In People v. Credit Suisse Securities (USA) LLC, New York's highest court considered the applicable statute of limitations for Martin Act claims, holding in a June 12 opinion that such claims are governed by a three-year statute of limitations, rather than the six-year statute of limitations urged by the New York attorney general. This is the first time that the New York Court of Appeals has weighed in on the statute of limitations that applies to claims brought under the Martin Act, a 1921 state law that authorizes the attorney general to pursue civil and criminal cases for fraudulent practices in connection with the sale of securities. The statute has been used to regulate a wide variety of conduct, from Wall Street financings to the sale of condominiums and cooperative apartments in public offerings. The Martin Act is one of the most powerful tools in the attorney general's regulatory arsenal because, unlike similar causes of action, it does not require scienter, or intent to defraud.
Appellants, Credit Suisse Securities (USA) LLC and affiliated entities, argued that a three-year statute of limitations should apply to Martin Act claims under CPLR 214(2), which imposes a three-year limitation period for a claim based on a New York statute. The attorney general argued that a six-year limitation period should apply to Martin Act claims, pointing out that the limitations period for an "action based upon fraud" is six years under CPLR 213(8).
As the Court of Appeals explained, the applicability of CPLR 214(2) turns on whether a claim is truly created by statute, as opposed to one brought pursuant to a statute that merely codifies an existing common law claim. Only claims that would not exist but for the statute are subject to CPLR 214(2)'s three-year limitations period. The question for the Court of Appeals, therefore, was whether the Martin Act creates liabilities that did not exist at common law. The Court of Appeals answered that question in the affirmative. Writing a majority opinion for four judges, with two judges on the Court not participating, Chief Judge DiFiore emphasized the ways in which the Martin Act has a broader sweep than common law fraud, noting the Act's registration and disclosure requirements relating to the sale of security interests in condominium and cooperative apartments, as well as its broad definition of prohibited "fraudulent practices" that dispenses with certain common law requirements such as justifiable reliance and intent to defraud.
The Court's opinion was not a total loss for the attorney general, however. The Court held that, when the attorney general prosecutes cases of "persistent fraud or illegality" under Executive Law 63(12), lower courts must "look through" Executive Law 63(12) and apply the statute of limitations applicable to the underlying liability. When the attorney general brings a case of "persistent fraud or illegality" under Executive Law 63(12) that also satisfies the elements of common law fraud, then the statute of limitations is six years pursuant to CPLR 213(8).
In a concurring opinion, Judge Feinman wrote separately to provide guidance to the lower courts in determining which sorts of claims brought under Executive Law 63(12) were actionable at common law and therefore enjoy a six-year limitations period. Judge Rivera dissented, echoing the attorney general's view that restricting the statute of limitations for Martin Act claims to three years is inconsistent with the legislative intent of providing a muscular antifraud provision with which to regulate the state's securities markets.
Given the broad reach of the Martin Act, the three-year limitation period will provide greater certainty and respite to financial firms, securities industry professionals and real estate developers, among others, who may become subject to investigation by the New York attorney general.
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