In a recent post (here) discussing the New York state court lawsuit recently filed against Banco Santander and related entities on behalf of Madoff-related victims, I mentioned that among the claims asserted in the complaint is a cause of action under New York General Business Law Section 349. This item caught the attention of Albany Law School professor Christine Sgarlata Chung, who has a particular interest in the question whether Section 349 is applicable to securities claims.

 

At my invitation, Professor Chung has submitted the following brief guest post relating to the plaintiffs’ Section 349 claims:

 

I read with interest your recent post on the Madoff-related class action filed by the Coughlin Stoia firm.  As you note, the complaint asserts a variety of state law claims, including claims under §349 of the New York General Business Law.   This is an interesting approach, given the reluctance of some New York courts to apply §349 to securities transactions. 

 For example, in Gray v. Seaboard Securities, Inc., 788 N.Y.S 2d 471 (N.Y. App. Div. 2005), plaintiffs alleged that they opened accounts at Seaboard, purchased stock recommended by Seaboard, and paid full service brokerage commissions to Seaboard based on Seaboard’s promise to provide proprietary research.   Plaintiffs alleged that Seaboard engaged in a deceptive business practice within the meaning of §349 by failing to provide the promised investment advice.

The district court dismissed the plaintiffs’ claims on the grounds that §349 does not apply to securities transactions.  On appeal, plaintiffs argued that §349 does not contain a "wholesale exclusion" for securities transaction.  They also argued that their claims arose from Seaboard’s furnishing of services (i.e., investment advice) and not from securities transactions per se. 

The appellate court affirmed the dismissal of the plaintiffs’ claims, noting that the "vast majority of [New York] courts which have considered the issue have found general Business Law §349 inapplicable to securities transactions for essentially two reasons."   First, the court reasoned "individuals do not generally purchase securities in the same manner as traditional consumer products, such as vehicles, appliances or groceries, since securities are purchased as investments and not goods to be consumed or used."  Second, the court held that because the securities arena is highly regulated at the federal level, "it is questionable that the legislature intended to give securities investors an added measure of protection beyond that provided by securities acts." 

It is important to note that in 2001, a different department of the New York appellate court held that § 349 does not contain a blanket exception for securities transactions.   See Scalpe & Blade, Inc.  v. Advest, Inc., 722 N.Y.S. 2d (N.Y. App. Div. 2001).  Still, given Gray and its ilk, I am curious to see how the Coughlin Stoia plaintiffs fare with their § 349 claim.

 

Special thanks to Professor Chung for her interesting commentary on this issue. The D&O Diary welcomes guest posts from responsible commentators and we are always interested in submissions and contributions from readers.

 

Other Madoff-Related Notes: A February 18, 2009 Wall Street Journal article entitled "Accounting Firms that MIssed Fraud at Madoff May be Liable" (here) suggests that accounting firms for Madoff feeder funds could be "legally vulnerable to claims that they should have uncovered red flags, according to legal and accounting experts."

 

And a February 17, 2009 article in The (London) Times reports (here) that lawyers from firms in 21 different countries (including the U.S.) recently met in Madrid and formed a global alliance to represent claimants who lost money as a result of the Madoff scheme. Hat tip to the Securities Docket (here) for the linkl to the Times article.