The Business Council of New York State strongly opposes this legislation as it would significantly increase the legal exposure of businesses by authorizing certain institutional investors and public pension funds to bring actions for alleged violations of the state’s “Martin Act” (General Business Law § 352-c) related to to the purchase or sale of a security.
Given that such investors already can pursue common law claims for fraud, breach of fiduciary duty and gross negligence, there is no compelling need for this legislation. And given the lopsided nature of the Martin Act, we believe any legislation to expand its application is bad public policy.
This legislation would allow institutional investors and public pension funds to take advantage of the excessively broad Martin Act. More than just a financial services issue, the Martin Act, and this legislation, could be applied to any publicly traded business.
Enacted in 1921, the Martin Act is one of the most extreme securities laws in the nation because of its overly broad definition of fraud, low evidentiary standards and expansive investigative authority. Among other things, its definition of fraud is broader than that in common law, federal securities law, or other similar state law, in that it does not require a finding “scienter,” or intent to defraud, just the misrepresentation or omission of a material fact. Nor does a plaintiff have to demonstrate that it in any way relied on such information.
Under current law, the Martin Act’s expansive definition of “fraud” is reserved for enforcement actions by the state Attorney General. In recent years, the broad power of the Martin Act was energetically applied by the state’s attorney general in cases that resulted in significant financial settlements with the state, as well as restitution for investors.
Under S.2677/A.3805, institutional investors retirement systems would be allowed to bring suit for damages for acts prohibited by the Martin Act. Since this legislation does not require a prior conviction, their lawsuits would both allege a Martin Act violation and seek related damages.
As a result, these investment and pension funds would be able to pursue cases in instances where the Attorney General has taken no enforcement action, or has determined that no investigation or prosecution is warranted. Under this legislation, the plaintiff’s bar would be empowered to avail themselves with the extraordinary powers of the Martin Act, allowing them to initiate multiple lawsuits, the threat of which could lead to settlement even in very questionable cases, further eroding the state’s economic climate.
The Business Council believes that this legislation is unnecessary because state and federal law provides investors ample protections. As previously stated, the Attorney General has exclusive authority to seek damages pursuant to the Martin Act. Federal securities laws provide the powerful Securities and Exchange Commission the ability to seek damages for institutional investors. Recent case law in New York has affirmed common law remedies for investors that believe they have been damaged by fraudulent acts.
Furthermore, extending the unlimited power of the Martin Act to the plaintiff’s bar would significantly increase the legal exposure of businesses and the frictional costs associated with new lawsuits.
For these reasons, The Business Council strongly opposes approval of S.2677/A.3805.