On Dec. 21, in Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc., New York's Court of Appeals held that the Martin Act (New York's "blue sky" securities law) does not bar private investors from bringing common-law claims involving securities, resolving confusion in New York state and federal courts about the act's pre-emptive scope.

This decision is particularly important because of the securities industry's substantial presence in New York and because New York law is routinely selected by parties to govern their contractual relationships. If, as some commentators believe likely, the decision leads to substantially greater litigation against players in the securities industry -- particularly investment advisers -- the ruling may cause securities advisers to reconsider their strategies and follow more conservative investment approaches.

The decision opens the door to a wide range of common-law claims and attendant exposure to awards of punitive damages, a point underscored by the large number of amici curiae briefs filed on both sides. In reviewing the opposing positions, an interesting divide becomes apparent. Those arguing that private litigation claims should be permitted to proceed assert that the law is clear and that private claims are not pre-empted, while the opponents argue that allowing claims will result in a flood of unjustified litigation and cause the downfall of the securities industry.

Originally adopted in 1921, the Martin Act "authorizes the Attorney General to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York." The act is enforced exclusively by the New York attorney general and allows the AG to bring criminal and civil proceedings against fraudulent practices without proof of scienter or fraudulent intent. The statute is silent about its pre-emptive effect on common-law claims. In Assured, the Court of Appeals unambiguously held that such claims are not pre-empted.

At minimum, the decision will lead to more litigation in the securities industry, a prospect acknowledged by many of the amicus curiae. This increase is likely to result because common-law fraud claims are often difficult to prove. Most importantly, fraud must be proved by clear and convincing evidence, a much higher standard than a preponderance of evidence. It is worth noting that Assured had not asserted fraud claims against J.P. Morgan Investment Management.

By contrast, claims like gross negligence and breach of fiduciary duty revolve around an amorphous "reasonableness" standard of liability, and may be proved by a simple preponderance of evidence. Yet, like fraud claims, these claims allow punitive damage awards.

More broadly, Assured is a further step away from the statutory -- chiefly federal regulation of securities industry practices -- and the predictability those statutes may afford industry decision makers through defined statutory terms and the large body of case law and administrative guidance arising from the SEC's enforcement of those statutes. Assured introduces further uncertainty and additional risk to the decision-making process in the financial sector. Some also argue that this will lead to less innovation and improvement, as it will be more difficult for companies without a proven track record to obtain financing and to find investors interested in investing with them.

The Court of Appeals' failure to address this concern reflects the narrow role often played by courts, which are called upon to analyze the language and legislative histories of statutes, rather than to develop policies to affect industries. That role is better left to the legislature or an agency charged with administering a statute.

In fact, judges often comment in their opinions that it is not their role to make the law or decisions that foster the best policy. Courts are only given authority to determine the meaning of the legislature's actions. The Martin Act consists of a series of prohibitions, and is not "administered" by the New York attorney general in the manner traditionally associated with a regulatory agency.

If the dire predictions of the industry amici come true, the securities industry may lobby the New York Legislature to amend the Martin Act to bar common-law causes of action involving securities. While the effect of the decision is not clear, it is now the prevailing rule that industry participants must follow, at least until it is changed by the legislature.

Schuyler Carroll is a partner and head of the New York office for law firm Perkins Coie LLP. Barry Reingold is a partner in the firm's Washington office.