The New York Court of Appeals has pared down claims brought by the state Attorney General’s Office in its $11 billion suit against Credit Suisse, which it accused of misleading investors about the risks of purchasing residential mortgage-backed securities in the lead up to the 2008 financial crisis.
A split court of appeals ruled that the AG’s claims under the state’s Martin Act were time-barred by a three-year statute of limitations, refuting arguments by the AG’s Office and rulings by two lower courts that there was a six-year window to bring the claims.
But the court preserved the AG’s claim that the Zurich-based Credit Suisse’s conduct constituted common-law fraud and remanded it to the trial court to determine if conduct underlying that claim should be subject to a six-year statute of limitations.
Writing for the majority, Chief Judge Janet DiFiore said that the Martin Act, which gives the AG the authority to investigate fraudulent practices in marketing securities and bonds, does not contain a provision explicitly stating its statute of limitations and, although the statute is almost a century old, the Court of Appeals has yet to take up the issue.
The Martin Act expands liability for “fraudulent practices” beyond what was envisioned in common-law fraud, DiFiore said, and thus claims brought under the act should be governed by the statute of limitations imposed on an action to recover on a liability.
DiFiore was joined in the majority by Judges Leslie Stein, Eugene Fahey and Paul Feinman, while Judges Michael Garcia and Rowan Wilson took no part in the ruling.
Credit Suisse is represented by Cravath, Swaine & Moore attorneys Richard Clary, Michael Reynolds and Lauren Moskowitz. Clary, who presented oral arguments before the court in March, referred questions to Credit Suisse.
Nicole Sharp, a spokeswoman for Credit Suisse, said the investment bank denies any wrongdoing and that it will continue to defend itself from the AG’s “unfounded and meritless” allegations.
“Limiting the statute of limitations period for Martin Act claims is significant not only for this case but for all future industry proceedings,” Sharp said. “We believe the sole remaining claim should now also be dismissed.”
New York Attorney General Barbara Underwood, who previously served as New York’s solicitor general before Eric Schneiderman stepped down in May, argued the case before the Court of Appeals for the AG’s Office, which appeared undeterred by the dismissal of the Martin Act claims.
“This decision will have no impact on our efforts to vigorously pursue financial fraud wherever it exists in New York,” said Amy Spitalnick, spokeswoman for the AG’s Office. “That includes continuing our case against Credit Suisse.”
Schneiderman brought suit against Credit Suisse in 2012, alleging that the investment bank misled investors in 2006 and 2007 by claiming that it had carefully scrutinized and would continuously monitor the loans underlying residential mortgage-backed securities despite knowing that there were flaws in the screening process and that loan originators were encouraged to produce defective loans by an incentive program.
In a concurring opinion, Feinman said that while he agreed with Acting Manhattan Supreme Court Justice Marcy Friedman and the majority of a five-judge panel from the Appellate Division, First Department, that the AG adequately alleged common-law fraud, it still was an open issue as to whether or not disclaimers in Credit Suisse’s marketing materials—such as a statement that language in its materials “may not be used or relied upon for any purpose other than as specifically contemplated by a written agreement with” the investment bank—defeats the common-law fraud claim.
In her lone—and lengthy—dissent, Judge Jenny Rivera said the lower courts were correct in applying a six-year statute of limitations on the AG’s Martin Act claims and that applying a three-year statute of limitations compromises a “vital tool” for rooting out fraud in the state.
“There is no doubt that the Legislature intended the attorney general’s enforcement powers to be expansive,” Rivera said. “We are reminded of the wisdom of this legislative choice with every insider trading scandal, every stock market crash, and every fraudulent securities scheme that can be traced back to deceptive or misleading practices intended to lure investors.”
John Coffee Jr., a Columbia Law School professor and securities law expert, said the high court’s ruling curbs the AG’s powers in future cases, as the office will have a relatively small window of three years to bring securities fraud actions, while the U.S. Securities and Exchange Commission has five years and private investors have up to five years, depending on when they should have discovered the fraud.
Additionally, Coffee said, in the Credit Suisse case, the AG will have a higher burden to prove common-law fraud, as the office will have to prove scienter.