Corporate Governance

SDNY Issues Promising Decision Limiting Martin Act Preemption

By Anthony F. Maul

US District Judge Victor Marrero of the Southern District of New York has issued an opinion holding that New York?s Blue Sky law, the ?Martin Act,? does not preempt private common law causes of action related to the sale of securities.  The opinion in the case Anwar v. Fairfield Greenwich Ltd., No. 09 Civ. 0118 (VM) (S.D.N.Y. July 29, 2010) effectively overturns a large body of prior case law within the New York federal courts previously holding that the Martin Act, which empowers the Attorney General to prosecute fraudulent practices in the securities market, preempts private causes of action in connection with the sale of securities.  Because Martin Act claims require no showing of deceitful intent, preemption was typically limited to causes of action requiring no showing of scienter (e.g., breach of fiduciary duty, negligence, negligent misrepresentation, etc., but not common law fraud).  It appears that after Judge Marrero?s ruling, Martin Act preemption, at least within the SDNY, no longer exists.

In a methodical and scholarly opinion, Judge Marrero examined the evolution of courts? understanding of the Martin Act and its relationship with private, common law causes of action.  Ultimately, Judge Marrero concludes that the concept of Martin Act preemption arose from various courts? misreading of precedent out of context, and uncritical adoption of rules divorced from their original purpose.  The opinion concludes that federal courts sitting in New York have misinterpreted New York law and that ?New York?s highest tribunal would hold that the Martin Act does not preclude state common law causes of action that do not derive from or rely upon the Martin Act to establish a required element of the claim.?

It remains to be seen whether this will be the final chapter in the Martin Act preemption saga.  While Judge Marrero?s decision is a truly welcome development, it could just as easily be undone should the Second Circuit or New York Court of Appeals provide a contrary view on the subject.  For the time being, it appears that wronged investors have one less obstacle to contend with.

Full post as published by PomTalk on August 03, 2010 (boomark / email).