Martin Act

The Martin Act is a powerful and unusually broad anti-fraud law in the state of New York. Enacted in 1921, long before the major federal securities laws, it grants the New York Attorney General (NYAG) extraordinary powers to investigate and prosecute financial fraud. What makes it Wall Street's Kryptonite is its remarkably low burden of proof. Unlike federal securities laws, prosecutors using the Martin Act do not need to prove scienter (that the defendant intended to deceive) or that any specific investor was harmed or relied on the fraudulent information. The mere presence of misrepresentation or deception in connection with the sale of securities or commodities in or from New York is enough to bring a case. This makes it one of the most feared tools in a regulator's arsenal and a significant factor in the landscape of financial regulation, given New York's central role in global finance.

The Martin Act's power comes from a few key features that make it the legal equivalent of a bazooka when federal laws might feel like a peashooter.

This is the big one. Under most fraud statutes, a prosecutor must climb the difficult mountain of proving that the accused knew they were doing something wrong and intended to defraud someone. The Martin Act flattens that mountain. Prosecutors only need to show that a misrepresentation or a false promise was made. It doesn't matter if the person making the statement was a diabolical genius or just astonishingly incompetent; if the statement was false and related to a security sale, they can be held liable. This is a dramatic departure from federal laws like the Securities Act of 1933 and the Securities Exchange Act of 1934, which generally require proof of intent.

The law's scope is incredibly wide. It applies to anyone promoting or selling securities to the public within or from New York State—which, by extension, covers a huge portion of Wall Street and the global financial industry. The NYAG has the power to:

• Subpoena any documents it deems relevant.
• Compel witnesses to testify under oath.
• Halt the sale of securities immediately.
• Bring both civil and criminal charges against individuals and corporations.

This gives investigators immense leverage, allowing them to quickly pierce corporate secrecy and uncover wrongdoing that might otherwise remain hidden for years.

The Martin Act was born in the Roaring Twenties to combat the rampant fraud of “bucket shops”—shady operations that took clients' money for stock trades but never actually bought the stocks, simply betting against their own customers. For many decades, the law was used sparingly. Its modern-day fame began in the late 1990s and early 2000s when then-NYAG Eliot Spitzer dusted it off and used it to launch high-profile investigations. He famously targeted conflicts of interest among research analysts at major investment banks, revealing how they were privately trashing stocks they were publicly rating as “Buy.” Since then, successive Attorneys General have used the Act to investigate everything from the subprime mortgage crisis and auction-rate securities to high-frequency trading and, more recently, the cryptocurrency industry.

While you might not be the target of a Martin Act investigation, its existence is hugely relevant for any prudent investor, especially a value investor.

• A Safer Playground: The Act’s power serves as a significant deterrent to corporate malfeasance. Knowing that the NYAG can launch a full-scale investigation without having to prove intent makes executives think twice about cutting corners or misleading the public. This helps create a more transparent and honest market, which is good for everyone.
• A Source of Insight: When the Martin Act is used, the resulting investigations often unearth a treasure trove of information. A savvy investor can study the findings to understand hidden risks within an industry or to identify red flags in a company's financial reporting or business practices. The analyst scandal, for instance, was a powerful lesson in not taking Wall Street research at face value.
• A Reminder to Be Cautious: The very need for such a law reinforces a core tenet of Benjamin Graham: always invest with a margin of safety. The market is filled with hype, misinformation, and, occasionally, outright fraud. The Martin Act is a potent reminder that you can't always trust what companies or promoters say. Your best defense is a deep understanding of the business you're buying and paying a price that provides a cushion against both unforeseen business problems and the ever-present risk of human folly and deception.