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J. & W. Seligman & Co. Inc. v. Spitzer

September 27, 2007


The opinion of the court was delivered by: Wood, U.S.D.J.


Plaintiffs J. & W. Seligman & Co. Incorporated ("Seligman") and its president, Brian T. Zino (together, "Plaintiffs") bring this action to enjoin Defendant Eliot Spitzer, New York State Attorney General (the "Attorney General") from investigating the advisory fees Seligman charges for its financial services. In particular, Plaintiffs seek to enjoin enforcement of portions of certain subpoenas, issued by the Attorney General in the course of a fraud investigation, that seek information regarding Seligman's advisory fees and the process for arriving at them. Plaintiffs argue that the Attorney General's actions are preempted by federal law, namely section 36(b) of the Investment Company Act of 1940, 15 U.S.C. § 80a ("ICA").

The Attorney General now moves to dismiss this action on the grounds that (1) this Court should abstain from considering the merits pursuant to the Supreme Court's decision in Younger v. Harris et al., 401 U.S. 37 (1971); and (2) in any event, Plaintiffs' preemption argument is without merit and should be dismissed for failure to state a claim. For the reasons that follow, the Court holds that abstention is appropriate and that the case should be dismissed without consideration of Plaintiffs' preemption argument. The Attorney General's motion to dismiss is therefore GRANTED.

I. Factual Background

A. The Parties

Seligman is an investment adviser registered with the Securities and Exchange Commission ("SEC") pursuant to the Investment Advisers Act of 1940, 15 U.S.C. § 80b-1 et seq.. It manages several types of funds and accounts, including mutual funds ("Seligman Funds"). Brian T. Zino is the President of Seligman.

The Attorney General is the state official authorized by the Martin Act, New York's "blue sky" law, to investigate and prosecute securities fraud. N.Y. Gen. Bus. Law § 352. The Martin Act provides, in pertinent part, that "[w]henever it shall appear to the attorney-general" that securities fraud has occurred, is ongoing, or is about to occur, the attorney general may in his discretion either require or permit . . . [the alleged violator] to file with him a statement in writing under oath or otherwise as to all the facts and circumstances concerning the subject matter which he believes it is [in] the public interest to investigate . . . and may also require such other data and information as he may deem relevant and may make such special and independent investigations as he may deem necessary in connection with the matter.

N.Y. Gen. Bus. Law § 352(1). Subsection (2) provides the Attorney General with subpoena power in furtherance of an investigation.

The attorney-general, his deputy or other officer designated by him is empowered to subpoena witnesses, compel their attendance, examine them under oath before him or a magistrate, a court of record or a judge or justice thereof and require the production of any books or papers which he deems relevant or material to the inquiry. . . .

Id. at § 352(2).

B. Commencement of the Martin Act Investigation

On January 30, 2004, the Attorney General commenced a Martin Act investigation into possible fraudulent conduct by Seligman and related entities and persons. The SEC was conducting, at that time, an investigation into the same conduct. According to the Attorney General, his investigation inquires into at least three possible frauds under the Martin Act: one relating to a misrepresented market timing policy, allowing purportedly prohibited activities that appear to have cost Fund shareholders over $80 million since 1998; a second arising out of a misleading press release creating the false impression that restitution payments made by Seligman to the Funds fully compensated shareholders for the harm they suffered; and a third examining whether Seligman or others engaged in fraudulent conduct relating to Seligman's advisory fees. (AG's Mem. at 4.) Plaintiffs do not contest the Attorney General's power to investigate the first two of the possible frauds described above.

On January 30, 2004, the Attorney General issued subpoenas relating to the market timing aspects of the investigation. (Johnson Aff. ¶ 4.) On or about June 14, 2005, the Attorney General issued additional subpoenas, parts of which inquired into the subject of advisory fees. (Johnson Aff. ¶ 5.) Apparently, neither Seligman nor its officers or directors contested these subpoenas.

In March 2005, Seligman, the Attorney General, and representatives of the SEC began settlement discussions. (See Compl. ¶ 11.) In mid-August, a tentative agreement was reached on the financial terms of the settlement. (Id.) The Attorney General also sought to impose certain operating restrictions on Seligman, regarding the manner in which Seligman's advisory fees would be negotiated and established in the future. These restrictions were not required or requested by the SEC. (Id.; Opp. at 2-3.)

During the week of August 22, 2005, Seligman advised the Attorney General that it would accept the financial terms of the settlement, but could not accept the other conditions. (Compl. ¶ 12.) Plaintiffs allege that at this point, the Attorney General "threatened" that unless Seligman accepted the additional conditions, he would "expand" his investigation into "excessive" advisory fees. (Id. at ¶ 13.) Seligman refused to accept the additional condition, and asserted that the Attorney ...

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