In 2015, our colleagues in the white-collar criminal defense bar braced for the impact of a memorandum penned by then Deputy Attorney General Sally Yates.  The Yates Memo encouraged both federal prosecutors and civil enforcement attorneys to make increased efforts to hold culpable individuals accountable for corporate misconduct.

The Yates Memo embodied the precept that justice is better served when the responsible individuals are held accountable for corporate misconduct.  That precept plays a prominent role in a case recently decided by Justice Ostrager of the New York County Commercial Division.  In Kilgour Williams Group, Inc. v. Ben-Artzi, Justice Ostrager awarded the plaintiffs—accounting and financial experts Colin Kilgour and Daniel Williams—summary judgment on their breach of contract claims stemming from their assistance in securing an $8.25 million whistleblower award.

The case highlights the difficulty of avoiding an agreement based on unconsionability, finding no issues of fact concerning the enforceability of an eleventh-hour “letter agreement” that quadrupled plaintiffs’ consulting fee after their engagement was completed.  It also adds a chapter to the fascinating story of the Deutsche Bank executive who blew the whistle on accounting misconduct, then turned down a multi-million dollar award.

The Misconduct, the Experts, and the Agreements

Between 2010 and 2011, Eric Ben-Artzi was a risk officer at Deutsche Bank.  In that role, he discovered that during the financial crisis, Deutsche Bank concealed from its shareholders potentially massive credit-derivatives losses.  He reported that misconduct first internally, and then to the SEC.

In November 2011, Ben-Artzi and his attorneys commenced a proceeding for a whistleblower award before the SEC.  At the suggestion of his attorneys, Ben-Artzi retained Kilgour Williams Group (“KWG”)—the Plaintiffs in this action—to render expert consulting services in support of his whistleblower claim.  The relationship between KWG and Ben-Artzi evolved as his whistleblower proceeding unfolded, and KWG’s compensation was memorialized in several agreements:

First, in April 2013, Ben-Artzi’s company, Model Risk LLC, entered into an agreement with KWG where KWG agreed to provide expert consulting services in exchange for 3% of the gross value of any whistleblower award rendered by the SEC.

Second, in August 2014, Ben-Artzi’s Model Risk entered into a “Tri-Party Agreement” among (i) Model Risk, (ii) KWG and (iii) its principals Daniel Williams and Colin Kilgour.  This agreement increased KWG’s fee to 5% of the gross value of any award, and it transferred to KWG the rights to the intellectual property that it had developed while working on Ben-Artzi’s claim.  As consideration for the transfer of intellectual property, KWG agreed that it would submit its own whistleblower claim, and that Ben-Artzi would be entitled to 60% of the payout on that claim.

Ben-Artzi Turns Down the Award

In 2015 after many meetings between Ben-Artzi and the SEC, including one where Plaintiffs gave a thorough powerpoint presentation regarding Deutsche Bank’s alleged misconduct, the SEC reached a settlement with Deutsche Bank.  The settlement imposed civil penalties on Deutsche Bank of $55 million for violations of the Securities and Exchange Act, but it did not punish any of the responsible executives.

Members of the SEC’s enforcement division subsequently attested to helpfulness of both Ben-Artzi and KWG in providing information necessary to bring their action.  Accordingly, Ben-Artzi’s whistleblower claim was accepted, and he was awarded 15% of the $55 million penalty imposed on Deutsche Bank, or $8.25 million.  Accordingly, under the Tri-Party Agreement, KWG was entitled to receive approximately $412,500.  The SEC denied KWG’s independent whistleblower claim.

About a month after receiving notice of the award (and while the ink was still wet on the Yates Memo) Ben-Artzi published an editorial in the Financial Times announcing his decision to turn down his share of the award because the SEC did not fine the executives responsible for the wrongdoing:

But Deutsche did not commit this wrongdoing. Deutsche was the victim. To be precise, the bank’s shareholders and its rank-and-file employees who are now losing their jobs in droves are the primary victims. . . . Although I need the money now more than ever, I will not join the looting of the very people I was hired to protect. I never intended to turn a job in risk management into a crusade, but after suffering at the hands of the Deutsche executives I will not join them simply because I cannot beat them.

