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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Monday, October 24, 2011

New York's Highest Court Will Address Investors' Claims for Breach of Fiduciary Duty and Gross Neligence

An important, 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, which authorizes the Attorney General to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York State.  The New York Court of Appeals will hear oral argument on this question on November 15 in Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc., 915 N.Y.S.2d 7 (App. Div. 1st Dept. 2010). This post provides background on the issue. 

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.   In 2010, however, Judge Victor Marrero, in a scholarly analysis of the history of the Martin Act and the preemption doctrine, held that the Martin Act did not preclude any private common law causes of action, in Anwar v. Fairfield Greenwich Limited, 728 F. Supp.2d 354 (S.D.N.Y. 2010).   Although the judge acknowledged that a significant body of case law (much of it from the S.D.N.Y.) found a preemptive reading of the Martin Act, in his opinion, better reasoned and more persuasive authority, including the New York Attorney General, rejected that view.

Since then, New York's Supreme Court, Appellate Division, First Dept. addressed the issue in Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc. and also concluded that common-law causes of action for breach of fiduciary duty and gross negligence are not preempted by the Martin Act,   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.

We will report further on the case after the November 15 oral argument.

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Comments

I'm glad that they are looking into this. The act really could use some fine-tuning.

Posted by: forensic accountant nj | Oct 24, 2011 10:19:54 AM

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