New York Law Review

Tag: Martin Act

  • People v. Greenberg, 26 N.Y.3d 495 (2015): Availability of Equitable Relief Under the Martin Act and Executive Law § 63(12)

    26 N.Y.3d 495 (2015)

    Under the Martin Act and Executive Law § 63(12), the Attorney General may seek permanent injunctive relief upon showing a reasonable likelihood of a continuing violation, and disgorgement of ill-gotten gains is also an available remedy.

    Summary

    The New York Court of Appeals considered whether the Attorney General could seek equitable relief, specifically permanent injunctive relief and disgorgement, under the Martin Act and Executive Law § 63(12). The court held that the Attorney General could pursue permanent injunctive relief upon demonstrating a reasonable likelihood of a continuing violation and that disgorgement is an available remedy. The court rejected the defendants’ arguments that irreparable harm needed to be shown for injunctive relief and that disgorgement was not authorized or was preempted by federal law. The case clarified the standards for obtaining equitable remedies in actions brought by the Attorney General to combat fraud in securities offerings.

    Facts

    The Attorney General brought an action against former officers of American International Group, Inc. (AIG) under the Martin Act (General Business Law art 23-A) and Executive Law § 63(12). The defendants moved for summary judgment, arguing that equitable relief was not warranted on the facts, that disgorgement was not a remedy under the Martin Act or Executive Law § 63(12), and that disgorgement was preempted by federal law. The Supreme Court denied the motion, and the Appellate Division affirmed. The defendants appealed to the Court of Appeals, which had previously considered a related appeal involving the same case.

    Procedural History

    The Attorney General initiated the action. The Supreme Court denied the defendants’ motion for summary judgment. The Appellate Division affirmed the Supreme Court’s decision. The Court of Appeals granted the defendants leave to appeal and certified a question regarding the propriety of the lower court’s order.

    Issue(s)

    1. Whether the Attorney General must show irreparable harm to obtain a permanent injunction under the Martin Act and Executive Law § 63(12).

    2. Whether disgorgement is an available remedy under the Martin Act and Executive Law § 63(12).

    Holding

    1. No, because the requirement of irreparable harm does not apply to permanent injunctions under these statutes.

    2. Yes, because the Martin Act contains a broad residual relief clause, and disgorgement is an appropriate remedy in such cases.

    Court’s Reasoning

    The Court of Appeals first addressed the standard for obtaining a permanent injunction, holding that the Attorney General does not need to show irreparable harm, unlike in the case of a preliminary injunction. The court reasoned that the focus of the Martin Act and Executive Law § 63(12) is preventing fraud and defeating exploitation, and the standards of the public interest, not private litigation, measure the need for injunctive relief. The court distinguished the current case from precedent on preliminary injunctions, which incorporate the CPLR’s irreparable harm requirement, whereas permanent injunctions do not.

    The court then addressed the availability of disgorgement as a remedy. The court emphasized the broad, residual relief clause in the Martin Act. The court noted that disgorgement requires the return of wrongfully obtained profits and is an equitable remedy that is distinct from restitution. The court found no merit in the arguments that disgorgement was barred by the Supremacy Clause or was waived by the Attorney General.

    The court referenced the prior decision that had already addressed the issue of whether equitable relief was available in the first instance. In this appeal, the Court of Appeals affirmed that equitable relief was available, and issues of fact prevented summary judgment.

    Practical Implications

    This decision clarifies the Attorney General’s ability to seek equitable remedies, like injunctions and disgorgement, in cases of securities fraud under the Martin Act and Executive Law § 63(12). The ruling reinforces the broad authority granted to the Attorney General to protect the public and deter fraudulent practices. Attorneys litigating cases under the Martin Act should understand that permanent injunctive relief does not require a showing of irreparable harm. Furthermore, this case supports the availability of disgorgement as a potential remedy in securities fraud cases, even if not explicitly mentioned, provided the recovery is limited to the defendants’ unjust gains. This also has implications for the analysis of cases where the Attorney General seeks civil penalties or other equitable relief.

  • East Midtown Plaza Housing Co. v. Cuomo, 19 N.Y.3d 164 (2012): Martin Act Applicability to Mitchell-Lama Privatization and Voting Rights

    East Midtown Plaza Housing Co. v. Cuomo, 19 N.Y.3d 164 (2012)

    The Martin Act applies to the proposed privatization of a Mitchell-Lama cooperative apartment complex, and a vote to determine whether the cooperative withdraws from the Mitchell-Lama program must be counted on a per-apartment basis when the certificate of incorporation so specifies.

