806 F. Supp. 2d 1253
N.D. Ga.2011Background
- Morgan Keegan & Co. is an underwriter of ARS with substantial ARS inventory during the 2008 market collapse.
- ARS are long-date securities with liquidity that depends on Dutch auctions, which can fail.
- Morgan Keegan issued a suite of Written Disclosures (ARS Manual, Trade Confirmations, ARS Brochure, website disclosures) describing ARS risks and that Morgan Keegan could bid for its own account.
- During 2007–2008, ARS auctions began failing; Morgan Keegan continued to buy ARS to support auctions and later capped its ARS inventory.
- SEC alleges Morgan Keegan misled investors about ARS liquidity risks and that brokers made oral misrepresentations; Morgan Keegan seeks summary judgment.
- Morgan Keegan argues Written Disclosures were adequate and that isolated oral misrepresentations by a few brokers cannot establish a company-wide securities violation; court grants summary judgment for Morgan Keegan.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Materiality of alleged oral misrepresentations | SEC argues misrepresentations affected the total mix of information | Keegan contends disclosures render oral statements immaterial | Materiality not shown; isolated oral misstatements insufficient |
| Adequacy of Written Disclosures | SEC contends disclosures were not adequately distributed or read | Disclosures were available and Morgan Keegan complied with disclosure duties | Written Disclosures adequately described ARS risks; distribution deemed adequate |
| Scope of misrepresentation evidence | Four investors' statements show broader company-wide misrepresentation | Four statements do not prove systemic misconduct; no evidence of department-wide policy | Cannot infer broad misrepresentation from four isolated cases; no viable class-wide claim |
| Fraud from failure to predict market | Failure to predict market constitutes fraud | Not actionable as fraud; expectations governed by reasonable disclosures | Failure to predict market not securities fraud |
| Reliance in SEC enforcement action | Not needed to prove enforcement violation; reliance considerations weighed in context; court treats as not altering outcome |
Key Cases Cited
- Bruschi v. Brown, 876 F.2d 1526 (11th Cir. 1989) (considering justifiable reliance with written disclosures and oral misrepresentations)
- First Union Discount Brokerage Servs., Inc. v. Milos, 997 F.2d 835 (11th Cir. 1993) (reliance on oral misrepresentations where written disclosures exist)
- Acme Propane, Inc. v. Tenexco, Inc., 844 F.2d 1317 (7th Cir. 1988) (written disclosures can trump inconsistent oral statements)
- Carr v. Cigna Securities, Inc., 95 F.3d 544 (7th Cir. 1996) (written representations prevail over oral representations)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (corporate officials need not be clairvoyant; disclose reasonably available facts)
- Basic Inc. v. Levinson, 485 U.S. 224 (1988) (materiality in securities fraud depends on total mix of information)
- Thompson v. Smith Barney, Harris Upham & Co., 709 F.2d 1413 (11th Cir. 1983) (consideration of whether investor could realistically find disclosed risks)
- Modem Settings, Inc. v. Prudential-Bache Secs., Inc., 936 F.2d 640 (2d Cir. 1991) (ten-day written complaint clause upheld as adequate disclosure mechanism)