Barclay Damon
Barclay Damon

Legal Alert

Martin Act Preemption Still The Rule In Federal Courts In New York

On March 28, 2011, in Iroquois Master Fund, Ltd. v. CEL-SCI Corp.,1 Judge Harold Baer, Jr., of the Southern District of New York, dismissed claims for breach of fiduciary duty, conversion, and negligence, as preempted by the Martin Act, N.Y. Gen. Bus. Law. § 352, et. seq. Judge Baer’s decision demonstrates that Martin Act preemption remains a valid defense in federal courts in New York.

The Martin Act is a consumer protection law that prohibits fraudulent or deceptive business practices in connection with the distribution, exchange, sale, and purchase of securities. One of the most significant features of the act is that it does not require proof of scienter; i.e., intent to deceive.

The Attorney General has exclusive authority to prosecute Martin Act violations. As a result, courts have historically ruled that the Martin Act preempts claims by private plaintiffs alleging deception in connection with the purchase or sale of securities, where the cause of action pleaded does not have intent to deceive as an element (e.g., negligent misrepresentation, and breach of fiduciary duty). Although Martin Act preemption has been recognized and applied for some time, in recent years some state appellate courts have rejected the defense, as has at least one federal judge in New York.

Despite the inconsistent treatment of the doctrine, Judge Baer held that Martin Act preemption is the majority view among federal courts in New York. Judge Baer relied on Castellano v. Young & Rubicam, Inc.,2 where the Second Circuit held that “principles of federalism and respect for state courts’ interpretation of their own laws” support Martin Act preemption. In his decision, Judge Baer held that the act “preempts common law securities claims sounding in fraud or deception that do not require pleading or proof of intent, and that are based on conduct that is ‘within or from’ New York.”3

Judge Baer acknowledged the inconsistency in recent Martin Act preemption decisions. However, he noted in dicta that until the New York legislature or Court of Appeals indicates otherwise, Martin Act preemption remains a viable defense, at least in New York federal courts.

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Practice Area.

1 09 CV 8912 (HB) (THK), 2011 U.S. Dist. LEXIS 31977 (S.D.N.Y. March 28, 2011).
2 Id. at *7 (citing Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 190 (2d Cir. 2001)
(dismissing breach of fiduciary duty claim as preempted by Martin Act)).
3 Id., at *8.