In Assured Guaranty (UK) Ltd. v. J. P. Morgan Investment Management Inc., 2011 N.Y. Slip Op. 09162, 2011 WL 6338898 (N.Y. Dec. 20, 2011), the New York Court of Appeals held that the Martin Act, N.Y. Gen. Bus. Law art. 23-A — New York's "blue sky" law designed to address fraudulent practices in the marketing of securities — does not preempt common law causes of action for breach of fiduciary duty and gross negligence in connection with the marketing or sale of securities, even if the alleged wrongdoing also would fall within the purview of the Martin Act. This decision thus eliminates a defense to New York common law causes of action relating to securities.
Plaintiff Assured Guaranty (UK) Ltd. ("Assured
Guaranty") brought claims for breach of fiduciary duty, gross
negligence and breach of contract against Defendant J. P. Morgan
Investment Management Inc. ("J.P. Morgan") due to J.P.
Morgan's alleged mismanagement of nonparty Orkney Re II
PLC's ("Orkney") investment portfolio, the
obligations of which plaintiff guaranteed. Assured Guaranty
asserted that J.P. Morgan failed to diversify the portfolio or
advise Orkney of the true level of risk involved, and that J.P.
Morgan improperly made investment decisions in favor of nonparty
Scottish Re Group Ltd., a client of J.P. Morgan and
Orkney's largest equity holder, rather than for the benefit
of Orkney or Assured Guaranty. Assured Guaranty alleged that
Orkney suffered substantial financial losses, triggering Assured
Guaranty's obligation to pay under its guarantee.
J.P. Morgan moved to dismiss the complaint, arguing (among other
things) that the breach of fiduciary and gross negligence claims
were preempted by New York's Martin Act. The Martin
Act authorizes the New York Attorney General to investigate and
enjoin fraudulent practices in the marketing of stocks, bonds and
other securities within or from New York. J.P. Morgan
contended that because the statute vests the Attorney General with
exclusive authority over fraudulent securities and investment
practices addressed by the statute, it would be inconsistent to
allow private investors to bring overlapping common law
claims.
The Supreme Court, New York County (Kapnick, J.),
granted J.P. Morgan's motion to dismiss. It agreed
that the breach of fiduciary duty and gross negligence claims fell
within the purview of the Martin Act and their prosecution by
Assured Guaranty would be inconsistent with the Attorney
General's exclusive enforcement powers under the
Act. Assured Guar. (UK) Ltd. v J.P. Morgan Inv. Mgt.,
Inc., 28 Misc. 3d 1215(A), 2010 WL 2977934 (Sup. Ct. N.Y. Co.
Jan. 28, 2010). The Appellate Division, First Department reversed,
reinstating the breach of fiduciary duty and gross negligence
causes of action and part of the contract claim. The court
concluded that nothing in the plain language of the Act, its
legislative history or appellate level decisions supported
preemption of the common law causes of action. The Appellate
Division nevertheless granted J.P. Morgan leave to appeal on a
certified question to the Court of Appeals. Assured Guar.
(UK) Ltd. v J.P. Morgan Inv. Mgt. Inc., 80 A.D.3d 293, 915
N.Y.S.2d 7 (1st Dep't 2010), lv. granted, N.Y.
Slip Op. 64361[u] (1st Dep't 2011).
The Court of Appeals affirmed the decision of the Appellate
Division. In deciding whether the Martin Act was intended to
supplant the non-fraud common law claims, the Court of Appeals
looked to the plain text of the statute as well as the legislative
intent behind the Act, reviewing the purpose of each of a number of
the Act's amendments throughout the 20th century. The
Court held that the plain text of the Martin Act, while granting
the Attorney General investigatory and enforcement powers and
prescribing various penalties, does not expressly mention or
otherwise contemplate the elimination of common law
claims. The Court observed that the Act, as originally
conceived in 1921, did not evince any intent to displace all common
law claims in the securities field.
The Court went on to observe that although the Martin Act does not
create a private right of action, and thus "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," there was nothing in the legislative history of the
various amendments that demonstrated a "clear and
specific" legislative mandate to abolish preexisting
common-law claims that private parties would otherwise
possess. In other words, an injured investor may bring a
common law claim (for breach of fiduciary duty, gross negligence,
fraud or otherwise) that is not entirely dependent upon the Martin
Act for its viability because the "[m]ere overlap between the
common law and the Martin Act is not enough to extinguish
common-law remedies."
The Court also held that policy concerns militated in favor of
allowing Assured Guaranty's common law claims to proceed.
Looking to the purpose of the statute — combating
fraud and deception in securities transactions — the
Court concluded that 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 of combating fraud and deception in
securities transactions. The Court reasoned that a ruling
which held that the Martin Act precluded 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."
As stated above, the Court of Appeals' decision eliminates
a legal defense to New York common law actions arising from alleged
wrongdoing in connection with the marketing or sale of
securities.
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