The New York Martin Act, New York General Business Law Section 352 and 352-C, is a state statute in New York that provides for civil and criminal penalties for securities fraud. The Martin Act is analogous to federal and other state securities fraud statutes, with certain key differences. One of those key differences is that the Martin Act does not require proof of an intent to defraud, or proof of intent to deceive or mislead, in order to charge and convict a person of a crime under the statute, punishable by up to one year in jail. However, if such intent is established, the charges under the Martin Act can be elevated to a felony punishable by state prison time.
This lack of an intent to defraud requirement becomes especially relevant where the Martin Act charges are based on non-disclosure. Generally speaking, it is much more difficult for a prosecutor to prove that a person had the intent to mislead an investor by not providing information that it is to prove that intent based on affirmatively providing false information. Doing away with any requirement that an intent to deceive be alleged or proven removes this hurdle from a prosecutor’s path to conviction. The following touches on this non-disclosure issue.
In People v. Morris, 2010 NY Slip Op 51331(U) (Sup. Ct. NY Co., Crim Term 2010), the defendant argued that basing a Martin Act charge solely on non-disclosure is unconsitutionally vague. In other words, there is almost an infinite amount of information that is not provided in any financial transaction or securities offering, and to penalize a person criminally without any showing of an intent to defraud could be construed to essentially criminalize every securities offering. It should be noted that, under the Martin Act, the omission must be material, but the argument remains. The Court in Morris, disagreed with the defendant and denied the motion to dismiss on that ground. The court in Morris acknowledged that at a trial a jury may decide any alleged omissions or non-disclosures were not material and wouldn’t have affected the investor’s decision, but that is a question of fact, not a basis for dismissal on the law. In a motion to dismiss for legal sufficiency, issues of law are paramount where as issues of fact are substantively bound by the accusatory instrument and evidence from the Grand Jury.
Historically, sales of goods were subject to the principle of caveat emptor, or “buyer beware.” The Court in Morris noted that the New York State Legislature, by enacting the Martin Act, had explicitly changed that common law rule and shifted the burden onto the seller of securities to identify and disclose all material information about the transaction where that seller has a economic interest in the transaction. The Act essentially imposes a duty on the seller or promoter to proactively identify and disclose all material information to a prospective buyer, and imposes criminal penalties for failure to abide by that duty, even in the absence of any criminal intent.
To learn more about the Martin Act, and New York General Business Law 352-C, follow the links found throughout this entry.
Crotty Saland PC is a New York criminal defense firm founded by two former Manhattan prosecutors. The New York criminal lawyers at Crotty Saland PC represent clients in Martin Act cases throughout the New York City and Hudson Valley regions.