Just before the holidays, in a “little-noticed” decision, New York’s Appellate Division, First Department overturned a long-standing legal doctrine called “Martin Act Preemption,” and expanded investor protection according to a Law360 article entitled “Preemption And The Martin Act.”
However, this decision was noticed and commented upon by Seth E. Lipner, of the New York law firm Deutsch & Lipner, in his December 16, 2010 Forbes article entitled “Madoff Feeder Funds Lose Their Immunity.”
The Martin Act, New York’s “blue sky” securities act, covers a wide range of financial wrongdoing, and unlike federal securities laws, does not require a plaintiff to prove scienter ? i.e., that a defendant had fraudulent intent. But unlike most other state securities acts, it can only be used by the Attorney General, not private litigants.
Spitzer brought conflicted-research-analyst cases and cases involving preferential access to hot IPO shares in return for financial business under the Martin Act. ?Cuomo used the Martin Act to bring claims against Bank of America executives for not disclosing losses at Merrill Lynch. Some Martin Act cases have permanently reversed longstanding business practices on Wall Street.
The powers that the Martin Act gave to the attorney general to prosecute securities fraud is “indisputably a good thing,” says Mr. Lipner, adding: “But incredible as it may seem, many courts misinterpreted the Martin Act in recent years, holding that it barred suits by investors where seller wrongdoing did not rise to the level of intentional fraud. The cases held that common-law claims for things like breach of fiduciary duty, breach of contract and negligence were preempted by the statute. End of story, end of case. Instead of protecting investors, because fraud is hard to plead and prove, New York’s blue sky statute had been transformed into a law that was protecting wrongdoers.”
This unintended protection worked particularly well for Madoff feeder funds, which were able to obtain dismissals of negligence-based class actions. In those cases, courts “held that without proof of scienter–guilty knowledge of Madoff’s fraud–these firms could not be held liable, even if they ignored obvious red flags,” said Mr. Lipner, adding: “The feeders were winning the cases. Preemption was their best friend.”
Then, in Guaranty Assurance v. JP Morgan, the Appellate Division First Department in New York, helped by an amicus brief filed by New York Attorney General Andrew Cuomo, the court held that the Martin Act does NOT preempt claims of negligence, breach of fiduciary duty or breach of contract.
Mr. Lipner summed it up: “In a rare event, the state court told the federal courts they were plain wrong. The federal courts will have no choice but to reverse themselves and adopt this better view. The Martin Act preemption has fallen, and the cases against Madoff feeder funds are alive and well. For investors nationwide, it was a very good week.”
Page Perry, a law firm based in Atlanta, Georgia, is co-counsel with Mr. Lipner and his Garden City, New York law firm, Deutsch & Lipner, in representing a number of investors in Lehman structured product cases.
Page Perry has over 125 years collective experience representing institutional and individual investors in securities-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.