For years we have battled defendants’ arguments that investors could not bring claims against fraudsters under New York common law. Thus, in cases such as those relating to Madoff feeder funds, the courts have tossed claims of negligence or breach of fiduciary duty based on the argument that the Martin Act vests the Attorney General of New York with exclusive authority over fraudulence securities and investment practices. In many instances, this has left investors empty-handed with not ability to seek recovery from those who assist in corporate wrongdoing or fail to fulfill the duties we generally expect of them – accountants, banks, even (GASP) lawyers.

On December 20, New York’s highest court threw those arguments…and the holdings of the courts resting on those arguments…to the wind. In Assured Guaranty (UK) Ltd., & c., Respondent, v. J.P. Morgan, --- N.E.2d ---- (2011) 6 of the highest court’s justices (one took no part) unanimously agreed that there was not clear intent in the legislative history of the Martin Act indicating that is was to preempt other causes of action. Reasoning that it is well settled that “when the common law gives a remedy, and another remedy is provided by statute, the latter is cumulative, unless made exclusive by the statute”, the Court noted:

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.

However, desperate for protection from its own wrongdoing, JP Morgan sought to have the Court find pre-emption for public policy reasons. But in an atmosphere of “Occupy Wall Street”, that plea feel of deaf ears:

Finally, J.P. Morgan claims that policy considerations, including the preservation of the Attorney General's exclusive enforcement authority under the Martin Act, should encourage us to find expansive preemption in the securities and real estate fields. To the contrary, we believe that policy concerns militate in favor of allowing plaintiff's common law claims to proceed. We agree with the Attorney General that the purpose of the Martin Act is not impaired by private common-law actions that have a legal basis independent of the statute because proceedings by the Attorney General and private actions further the same goal—combating fraud and deception in securities transactions. Moreover, as Judge Marrero observed recently, to hold that the Martin Act precludes properly pleaded common-law actions would leave the marketplace “less protected than it was before the Martin Act's passage, which can hardly have been the goal of its drafters” (Anwar v. Fairfield Greenwich Ltd., 728 F Supp 2d 354, 371 [SD N.Y.2010] ).

With the Martin Act now put in its rightful place, of supplementing enforcement, we still have a stumbling block if such actions are brough on behalf of more than 50 people or as a class action. The Securities Litigation Uniform Standards Act of 1998 (SLUSA) pre-empts all common law claims---including neglingece and breach of fiduciary duty claims ‘alleging a misrepresentation or omission of a material fact I connection with the purchase or sale of a covered security.” In the Madoff and other Ponzi scheme cases where no security was actual purchased, courts have held that the claims are pre-empted under SLUSA. We think these cases take SLUSA too far, and like the Martin Act would have if not reversed, leave the marketplace less protected.