N.Y. Court: AG Enforcement Doesn’t Pre-empt Private Securities Suits

December 21, 2011

Enforcement by the state attorney general against securities fraud doesn’t pre-empt private common-law claims of negligence against investment companies, New York’s top court ruled Tuesday.

The Court of Appeals rejected J.P. Morgan Investment Management’s argument that New York’s Martin Act gives the attorney general exclusive authority over fraudulent securities and investment practices. The court said Assured Guaranty (UK) Ltd. can sue J.P. Morgan.

“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 action have the same goal — combating fraud and deception in securities transactions,” Judge Victoria Graffeo wrote.

Assured claimed breach of fiduciary duty and gross negligence, alleging J.P. Morgan invested heavily in risky mortgage-backed securities while committing to a conservative investment policy for reinsurance company Orkney RE II PLC, whose obligations Assured guaranteed. After the market crashed, Assured had to cover Orkney losses.

“Here, the plain text of the Martin Act, while granting the attorney general investigatory and enforcement powers and prescribing various penalties, does not expressly mention or otherwise contemplate the elimination of common-law claims,” Graffeo wrote. The unanimous ruling upheld a midlevel court, which had reversed a judge.

J.P. Morgan said Tuesday it continues to dispute Assured’s negligence claims.

“We believe that we acted appropriately at all times with respect to the management of the client’s accounts,” J.P. Morgan spokesman Doug Morris said. “This is a decision related to the adequacy of the pleadings and not to the merits of the claims. We will continue to defend ourselves vigorously against the claims.”

The Martin Act prohibits deception and misrepresentation in offering stocks, bonds or other securities to investors. It can carry civil and criminal penalties, ranging from fines and restitution to prison time.

Calls to Assured’s lawyer were not immediately returned.

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