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Recovering Losses Caused By Investment Misconduct

New York's "Blue Sky" Law Offers No Immunity to Madoff Feeder Funds, Says Judge

New York's Martin Act (aka the "blue sky" law) was enacted in 1921 in order to give New York attorneys general the ability to prosecute financial firms for investment fraud. In a bizarre twist of legislative intent, the Act has since been used to dismiss court cases brought by investors against financial firms, if the firm's wrongdoing did not involve intentional fraud. That is, it was used to dismiss cases of negligence, breach of fiduciary duty, and breach of contract - particularly by firms linked to Bernie Madoff's devastating Ponzi scheme - up until recently.

Last summer, as reported in Forbes.com's "Madoff Feeder Funds Lose Their Immunity," U.S. District Judge Marrero wrote an opinion in a case involving a Madoff feeder fund (Anwar v. Fairfield Greenwich) in which he concluded that there was no preemption clause in the Martin Act that could be used to dismiss traditional common-law claims such as in cases of negligence. Recently, in a ruling on Guaranty Assurance v. JP Morgan, the Appellate Division First Department in New York voiced its opinion in the matter - an opinion which echoed that of U.S. District Judge Marrero.

The ruling by the Appellate Division should mean that lower judges and courts will now have to reverse their previous interpretations of the Martin Act and judge new cases without dismissing for preemption under the "blue sky" law. This is good news for investors both in New York and nationwide, since many financial firms have routinely included "New York choice-of-law" clauses in their contracts and agreements with customers across the United States. Finally, the legislative intent of the Martin Act will be realized, and investors will be protected by the law rather than victimized by it.

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