    Summary

    East Midtown Plaza, a Mitchell-Lama cooperative, sought to privatize. The Attorney General required the filing of a cooperative offering plan under the Martin Act and mandated a per-apartment vote, based on the certificate of incorporation. East Midtown challenged this, arguing the Martin Act didn’t apply and the vote should be per share under Business Corporation Law. The Court of Appeals held that the Martin Act does apply because privatization constitutes a new offering of securities due to substantial changes in shareholder rights, including the ability to sell at market rates. The court further held that the vote was correctly counted on a per-apartment basis due to the cooperative’s certificate of incorporation. This decision ensures that shareholders are fully informed about the risks and benefits of privatization and protects the voting rights established in the cooperative’s governing documents.

    Facts

    East Midtown Plaza, a 746-unit Mitchell-Lama cooperative, sought to withdraw from the program. A 2004 vote favored privatization on a per-share basis but not per-apartment. The Attorney General required a cooperative offering plan under the Martin Act and mandated a per-apartment vote based on the certificate of incorporation. A revised 2008 plan avoided a physical exchange of shares, but a 2009 vote mirrored the 2004 result. East Midtown sought to declare the plan effective based on a per-share count, which the Attorney General rejected.

    Procedural History

    East Midtown filed an Article 78 proceeding to compel the Attorney General to accept the privatization plan and recognize the per-share vote. Supreme Court denied the petition. The Appellate Division affirmed. The Court of Appeals granted leave to appeal and affirmed the Appellate Division’s order.

    Issue(s)

    1. Whether the Martin Act (General Business Law art 23-A) applies to the privatization of a Mitchell-Lama cooperative apartment complex.

    2. Whether the shareholder vote to privatize East Midtown should be counted on a one-vote-per-apartment basis or a one-vote-per-share basis.

    Holding

    1. Yes, because the privatization of East Midtown’s cooperative apartment complex results in substantial changes to the nature of its shareholders’ interests, constituting an “offering or sale” of securities under the Martin Act.

    2. Yes, because East Midtown’s certificate of incorporation expressly provides that its shareholders “shall be entitled to one vote at any and all meetings of stockholders for any and all purposes regardless of the number of shares held by such holder, except as otherwise provided by statute,” and the Business Corporation Law does not mandate a different method of vote calculation in this context.

    Court’s Reasoning

    The Court reasoned that the Martin Act, aimed at preventing fraudulent securities practices, should be liberally construed. Citing federal precedents, the court emphasized that changes in the rights of existing securities holders can amount to a “purchase or sale” if there is a “significant change in the nature of the investment or in the investment risks as to amount to a new investment” (Gelles v TDA Indus., Inc., 44 F.3d 102, 104 [2d Cir 1994]). Privatization enables residents to sell shares at market rates, a significant change from the Mitchell-Lama program where resale prices are capped. The court dismissed the argument distinguishing the 2004 and 2008 plans as elevating form over substance, stating, “the end result under either proposal is the same—privatization and market value resale potential.”

    Regarding the voting rights, the Court noted that Business Corporation Law § 612(a) establishes a default rule of one vote per share “unless otherwise provided in the certificate of incorporation.” East Midtown’s certificate explicitly provided for one vote per apartment. The Court rejected East Midtown’s argument that Business Corporation Law § 1001 mandated a per-share vote, reasoning that § 1001 focuses on *who* can authorize dissolution, not *how* the votes are weighted. “In substance, the one-vote-per-apartment rule set forth in East Midtown’s certificate of incorporation entitles the holder of shares to one vote at stockholder meetings.” The Court also found that an HPD regulation requiring two-thirds approval of outstanding shares was compatible with the certificate of incorporation’s voting method.

  • Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc., 18 N.Y.3d 341 (2011): Martin Act Preemption of Common Law Claims

    Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc., 18 N.Y.3d 341 (2011)

    The Martin Act does not preempt common-law claims for breach of fiduciary duty or gross negligence that are not solely predicated on violations of the Martin Act itself; mere overlap between the common law and the Martin Act is insufficient for preemption.

    Summary

    Assured Guaranty (UK) Ltd. sued J.P. Morgan, alleging breach of fiduciary duty, gross negligence, and breach of contract related to the mismanagement of an investment portfolio. J.P. Morgan argued that the Martin Act preempted the common-law claims. The Court of Appeals held that the Martin Act, which grants the Attorney General broad powers to investigate securities fraud, does not preempt common-law claims that are not exclusively based on violations of the Martin Act. The Court emphasized that legislative intent to override common law must be clear and specific, which was absent here.

