The Martin Act, New York's principal securities statute, or blue sky law, is designed to prevent fraud in the purchase and sale of securities. It is regarded as the most expansive anti-fraud state law in the country. Since the early 2000s, the New York Attorney General's office (NYAG) has aggressively brought actions against financial institutions under the Martin Act, and the courts have buttressed this effort by interpreting the statute to apply to a wide range of financial transactions, including such matters as privatizations of cooperative housing complexes (E. Midtown Plaza Hous. Co., Inc. v. Cuomo, 957 N.Y.S.2d 644 (2012)).

For more information about the Martin Act, see Practice Note, Enforcement Proceedings under New York's Martin Act.

On February 13, 2015, Justice Shirley Werner Kornreich of the New York Supreme Court continued the trend when she ruled, in an issue of first impression, that the Martin Act applies to material misstatements about private trading platforms known as "dark pools" (People v. Barclays Capital, Inc., No. 451391/2014, (Sup. Ct. N.Y. Co. Feb. 13, 2015)).

A significant percentage of current trading activity is conducted through computer algorithms programmed to execute trades with greater speed than any person could achieve. This technique is known as high frequency trading (HFT). On public exchanges, such as the New York Stock Exchange, where information about trade orders can be viewed by the participants, organizations with sophisticated HFT capabilities can realize trading gains by using this information to execute trades more quickly than the ordering investors. For example, if an investor puts in a large order to buy a certain security on several exchanges (the usual practice for large orders), the algorithm at HFT firms will recognize that order once it hits the closest exchange, buy the security on other exchanges more quickly than the investor's order can be fulfilled and sell it to the investor at a slightly higher price. Effectively, the high-frequency traders take a piece of the investor profits.

For this and other reasons, many large banks have set up proprietary trading platforms, so-called dark pools, where trades of securities are executed anonymously and where trade data is not disclosed in real time. Among other things, trading on dark pools allows investors to execute trades without alerting the HFT firms and so avoid adversely moving the market before the trade is fully executed.

Last fall, NYAG sued Barclays, one of the world's largest banks and an operator of a dark-pool exchange, alleging that it violated the Martin Act by making certain material misrepresentations to investors about how its dark pool works. Barclays filed a motion to dismiss, arguing that NYAG failed to state a claim and that only misstatements about a particular security, not about the trading platform, could give rise to liability under the Martin Act.

Noting the novelty of the issue, the court denied Barclays' motion to dismiss on the issue of the Martin Act's applicability, holding that it applies to alleged misrepresentations about the dark pool. Judge Kornreich reasoned that, where the allegation is that investors chose to execute their trades in Barclays' dark pool to avoid exposure to HFT, the decision to trade in the dark pool is "very much an investment decision." The court has not yet ruled on the issue of whether NYAG's complaint properly stated the claim.

Counsel for financial institutions in New York should be mindful of the expansive reach of the Martin Act, now encompassing statements about alternative trading platforms.

Practical Law has resources to help lawyers become familiar with and navigate the enforcement proceedings under the Martin Act, including Practice Note, Enforcement Proceedings under New York's Martin Act.