By: Scott Hobson
A recent 6-0 ruling in the case of Assured Guaranty v. J.P. Morgan by the New York Court of Appeals held that the nearly century-old Martin Act does not preclude private investors from pursuing claims in common law.
The decision overturned a January 2011 ruling by a Manhattan federal court judge which held that the Martin Act preempted common law claims. The Court of Appeals’ unanimous decision noted that the Martin Act, while empowering the Attorney General, “does not expressly mention or otherwise contemplate the elimination of common-law claims.” The decision received support from current Attorney General Eric Schneiderman, who indicated that the recognition of private lawsuits would help his office in its public enforcement role.
The decision did not, however, allow private actions under the provisions of Martin Act. Nonetheless, Assemblyman Rory Lancman (D, Queens) is using this case as an opportunity to promote his own legislation which would, disastrously, extend the Attorney General’s power under the Martin Act to private attorneys. Quoted in a New York Law Journal article, Lancman said,
“I read the decision as an invitation to the Legislature to expand the Martin Act itself and allow investors to recoup losses as a result of fraud or malfeasance the Court of Appeals is not immune to the economic and legal reality that most people defrauded on Wall Street these days just have to suck it up and move on because the federal securities laws have been so constricted over the past 20 years.”
Assemblyman Lancman’s proposal has troubling implications, in addition to the glaring conflict of interest from his outside work as a trial lawyer. The Martin Act is indisputably the strongest securities fraud statute in the nation and is unique to New York. Under the law, the Attorney General is empowered to file lawsuits against any public corporation or associated party for absolutely any act or omission which could be construed to “mislead” investors – no matter how insignificant. As the law is written, a mere typographical error in a funding prospectus could give rise to a suit.
In stark contrast to lawsuits in common law, Martin Act lawsuits do not require the Attorney General to prove that any investor actually relied on the allegedly misleading information or suffered any damages. In fact, the current statute does not even require that the Attorney General prove deliberate fraud.
Mr. Lancman insists that this virtually unlimited power should be given to private attorneys. Consider for a moment, the implications of such a proposal. Currently, the Martin Act’s powers are entrusted solely to the Attorney General, who is elected by the people of New York and is publicly accountable for his actions. Private attorneys, motivated by profit, have no accountability and no duty to the people of the state. Far from protecting investors, Lancman’s proposed legislation would instead give rise to a new breed of jackpot securities lawsuits and trigger a feeding frenzy which could threaten the viability of an entire industry.
Given that this recent Court of Appeals decision now gives private investors a cause of action through common law, Lancman’s proposal to expand the Martin Act is as unnecessary as it is reckless.