    Facts

    Assured Guaranty guaranteed the obligations of Orkney Re II PLC. J.P. Morgan managed Orkney’s investment portfolio. Assured Guaranty alleged J.P. Morgan invested heavily in high-risk securities, failed to diversify the portfolio, and made investment decisions favoring another client, Scottish Re Group Ltd., to the detriment of Orkney and Assured Guaranty. These actions allegedly caused substantial financial losses for Orkney, triggering Assured Guaranty’s obligations under its guarantee.

    Procedural History

    J.P. Morgan moved to dismiss the complaint, arguing the Martin Act preempted the breach of fiduciary duty and gross negligence claims. Supreme Court granted the motion, dismissing the entire complaint. The Appellate Division modified the Supreme Court’s decision, reinstating the breach of fiduciary duty and gross negligence claims and part of the contract claim. The Appellate Division then granted J.P. Morgan leave to appeal to the Court of Appeals.

    Issue(s)

    Whether the Martin Act preempts common-law causes of action for breach of fiduciary duty and gross negligence when those claims arise from conduct related to securities and investment practices.

    Holding

    No, because the Martin Act does not explicitly or implicitly eliminate common-law claims that are not solely dependent on violations of the Martin Act for their viability.

    Court’s Reasoning

    The Court of Appeals determined that the Martin Act does not expressly or implicitly preempt common-law claims for breach of fiduciary duty or gross negligence. The Court emphasized that a clear and specific legislative intent is required to override the common law, and such intent was not evident in the Martin Act’s language or legislative history.

    The Court distinguished its prior holdings in CPC Intl. v McKesson Corp. and Kerusa Co. LLC v W10Z/515 Real Estate Ltd. Partnership, explaining that those cases only prevent private litigants from pursuing common-law claims that are exclusively predicated on violations of the Martin Act. Here, Assured Guaranty’s claims were based on common-law duties independent of the Martin Act.

    The Court stated, “Read together, CPC Intl. and Kerusa stand for the proposition that a private litigant may not pursue a common-law cause of action where the claim is predicated solely on a violation of the Martin Act or its implementing regulations and would not exist but for the statute. But, an injured investor may bring a common-law claim (for fraud or otherwise) that is not entirely dependent on the Martin Act for its viability. Mere overlap between the common law and the Martin Act is not enough to extinguish common-law remedies.”

    The Court also noted that allowing private common-law actions complements the Attorney General’s enforcement authority under the Martin Act by further combating fraud and deception in securities transactions.

    The Court affirmed the Appellate Division’s order, allowing Assured Guaranty’s breach of fiduciary duty and gross negligence claims to proceed.

  • Kerusa Co. LLC v. W10Z/515 Real Estate L.P., 12 N.Y.3d 235 (2009): No Private Right of Action for Fraud Based Solely on Martin Act Violations

    Kerusa Co. LLC v. W10Z/515 Real Estate L.P., 12 N.Y.3d 235 (2009)

    A purchaser of a condominium apartment may not bring a claim for common-law fraud against the building’s sponsor when the fraud is predicated solely on alleged material omissions from offering plan amendments mandated by the Martin Act.

    Summary

    Kerusa Co. LLC, a purchaser of a penthouse and other units in a luxury condominium, sued the sponsor defendants for common-law fraud, alleging that they failed to disclose construction and design defects in offering plan amendments required by the Martin Act. The New York Court of Appeals held that a private party cannot bring a fraud claim based solely on alleged omissions from Martin Act disclosures, as this would create a backdoor private right of action to enforce the Martin Act, which is reserved for the Attorney General. The court reversed the Appellate Division’s order allowing Kerusa to replead the fraud claim.

    Facts

    Kerusa Co. LLC purchased a penthouse and other units in a condominium building at 515 Park Avenue for $13.3 million. Kerusa bought the penthouse as raw space and spent an additional $8 million building it out. Kerusa filed suit against the sponsor defendants, alleging construction and design defects caused water damage, leaks, systems failures, condensation, and mold. Kerusa claimed the sponsor defendants made false representations and material omissions in sales brochures, advertisements, and offering plan amendments. Kerusa alleged that the sponsor defendants knew of construction and design defects but did not disclose them in the amendments, instead stating that there were no material changes affecting the property or offering.

