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Causes of Action Based Upon Allegations of Violations of Martin Act Concerning Fraud in the Selling of Securities Allowed to Go Forward— Supreme Court Should Not Have Evaluated Merits on Motion to Dismiss

The First Department determined Supreme Court should not have dismissed certain Martin Act/Executive Law causes of action alleging fraud in the sale of securities brought by the Attorney General against Charles Schwab. The First Department explained that Supreme Court should not have evaluated the merits of the case in determining the motion to dismiss:

The Martin Act causes of action are based on General Business Law § 352-c(1)(a), which, where applicable, prohibits fraud, concealment, suppression or false pretense, and General Business Law § 352-c(1)(c), which prohibits false representations or statements to induce or promote the issuance, purchase or sale of securities within or from the State. It is alleged in the complaint that defendant, Charles Schwab & Co., Inc. (Schwab), a registered securities broker-dealer, engaged in fraudulent and deceptive conduct in the sale of auction rate securities (ARS) to the investing public. The Attorney General asserts that Schwab misrepresented ARS to its customers as safe, liquid investments while concealing the fact that they were complex financial instruments with significant, inherent and increasing liquidity risks. * * *

In dismissing the Martin Act causes of action, the court concluded that the “misrepresentations alleged were true when made and the complaint contains no allegations that ARS were liquid at a time when they were illiquid.” The court based this conclusion on its own finding that there had been no failures in the auctions in the 20 years preceding August 2007. In reaching this conclusion, the court erroneously engaged in an evaluation of the merits of the Martin Act causes of action. On a motion to dismiss for failure to state a cause of action, it is not the function of the court to evaluate the merits of the case… . People v Charles Schwab & Co, Inc, 2013 NY Slip Op 05722, 1st Dept 8-27-13

 

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