Friday, September 09, 2016

AIG’s former chairman Greenberg challenges New York’s Martin Act in cert petition

By Kevin Kulling, J.D.

Maurice “Hank” Greenberg, former chairman of American International Group Inc. (AIG), has filed a petition for a writ of certiorari asking that the United States Supreme Court declare that a portion of New York’s Martin Act is preempted by federal law. Greenberg is currently defending a Martin Act fraud action based on events that occurred while he was at AIG (Greenberg v. People of the State of New York, August 30, 2016).

Long history. Greenberg served as president and CEO of AIG from 1968 until 1989, as its chairman and CEO from 1989 until his retirement in 2005, and as a member of the board of directors from 1967 to 2005.

The case has a long history, dating back to May 2005, when former New York Attorney General Eliot Spitzer filed the original complaint against AIG and Greenberg. While issues in the case have been narrowed over the years, the remaining claims in the case relate to two reinsurance transactions that fall under the New York Martin Act and the New York Executive Law.

On June 2, 2016, the case was returned to the trial court following a decision by New York’s highest court that rejected Greenberg’s challenge to the availability of equitable relief and his assertion that disgorgement was preempted by federal law.

State law preempted. Greenberg claims in his cert petition that the use of the Martin Act in his case is preempted by federal law.

The petition argues that the National Securities Improvement Act of 1996 (NSMIA) broadly and expressly preempted state securities law. Congress enacted three statutes in the 1990s—the Private Securities Litigation Reform Act of 1995 (PSLRA), NSMIA in 1996, and the Securities Litigation Uniform Standards Act of 1998 (SLUSA)—to address the erosion of uniformity in the national securities markets caused by state laws and proceedings, according to the petition.

To that end, the petition says, NSMIA expressly preempted state securities regulation. Preemption was deliberately chosen for the express purpose of eliminating the overlapping regulation of national securities markets by the federal government and the attorneys general or other regulators of fifty states, the petition argues.

Fraud and deceit exception. The federal provisions include a single exception to the broad application of preemption. The exception is for enforcement actions for fraud and deceit. The New York statutes at issue, however, do not fit the definition of fraud under federal law because they do not require proof of scienter, according to the petition.

The New York attorney general has argued that the Martin Act falls within that exception to NSMIA preemption for enforcement actions concerning fraud or deceit.

The petition urges the Supreme Court to decide whether the exception to federal preemption for state enforcement actions alleging fraud or deceit applies to the New York attorney general’s prosecution of an action under state statutes that do not satisfy the federal definition of fraud because they do not require proof of scienter.

Greenberg argues that the exception to NSMIA preemption for state enforcement actions with respect to fraud or deceit should be interpreted narrowly and consistently with the federal definition of fraud. The New York statutes at issue are far broader than the federal definition of securities fraud or even common law fraud, the petition concludes.

Under the Martin Act, liability for fraudulent practices can be imposed without any proof of scienter, a concept that has been accepted since the Act was enacted in 1921, according to the petition.

The case is No. 16-284.