    Procedural History

    Supreme Court initially dismissed the fraud cause of action for lack of particularity. Kerusa moved to file a second amended complaint, which was denied by the Supreme Court on the grounds that the Martin Act precluded the fraud claim. The Appellate Division modified the Supreme Court’s decision, allowing Kerusa to replead the common-law fraud claim. The sponsor defendants appealed to the Court of Appeals after the Appellate Division denied their motion for reargument. The Court of Appeals reversed the Appellate Division’s order.

    Issue(s)

    Whether a purchaser of a condominium apartment may bring a claim for common-law fraud against the building’s sponsor when the fraud is predicated solely on alleged material omissions from the offering plan amendments mandated by the Martin Act?

    Holding

    No, because allowing such a claim would create a private right of action under the Martin Act, which is exclusively enforced by the Attorney General.

    Court’s Reasoning

    The Court of Appeals reasoned that the Martin Act grants the Attorney General broad powers to investigate and enjoin fraudulent practices in the marketing of securities, including real estate interests like condominiums. The Martin Act requires full disclosure of risks to protect purchasers, and the Attorney General has the sole responsibility for implementing and enforcing the Act. There is no private right of action under the Martin Act. The court emphasized that Kerusa’s fraud claim was based entirely on alleged omissions from filings required by the Martin Act and the Attorney General’s implementing regulations. To allow Kerusa’s claim would invite a backdoor private cause of action to enforce the Martin Act, contradicting the established principle that only the Attorney General can enforce that statute. The court distinguished this case from CPC Intl. v. McKesson Corp., where the fraud claim was not based on nondisclosure of information required by Martin Act regulations. The Court also noted that prior to the Martin Act, New York adhered to the doctrine of caveat emptor, placing the onus on the buyer to discover defects unless the seller engaged in active concealment beyond mere silence. The court found no active concealment here unrelated to the alleged omissions from Martin Act disclosures. Allowing the claim would expand the already detailed disclosure requirements of the Martin Act by forcing parties to disclose even normal construction problems to avoid transforming every potential latent construction defect case into a common-law fraud claim.

  • Kralik v. 239 E. 79th St. Owners Corp., 5 N.Y.3d 54 (2005): Determining ‘Unsold Shares’ in Co-ops via Contract Law

    5 N.Y.3d 54 (2005)

    Whether an apartment owner qualifies as a holder of unsold shares in a cooperative building is determined by interpreting the relevant contract documents, not by compliance with regulations governing public offerings of securities.

    Summary

    George and Sara Kralik, shareholders in a cooperative building, sought a declaration that they were holders of unsold shares, exempting them from sublet restrictions. The cooperative argued they failed to comply with regulatory requirements under the Martin Act. The New York Court of Appeals held that the Kraliks’ status as holders of unsold shares depends on the interpretation of their contract with the cooperative, not on compliance with regulations applicable to public offerings of securities under the Martin Act. The court reversed the lower court decisions, emphasizing that the Attorney General’s regulations are for public disclosure and fraud prevention, not private rights determination.

    Facts

    The Kraliks purchased shares and a proprietary lease for apartment 16E in a cooperative building as an investment. They understood they were holders of unsold shares, exempt from restrictions on subletting. Initially, they sublet the apartment without board approval or fees. Later, the board demanded sublet fees, which the Kraliks paid under protest before ceasing payment. The board then issued a notice of default threatening lease termination.

    Procedural History

    The Kraliks sued for a declaration that they were holders of unsold shares and for damages. The Supreme Court granted summary judgment to the cooperative, finding the Kraliks failed to comply with regulatory prerequisites for unsold shares status. The Appellate Division affirmed, stating compliance with the proprietary lease alone was insufficient, and regulatory compliance was also required. The Court of Appeals reversed the Appellate Division’s order.

    Issue(s)

    Whether an apartment owner’s status as a holder of unsold shares in a cooperative is determined by compliance with regulations promulgated under the Martin Act, or by interpreting the contract documents defining their relationship with the cooperative corporation.

    Holding

    No, because the determination of whether plaintiffs are holders of unsold shares should be determined solely by applying ordinary contract principles to interpret the terms of the documents defining their contractual relationship with the cooperative corporation. The Martin Act regulations pertain to public offerings and are not the basis for determining private rights between the shareholder and the cooperative.

