New York Court Of Appeals Decides Martin Act Does Not Preempt Private Common Law Claims

The New York Court of Appeals has given a holiday gift to New York securities plaintiffs: yesterday, the court handed down its decision in Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc., 2011 NY Slip Op 09162, New York Supreme Index Number 603755/2008 (available at http://www.courts.state.ny.us/ CTAPPS/Decisions/2011/Dec11/227opn11.pdf), at long last determining that New York's Martin Act does not preclude private plaintiffs from pursuing common law claims such as fraud and negligent misrepresentation related to securities transactions. Until now, the court had not spoken on the issue.

The Martin Act, New York State's "blue sky" law, N.Y. Gen. Bus. Law, Art. 23-A, § 352 et seq. (McKinney 1996), was enacted in 1921 to protect New York investors from fraud in the offer and sale of securities. Since then, the Act has been strengthened by the Legislature and has been interpreted broadly, making it an extremely powerful weapon in the hands of the state attorney general. During his tenure as New York Attorney General, Eliot Spitzer resurrected the until then fairly dormant Martin Act, using its broad regulatory and damages powers to bring companies to task for securities violations, and earning him the moniker "Sheriff of Wall Street." The statute has gained a measure of notoriety as a mighty – some would say too mighty – sword. Most notably, as it was strengthened in 1955, the statute permits the attorney general to seek criminal penalties and to pursue claims without proving either "scienter" (the knowing commission of an illegal act) or intent to defraud. The Act also allows far-reaching investigation by the attorney general, adding broad administrative, pre-litigation discovery provisions to the attorney general's already existing subpoena power. After Spitzer, his successor, Andrew Cuomo, used the Martin Act to go after the energy industry, seeking information regarding companies' corporate disclosures concerning climate change risk.

The question addressed in yesterday's New York Court of Appeals decision concerns the right and ability of private investors to bring Martin Act-type claims related to securities transactions. It has long been settled that the statute does not provide for a private right of action; it is a sword the attorney general alone may wield. See CPC Int'l v. McKesson Corp, 70 N.Y.2d 268 (1987) (dismissing Martin Act claims brought by private litigant but allowing pursuit of common-law fraud claims)...