The People of the State of New York by Andrew M. Cuomo,, Respondent,v.Maurice R. Greenberg, et al., Appellants.BriefN.Y.May 28, 2013Supreme Court, New York County, Index No. 401720/2005 ~tate of ~etu !?ork QCourt of %lppeals PEOPLE OF THE STATE OF NEW YORK BY ANDREW M. CUOMO, ATTORNEY GENERAL OF THE STATE OF NEW YORK, Plaintiff-Respondent, v. MAURICE R. GREENBERG and HOWARD I. SMITH, Defendants-Appellants. BRIEF OF THE STATES OF CONNECTICUT AND VERMONT OFFICES OF THE ATTORNEYS GENERAL AS AMICI CURIAE IN SUPPORT OF THE PEOPLE OF THE STATE OF NEW YORK DINAHJ.BEE Assistant Attorney General GEORGE JEPSEN Attorney General of the State of Connecticut 55 Elm Street P.O. Box 120 Hartford, CT 06141-0120 (860) 808-5270 (860) 808-5385 (facsimile) WILLIAM H. SORRELL Attorney General of the State of Vermont 109 State Street Montpelier, VT 05609-1001 (802) 828-3173 (802) 828-2154 (facsimile) Dated: February 1, 2013 TABLE OF CONTENTS TABLE OF CONTENTS .................•............................ i TABLE OF AUTHORITIES .......................................... ii PRELIMINARY STATEMENT .......................................... 1 THE INTERESTS OF THE STATES OF CONNECTICUT AND VERMONT IN THIS ACTION ...............................•......................... 1 STATEMENT OF THE FACTS ......................................... 2 ARGUMENT .........................••............................ 3 I. The National Securities Markets Improvement Act Does Not Preempt State Blue Sky Laws .............................. 3 II. New York Attorney General's Action is an Enforcement Action for Fraud ................................................ 7 CONCLUSION ........................•........................•.. 10 i TABLE OF AUTHORITIES CASES: Aaron v. SEC, 446 u.S. 680 (1980} .............................. 7 Alabama v. Star Serv. & Petroleum Co., 616 F. Supp. 429 (S.D. Ala. 1985} ............................................. 9 Alfred L. Snapp & Sons, Inc. v. Puerto Rico, 458 U.S. 592 (1982} ................................................ 7' 8 All Seasons Resorts v. Abrams, 68 N.Y.2d 81(1986} .............. 8 California v. FCC, 75 F. 3d 1350 (9th Cir. 1996} ................. 7 Castillo v. Cameron County, 238 F.3d 339 (5th Cir. 2001} ........ 7 Connecticut v. Moody's Corp., 664 F. Supp.2d 196 (D. Conn. 2009} .............................................. 8 Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101 (2d Cir. 2001} ............................................... 4 Lehn v. Dailey, 77 Conn. App. 621, 825 A.2d 140 (2003} ......... 6 Levin v. Barry Kaye & Assoc,, Inc., 858 F. Supp.2d 914 (S.D. Ohio 2012} ................................................... 8 Maine v. Data Gen'l Corp., 697 F. Supp. 23 (D. Me. 1988} ....... 9 Medtronic, Inc. v. Lohr, 518 U.S. 470(1996} .................... 5 Mississippi v. Microsoft Corp., 428 F. Supp.2d 537 (S.D. Miss. 2006} ............................................ 9 State v. Andresen, 256 Conn. 313 773 A. 2d 328 (2001} ........... 8 State of New York v. General Motors Corp., 547 F. Supp. 703 (S.D.N.Y. 1982} ............................................. 9 State v. Simons, 193 Or. 274, 238 P.2d 247(1951} ............... 8 ii Texas Office of Pub. Util. Counsel v. ~CC, 183 F.3d 393 (5th Cir. 1999) ............................................... 7 Wisconsin v. Abbott Labs, Inc., 341 F. Supp.2d 1057 (W.D. Wise. 2004) ............................................ 9 STATUTES: 15 U.S.C.A. § 77r(c) (1) ........................................ 4 Conn. Gen. Stat. 36b-2 ......................................... 1 Vt. Stat. Ann. tit. 9, § 5105 .................................. 1 OTHER AUTHORITIES: Executive Law§ 63(12) 2' 8 H.R. Rep. No. 104-662 (1996) 5' 6 Martin Act, General Business Law § 352 ...................... 2, 8 President on National Securities Markets Act Signing 10/11/96, 1996 WL 584922 (October 11, 1996) ............................ 4 Securities Investment Promotion Act of 1996: Hearing on S. 1815 Before the Committee on Banking, Housing and Urban Affairs, 104th Cong. (1996) ............................................ 