    Court’s Reasoning

    The Court of Appeals reasoned that the Martin Act and its regulations (13 NYCRR part 18) govern the offer and sale of securities, including cooperative apartment shares, to protect the public from fraud through disclosure requirements. The Attorney General’s role is to review disclosures and investigate fraud, not to determine private rights. The court emphasized that part 18 only applies when shares are offered for sale to the public, and only the Attorney General can enforce its requirements. “Because section 352-e is ‘a disclosure statute, designed to protect the public from fraudulent exploitation in the sale of real estate securities’ (Council for Owner Occupied Hous. v Abrams, 72 NY2d 553, 557 [1988]), part 18 is similarly limited and only applies to disclosures made in a public offering.” The court held that the lower courts erred by relying on Pacella v 107 W. 25th St. Corp. and Gorbatov v Gardens 75th St. Owners Corp., to the extent that those cases suggest that compliance with 13 NYCRR part 18 is necessary to attain holder of unsold shares status in the absence of a public offering. The determination of whether someone is a holder of unsold shares should be based on the terms of the proprietary lease and other governing documents, interpreted according to contract law principles. The court directly stated that “the terms of the controlling documents—not part 18—determine whether plaintiffs are holders of unsold shares.”

  • 511 West 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144 (2002): Implied Covenant of Good Faith in Cooperative Conversion

    511 West 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144 (2002)

    In New York, every contract contains an implied covenant of good faith and fair dealing in the course of its performance, ensuring neither party injures the other’s right to receive the benefits of the agreement; this is particularly important in cooperative conversions where sponsors owe tenants high standards of fair dealing.

    Summary

    A cooperative corporation and tenant-shareholders sued the sponsor of their building’s conversion, alleging breach of contract for failing to sell the remaining unsold shares after the conversion. The New York Court of Appeals held that the plaintiffs sufficiently pleaded a breach of contract cause of action to survive a motion to dismiss. The court emphasized the implied covenant of good faith and fair dealing inherent in all contracts, particularly significant in cooperative conversions due to the unequal bargaining power between sponsors and tenants. The sponsor’s retention of a majority of shares, frustrating the creation of a viable cooperative, could constitute a breach.

    Facts

    Jennifer Realty Co. (the sponsor) converted a 66-unit rent-regulated apartment building into a cooperative in 1988 under a non-eviction plan after obtaining the Attorney General’s approval. After the conversion, the sponsor sold some shares but retained over 62% of the shares, corresponding to 41 apartments. The sponsor stopped updating the offering plan in 1996, preventing them from selling additional shares. In 1998, the tenant-owners learned that the sponsor had rejected bona fide purchase offers for vacant apartments. The tenant-owners argued that the sponsor’s actions undermined the viability of the cooperative.

    Procedural History

    The tenant-owners and the Co-op Board sued the sponsor, alleging breach of contract. The Supreme Court dismissed the contract claim. The Appellate Division reinstated the contract cause of action. The Appellate Division granted the sponsor leave to appeal to the Court of Appeals, certifying the question of whether the Appellate Division’s order was properly made.

    Issue(s)

    Whether the plaintiffs sufficiently pleaded a cause of action for breach of contract based on the sponsor’s alleged failure to act in good faith and deal fairly in fulfilling the terms and promises of the cooperative offering plan.

    Holding

    Yes, because based on the offering plan and the sponsor’s conduct, the plaintiffs sufficiently alleged that the sponsor undertook a duty in good faith to timely sell enough shares to create a viable cooperative, and that the sponsor’s retention of a majority of shares and rejection of purchase offers undermined that duty.

    Court’s Reasoning

    The Court of Appeals emphasized that on a motion to dismiss, the court must determine whether the pleadings state a cause of action, liberally construing the complaint and accepting the facts alleged as true. The Court found that the plaintiffs’ complaint alleged that the sponsor, by offering the shares for sale but retaining a majority, failed to act in good faith to create a viable cooperative.

    The Court relied on the principle that New York law implies a covenant of good faith and fair dealing in every contract. “This covenant embraces a pledge that ‘neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract’” (quoting Dalton v. Educational Testing Serv., 87 N.Y.2d 384, 389 (1995)). The Court further cited Vermeer Owners v Guterman, 78 N.Y.2d 1114, 1116 (1991) which stated that cooperative sponsors must meet “high standards of fair dealing and good faith toward tenants” because tenants lack equal bargaining power.

    Specifically, the plaintiffs asserted that the sponsor frustrated their ability to resell shares, interfered with refinancing, and caused maintenance payments to increase, thus undermining the fundamental objective of creating a viable cooperative. The court concluded that the sponsor’s documentary evidence did not clearly refute these assertions. Because the Attorney General imposes a duty on the sponsor not to abandon the offering plan (13 NYCRR 18.3 [r] [11]), the sponsor’s CPLR 3211 motion to dismiss must fail. The Court explicitly limited its holding to the sufficiency of the pleadings and did not address the merits of the claim or whether the sponsor had impliedly promised to sell all unsold shares.

