In Re Merrill Lynch Auction Rate Securities Litigation
758 F. Supp. 2d 264
| S.D.N.Y. | 2010Background
- LSED (Louisiana Stadium and Exposition District) and the State of Louisiana sue Merrill Lynch entities over ARS issuance tied to the Louisiana Superdome refinancing.
- MLPFS acted as lead underwriter and broker-dealer for auctions; Merrill Lynch, Co. is the parent sponsor.
- ARS were long-term variable-rate instruments settled by Dutch auctions with a “clearing rate” determining all rates; failures trigger a 12% failure rate.
- SEC issued an order in 2006 alleging undisclosed bidding practices and that brokers could bid on their own accounts; MLPFS posted an August 2006 disclosure describing such practices.
- ARS market collapsed in February 2008 with widespread auction failures, triggering higher interest payments for sponsors like LSED.
- Plaintiffs allege MLPFS suppression/omission of bidding practices and conflicts of interest as the core misrepresentations driving losses; Defendants move for judgment on the pleadings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether federal securities claims are time-barred | LSED timely under 28 U.S.C. §1658(b); discovery rule clock starts when violation facts are discoverable | Earlier disclosure/SEC Order precludes late discovery; limitations run earlier | Federal claims timely; discovery rule did not bar timely filing. |
| Whether plaintiffs adequately plead loss causation | Disclosures post-August 2006 concealment of bidding; losses tied to failed auctions | Disclosures negated concealment; investors chose not to convert; losses not caused by misstatements | Loss causation not established; misstatements and market manipulation claims dismissed. |
| Whether Louisiana state-law claims survive against fiduciary/ misrepresentation theories | Partners in advisory capacity create fiduciary duty; misrepresentation relied on pre-August disclosures | Disclosures after issuance cure some misstatements; no post-disclosure reliance | Counts as to fiduciary duty and misrepresentation largely viable; some post-disclosure misstatement claims dismissed. |
| Whether remaining state-law claims (breach of contract, redhibition, detrimental reliance, unjust enrichment) survive | Proposal did not form contract; reliance and damages exist; redhibition applies | Proposal not a binding offer; parol evidence barred; redhibition does not apply to intangibles | Count Four (breach of contract) dismissed; Counts Eight–Ten dismissed; detrimental reliance and unjust enrichment dismissed. |
Key Cases Cited
- Merck & Co. v. Reynolds, 130 S. Ct. 1784 (U.S. 2010) (discovery rule governs accrual of federal securities claims)
- Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005) (loss causation framework for securities claims)
- Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501 (2d Cir. 2010) (loss causation and market manipulation analysis in securities actions)
- Dodds v. Cigna Sec., Inc., 12 F.3d 346 (2d Cir. 1993) (derivative nature of Section 20 claims; statutory framework)
- ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (pleading heightened standard under Rule 9(b) and PSLRA)
- Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (U.S. 1977) (necessity of alleging damages and reliance in market manipulation context)