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New York Establishes Six-Year Statute of Limitation for Prosecution of Claims under the Martin Act

On August 25, 2019, New York Governor Andrew Cuomo signed New York State Senate Bill S6536 which established a six-year statute of limitations for the prosecution of certain crimes related to fraudulent practices in respect to stocks, bonds and other securities and conducting business in the State of New York. As discussed below, the legislation overturned a New York Court of Appeals ruling last year holding that claims under the Martin Act were subject to a three-year statute of limitations.

Background

First enacted in 1921, the Martin Act “authorizes the [New York] Attorney General to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York State.” Kerusa Co. LLC v. W10Z/515 Real Estate Ltd. Partnership, 12 N.Y.3d 236, 242, 906 N.E.2d 1049 (2009). Unlike claims of fraud under common law, the Martin Act does not require proof of scienter and reliance, making it an extremely powerful enforcement tool for the New York Attorney General (“NYAG”).

People v. Credit Suisse Securities USA LLC, et al.

Despite the lengthy history of the Martin Act, before 2018 the New York Court of Appeals had never judicially determined the applicable statute of limitations. A recent appeal brought the issue to the forefront. On November 20, 2012, the NYAG commenced an action against Credit Suisse Securities USA LLC, et al. (“Credit Suisse”) alleging violations of the Martin Act in connection with the offer and sale of residential mortgage-backed securities in 2006 and 2007.

Credit Suisse moved to dismiss the Martin Act claims on the basis that the three-year statute of limitations under Section 214(2) of the New York Civil Practice Law and Rules (“New York CPLR”) applied to the action and thus, despite a tolling agreement Credit Suisse entered into with the NYAG in March of 2012, the claims were time-barred. The NYAG countered that the timeliness of the claims were instead governed by the six-year statute of limitations under Section 213(8) of the New York CPLR.

Comparing the relevant provisions in the New York CPLR, the six-year statute of limitations under Section 213(8) applies to actions “based on fraud,” while three-year statute of limitations under Section 214(2) applies to fraudulent practices beyond those recognized under common law (i.e. those causes of action created by statute). Credit Suisse argued that because fraud claims brought under the Martin Act do not require proof of scienter or reliance, such claims were statutory creations and therefore subject to the three-year statute of limitations under Section 214(2).

In 2014, the New York state trial court denied Credit Suisse’s motion dismiss, which Credit Suisse appealed. In 2016, the New York Appellate Division (First Department) affirmed the trial court’s ruling in a 3-2 decision. Credit Suisse subsequently petitioned the New York Court of Appeals for further review.

On June 12, 2018, the New York Court of Appeals issued a 4-1 ruling reversing the Appellate Division and holding that claims brought under the Martin Act were subject to the three-year statute of limitations under Section 214(2) of the New York CPLR. The court reached its decision on the grounds that the Martin Act expanded liability for “fraudulent practices” beyond those recognized under the common law. Perhaps in a foreshadowing of future events, dissenting Judge Jenny Rivera called on the New York state legislature to put forth legislation expressly codifying a six-year limitations period for claims brought under the Martin Act.

Following the New York Court of Appeals ruling, a spokeswoman for the NYAG stated that the ruling would “have no impact” on the activities of the NYAG. However, practitioners predicted a rise in requests by the NYAG for tolling agreements, as well as an acceleration of investigations brought by the NYAG. Some practitioners also predicted that the NYAG could start to pursue claims under common law theories of fraud, to take advantage of a longer six-year statute of limitations period.

The Legislative Fix

On June 15, 2019, Senate Bill S6536 was proposed to amend Section 213 of the New York Rules to expressly include claims brought under the Martin Act within a six-year statute of limitations. According to its own press release, the NYAG submitted the legislation as a program bill and vigorously advocated for its passage. On August 25, 2019, New York Governor Andrew Cuomo signed the bill into law.

Takeaways

While the legislation is effective immediately, it does not clearly address whether it applies retroactively. Nonetheless, any defendant would likely have strong policy-based arguments that previously time-barred claims should be precluded from prosecution. At the same time, the NYAG may seek to include conduct from earlier time periods in connection with ongoing investigations, which would have previously been time-barred under the 2018 New York Court of Appeals ruling.

© 2019 Proskauer Rose LLP.

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About this Author

Anthony M. Drenzek, Special regulatory Counsel, Proskauer Rose, Attorney, Finance Policy Lawyer
Special Regulatory Counsel

Tony is special regulatory counsel in the Corporate Department and a member of the Private Funds Group and the Private Equity & Hedge Fund Litigation team. His practice focuses on advising U.S. and offshore private fund managers on all aspects of federal, state and SRO organizational and operational compliance, with a specific emphasis on the Investment Advisers Act of 1940.

Tony assists U.S. and offshore private fund clients in registering with the SEC as investment advisers, or reporting as exempt reporting advisers, and complying with...

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 Seetha Ramachandran Proskauer New York, Trial Strategies White Collar Defense & Investigations Appellate,Financial Institutions, anti-money laundering AML, Bank Secrecy Act,
Partner

Seetha Ramachandran is a partner in the Litigation Department.

She is a leading expert in anti-money laundering (AML), Bank Secrecy Act, economic sanctions and asset forfeiture matters. She represents banks, broker dealers, hedge funds, private equity funds, online payment companies, and individual executives and officers, in high stakes and sensitive matters. Her practice focuses on white collar and regulatory enforcement defense, internal investigations, and compliance counseling. In addition to her subject matter expertise, Seetha is an experienced trial and appellate lawyer, having conducted 10 criminal jury trials, argued 10 appeals before the U.S. Court of Appeals for the Second Circuit, and handled ancillary civil proceedings in forfeiture cases.

Seetha served as a federal prosecutor for nearly 10 years, including as Deputy Chief in the Asset Forfeiture and Money Laundering Section (AFMLS), Criminal Division, U.S. Department of Justice. She was the first head of DOJ’s Money Laundering & Bank Integrity Unit, where she supervised DOJ’s first major AML prosecutions, and oversaw all of the Criminal Division’s AML cases. In that role, Seetha coordinated closely with state and federal banking regulators, including FinCEN, the OCC and the New York State Department of Financial Services, giving her deep experience with how these agencies work together, especially in matters involving civil and criminal liability. Her work developing and charging criminal cases under the Bank Secrecy Act (BSA) formed the model for AML enforcement that regulators and prosecutors follow today.

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