On July 29, 2010, Judge Victor Marrero in the Southern District of New York issued a decision that may change the landscape for common law securities claims sounding in negligence and for breach of fiduciary duty. In Anwar v. Fairfield Greenwich Limited, 09 Civ. 0118 (VM), plaintiff sued, among others, a unit of Fairfield Greenwich Group, a hedge fund that earned more than $900 million in fees from investments with Bernard Madoff. Defendants moved to dismiss the common law claims, arguing, among other things, that these claims were preempted by New York's Martin Act. 1 A number of trial-level courts in New York State and the Southern District previously had determined that common law causes of action based on securities transactions that did not require proof of scienter were preempted by the Martin Act.
In an extremely well-reasoned opinion, Judge Marrero disagreed. After surveying the precedent, legislative history of the Martin Act, and the Act itself, the Anwar court held that plaintiff's claims of negligence and for breach of fiduciary duty were not preempted by the Martin Act even though proof for those causes of action relies on the same facts that would support a Martin Act prosecution. The Anwar court explained that the "plain language of the Martin Act, while granting the Attorney General investigatory and enforcement powers and prescribing various penalties, nowhere mentions or otherwise contemplates erasing common law causes of action . . . [or] suggest[s] a desire on the part of the legislature to preempt common law actions." 09 Civ. 0118 (VM) at 8. The court then noted that "more recent decisions of the state appellate divisions hold or colorably suggest that the Martin Act is not preclusive of parallel state law claims . . . ." Id. at 41. Thus, according to the Anwar court, the Martin Act "'does not pre-empt the prosecution of private common law claims'" including breach of contract, "'fraud, misrepresentation or negligence independent of the duty imposed under the Martin Act.'" Id. at 16 (internal citation omitted).
The issue of Martin Act preemption currently is before the New York Appellate Division, First Department. See CMMF, LLC v. J.P. Morgan Inv. Mgmt., Inc., No. 601924/09 (argued May 26, 2010); Assured Guaranty (UK) Ltd. v. J. P. Morgan Inv. Mgmt., Inc., No. 603755/08 (argued May 26, 2010). We will continue to monitor these two cases.
Footnotes
1. The Martin Act, N.Y.GEN. BUS. LAW, Art. 23-A, ยง 352 et seq. (McKinney 1996), was enacted in 1921.
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