First Department Decision May Give Aggrieved Hedge Fund Investors an Unexpected and Powerful Avenue of Redress

The Martin Act (New York General Business Law §§ 352-359) prohibits various fraudulent and deceitful practices in the distribution, exchange, sale and purchase of securities.  It authorizes the New York Attorney General to investigate these activities and seek relief against sellers of securities engaged in dishonest or deceptive activities.  For more on the Martin Act in the hedge fund context, see “New York Supreme Court Rules that Aris Multi-Strategy Funds’ Suit against Hedge Funds for Fraud May Proceed, but Negligence Claims are Preempted under Martin Act,” Hedge Fund Law Report, Vol. 2, No. 51 (Dec. 23, 2009); “Federal Court Dismisses Breach of Fiduciary Duty Claim, but Permits Securities Fraud Claim, Against Alternative Investment Fund and Its Manager and Principals,” Hedge Fund Law Report, Vol. 2, No. 3 (Jan. 21, 2009).  The Martin Act does not create a private right of action for such violations, however.  See CPC Int’l v. McKesson Corp., 70 N.Y.2d 268 (1987).  Enterprising defendants have used that proposition to argue not only that no private right of action exists, but also that the Martin Act preempts certain private common law claims arising from the conduct covered by the statute.  To date, New York State and a majority of federal courts have found this argument persuasive, and applied it to non-fraud-based common law claims, such as breach of fiduciary duty and negligent misrepresentation.  Hence, many defendants have succeeded in having these claims dismissed.  This has been especially true in the federal courts’ construction of New York law.  However, a recent and notable decision of the Appellate Division, First Department repudiates this trend.

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