3 iii PRELIMINARY STATEMENT The States of Connecticut and Vermont Offices of the Attor- neys General submit this brief as amici curiae in support of the People of the State of New York in this appeal. The Connecticut and Vermont Offices of the Attorneys General believe that the May 8, 2012 decision by the Appellate Division that the New York Attorney General's action was not preempted by federal law was correct as a matter of law. THE INTERESTS OF THE STATES OF CONNECTICUT AND VERMONT IN THIS ACTION Of the many states that have adopted the Uniform Securities Act, Connecticut and Vermont have an interest in protecting the investing public by enforcing those laws. The Connecticut Uni- form Securities Act, Conn. Gen. Stat. § 36b-2 et seq. ("CUSA") was adopted in 1977. See also, Vt. Stat. Ann. tit. 9, § 5105 et seq. The appellants' position that federal law preempts states' enforcement actions would have a detrimental effect on the exer- cise of states' sovereign and quasi-sovereign powers. This Court should affirm the Appellate Division's determination that feder- al law does not preempt states' enforcement actions for fraud or deceit in connection with securities transactions. 1 STATEMENT OF THE FACTS The New York Attorney General ("NYAG") brought an enforce- ment action against American International Group ("AIG") and two former executive officers of AIG, Maurice R. Greenberg and How- ard I. Smith, alleging that they engaged in securities fraud in violation of the Martin Act and Executive Law§ 63(12). In 2006, AIG settled fraud allegations with the NYAG .and the Secu- rities and Exchange Commission and paid over $1.6 billion in penalties and other monetary relief. The NYAG's enforcement ac- tion remains pending against Greenberg and Smith. Greenberg and Smith contend that the NYAG's action is preempted by federal law. 2 ARGUMENT I. The National Securities Markets Improvement Act Does Not Preempt State Blue Sky Laws When Congress enacted the National Securities Markets Im- provement Act of 1996 ("NSMIA"), it recognized that the federal and state governments have distinct responsibilities for pro- tecting the securities markets. The federal government was des- ignated as the exclusive regulator as to registration of nation- al offerings of securities and the state governments retained authority to bring actions pursuant to state laws prohibiting fraud and deceit. H.R. Rep. 104-622, at 16 (1996). [S]tate securities authorities play an essential role in the regulation of the U.S. securities industry. State regulators are often the front line of defense against developing problems; they are the "local cops" on the beat who can quickly detect and respond to vio- lations of law. Further, the states have been aggres- sive in seeking to publicize instances of possible fraud and abuse as a means of better educating inves- tors. ·Securities Investment Promotion Act of 1996: Hearing on S. 1815 Before the Committee on Banking, Housing and Urban Affairs, 104th Cong. (1996) (statement of Arthur Levitt, Chairman of the United States Securities and Exchange Commission) . NSMIA does not preempt states' authority to enforce their securities laws with respect to fraud or deceit, impliedly or otherwise. "The primary purpose of NSMIA was to preempt state 'Blue Sky' laws which required issuers to register many securi- 3 ties with state authorities prior to·marketing in the state." Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 108 (2d Cir. 2001). Congress expressly preserved the states' investigatory and enforcement jurisdiction for fraud in connection with securities or securities transactions. Specifically, Congress included a clause that provides: Consistent with this section, the securities commis- sion (or any agency or office performing like func- tions) of any State shall retain jurisdiction under the laws of such State to investigate and bring en- forcement actions, in connection with securities or securities transactions with respect to fraud or de- ceit. 15 U.S .C.A. § 77r(c) (1). In signing NSMIA into law, President Clinton stated that the purpose of NSMIA was to "improve[e] the efficiency of the financial markets without compromising investor protections .. [with] States . . retaining their authority to take enforce- ment actions against fraudulent conduct in all situations." President on National Securities Markets Act Signing 10/11/96, 1996 WL 584922 (October 11, 1996) (emphasis supplied). Appellants