November 30, 2010
Recent New York State and Federal Court Decisions Reject "Martin Act Preemption" Doctrine
A persistent and unresolved question in New York state investor protection law is whether common-law causes of action for breach of fiduciary duty and gross negligence are preempted by the state's Martin Act. A majority of the federal courts in the Southern District of New York have, in recent years, held that, except for fraud, the Martin Act forecloses any private common-law causes of action. Recently, however, Judge Victor Marrero, in a scholarly analysis of the history of the Martin Act and the preemption doctrine, held that the Martin Act does not preclude any private common law causes of action; Anwar v. Fairfield Greenwich Limited, No. 09 Civ. 01 18 (VM) (S.D.N.Y. July 29, 2010).
New York's Supreme Court, Appellate Division, First Dept. has now addressed the issue and also concluded that common-law causes of action for breach of fiduciary duty and gross negligence are not preempted by the Martin Act; Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc. (Appel. Div. First Dept. Nov. 23,2010). In reaching this conclusion, the First Department quoted Judge Marrero's "cogent and forceful" argument that to find Martin Act preemption would "leave [ ] the marketplace arguably less protected than it was before the Martin Act's passage, which can hardly have been the goal of its drafters." The court also relied on the New York Attorney General's amicus brief that argued that "the purpose or design of the Martin Act is in no way impaired by private common-law claims that exist independently of the statute, since statutory actions by the Attorney General and private common-law actions both further the same goal, namely, combating fraud and deception in securities transactions."
The First Department now joins the Second Department and the Fourth Department in rejecting the argument that the Martin Act preempts properly pleaded common-law causes of action. While definitive word must come from the New York Court of Appeals, it is encouraging to see that both the federal and state courts in New York are finally rejecting this pernicious preemption doctrine that has denied many investors their right to bring claims for the harm caused by negligent conduct or breach of fiduciary duty of their investment advice providers.
(Hat tip: Jill Gross)
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