New York’s Martin Act and the Expansive Meaning of “Fraud” and “Fraudulent Practice”

New York’s “Blue Sky Law,” The Martin Act, prohibits “[a]ny fraud, deception, concealment, suppression, false pretense or fictitious or pretended purchase or sale” in “the issuance, distribution, exchange, sale, negotiation or purchase … of any securities or commodities.” Codified by New York Business Law section 352, the Martin Act packs a punch in terms of punishment and consequences. Because of this, one of the critical components to any defense is to determine whether prosecutors can prove beyond a reasonable doubt that you violated each element  and every of the crime or the offenses that are routinely prosecuted alongside the Martin Act. As addressed in a previous blog entry discussing the requisite intent to defraud (or lack thereof in Martin Act cases), courts have given prosecutors more room to prosecute securities crimes as opposed to confining or restraining them. This blog entry will address not whether one must have an intend to defraud as analyzed in the earlier entry, but the latitude given to law enforcement in defining what constitutes fraud.

In People v. Cadplaz Sponsors, 69 Misc.2d 417 (1972), the Supreme Court of New York County faced a Martin Act issue involving what constitutes a “fraud” in connection to N.Y. Bus. Law 352. Specifically, the issue was whether or not the defendants had violated the Martin Act when they failed to update an Information Bulletin related to their public stock offering.

The defendant, Cadplaz Sponsors Inc., was in the process of building The Cadman Towers project as a limited profit housing development in Brooklyn. In order to finance the project Cadplaz Sponsors was selling Class B Capital stock in Cadman Towers, Inc. To sell their stock Cadman Towers, Inc. submitted an Information Bulletin for filing to the Attorney General that offered 16,007 shares of its Class B Capital Stock to the public for $2,000,250. In this Information Bulletin the estimated project cost was $16,850,250.00 with an estimated mortgage of $14,849,000.00.

One of the central issues presented before the court was that the construction contract that was actually executed did not conform to the representation in the Information Bulletin filed with the Attorney General. The proposed mortgage had increased by almost 40% and the anticipated carrying charges would be proportionally higher. The executed construction contract was open ended, not for a lump sum; and the proposed mortgage has increased from $14,489,000.00 to $20,106,850.00. These increased costs were not reflected in the Information Bulletin that had been filed by the defendants and under which members of the public had purchased stock.

The Attorney General alleged that the defendant had failed to make timely changes to their Informational Bulletin to the detriment of the public and the purchasers of Cadman Towers Inc. stock. According to the Attorney General this failure to update the Information Bulletin constituted a fraudulent practice under the Martin Act. As such, according to the Attorney General, the defendant perpetrated a fraud. The Court held that the words “fraud” and “fraudulent practice” as used in the [Martin] act are given a wide meaning to include all deceitful practices contrary to the plain rules of common honesty and therefore the Attorney General’s argument succeeded. The court specifically wrote: “[i]ts [The Martin Act’s] purpose is to defeat any scheme whereby the public is exploited.”

The defendants argued the Attorney General’s oversight was unnecessary since they were already regulated by the Housing Development Agency. The court disagreed with this conclusion and held that the defendant’s actions are subject to both regulation by the Housing and Development Administration and the Attorney General under the Martin Act. Specifically, the court stated that “[t]he function of each agency (referring to the Attorney General and the Housing and Development Administration) is not a substitute for that of the other.” Ultimately, the court forced the defendant to update the Information Bulletin on file. Until the file was updated the court enjoined the defendant from selling stock in Cadman Towers Inc.

This entry should make it clear that “fraud” and “fraudulent practice” may not be as clear and intentional as you think. Even something appearing to be a mere oversight may satisfy a Martin Act prosecution and expose you to Grand Larceny and other White Collar New York crimes.

Educate yourself on the New York Martin Act, read about New York White Collar crimes such as Grand Larceny and Criminal Possession of Stolen Property and prepare yourself should you face a law enforcement investigation by following the links above and below.

Crotty Saland PC is a new York criminal defense law practice representing clients in Martin Act, Grand Larceny ad other White Collar New York State and Federal investigations, arrests, indictments and trials. The New York criminal defense lawyers at Crotty Saland PC served collectively as prosecutors in the Manhattan District Attorney’s Office, United States Attorneys office and Main Justice.

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