On August 26, 2019, New York Governor Andrew Cuomo signed into law legislation extending the statute of limitations for claims brought under the Martin Act from three to six years. The statute reverses a New York Court of Appeals decision holding that Martin Act claims must be brought within three years.
The Martin Act
The Martin Act is one of the country's most widely used and powerful "blue sky" laws. It "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" and grants the Attorney General "broad authority to investigate, to secure a permanent injunction against any person or entity that has engaged in fraudulent practices and to obtain restitution of money or property wrongfully obtained." In addition—and in contrast to common law fraud claims—the Attorney General does not need to show scienter, intentional fraud, or reliance in order to state a claim under the Martin Act.
Nearly a century old, the Martin Act was primarily used to police Ponzi schemes and other smaller-scale frauds. But New York prosecutors, starting with Eliot Spitzer, have transformed the Martin Act in recent years into a powerful tool of broad application, leveraging it to collect billions from financial institutions and even to address climate change1 and investigate the cryptocurrency market2.
People v. Credit Suisse Sec. (USA) LLC3
However, in 2018, the New York Court of Appeals, in People v. Credit Suisse Sec. (USC) LLC, 31 N.Y.3d 622 (2018), held that Martin Act claims were subject to a three-year statute of limitations. In that case, the New York Attorney General had alleged that Credit Suisse Securities (USA) LLC and affiliated entities ("Credit Suisse") violated the Martin Act in connection with the creation and sale of residential mortgage-backed securities in 2006 and 2007 by misrepresenting to investors the quality of the underlying mortgage loans and the due diligence it conducted into the quality of the loans.4
On June 12, 2018, the New York Court of Appeals overruled various lower court decisions to dismiss the Attorney General's Martin Act claim against Credit Suisse on the grounds that the claim was time barred. The Court of Appeals held that "the Martin Act imposes numerous obligations—or 'liabilities'—that did not exist at common law;" therefore Martin Act claims are causes of action to recover on a liability created by statute and not common law and are governed by the three-year limitations period set forth in CPLR § 214(2).5 In so holding, the Court of Appeals distinguished Martin Act claims from other claims that are provided for in statutes but merely codify existing common law. Those common law-based claims are governed by the six-year limitations period set forth in CPLR § 213.6 Given the time it can take to discover and investigate complex financials frauds, this development was a potentially serious blow to the Office's enforcement efforts.
Six Year Statute of Limitations for Martin Act Claims
Initially, in response to the Court of Appeals' decision in Credit Suisse Sec. (USA) LLC, the Office of the Attorney General stated that the "decision will have no impact on [its] efforts to vigorously pursue financial fraud wherever it exists in New York."7 Nevertheless, the Office lobbied for a bill to amend CPLR § 213 to explicitly include Martin Act claims and Executive Law § 63(12) claims among those that are governed by a six-year statute of limitations.
The bill was passed by the New York Legislature on June 15, 2019, and signed into law on Monday, August 26, 2019. The amendment to the CPLR is effective immediately.
The newly enacted legislation restores the status quo before the Court of Appeals' decision in Credit Suisse Sec. (USA) LLC last year. The Attorney General's Office is relieved of the time pressure of a three-year statute of limitations to pursue its fraud cases and bring claims under the Martin Act and Executive Law § 63(12). This is a significant development as the Martin Act has long been a primary tool in New York State's enforcement arsenal. When signing the bill, Governor Cuomo made the point: "[b]y restoring the six-year statute of limitations under the Martin Act, we are enhancing one of the state's most powerful tools to prosecute financial fraud so we can hold more bad actors accountable, protect investors and achieve a fairer New York for all." Indeed, given the complexity of many financial frauds, it can take years for enforcement agencies to uncover and fully investigate them.8
Now, pursuant to CPLR § 213(8), the Attorney General's Office has six years from the "date the cause of action accrued" (i.e., the date the plaintiff "completed the act" that gave rise to the fraud claim9) or "two years from the time the [Attorney General's Office] discovered or could with reasonable diligence have discovered the fraud." For private plaintiffs, New York courts have found that the reasonable diligence standard is met and therefore knowledge of the fraud imputed to the plaintiff "where the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded."10 This is in contrast to CPLR § 214(2) which does not extend the limitations period while an alleged fraud remains undiscovered.
