 25 with this every day, and it's going to play and animate this 26 entire lit igat ion no matter what happens. mb 16 1 Proceedings 2 THE COURT : Right . 3 MR . ELLENHORN : In tha t case , a settlement had been 4 reached in an a class action -- 5 THE COURT : Correct . 6 MR . ELLENHORN : -- in which money was available for 7 t he investors . There is a pending federal class case here 8 before J udge Kaplan . Okay . 9 Now , what the Court of Appeals held was that where 10 the federal class action was settled, and the investors 11 released the defendants , the Ne w York Attorney General's 12 office was , t he r efore - - I don't t he word is p reempt i on , but 13 were , ther efore , bound by princi ples of res j udicata , we 14 couldn ' t get money from the people because they had already 15 settled with the plaintiff s . 16 THE COURT: The Court of Appeals said, that ' s not 17 accurate , you c an do that . Court of Appeals a l lows you to 18 do what you d id . 19 MR . ELLENHORN : This is what I ' m saying , Judge, the 20 Court of Appeals says we cannot get money for the victims 21 who have been s atisfied and give n r elief . 22 THE COURT: Right . 23 MR . ELLENHORN : But , t he Court goes on to say that , 24 as an exercise of the equity powers, the court may order 25 wrongdoers to disgorge their fraudulently obtained profits , 26 and it doesn ' t say the New York Court of Appeal s is saying mb 17 1 Proceedings 2 that we could get disgorgement . 3 THE COURT : Wa i t a minute , you j ust quoted a 4 phrase , " the cour t may order wrongdoers to disgorge their 5 fraudulently obtained profi ts. " MR . ELLENHORN: Yes . 6 7 8 9 THE COURT : Did you know you just quot ed a federal court? MR . ELLENHORN : I 'm quot ing t he New York Court of 10 Appea l s quot ing a federa l court . 11 THE COURT : Than k you . Because it was n ' t real ly 12 quoting. What t hey did was t hey put is as a '' see ," and said 13 right here , Compar e CF, Securities and Exchange Commission 14 vs . Fischbach Corporation , 133 F 3d, 170 at 175 Second 15 Circuit 1997 , and they quoted t hat l anguage that you cited . 16 But, before that language , t here was t his whol e 17 paragr a ph t h a t t hey put i n, a nd I ' ll read i t for t he record : 18 "Our holding does not , however , substantially 19 p r ej udice t he public interest served by the Attorney General 20 in pursuing t his action . Indeed , r espect fo r t he finality 21 of t he Allee sett l ement ," which you have mentioned , "still 22 permit s t he Atto r ney General to see k restit ution on beha l f 23 of those not bound by t he sett l ement and for the t ime 24 periods not embraced t herein ." 25 Clearl y , that ' s right on point . 26 "In addition , the cla ims for injunctive relief, mb 18 1 Proceedings 2 civil penalt i es , and costs remain undisturbed. And , as 3 Supreme Court noted , the Attor ney General might be able to 4 obtain disgorgement, an equitable remedy distinct from 5 restitution of profits that respondents derive from all 6 New York consumers whether within the Allee settlement class 7 or not. " 8 MR . ELLENHORN : Yes . 9 THE COURT : Again I ask you, who are t he consumers 10 in this case in your complaint that you have alleged have 11 been harmed by the acts of Ernst & Young? 12 MR . ELLENHORN : The people who were harmed by t he 13 actions of Ernst & Young and Lehman where hundreds of 14 thousands of investors in Lehman stock. 15 THE COURT : Counsel, that would be fine , but if you 16 had made that allegation , and the allegations could have 17 taken t he form of Ernst & Young whic h reaped over $1 50 18 million in fees that were derived from investors and 19 con sumers putting money i n Lehman because of the misleading 20 financial statements that generated such huge amounts such 21 that Ernst & Young can earned $150 million , that would be a 22 different story. I don ' t hav e those allegat ions . 23 MR . ELLENHORN : I have never heard -- t his case , 24 Applied Card wasn't a consumer fraud case. There are cases, 25 consumer fraud cases where we get disgorgement of profits, 26 separate , and we may or may not g i ve it to the consumers . mb 19 1 Proceedings 2 This is a securities fraud case. It's a slightly 3 different case . If we are stripped of this power, we will 4 have less power than the Securities and Exchange Commission 5 under statutes that are exactly alike, and , in fact , less 6 liberal than t he Martin Act , that have the Securit i es and 7 Exchange Commiss ion that has been getting d i sgorgement of 8 profits in securities fraud cases for money t hat wasn' t 9 necessarily paid by investors. 