Dismissal of $18.5M Merrill Lynch Securities Fraud Lawsuit Affirmed

The U.S. Court of Appeals for the Second Circuit has affirmed a lower court’s ruling to dismiss the ARS lawsuit filed against Merrill Lynch (MER), Merrill Lynch, Pierce, Fenner, and Smith Inc. ( MLPF&S), Moody’s Investor Services (MCO), and the McGraw-Hill Companies, Inc. (MHP). Pursuant to state and federal law, plaintiff Anschutz Corp., which was left with $18.95 million of illiquid auction-rate securities when the market failed, had brought claims alleging market manipulation, negligent misrepresentation, and control person liability. The case is Anschutz Corp. v. Merrill Lynch & Co. Inc.

According to the court, Merrill Lynch underwrote a number of the Anchorage Finance ARS and Dutch Harbor ARS offerings in which Anschutz Corp. invested. To keep auction failures from happening, Merrill was also involved as a seller and buyer in the ARS auctions and had its own account. Placing these support bids in both ARS auctions allowed Merrill to make sure that they would clear regardless of the orders placed by others. The financial firm is said to have been aware that the ARS demand was not enough to “feed the auctions” unless it too made bids and that its clients did not know of the full extent of these practices.

Per its securities complaint, Anschutz contends that the description of Merrill’s ARS practices, which were published on the financial firm’s website beginning in 2006, were misleading, untrue, and “inadequate.” The plaintiff accused the credit rating agency defendants of giving the ARS offerings ratings that also were misleading and false and should have been lowered (at the latest) in early 2007 when Merrill knew or should have known that the ratings they did receive were unwarranted.

Last year, the United States District Court for the Southern District of New York dismissed the ARS lawsuit, concluding that Merrill’s disclosures on its Web site had been “sufficient” to make Anschutz aware of Merrill’s ARS “support bidding practices.” In regards to the claims against the credit rating agency, the court found that the plaintiff did not succeed in alleging that there was any actionable misstatement under California or New York law because the challenged ratings were only “statements of opinion.”

Now, in affirming the district court’s decision to dismiss the ARS lawsuit, the appeals court has found that the “generalized and conclusory allegations” made by the plaintiff are not enough to plead that a violation of securities law occurred. The 2nd Circuit also affirmed the district court’s decision to dismiss the California statutory claims against Merrill on the basis that Anschutz did not allege that the harm it suffered occurred in that state or that the financial firm committed any behavior there that was relevant.

As for the claims against the credit ratings agency, the appeals court held that the plaintiff did not have any alleged contact or relationship with the defendants that would “remotely” meet the standard under New York law, which mandates that to make a negligent misrepresentation claim a plaintiff has to allege that because of “a special relationship” it was the defendant’s duty to provide the correct information.

If your losses are a result of a failed ARS and you believe that misconduct or negligence on the part of a financial firm or one of its advisers was a factor, please contact one of our auction-rate securities lawyers today.

Anschutz Corp. v. Merrill Lynch & Co. Inc.

More Blog Posts:
Raymond James Settles Auction-Rate Securities Case with Indiana Securities Division for $31M, Stockbroker Fraud Blog, August 27, 2011

The 11th Circuit Revives SEC Fraud Lawsuit Against Morgan Keegan Over Auction-Rate Securities, Institutional Investor Securities Blog, May 8, 2012

Securities Fraud Lawsuit Against UBS Securities LLC by Detroit Pension Funds Won’t Be Remanded to State Court, Says District Court, Institutional Investor Securities Blog, January 17, 2011