The New York State Court of Appeals’ decision in The People v. Credit Suisse Securities (USA) LLC, et. al. (June 12, 2018), is important to the financial services industry and other business sectors that have been targets of the Attorney General’s Office for decades. The question presented is whether the Attorney General must bring Martin Act claims within the three-year statute of limitation in CPLR 214(2) or the six-year statute of limitation in CPLR 213(1) or (8). In a 4-1 decision, the Court ruled that the three-year statute of limitation applied because the Martin Act expanded liability for “fraudulent practices” beyond those recognized at common law when the legislature enacted the statute.
Attorney General Schneiderman filed a two-count complaint against Credit Suisse in November 20, 2012. The complaint alleged securities fraud under the Martin Act, GLB Article 23-A, and persistent fraud or illegality under Executive Law § 63(12), related to Credit Suisse’s creation of residential mortgage back securities (RMBS) prior to the 2008 financial crisis. Credit Suisse purportedly filed public documents and marketing materials in which it represented that it carefully evaluated and monitored the quality of loans underlying their RMBS and encouraged loan originators to implement sound origination practices. According to the complaint, Credit Suisse did not rigorously evaluate or monitor pools of loans and allowed some loans to remain in the RMBS pools after it discovered that lenders underwrote loans to borrowers who could not reasonably repay them. The complaint alleged that Credit Suisse deceived investors regarding the care with which it evaluated the quality of the mortgage loans packaged into RMBS prior to 2008.
Credit Suisse moved to dismiss the complaint because the three-year statute of limitation had expired. The Attorney General countered that the Martin Act and Executive Law claims have a six-year limitation period. The Supreme Court sided with the Attorney General and denied the motion because “the essence of plaintiff’s claim under both Executive Law § 63(12) and the Martin Act is that defendants made false representations in order to induce investors to purchase their securities … [and] thus seek to impose liability on defendants based on the classic, longstanding common-law tort of investor fraud.”
The Appellate Division affirmed the Supreme Court’s decision. The majority opinion stated that (1) both the Martin Act and Executive Law “target wrongs that existed before the statute’s enactment, as opposed to targeting wrongs that were not legally cognizable before enactment;” and (2) the complaint “sets forth the elements of common-law fraud, including scienter or intent, reliance and damages because the allegations ‘describe a specific scheme whereby Credit Suisse benefitted itself at the expense of investors.’”
Court of Appeals Analysis
The Court of Appeals framed its analysis as follows: (1) were the causes of action stated in the complaint present at common-law and now have a statutory veneer; or (2) do Martin Act actions create new “liabilities” that did not exist at common law?
The Court observed that the Martin act does not define the terms “fraud” and “fraudulent practices” and early cases that interpreted the Martin Act gave those terms a “wide meaning … to include all acts … which do by their tendency to deceive or mislead the purchasing public come within the purpose of the law.” The Court traced the evolution of the Martin Act’s reach and observed that, unlike common law fraud, the Act does not require the Attorney General to prove scienter or intentional fraud or reliance by an investor.
The Court of Appeals concluded that the Martin Act expands upon, rather than codifies, the common law of fraud and “imposes numerous obligations … that did not exist at common law.” The “broad definition of ‘fraudulent practices’ as repeatedly amended by the Legislature and interpreted by the courts, encompasses ‘wrongs’ not cognizable under common law and dispenses … with any requirement that the Attorney General prove scienter or justifiable reliance [by] investors.” As a result, the Attorney General must file Martin Act claims with the three-year statute of limitation pursuant to CPLR 214(2). The Court reversed the Appellate Division’s order and granted Credit Suisse’s motion to dismiss Martin Act claims.
The Court of Appeals reinforced its conclusion by explaining that the Martin Act was analogous to General Business Law § 349, which addresses “deceptive practices.” The Legislature did not define “deceptive practices,” in § 349, but courts have interpreted the term broadly to include wrongful conduct not previously actionable on a common law fraud theory, and have held that the three-year statute of limitation in CPLR 214(2) governs in those instances.
The Court of Appeals found that a claim under Executive Law § 63(12) requires courts to look at the substance of the underlying liability, rather than its form, to ascertain which limitation period to apply. The Court concluded that it was wrong for the Supreme Court to automatically apply a six-year statute of limitation regardless whether the Attorney General had proven the elements of common law fraud. The six-year limitation period would apply if the Attorney General can prove that “the conduct underlying the Executive Law § 63(12) claim [was] a type of fraud recognized at common law.” The Court remanded the case to the Supreme Court to determine whether the Attorney General had demonstrated the elements of common law fraud.
- The decision represents a procedural change to the Attorney General’s pleading requirements in Martin Act and Executive Law § 63(12) cases. The Attorney General still does not have to prove scienter or reliance under the Martin Act; it merely has to bring cases sooner.
- The shorter limitation period narrows the time for the Attorney General to investigate and establish culpability by individual actors, a key feature of federal and state enforcement programs.
- The Attorney General’s Office may have resource constraints to investigate and prosecute actions within three-years. One option may be to revive (or act upon) the 2013 agreement between former Attorney General Schneiderman and Comptroller Thomas DiNapoli to combine their offices’ resources to investigate financial fraud given that alleged fraudulent conduct by financial firms may impact individual New Yorkers and New York pension funds.
- The Attorney General’s office has become focused on political issues that emanate from outside the state. The Attorney General post has been derisively called “Aspiring Governor.” Perhaps the shorter limitation period will force the Office to pull back from national politics and bring cases that focus on New Yorkers.