  • People v. Landes, 84 N.Y.2d 655 (1994): Determining Public vs. Private Offering of Securities

    People v. Landes, 84 N.Y.2d 655 (1994)

    Whether a securities offering is “public” versus “private” under New York’s Martin Act (General Business Law § 359-e (3)) depends on factors like the number and relationship of offerees, the number of units offered, the size of the offering, and the manner of the offering, with the crucial inquiry being whether the offerees have access to the kind of information a registration would provide.

    Summary

    Landes was convicted of fraud and unregistered sale of securities under the Martin Act for soliciting investments in a health food product venture. He orally promised investors their money would be secure and used solely to purchase the product, but instead, he commingled and spent the funds on personal expenses. The key issue was whether the offering was “public,” requiring dealer registration. The New York Court of Appeals affirmed the conviction, holding that the offering was public because the investors lacked sufficient knowledge of Landes and the venture to substitute for the information a registration would have provided. The court considered the four factors from Doran v. Petroleum Mgt. Corp., adapting them to focus on the availability of information about the seller, not just the security itself.

    Facts

    Landes, owner of a health food store, sought investors for Nutri-King, a health food product. He orally assured potential investors that funds would be held in escrow and used solely for purchasing the product, and that they would receive stock in a new corporation. Twelve individuals invested a total of $100,000, but the written agreements did not include the oral promises.

    Procedural History

    Landes was indicted on multiple charges, including grand larceny and violations of the Martin Act. Following a jury trial, he was convicted of fraud (General Business Law § 352-c (1)) and unregistered sale of securities (General Business Law § 359-e (3)). The Appellate Division modified the sentence but sustained the convictions. The New York Court of Appeals granted leave to appeal to determine if the offering was public or private.

    Issue(s)

    Whether the transactions at issue constituted a public offering or personal sales of stock in a private corporation exempt from the registration requirements of General Business Law § 359-e (3)?

    Holding

    Yes, because the evidence supported the finding that the offering was public, as most investors knew little about Landes, the securities, or each other, and lacked access to information that a registration would have provided.

    Court’s Reasoning

    The court analyzed whether the offering was public or private, applying the framework from Securities & Exch. Commn. v Ralston Purina Co., 346 U.S. 119 (1953) and Doran v. Petroleum Mgt. Corp., 545 F.2d 893 (5th Cir. 1977), focusing on the number of offerees and their relationship to the issuer, the number of units offered, the size of the offering, and the manner of the offering. The court noted that New York law, unlike federal law, does not require securities registration except in specific areas. Since registration of the securities was not required, but dealer registration was if the offering was public, the court focused on the availability of information. The court adapted the Ralston Purina and Doran tests to consider information about the seller, as well as the security. The court noted, “[T]he relationship of many investors was far from intimate, and few if any had sufficient knowledge or access to information of defendant’s background and experience to substitute for what could have been learned about defendant from a State registration, or what could have been learned about the securities under the requirements of Federal law.” Furthermore, the court found that Landes evaded investors’ inquiries when they sought material information. The Court concluded that the investors had to rely completely upon Landes to learn the financial prospects of the new enterprise and that their relationship with him was not close enough to obviate the need for Martin Act protection.

  • Council for Owner Occupied Housing v. Abrams, 72 N.Y.2d 553 (1988): Limits on Attorney General’s Regulatory Authority Under the Martin Act

    Council for Owner Occupied Housing v. Abrams, 72 N.Y.2d 553 (1988)

    The Attorney General’s authority under the Martin Act (General Business Law Article 23-A) is primarily a disclosure statute, and regulations promulgated under it cannot exceed the scope of ensuring adequate disclosure to potential investors; the Attorney General cannot use the Act to enforce building repairs or preempt other regulatory agencies.

    Summary

    The Council for Owner Occupied Housing and several cooperative housing sponsors challenged a regulation (13 NYCRR 18.3(hh)(3)) promulgated by the New York Attorney General under the Martin Act. This regulation required sponsors of cooperative conversions to guarantee the cure of all building violations before closing. The plaintiffs argued, and the lower courts agreed, that the regulation exceeded the Attorney General’s statutory authority. The Court of Appeals affirmed, holding that the Martin Act is a disclosure statute, not an enforcement statute, and the regulation improperly expanded the Attorney General’s powers beyond requiring adequate disclosure to potential investors.

