The New York Court of Appeals has held that the purchaser of a condominium could not bring a claim for common law fraud based solely on alleged material omissions from disclosures mandated by the New York Blue Sky Law (Martin Act). Reversing the decision below, the state high court emphasized that the Martin Act authorizes only the Attorney General to enforce its provisions and permits no private right of action. Although the plaintiff alleged that the defendants fraudulently represented that there were no material changes in the offering by not disclosing various construction and design defects, the court reasoned that the disclosures would not have been required but for the Martin Act and its implementing regulations. Accordingly, to accept the plaintiff's pleading as valid would impermissibly expand the statute's detailed disclosure requirements by transforming every claim concerning latent construction defects into a claim for common law fraud.
The state high court also rejected the plaintiff's claim that the defendants actively concealed fraud by repeatedly representing in plan amendments that there were no material changes of facts or circumstances. Nothing in the complaint supported claims of active concealment that were unrelated to the defendants' alleged omissions from Martin Act disclosures, the court held. At most, the court stated, the plaintiff's proposed second amended complaint alleged only that the defendants tolerated shoddy construction.
The court distinguished its holding from that in CPC International, Inc. v. McKesson Corp., where the court concluded that a purchaser of securities sufficiently pleaded a claim for common law fraud when it alleged that the seller and its investment bankers falsely prepared projections of revenues, operating expenses, and profits, while intentionally withholding other accurate projections. Unlike the instant case, the court stated, CPC International did not turn on the alleged non-disclosure of information required by the Attorney General's Martin Act regulations. Rather, the plaintiff in CPC International sufficiently pleaded common law fraud because, given its most favorable treatment, the complaint described a scheme to defraud.