10 And they have been keeping the money in the United 11 States Treasury or they have been giving it to the investors 12 as a matter of discretion, and they have that discretion . 13 THE COURT : I understand that . 14 MR . ELLENHORN : No court has ever suggested that we 15 don ' t have that same power . 1 6 THE COU RT : You are relying on the principle then 17 in federal cour t where t hey permit disgorgement unde r t he 18 Federal Securities Act , and you are aski ng me to use that as 19 the basis now to extend the Martin Act -- 20 21 22 23 24 25 26 MR . ELLENHORN: No . THE COURT : beyond what it's saying . MR . ELLENHORN: No. No, I am not . The federal courts have I absolutely am not. The fede r al courts have been saying fo r decades, literally decades , that in federal courts can order disgor gement in securities fraud cases without a n y statutory rnb 20 1 Proceedings 2 authority whatsoever . 3 There were later some statutes adopted that used 4 the word disgorgement . They were ordering disgorgement in 5 comparable circums tances to this one , including b y 6 accountants before the statutes ever ment ioned t he word 7 disgorge ment. 8 THE COURT : Let me remind you a nd I r emind t he 9 fol ks in t he other motion I argued , I am in sta t e court , and 10 unless you have a Court of Appeals case from the New York 11 State Court of Appeals that says exactly what the federal 12 courts say, I am less inclined to agree with that statement . 13 MR . ELLENHORN : I understand that . But we are not 14 talking about f ederal rul es of procedure here . 15 THE COURT : I ' m talking about 1 6 MR. ELLENHORN : We ' re talki ng about power . 17 THE COURT : I ' m talking abou t s ubs tan t i ve p roced ure 18 here . I ' m gla d you ment i oned t hat. This is powe r . Thi s 19 disgorgement . Thi s i s nothing to take lightly . This i s an 20 extreme r emedy t hat you are asking to pursu e . 21 MR . ELLENHORN : I don ' t want to mention , I ' m a 22 little embarrassed to say this , but one of the cases we 23 didn't bring to your attention, I just didn ' t think of it, 24 I'm embarrassed , it ' s a case that I tried about 20 yards 25 away here across the hall before Justice Ramos this last 26 summer , and it was a case involving our cla im for mb 21 1 Proceedings 2 disgorgement of certain fees t hat an appraising company had 3 gotten, and it was no intention to give that money to the 4 people who paid the money for practical reasons and many, 5 many reasons . Justice Ramos held that we had the power to 6 get disgorgement . 7 THE COURT: I am glad you mentioned t hat because 8 you said something very critical . You said it was an 9 appraisal fee, that there were consumers that actually paid 10 11 12 fees . MR . ELLENHORN : In that case there were. THE COURT: So , whether or not you are going to 13 distribute to consumers that, to me, is irrelevant . 14 But, the fact that there are actual bodies that 15 have been injured as a result of the defendant 's conduct is 16 sufficient to provide disgorgement . 17 I don' t have anything in this complaint , and I ' ve 18 read this compl aint even though I was -- I did read it very 19 carefully . 20 MR . ELLENHORN : I 'm sure you did . 2 1 THE COURT: I didn't see any allegations other than 22 Lehman and Ernst & Young having this sort of like , okay , we 23 changed the accounting principle, now you could post these 24 transactions as sales rather than loans so that we could 25 look really good on our balance sheets. That we're getting 26 rid of -- we're lowering our leverage . We're looking rosy mb 22 1 Proceedings 2 to investors . We ' re liquid and all that . But, no one 3 knows , you know, wink-wink, that in actuality tomorrow, even 4 though we get a hundred million dollars , tomorrow we got to 5 pay it back wi t h interest . 6 So, you know , I don't see those allegations . 7 MR. ELLENHORN : A couple of responses . 8 THE COURT : In the Ramos case you j ust conceded or 9 admitted to me . 