blue sky law A blue sky law is a U.S. state, state law in the United States that regulates the offering and sale of security (finance), securities to protect the public from fraud. Though the specific provisions of these laws vary among states, they all req ...

Attorney General of New York The attorney general of New York is the chief legal officer of the U.S. state of New York (state), New York and head of the Department of Law of the government of New York (state), state government. The office has existed in various forms since ...

securities fraud Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information. It was used infrequently until the early 2000s, when then-Attorney General

Eliot Spitzer Eliot Laurence Spitzer (born June 10, 1959) is an American politician and attorney who served as the 54th governor of New York from 2007 until his resignation in 2008 after a prostitution scandal. A member of the Democratic Party, he was also ...

began using it to bring civil cases against

Wall Street Wall Street is a street in the Financial District, Manhattan, Financial District of Lower Manhattan in New York City. It runs eight city blocks between Broadway (Manhattan), Broadway in the west and South Street (Manhattan), South Str ...

firms. It has since become the basis for a number of high-profile cases, including a 2002 investigation of

Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporated, doing business as Merrill, and previously branded Merrill Lynch, is an American investment management and wealth management division of Bank of America. Along with BofA Securities, the investm ...

for alleged conflicts of interest, and the 2012 suit against Bank of New York Mellon Corp. for allegedly defrauding customers through foreign currency transactions.

Background

The Martin Act was passed by the New York Legislature in 1921, bearing the name of its sponsor in the state assembly, Louis M. Martin. New York was one of the last states to pass an act of this kind, termed "

blue sky law A blue sky law is a U.S. state, state law in the United States that regulates the offering and sale of security (finance), securities to protect the public from fraud. Though the specific provisions of these laws vary among states, they all req ...

s," due in part to lobbying from the state's financial institutions The

New York Legislature The New York State Legislature consists of the two houses that act as the state legislature of the U.S. state of New York: the New York State Senate and the New York State Assembly. The Constitution of New York does not designate an offici ...

reportedly intended for the Martin Act to be an "anemic" regulation, leaving the

Attorney General of New York The attorney general of New York is the chief legal officer of the U.S. state of New York (state), New York and head of the Department of Law of the government of New York (state), state government. The office has existed in various forms since ...

's Office with minimal control over who could sell securities. In 1925, Albert Ottinger became the first New York Attorney General to make use of the Act in high-profile cases, ultimately using it to shut down the

Consolidated Stock Exchange The Consolidated Stock Exchange of New York, also known as the New York Consolidated Stock Exchange or Consolidated,See ''Brooklyn Daily Eagle'', Saturday, January 13, 1912, p. 18 was a stock exchange in New York City, New York, in direct competit ...

. Following Ottinger's tenure, subsequent attorneys general did not follow his lead, and the Act remained largely dormant for decades. For the remainder of the 20th century, the Act was known mainly for investigations of "small-time fraud." This period has been characterized as the product of an "unspoken gentleman's agreement" between Wall Street and the New York Attorney General's Office, whereby the Attorney General's Office agreed not to use the Act against more significant players on Wall Street.

Eliot Spitzer Eliot Laurence Spitzer (born June 10, 1959) is an American politician and attorney who served as the 54th governor of New York from 2007 until his resignation in 2008 after a prostitution scandal. A member of the Democratic Party, he was also ...

is said to have revived the law during his tenure as Attorney General. In 2001, his office launched a Martin Act investigation against

Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporated, doing business as Merrill, and previously branded Merrill Lynch, is an American investment management and wealth management division of Bank of America. Along with BofA Securities, the investm ...

for suspected fraud. When the investigation was made public, Merrill's market value dropped $5 billion in one week. Ultimately, Merrill settled, agreeing to pay a $100 million fine and change the way its analysts are paid to head off possible criminal charges that it misled investors with tainted stock research. Spitzer followed up by bringing Martin Act cases against the entire investment banking industry, forcing New York's 10 biggest investment firms to pay $1.4 billion in fines. Other notable Martin Act cases from the Spitzer era included many against hedge funds, as well as one launched against the mutual fund industry for its practices of late trading and market timing. Spitzer's successor,

Eric Schneiderman Eric Tradd Schneiderman (born December 31, 1954) is an American lawyer and politician who served as the 65th attorney general of New York from 2011 until his resignation in May 2018. Schneiderman, a member of the Democratic Party, spent ten year ...

