Charles H. Greenthal & Co. v. Lefkowitz — 32 N.Y.2d 457

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In the Matter of Charles H. Greenthal & Co., Inc., Appellant, v. Louis J. Lefkowitz, as Attorney-General of the State of New York, Respondent.

Argued May 3, 1973;

decided June 8, 1973.

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Edmund F. Wolk and Julius Mager for appellant.

I. Since the securities offering involving the proposed conversion of an apartment house from private to co-operative ownership is unique and entirely different from any other general stock offering, the Martin Act must be applied accordingly and, therefore, Special Term was correct in granting the petition to quash the

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subpoena. (Dunham v. Ottinger, 243 N. Y. 423 .) II. Even if the Attorney-General had the power to conduct an investigation under the Martin Act, it was not exercised properly and Special Term was correct in quashing the subpoena since the Attorney-General failed to demonstrate the following: (a) that there was sufficient prima facie factual evidence of wrongdoing to warrant the issuance of a subpoena; (b) that there was a reasonable need for such an investigation in relation to the subject matter under investigation and to the public purpose to be achieved, and (c) that the Attorney-General was acting in good faith. (Matter of La Belle Creole Int., S. A. v. Attorney-General of State of N. Y., 10 N Y 2d 192 ; Matter of Attorney-General of State of N. Y. [Amer. Research Council], 10 N Y 2d 108 ; Matter of Hartsdale Canine Cemetery, 37 A D 2d 548 ; Matter of Security Adv. Co. v. Lefkowitz, 20 A D 2d 860 ; Matter of Ryan v. Lefkowitz, 26 A D 2d 604 ; Matter of Prestige Sewing Stores of Queens v. Lefkowitz, 54 Misc 2d 188 ; Matter of A’Hearn v. Committee on Unlawful Practice of Law of N. Y. County Lawyers’ Assn., 30 A D 2d 47 ; Matter of Edge Ho Holding Corp., 256 N. Y. 374 ; Matter of Dairymen’s League Co-op. Assn. v. Murtagh, 274 App. Div. 591 ; Matter of Erb Strapping Co. v. Waterfront Comm. of N. Y. Harbor, 31 A D 2d 101 .) III. Any investigation commenced by the Attorney-General at any time must comply with certain minimal standards. Since the Attorney-General failed to meet such standards, the subpoena was properly quashed. (Reiter v. Greenberg, 21 N Y 2d 388 ; People v. Cadplaz Sponsors, 69 Misc 2d 417 ; People v. Federated Radio Corp., 244 N. Y. 33 ; People v. Smith Co., 230 App. Div. 268 ; People v. New York City Airport, 143 Misc. 472 ; People v. Royal Securities Corp., 5 Misc 2d 907 ; People v. Riley, 188 Misc. 969 ; People v. Hooker, 2 Misc 2d 874 ; People v. Mintzer, 23 A D 2d 821 ; People v. Canal Bd. of State of N. Y., 55 N. Y. 390 .) IV. The Supreme Court’s determination that the co-op was valid and effective prohibited the issuance of the subpoena in the first instance. Moreover, assuming, arguendo, that the Attorney-General had the right to issue the subpoena, the final disposition of the private litigation (between the sponsors and the non-purchasing tenants) ipso facto required an immediate termination of the Attorney-General ’s right to investigate. There now was no longer any public issue involved, and the right to inves

