(CN) - A guaranty insurance company's securities fraud claims against J.P. Morgan have been given a second chance after the New York Court of Appeals found that the claims are not preempted by the Martin Act.
     Assured Guaranty claims J.P. Morgan Investment Management Inc. mishandled Orkney Re II PLC's portfolio when the firm sunk - and lost - the client's funds into one of its own customers, Scottish Re Group Ltd., according to the ruling. Assured was forced to cover the losses under its agreement to guarantee Orkney's investment, the ruling says.
     However, when Assured sued J.P. Morgan for breach of fiduciary duty and gross negligence, the New York County Supreme Court booted the complaint, finding it was preempted by the Martin Act, according to the ruling.
     The Act, a "blue sky" law adopted in New York in 1921, gives the Attorney General the power to put a stop to securities fraud within the state, either through criminal or civil proceedings, the ruling says.
     The county supreme court ruled that the Attorney General has "exclusive enforcement powers under the Act," according to the ruling.
     On appeal, the appellate division revived Assured's tort claims, finding that "there is nothing in the plain language of the Martin Act, its legislative history or appellate level decisions in this state that supports defendant's argument that the Act preempts otherwise validly pleaded common-law causes of action," the ruling states.
     Judge Victoria Graffeo agreed, finding that the Act and prior case law dissecting the Act does not bar individuals from pursuing securities fraud claims.
     "Here, the plain text of the Martin Act, while granting the Attorney General investigatory and enforcement powers and prescribing various penalties, does not expressly mention or otherwise contemplate the elimination of common-law claims," the ruling states.
     The judge found that J.P. Morgan cannot "point to anything in the legislative history of the various amendments that demonstrates a 'clear and specific' legislative mandate to abolish preexisting common-law claims that private parties would otherwise possess."
     Although an investor cannot file a claim "predicated solely on a violation of the Martin Act ... an injured investor may bring a common-law claim (for fraud or otherwise) that is not entirely dependent on the Martin Act for its viability," the ruling states. "Mere overlap between the common law and the Martin Act is not enough to extinguish common-law remedies."