Litigation: Martin Act doesn’t preclude all common-law claims

Common-law claims in New York preempted only if they are solely predicated on the Act

On Dec. 20, 2011, New York’s highest court held that the Martin Act (General Business Law art 23-A)—New York’s “blue sky” law—does not preempt a plaintiff’s common-law causes of action for breach of fiduciary duty and gross negligence regarding the alleged mismanagement of an entity’s portfolio, as long as such claims are not predicated solely on a violation of the Act (or its implementing regulations) and would exist separate from the Act. (See Assured Guaranty (U.K.) Ltd. v. J.P. Morgan Inv. Management Inc., ___ N.E. 2d ___, 2011 WL 6338898 (N.Y.), 2011 N.Y. Slip Op. 09162.)

The plaintiff, Assured Guaranty (UK) Ltd., was the third-party beneficiary of an investment management agreement between defendant J.P. Morgan Investment Management Inc. and an entity whose obligations plaintiff guaranteed. The plaintiff alleged that the assets were mismanaged due to:

The court of appeals found that although the plain text of the Act grants the attorney general investigatory and enforcement powers and prescribes various penalties, it neither mentions nor contemplates the elimination of common-law claims. The court found that in arguing for preemption, the defendant overread the import of two of its prior cases, CPC Intl. v. McKesson Corp., 70 N.Y.2d 268 (1987) and Kerusa Co. LLC v. W10Z/515 Real Estate Ltd. Partnership, 12 N.Y.3d 236 (2009). The court of appeals has previously held that the Martin Act did not create a private right of action to enforce its provisions, but it found no requirement to conclude that traditional forms of action are no longer available to redress injury.

The court concluded that “a private litigant may not pursue a common-law cause of action where the claim is predicated solely on a violation of the Martin Act or its implementing regulations and would not exist but for the statute. But an injured investor may bring a common-law claim (for fraud or otherwise) that is not entirely dependent on the Martin Act for its viability.” Id. at *4.


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Alex Romain

Alex G. Romain is a partner at Williams & Connolly LLP, where he concentrates his practice on securities litigation and professional liability defense. He can...

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