Intersection Between Common Law Fraud And The Martin Act

• Published date: 28 February 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Criminal Law, Corporate and Company Law, Trials & Appeals & Compensation, Securities, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Meyer Suozzi English & Klein
• Author: Mr Kevin Schlosser

A new decision of the Appellate Division, First Department (Board of Mgrs. of the Latitude Riverdale Condominium v 3585 Owner, LLC, 2021 NY Slip Op 06072 (1^st Dep't Decided Nov. 9, 2021), has triggered a discussion of the intersection between common law fraud claims and the New York State Martin Act ...

The Martin Act

A so-called "blue sky law," Article 23-A of New York's General Business Law, commonly referred to as the Martin Act, is a statute that empowers New York's Attorney General to prosecute a wide range of alleged securities-related offenses. Section 352-c prohibits "any person, partnership, corporation, company, trust or association, or any agent or employee thereof," from engaging in a variety of fraudulent practices in connection with the "issuance, distribution, exchange, sale, negotiation or purchase within or from [New York] of any securities or commodities." 123-A N.Y. Gen. Bus. Law '352-c. Unlike common law fraud, Section 352-c does not require the Attorney General to plead or prove that an alleged violator acted with scienter, and a number of other elements of common law fraud are not required. See State v. Sonifer Realty Corp., 212 A.D.2d 366, 367 (1st Dept. 1995) ("[T]he fraudulent practices targeted by the statute need not constitute fraud in the classic common law sense, and reliance need not be shown in order to obtain relief.") (citing People v. Royal Sec. Corp., 165 N.Y.S.2d 907, 909 (Sup. Ct. N.Y. County 1955)); People v. Barysh, 408 N.Y.S.2d 190, 193 (Sup. Ct. N.Y. County 1978) (holding that the Martin Act does not require reliance or scienter); Royal Sec. Corp., 165 N.Y.S.2d at 909 (scienter, reliance, and damages are not needed for Martin Act violation). A separate part of the Martin Act, Section 352-e, grants the Attorney General authority to regulate offers and sales of interests in cooperative and condominium apartment buildings. Among other things, Section 352-e and its corresponding regulations require the sponsors of cooperatives and condominiums to issue offering statements or prospectuses with specified disclosures about aspects of the project. See 23-A N.Y. Gen. Bus. Law '352-e.

The Martin Act does not provide for private causes of action based upon its violation. CPC International Inc. v. McKesson Corp., 370 N.Y.2d 268 (1987). In many cases, however, plaintiffs would try to base their assertion of common law claims on the same conduct that was barred by the Martin Act, principally, omissions of material information...