REFinBlog

Editor: David Reiss
Brooklyn Law School

June 12, 2018

Court Limits NY Attorney General’s Reach

By David Reiss

New York State Attorney General                  Barbara D. Underwood

Bloomberg quoted me in Credit Suisse Wins Narrowing of $11 Billion Suit, Martin Act. It opens,

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, trimming the statute-of-limitations of the law to three years from six years. The Martin Act has been used by the state’s attorney general 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.”

Prior to the legal battle against Credit Suisse, the Martin Act, one of the country’s oldest and toughest anti-fraud tools, faced relatively few tests in court. The law can be used by the state attorney general to file both civil suits and criminal charges, and 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.

Legal Tool

Through the specter of the Martin Act, New York state has been able to collect billions of dollars in fines from investment banks, insurance companies 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 she 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.

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