In Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Management Inc., 2011 N.Y. Slip Op. 09162, 2011 WL 6338898 (N.Y. Dec. 20, 2011), the plaintiff, Assured Guaranty (UK) Ltd., commenced an action against defendant, J.P. Morgan Investment Management Inc., asserting causes of action for breach of fiduciary duty, gross negligence and breach of contract. The gravamen of the complaint was that J.P. Morgan mismanaged the investment portfolio of an entity whose obligations plaintiff guaranteed.
J.P. Morgan moved to dismiss the complaint, arguing that the breach of fiduciary and gross negligence claims were preempted by the Martin Act (New York's "blue sky" law). The Supreme Court granted the motion and dismissed the complaint. The Appellate Division modified by reinstating the breach of fiduciary duty and gross negligence causes of action and part of the contract claim. The Appellate Division granted J.P. Morgan leave to appeal.
J.P. Morgan's position was that plaintiff's common-law breach of fiduciary duty and gross negligence claims must be dismissed because they are preempted by the Martin Act. The Martin Act, argued J.P. Morgan, vests the Attorney General with exclusive authority over fraudulent securities and investment practices addressed by the statute. Therefore, J.P. Morgan contended, it would be inconsistent to allow private investors to bring overlapping common-law claims.
After reviewing the legislative history of the Martin Act, the court found that the plain text of the Act, while granting the Attorney General investigatory and enforcement powers and prescribing various penalties, did not expressly mention or otherwise contemplate the elimination of common-law claims. (citing ABN AMRO Bank, N.V. v. MBIA Inc., 17 N.Y.3d 208, 224 (2011) (stating that, if the Legislature intended to extinguish common-law remedies, “we would expect to see evidence of such intent within the statute”)). The court could find nothing in the legislative history that demonstrated a “clear and specific” legislative mandate to abolish preexisting common-law claims that private parties would otherwise possess.
The court acknowledged that New York courts had previously held that the Martin Act did not “create” a private right of action to enforce its provisions (citing CPC Intl. v. McKesson Corp., 70 N.Y.2d 268, 276-277 (1987)). However, the court found that the fact that “no new per se action was contemplated by the Legislature does not ... require us to conclude that the traditional ... forms of action are no longer available to redress injury” (citing Burns Jackson Miller Summit & Spitzer v. Lindner, 59 N.Y.2d 314, 331 (1983)). Hence, the court agreed with plaintiff that the Martin Act does not preclude a private litigant from bringing a nonfraud common-law cause of action.
J.P. Morgan pointed to past precedent which established that there was no common-law cause of action where the claim is predicated solely on a violation of the Martin Act or its implementing regulations. However, the court distinguished these cases by noting that an injured investor may bring a common-law claim (for fraud or otherwise) that is not entirely dependent on the Martin Act for its viability. In other words, the mere overlap between the common law and the Martin Act was not enough to extinguish common-law remedies.
Finally, the court found that policy concerns militated in favor of allowing plaintiff's common-law claims to proceed. The court agreed with the New York Attorney General that the purpose of the Martin Act is not impaired by private common-law actions that have a legal basis independent of the statute because proceedings by the Attorney General and private actions further the same goal—combating fraud and deception in securities transactions.
For all of these reasons, the court concluded that plaintiff's breach of fiduciary duty and gross negligence claims were not barred by the Martin Act. Accordingly, the court found that the order of the Appellate Division reinstating the breach of fiduciary duty and gross negligence causes of action and part of the contract claim should be affirmed.