10 MR . ELLENHORN : I want to clarify what I said in 11 the Ramos case . 12 THE COURT : I'm listening to what you're saying, 13 that's why . Okay . 14 MR . ELLENHORN : The fees were actually paid by the 15 banks which made the mortgage loans , and they wer e not the 16 victims . It was a scheme by a bank and mortgag e lenders and 17 First American t o r ender inflated appraisals which led, as 18 you know , to the collapse of t h e housing market , a nd the 19 fees that were being d isgorged where paid by the banks, the 20 wrongdoers , Great Western or Country Wide . They were not 21 fees being paid by any consumers . 22 THE COURT: Who was paying the fees? The banks 23 were paying the fees . 24 MR . ELLENHORN : The banks were directly paying the 25 fees to First American . 26 THE COURT: To First American who was being sued , mb 23 1 Proceedings 2 right, they were the defendants ? 3 MR. ELLENHORN: We were suing t hem. 4 THE COURT: You were suing First American? 5 MR . ELLENHORN : Yes . 6 THE COURT : In other words, there was somebody 7 other t han - - there was a consumer of sorts paying t he fees . 8 Okay . Here , in this case , Lehman is not a consumer. Lehman 9 is sort of the -- what is the word? 10 MR . ELLENHORN : They ' re the wrongdoer . 11 THE COURT : I understand they ' re the wrongdoer, but 12 they ' re paying a fee for services rendered . 13 In your case , it 's multiple people paying these 14 mortgage fees to First American . 15 MR . ELLENHORN : All I ' m saying is that I don't 16 believe the law limits . If you do, then , obviously , I am 17 fighti ng against you. I don't want -- I don ' t enjoy t hat . 18 THE COURT: I want to hear the argument s. 19 MR . ELLENHORN: I am saying , yes, many of the 20 cases -- this is an unusual case , it ' s the firs t time the 21 Attorney General's office , I'll acknowledge that , I ' m happy 22 to acknowledge it, proud to acknowledge it , it ' s the first 23 time -- 24 THE COURT : And you walked in here . I guarantee 25 you it's going uptown . 26 MR. ELLENHORN : It 's the first time the Attorney mb 24 1 Proceedings 2 General ' s office probably has sued an accounting firm. It ' s 3 neither here, nor there . It ' s a ma j or fraud or established 4 to be a major fraud . 5 Now, it's true, therefore, that many of t he cases, 6 the run-o f -the-mine cases where we get disgorgement or seek 7 disgorgement are consumer fraud cases . I ' m not going to 8 dispute that . So, what? 9 I don't know of any case law that says that t he 10 fundamental principle is that if someone has aided and 11 abetted or taken part or specifical l y in a fraud, a 12 securities fraud or a consumer fraud or some other financial 13 fraud , and they have been enriched as a result of their 14 misconduct , the court , in its discretion, depending on the 15 facts , can order disgorgement as a way of denying them . 16 It is in the public interest . It is a prophylactic 17 measure , but not deemed to be a penalty as s uch , but it is 18 in the nature of a prophylactic meas ure . It has simply 19 nothing to do with helping the victims . 20 The separate relief is sought for them . This is a 21 discreet form of relief . It is designed to prevent unjust 22 enrichment or people from profiting from wrongdoing . 23 I agree with you that many, if not most , I haven ' t 24 combed them carefully, of the cases that come through the 25 courts in whi ch we get disgorgement involve consumers, but 26 it 's not limited to that. mb 1 2 Proceedings THE COURT: Let me ask you this: 25 3 Other t han d i sgorgement, t hat doesn' t mean you are 4 not going to be able to recover other monies or damages? 5 MR. ELLENHORN: Well, let me tell you about that 6 because t here ' s a very interesting s ubtext going on here or 7 may be going on. It may or may not e l iminate it as well. 8 We are seeking in the main, as I said, two t ypes of 9 relief. One in the main, let's leave out injunctions, 10 penalt ies for t he moment, which are incidental penalt i es . 11 We are seeking money . I t coul d be hundreds of 12 mill i ons o f dollars, if n o t billions, to be determined fo r 13 people who invested i n Lehman s t ock, part icular l y i n 2007 14 and 2008, got severe losses. If we have to p r ove that , that 15 is a fundament a l part o f o ur relief. 1 6 The second part it's severed. 