N.Y. Martin Act Does Not Bar Investors From Asserting Common Law Claims

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New York General Business Law, Art. 23-A, §§352-359, commonly referred to as the “Martin Act” provides the New York Attorney General with the authority to file civil or criminal charges for fraud in connection with the offer and sale of securities in and from New York State.  The majority of federal and New York state courts have taken the position that the Martin Act gives exclusive authority to the Attorney General and thus preempts any private non-fraud common law causes of action (e.g. breach of fiduciary duty, gross negligence, unjust enrichment, negligent misrepresentation) related to the sale of securities.  However, several recent decisions indicate that the tide is changing as courts in New York are finally rejecting Martin Act preemption arguments and permitting investors to assert claims for breach of fiduciary duty and negligent conduct.  See Anwar v. Fairfield Greenwich Ltd. (“Anwar I”), No. 09 Civ. 0118 (VM), 2010 U.S. Dist. LEXIS 78425 (S.D.NY. July 29, 2010) (finding that the Martin Act does not preempt common law claims); Terra Sec. ASA Konkursbo v. Citigroup, Inc., No. 09 Civ. 7058 (VM), 2010 U.S. Dist. LEXIS 84881 (S.D.N.Y. Aug. 16, 2010) (same). 

In Anwar I, Judge Marrero examined the history and evolution of how different courts have interpreted the Martin Act and its relationship with private common law causes of action.  Judge Marrero determined that previous cases supporting preemption were based on a misreading of precedent that had been taken out of context.  In support of his determination that the Martin Act should not preempt common law claims, Judge Marrero reviewed the plain language of the statute and determined that, although it granted the Attorney General investigatory and enforcement powers, the law “nowhere mentions or otherwise contemplates erasing common law causes of action.”  See Anwar I, 2010 U.S. Dist. LEXIS 78425, at *21-22.  While recognizing that many federal courts have held that the Martin Act preempts non-fraud common law causes of action, Judge Marrero noted that several New York state courts have reached the opposite conclusion. Id. at *31-48. The Court also looked at the legislative history of the Martin Act and determined that it did not “suggest a desire on the part of the legislature to preempt common law actions” (Id. at *22) and that preemption would conflict with the policy goals of the Martin Act, which is “a consumer protection law intended to defeat any scheme whereby the public is exploited.” Id. at *59-60.

Last month, in Assured Guaranty (UK) Ltd. v. J.P. Morgan Inv. Mgmt. Inc., No. 603755/08, 2010 N.Y. Slip Op. 8644 (N.Y. App. Div. First Dept. Nov. 23, 2010), a unanimous panel of New York’s Supreme Court, Appellate Division, First Dept., determined that the Martin Act does not preempt private common-law claims of securities fraud.  In a detailed holding, the Court concluded that “there is nothing in the plain language of the Martin Act, its legislative history or appellate level decisions in this State that supports the defendant’s argument that the act pre-empts otherwise validly pleaded common-law causes of action.”  2010 N.Y. Slip. Op. 8644 at *8.  The panel cited the “exhaustive analysis” in Anwar I and recognized Judge Marrero’s cogent and forceful argument that to find Martin Act preemption would “leave [ ] the marketplace arguably less protected than it was before the Martin Act’s passage, which can hardly have been the goal of its drafters.”  Id. at *7 (citing Anwar I, 2010 U.S. Dist. LEXIS 78425 at *25).