Source: https://phillipslytle.com/publications/article/alan-j-bozer-and-ryan-a-lema-co-author-white-collar-column-in-the-daily-record/
Timestamp: 2019-04-24 02:55:17+00:00

Document:
The Legislature handed the New York Attorney General a powerful tool when it enacted Executive Law Section 63(12) to investigate civil fraud. Section 63(12) authorizes the Attorney General to investigate fraudulent or illegal acts and to commence summary proceedings to enjoin “repeated fraudulent or illegal acts or … persistent fraud or illegality in the carrying on, conducting or transaction of business.”1 This article addresses the power of Section 63(12) as an investigative discovery tool; a discussion of the law’s summary enforcement procedures is left for another day.
While Section 63(12) does not itself create the basis for liability, it provides the Attorney General with standing to investigate alleged fraudulent or other illegal behavior, and to seek injunctive relief and specific remedies.2 Among the noteworthy applications of Section 63(12), the Attorney General brought charges in 2013 against the now-defunct “Trump University.” That case made headlines around the time of the 2016 presidential election and, after a New York Appellate Division decision affirmed the Attorney General’s authority to pursue its claims for fraud under Section 63(12)3, the case settled.
“Illegality” is also broadly defined to include violations of state and local laws and regulations, including violations of New York’s consumer fraud statutes or the New York False Claims Act, as well as violations of federal laws or regulations.6 The statute also requires that the fraudulent or illegal activity be “persistent”— while a few courts have interpreted that requirement strictly (particularly where there has been a passage of time since the alleged illegal act and it is unlikely to reoccur), in practice the Attorney General can often satisfy the statute by demonstrating only minimal repetition.7 Because of the broad scope of the Attorney General’s powers under Section 63(12), the Attorney General often invokes the statute in conjunction with its other enforcement authority (e.g., the Martin Act or N.Y. General Business Law §§ 349-350) as a broad catch-all provision.
Because the Attorney General’s investigatory powers under Section 63(12) are expansive and the statute is civil in nature, many of the protections that would normally be afforded to the target of a criminal investigation are absent. The Attorney General may issue investigative subpoenas for documents and take sworn testimony. With respect to sworn testimony, the Attorney General’s office takes the position that a witness’s counsel has no right to be present—if she is, then she may not object to questions, may not ask any questions to clarify the record, and is not entitled to a transcript of the proceedings.
As with any civil subpoena or investigative demand, if a client receives an investigative subpoena arising out of the Attorney General’s authority under Section 63(12), the first step should be to contact the issuing Assistant Attorney General to learn about the investigation and the nature of his or her interest in the client. While the Assistant Attorney General may not be forthcoming about the scope or focus of the investigation, other information about the subpoena may be gained and burden on the client relieved.
For example, counsel should seek to narrow overbroad requests, clarify ambiguous requests, identify (and to place limits on) the number of document custodians to be included in the search, and propose search terms and date restrictions to speed and narrow the scope of electronic discovery. In discussing ways to narrow the scope of an overbroad subpoena and to reduce the burden of reviewing electronically stored information (ESI), counsel may gain insight as to what information the Attorney General actually seeks.
Subpoenas may be issued by the Attorney General under Section 63(12) without court order.8 In the appropriate case, where the Attorney General refuses to modify an overbroad subpoena, or where the demands are not reasonably related to the subject matter of the investigation, a motion to quash or to modify a subpoena may be filed within the time limits proscribed by CPLR 2304. However, such a motion faces a high burden: the Attorney General need only show some factual basis for the investigation (short of probable cause) and “that the records and books which he seeks bear a reasonable relation to the subject-matter under investigation and to the public purpose to be achieved.”9 Thus, absent unusual circumstances, an adversarial approach is typically futile, while a cooperative approach often will yield intelligence that will be helpful at the outset of the investigation.
Upon receipt of the subpoena, the client should implement a “litigation hold” to preserve all potentially responsive documents and data. As counsel begins the process of coordinating the response to the Attorney General’s subpoena, an internal investigation can be commenced by interviewing document custodians and other key witnesses, and by collecting and reviewing all potentially responsive documents. Armed with insight obtained from the Assistant Attorney General about the scope of the investigation, the Attorney General’s interest may be deduced.
From there, counsel can evaluate the client’s exposure and begin to prepare for any further legal action by the Attorney General. Section 63(12) provides for summary enforcement proceedings for injunctive and monetary relief brought on five days’ notice, but that topic deserves separate treatment.
Ryan A. Lema is an attorney with Phillips Lytle LLP where he concentrates his practice in the area of civil litigation, with a focus on commercial litigation, products liability, and workplace accident claims. His practice also includes white collar criminal defense and advising clients in a variety of government investigation and regulatory compliance matters. He can be reached at rlema@phillipslytle.com or (716) 504-5790.
1 New York Executive Law § 63(12) (Westlaw 2018).
2 See People v. One Source Networking, Inc., 125 A.D.3d 1354, 1356 (4th Dep’t 2015).
3 In re People v. Trump Entrepreneur Initiative LLC, 137 A.D.3d 409 (1st Dep’t 2016).
4 In re People v. Applied Card Systems, Inc., 27 A.D.3d 104, 106 (3d Dep’t 2005).
6 See, e.g., People v. First Am. Corp., 76 A.D.3d 68, 83 (1st Dep’t 2010); People v. World Interactive Gaming Corp., 185 Misc. 2d 852 (Sup. Ct., N.Y. Cty. 1999).
7 Compare State v. Italian Line, 56 A.D.2d 533, 533 (1st Dep’t 1977), aff’d, 43 N.Y.2d 851 (1978) (steamship company’s allegedly impermissible surcharges on passages made 18 months prior to commencement of proceeding by AG – given elapsed time and lack of any imminent threat of repetition, conduct could not “fairly be called ‘repeated’ or ‘persistent’ within the meaning of this statute”), and State v. Grecco, 21 A.D.3d 470, 478 (2d Dep’t 2005) (trial court properly dismissed Section 63(12) claims where fraudulent acts all occurred in connection with a single transaction and thus AG failed to demonstrate repeated or persistent fraud or illegality), with State v. Princess Prestige Co., 42 N.Y.2d 104 (1977) (deceptive practices in only 16 out of 3600 transactions found sufficient to establish repeated or persistent conduct).
8 See CPLR 2302(a) (Westlaw 2018).
9 Airbnb, Inc. v. Schneiderman, 44 Misc. 3d 351, 354-55 (Sup. Ct., Albany Cnty. 2014) (quoting In re La Belle Creole Int’l, S.A. v Attorney-General of State of N.Y., 10 N.Y.2d 192, 196 (1961)).

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