State of New York Court of Appeals

Supreme Court, New York County, Index No. 401720/05 State of New York Court of Appeals ___________ THE PEOPLE OF THE STATE OF NEW YORK BY ANDREW M. C...
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Supreme Court, New York County, Index No. 401720/05

State of New York Court of Appeals ___________ THE PEOPLE OF THE STATE OF NEW YORK BY ANDREW M. CUOMO, ATTORNEY GENERAL OF THE STATE OF NEW YORK, Plaintiff-Respondent, -againstMAURICE R. GREENBERG and HOWARD I. SMITH, Defendants-Appellants. ________________ BRIEF OF AMICUS CURIAE AARP IN SUPPORT OF PLAINTIFF-RESPONDENT __________________________ On brief: Michael Schuster AARP 601 E Street, NW Washington, DC 20049

Susan Ann Silverstein* AARP Foundation Litigation 601 E Street, NW Washington, DC 20049 Tel.: (202) 434-2159 *Counsel of record for AARP Dated: January 30, 2013

____________________________________________________

TABLE OF CONTENTS TABLE OF AUTHORITIES .................................................................................... ii STATEMENT OF INTEREST .................................................................................. 1  

PRELIMINARY STATEMENT ............................................................................... 1 ARGUMENT ............................................................................................................. 2 I.

COMPLEX SECURITIES CREATE CONSIDERABLE CHALLENGES FOR INVESTORS ............................................................... 2 A. An Increasing Number of Individuals Must Rely on Securities for a Secure Retirement ........................................................................... 2 B.

II.

The Integrity of the Securities Markets Depends Upon Accurate Disclosure by Insiders and Rigorous Enforcement of Disclosure Standards .................................................................................................. 5

THE PREVALENCE OF SECURITIES FRAUD REQUIRES THAT INVESTORS HAVE A FULL RANGE OF STRONG, FLEXIBLE ENFORCEMENT TOOLS .......................................................... 9 A. State Authorities Play an Essential Role in the Regulation of the U.S. Securities Industry ................................................................. 9 B.

III.

Fraud Remains an Enormous Problem, Especially for Older Investors ....................................................................................... 11

UPHOLDING STATE ANTI-FRAUD ENFORCEMENT ACTIONS IN THE FACE OF ARGUMENTS ASSERTING FEDERAL SECURITIES LAW PREEMPTION WOULD PLACE NEW YORK IN LINE WITH OTHER STATE AND FEDERAL COURTS THAT HAVE ADDRESSED THE ISSUE ................................................................................................... 14

CONCLUSION ........................................................................................................ 17

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TABLE OF AUTHORITIES Cases Capital Research & Management Co. v. Brown, 147 Cal. App. 4th 58 (Ct. App. 2007) ..................................................... 15-16 Chamberlin v. Advanced Equities, Inc., 2002 U.S. Dist. LEXIS 28307 (W.D. Wash. 2002) ...................................... 17 Houston v. Seward & Kissel, LLP, 2008 U.S. Dist. LEXIS 23914 (S.D.N.Y. 2008) ........................................... 17 IDS Bond Fund, Inc. v. Gleacher NatWest Inc., 2002 U.S. Dist. LEXIS 4073 (D. Minn. 2002) .............................................. 16 Missouri ex rel. Carnahan v. Stifel, Nicolaus & Co., 648 F. Supp. 2d 1095 (E.D. Mo. 2009) ......................................................... 16 Papic v. Burke, 2007 Conn. Super. LEXIS 820 14-15 (Conn. Super. Ct. 2007), aff’d, 113 Conn. App. 198 (Conn. App. Ct. 2009) ................................................................................... 16 Zuri-Invest AG v. Natwest Fin. Inc., 177 F. Supp. 2d 189 (S.D.N.Y. 2001) ........................................................... 17 Federal Statutes National Securities Markets Improvement Act of 1996 (NSMIA), codified at 15 U.S.C. § 77r(a)(2)(B).............................................................. 15 Sarbanes-Oxley Act of 2001, Pub. L. 107-204, 116 Stat. 745 (codified as amended in scattered sections of 15 U.S.C. and 18 U.S.C.) ....... 6 Securities Act of 1933, 15 U.S.C. §§ 77a–77z-3 (2006) ........................................... 5 Securities Exchange Act of 1934, 15 U.S.C. §§ 78a–78pp (2006) ....................... 5, 6