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tigate was moot and academic. (Carlisle v. Bennett, 268 N. Y. 212 ; People v. Federated Radio Corp., 244 N. Y. 33 ; People v. Hooker, 4 Misc 2d 558 ; Matter of New York State Labor Relations Bd. v. Holland Laundry, 294 N. Y. 480 ; Manhattan Stor. & Warehouse Co. v. Movers & Warehousemen’s Assn., 289 N. Y. 82 .) V. When the Attorney-General accepted the Third Amendment to the “ Plan ” for filing on January 2,1973, he waived any rights to subpoena and examine the respondent relative to the ‘1 Plan ’ ’. VI. Special Term properly held, based upon the papers before it, that this was not a proper case for the issuance of a subpoena. The Appellate Division erred when it reversed Special Term. (Carlisle v. Bennett, 268 N. Y. 212 .) VII. Assuming, arguendo, that the Attorney-General had the right under the Martin Act to issue a subpoena in March, 1972, such a right no longer exists since there is now no public issue and public purpose which warrants any investigation. The purchasers never complained. The nonpurchasers have agreed by stipulation in court to the validity of the plan. Any attempt, therefore, by the Attorney-General to question, by investigation, the 35% count is now moot and academic. (Matter of New York State Labor Relations Bd. v. Holland Laundry, 294 N. Y. 480 ; Manhattan Stor. & Warehouse Co. v. Movers & Warehousemen’s Assn., 289 N. Y. 82 .) VIII. The statutory scheme clearly entrusts to the Attorney-General the following powers and responsibilities: (a) to pass on the sufficiency of the offering plan or prospectus, (b) to pass on the sufficiency. of all amendments including the amendment that permits the plan to be declared effective, and (c) if a fraudulent practice is disclosed, to seek injunctive relief. The court, however, retains its inherent jurisdiction over the plan and it alone can deal with allegations of fraud, deceit, misrepresentation and breach of fiduciary obligations that affect the plan after the filing irrespective of statutory requirements. (Dunham v. Ottinger, 243 N. Y. 423 ; Carlisle v. Bennett, 268 N. Y. 212 ; People v. Canal Bd. of State of N. Y., 55 N. Y. 390 .)

Louis J. Lefkowitz, Attorney-General (Irving Galt and Samuel A. Hirshowitz of counsel), respondent, pro se.

I. The Appellate Division correctly found that no tenable basis was established by petitioner for vacating the subpoena issued by the Attorney-

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General in the exercise of his reasonable discretion and broad powers under the Martin Act. The record amply demonstrates the source of the exercise of subpoena power by the Attorney-General and the nature and scope of the inquiry. (Matter of La Belle Creole Int., S. A. v. Attorney-General of State of N. Y., 10 N Y 2d 192 ; Matter of Attorney-General of State of N. Y. [Amer. Research Council], 10 N Y 2d 108 , 368 U. S. 947 ; Matter of Hartsdale Canine Cemetery, 37 A D 2d 548 , 29 N Y 2d 702 ; Matter of Security Adv. Co. v. Lefkowitz, 20 A D 2d 860 , 14 N Y 2d 754 ; Matter of Ryan v. Lefkowitz, 26 A D 2d 604 , 18 N Y 2d 977 ; Matter of Prestige Sewing Stores of Queens v. Lefkowitz, 54 Misc 2d 188 .) IT. The authority to investigate is a continuing one unaffected by the filing of the offering. (Reiter v. Greenberg, 21 N Y 2d 388 ; Matter of Kovarsky v. Housing & Development Admin, of City of N. Y., 31 N Y 2d 184 ; Schumann v. 250 Tenants Corp., 65 Misc 2d 253 ; People v. Cadplaz Sponsors, 69 Misc 2d 417 ; People v. Mintzer, 23 A D 2d 821 , 16 N Y 2d 1051 , 17 N Y 2d 491 ; Mines & Metals Corp. v. S.E.C., 200 F. 2d 317 , 345 U. S. 941 ; Matter of Hoyt, 258 N. Y. 569 .) III. The disposition of the private litigation furnished no basis for quashing the subpoena and throttling the investigation. (People v. Federated Radio Corp., 244 N. Y. 33 ; People v. Hooker, 4 Misc 2d 558 ; People v. Bunge Corp., 25 N Y 2d 91 ; Matter of New York State Labor Relations Bd. v. Holland Laundry, 294 N. Y. 408 , 295 N. Y. 568 ; Commissioners of State Ins. Fund v. Low, 3 N Y 2d 590 ; Kowalski v. Mohsenin, 38 A D 2d 274 ; Manhattan Stor. & Warehouse Co. v. Movers & Warehousemen’s Assn., 289 N. Y. 82 .)

Petitioner Greenthal, Inc. seeks review of an order of the Appellate Division which reversed the order of Special Term granting petitioner’s application to quash a subpoena issued by respondent Attorney-General in aid of Ms investigation into petitioner’s real estate syndication offers.