17 Now, i n the federal court, in t he federal court, 18 the private plaintiffs' class acti o n , major c l ass act ion, 19 actually they don't have the power , t h e p rivate plaintiffs 20 don't have t he power to get disgorgement under the 21 securities laws, the SEC does. Wha t t hey're seeki ng i s 22 mon ey damages f or t h e vict ims of the a lleged f ra ud. 23 THE COURT: Ri ght. 24 MR. ELLENHORN: In t h a t sense, we're in the same 25 shoes they ' re in. We are seeking additional relief 26 d i sgorgement as the SEC does all the t ime. mb 26 1 Proceedings 2 Now , if t hey settle that case at some poin t -- and 3 may sett le it, I don't know, 99.9 of these cases settle, 4 this may be the o n e -tenth of one percent, it isn't --when 5 they settle that case, if they sett l e that case, probably a 6 couple of years from now, they will then , without any 7 question, i f we have not resolved o u r case, f i rst by 8 settlement or trial or whatever , they'll come in a n d say 9 they may well be right . 10 Sorr y, fellows, you have wasted your time because 1 1 we have settled. Over in the federal cour t, you can't, 12 under Applied Card, now get damages for the people except 13 for a few people might opt out. All r ight . That's part of 14 the life. That's what the Applied Card case was about. 15 But it i s for that reason , amon g others, amon g 16 others, that our abili t y to get disgorgement of some or all 17 of the fees t hat they r eceived in doin g a non- audit, an 18 imprope r audi t , that we have that power and t hat right. 19 That's not effect ed by Applied Car d. In f act , i t ' s 20 preserved by Applied Card . 21 Al l , I could say , J udge, very r espectful ly -- you 22 don 't like people to say with respect -- I 'm not goi ng to 23 say with respect. 24 THE COURT : Than k you. 25 MR. ELLENHORN: But it is with respect, I believe 26 that my colleagues want me to say somet hing. mb Proceedings Okay , I thank you . 27 1 2 3 Good suggestion. I don't want to put it that way . 4 THE COURT : Okay. 5 MR . ELLENHORN : I think when you delve a little 6 further into the cases it becomes very clear that 7 disgorgement is s imply a different form of animal . It is 8 designed -- it is not des i gned to punish in a l egal sense , 9 but it is designed to deter people who receive money t hey 10 shouldn ' t get , and where it goes is a totally separate 11 question . 12 THE COURT: Right . 13 MR . ELLENHORN: Whether it goes to the consumer, we 14 could give it to the victims . I believe and the SEC has 15 done it all the t i me, that we could . 16 THE COURT : Your time is up . That's wha t I was to 17 tell you . 18 MR . ELLENHORN: I don't mind if you say so . 19 THE COURT: He ' s your colleagu e . He 's t elling you 20 your time is up . 21 MR . ELLENHORN : He tries to do that to me in the 22 office all the time. 23 THE COURT : I need to do that though . 24 MR . ELLENHORN: These are very serious matters . 25 THE COURT : Absolutely . You are right , and I think 26 I got a handle on it . mb 28 Proceedings 1 2 MR . ELLENHORN : Wh a t I ' m sayi ng is the case is very 3 clear, the federal cases are very clear , there 's no reason 4 they don't apply fully here . In fact, our courts said we 5 look to federal cases when we' r e dealing with t he Martin Act 6 because t hey're parallel types of proceedings. 7 The cases are very clear that if we get 8 disgor gement , wha t ever it might be, you might give us half, 9 it becomes your decision , by the way . It's not a jury 10 matter . That's what J udge Ramos ruled in First American , 11 that 's why we fought about disgor gement . 12 If you say at the end of the day , I t h ink Ernst & 13 Young should give back hal f of t he fees because you did a 14 bad audit, t hey did an improper audit, if you reach that 15 conclus ion , and t he fair thing is for them they s houldn 't 16 profit from a fra udulent audit . Then that money can , in 17 fact, be given to people who were victimized by t his fraud . 18 It could theoretically be given to Lehman creditors that 19 went into bankruptcy. It could be kept by the State . 20 That's not t he issue . 21 THE COURT: All r ight . Mr. Ellenhorn, I have to 22 cut you off. 23 MR. ELLENHORN: Thank you very much . 