ALBANY, N.Y. (Legal Newsline) - The New York Court of Appeals, in a ruling Tuesday, said a plaintiff's breach of fiduciary duty and gross negligence claims against an investment firm are not barred by the state's Martin Act.
The plaintiff, Assured Guaranty Ltd., sued J.P. Morgan Investment Management Inc., claiming it mismanaged the investment portfolio of an entity -- Orkney Re II PLC -- whose obligations Assured guaranteed.
As an express third-party beneficiary of an investment management agreement between J.P. Morgan and Orkney, Assured alleged that J.P. Morgan invested Orkney's assets heavily in high-risk securities, such as subprime mortgage-backed securities, and failed to diversify the portfolio or advise Orkney of the true level of risk.
Assured also alleged that J.P. Morgan improperly made investment decisions in favor of non-party Scottish Re Group Ltd., a client of J.P. Morgan and Orkney's largest equity holder, rather than for the benefit of Orkney or itself.
As a consequence, Assured claimed that Orkney suffered substantial financial losses, triggering Assured's obligation to pay under its guarantee.
J.P. Morgan moved to dismiss Assured's complaint. It argued the private investor's breach of fiduciary and gross negligence claims were preempted by the state's Martin Act.
The Martin Act, also known as New York's "blue sky" law, authorizes the attorney general to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York.
The Act was enacted to "create a statutory mechanism in which the attorney general would have broad regulatory and remedial powers to prevent fraudulent securities practices by investigating and intervening at the first indication of possible securities fraud on the public and, thereafter, if appropriate, to commence civil or criminal prosecution."
Basically, J.P. Morgan asserted it would be inconsistent to allow private investors, like Assured, to bring overlapping common-law claims.
A state supreme court granted J.P. Morgan's motion and dismissed the complaint in its entirety, holding that the claims fell "within the purview of the Martin Act and their prosecution by plaintiff would be inconsistent with the attorney general's exclusive enforcement powers under the Act."
The state's appellate division modified by reinstating the breach of fiduciary duty and gross negligence causes of action and part of the contract claim.
In reinstating the claims, the court concluded there is "nothing in the plain language of the Martin Act, its legislative history or appellate level decisions in this state that supports defendant's argument that the Act preempts otherwise validly pleaded common-law causes of action."
The appellate division granted J.P. Morgan's leave to appeal on a certified question.
The Court of Appeals, New York's highest court, affirmed the appellate division's ruling that the plaintiff's common-law claims are not preempted.
"Certainly the Martin Act, as it was originally conceived in 1921 with its limited relief, did not evince any intent to displace all common-law claims in the securities field. Nor can J.P. Morgan point to anything in the legislative history of the various amendments that demonstrates a 'clear and specific' legislative mandate to abolish preexisting common-law claims that private parties would otherwise possess," Justice Victoria A. Graffeo wrote for the Court.
"True, we have held that the Martin Act did not 'create' a private right of action to enforce its provisions. But the fact that 'no new per se action was contemplated by the Legislature does not... require us to conclude that the traditional... forms of action are no longer available to redress injury.'
"Hence, we agree with plaintiff that the Martin Act does not preclude a private litigant from bringing a nonfraud common-law cause of action."
The Court said it agreed with Attorney General Eric Schneiderman -- who filed an amicus brief in the case -- that the purpose of the Act is not impaired by private common-law actions that have a legal basis independent of the statute.
"Proceedings by the attorney general and private actions further the same goal -- combating fraud and deception in securities transactions," Graffeo wrote in the Court's 11-page ruling.
From Legal Newsline: Reach Jessica Karmasek by email at firstname.lastname@example.org.