ALBANY – A decade after Attorney General Eliot Spitzer dusted off the long dormant Martin Act and deployed it to become the “Sheriff of Wall Street,” the Court of Appeals has essentially deputized private citizens in holding for the first time that common-law tort claims are not preempted by the law.

In affirming the Appellate Division, First Department, yesterday, the Court of Appeals doused what had been conventional wisdom in other state and federal courts, and handed a significant consumer victory to investors and current Attorney General Eric T. Schneiderman.

“Today’s decision is an important recognition that private lawsuits brought by harmed investors are compatible with our office’s public enforcement role under the Martin Act,” said Jennifer Givner, a spokeswoman for the attorney general. “As the Court’s decision reflects, the purpose of the Martin Act is in no way impaired by private legal claims, since actions by the Attorney General and harmed investors both further the same goal: to fight fraud and deception in the securities marketplace.”

Judge Victoria A. Graffeo

The Court did not go so far as to recognize a private right of action under the Martin Act itself—a remedy that Mr. Schneiderman had unsuccessfully pursued in a state senator. Rather, it held in a 6-0 opinion by Judge Victoria A. Graffeo (See Profile), that the act is not a bar to private actions and that investors, and not just the attorney general, can pursue claims.

In the case decided yesterday, Mr. Schneiderman maintained that permitting private actions would not undercut his enforcement powers, as argued by the defendant, but on the contrary would assist him in preventing securities-related fraud. The Court of Appeals agreed.

The Court said law and public policy support its conclusion that “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. Mere overlap between the common law and the Martin Act is not enough to extinguish common-law remedies.”

Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc., 227, is rooted in an action initiated by a financial guarantee company that accused J.P. Morgan of mismanaging the portfolio of a company whose obligations were guaranteed by Assured Guaranty. Assured asserted claims for breach of fiduciary duty, gross negligence and breach of contract.

Manhattan Supreme Court Justice Barbara R. Kapnick (See Profile) dismissed the suit in its entirety, finding that the claims were preempted by the Martin Act.

That opinion was seemingly consistent with the Court of Appeals’ 1987 holding in CPC Intl. v. McKesson Corp, 70 NY2d 268, and its 2009 ruling in Kerusa Co. LLC v. W10Z/515 Real Estate, 12 NY3d 236. In those decisions, the Court had concluded that only the attorney general can sue for violations of the Martin Act.

But the First Department, in an opinion by Justice John Sweeny Jr. (See Profile), reversed, finding “nothing in the plain language of the Martin Act, its legislative history or appellate level decisions in this State support defendant’s argument that the [Martin Act] preempts otherwise validly pleaded common-law causes of action.” 80 AD 3d 293 (1st Dept. 2010)

Yesterday, the Court of Appeals said J.P. Morgan “overreads the import” of PC Intl. and Kerusa and affirmed the First Department.

Judge Graffeo noted that the Martin Act, which “authorizes the Attorney General to investigate and enjoin fraudulent practices in the market of stocks, bonds and other securities within or from New York,” gives the attorney general investigatory and enforcement powers but “does not expressly mention or otherwise contemplate the elimination of common-law claims.”

She said the Legislature, in enacting the Martin Act, also known as New York’s “Blue Sky Law,” in 1921 and fortifying it in 1955 and 1960, could not have intended to preempt private claims and leave the marketplace with less protection than before the law was adopted.

“We agree with the Attorney General that the purpose of the Martin Act is not impaired by private common-law actions that have a legal basis independent of the statute because proceedings by the Attorney General and private actions further the same goal —combating fraud and deception in securities transactions,” Judge Graffeo wrote.

The decision is likely to have wide impact as it resolves an issue that arises with some frequency, and shatters the long-held assumptions of lower state and federal courts.

Even after the First Department issued its opinion on Dec. 28, 2010, a federal court declined to follow it.

Southern District Judge Colleen McMahon (See Profile), in In re J.P. Jeanneret Associates, 769 F. Supp. 2d 340 (Jan. 31, 2011), which stemmed from Bernard Madoff’s massive Ponzi scheme, noted that the First Department opinion was “not the last word on the subject” and reflected a “shift from earlier pronouncements.”

Judge McMahon said in January that until the New York Court of Appeals holds that common-law claims involving securities are not preempted by the Martin Act ­—–”and it is far from clear they will”—she was bound to follow the only Second Circuit case on point (Castellano v. Young & Rubicam, 257 F.3d 171, 190 (2001), which said that the Martin Act preempts private claims.

With yesterday’s ruling, the state high court has now issued the “last word.”

In an amicus brief drafted by lawyers at Wilmer Cutler Pickering Hale and Dorr, the Securities Industry and Financial Markets Association argued that a finding against preemption would “impose substantial and unnecessary regulatory burdens on advisers, which in turn will result in higher costs, reduced returns, and narrower investment choices for investors.”

Assemblyman Rory I. Lancman, a Queens Democrat is sponsoring a bill that would expand the Martin Act to permit public retirement systems and multi-employer health and welfare plans to bring actions.

“I read the decision as an invitation to the Legislature to expand the Martin Act itself and allow investors to recoup losses as a result of fraud or malfeasance,” Mr. Lancman said. “The Court of Appeals is not immune to the economic and legal reality that most people defrauded on Wall Street these days just have to suck it up and move on because the federal securities laws have been so constricted over the past 20 years.”

As attorney general in the early 2000s, Mr. Spitzer cited the same concern—lax enforcement of federal consumer protection and securities laws—when he aggressively confronted Wall Street with the Martin Act.

Mr. Lancman said his bill, which is supported in the GOP-controlled senate by Deputy Majority Leader Thomas Libous, R-Binghamton, would not allow a private right of action. He said it was necessary to narrow the bill to garner bi-partisan support in both houses of the Legislature.

“The next logical step is for New York State policymakers trying to protect investors and enable people to recoup losses is to expand the Martin Act powers itself,” Mr. Lancman said.

Yesterday’s opinion was joined by Chief Judge Jonathan Lippman (See Profile) and Judges Carmen Beauchamp Ciparick (See Profile), Susan Phillips Read (See Profile), Eugene F. Pigott Jr. (See Profile) and Theodore T. Jones (See Profile). Judge Robert S. Smith (See Profile) did not take part.

Douglas O. Morris, spokesman for J.P. Morgan, noted that the ruling has no bearing on the merits of the lawsuit.

“We believe that we acted appropriately at all times with respect to the management of the client’s accounts,” Mr. Morris said. “This is a decision related to the adequacy of the pleadings and not to the merits of the claims. We will continue to defend ourselves vigorously against the claims.”

Mr. Morris declined to discuss the broader impact of the holding.

William A. Maher of Wollmuth Maher & Deutsch in Manhattan argued for Assured Guaranty.

Walter Rieman of Paul, Weiss, Rifkind, Wharton & Garrison appeared for J.P. Morgan.

Mr. Schneiderman’s deputy solicitor general, Richard Dearing, appeared as amicus curiae.