The facts are undisputed. On .December 31, 1970, respondent accepted for filing an offering plan of co-operative organization for apartment premises at 150 "East 61st Street, "ffow^York, N. Y., pursuant to section 352-e -of the General Business Law. Three amendments of the plan were filed. The plan is a u 35% plan ” whereby if 35% or more of the tenants in occupancy

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a^ree, the leasing arrangements for the whole building could be converted to a co-operative basis with the attendant selling of shares. The amendment of June 23, 1971 filed with respondent declared the plan effective under the New York City Rent Stabilization Law (Administrative Code of City of New York, tit. YY), and the Code of the Real Estate Industry Association; and this amendment was accompanied by a sworn statement of petitioner’s vice-president that purchase agreements had been signed by 55 tenants constituting more than 41% of the tenants.

Thereafter, an attorney for certain of the tenants registered a Complaint with the Attorney-General that the co-operative plan was improper because included in the 35% computation were people who were neither bona fide tenants nor bona fide purchasers. The subject subpoena was issued the following day and, upon petitioner’s motion it was quashed.

The Appellate Division correctly held that the Attorney-General has specific subpoena power under the Martin Act (General Business Law, art. 23-A) for purposes of investigating allegations of wrongdoing on petitioner’s part in its offering plan of co-operative apartment' organization; and that collateral proceedings involving both tenants and the Attorney-General had no bearing on this power.

The statutory scheme in the act shows the Attorney-General to be entirely within the powers allocated to him by the Legislature in issuing this subpoena. In the first place, the fact he accepts offering statements for filing does not mean he has “approved” them or that they thereby become “effective” so that he would thereafter be estopped from looking into transactions underlying those statements. The filing requirement is '.simply for the purpose of affording ‘ ‘ potential investors, purchasers and participants an adequate basis upon which to found tlheir judgment and shall not omit any material fact or contain aAy untrue statement of a material fact ” (General Business Law, § 352-e, subd. 1, par. [b]). Nothing in article 23-A, or in Schumann v. 250 Tenants Corp. ( 65 Misc 2d 253 ) requires that upüynYJe filing of a plan the Attorney-General is obliged to launch a detailed investigation as to the truthfulness of all the representations made in the statement. The statement is filed simply for informational purposes. The Schumann case holds

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that where it is claimed that the filed prospectus is deficient, the appropriate remedy is article 78 review from the Attorney-General’s acceptance for filing; but where there are allegations of actual fraud tenants are entitled to bring a plenary action (see, also, Richards v. Kaskel, 32 N Y 2d 524 , decided June 6, 1973) and the exclusive remedy does not lie with the Attorney-General. There was no holding that the Attorney-General has an affirmative duty to investigate all representations in offerings as they are filed.

False or fraudulent representations in real estate syndicate offerings are specifically made crimes under the General Business Law (§ 352-e, subd. 1, par. [a]) and “whenever it shall appear to the attorney-general, either upon complaint or otherwise ” (§ 352, subd. 1; emphasis added) that skulduggery may be afoot he is authorized to start an investigation, and is accorded full use of the subpoena-power (§ 352, subds. 1, 2). Article 23-A is not only geared to prevent fraud, deception and wrongdoing, because of the filing requirements; it is also geared to assure investigation “upon complaint or otherwise” and appropriate civil or criminal follow-up procedures when wrongdoing, in fact, is found. As petitioner would have it, if wrongdoing could be concealed or successfully defended against long enough, the Attorney-General’s powers under article 23-A would be totally eclipsed. There is no authority for such a theory. Petitioner is attempting to trade on principles such as waiver, estoppel and collateral estoppel, none of which are remotely applicable here where the same issues and same parties were not brought together in any of the prior litigation.

As noted, article 23-A provides that the Attorney-General may proceed either civilly or criminally; and if it were shown that he had thoroughly and unsuccessfully pursued a substantial point by one avenue or the other, his reactivation of that point by the alternative route would not be countenanced. But petitioner has not shown that the question whether the 35% figure is bona fide has been fully investigated in the other proceedings, and, of course, there has been a failure to show the subpoena to be a harassing tactic. Neither is there any claim that the scope of the subpoena is overbroad.

The order of the Appellate Division should be affirmed.