The new legislation is effective immediately and will also allow the Attorney General's Office to investigate conduct further back in time without the pressure of an immediately impending expiration of the limitations period. That said, the Attorney General's Office is unlikely to be able to reach claims that were already barred under CPLR § 214's three-year limitations period. It has long been the law in New York that "revival by statute of a right of action already barred by limitations is an extreme exercise of legislative power."11 In the case of a claim-revival statute that explicitly extends a statute of limitation even after the limitations period has already expired, the statute may not necessarily violate the State Constitution's Due Process Clause if the statute was "enacted as a reasonable response in order to remedy an injustice."12 But where (as here) there is no express retroactive application, the intent to revive an already expired limitations period must be clear and "not deduced from words of doubtful meaning."13 The current amendment is silent on this issue and, thus, such claims are likely not revived by the new legislation. Overall, however, the amendment restores a significant enforcement power to the New York Attorney General's Office, an authority we expect to see the Office make use of.
1 People v. Exxon Mobile Corp., Index No. 452044/2018 (Sup. Ct., N.Y. Cty. Oct. 24, 2018).
2 Matter of the Inquiry by Letitia James, Attorney General of the State of New York v. iFinex Inc., Index No. 450545/2019 (Sup. Ct., N.Y. Cty. 2019).
3 Additional information regarding the Credit Suisse Sec. (USA) LLC case can be found in Cleary Gottlieb's June 18, 2018 Alert Memo, New York Court of Appeals Holds Securities Fraud Claims Under the Martin Act Must Be
Brought Within Three Years, https://www.clearygottlieb.com/-/media/files/alert-memos-2018/new-york-court-of-appeals-holds-securities-fraud-claims-under-the-martin-act.pdf.
4 The Attorney General's Office also alleged violations of New York Executive Law § 63(12)—which outlaws "repeated fraudulent or illegal acts ... in the carrying on, conducting or transaction of business"—based on Credit Suisse's alleged violation of the Martin Act.
5 People v. Credit Suisse Sec. (USA) LLC, 31 N.Y.3d 622 at 632 (2018).
6 As for Executive Law § 63(12) and the applicable statute of limitations, the Court held that it would need to first examine whether the conduct underlying the claim amounted to a type of fraud recognized in common law in order to determine whether a three or six-year limitations period would apply. That question was remitted to the trial court.
7 Jonathan Stempel, New York top court narrows Martin Act in $11 billion Credit Suisse case, Reuters, June 12, 2018, https://www.reuters.com/article/us-credit-suisse-new-york/new-york-top-court-narrows-martin-act-in-11-billion-credit-suisse-case-idUSKBN1J81WK.
8 As the then-Attorney General noted in briefing in the Credit Suisse Sec. (USA) LLC case, "[i]nvestor fraud cases are often complex, requiring considerable time and effort to investigate." Brief and Addendum for Respondent at 58, People v. Credit Suisse Sec. (USA) LLC, 46 Misc. 3d 1211(A) (Sup. Ct., N.Y. Cty. 2014) (No. APL-2017-00056).
9 Prichard v. 164 Ludlow Corp., 49 A.D.3d 408, 408 (1st Dep't 2008); see also Commerzbank AG London Branch v. UBS AG, 2015 WL 3857321 at *2, 2015 N.Y. Slip Op. 31051(U) (Trial Order) (Sup. Ct., N.Y. Cty. June 17, 2015) (fraud claim accrues under CPLR § 213(8) on the date plaintiff was fraudulently induced to purchase residential mortgage backed securities certificates).
10 Gutkin v. Siegal, 85 A.D.3d 687, 687 (1st Dep't 2011); see also Commerzbank AG London Branch,2015 WL 3857321 at *3.
11 Hopkins v. Lincoln Trust Co., 233 N.Y. 213, 215 (1922).
12 In re World Trade Center Lower Manhattan Disaster Site Litigation, 30 N.Y.3d 377, 400 (2017).
13 Hopkins, 233 N.Y. at 215. In the event that a cause of action has accrued but not yet expired at the time of the new statute, the new limitations period would apply to the cause of action. Id.
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