New York Law Review

Tag: Martin Act

  • All Seasons Resorts, Inc. v. Abrams, 68 N.Y.2d 81 (1986): Defining ‘Securities’ Under New York’s Martin Act

    All Seasons Resorts, Inc. v. Abrams, 68 N.Y.2d 81 (1986)

    An interest is a security under New York’s Martin Act if it constitutes a participation interest or investment in real estate with the expectation of financial profit or return or meets the broader definition of a security as an investment of money in a common enterprise with profits to come solely from the efforts of others.

    Summary

    All Seasons Resorts, Inc. (ASR) sought a declaratory judgment to prevent the New York Attorney General from applying the Martin Act’s registration requirements to its campground memberships. ASR argued that these memberships, which grant non-exclusive use of recreational facilities, are not securities. The Court of Appeals held that ASR memberships are not securities under the Martin Act because they do not offer financial profit, an ownership interest, or control over ASR’s management, and are sold for personal recreational use, not investment purposes.

    Facts

    ASR, a Washington corporation, owns and operates campgrounds in several states. It markets memberships in these campgrounds, offering members the non-exclusive right to use recreational facilities. Members pay an initial fee and annual dues. The membership agreement specifies that members acquire no ownership interest in ASR or its assets, no right to income or distributions, and no voting rights. Members represent they are buying the memberships for personal use, not for resale or profit. Transfer of memberships is restricted to prevent speculative investment.

    Procedural History

    ASR filed a declaratory judgment action against the Attorney General, seeking a determination that its memberships are not securities and an injunction against enforcement of the Martin Act. Special Term granted summary judgment to ASR, holding that the memberships are not securities. The Appellate Division reversed, finding the memberships to be participation interests in real estate. The Court of Appeals reversed the Appellate Division and reinstated the Special Term’s judgment.

    Issue(s)

    Whether ASR’s campground memberships are securities under General Business Law § 352-e, requiring registration under the Martin Act.

    Holding

    No, because ASR memberships do not constitute participation interests or investments in real estate, nor do they fall within the general definition of securities under the Martin Act.

    Court’s Reasoning

    The Court analyzed whether ASR memberships fall within the specific categories listed in § 352-e (1)(a), specifically “participation interests or investments in one or more real estate ventures” and “cooperative interests in realty”, and also under the broader definition of “securities” under § 352. The Court applied a substance-over-form approach, emphasizing economic reality and looking to decisions construing federal securities laws as persuasive authority.

    The Court determined that ASR memberships are not investments because they lack the essential characteristic of an expectation of financial profit or return. Members receive no profit, share in no gain, and acquire no interest in ASR’s assets. The memberships also do not constitute “participation interests in real estate” because members obtain no rights to share in profits or gains.

    The Court also found that the memberships do not fit within the term “cooperative interests in realty” because members hold no stock in ASR and no ownership or leasehold interest in any of its property. The agreement specifies that a membership is “only a license for nonexclusive use of recreational facilities.”

    The Court then applied the Howey test, derived from Securities & Exch. Commn. v Howey Co., asking whether the transaction “involve[d] an investment of money in a common enterprise with profits to come solely from the efforts of others.” The Court found that the ASR membership did not satisfy the Howey test because there was no expectation of financial gain or profit. The Attorney General argued for a broader “risk capital” test, focusing on the risk of loss and expectation of future benefits. However, the Court found that even under this test, ASR memberships would not be considered securities because the business was already established, and members received immediate use of facilities.

    The court noted, “There is certainly nothing about the ASR membership which would whet the ‘foolish cupidity’ of the ‘inexperienced, confiding and credulous investor’” (quoting People v Smith Co., 230 App. Div. 268, 269).

  • Attorney-General v. Katz, 55 N.Y.2d 1015 (1982): Duration of Martin Act Injunctions

    55 N.Y.2d 1015 (1982)

    An injunction order issued pursuant to Section 354 of the General Business Law (the Martin Act) does not automatically expire upon the commencement of a plenary action under Section 353 of the same law.

    Summary

    This case addresses whether a preliminary injunction issued under Section 354 of New York’s Martin Act automatically terminates when the Attorney General commences a plenary action under Section 353. The Court of Appeals held that the injunction does not expire automatically. While the Attorney General will generally seek a new injunction in the plenary action, terminating the initial injunction immediately could create a gap in protection. The court affirmed the Appellate Division’s order without prejudice to the respondents’ right to apply for vacatur of the initial injunction.

    Facts

    The Attorney General of New York obtained a preliminary injunction against Curtis Katz and others under Section 354 of the General Business Law (the Martin Act). This injunction was related to alleged fraudulent practices in the sale of securities or commodities. Subsequently, the Attorney General commenced a plenary action against the same parties under Section 353 of the Martin Act, seeking a permanent injunction and other relief based on the same alleged fraudulent practices.

