(Article from Securities Law Alert, May/June 2018)
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On June 12, 2018, the New York Court of Appeals (the “Court of Appeals”) held that claims brought under the Martin Act, New York’s blue sky law, are governed by the three-year statute of limitations set forth in New York Civil Practice Law and Rules (“CPLR”) 214(2), which applies to actions “to recover upon a liability, penalty or forfeiture created or imposed by statute.”People by Schneiderman v. Credit Suisse Sec. (USA), 2018 WL 2899299 (N.Y. 2018) (DiFiore, C.J.). The Court of Appeals reversed the ruling of the Appellate Division, First Department, which held that the six-year statute of limitations set forth in CPLR 213(8) for actions “based upon fraud” applies to Martin Act claims. The Court of Appeals also found CPLR 213(1), which establishes a six-year statute of limitations for actions “for which no limitation is specifically prescribed by law,” inapplicable to Martin Act claims.
The Court of Appeals explained that CPLR 214(2)’s three-year statute of limitations applies “where liability would not exist but for a statute.” CPLR 214(2) does not govern “claims which, although provided for in a statute, merely codify or implement an existing common-law liability.” To determine whether CPLR 214(2)’s three-year statute of limitations applies to Martin Act claims, the Court of Appeals considered “whether the Martin Act creates liabilities that did not exist at common law.”
The Court of Appeals noted that the Martin Act “authorizes the Attorney General to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York State.” To prevail in enforcement proceedings brought under the Martin Act, “the Attorney General need not prove scienter or intentional fraud [or] reliance on the part of any investor.” The Court of Appeals observed that it has “repeatedly held that the Martin Act does not create a private right of action in favor of parties injured by prohibited fraudulent practices.” The court has also previously ruled that “a private litigant may not pursue a common-law cause of action where the claim is predicated solely on a violation of the Martin Act or its implementing regulations and would not exist but for the statute.” Id. (quoting Assured Guaranty (UK) Ltd. v. J.P. Morgan Inv. Mgmt., 18 N.Y.3d 341 (N.Y. 2011) (emphasis omitted)). The Court of Appeals found these decisions confirm that “the Martin Act covers some fraudulent practices not prohibited elsewhere in statutory or common law.” Based on its determination that “the Martin Act imposes numerous obligations—or ‘liabilities’—that did not exist at common law,” the Court of Appeals held that the three-year statute of limitations set forth in CPLR 214(2) “governs Martin Act claims.”
The Court of Appeals also considered the statute of limitations applicable to claims brought under § 63(12) of New York’s Executive Law, which empowers the Attorney General to bring enforcement proceedings in connection with fraudulent practices. The court observed that the statutory language is “virtually identical to language found in section 352 of the Martin Act.” Nevertheless, because Executive Law § 63(12) “gives the Attorney General standing to redress liabilities recognized elsewhere in the law,” the Court of Appeals held that courts must “‘look through’ Executive Law § 63(12) and apply the statute of limitations applicable to the underlying liability.” If the “conduct underlying the Executive Law § 63(12) claim amounts to a type of fraud recognized in the common law,” then “the action will be governed by [the] six-year statute of limitations” set forth in CPLR 213(8). But if the conduct at issue is actionable only under the Martin Act, then CPLR 214(2)’s three-year statute of limitations applies.
In a lengthy dissenting opinion, Judge Rivera expressed her view that the majority opinion “reads the CPLR and the Martin Act in a way that undermines the Legislature’s purpose.” She opined that “[a] construction that limits actions under the Martin Act to three years must be rejected as unsound.” She further opined that the majority’s decision with respect to the applicable statute of limitations for claims brought under Executive Law § 63(12) was based on the same “flawed analysis” as the rest of the majority’s opinion.