Merrill Lynch Doesn’t Have to Arbitrate ARS Claims by LSED, Says Appeals Court

The U.S. Court of Appeals for the Second Circuit is affirming a district court’s ruling that Merrill Lynch & Co. Inc. does not need to arbitrate a disputes over auction-rate securities losses suffered by the state of Louisiana and the Louisiana Stadium and Exposition District (known collectively as LSED). The court noted that even assuming that LSED was entitled to arbitration, the district court reached the right conclusion when it found that LSED waived its right to arbitrate when it made known that it intended to resolve its ARS dispute through litigation and took numerous steps to make this happen.

Per the court, LSED, which owns the New Orleans Superdome, retained Merrill Lynch as the broker-dealer and underwriter to restructure its bond debt. After Hurricane Katrina damaged the Superdome, LSED also looked to Merrill about financing the repairs.

In 2006, LSED issued $240 million in municipal bonds as ARS. LSED’s auctions failed in 2008.

In 2009, LSED filed ARS lawsuits against three Merrill entities and bond insurer Financial Guaranty Insurance Co. One complaint was submitted to the U.S. District Court for the Eastern District of Louisiana, while another was filed in Louisiana state court. The Judicial Panel on Multidistrict Litigation would go on to centralize the cases, along with other ARS lawsuits, in the Southern District of New York. Meantime, the defendants sent a letter to LSED asserting that the plaintiff could not obtain relief on the basis of the factual allegations it submitted in its lawsuit.

Prior to filing its third amended complaint, LSED suggested that the case be resolved in arbitration. When the defendants did not respond, LSED moved to compel arbitration. It claimed that because Merrill subsidiary Merrill Lynch Pierce Fenner & Smith Inc. is a Financial Industry Regulatory Authority member, the broker-dealer is required to arbitrate customer disputes.

The district court denied LSED’s motion.

Louisiana Stadium and Exposition District

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