    Facts

    The Attorney General of New York promulgated 13 NYCRR 18.3(hh)(3), which mandated that sponsors of cooperative conversions include in their offering plans a guarantee to cure all building violations of record (excluding those caused by tenants) and eliminate all dangerous conditions known to the sponsor before closing. The Council for Owner Occupied Housing and several cooperative sponsors initiated a declaratory judgment action, contending this regulation exceeded the Attorney General’s authority under the Martin Act. The plaintiffs argued the rule improperly established enforcement measures beyond the scope of the statute.

    Procedural History

    The trial court ruled in favor of the plaintiffs, declaring the regulation invalid. The Appellate Division affirmed the trial court’s decision. The Attorney General appealed to the New York Court of Appeals. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether the Attorney General, under the authority granted by section 352-e of the General Business Law (the Martin Act), exceeded his authority by promulgating a regulation that requires sponsors of cooperative conversions to guarantee the cure of all building violations before closing.

    Holding

    No, because section 352-e of the General Business Law is a disclosure statute designed to protect the public from fraudulent exploitation in the sale of real estate securities, and the regulation in question goes beyond that purpose by requiring not only disclosure of violations but also a representation that they will be cured, which is not authorized by the statute.

    Court’s Reasoning

    The Court of Appeals held that the Martin Act, specifically section 352-e, is primarily a disclosure statute intended to protect the public from fraud in the sale of real estate securities. While the Attorney General has broad authority to require detailed offering plans to provide potential investors with an adequate basis for judgment, this authority does not extend to imposing substantive obligations on sponsors to repair buildings or correct violations. The Court emphasized that “section 352-e is not, in any sense, an omnibus enforcement statute.”

    The Court reasoned that the regulation at issue (13 NYCRR 18.3(hh)(3)) exceeded the Attorney General’s authority because it required sponsors to guarantee the cure of violations, which effectively granted the Attorney General extensive powers to enjoin sales and prosecute code violations—powers not explicitly delegated by the legislature. “Nothing in the statute authorizes the Attorney-General to require repair of a building, correction of statutory violations, or elimination of undefined conditions he finds ‘dangerous or hazardous’.”

    The Court rejected the Attorney General’s argument that the Martin Act should be construed broadly to protect the public and that he possesses licensing authority over cooperative conversions. The Court stated that the absence of substantive provisions in section 352-e indicates that the Legislature did not intend to confer such powers on the Attorney-General. The Court cited the principle that an executive official may not extend delegated power or exercise lawmaking power vested solely in the Legislature by adopting remedial measures that exceed the authority granted by the enabling statute. The Court affirmed the lower court’s decision, finding that the regulation improperly expanded the Attorney General’s authority beyond the scope of the Martin Act.

  • People v. Rachmani Corp., 71 N.Y.2d 775 (1988): Material Omission in Securities Fraud Under the Martin Act

    71 N.Y.2d 775 (1988)

    Under the Martin Act, an omission is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding how to act, viewing the omission in light of the total mix of information available.

    Summary

    This case addresses whether a real estate company’s failure to disclose an unmet precondition to a cooperative conversion constitutes fraud under New York’s Martin Act. The Attorney-General sought an injunction, arguing that the omission misled tenants into purchasing their apartments. The Court of Appeals reversed the lower court’s decision, holding that the omitted information (a mortgage requirement to sell 40.5% of the units) was not material because it was already disclosed in the original offering plan and would not have significantly altered a reasonable tenant’s decision to purchase by the insider deadline, given the other conditions that had been met.

    Facts

    Rachmani Corporation was the selling agent for the cooperative conversion of an apartment building. The offering plan, distributed in December 1979, required 35% of tenants to subscribe for an eviction-type conversion and a separate condition imposed by the mortgagee requiring 40.5% of the apartments to be sold by June 26, 1981. On July 3, 1980, Rachmani notified tenants that the 35% requirement was met, but did not mention that the 40.5% requirement was not. Tenants had until July 6, 1980, to purchase at the insider price. The Attorney-General alleged that the omission of the 40.5% requirement in the July 3 notice constituted fraud under the Martin Act.

    Procedural History

    The Attorney-General brought an enforcement action. The trial court found that the defendants committed fraud by omitting the 40.5% requirement, issuing an injunction under the General Business Law and Executive Law. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal and reversed the Appellate Division’s order, vacating the injunction and dismissing the complaint.