    Procedural History

    The Attorney General obtained a preliminary injunction from the Special Term. The Appellate Division reviewed the Special Term’s decision and affirmed. The case then went to the Court of Appeals, which affirmed the Appellate Division’s order. The Court of Appeals ruling was without prejudice to the respondents’ right to apply to the Special Term to vacate the initial injunction.

    Issue(s)

    Whether an injunction order issued pursuant to Section 354 of the General Business Law automatically expires eo instanti upon the commencement of a Section 353 plenary action.

    Holding

    No, because automatically terminating the Section 354 injunction upon commencement of the Section 353 action would be inconsistent with the purpose of the statute and potentially leave investors unprotected during the period before a new injunction could be obtained in the plenary action.

    Court’s Reasoning

    The Court of Appeals reasoned that while it is typical to seek a new injunction within the plenary action, an automatic termination of the Section 354 injunction upon the commencement of the Section 353 action would be problematic. The court stated, “It would, however, be inconsistent with the purpose of the statute to terminate the section 354 injunction at the moment the plenary action papers are served.” The court acknowledged the potential for conflicting orders but noted that the defendants are protected by their right to move for dissolution of the initial injunction once the plenary action begins. The court emphasized the discretion of the Appellate Division, stating that its order was “a discretionary decision outside our power of review.” The court further observed, “Those against whom a plenary action is begun are sufficiently protected against being whipsawed between two overlapping and possibly not entirely consistent orders by the right to move for dissolution of the section 354 order once the section 353 action has been begun.”

  • Greenthal, Inc. v. Lefkowitz, 32 N.Y.2d 457 (1973): Scope of Attorney General’s Investigative Power Under the Martin Act

    Greenthal, Inc. v. Lefkowitz, 32 N.Y.2d 457 (1973)

    The Attorney General’s acceptance of offering statements for filing under the Martin Act does not preclude the Attorney General from investigating potential fraud or wrongdoing related to those statements.

    Summary

    Greenthal, Inc. sought to quash a subpoena issued by the Attorney General (Lefkowitz) during an investigation into Greenthal’s real estate syndication offers. The Attorney General accepted Greenthal’s co-operative organization plan for filing. A complaint was filed alleging improprieties in the 35% tenant purchase agreement calculation required for the co-operative conversion. The Attorney General then issued a subpoena, which Greenthal moved to quash. The Court of Appeals held that the Attorney General’s statutory power to investigate fraud under the Martin Act was not extinguished by the initial acceptance of the offering plan for filing. The filing is simply for informational purposes; the Attorney General retains the power to investigate potential wrongdoing either upon complaint or otherwise.

    Facts

    Greenthal, Inc. filed an offering plan for co-operative organization of an apartment building with the Attorney General on December 31, 1970, as required by General Business Law § 352-e (the Martin Act). The plan was a “35% plan,” requiring at least 35% of tenants to agree to purchase for the building to convert to a co-operative. Greenthal filed an amendment declaring the plan effective, including a sworn statement claiming over 41% tenant purchase agreements were signed. An attorney representing tenants filed a complaint alleging that the 35% calculation included non-bona fide tenants/purchasers. The Attorney General issued a subpoena to investigate, which Greenthal sought to quash.

    Procedural History

    The Supreme Court, Special Term granted Greenthal’s motion to quash the Attorney General’s subpoena. The Appellate Division reversed, holding that the Attorney General had subpoena power to investigate the allegations. Greenthal appealed to the New York Court of Appeals.

    Issue(s)

    Whether the Attorney General’s acceptance of a real estate syndication offering plan for filing under the Martin Act precludes the Attorney General from subsequently investigating the truthfulness of the representations made in that plan based on allegations of fraud or wrongdoing.

    Holding

    No, because the Attorney General’s duty to investigate fraud under the Martin Act arises “upon complaint or otherwise,” and the initial filing of an offering plan does not constitute an approval or validation of its contents. The filing requirement is solely for informational purposes, allowing potential investors to make informed decisions.

    Court’s Reasoning

    The Court of Appeals emphasized the broad investigative powers granted to the Attorney General under the Martin Act (General Business Law, Article 23-A). The Court stated that the filing requirement under § 352-e(1)(b) aims to provide potential investors with sufficient information, and does not obligate the Attorney General to conduct a detailed investigation upon filing. The court distinguished Schumann v. 250 Tenants Corp., stating that while Article 78 review is appropriate for challenging deficiencies in a filed prospectus, a plenary action is available for allegations of actual fraud.

