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Common Law Fraud:

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In 1921, New York enacted the Martin Act, often referred to as New York’s “Blue Sky Law,” to fight fraud in connection with the public sale of securities and later, real estate offerings.  The Martin Act, New York General Business Law article 23-A, sections 352–353, gives the attorney general exclusive enforcement powers, including both civil and criminal remedies.

The Martin Act requires that a condo or co-op sponsor fully disclose all material terms, including certain disclosures about a building’s construction and projected finances, within the offering plan.  Under the Martin Act, only the attorney general may bring an action against a sponsor if the sponsor fails to disclose the required financial and construction details.

The Martin Act’s “exclusive enforcement” provision leaves private entities and individuals with a lack of authority to pursue any Martin Act claims against a sponsor. While private plaintiffs can still bring common law fraud claims, a common law fraud claim requires a private plaintiff to prove that the sponsor made an affirmative statement within the offering plan that can be proven to be false, and that the sponsor knew the statement was false at the time it was made.  A simple omission of fact in the offering plan is not persuadable by a private entity, as it would fall solely under the purview of the Martin Act and the attorney general to remedy. Further, courts have been quick to dismiss such actions as impermissible tricks, noting that such parties are not permitted to bring an action based on the sort of claim over which the attorney general has exclusive jurisdiction under the Martin Act, and that “artful pleading” will not result in a successful common law fraud claim.  This often arises in the context of construction defects, in which it is next to impossible to prove intent, making a common law fraud claim unsustainable.

 

 

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