    Issue(s)

    Whether the failure to mention the unmet 40.5% sales requirement in the July 3 notice, when the 35% tenant subscription requirement had been met, constituted a material omission amounting to fraud under the Martin Act.

    Holding

    No, because the omission of the 40.5% sales requirement was not a material omission that would have significantly altered a reasonable tenant’s decision to purchase their apartment, given that this requirement was already disclosed in the original offering plan and the tenants were deciding whether to purchase at the insider price before the July 6 deadline.

    Court’s Reasoning

    The Court of Appeals adopted the federal securities law standard for materiality, stating, “An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote * * * [T]here must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” The court reasoned that a reasonable tenant would be presumed to have knowledge of the original offering plan, which disclosed the 40.5% requirement. The court emphasized that tenants were primarily concerned with whether they could be evicted if they did not purchase by July 6. Since the 35% requirement had been met, they knew eviction was possible if they did not purchase. The 40.5% requirement, which could be satisfied by sales to tenants or outsiders, and which had almost a year to be met, would not have significantly impacted their decision. The Court highlighted that “there is no requirement that information already adequately disclosed be spoonfed to them” and that including unnecessary information could be misleading. A gratuitous reminder of the unmet 40.5% condition could even be interpreted as an attempt to dissuade tenants from exercising their insider rights.

  • Matter of First Energy Leasing Corp., 64 N.Y.2d 61 (1984): Scope of Attorney General’s Powers Under the Martin Act

    Matter of First Energy Leasing Corp., 64 N.Y.2d 61 (1984)

    When the Attorney General examines witnesses under General Business Law §§ 354 and 355 (Martin Act), the examination must occur before a Justice of the Supreme Court or a designated Referee.

    Summary

    This case concerns the scope of the New York Attorney General’s powers under the Martin Act (General Business Law art 23-A), specifically regarding witness examinations. The Attorney General sought to examine witnesses in an alleged fraudulent tax shelter scheme. The appellants argued that the examinations must be conducted before a Justice of the Supreme Court or a designated Referee, as specified in General Business Law §§ 354 and 355. The Court of Appeals held that when the Attorney General proceeds under §§ 354 and 355, witness examinations must be conducted before a Justice or Referee, rejecting the argument that broader powers under § 352 override these specific requirements.

    Facts

    The Attorney General obtained an ex parte order under General Business Law § 354 to examine 59 parties, including First Energy Leasing Corporation and its president, James Marci, regarding an alleged fraudulent tax shelter scheme involving energy management systems. The order directed the parties to appear before “a Justice of this [Supreme] Court.” The appellants refused to submit to examination unless a Justice or Referee was present and moved to compel such presence.

    Procedural History

    Special Term denied the appellants’ motion to compel the Attorney General to conduct the examination before a Justice of the Supreme Court or a designated Referee. The Appellate Division affirmed this decision without opinion. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether, when the Attorney General conducts an examination of witnesses pursuant to General Business Law §§ 354 and 355, the examination must be conducted before a Justice of the Supreme Court or a designated Referee.

    Holding

    Yes, because General Business Law §§ 354 and 355 explicitly require that witness examinations be conducted before a Justice of the Supreme Court or a designated Referee when the Attorney General proceeds under those sections.

    Court’s Reasoning

    The Court focused on the plain language of General Business Law §§ 354 and 355, which mandate that witness examinations be conducted before a Justice of the Supreme Court or a designated Referee. The court rejected the Attorney General’s argument that the broad investigatory powers granted under § 352 override these specific requirements. The court emphasized that the Attorney General initiated the proceedings under § 354, not § 352. The court stated that the last sentence of section 352(2) safeguards the investigative “power of subpoena and examination” granted to the Attorney-General under section 352 and does not create new powers or expand existing powers granted under section 354. The court stated that “[s]uch power of subpoena and examination [granted under section 352] shall not abate or terminate by reason of any action or proceeding brought by the attorney-general under this article”. The Court acknowledged that the Martin Act should be liberally construed to give effect to its remedial purpose, but it found no basis to ignore the clear statutory language of §§ 354 and 355. The court noted the significant substantive and procedural differences between § 352 and §§ 354 and 355, namely that section 354 allows for ex-parte temporary restraining orders. The Court found that “the Legislature, in granting to the Attorney-General the extraordinary enforcement powers under section 354, found it appropriate to give the subjects of those proceedings the added protection of judicial supervision.” The court also held that the timing of filing witness transcripts is left to the court to determine in its discretion.