NY AG and The Martin Act

The Martin Act, along with other New York statutes combine to grant authority to the New York Attorney General to investigate and pursue criminal and civil matters related to fraud, deceptive, and misleading practices that involve securities, commodities and other financial transactions between a company and the consumer. However, due to the fact that these provisions lack basic procedural protections, combined with the aggressive manner in which New York Attorney Generals have chosen to apply them, only amplifies the need for sufficient legal counsel to represent an individual or entity who has been served with an investigative subpoena. In addition, New York appellate and federal trial courts have failed to properly scrutinize these provisions. Having sufficient counsel allows the individual or entity to challenge the morals, reasoning, or decency of the Attorney General’s conduct. Having competent counsel would allow the individual or entity to push back, possibly filing a motion to have a subpoena thrown out based on appropriate claims and objections.


The Martin Act’s jurisdiction is widespread and regulates the issuance, the exchange, advertisement, and the purchase or sale of securities, commodities and other investments in or from the state of New York. Because of the wide scope of this law, Attorney Generals have the authority to not only conduct investigations but also bring criminal and civil actions against any violators. The Martin Act grants a New York General Attorney the following provisions:


  • To conduct both public and confidential investigations to discover potentially fraudulent practices

  • To initiate civil proceedings for relief or restitution

  • To issue statewide subpoenas to compel the attendance of witnesses or to compel an individual or entity to provide documents in connection with an investigation


One notable fact about the Martin Act is that it contains no scienter requirement. In other words, the Martin Act requires no knowledge of the intent or knowledge of wrongdoing for an investigation or subpoena to be issued. Courts have upheld the notion that the Attorney General does not need proof of intent to deceive or defraud to launch an investigation on an individual or entity. Unlike other securities fraud statutes, the Martin Act requires no proof of knowledge or intent of fraud, but instead, the Attorney General needs to only show that the investigation or subpoena is relevant and has “some factual basis”. Some courts have even gone as far as stating that a witness has no right to hold his or her legal counsel present during his or her investigative testimony or have access to a copy of the testimony transcript.  


Investigations and enforcement actions taken under the Martin Act have transcended securities as they are most commonly understood. Investigations and corrective actions have been taken in issues even involving mortgage notes, membership interest in real estate ventures, interest in “numismatic coin portfolios” and even membership interest in real estate ventures have been deemed securities that fall under the Martin Act. While the interpretation of a security may be broad, there are limits and boundaries to its reach.


The Martin Act provides the foundation that governs the offer and sale of securities, commodities, and other investment verticals in and from the state of New York. This statue is sometimes interpreted to include more complex transaction such as Forex trades. The law about the boundaries of the Martin Act toward have been unclear as different individuals have interpreted the reach of the Act in different ways, however, current Attorney General Schneiderman has not been deterred. According to reports, Attorney General Schneiderman has issued several investigative subpoenas to brokers involved in foreign exchange trading.


Other actions taken under the Martin Act brought by New York Attorneys include investigating banks in regards to the promotion of internet stocks, the investigation of the compensation of certain executives, and foreign exchange fees. Investigations under Martin Act laws have increased tenfold under recent New York Attorneys Generals. A couple of examples include the investigation of alleged “pay-to-play” schemes at the New York Office of the State Comptroller during Comptroller Alan Hevesi’s tenure and the subsequent indictment of several employees of the Comptroller’s office led by Attorney General Cuomo. Another widely publicized investigation includes the investigative subpoena served to Airbnb by Attorney General Schneiderman.


The New York Attorney General’s statutory power goes well beyond the Martin Act. The New York Attorney General has pursued both civil and criminal enforcement actions under New York Executive Law and General Business Law provisions. It is important to note that both the Attorney General’s office and the courts often interpret these laws broadly and that their provisions blanket an array of potential misconduct.


New York Executive Law grants the Attorney General the power to investigate and bring action against the “persistent fraud or illegality in the advancement, conducting, or transaction of business. More recently, a New York trial court found that New York’s Executive Law doesn’t create an independent cause of action, but instead, provides the AG with the power to seek a remedy against fraudulent and illegal behavior. The AG has appealed this finding, arguing that New York Executive Law does provide an independent claim for fraud and the need to not be tethered to a separate statutory or common law fraud claim.


According to New York Executive Law (Section 63(12)), the Attorney General may issue investigative subpoenas for documents and witness testimony. Under the terms of New York’s Executive Law, “fraudulent conduct” includes the use of any device, scheme or artifice used to defraud or deceive. In addition, any form of deception, misrepresentation, concealment, suppression, false pretense, false promise, or inconsiderable contraction provision is also a violation of New York Executive Law. New York courts who have interpreted Executive Law, found that proof of fraud or deceptive conduct only required a “capacity or tendency to deceive”. The courts found that the law does not require the Attorney General to establish the elements of common law fraud nor scienter. The term “illegality” is broadly defined under Executive law, and also includes a violation of state and local laws.


A few noteworthy actions taken by the Attorney General under the Executive Law statute include General Schneiderman’s filed complaint against DraftKings and FanDuel, two fantasy sports websites. The complaint was in regards to their alleged acceptance of wagers from residents of New York State; a direct violation of state law. The AG sought an injunction to refrain these sites from operating within the state. While the injunction was granted but was quickly challenged by both companies. Both companies continue to operate in New York due to an interim stay pending a hearing on the injunction.


The AG also has the authority to investigate deceptive consumer practices or initiate enforcement actions against any person or business that engages in deceptive behavior, practices, or false advertising pursuant to the statutes described under General Business Law. These statutes are broad and invoked against a variety of economic activity. Another added provision is that the Martin act requires scienter, which means that the AG does not need to prove that the deceptive practice or false advertising was reckless or intentional.


The AG holds powers under New York’s General Business Law that extends beyond the provisions that the statute provides to a plaintiff. To succeed a successful complaint as a private citizen, a plaintiff must show that the act, or unlawful practice was oriented toward consumers, that it was misleading, that the advertisement was misleading, and that he or she suffered injury or damages as a result of the misleading advertising. The Attorney General, however, is not burdened with demonstrating actual injury. Additionally, the AG has the power to initiate an enforcement action to enforce the consumer protection laws on behalf of the general public while a private plaintiff lacks this authority. Furthermore, an AG does not have to show actual deception from a business.


The Attorney General also possesses the power to seek more extensive remedies for General Business Law violations than a private plaintiff. For example, a private plaintiff may bring an action only to enjoin an alleged unlawful practice or advertisement and recover actual damages (or damages up to $50 for section 349 violations and $500 for section 350 violations). The Attorney general, on the other hand, may obtain injunctive relief, preliminary injunctive relief, restitution, and civil penalties of up to $5,000 per violation.


A few examples of the consumer protection actions that the New York AG has pursued under General Business Law statutes include the investigation of, and against the recorded music industry in regards to certain music promotion practices toward radio stations, and the investigation of the largest nationwide health insurers regarding purported rate manipulation which resulted in overcharging patients.

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