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February 7, 2013

SLUSA Does Not Preempt State Actions Seeking Damages for Investor Harm, NASAA Argues

By John M. Jascob, J.D

In an amicus brief filed with the New York Court of Appeals, the North American Securities Administrators Association (NASAA) has argued that the Securities Litigation Uniform Standards Act (SLUSA) does not preempt the New York Attorney General from seeking compensation for harm to victims under the Martin Act. NASAA contended that the claim for victim compensation brought by the New York Attorney General against American International Group's former CEO Maurice "Hank" Greenberg and former CFO Howard Smith was not expressly preempted by SLUSA because such an action qualifies as an enforcement action under the SLUSA savings clause. Moreover, SLUSA preemption does not apply to the Attorney General's suit because an action by a state securities regulator does not constitute a class action by a private party within the meaning of SLUSA, NASAA contended (People v. Greenberg, January 31, 2013).

At trial, the Attorney General alleged that the defendants had violated the Martin Act by facilitating reinsurance transactions designed to conceal from investors certain underwriting losses and a potentially negative trend of declining loss reserves. Although the defendants argued that the Attorney General's claims conflicted with congressional intent to create a uniform federal standard for securities litigation, the intermediate appellate court upheld the trial court's ruling that federal law did not preempt the action. The Appellate Division reasoned that nothing in the language or legislative history of either SLUSA or the National Securities Markets Improvement Act (NSMIA) indicated that Congress intended to preempt such actions. Rather, the statutes, their legislative histories, and the case law presupposed an important role for the states in investigating fraud and bringing civil actions to enjoin wrongful conduct and deter future fraud.

If the Attorney General were to be preempted from pursuing an enforcement action that includes a claim for money damages based on harms to investors, then SLUSA would substantially narrow the states' traditional anti-fraud authority in a way that Congress did not intend, NASAA argued. By asserting a strained interpretation of federal law and preemption, the defendants were attempting to eliminate one of the states' most effective tools for deterring future misconduct. Accordingly, the states' historic role in policing national securities offerings for fraud was placed at risk in the defendants' appeal. In NASAA's view, such a dramatic restriction of state authority cannot be reconciled with Congress's language and intent.

Specifically, the defendants argued that SLUSA preempted the Attorney General's civil enforcement action, insofar as it sought damages, because it was a de facto private class action. NASAA reminded the court, however, that Congress adopted SLUSA in order to prevent unscrupulous private plaintiffs and their attorneys from profiting through meritless state-level class actions. Congress was thus focused on reining in the activities of private parties, not public officials, and nothing in the legislative history indicates any concern with litigation by government officials who derive no monetary benefit from the recovery of funds on the behalf of investors. On the contrary, NASAA asserted, the record shows a deliberate attempt by Congress to preserve state enforcement authority.

NASAA rejected the defendants' contention that the Attorney General's action seeking victim compensation was not an "enforcement action" under SLUSA's savings clause for state regulators. Although the defendants proffered an interpretation of federal law that does not empower the SEC to seek damages on behalf of private shareholders, NASAA noted that SEC actions often do result in compensation to victims. For example, civil penalties and disgorgement collected by the SEC may be deposited into a "Fair Fund" for defrauded investors. More importantly, however, no support exists in either the statutory language or SLUSA's legislative history for the defendants' argument that the term "enforcement action" should be defined by reference to federal law. The power to seek monetary remedies on behalf of investors is a traditional state power that predates SLUSA, NASAA argued, and Congress expressed no desire to constrain the ability of states to continue to seek compensation for harmed investors.

NASAA also rejected the defendants' argument that the Attorney General's action constituted a "class action" by a "private party" merely because the Attorney General sought recompense for widely dispersed victims who purchased securities traded on a national securities market. NASAA noted that the pursuit of damages serves a broader public interest than just the repayment of investors. To create a meaningful deterrent, regulators need a full arsenal of enforcement remedies. State regulators retain independent enforcement objectives and act on behalf of the state, not as a personal representative of the investors. An action by a public official is clearly distinct from a private class action, even if the official seeks damages that flow to the investor, NASAA stated.

Finally, NASAA dismissed the defendants' argument that federal law impliedly preempted the Attorney General's action because it would conflict with Congress's intent to create uniform securities litigation standards through the passage of NSMIA and SLUSA. As Congress expressly preserved the authority of states to bring anti-fraud enforcement actions under both NSMIA and SLUSA, the court should look no further to determine if preemption was implied. Accordingly, NASAA urged the state high court to uphold the decision of the lower court in order to preserve the states' ability to pursue remedies designed to protect investors by deterring misconduct in the market and obtaining appropriate compensation for defrauded investors.

Attorneys: Eric Schneiderman for the State of New York. Vincent Sama (Kaye Scholer, LLP) & David Bois (Boies Schiller & Flexner, LLP) for Maurice R. Greenberg and Howard I. Smith.

LitigationEnforcement: Enforcement NewYorkNews

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