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Securities Litigation Uniform Standards Act of 1998 (SLUSA), 15 U.S.C. § 78a (4)(5) ................................................................................... 14 Legislative History & Congressional Hearings Capital Markets and Deregulation Act of 1995: Hearings Before House Subcomm. on Telecommunications and Finance Comm. on Commerce on H.R. No. 2131, 104th Cong. (1995) available at http://www.sec.gov/news/testimony/testarchive/1995/spch069.txt .............. 10 Hearing Before the Committee on Banking, Housing and Urban Affairs, 107th Cong. (2002), available at http://www.sec.gov/news/testimony/032102tshlp.htm ................................... 5 The State of Financial Literacy and Education in America: Hearing Before Sen. Comm. on Banking, Housing and Urban Affairs, 107th Cong. (2002), available at http://www.gpo.gov/fdsys/pkg/ CHRG-107shrg88644/html/CHRG-107shrg88644.htm.................................. 8 Not Born Yesterday: How Seniors Can Stop Investment Fraud: Hearing Before Sen. Special Com. on Aging, 109th Cong. (2006), available at http://aging.senate.gov/publications/3292006.pdf ..................................13, 14 Not Born Yesterday: How Seniors Can Stop Investment Fraud: Hearing Before Sen. Special Com. on Aging, 109th Cong. (2006), available at http://aging.senate.gov/minority/public/index.cfm/files/serve?File _id=41969189-0b66-53a6-c58a-021a05524191 ........................................... 12 Securities Lending in Retirement Plans: Why the Banks Win, Even When You Lose: Hearing Before the Special Comm. on Aging, 112th Cong. (2011) available at http://aging.senate.gov/publications/3162011.pdf .......................................... 7 Other Authorities Applied Research & Consulting, NASD Investor Literacy Research – Executive Summary (2003), http://bit.ly/TZsIu5 ............................................. 8 iii  

ICI, 2012 Investment Company Fact Book (52nd ed. 2012), available at http://www.ici.org/pdf/2012_factbook.pdf.................................. 3 ICI, The U.S. Retirement Market, 2009, 19 Res. Fundamentals 3 (2010), available at http://www.ici.org/pdf/fm-v19n3.pdf .......................................... 4 Dennis Jacobe, In U.S., 54% Have Stock Market Investments, Lowest Since 1999, Gallup Econ. (Apr. 20, 2011), http://www.gallup.com/poll/147206/Stock-Market-Investments -Lowest- 1999.aspx.......................................................................................... 3 Alicia H. Munnell, Boston College Ctr. for Ret. Research, The Declining Role of Social Security 1 (Feb. 2003), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=556792 ......................... 4 NASAA Enforcement Section, NASAA Enforcement Report (2012), available at: http://bit.ly/UdQJOr ................................................................. 10 Opinion Research Corp., Investor Survival Skills Survey: An Examination of Investor Knowledge and Behavior (2005), http://bit.ly/QlTReU......................................................................................... 8 Barbara Roper & Stephen Brobeck, Mutual Fund Purchase Practices (June 2006), http://www.consumerfed.org/pdfs/mutual_fund_ survey_report.pdf ......................................................................................... 7, 9 Daniel Schrass & Michael Bogdan, Profile of Mutual Fund Shareholders, 2011, ICI Research Report (Feb. 2012), http://www.ici.org/pdf/rpt_12_profiles.pdf ..................................................... 2 Patricia D. Struck, Wisconsin Securities Administrator and President of NASAA, Seniors Summit Statement (July 17, 2006), available at http://www.nasaa.org/860/nasaa-presidents-statement-at-sec-seniorssummit/ .......................................................................................................... 13 U.S. Bureau of Labor Statistics, U.S. Dep’t of Labor, Employee Benefits in the U.S.—March 2012 (July 11, 2012), available at http://www.bls.gov/ncs/ebs/sp/ ebnr0018.pdf .................................................................................................... 4 iv  