, continued to aggressively use the Martin Act against high-profile companies and Wall Street Banks. For example, he leveraged the Martin Act to investigate Exxon for purportedly misleading the public about climate change.

Provisions

It is widely recognized that the powers granted to the Attorney General of New York under the Martin Act exceed those given to any regulator in any other state. The Act vests the attorney general with sole responsibility for its implementation and enforcement, and authorizes them to pursue both equitable and

monetary Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: med ...

relief.

Violations

The Martin Act has been interpreted to prohibit all deceitful practices, as well as false promises, related to the offer, sale, or purchase of securities and commodities within or from New York. Notably, to secure a conviction, the state is not required to prove

scienter In law, ( in British English, in American English, Law Latin for "knowingly", , ) is a legal term for intent or knowledge of wrongdoing, or reckless disregard for the truth. An offending party then has knowledge of the "wrongness" of an act ...

(except in connection with felonies) or an actual purchase or sale or damages resulting from the fraud.

Investigative powers

The Martin Act further empowers New York Attorneys General to conduct investigations into fraudulent practices. When conducting an investigation, the attorney general is not required to demonstrate probable cause or disclose the details of the investigation, and has discretion to keep the investigation confidential to avoid unwarranted market reaction. The Act also permits the Attorney General to issue subpoenas to compel attendance of witnesses and production of documents deemed relevant or material to an investigation. Those called in for questioning during such investigations do not have a right to counsel or a right against self-incrimination. Furthermore, the attorney general's decision to conduct an investigation is not reviewable by courts.

Enforcement

Civilly, the attorney general may bring an action under the act to obtain preliminary or permanent injunctive relief against defendant selling or offering to sell securities in New York. Violation of a Martin Act injunction is a misdemeanor, punishable by a cumulative civil penalty of $3,000 per violation. Criminally, the attorney general may assume a prosecutorial rule to punish both misdemeanors and felonies. Misdemeanors are punishable by a fine of up to $500 or imprisonment of up to one year, or both. Felonies carry a penalty of up to four years of imprisonment.

Judicial interpretation

Much of the Martin Act's power is attributable to early court cases upholding its provisions. In 1926, the New York Court of Appeals held in ''People v. Federated Radio Corp.'' that proof of fraudulent intent was unnecessary for prosecution under the Act. In 1930, the court elaborated that the Act should "be liberally and sympathetically construed in order that its beneficial purpose may, so far as possible, be attained."People v. F. H. Smith Co., 230 A.D. 268 (N.Y. App. Div. 1930). For much of the Act's history, one of the questions left open was whether it conferred a

private right of action A cause of action or right of action, in law, is a set of facts sufficient to justify suing to obtain money or property, or to justify the enforcement of a legal right against another party. The term also refers to the legal theory upon which a p ...

to victims of

securities fraud Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information. The New York Court of Appeals settled this issue in 1987, holding that there is no private right of action.''CPC Int’l Inc. v. McKesson Corp.'', 519 N.Y.S.2d 804, 807 (1987) In reaching this holding, the court reasoned that no private right of action was expressly authorized, and found that an implied private right of action would be inconsistent with the enforcement mechanism created by the Act.

Criticism

The Martin Act has been criticized as "unjust," authorizing penalties that are "arbitrary and unfair." Among the law's controversial aspects is the absence of a requirement that the state prove a defendant had intent to defraud, which gives prosecutors a significant advantage over defendants.

References

{{Reflist 1921 in American law 1921 in New York (state) New York (state) statutes