New York's High Court Rules that Private Actions Are Not Preempted by New York's Blue Sky Law


During an undoubtedly turbulent period in our nation’s economic history – when even the most unsophisticated investor has been sensitized to the actual and potential harms that can be occasioned by fraudulent securities practices – New York’s highest court has underscored the power of private litigants to police financial practices – a power previously understood to reside solely with New York’s Attorney General under the Martin Act (General Business Law, Art. 23-A).

Observing that neither the Martin Act, its legislative history nor its various amendments over the decades have vested the Attorney General with exclusive authority over the fraudulent securities and investment practices addressed by the statute, the Court of Appeals, in Assured Guaranty (UK) Ltd. V. J.P. Morgan Investment Management Inc., 2011 WL 6338898 (N.Y. Dec. 20, 2011), has unanimously affirmed that “common-law claims not predicated exclusively on violations of the Martin Act may proceed in private actions.”

In Assured Guaranty (UK) Ltd., the plaintiff asserted causes of action against defendant, J.P. Morgan Investment Management Inc. (“J.P. Morgan”) for breach of fiduciary duty, gross negligence and breach of contract in connection with its investment of certain third-party assets in high-risk securities, its alleged failure to diversify the third party’s portfolio, and its alleged failure to advise the third party regarding the true level of risk.  In moving to dismiss the complaint, J.P. Morgan successfully argued that the breach-of-fiduciary-duty and gross-negligence claims were preempted by the Martin Act.  On appeal, however, the Appellate Division, First Department reinstated the two tort claims and granted J.P. Morgan leave to appeal on a certified question to the Court of Appeals.

A central issue before the Court was the exclusivity of the Attorney General’s enforcement powers under the Act.  “The Martin Act was enacted ‘to create a statutory mechanism in which the Attorney General would have broad regulatory and remedial powers to prevent fraudulent securities practices by investigating and intervening at the first indication of possible securities fraud on the public and, thereafter, if appropriate, to commence civil or criminal prosecution.’”  No. 227 at 4, quoting, CPC Int’l v. McKesson Corp., 70 N.Y.2d 268, 277 (1987); see also Kralik v. 239 E. 79th St. Owners Corp., 5 N.Y.3d 54, 58-59 (2005).

The Court explained that “[l]egislative intent is integral to the question of whether the Martin Act was intended to supplant nonfraud common-law claims” and reaffirmed that “a clear and specific legislative intent is required to override the common law and that such a prerogative must be unambiguous,” quoting, Hechter v. New York Life Ins. Co., 46 N.Y.2d 34, 39 (1978).  Based upon these well-established principles of legislative interpretation, the Court observed 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.”

Distinguishing its prior decisions in CPC Int’l, 70 N.Y.2d at 277 and Kerusa Co. LLC v. W10Z/515 Real Estate Ltd., 12 N.Y.3d 236 (2009), the Court “carved out” its holding by observing that the Martin Act preempts fraud claims that are premised entirely on a violation of the Act or its implementing regulations and “would not have existed absent the statute.”  In other words, although “[m]ere overlap between the common law and the Martin Act is not enough to extinguish common-law remedies,” there is no private right of action to enforce the Martin Act.

Finally, the Court explained that “policy concerns militate in favor of allowing plaintiff’s common-law claims” because “the purpose of 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 – combating fraud and deception in securities transactions.”

So, what does the Court’s ruling mean in the real world?  Perhaps first and most apparently, it reinforces the well-established preemption concept that private litigants have no “backdoor” avenue for bringing fraud claims that are covered by the Martin Act.  Conversely, however, it is now clear that, where there is some valid basis for doing so, plaintiffs may bring other forms of non-fraud common-law claims against defendants who may also be contending with separate – yet broadly related – investigations into possible fraud by the Attorney General’s Office under the Martin Act.  Of course, as a result, putative defendants in the securities industry can expect to face an overall increase in private securities-law claims, particularly where parallel proceedings have been commenced under the Martin Act.

***   ***   ***

Aldous pllc is a law firm located in mid-town Manhattan and Westchester (New York), dedicated to providing quality and cost-effective legal services to its clients.  Its founding member, Kenneth E. Aldous, is an experienced lawyer, qualified to practice in both the U.S. and UK, who has represented a broad range of diverse interests in complex litigation before various federal and state courts, as well as in domestic and international arbitration.

With the right experience, an unwavering dedication to client needs, and a strong commitment to quality – not to mention a strategic network of outside legal professionals in a variety of specializations and geographic locations – Aldous pllc offers its clients an attractive alternative.  Whatever your legal needs, Aldous pllc is well situated to help you and your business find your way through a complex and fast-paced world.

Social Media

Recent News


New York Court Rejects Services of Process Via Facebook   

In a recent decision, a New York trial court has rejected a plaintiff’s appli..


Repeated and Deliberate Use of New York Correspondent Bank Confers Personal Jurisdiction Over Swiss   

In a 4-3 split decision, New York’s highest court recently held that New York’s..


Finding Fraud to Fend Off Motions for Summary Judgment in Lieu of A Complaint Under CPLR 3213  

Defendants facing motions for summary judgment in lieu of a complaint, pursuant to CPLR 3213, ar..


Kenneth E. Aldous
Attorney at Law
555 Fifth Avenue, 17th Floor
New York, New York 10017

212.856.7281   direct
646.607.9363   |  facsimile

email  |