Miscellaneous Press Release, Nat’l Ass’n of Securities Dealers, Inc., NASD Launches Major Public Disclosure, Investor Education Initiative (Feb. 19, 1997), available at http://www.nasd.com/PressRoom/NewsReleases/1997 NewsReleases /NASDW_010448 ................................................................... 7 Press Release, New York State Office of the Attorney General, AIG Settles Fraud, Bid-rigging And Improper Accounting Charges (Feb. 9, 2006), http://www.ag.ny.gov/press-release/aig-settles-fraud-bidrigging-and-improper-accounting-charges, (Sept. 3, 2003), http://www.ag.ny.gov/press-release/state-investigation-revealsmutual-fund-fraud .......................................................................................... 11 Press Release, New York State Office of the Attorney General, State Suit Cites Pattern of Fraud at AIG (May 26, 2005), http://www.ag.ny.gov/press-release/state-suit-cites-pattern-fraud-aig ......... 11 Press Release, New York State Office of the Attorney General, State Investigation Reveals Mutual Fund Fraud (Sept. 3, 2003), http://www.ag.ny.gov/press-release/state-investigation-reveals-mutual-fundfraud ............................................................................................................... 11

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STATEMENT OF INTEREST AARP is a nonpartisan, nonprofit organization with a membership dedicated to addressing the needs and interests of people age fifty and older in ways beneficial and affordable to them and to society as a whole. Through education, advocacy and service, AARP seeks to enhance the quality of life for older persons and all Americans by promoting independence, dignity, and purpose. AARP is greatly concerned about fraudulent, deceptive, and unfair business practices that can disproportionately harm older people, as well as the rights of older workers. AARP thus supports laws and public policies designed to protect older people from investment fraud. PRELIMINARY STATEMENT The decreased ability of retirees to rely on Social Security to replace wages has led more individuals to enter the securities markets, either on their own or through an employer-sponsored defined contribution plan. This is a paradigm shift. In the vast majority of situations the responsibility for directing the investment of retirement plan assets is transferred to the individual. Generally, individual investors lack basic knowledge of how the securities markets operate and are unaware of the fundamental features of their own investments. The complexity of the marketplace and the relative lack of financial sophistication of a large swath of the individual investor population make many investors vulnerable 1  

to fraud. The unfortunate prevalence of fraud in the marketplace requires that investors have the benefit of a full range of strong, flexible legal enforcement tools. Federal law does not preempt the states’ historic police powers in such fields as consumer and investor protection. The respective federal and state law enforcement schemes at issue in this appeal were enacted to protect investors, and exist in harmony to achieve this purpose. The decision of the Appellate Division should be affirmed. ARGUMENT I.

COMPLEX SECURITIES CREATE CONSIDERABLE CHALLENGES FOR INVESTORS. A. An Increasing Number of Individuals Must Rely on Securities for a Secure Retirement. The number of investors owning individual stocks and mutual funds has

grown enormously in the last several decades. This era in the investment arena presents an unusually difficult environment for the individual investors who shoulder the primary responsibility for making appropriate investment choices to assure adequate income to fund their retirement years. According to the latest publicly data available from the Investment Company Institute, in 2011 more than 52 million U.S. households, or about 44 percent, owned mutual funds. Daniel Schrass & Michael Bogdan, Profile of Mutual Fund Shareholders, 2011, ICI Research Report 5 (Feb. 2012), http://www.ici.org/pdf/rpt_12_profiles.pdf. The 2  

