New York Widens Window for Prosecuting Securities Fraud Claims

Nov 6, 2019 | Blog

On Monday, August 25th, 2019, New York Governor Andrew Cuomo signed legislation that will give the New York Attorney General’s Office greater teeth with which to investigate and prosecute financial fraud claims brought under the Martin Act.

The Martin Act (New York General Business Law article 23-A, sections 352-353) is a state law originally passed in 1921 as one of the most stringent “blue sky laws” in the country. This set of laws was enacted with the purpose of regulating the sale of securities and protecting public investors from fraud. The Martin Act grants authority to the New York Attorney General’s Office to investigate and prosecute civil and criminal securities-related fraud claims.

While the Act wasn’t regularly employed until approximately 20 years ago, it has become an often-used tool in the years since the 2008 economic recession. It has been wielded by multiple New York Attorney Generals to aggressively pursue fraud claims against both Wall Street financial firms and individuals.

Historically, the timeliness of claims under the Martin Act had been evaluated under New York common law, which allows a 6-year statute of limitations for bringing fraud claims. In 2012, however, fraud allegations brought against Credit Suisse Securities (a global financial services company) by the New York Attorney General’s Office threw application of the statute of limitations into question.

The allegations brought against Credit Suisse under the Martin Act accused the company of misleading investors regarding the quality of mortgage-backed securities in 2006 and 2007—a practice that would have directly contributed to the subsequent financial crisis.

However, Credit Suisse argued that since the Martin Act included a much wider scope of fraudulent practices than were detailed in New York common law, the Act should not fall under the 6-year statute. Credit Suisse’s argument posited that by definition the Act should necessarily fall under a different section of New York civil practice law, one that imposed a 3-year statute of limitations.

In June 2018, the question reached the state’s highest court, the New York Court of Appeals. In a 4-1 landmark decision, the court decided that the Martin Act did indeed fall under a 3-year statute of limitations, effectively cutting in half the length of time fraud cases were prosecutable by the Attorney General’s office.

At the time, the decision received considerable criticism for substantially limiting the Attorney General’s ability to protect financial consumers and investigate bad actors. The new legislation serves to overturn last year’s ruling by making claims under the Martin Act subject to the 6-year statute of limitations.

Referred to state lawmakers by incumbent Attorney General Letitia James, the new piece of legislation was passed in June and signed by Governor Cuomo on August 25, 2019. In a statement released by Governor Cuomo, he explained the driving logic behind the new legislation:

“By restoring the six-year statute of limitations under the Martin Act, we are enhancing one of the state’s most powerful tools to prosecute financial fraud so we can hold more bad actors accountable, protect investors and achieve a fairer New York for all.”

The new legislation is effective immediately.

If you have any further questions related to the Martin Act or other financial fraud legislation, please contact James Heavey.