Martin Act Does Not Preclude Common Law Fraud Claim

The Martin Act (General Business Law art. 23-A) grants the Attorney General the power to investigate and bring an action against entities who engage in fraud or deceptive practices in connection with the sale of securities (including the sale of condominium and cooperative interests). There has been some confusion in the case law whether the Martin Act thus precludes a private party from bringing a common-law fraud claim in connection with the sale of such securities.

On Tuesday, the First Department clarified the issue in Kramer v W10Z/515 Real Estate Ltd. Partnership, 2007 NY Slip Op 07763. The First Department held that the Martin Act does not preclude a private party from prosecuting an otherwise valid common-law fraud claim.

The confusion in the case law arose as follows. Under the Martin Act, the Attorney General does not need to allege or prove either scienter or intentional fraud. Thus, in a case Whitehall Tenants Corp. v Estate of Olnick, 213 AD2d 200 [1995], lv denied 86 NY2d 704 [1995], it was held that private parties could not use artful pleadings to press claims of the type that the Attorney General could bring and styled as one for common-law fraud, where the essential elements of common-law fraud were lacking. Unfortunately, as the First Department recognized, Whitehall was erroneously extended in a number of case which were at the pleading stage where the elements of common-law fraud were alleged.

Thus, in Kramer the First Department held that as long as a plaintiff pleads all the elements of fraud with particularity, there is nothing in the Martin Act to prevent that plaintiff from pursuing the common-law fraud cause of action.

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