median age of individuals heading households that owned mutual funds was 50. Id. Thirty-two percent of mutual fund–owning households held those investments solely inside employer-sponsored retirement plans that include defined contribution plans and employer-sponsored IRAs; 31 percent owned funds solely outside these plans, and 37 percent had funds both inside and outside employersponsored retirement plans. Id. In the latest Gallup poll of investors released a year ago, 54 percent of Americans said they hold individual stocks, stock mutual funds, or stocks in their 401(k) or IRA. Dennis Jacobe, In U.S., 54 percent Have Stock Market Investments, Lowest Since 1999, Gallup Econ. (Apr. 20, 2011), http://www.gallup.com/poll/147206/Stock-Market-Investments-Lowest-1999.aspx. Although self-reported stock ownership has trended downward since 2007 when 65 percent of Americans owned stock, more than half of adult Americans continue to rely on the stock market to help fund their retirement. Id. A recent Investment Company Institute (ICI) survey of the mutual fund industry showed that the combined assets of the nation’s mutual funds totaled $11.6 trillion, approximately 89 percent of which was held by individuals (as opposed to financial institutions, nonprofits, and other institutional investors). ICI, 2012 Investment Company Fact Book 101 (52nd Ed. 2012), available at http://www.ici.org/pdf/2012_factbook.pdf. 3  

In the years to come, Social Security is projected to provide proportionately less retirement income as a percentage of prior earnings compared to its role in earlier times. Alicia H. Munnell, Boston College Ctr.for Ret. Research, The Declining Role of Social Security 1 1 (Feb. 2003), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=556792 (reporting that this replacement rate will continue to drop from 41.2% for a “medium earner” who retired at 65 in 2000 to 36.5% by 2030). At the same time, relatively few private sector employers provide traditional defined benefit pension plans, and more employees rely on defined contribution plans. U.S. Bureau of Labor Statistics, U.S. Dep’t of Labor, Employee Benefits in the U.S.—March 2012 1-2, 6-7 (July 11, 2012), available at http://www.bls.gov/ncs/ebs/sp/ebnr0018.pdf. Defined contribution plans and IRAs continued to grow more rapidly than assets in other types of retirement plans, such as defined benefit plans; defined contribution plans and IRAs constituted 52 percent of retirement assets in 2009. ICI, The U.S. Retirement Market, 2009, 19 Res. Fundamentals 3, 4 (2010), available at http://www.ici.org/pdf/fm-v19n3.pdf. “IRAs represented the largest component of the retirement market, with $4.2 trillion in assets accounting for 26 percent of U.S. retirement assets at year-end 2009 . . . .” Id. at 6.

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The decreased ability of retirees to rely on Social Security to replace wages has led more individuals to enter the securities markets, either on their own or through an employer-sponsored defined contribution plan. B.

The Integrity of the Securities Markets Depends Upon Accurate Disclosure by Insiders and Rigorous Enforcement of Disclosure Standards.

Accurate financial disclosures by issuers are central to informed investment decisions. Both investment advisors and investors who conduct their own research depend on the integrity of the market and the accuracy of the information available to them. See Hearing Before the Committee on Banking, Housing and Urban Affairs, 107th Cong. (2002) (written testimony of Harvey L. Pitt, Chairman, U.S. Securities & Exchange Commission), available at http://www.sec.gov/news/testimony/032102tshlp.htm (“With Enron’s disintegration, innocent investors, employees and retirees, who made life-altering decisions based upon a stock’s perceived value, found themselves locked-in to a rapidly sinking investment that ate up the fruits of years of their hard work. It is these Americans, whose faith fuels our markets, whose interests are, and must be, paramount.”). The legislature has long recognized the significance of accurate disclosures beginning with the Securities Act of 1933, 15 U.S.C. §§ 77a–77z-3 (2006), and the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a–78pp (2006). These laws, 5  