Ben-Artzi attributed the SEC’s failure to personal relationships and the “revolving door” of high-level executives between Deutsche Bank and the SEC.

The Letter Agreement

According to Ben-Artzi, his decision to repudiate the award led both his counsel and KWG to turn on him.  Shortly after the Financial Times published his editorial, KWG presented Ben-Artzi with a curious letter.  The letter accused Ben-Artzi of somehow impacting KWG’s own whistleblower claim and requested that Ben-Artzi agree to transfer $2.5 million to them, in addition to the amounts payable under their agreements:

We understand that you regard your share of the award as dirty money and have decided not to personally accept any portion of the award. Therefore, we request that you direct the SEC to direct $2,500,000 to us. This payment is in addition to the contracted amount payable to Kilgour Williams Group. Please sign below to indicate your agreement . . .

For some reason—though it’s not at all clear why—Ben-Artzi signed this “Letter Agreement.”  In his affidavit opposing Plaintiffs’ motion for summary judgment, Ben Artzi argues that he “most certainly never intended to create an obligation in that amount,” but he does not explain what else he thought signing the Letter Agreement would do.

Ultimately, Ben-Artzi did not instruct the SEC to disburse the award in accordance with the Letter Agreement.  Rather, he instructed the SEC to pay a portion of the award to his ex-wife (as ordered by a court overseeing his divorce proceedings), a portion to his attorneys, and the balance to a trust for his children.  The SEC disbursed the award as requested.  Ben-Artzi did not contest that KWG was owed their 5% fee under their earlier agreements, but he disputed the notion that the Letter Agreement entitled them to an additional $2.5 million.

Ben-Artzi’s Unconscionability Claim

Plaintiffs sued to enforce the Letter Agreement.  Opposing their motion for summary judgment on their breach of contract claim, Ben-Artzi argued that the Letter Agreement was both procedurally and substantively unconscionable.  It was procedurally unconscionable, Ben-Artzi argued, because after KWG learned of Ben-Artzi’s intention to reject the award, “Kilgour and Williams became aggressive and threatening, exerting tremendous pressure upon him to give to them whatever portion of the award he would otherwise have realized (but for his repudiation).”  The Letter Agreement was substantively unconscionable, Ben-Artzi argued, because it changed Plaintiffs’ fee from 5% of the gross award ($412,500) to more than $2.5 million after the work was complete and without any corresponding benefit to Ben-Artzi.

Plaintiffs countered that the Letter Agreement was neither procedurally nor substantively unconscionable.  The Letter Agreement was negotiated between sophisticated parties—Ben Artzi has a Ph.D. in mathematics and worked at some of the world’s most powerful financial institutions—and emails preceeding the Letter agreement do not show any high-pressure or deceptive tactics.  Substantively, the Letter Agreement reflected a bargained-for exchange: in exchange for the increased payments, Plaintiffs were releasing Ben-Artzi for claims they might have had against him arising out of his rejecting the award or compromising KWG’s own whistleblower application.

Justice Ostrager’s Decision, Practical Considerations

Ruling from the bench, Justice Ostrager granted Plaintiffs’ motion for summary judgment for breach of the Letter Agreement.  Although his written findings of fact do not say much about his reasoning and the transcript of oral argument is not filed, Justice Ostrager holds Ben-Artzi to the terms of his Letter Agreement.  In so doing, he highlights just how difficult it is for sophisticated parties to avoid a contract based on unconscionability: KWG’s last minute, $2.5 million increase did not even raise an issue of fact concerning whether the Letter Agreement was unconscionable.  As the Commercial Division occasionally reminds us: absent circumstances that truly are extreme, sophisticated parties will be held to the deal they struck, however one-sided.