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Chief Judge Fuld and Judges Burke, Bbeitel, Jasen, Jones and Waohtler concur.

Order affirmed, with costs.

Cases cited

Dunham v. Ottinger 243 N. Y. 423 N.Y. 1926-11-16 p. 459, p. 460
La Belle Creole International, S. A. v. Attorney-General 10 N Y 2d 192 N.Y. 1961-07-07 p. 459, p. 461
In re Attorney-General 10 N Y 2d 108 N.Y. 1961-07-07 at 368 p. 459, p. 461
Prestige Sewing Stores of Queens, Inc. v. Lefkowitz 54 Misc 2d 188 N.Y. Sup. Ct. 1967-06-15 p. 459, p. 461
A'Hearn v. Committee on Unlawful Practice of the Law of New York County Lawyers' Ass'n 30 A D 2d 47 N.Y. App. Div. 1968-05-03 p. 459
In re Edge Ho Holding Corp. 256 N. Y. 374 N.Y. 1931-06-02 p. 459
Erb Strapping Co. v. Waterfront Commission of New York Harbor 31 A D 2d 101 N.Y. App. Div. 1968-12-10 p. 459
Reiter v. Greenberg 21 N Y 2d 388 N.Y. 1968-02-14 p. 459, p. 461
People v. Cadplaz Sponsors, Inc. 69 Misc 2d 417 N.Y. Sup. Ct. 1972-03-13 p. 459, p. 461
People v. Federated Radio Corp. 244 N. Y. 33 N.Y. 1926-12-04 p. 459, p. 460, p. 461
People v. New York City Airport, Inc. 143 Misc. 472 N.Y. Sup. Ct. 1931-09-08 p. 459
People v. Royal Securities Corp. 5 Misc 2d 907 N.Y. Sup. Ct. 1955-05-26 p. 459
People v. Riley 188 Misc. 969 N.Y. Sup. Ct. 1946-07-26 p. 459
People v. Hooker 2 Misc 2d 874 N.Y. Sup. Ct. 1956-03-29 p. 459
People v. Canal Board 55 N. Y. 390 N.Y. 1874-01-20 p. 459, p. 460
Carlisle v. Bennett 268 N. Y. 212 N.Y. 1935-07-11 p. 460
People v. Hooker 4 Misc 2d 558 N.Y. Sup. Ct. 1955-12-06 p. 460, p. 461
New York State Labor Relations Board v. Holland Laundry, Inc. 294 N. Y. 480 N.Y. 1945-07-19 p. 460
Manhattan Storage & Warehouse Co. v. Movers & Warehousemen's Ass'n of Greater New York, Inc. 289 N. Y. 82 N.Y. 1942-07-29 p. 460, p. 461
Hartsdale Canine Cemetery, Inc. v. Lefkowitz 29 N Y 2d 702 N.Y. 1971-10-14 p. 461
People v. Phillips 14 N Y 2d 754 N.Y. 1964-05-07 p. 461
Ryan v. Lefkowitz 18 N Y 2d 977 N.Y. 1966-12-30 p. 461
Kovarsky v. Housing & Development Administration 31 N Y 2d 184 N.Y. 1972-07-07 p. 461
Schumann v. 250 Tenants Corp. 65 Misc 2d 253 N.Y. Sup. Ct. 1970-11-20 p. 461, p. 462
People v. Mintzer 16 N Y 2d 1051 N.Y. 1965-12-01 p. 461
Odell v. Humble Oil & Refining Co. 345 U. S. 941 SCOTUS 1953-04-27 p. 461
In re Hoyt 258 N. Y. 569 N.Y. 1932-01-05 p. 461
People v. Bunge Corp. 25 N Y 2d 91 N.Y. 1969-07-01 p. 461
Johnson v. State 295 N. Y. 568 N.Y. 1945-10-25 p. 461
Commissioners of State Insurance Fund v. Low 3 N Y 2d 590 N.Y. 1958-01-23 p. 461
Kowalski v. Mohsenin 38 A D 2d 274 N.Y. App. Div. 1972-02-22 p. 461
Richards v. Kaskel 32 N Y 2d 524 N.Y. 1973-06-06 p. 463

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Cases cited

Statutes and regulations cited