focused on requiring documentation, as well as accurate and thorough disclosures.  Since then, regulation requiring mandatory disclosure has periodically increased. See 15 U.S.C. § 78m (2006) (listing various documents that issuers of securities “shall file with the Commission, in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate for the proper protection of investors and to insure fair dealing in the security”). The importance of accurate disclosure to the legislature and the investing public is evidenced by the Sarbanes-Oxley Act’s directive “[t]o protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.” Sarbanes-Oxley Act of 2001, Pub. L. 107-204, 116 Stat. 745 (codified as amended in scattered sections of 15 U.S.C. and 18 U.S.C.). Without accurate disclosures, individual investors and investment advisors cannot make informed investment decisions. AARP is particularly concerned by the harm caused to individual investors, because they often lack the knowledge to make independent investment decisions and they rely heavily on financial professionals. The complexity of the marketplace and the relative lack of financial sophistication of many investors, among other factors, make many investors illequipped to make wise investment decisions on their own. “In recent years, most workers have seen their savings take a hit, leaving many to wonder if they will ever be able to retire. The gap between what Americans will need in retirement 6  

and what they will actually have saved is estimated to be a staggering $6.6 trillion.” Securities Lending in Retirement Plans: Why the Banks Win, Even When You Lose: Hearing Before the Special Comm. on Aging, 112th Cong. 1 (2011) (statement of Herb Kohl, Chairman, Sen. Special Com. on Aging), available at http://aging.senate.gov/publications/3162011.pdf. Studies consistently show that typical consumers do not have even the most fundamental knowledge needed to make informed investment decisions. These investors often do not know the basics of how investments work and do not even know what they are doing with their own money. Unfortunately, there has been little improvement over time. Barbara Roper & Stephen Brobeck, Mutual Fund Purchase Practices 10 (June, 2006), http://www.consumerfed.org/pdfs/mutual_fund_survey_report.pdf. The National Association of Securities Dealers (NASD) has further reported key findings from its survey and focus groups designed to gauge investor knowledge: while 78% of Americans could name a character on a television sitcom, only 12% knew the difference between a “load” and “noload” fund; 63% of Americans knew the difference between a halfback and a quarterback, while a mere 14% could tell the difference between growth and income stocks. Press Release, Nat’l Ass’n of Securities Dealers, Inc., NASD Launches Major Public Disclosure, Investor Education Initiative (Feb. 19, 1997), available at 7  

http://www.nasd.com/PressRoom/NewsReleases/1997NewsReleases/NASDW_01 0448. Studies show little improvement in knowledge critical to allow investors to make wise decisions independently. “Despite numerous, well-intentioned efforts over the last few years to increase investor knowledge, recent surveys on financial literacy are finding nearly the same dismal results that were found in surveys five or more years earlier.” The State of Financial Literacy and Education in America: Hearing Before Sen. Comm. on Banking, Housing and Urban Affairs, 107th Cong. 140 (2002) (prepared statement of Denise Voigt Crawford, Tex. Securities Comm’r), available at http://www.gpo.gov/fdsys/pkg/CHRG107shrg88644/html/CHRG-107shrg88644.htm. For example, a survey of investor knowledge and behavior conducted for the Securities Investor Protection Corporation (SIPC) and the Investors Protection Trust concluded that the “vast majority of American investors do not appear to possess the basic ‘investor survival skills’ needed to build their savings into a retirement nest egg.” Opinion Research Corp., Investor Survival Skills Survey: An Examination of Investor Knowledge and Behavior 5 (2005), http://bit.ly/QlTReU. Among the survey’s specific findings: more than four out of five respondents (83%) failed the overall test of key knowledge and behavior; 80% of respondents incorrectly believe that some institution insures them against loss due to 8  

investment fraud. See also Applied Research & Consulting, NASD Investor Literacy Research -- Executive Summary 9 (2003), http://bit.ly/TZsIu5 (reporting the results of a 2003 survey indicating that 62% of investors believed they were insured or did not know whether they were insured against stock market losses). In addition, mutual fund investors frequently misjudge their own knowledge and sophistication. Roper & Brobeck, supra, at 6. While this survey reported that 66% of mutual fund investors indicated that they knew either a great or fair amount about mutual funds, it also noted that surveys that test investor knowledge have found that actual knowledge levels are significantly lower than self-assessed knowledge. Individual investors need recourse to legal measures through the full range of legal enforcement mechanisms and remedies—federal and state, public and private, civil and criminal—that Congress and state legislatures enacted for their protection. II.

