Blue Skies for America in the Securities Industry ... except for New York: New York's Martin Act and the Private Right of Action

By Gana, Adam J.; Villacres, Michael | Fordham Journal of Corporate & Financial Law, July 1, 2014 | Go to article overview

Blue Skies for America in the Securities Industry ... except for New York: New York's Martin Act and the Private Right of Action


Gana, Adam J., Villacres, Michael, Fordham Journal of Corporate & Financial Law


TABLE OF CONTENTS

INTRODUCTION ...................587

I. THE ORIGIN AND LEGISLATIVE HISTORY OF NEW YORK'S BLUE SKY LAW ...................588

II. THE UNIFORM SECURITIES ACT OF 2002 AND OTHER STATES' BLUE SKY LAWS ...................590

III. CHALLENGES FACING NEW YORK INVESTORS ...................596

RECOMMENDATION AND CONCLUSION ...................598

INTRODUCTION

New York City is the financial hub of the United States and according to some, the world.2 Yet, New York is the only state without a private right of action for violations of state securities laws, and thus fails to provide its resident investors with the securities protection afforded to residents of other states.3 Blue Sky laws are statutorily designed to regulate the statewide sale of securities.4 Compared to the Blue Sky laws of other states, New York's Martin Act severely5 restricts New York residents.6

This Article first discusses, in Part I, the origins and legislative history of the Martin Act in order to explain its purpose. Next, Part II explores the advantages and disadvantages of the Blue Sky laws of other states. In light of this exploration, Part III of this Article shows how New York residents are disadvantaged because they cannot rely on a statutory private cause of action under the act. Finally, this Article recommends that to truly protect New York's investing public, the New York legislature must either enact a new Blue Sky law or modify the Martin Act to include a private right of action.

I. The Origin and Legislative History of New York's Blue Sky Law

Securities regulations have become a necessity to protect the increasing number of investors who have become involved in the marketplace.7 To fund World War I, the federal government began to sell "securities in the form of Liberty Bonds" to the public.8 While this introduced many average citizens to the idea of security ownership, it also exposed investors to early forms of securities fraud.9 Yet, as the federal government had not enacted any legislation to protect its citizens, state legislatures were left to act on the matter.10 Thus, states enacted Blue Sky laws to protect investors from dishonest vendors who "sell shares in the 'bright blue sky itself.'""

New York faced the problem of "an enormous population with an unusually high per capita wealth suddenly made security conscious" that was prey to dishonest investment practices.12 Thus, on May 7, 1921, the New York legislature enacted the Martin Act to protect investors from the fraudulent sale of securities." The Martin Act empowers the New York State Attorney General to regulate and enforce the securities laws of New York.14 However, there is no express or implied private cause of action in the text of the Martin Act's anti-fraud provisions." Very few sources of legislative history look into a private cause of action or why the legislature might have left it out.16 As such, the New York courts have ruled that there is no private right of action under the Martin Act.17

Although there is no private cause of action in the Martin Act, an individual can still bring a claim under common law fraud in New York as long as the traditional rules of pleadings and proof are fulfilled.18 In Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc., the New York Court of Appeals addressed whether the legislature intended the Martin Act to supplant "non-fraud common law claims."19 To override common law, there must first be a "clear and specific legislative intent" to do so.2l) The legislature, however, did not expressly state that the Martin Act would eliminate all other common law claims that could relate to securities fraud.21 Therefore, the Court of Appeals 2008).

determined that an investor may "bring a common-law claim (for fraud or otherwise) that is not entirely dependent on the Martin Act . . . ."22 The court reasoned that allowing both common law fraud actions and actions brought by the Attorney General under the Martin Act would further the legislature's goal of "combating fraud and deception in securities transactions. …

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