For more than 20 years, courts routinely dismissed common law claims brought by investors and other securities market participants under New York law. The courts relied on a line of cases holding that New York’s blue sky statute, the Martin Act, preempted those claims. But last month, the Court of Appeals rejected that line of cases. See Assured Guaranty (UK) Ltd. v. J.P. Morgan Inv. Mgmt. Inc., No. 227, —N.E.2d—, 2011 WL 6338898 (N.Y. Dec. 20, 2011). Some observers see Assured as clearing the path to the courthouse for plaintiffs pursuing negligent misrepresentation, breach of fiduciary, and other common law claims arising from securities transactions. But that view gives short shrift to significant substantive and procedural protections—unaffected by Assured—that will continue to provide robust defenses to issuers, underwriters, and other defendants in securities-related actions.
Rise of Martin Act Preemption
The Martin Act authorizes New York’s Attorney General to investigate and remediate fraud in the securities markets. It does not provide a private right of action for violations of the act. See CPC Int’l Inc. v. McKesson Corp., 514 N.E.2d 116 (N.Y. 1987). In CPC, the Court of Appeals dismissed a Martin Act claim brought by a company that acquired the stock of another company’s subsidiary. The Court observed that the Martin Act did not expressly provide a private right of action, and held that an implied private right of action was inconsistent with the Legislature’s intent to provide to the attorney general broad powers to police the securities markets.