New York Court of Appeals Finds Private Right of Action is Not Precluded Under the Martin Act

Last year, in our December 2010 blog post, we reported about the “Martin Act” which 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.  As we explained in that post, for many years, 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.

We also noted that courts were beginning to take a different view of the Martin Act and cited several decisions rejecting the preemption argument. 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); 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)(holding 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.”)

More recently, in cases brought by investors seeking to recover losses related to the Bernard Madoff scandal, New York courts have been unwilling to follow Anwar I or Assured. See In re J.P. Jeanneret Assocs., 769 F. Supp. 2d 340 (S.D.N.Y. January 31,  2011)(dismissing all state law claims as preempted by the Martin Act); Merkin v. Gabriel Capital, L.P., 2011 U.S. Dist. LEXIS 112931 (S.D.N.Y. Sept. 23, 2011)(dismissing non-fraud claims for breach of fiduciary duty, gross negligence (and mismanagement), and unjust enrichment as preempted by the Martin Act).

On December 20, 2011, the New York Court of Appeals (New York’s highest court) issued its decision in Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management, Inc. , and held that “the Martin Act does not preclude a private litigant from bringing a nonfraud common-law cause of action.”  No. 227, slip op. at 7 (N.Y. Ct. App. Dec. 20, 2011).   In the 6-0 opinion by Judge Victoria A. Graffeo, the Court of Appeals stated that:

[A] private litigant may not pursue a common-law cause of action where the claim is predicated solely on a violation of the Martin Act or its implementing regulations and would not exist but for the statute.  But, an injured investor may bring a common-law claim (for fraud or otherwise) that is not entirely dependent on the Martin Act for its viability.  Mere overlap between the common law and the Martin Act is not enough to extinguish common-law remedies.


We agree with the Attorney General that the purpose of the Martin Act is not impaired by private common-law actions that have a legal basis independent of the statute because proceedings by the Attorney General and private actions further the same goal — combating fraud and deception in securities transactions. Moreover, as Judge Marrero observed recently, to hold that the Martin Act precludes properly pleaded common-law actions would leave the marketplace “less protected than it was before the Martin Act’s passage, which can hardly have been the goal of its drafters” (Anwar v. Fairfield Greenwich Ltd., 728 F Supp 2d 354, 371 [SD NY 2010]).”

Assured Guaranty, slip op. at 10-11.

This landmark decision is a victory for investors and will likely have a wide impact on pending and future class action litigations.

Abbey Spanier, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm with a concentration in employment law.