United States: New York Court of Appeals Curtails New York Attorney General's Use Of The Martin Act

On June 12, 2018, the New York Court of Appeals held that a three-year statute of limitations applies to actions brought by the New York Attorney General (NYAG) under the Martin Act, rejecting NYAG's argument that it could bring such claims within six years of the purported wrongdoing.¹ The Martin Act, New York's anti-fraud provision, has allowed the NYAG to bring state securities actions alleging fraud without the need to establish any intent to defraud (scienter). This decision marks an important development in limiting potential exposure for companies whose shares are traded in New York.

Background

New York's Martin Act, General Business Law article 23-A, § § 352 et seq., provides the NYAG with sweeping powers to police securities laws violations nationwide based on purported "fraudulent practices." It contains no scienter requirement and provides the NYAG with broad investigatory powers. The Martin Act was enacted in 1921 and was used infrequently until early 2000, when the NYAG began utilizing it to pursue enforcement actions against defendants and banks throughout the country whose securities were traded in New York.

In this case, the NYAG brought an action against Credit Suisse Securities (USA) LLC (and affiliated entities) for its purported role in the 2006 and 2007 creation and sale of residential mortgage-backed securities. The complaint asserted Martin Act claims and violations of Executive Law § 63(12), which prohibits repeated fraudulent or illegal acts. The NYAG entered into a tolling agreement with Credit Suisse on March 8, 2012, and then filed the complaint in November 2012. Credit Suisse moved to dismiss, asserting that the three-year statute of limitations of § 214(2) of the New York Civil Practice Law and Rules (CPLR) governs, and that even with the tolling agreement, the NYAG's claims were untimely. The trial court denied the motion to dismiss, holding that the six-year statute of limitations for actions sounding in fraud applied. An interlocutory appeal, which is a matter of right in New York, was taken and the Appellate Division, First Department, affirmed 3-2. The Appellate Division then granted leave to appeal to the Court of Appeals.

Decision

The Court of Appeals reversed, ruling that the three-year statute of limitation of CPLR § 214(2) was applicable to actions where "liability would not exist but for a statute." After discussing the legislative history of the Martin Act, which dates back to 1921, the Court honed in on the inescapable conclusion that the Martin Act "imposes numerous obligations -- or 'liabilities'-- that did not exist at common law." As the Court recognized, "the broad definition of 'fraudulent practices,' as repeatedly amended by the Legislature and interpreted by the courts, encompasses 'wrongs' not cognizable under the common law and dispenses, among other things, with any requirement that the Attorney General prove scienter or justifiable reliance on the part of investors." Since the Martin Act claim against Credit Suisse was brought outside of the three-year statute of limitations, the Court ordered that portion of the complaint dismissed. With respect to the Executive Law claim asserted, the Court remitted for a determination of whether the "repeated" instances of purported wrongdoing were common-law based, and thus governed by a six-year statute of limitations, or based on the alleged Martin Act violations and untimely.

In a concurring opinion, Justice Feinman (who also joined in the majority opinion) provided direction to the trial court in determining the Executive Law issue on remand. Justice Feinman noted that New York has long recognized equitable fraud claims, which do not require proof of scienter or pecuniary damages. Under this reading of the majority's opinion, an action could be maintained by the NYAG under the Executive Law outside of the three-year statute of limitations without requiring proof of scienter as long as the NYAG could establish "a material misrepresentation of fact and 'justifiable reliance.'"

Finally, in a strong dissent, Justice Rivera declared that this was a "significant decision," that would have "devastating consequences" because it would curtail the NYAG's enforcement powers. Justice Rivera opined that legislative action would be needed to "correct [the] error" made by the majority, in mandating that all Martin Act actions be brought within the statutorily mandated three-year period.

Implications

In response to this decision, the NYAG will likely increase efforts to expedite investigations and expand the use of tolling agreements earlier and more frequently during investigations. Regardless, the three-year limitation on the Martin Act will bring a degree of certainty to companies nationwide and may be an indication that courts might more closely scrutinize the NYAG's use of the Martin Act in the future.

Footnotes

1 People v. Credit Suisse Securities (USA) LLC, 2018 N.Y. Slip Op. 04272 (N.Y. June 12, 2018).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.