Martin Act doesn't pre-empt private investor suits

Dec 20 () - * NY State Supreme Court clarifies 90-year-old law’s scope

* “Mere overlap” doesn’t eliminate common-law claims

ALBANY, N.Y., Dec 20 (Reuters) - For the first time, New York state’s top court has ruled that lawsuits brought by private investors against investment firms are not pre-empted by a powerful state law reserved for use by the state attorney general.

In a 6-0 ruling released Tuesday in Assured Guaranty AGO.N v. JP Morgan JPM.N, the Court of Appeals found that for a claim to be pre-empted by the Martin Act, the claim must arise solely from that law and not simply overlap it.

While the act has been in place for 90 years, it fell out of regular use until the last decade, when former New York Attorney General Eliot Spitzer used it to aggressively pursue civil and criminal claims against Wall Street banks. Spitzer’s successor, Andrew Cuomo, who is currently the governor of New York, also frequently relied on the act.

The law, which allows the attorney general’s office to pursue securities-fraud cases without having to prove an intent to defraud, has commonly been invoked by investment banks as a defense against claims of negligence, fraud and breach of fiduciary duty by private investors who sue after losing money.

“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,” Judge Victoria Graffeo wrote for the court. “Mere overlap between the common law and the Martin Act is not enough to extinguish common-law remedies.”

In the case before the court, Assured Guaranty claimed JP Morgan was negligent and breached its fiduciary duty when it invested the funds of a third party, Orkney RE II Plc, in risky mortgage-backed securities prior to the financial crash of 2008. Assured had guaranteed Orkney’s investment, meaning it was obligated to cover any losses. As a result of Tuesday’s ruling, the case will move forward on those claims.

The ruling also settles a long-standing controversy among litigants about the scope of the Martin Act. In January, U.S. District Judge Colleen McMahon of Manhattan federal court ruled that the act barred private common-law claims but suggested that precedent could be overturned by the Court of Appeals.


When the lawsuit was argued last month, attorneys for both sides focused on the intent of the legislature when it passed the act and when it amended the law a number of times since. Attorneys for JP Morgan contended the legislature intended to vest all power to pursue securities fraud in the attorney general, but the court rejected that argument.

The “plain text of the Martin Act ... does not expressly mention or otherwise contemplate the elimination of common-law claims,” Graffeo wrote.

JP Morgan also argued that allowing the private claims to proceed would dilute the power of the attorney general’s office, but Attorney General Eric Schneiderman argued in court filings that, to the contrary, it would bolster his office’s mission by allowing investors to pursue fraud claims that fall through the cracks.

“As the court’s decision reflects, the purpose of the Martin Act is in no way impaired by private claims,” Schneiderman spokesman Danny Kanner said Tuesday, “since actions by the attorney general and harmed investors both further the same goal: to fight fraud and deception in the securities marketplace.”

Attorneys for JP Morgan and Assured declined to comment. In a statement, Assured said it was “extremely pleased ... that the court has ruled definitively on this important issue of New York law.”

Doug Morris, a spokesman for JP Morgan, would not comment on the larger implications of the ruling. He noted the decision only applies to “the adequacy of the pleadings and not to the merits of (Assured’s) claims.”

“We believe that we acted appropriately at all times with respect to the management of the client’s accounts,” he said. “We will continue to defend ourselves vigorously against the claims.”

Tuesday’s decision also applies to a separate case, Roni LLC v. Arfa, in which the plaintiff alleges that a group of real estate promoters concealed their commissions, thereby artificially inflating the price of property purchased by Roni. The defendants argued Roni’s claim of breach of fiduciary duty is preempted by the Martin Act, but the court disagreed.

The case is Assured Guaranty v. JP Morgan, New York State Court of Appeals No. 227. Judge Robert Smith took no part. Reporting by Dan Wiessner in Albany, New York; Editing by Steve Orlofsky)

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