New York Law Review

Tag: securities fraud

  • 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.

  • 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.

  • 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.”

  • 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.”

  • Rich v. L.B.B. Corp., 6 N.Y.2d 375 (1959): Class Action Allowed for Identical Misrepresentations in a Prospectus

    Rich v. L.B.B. Corp., 6 N.Y.2d 375 (1959)

    A class action is permissible when all members of the class relied on identical misrepresentations in a prospectus, even if individual class members have additional, separate claims.

    Summary

    This case addresses whether a class action can be maintained when based on identical misrepresentations made to all purchasers of stock via a prospectus. The Court of Appeals held that a class action is appropriate because the misrepresentations were uniform, affecting all purchasers equally. The court distinguished this scenario from cases where representations varied among individuals, emphasizing that proof of a cause of action for one member automatically proves it for all members relying on the same prospectus. This ruling allows for a more efficient resolution of claims arising from standardized misrepresentations in securities offerings.

    Facts

    The plaintiffs, representing a class of stock purchasers, claimed that they were induced to buy stock in L.B.B. Corp based on misrepresentations contained in a prospectus issued pursuant to Section 352-e of the General Business Law. The alleged misrepresentations were identical for all purchasers. The defendant argued that a class action was inappropriate because individual purchasers might have separate causes of action based on representations made outside the prospectus, requiring individual proof of scienter and reliance.

    Procedural History

    The lower court’s decision regarding the appropriateness of a class action was appealed to the Court of Appeals.

    Issue(s)

    Whether a class action is maintainable when the cause of action is based on identical misrepresentations made to all members of the class through a prospectus, even if some members may have additional individual claims.

    Holding

    Yes, because proof of the cause of action of any one member of the class automatically proves the cause of action for all members of the class who relied on the identical prospectus.

    Court’s Reasoning

    The Court of Appeals reasoned that because the misrepresentations in the prospectus were identical for all purchasers, a common thread joined the members of the proposed class. This distinguishes the case from situations where representations vary, making a class action unmanageable. The court emphasized that proving the cause of action for one member of the class would inherently prove it for all others who relied on the same prospectus. The court stated, “Here proof of the cause of action of any one member of the class automatically proves the cause of action for all members of the class.” The court further noted that additional individual causes of action arising from representations outside the prospectus are irrelevant to the core issue of the uniform misrepresentations. The dissent argued that because individual members might have separate claims requiring individual proof of scienter and reliance, a class action was inappropriate. However, the majority rejected this argument, focusing on the common reliance on the identical prospectus, which, as a matter of law, constituted the sole offer of securities and was subject to specific statutory prohibitions against fraud.