For whom the bell tolls: Martin Act claims subject to three-year statute of limitations06.29.18
The New York Court of Appeals, in People v. Credit Suisse Securities (USA) LLC, recently held that claims brought by the New York Attorney General (the AG) under New York General Business Law Article 23-A (the Martin Act) are subject to a three-year statute of limitations, not the six-year statute of limitations that is generally applicable to claims for common law fraud. In the same case, the Appeals Court, however, did not definitively decide whether claims brought by the AG under Executive Law § 63(12) (the Executive Law) are subject to a three- or six-year statute of limitations. We expect that this decision will likely prompt the AG to accelerate the pace of investigations and to be more aggressive in seeking to enter tolling agreements to ensure its ability to bring Martin Act claims which do not require that the AG prove a defendant’s intent to defraud and an investor’s justifiable reliance in order to be successful on the merits.
The Martin Act and The Executive Law
The Martin Act, widely considered the most expansive and stringent state securities law in the United States, authorizes the AG to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from the State of New York. With respect to a claim brought under the Martin Act, the AG does not have to prove a defendant’s intent to defraud (scienter) or an investor’s justifiable reliance on the fraud; rather, the AG must only prove that a defendant, in connection with the offer and sale of securities, made a false statement or omitted a fact that was material. Conversely, a claim for common law fraud requires that plaintiff prove a defendant’s intent to defraud and justifiable investor reliance. Notably, the Martin Act does not expressly contain a statute of limitations provision that serves to limit claims that can be made for stale conduct.
Claims brought by the AG under the Martin Act are often coupled with claims brought under the Executive Law which generally authorizes the AG, when any person engages in repeated fraudulent or illegal acts when conducting business activities, to apply for a court order to enjoin the person from continuing to engage in, and for restitution and damages arising from, the fraudulent or illegal acts.
For many years, the Martin Act was not frequently used, although in the last two decades, and specifically in connection with the Great Recession, the AG has successfully used it to secure significant settlements in a variety of actions against corporations, financial institutions and executives.
During the Great Recession, the AG began an investigation of Credit Suisse Securities (USA) LLC and affiliated entities (Credit Suisse) in connection with certain of its residential mortgage-backed securities in 2006 and 2007.
In March of 2012, Credit Suisse and the AG entered into a tolling agreement to preserve the AG’s ability to bring suit against Credit Suisse, and, in November 2012, the AG filed suit with the Supreme Court, New York County alleging that Credit Suisse had engaged in multiple fraudulent and deceptive acts in connection with its creation and sale of the residential mortgage-backed securities.
Credit Suisse filed a motion to dismiss the suit on the grounds that the claims made under the Martin Act and the Executive Law were time-barred by the three-year statute of limitations prescribed by New York Consolidated Laws, Civil Practice Law and Rules 241(2) because the claims sought to recover “upon a liability, penalty or forfeiture created or imposed by statute” and, therefore, the six-year statute of limitations that applies to claims for common law fraud did not apply.
The Supreme Court denied Credit Suisse’s motion to dismiss, and the Appellate Division of the Supreme Court of New York, First Department (the Appellate Division) affirmed the Supreme Court’s denial.
The Appeals Court reversed the Appellate Division’s decision and held that a three-year statute of limitations applies to claims made under the Martin Act and that the statute of limitations applicable to claims made under the Executive Law is dependent upon the nature of the underlying cause of action. The Appeals Court thereafter dismissed the Martin Act claims and remitted the action to the Supreme Court to determine whether the conduct underlying the Executive Law claims amounted to common law fraud which, if so, would be governed by a six-year statute of limitations.
After discussing the legislative and case law history of the Martin Act and, in particular whether the definition of “fraudulent practices” covers fraudulent practices not prohibited elsewhere in statutory or common law, the Appeals Court stated that the “Martin Act imposes numerous obligations — or ‘liabilities’ — that did not exist at common law . . .” and that the “broad definition of ‘fraudulent practices,’ as repeatedly amended by the Legislature and interpreted by the courts, encompasses ‘wrongs’ not cognizable under the common law and dispenses, among other things, with any requirement that the Attorney General prove scienter or justifiable reliance on the part of investors.” Accordingly, the Appeals Court found that the three-year statute of limitations that applies to “a liability, penalty or forfeiture created or imposed by statute” governs Martin Act claims.
Turning thereafter to the Executive Law claims, the Court, in connection with the parties’ dispute regarding whether the Executive Law provides a standalone cause of action or merely a basis for the AG to pursue fraud claims under other statutes or common law theories on a “look through” basis, noted that the Executive Law had been previously amended by the AG with the intention to “equate the meaning of the words ‘fraud’ and ‘fraudulent’ as used therein with the provisions of the Martin Act.” The Appeals Court, however, did not end its analysis there, stating that it is undisputed that the Executive Law gives the AG “standing to redress liabilities recognized elsewhere in the law, expanding the scope of available remedies.” Therefore, the Appeals Court found that “courts must ‘look through’ Executive Law § 63(12) and apply the statute of limitations applicable to the underlying liability.”
This decision provides defendants with an important time-based defense against Martin Act claims, so the AG will have to pursue potential claims more expeditiously to ensure their timeliness. To ensure that it does not have to clear the higher evidentiary hurdles of intent to defraud and reasonable investor reliance that are key elements in claims for common law fraud, we expect that the AG will seek to initiate and complete its Martin Act investigations more expeditiously and enter into tolling agreements more frequently, especially with respect to potential claims that may soon become stale.