People in the know claim this is a huge ruling in New York, and it’s not hard to see why.
A decade after then 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 pre-empted by the law.
In affirming the Appellate Division, First Department this morning, 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.
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.
Prior to this unanimous ruling, only the Attorney General could bring action under the Martin Act, a securities fraud law in New York State that is much more expansive than federal statutes. Typically the plaintiff must prove intent to commit fraud; under the Martin Act the plaintiff need only prove that fraud was committed. Now, as a result of this ruling, any aggrieved private actor can use the Martin Act as part of their lawsuit. This empowers a metric ton of investors of all sizes to go after the banks on securities fraud. It has the effect of lowering the burden of proof on those investors in those lawsuits.
Maybe this can explain why Bank of America stock dipped below $5 a share yesterday for the first time since 2009. (It’s since risen slightly.)
Consider one other thing. When environmental groups sued power companies in “public nuisance” lawsuits, saying that their rights were violated by polluting industries under the Clean Air Act, the Administration effectively sided with the polluters, in trying to block the lawsuit, saying that EPA regulations on greenhouse gas emissions displace common-law claims. Here, Attorney General Schneiderman – whose deputy solicitor general argued the case before the Court of Appeals – said the opposite, that private investors’ claims under the Martin Act only complemented his work. And the courts in New York agreed. I have more faith that Schneiderman will get his work done on financial fraud than the EPA on greenhouse gas regulations. And yet he still allowed private actions.
This will have a major impact over fraud cases in New York, and we’ll probably see a flowering of lawsuits in the aftermath.