24 THE COURT : You want to respond briefly, counsel, 25 very bri efly. 26 MR . ROTHBERG: Very briefly . J ust for the record, mb 29 1 Proceedings 2 your Honor, Mr . El lenhorn has said that f r aud has someh ow 3 been established in t h is case. That is what this case is 4 about . Th e SEC d id not seek disgorgement because t here was 5 no f r aud by Er nst & You ng here . And so we will , in due 6 cou rse, we will present t o your Honor t he facts on that . I 7 am not going t o , obviously, do that today. With that , I 8 will si t down , your Honor. 9 THE COURT: All r ight . 10 This is my decision with respect do the defendant's 11 motion here . 12 I heard the arguments here, and I know t he reliance 13 is on a lot of the federa l cases with respect to 14 disgorgement there . 15 Th e r e is an u nderstan d ing, and I can't i gnore the 16 fact that, yes, on the federal side , disgorgement seems to 17 be routinely a remedy that is applied against t he defendant 18 in t hose securi ties actions . 19 It i s not t o say disgorgement is no t applied here 20 in t h e s t a t e court . The only condition is , and I read those 2 1 t wo cases that I hav e here , t he People vs. Applied Card, as 22 well as People vs . Direct Revenue . 23 The courts t here , one Court of Appea l s and one 24 Supreme Court trial court decision , they are not saying 25 d isgorgement is not in t he zone or realm of possibility . 26 They are saying if you want disgorgemen t , the re a r e going to mb 30 1 Proceedings 2 be conditions seeking disgorgement. One of t he impacts it 3 has to impact t he consumers . There has to be some sort of 4 showing or a llegat ion that t he consumers who are putt ing in 5 money . For example , in the Direct Revenue case , t here the 6 consumers weren't putt ing any money in . Those were the 7 advertisers themselves t hat were putting t he money in . And, 8 in t he Court of Appeals case , they make the same motion t hat 9 as long as you have respondents or consumers putting in 10 money, disgorgement may be possible. 11 Here, in t his case , and I know plaintiff's counsel 12 is arguing that the fact that there are no consumers or no 13 allegations in this complaint that consumers that have been 14 impacted or the public has been impacted , that it sti l l 15 shoul d not prevent a disgorgement r emedy. 16 I disagree wi t h t ha t. I believe t hat while we 17 are -- while t he courts do look at d i sgor gement , it is done 18 in t he very careful and very thoughtful manner , and that is , 19 i n t his case, the a llegations in this complaint fail to 20 a llege a nything with respect to consumers or t he public at 21 large , 22 Now , the a r gument then goes plaint iff's counsel 23 says t hat we don't necessarily need to have consumers , we 24 don't necessari ly need t o have the public affected . The 25 State Attorney General is permitted to go and recover these 26 monies on behalf o f t he consumers. mb 31 1 Proceedings 2 My question t hen becomes is where is the allegation 3 in here that the State actually invested money or lost money 4 as a resul t of t he purport ed ac t ion or conduct of 5 defendants . That allegat ion is missing t oo. When those 6 allegations are not met o r made, then wha t happens is that 7 disgorgement remedy or vehicle t hat the plaintiff is seeking 8 and if they actually prevail , i t becomes a penalty . It 9 becomes punitive. Disgorgement is not designed as a 10 punitive measure because punitive damages in t reble damages 11 are a whole separate area of law . 12 Disgorgement is exactly that , resti t ution t o give 13 back or pay bac k somebody a va lue that t hey put in when t hey 14 shouldn't have . And in this case, these allegations in t his 15 complaint fail to set fo r th sufficiently 16 (Pause) . 17 THE COURT : You have one . I have one . 18 MR. ELLENHORN: I'm sorry? 19 THE COURT: You have someone telling you. 20 LAW SECRETARY: Sorr y. 21 22 23 24 25 26 second. THE COURT: Okay. MR. ELLENHORN: I would like to say something . THE COURT: Hol d on one second. MR . ELLENHORN : After you finish . THE COURT: I'll give you a second . Hang on a mb 32 1 Proceedings 2 (Cont inuing) -- exact ly what t h e public in jury i s, 3 what t he consumer's inj u ry is , what the injury is to the 4 State. 5 Disgorgement , one , is restitution to recover , 6 disgorgement is to deter conduct , and in t his sense it is 7 not there . 