THE PREVALENCE OF SECURITIES FRAUD REQUIRES THAT INVESTORS HAVE A FULL RANGE OF STRONG, FLEXIBLE ENFORCEMENT TOOLS. A.

State Authorities Play an Essential Role in the Regulation of the U.S. Securities Industry.

Former Securities and Exchange Commission (SEC) Chairman Arthur Levitt noted the critical role that state securities authorities play in regulating the nation’s securities markets: “state securities authorities play an essential role in the 9  

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 violations of law.” Capital Markets and Deregulation Act of 1995: Hearings Before House Subcomm. on Telecommunications and Finance Com. on Commerce on H.R. No. 2131, 104th Cong. 6 (1995) (prepared statement of Arthur Levitt, Chairman, Sec. and Exch. Comm’n), available at http://www.sec.gov/news/testimony/testarchive/1995/spch069.txt. Chairman Levitt further testified that the SEC did not believe federal preemption is appropriate in the enforcement authority context, noting the limited resources available to the federal agency. Id. at 23. The SEC’s inability to bring actions in all investor fraud cases makes enforcement actions by state officials crucial. Id. at 6. The most recent survey of the North American Securities Administrators Association (NASAA), published in March 2012, indicates that “[s]tates imposed more than $2.2 billion in investor restitution orders and levied fines or penalties and collected costs in excess of $290 million.” NASAA Enforcement Section, NASAA Enforcement Report 6 (2012), available at http://bit.ly/UdQJOr. Investors continue to rely on state regulators “to address both traditional areas of securities fraud and emerging issues.” Id. The actions of the New York State Attorney 10  

General toward the transactions at issue in this case and in other situations illustrate the reach and effectiveness of state law to combat securities fraud. See, e.g., Press Release, New York State Office of the Attorney General, State Suit Cites Pattern of Fraud at AIG (May 26, 2005), http://www.ag.ny.gov/pressrelease/state-suit-cites-pattern-fraud-aig; Press Release, New York State Office of the Attorney General, AIG Settles Fraud, Bid-rigging And Improper Accounting Charges (Feb. 9, 2006), http://www.ag.ny.gov/press-release/aig-settles-fraud-bidrigging-and-improper-accounting-charges (describing state lawsuits that resulted in settlements by the NYAG and SEC with AIG); Press Release, New York State Office of the Attorney General, State Investigation Reveals Mutual Fund Fraud (Sept. 3, 2003), http://www.ag.ny.gov/press-release/state-investigation-revealsmutual-fund-fraud (illustrating the NYAG’s powers of investigation). B.

Fraud Remains an Enormous Problem, Especially for Older Investors.

Investment fraud is such an enormous problem that the U.S. Senate has held several hearings to address the problem. According to the past Special Committee Chairman on Aging: Americans routinely fall prey to investment scams. For older Americans, these crimes can be particularly devastating. According to the Federal Trade Commission’s fraud complaint data for Americans 50 and older, when looking at total dollars lost, investment fraud ranks number four out of the FTC’s 15 reporting categories. Clearly, retirement nest eggs are attractive 11  