    The Court emphasized the language of General Business Law § 352(1), stating that “whenever it shall appear to the attorney-general, either upon complaint or otherwise” (emphasis in original) that wrongdoing may exist, the Attorney General is authorized to investigate using subpoena power. Allowing Greenthal to evade investigation would undermine the Martin Act’s purpose of preventing fraud, deception, and wrongdoing. The Court rejected Greenthal’s arguments based on waiver, estoppel, and collateral estoppel, as the issues and parties were not the same in prior litigation. The Court acknowledged that if the Attorney General had thoroughly pursued a point civilly or criminally and failed, they could not reactivate it through an alternative route, but Greenthal did not demonstrate that the bona fide nature of the 35% figure had been fully investigated. The Court found no evidence of harassment or an overbroad subpoena.

  • Sterling National Bank & Trust Co. of New York v. Federated Mortgage Investors, 26 N.Y.2d 195 (1970): Attorney General’s Discretion in Martin Act Cases

    Sterling National Bank & Trust Co. of New York v. Federated Mortgage Investors, 26 N.Y.2d 195 (1970)

    The Attorney General’s discretion in prosecuting and settling actions under the Martin Act (General Business Law Article 23-A) is broad and generally not subject to judicial review or private intervention, except to establish an interest in already sequestered property.

    Summary

    Following the “salad oil scandal,” the Attorney General brought an action against Bunge Corporation under the Martin Act, alleging insider trading. A consent judgment was reached, with Bunge neither admitting nor denying wrongdoing. Appellants, a bank and insurance companies who suffered losses, sought to vacate the judgment, reopen the action, and appoint a receiver for Bunge’s assets. The Court of Appeals held that the Attorney General’s discretion in handling Martin Act cases is generally not subject to judicial review, and private parties cannot intervene to pursue their own remedies within the Attorney General’s action.

    Facts

    Anthony De Angelis and Allied Crude Vegetable Oil Refining Corporation caused over $200 million in losses to investors. The Attorney General investigated and sued Bunge Corporation, alleging that Bunge knew Allied was missing millions in vegetable oils pledged as collateral and used this knowledge to manipulate soybean oil futures, profiting by $1.5 million. The complaint alleged that Bunge failed to disclose Allied’s fraud, allowing it to continue for 14 months and increase fraudulent warehouse receipts from $8 million to $82 million.

    Procedural History

    The Attorney General’s complaint was served but not filed, and a press release announced the action. Simultaneously, a consent judgment was filed, with Bunge denying the allegations but agreeing to refrain from fraudulent acts and paying $2,000 in costs. The appellants sought to vacate the consent judgment, reopen the action, and appoint a receiver. Special Term dismissed the motions, and the Appellate Division affirmed.

    Issue(s)

    1. Whether the Attorney General’s exercise of authority in prosecuting a Martin Act action is subject to judicial review.
    2. Whether private parties can intervene in a Martin Act action to seek the appointment of a receiver for their own benefit.

    Holding

    1. No, because the Attorney General has broad discretion in handling Martin Act cases, and judicial review would be inconsistent with legislative intent.
    2. No, because the primary purpose of a Martin Act suit is to enjoin fraudulent activity, and private intervention might jeopardize the Attorney General’s prosecutorial discretion.

    Court’s Reasoning

    The court reasoned that when a statute authorizes the Attorney General to institute a suit, the exercise of that authority is not subject to judicial review. Implicit in the power to commence an action is the power over its disposition. The Legislature, in enacting section 63(15) of the Executive Law, gives the Attorney General the authority to accept an assurance of discontinuance in lieu of a civil action. The court rejected the argument that the Attorney General is merely an administrative officer subject to judicial review, distinguishing cases like Dunham v. Ottinger, which dealt with the Attorney General’s investigative powers, not prosecutorial discretion.

    The court emphasized that allowing private intervention to further individual aims might jeopardize the purpose of the Attorney General’s suit. The Martin Act allows intervention to prove ownership of already sequestered property. The court noted that the Attorney General represents the people of the State at large. The court emphasized that the complaint against Bunge alleged insider trading but not direct participation in De Angelis’s fraud, further justifying the denial of intervention. The court also cited confidentiality concerns regarding the Attorney General’s evidence, suggesting that turning it over to private litigants would be inappropriate. The court concluded that the appellants are free to commence their own suit against Bunge but cannot preempt the Attorney General’s discretion in prosecuting a Martin Act suit. The court held that the court cannot, sua sponte, appoint a receiver, because that would remove prosecutorial discretion from the hands of the Attorney-General.

    As stated in the case, “[The Martin Act’s] general plan and scope seem to be perfectly plain. The Attorney-General as an executive official of the State is given the power by appropriate injunctive action to restrain any person who is engaged or who is about to engage in the business of selling the securities and commodities designated in the statute by means and aid of fraudulent methods and practices which likewise are therein defined.”