Investors in financial stocks have a new reason to be nervous: On Tuesday, New York's highest court made it easier for disgruntled investors to sue banks and Wall Street firms. As a result, JPMorgan Chase (JPM +3.50%), Bank of America (BAC +4.59%) and Goldman Sachs (GS +2.63%) -- among the many other possible targets of investors -- may face many new lawsuits in the coming months.
Depending on how many new cases are filed and their cumulative stakes, they might add up to real money, even for the largest banks. The financial meltdown, after all, created huge numbers of angry investors.
At issue in the case was whether or not New York's strong securities law, the Martin Act, prevented investors from suing companies that mistreated them illegally under the "common law" -- the law developed by judges over the centuries rather than enacted by New York’s legislature. If the Act blocked common law claims, investors would have to use the less protective federal securities laws in any situation other than outright fraud.
However, the Court decided that the Martin Act didn’t block investors' common law suits, a result that shocked many even though it was unanimous and firmly grounded in the statute's text and public policy. The surprise stemmed from the fact that in over 50 cases cited by JPMorgan Chase -- the loser in Tuesday's case -- judges had dismissed common law claims as preempted by the Martin Act.
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