New York’s highest court on Tuesday curbed the state attorney general’s ability to fight fraud on Wall Street, awarding a victory to Credit Suisse Group AG as it tries to end an $11 billion lawsuit over risky mortgage securities.
By a 4-1 vote, the state Court of Appeals said New York’s top law enforcement officer has just three years to bring claims under the Martin Act, a 1921 law granting that office broad power to pursue civil and criminal cases over securities fraud without having to prove intent to defraud.
Two lower courts had agreed with the attorney general that the deadline should be six years, and rejected Credit Suisse’s arguments that the state sued too late. Tuesday’s decision overturned those findings.
“The Martin Act imposes numerous obligations – or ‘liabilities’ – that did not exist at common law, justifying the imposition of a three-year statute of limitations,” Chief Judge Janet DiFiore wrote.
The decision could doom a November 2012 lawsuit brought by then-Attorney General Eric Schneiderman accusing Credit Suisse of lying about the quality of loans underlying residential mortgage-backed securities it sold in 2006 and 2007, resulting in steep investor losses during the global financial crisis.
But the appeals court said current Attorney General Barbara Underwood deserved a chance to show a lower court that Credit Suisse committed fraud under common law, subjecting it to a six-year statute of limitations under the state’s Executive Law.
Underwood took over the case after Schneiderman resigned last month.
“We don’t anticipate this impacting our cases in any significant way,” said Amy Spitalnick, a spokeswoman for Underwood. “This decision will have no impact on our efforts to vigorously pursue financial fraud wherever it exists in New York. That includes continuing our case against Credit Suisse.”
The lawsuit had accused Credit Suisse of concealing known defects in home loans underlying its securities in a bid to sell more securities and generate higher fees.
“This will significantly constrain the NY AG’s reach,” John Coffee, a securities law professor at Columbia Law School, said in an email. “Yes, the AG can sue on a common law fraud theory and have six years, but then it must prove much more, including an intent to defraud.”
Coffee noted that the three-year deadline is shorter than the five years that the U.S. Securities and Exchange Commission has to pursue securities fraud claims.
Credit Suisse spokeswoman Nicole Sharp said the Swiss bank was “extremely pleased” to defeat the Martin Act claim, and that the three-year statute of limitations was significant “for all future industry proceedings.”
The bank will keep defending itself against the attorney general’s “unfounded and meritless allegations,” she said.
Judge Jenny Rivera dissented from Tuesday’s decision. She called on New York’s legislature to restore the six-year statute of limitations “before significant damage is done to the state’s securities markets.”
The Martin Act gained new life under former Attorney General Eliot Spitzer, who invoked it in 2005 when he sued American International Group Inc’s longtime chairman Maurice “Hank” Greenberg over two alleged sham reinsurance transactions.
Schneiderman also invoked it when he began probing whether Exxon Mobil Corp misled the public about climate change.
The case is People v Credit Suisse Securities (USA) LLC, New York State Court of Appeals, No. 40.
(Reporting by Jonathan Stempel in New York; editing by Marguerita Choy, Bill Berkrot and Richard Chang)
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