New York’s “blue sky” law, the Martin Act, has been a substantial impediment to certain types of private legal actions involving securities. This may be about to change.
Most courts, including the federal Second Circuit Court of Appeals, have held that the Martin Act preempts common law claims involving securities transactions that do not require scienter. The New York Court of Appeals, however, is currently reviewing a contrary holding by the First Department of the Appellate Division, Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management.
In Assured Guaranty, plaintiff alleged that investment manager J.P. Morgan committed a breach of fiduciary duty and gross negligence by overexposing a reinsurer’s reserves to risky mortgage-backed securities. The trial court granted J.P. Morgan’s motion to dismiss, holding that the breach of fiduciary duty and gross negligence claims were preempted by the Martin Act. The Appellate Division reversed, noting the general rule that a remedy provided by statute is cumulative unless specifically made exclusive. Further, the court interpreted prior state court decisions on Martin Act preemption very narrowly, pointing to a recent amicus brief submitted by the New York Attorney General in another case, in which the Attorney General argued that the Martin Act was “intended to supplement, rather than supplant existing causes of action.”