New York Governor Andrew Cuomo signed a law that reinstates the 6-year statute of limitations for the Martin Act, a statute that prohibits deceptive practices in securities transactions. A recent court case, seemingly counter to prior precedent, had limited the statute to three years. The New York State Attorney General Letitia James stressed the importance of the Martin Act because “the federal government continues to abdicate its role of protecting investors and consumers.” Governor Cuomo explained that NYS is “enhancing one of the state’s most powerful tools to prosecute financial fraud so we can hold more bad actors accountable, protect investors and achieve a fairer New York for all.”
We would have preferred that the New York State Legislature re-write the Martin Act to make it less ambiguous and subject to prosecutorial discretion. This wrangling over securities enforcement and statutes of limitations make it difficult on the industry to fully understand and follow a clear standard of care.
The New York State Court of Appeals has ruled that the NYS Attorney General must institute cases under the Martin Act within a three-year statute of limitations period. The court reasoned that the Martin Act, a broad securities fraud statute, expands liability beyond common law fraud and does not permit private rights of action. Consequently, the shorter 3-year statute of limitations applies, rather than the default 6-year period requested by the Attorney General. The case involved Martin Act fraud allegations against the sponsor of residential mortgage-backed securities.
OUR TAKE: This decision follows recent Supreme Court cases limiting statutes of limitations in government enforcement proceedings. The case also materially constrains the use of the (over) broad Martin Act.
The U.S. Supreme Court has ruled that the SEC cannot seek disgorgement with respect to ill-gotten gains received more than 5 years ago. A unanimous Court held that disgorgement is a “penalty” under the statute of limitations because (i) the SEC brings public cases not intended to remedy individual harm and (ii) disgorgement is imposed for punitive and deterrent purposes. The Court rejected the SEC’s argument that disgorgement is used for restitution because disgorgement orders often exceed the defendant’s gains. The Court has previously held that SEC penalties are also subject to the 5-year statute of limitations.
OUR TAKE: The Supreme Court significantly constrains the SEC’s enforcement power to demand huge settlements based on multi-year violations. The SEC will have to move more quickly to investigate and file.