targets for fraud, and once lost, the money often cannot be recovered. Not Born Yesterday: How Seniors Can Stop Investment Fraud: Hearing Before Sen. Special Com. on Aging, 109th Cong. (2006) (statement of Comm. Chairman Sen. Gordon H. Smith), available at http://aging.senate.gov/minority/public/index.cfm/files/serve?File_id=419691890b66-53a6-c58a-021a05524191. Senator Kohl, the current chair, has stressed the need to “shine a bright light on the disturbing and growing problem of senior investment fraud. . . . [M]any seniors are turning to investments to increase their retirement income,” and “are proving too easy prey for con artists ready to steal their hard earned and harder to replace money. . . . Regardless of the scam, the outcome remains the same: seniors lose their irreplaceable retirement income.” Not Born Yesterday: How Seniors Can Stop Investment Fraud: Hearing Before Sen. Special Com. on Aging, 109th Cong. 1 (2006) (opening statement of Sen. Herb Kohl), available at http://aging.senate.gov/publications/3292006.pdf. Similar sentiments were expressed by the President of NASAA, who stated that the advocacy group Consumer Action found that “[w]hile people age 60 and older make up 15 percent of the U.S. population, they also account for about 30 percent of fraud victims . . . .” She noted that the “targeting of seniors for investment schemes is a chronic problem,” and that “[a]s baby boomers swell the retiree population, state securities 12  

regulators are convinced that financial scams targeting seniors also will rise and based on our collective experience of over seventy-five years of securities regulation, we believe our concerns are well-founded.” Not Born Yesterday: How Seniors Can Stop Investment Fraud: Hearing Before Sen. Special Com. on Aging, 109th Cong. (2006) (statement of Patricia D. Struck, Pres. NASAA & Wis. Securities Div. Administrator), available at http://aging.senate.gov/publications/3292006.pdf. At a meeting convened by the SEC, the NASAA President reiterated these concerns as follows: Con artists have emerged from the side streets and back alleys to Main Street where older investors live. They know that today’s retirees are facing greater responsibility for their financial security because of the decline of traditional defined benefit pension plans, and they need to maximize their retirement investments. . . . The current landscape facing senior investors is littered with slick schemes and broken dreams. While our cases of senior investment fraud may not make national headlines, they are devastating in their impact on victims and their families. Patricia D. Struck, Wisconsin Securities Administrator and President of NASAA, Seniors Summit Statement (July 17, 2006), available at http://www.nasaa.org/860/nasaa-presidents-statement-at-sec-seniors-summit/. These concerns have not diminished, even with the increased attention to the issue in recent years; and there is good reason to fear that the problem may become more dire in the coming years. Therefore, never have state enforcement actions 13  

been more essential to the protection of older investment fraud victims. State laws are a critical element of the institutional arsenal available to police the marketplace. “State securities regulators have a long history of protecting investors at the local level day in and day out. Enforcement against fraud is the essence of what state . . . regulators do – to vigorously pursue sales practice abuses and a variety of scams and frauds against unsuspecting senior investors.” Not Born Yesterday: How Seniors Can Stop Investment Fraud: Hearing Before Sen. Special Comm. on Aging, 109th Cong. (2006) (statement of Patricia D. Struck, Pres. NASAA & Wis. Securities Div. Administrator), available at http://aging.senate.gov/publications/3292006.pdf. She concluded: “These are dangerous economic times for seniors. Now, more than ever, all American investors – and especially senior investors – need more, not fewer cops on the securities beat.” Id. III.

UPHOLDING STATE ANTI-FRAUD ENFORCEMENT ACTIONS IN THE FACE OF ARGUMENTS ASSERTING FEDERAL SECURITIES LAW PREEMPTION WOULD PLACE NEW YORK IN LINE WITH OTHER STATE AND FEDERAL COURTS THAT HAVE ADDRESSED THE ISSUE. State enforcement actions are a protected, essential tool in securities fraud

enforcement. Congress specifically intended to preserve “the appropriate enforcement powers of State securities regulators.” Securities Litigation Uniform Standards Act of 1998 (SLUSA), 15 U.S.C. § 78a (4)(5). 14  