contend that the legislative history of NSMIA shows that the NYAG's action should not be allowed and quotes part of the report that states "' [t]he legislation preempts au- thority that would allow the states to employ the regulatory au- thority they retain to reconstruct in a different form the regu- 4 latory regime for covered securities that [NSMIA) has preempt- ed.' H. Rep. No. 104-662, at 34." (Br. at 35; Reply Br. at 28) But after that quote, the Committee Report goes on to provide examples that show it intended to preempt the use of state law to impose requirements on the registration and regulation of se- curities offerings, and not to preempt existing state laws against fraud and deceit. Thus, for example, [NSMIA) precludes State regulators from, among other things, citing a State law against fraud or deceit or regarding broker-dealer sales prac- tices as its justification for prohibiting the circu- lation of a prospectus or other offering document or advertisement for a covered security that does not in- clude a legend or disclosure that the States believes is necessary or that includes information that a State regulator criticizes based on the format or content thereof. The Committee intends to eliminate States' authority to require or otherwise impose conditions on the disclosure of any information for covered securi- ties. If, however, a State had undertaken an enforce- ment action that alleged, for example, that the pro- spectus contained fraudulent financial data or failed to disclose that principals in the offering had previ- ously been convicted of securities fraud, it is con- ceivable that State laws regarding fraud and deceit could serve as the basis of a judgment or remedial or- der that could include a restriction or prohibition on the use of the prospectus or other offering document or advertisement within that State. The Committee does not intend [NSMIA) to be interpreted in a manner that would prohibit such judgments or remedial orders. H.R. Rep. No. 104-662, at 34 (1996). "' [T)he purpose of Congress is the ultimate touchstone' in every preemption case." Medtronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996) (quoting Retail Clerks v. Schermerhorn, 375 U.S. 96, 5 103 (1963). NSMIA does not restrict or limit states' authority to enforce laws prohibiting fraud or deceit in connection with securities transactions. The Committee does not intend, however, that the ex- tension of the prohibition to indirect actions by State regulators restrict or limit their ability to investigate, bring actions, or enforce orders, injunc- tions, judgments or remedies based on alleged viola- tions of State laws that prohibit fraud or deceit or that govern broker-dealer sales practices in connec- tion with securities or securities transactions. H.R. Rep. No. 104-662, at 30. The appellants contend that because the New York Blue Sky Laws do not require proof of scienter and federal securities laws do require scienter for actions for fraud or deceit, the NYAG's action is impliedly preempted because Congress intended to establish a national system of securities litigation. As stated above, Congress intended to establish a national system for the registration and regulation of securities offerings and to allow the states to retain their authority under their laws to take enforcement actions against fraudulent conduct in con- nection with securities transactions. Nothing in NSMIA implies that a state's blue sky laws are preempted if they do not re- quire proof of scienter for actions for fraud or deceit. Other states, including Connecticut, likewise do not require proof of scienter, see, Lehn v. Dailey, 77 Conn. App. 621, 630-32, 825 A.2d 140, 146-47 (2003), and federal securities law does not 6 uniformly require proof of scienter, see, Aaron v. SEC, 446 U.S. 680, 696-97 (1980). II. New York Attorney General's Action is an Enforcement Action for Fraud. The appellants argue that the NYAG's action is preempted because it is not an enforcement action. The appellants claim that because the NYAG's action seeks money damages that would benefit investors, NYAG is not the real party in interest and its action is not an enforcement action. The appellants mischar- acterize the NYAG's action as an action for damages on