New York’s Court of Appeals ruled Tuesday (12/20) that private parties can pursue claims under the Martin Act – New York’s anti-fraud statute that was used by Eliot Spitzer nearly a decade ago to bring Wall Street to heel.
News reports were brief, but the ruling is sure to arouse concern at the large banks, which have already seen their shares battered this year because of investor fear over litigation and regulatory risks.
Here’s the money quote from the ruling by Judge Victoria Graffeo:
“Here, the plain text of the Martin Act, while granting the attorney general investigatory and enforcement powers and prescribing various penalties, does not expressly mention or otherwise contemplate the elimination of common-law claims.”
The ruling seems likely to unleash a wave of shareholder suits against financial firms. Those firms will find it difficult to defend themselves under the Martin Act’s standards of proof, which require plaintiffs only to show that fraud occurred, unlike federal statues that require plaintiffs to prove there was intent to defraud.
Banks and other financial firms also will face significant communication challenges, both in reacting to lawsuits as they are filed and in responding to facts that emerge during a trial, assuming the matters aren’t settled.