New York High Court Holds That State Blue Sky Law Does Not Preempt Common Law Claims Involving Securities

In Assured Guaranty (UK) Ltd. v. J. P. Morgan Investment Management Inc., 2011 N.Y. Slip Op. 09162, 2011 WL 6338898 (N.Y. Dec. 20, 2011), the New York Court of Appeals held that the Martin Act, N.Y. Gen. Bus. Law art. 23-A — New York’s “blue sky” law designed to address fraudulent practices in the marketing of securities — does not preempt common law causes of action for breach of fiduciary duty and gross negligence in connection with the marketing or sale of securities, even if the alleged wrongdoing also would fall within the purview of the Martin Act. This decision thus eliminates a defense to New York common law causes of action relating to securities.

Plaintiff Assured Guaranty (UK) Ltd. (“Assured Guaranty”) brought claims for breach of fiduciary duty, gross negligence and breach of contract against Defendant J. P. Morgan Investment Management Inc. (“J.P. Morgan”) due to J.P. Morgan’s alleged mismanagement of nonparty Orkney Re II PLC’s (“Orkney”) investment portfolio, the obligations of which plaintiff guaranteed. Assured Guaranty asserted that J.P. Morgan failed to diversify the portfolio or advise Orkney of the true level of risk involved, and that J.P. Morgan improperly made investment decisions in favor of nonparty Scottish Re Group Ltd., a client of J.P. Morgan and Orkney’s largest equity holder, rather than for the benefit of Orkney or Assured Guaranty. Assured Guaranty alleged that Orkney suffered substantial financial losses, triggering Assured Guaranty’s obligation to pay under its guarantee.

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