behalf of private shareholders. States that enforce compliance with their blue sky laws are exercising their sovereign powers. n[T]he exercise of sovereign power over individuals and entities within the relevant juris- diction . . . involves the power to create and enforce a legal code, both civil and criminal. " Alfred L. Snapp & Sons, Inc. v. Puerto Rico, 458 U.S. 592, 601 (1982). Thus, a nstate has a sovereign interest in enforcing its laws." Castillo v. Cameron County, 238 F. 3d 339, 351 (5th Cir. 2001); see, Califor- nia v. FCC, 75 F. 3d 1350, 1361, (9th Cir. 1996) (holding that a state may appeal a federal order preempting state law in order to nvindicate its own sovereign interest in law enforcement .. . "); Texas Office of Pub. Util. Counsel v. FCC, 183 F.3d 393, 449 (5th Cir. 1999) (stating that nstates have a sovereign inter- 7 est in 'the power to create and enforce a legal code ... •• cit- ing Snapp); Connecticut v. Moody's Corp., 664 F. Supp.2d 196, 202 (D. Conn. 2009) ("State is bringing an enforcement action in its sovereign capacity. . •) . Blue sky laws are remedial in nature and are broadly con- strued to protect the investing public. All Seasons Resorts v. Abrams, 68 N.Y.2d 81, 86-87 (1986), State v. Simons, 193 Or. 274, 289, 238 P.2d 247, 254 (1951), Levin v. Barry Kaye & Assoc., Inc., 858 F. Supp.2d 914, 919 (S.D. Ohio 2012); State v. Andresen, 256 Conn. 313, 322-23, 773 A.2d 328, 336 (2001). The NYAG brought this enforcement action pursuant to the Martin Act and Executive Law§ 63(12) in its sovereign capacity, not on be- half of individual investors. Even if the NYAG's action could be construed as seeking re- lief for a subset of New York citizens, the NYAG has an inde- pendent quasi-sovereign interest in the well-being of its popu- lace and the honest operation of its markets, and therefore is the real party in interest. "[A] State has a quasi-sovereign interest in the health and well-being - both physical and economic - of its residents in general." Snapp, 458 U.S. at 607. "Quasi-sovereign interests . are not sovereign interests, proprietary interests, or pri- vate interests pursued by the State as a nominal party." Id. at 602. A state also has a substantial quasi-sovereign interest in 8 securing a fair and honest marketplace for its citizens. Mis- sissippi v. Microsoft Corp., 428 F. Supp.2d 537, 545 (S.D. Miss. 2006) (holding that •the State has a quasi-sovereign interest in the economic well-being of its citizens, which includes securing the integrity of the marketplace"); Wisconsin v. Abbott Labs, Inc., 341 F. Supp.2d 1057, 1063 (W.D. Wise. 2004) (holding that Wisconsin's lawsuit "is aimed at securing an honest marketplace, promoting proper business practices, protecting Wisconsin con- sumers and advancing plaintiff's interest in the economic well- being of its residents"); Maine v. Data Gen'l Corp., 697 F. Supp. 23, 25 (D. Me. 1988) (stating that •[a] state's interest in maintaining an honest marketplace is a quasi-sovereign interest, even where the state's action will also benefit individuals"); Alabama v. Star Serv. & Petroleum Co., 616 F. Supp. 429, 431 (S.D. Ala. 1985) (stating that •[t]he state of Alabama has an interest in preventing unfair or dishonest competition, monopo- lies, and price wars . This is obviously a 'quasi- sovereign' interest in which the state is the real party in in- terest.") ; State of New York v. General Motors Corp., 547 F. Supp. 703, 705-06 (S.D.N.Y. 1982)(stating that •[t]he State's goal of securing an honest marketplace in which to transact business is a quasi-sovereign interest . As such, it is sufficient to preclude characterizing the state as a nominal party without a real interest in the outcome of this lawsuit"). 9 CONCLUSION The Appellate Division correctly held that the NYAG's en- forcement action is not preempted by federal law. This Court should affirm the Appellate Division's decision. BY: 10 Respectfully submitted, GEORGE JEPSEN ATTORNEY GENERAL OF THE STATE OF CONNECTICUT ~.~ Dinah J. ~ee Assistant Attorney General 55 Elm Street P.O. Box 120 Hartford, CT 06141-0120 Tel: (860) 808-5270 Fax: (860) 808-5385 WILLIAM H. SORRELL ATTORNEY GENERAL OF THE STATE OF VERMONT 109 State Street Montpelier, VT 05609-1001 Tel: (802) 828-3173 Fax: (802) 828-2154