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Thomas D. Kearns
tkearns@olshanlaw.com

@TDKearns
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Creative Martin Act Strategy Loses

New York's Martin Act governs the sale of securities including cooperative and condominium apartments. Since the Court of Appeals CPC v McKesson decision in 1987 it has been accepted that individual purchasers do not have a private right of action under the Martin Act. Courts have held, however, that common law fraud actions remain available. The last 20+ years have seen an array of court decisions trying to find the exact line between common law fraud and mere Martin Act violations. Common law fraud is hard to show - you need an act or omission, scienter (bad intent) and reliance. So plaintiffs have tried repeatedly to pitch Martin Act violations as common law fraud. One of the more creative complaints was throw out in a recent Court of Appeals decision (Kerusa v. W10Z/515, 4/2/2009). Kerusa pointed to the provision used in most amendments to the statutorily required prospectus or "offering plan" which was used in the plan amendments for the sale of apartments in 515 Park Avenue: "Except as set forth in this Amendment, there have been no material changes of the facts or circumstances affecting the Property or the offering." Kerusa claimed this clause turned required Martin Act disclosure into a common law fraud since there had been some difficulties in construction of the property which were not disclosed in any amendment to the plan. Kerusa even won a reversal by the Appellate Division of the motion court which had thrown out the claim based on the pleadings. But the Court of Appeals reversed the Appellate Division - "...to accept Kerusa's pleading as valid would invite a backdoor private cause of action to enforce the Martin Act in contradiction to our holding in CPC Intl. that no private right of action exists." Another creative attempt to use the Martin Act to help an unhappy purchaser fails.

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