8 So , that is my decision and order with respect to 9 the motion. 10 I find that based on these t wo cases I have here 11 and based on t he insufficiency of t he allegations set forth 12 in the complaint that a disgorgemen t remedy has not been 13 stated here, and, accordingly, I am going to g r ant t he 14 defendant's motion to dismiss that aspect of the complaint 15 seeking disgorgement against it . 16 Coun sel, you have something you want t o add? 17 MR . ELLENHORN : You made your ruling , and I am not 1 8 going to try to persuade you o t herwise. I would li ke to 1 9 clarify something for the record because t his is , obviously , 20 going to take t his up. 2 1 THE COURT : Yep . 22 MR . ELLENHORN : The complaint is very clear that 23 inv est ors in Lehman stock suffered massive in jury. It is 24 true t hat they suffered massive injury from a fraud which we 25 contend was -- 26 THE COURT : Facilitated . mb 1 2 3 Young. 33 Proceedings MR . ELLENHORN: -- more t han faci l itated by Ernst & 4 It is true that, obviously, a stockholder in Lehman 5 didn't pay their auditing fees, t hat's a fact. They 6 wouldn't pay them . The company pays their a uditing fees . 7 But, it is not true, not even remotely true that 8 t he victims of the fraud did not suffer huge financial 9 losses. 10 THE COURT : I'm not disputing that. I'm just sayi ng 11 that t he allegations 12 MR. ELLENHORN: I want to be clear about that . 13 THE COURT: The allegations are insufficien t . 14 MR. ELLENHORN: Your Honor's r uling, I believe, i s 15 that because the fees were not actually paid by a 16 stockholder, t hey were paid by t he company, you know, 17 somehow they could keep t hem even if t hey acted wrongly. 18 THE COURT : I did not say t hat. I said t he 19 disgorgement vehicle is not available . 20 MR. ELLENHORN: Well, but there is no other way to 21 get the fees. There is no other way to get t he fees . 22 And by the way, New York's interests, I should also 23 note , although I didn't make this argument as such, I didn't 24 think it was necessary, New York's interest is not simply 25 those of a party that might through its State pension plan 26 have invested in Lehman. New York has a n interest, and the mb 34 1 Proceedings 2 courts have recognized it for about 75 years, in maintaining 3 the integrity of the financial markets of which New York is 4 t he world center, and t hat 's an interest. 5 THE COURT : Okay, Mr . Ellenhorn. 6 MR . ELLENHORN : All right , enough. 7 THE COURT : Thank you . I thin k I made my point. 8 MR . ELLENHORN : I'm sorry, I know you made your 9 point. I wanted to clarify our position. 1 0 THE COURT : You could clarify for t he record . 11 Counsel, you want to make any clarification with 12 respect to what was said? 1 3 MR. ROTHBERG : No, sir. 14 Before I forge t, I want to t ell you r Honor, we did 15 reach agreement on a stipulation and order regarding 16 sched u ling of discovery in t his case. I want to hand that 17 up your Honor . (Handing) . 18 19 THE COURT: When do you want to do a compliance 20 conference then? I'm going to sign it. You talk to my Part Clerk . 21 22 THE CLERK : Come over with me, and we will give you 23 a future date . Okay. 24 THE COURT: I need to know before you leave , folks. 25 Hold on one second . 26 Have you served an answer in this case? Has an mb 35 1 Proceedings 2 answer been served? I guess n o t. 3 MR. RUT HBERG : No . 4 MR. ELLENHORN : Only two and a half years , we still 5 don't have a n answer . 6 MR. RUTHBERG: Well, to correct the record, it was 7 in federal court and carne it back. 8 MR. ELLENHORN: It was in federa l court, carne bac k 9 and t he motion. 10 THE COURT: What I want i s I want t o direct you to 11 serve a n answer, today is December 12th , serve an answer or 12 move. Well, you've already moved with respect to t h e 13 complaint. Serve an answer by Janu a r y 9th . Okay . So t hat 14 we have that, so we coul d have t he i ssue joined before we go 1 5 forward . 16 Having said all t hat, that is my decision and order 17 wi t h respect to t his motion. 18 Counsel , you are the moving party . Order t he 19 transcript , please . I will so order it. You have it fo r 20 21 22 23 24 25 26 your records , and have a very good afternoon . MR. RUTHBERG: Thank you, your Honor. (Proceedings a re recessed) .