Court ruling may limit New York's powerful anti-fraud weapon

New York State Court of Appeals scales back $11 billion lawsuit against Credit Suisse

Jun 13, 2018 @ 11:30 am

By Bloomberg News

New York's powerful anti-fraud weapon known as the Martin Act was crimped by the state's highest court, which scaled back what was an $11 billion lawsuit against Credit Suisse Group AG over mortgage-securities practices in the run-up to the financial crisis.

The New York Court of Appeals found that many of the claims were too old after determining that the law's statute-of-limitations was three years, not six years. The Martin Act has been used by state authorities to police the securities markets since the 1920s, so the ruling may limit the prosecution of fraud in stock and bond sales and some other financial transactions.

"Anything that reduces a statute of limitations will have a big impact on enforcement," said David Reiss, a professor at Brooklyn Law School, noting that it can take many years to develop complex financial cases. "This case reflects a significant curtailment of the New York attorney general's ability to go after alleged financial wrongdoing."

The Martin Act is one of the country's oldest and toughest anti-fraud tools and been used by the the state attorney general to file both civil suits and criminal charges. It requires a lower standard of proof for civil cases than other anti-fraud statutes. It can also be used to launch investigations, which can help extract settlements.

Through the specter of the Martin Act, New York state has been able to collect billions of dollars in fines from banks, insurers and mutual funds over a wide variety of alleged fraud. It has also been used to charge individuals, including executives at Tyco International Ltd., accused of looting the company, and former officials at the law firm Dewey & LeBoeuf.

Amy Spitalnick, a spokeswoman for Attorney General Barbara Underwood, said the state pursues cases quickly and will continue to do so.

"This decision will have no impact on our efforts to vigorously pursue financial fraud wherever it exists in New York," Spitalnick said. "That includes continuing our case against Credit Suisse."

In recent years, the Martin Act has been used against Barclays Plc and other banks to pursue claims they misled customers about the role of high-frequency traders in dark pools, to win a settlement from the Bank of New York Mellon Corp. over foreign-currency trading, and to start an investigation into Exxon Mobil Corp. about whether it misled investors about the impact of climate change.

The case against Zurich-based Credit Suisse came as the office started probes into allegations of wrongdoing related to the financial crisis. The lawsuit, filed by former Attorney General Eric Schneiderman in November 2012, claimed the bank ignored warning signs about the quality of loans it was packaging and selling in 2006 and 2007.

The bank's lawyers argued that too much time had elapsed to bring claims under the Martin Act, saying the time period should be three years. Lawyers for Schneiderman's office said the six-year period applied, which had been the state's position for "decades."

New York State Supreme Court Justice Marcy Friedman denied the bank's request to dismiss the lawsuit in December 2014, and two years later a divided mid-level appeals court said the law had a six-year reach.

The Court of Appeals noted in its 4-1 ruling Tuesday that it had never before considered the law's statute of limitations. Weighing whether it was governed by one statute establishing a three-year period or another setting a six-year period, the court said the three-year term applies because the Martin Act expanded traditional notions of fraud.

In a dissent, Judge Jenny Rivera said the majority's ruling "grievously compromises this vital tool" for combating securities fraud, and that it "undermined" the intentions of the state legislature.

"Make no mistake, this is a significant decision with potentially devastating consequences for the people of the state of New York, as well as the markets beyond our borders, which depend on New York as a global financial center," Rivera wrote.

Not all claims against Credit Suisse were tossed out by the ruling. The state can proceed on other fraud claims, although they may be more difficult to prove, according to Bloomberg Intelligence litigation analyst Elliott Stein.

Credit Suisse spokeswoman Nicole Sharp said the bank is "extremely pleased" with the decision.

"Limiting the statute of limitations period for Martin Act claims is significant not only for this case but for all future industry proceedings," she said. "We will continue to vigorously defend ourselves against these unfounded and merit-less allegations, and we deny any wrongdoing."

The case is People of the State of New York v. Credit Suisse, No. 40, Court of Appeals, State of New York.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Oct 23

Conference

Women Adviser Summit - San Francisco

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

INTV

What's behind the TCA, ETrade deal?

Deputy editor Bob Hordt talks with senior columnist Jeff Benjamin about what each party in the recent acquisition stands to gain by joining forces.

Latest news & opinion

What's in a name? For TCA by ETrade, everything

Trust Company of America is gone, and there's big buzz over the name change. But turning the custodian into an industry powerhouse will take a lot longer — if it happens at all.

When it comes to regulating AI in financial services, murky waters are ahead

Laws are unclear on how the technology fits in with compliance.

As Ameriprise case shows, firms on hook when brokers go bad ​

The SEC will collect $4.5 million from the brokerage firm for failing to supervise brokers who were ripping off clients.

10 highest paid professions in America today

These are the top-paying jobs in the U.S., according to Glassdoor.

Ameriprise to pay $4.5 million to settle SEC charges that five reps stole more than $1 million from clients

Agency censures firm for not protecting clients from thieving brokers.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print