Other courts that have addressed the question of federal preemption of securities laws in a variety of contexts found there is no federal preemption. For example, in Capital Research & Management Co. v. Brown, 147 Cal. App. 4th 58 (Ct. App. 2007), the California Court of Appeal examined how Congress’ intent in writing the National Securities Markets Improvement Act of 1996 (NSMIA), codified at 15 U.S.C. § 77r(a)(2)(B), shaped the scope of preemption of state Attorneys General. The court stated that The plain language of the savings clause and its legislative history persuade us that Congress intended to preserve the states’ antifraud authority to control the conduct of brokers and dealers, notwithstanding that the exercise of such controls might prospectively influence the disclosure made by a covered security. Put another way, the Attorney General’s action has all the attributes necessary to bring it squarely within the ambit of the savings clause. It is (1) an enforcement action (2) brought by a state officer performing the functions of a securities commission, (3) under California law (4) with regard to fraud and deceit (5) in connection with covered securities transactions. Capital Res. & Mgmt. Co., 147 Cal. App. 4th at 66-67. The court found that under NSMIA’s savings clause, the Attorney General’s power encompassed the authority to bring enforcement actions “with respect to fraud or deceit, or unlawful conduct by a broker or dealer, in connection with securities or securities transactions,” id., the powers at issue in the instant case. The court therefore held that the savings clause “is sufficiently broad to permit the Attorney General of California to pursue injunctive relief and penalties 15  

against a covered security's investment advisor and wholesale broker-dealer who allegedly made inaccurate or inadequate representations to purchasers.” Id. at 61. In Papic v. Burke, 2007 Conn. Super. LEXIS 820 14-15 (Conn. Super. Ct. 2007), aff’d, 113 Conn. App. 198 (Conn. App. Ct. 2009), a Connecticut court adopted California’s reasoning. The court found that Connecticut’s “authority to enforce its laws under [the Connecticut Uniform Securities Act], in connection with fraud and/or with material omissions which would mislead investors in connection with the offer, sale, or purchase of securities, remains intact” under NSMIA’s savings clause. Id. at 15. In a similar context, a federal district court in Missouri found that the SLUSA expressly preserved the right of the state to provide for civil enforcement actions by the commissioner of securities to investigate and bring enforcement actions under Missouri law in any circuit court in the state. Missouri ex rel. Carnahan v. Stifel, Nicolaus & Co., 648 F. Supp. 2d 1095, 1097 (E.D. Mo. 2009). A federal district court in Minnesota also found that Congress did not intend NSMIA to preempt state securities fraud claims under the Minnesota Securities Fraud Act because it did not amend the savings clauses, and because it complements NSMIA’s purpose rather than impeding it. IDS Bond Fund, Inc. v. Gleacher NatWest Inc., 2002 U.S. Dist. LEXIS 4073, 19-20 (D. Minn. 2002). 16  

Likewise, a federal district court in Washington, considering federal preemption of Washington’s statutory rescission remedy under state blue sky laws, noted that “Congress did not intend NSMIA to interfere with states’ ability to protect their citizens from fraud, or to implement greater protections from fraudulent activity than the federal law provides, so long as states do not impose on issuers conflicting registration requirements.” Chamberlin v. Advanced Equities, Inc., 2002 U.S. Dist. LEXIS 28307, 10-11 (W.D. Wash. 2002). Similarly, two federal district courts in New York have found there is no federal law preemption in the realm of actions based on state statutes intended to deter fraudulent practices in the securities markets. Zuri-Invest AG v. Natwest Fin. Inc., 177 F. Supp. 2d 189 (S.D.N.Y. 2001) (interpreting preemption of New York common law fraud claims); Houston v. Seward & Kissel, LLP, 2008 U.S. Dist. LEXIS 23914 (S.D.N.Y. 2008) (interpreting Oregon’s securities fraud statutes). CONCLUSION For the foregoing reasons, the Court should affirm the decision of the Supreme Court, Appellate Division and remand the case for the trial.

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Dated: January 30, 2013

Respectfully submitted,

By: On brief: Michael Schuster AARP 601 E Street, NW Washington, DC 20049

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____________________ Susan Ann Silverstein* AARP Foundation Litigation 601 E Street, NW Washington, DC 20049 Tel.: (202) 434-2159 *Counsel of record for AARP