New York Court of Appeals Holds That Martin Act Does Not Preempt Common Law Claims: New York Court of Appeals Resolves Question of Martin Act Preemption of Common Law Claims, Holding That Claims for Breach of Fiduciary Duty and Gross Negligence May Be Asserted in Private Actions

Sullivan & Cromwell LLP - December 22, 2011

The New York Court of Appeals issued a unanimous decision this week holding that common law claims not predicated exclusively on violations of the Martin Act (N.Y. Gen. Bus. Law Art. 23-A), New York’s “Blue Sky” law, are not preempted and may be asserted in private actions. In Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management, Inc., No. 227 (Dec. 20, 2011), the Court of Appeals resolved a dispute among New York state and federal courts as to whether common law causes of action arising out of facts that might support a Martin Act prosecution by the Attorney General are barred in actions brought by private litigants. After analyzing the plain text and legislative history of the Martin Act and considering its prior decisions and relevant policy considerations, the Court of Appeals held that breach of fiduciary duty and gross negligence claims based on allegations of mismanagement of an investment portfolio are not barred by the Martin Act. Assured Guaranty has significant implications for litigants in private securities-related actions. The decision could result in private parties’ more frequently asserting common law claims against financial institutions and other parties.