A powerful law used by New York’s top prosecutor to bring fraud charges against Wall Street firms was reined in by the state’s highest court Tuesday, a decision that could imperil an $11 billion lawsuit against Credit Suisse and blunt a favored tool for pursuing wrongdoing by banks and their executives.
The ruling could scuttle a securities fraud lawsuit filed by the New York attorney general’s office against Credit Suisse over its marketing of mortgage-backed bonds. But the decision has potentially bigger ramifications: It will shorten the time frame the office has to use a powerful law when pursuing securities fraud claims.
A spokeswoman for Barbara D. Underwood, the acting New York attorney general, said in a statement that the ruling’s effects would be limited because most of the office’s cases against Wall Street firms are brought in a timely fashion.
“We don’t anticipate this impacting our cases in any significant way,” the spokeswoman, Amy Spitalnick, said. “We intend to move forward all of our existing investigations and prosecutions.”
In a dissenting opinion, Jenny Rivera, an associate judge on the Court of Appeals, said she believed the state Legislature had intended for a six-year statute of limitations to apply to the Martin Act. She said that in light of the ruling by her colleagues, the Legislature should make the law explicitly clear on that point.
“It now falls to the Legislature to correct this error before significant damage is done to the state’s securities markets,” Rivera wrote.
The nearly 100-year-old Martin Act gives the New York attorney general broad authority to investigate and prosecute fraudulent securities sale practices. Over the past 15 years, a succession of attorneys general have used it to go after Wall Street banks for everything from publishing flawed stock research to selling faulty mortgage products during the run-up to the financial crisis.
The law was the basis for much of the high-profile lawsuit filed against Credit Suisse in 2012 by the attorney general at the time, Eric T. Schneiderman. In the lawsuit, he said Credit Suisse had “deceived investors” about the quality of the mortgages it packaged into bonds that were sold in 2006 and 2007.
Schneiderman resigned last month after allegations that he had physically assaulted several women he had dated. The lawsuits that he brought against Wall Street firms for selling faulty mortgage bonds were among the highlights of his tenure.
The ruling does not mean the end of the lawsuit against Credit Suisse. The court said some of the claims may be able to proceed under another statute, the Executive Law. The Court of Appeals sent the case back to the trial court to analyze whether the claims are still viable under that statute.
But Credit Suisse was quick to claim victory. “Limiting the statute of limitations period for Martin Act claims is significant not only for this case but for all future industry proceedings,” the bank said in a statement.
The bank said it would continue to defend itself against remaining Executive Law claims.
This article originally appeared in The New York Times.