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.


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