842 F.3d 71 (1st Cir. 2016), 15-1945, Tutor Perini Corp. v. Banc of America Securities LLC
|Citation:||842 F.3d 71|
|Opinion Judge:||THOMPSON, Circuit Judge.|
|Party Name:||TUTOR PERINI CORPORATION, Plaintiff, Appellant, v. BANC OF AMERICA SECURITIES LLC, n/k/a Merrill Lynch, Pierce, Fenner & Smith, Incorporated, successor by merger; BANK OF AMERICA, N.A., Defendants, Appellees|
|Attorney:||George F. Carpinello, with whom Adam R. Shaw, John F. Dew, and Boies Schiller & Flexner, LLP were on brief, for appellant. Jonathan Rosenberg, with whom B. Andrew Bednark, Leah Godesky, and O'Melveny & Myers LLP were on brief, for appellees.|
|Judge Panel:||Before Thompson, Selya, and Kayatta, Circuit Judges.|
|Case Date:||November 21, 2016|
|Court:||United States Courts of Appeals, Court of Appeals for the First Circuit|
Tutor Perini Corporation, a giant construction company, sued Banc of America Securities LLC (BAS) and Bank of America, N.A. (BANA), alleging that BAS, acting as its broker-dealer and with BANA’s knowledge and acquiescence, sold Tutor Perini auction-rate securities (ARS) without disclosing that the ARS market was heading for a crash. Tutor Perini filed suit in Massachusetts’s federal district... (see full summary)
As Amended November 23, 2016.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS. Hon. Nathaniel M. Gorton, U.S. District Judge.
Affirmed in part, vacated in part, and remanded for further proceedings consistent with this opinion, with no costs to either side.
George F. Carpinello, with whom Adam R. Shaw, John F. Dew, and Boies Schiller & Flexner, LLP were on brief, for appellant.
Jonathan Rosenberg, with whom B. Andrew Bednark, Leah Godesky, and O'Melveny & Myers LLP were on brief, for appellees.
Before Thompson, Selya, and Kayatta, Circuit Judges.
THOMPSON, Circuit Judge.
Today's dispute is part of the fallout from the financial system's near meltdown in the late 2000s. On one side of this dispute is Tutor Perini Corporation (" Tutor Perini" ). On the other side is Banc of America Securities LLC and Bank of America, N.A. (" BAS" and " BANA," respectively). To hear Tutor Perini tell it, BAS -- acting as its broker-dealer, and with BANA's knowledge and acquiescence -- sold it auction-rate securities (" ARS" ) without disclosing that the ARS market was heading for a spectacular crash. But to hear BAS and BANA tell it, BAS actually disclosed the risks that later materialized. An obviously unconvinced Tutor Perini sued BAS and BANA in federal district court, alleging securities fraud under state and federal law, as well as a medley of other state-law claims. On cross-motions for summary judgment, the district judge sided with BAS and BANA. Concluding that triable claims exist worthy of a jury's time and attention, we -- for reasons recorded below -- affirm in part, vacate in part, and remand.
HOW THE CASE GOT HERE2
Tutor Perini is a giant construction company. And like most corporate colossi, Tutor Perini is extremely cash-conscious: it focuses daily on ensuring that it has enough cash on hand to fund its operations, and it traditionally pours any spare cash into short-term, low-risk, highly-liquid investments (like certificates of deposit and money-market funds) -- i.e., investments that will let Tutor Perini get cash back as quickly as possible whenever the need arises.
Which is where BAS came in. A wholly-owned subsidiary of BANA, BAS -- now known as Merrill Lynch, Pierce, Fenner & Smith, Incorporated -- is a banking company registered as a broker-dealer with the Securities and Exchange Commission. BAS was a moving force behind Tutor Perini's financial approach. And their relationship went back a ways.
Having gotten into financial trouble in the mid-1990s, Tutor Perini found itself in what is called a " workout period," generally defined as a time when the debtor and the creditor try to hammer out an agreement to reduce or discharge a debt. During that stretch, BAS served as Tutor Perini's banking advisor under a revolving credit agreement. To help Tutor Perini regain its financial footing, later credit agreements between them put limits on the kinds of cash investments Tutor Perini could make -- as a for-instance, Tutor Perini could not invest in ARS.
An ARS Primer
Backed by a variety of assets or revenue sources -- student loans or municipal assets, for instance -- ARS are long-term investments, often with maturity dates of 20 years or more. In the student-loan ARS market, student loans originated under the Federal Family Education Loan Program (" FFELP" ) were considered high-quality because they were largely guaranteed by the federal government. The credit quality of non-FFELP-backed student-loan ARS and municipal ARS was often enhanced by guarantees -- a " wrap" -- from " monoline" insurance companies like Ambac Assurance Corporation, which agree to make interest and principal payments if an issuer defaults ( i.e., Ambac " wraps" its own credit rating around the debt obligation and guarantees timely interest and principal payments in a default situation).3
Parties buy or sell ARS at periodic auctions (held, say, every 7, 28, or 35 days, depending on the particular ARS), with the ARS's interest rate set there too. These are nonpublic auctions. Placing bids via authorized broker-dealers, would-be investors say how many ARS they want and what interest rate they will accept (ARS are always bought and sold at par value, so buyers bid by specifying an interest rate rather than a price). The lowest interest rate needed to sell off all available ARS becomes the " clearing rate." And the clearing rate becomes the ARS's interest rate until the next auction. ARS have caps on the highest possible clearing rate, known in the biz as the max rate, which for our purposes is calculated using a byzantine formula based partly on indices like the London Interbank Offered Rate or the Treasury rate (two well-known indices in the financial markets measuring interest rates). If there are enough buy bids below the max rate so as to allow for the sale of all available ARS, then the auction is deemed a success; but if not, then not -- in which case ARS sellers must keep their ARS until the next successful auction, all the while earning interest at the max rate.
Like some other broker-dealers, BAS played several roles in the ARS market -- structuring and underwriting ARS on behalf of issuers; soliciting and placing ARS orders for investor-customers; and preventing auction failures by committing its own capital to buy ARS for its inventory accounts, from which it sold ARS to its customers. Ultimately, though, the ARS market was not terribly transparent. Among other unknowables, investors usually did not know if an auction only succeeded because of a broker-dealer support bid. They could only learn that from an authorized broker-dealer. Obviously, this lack of transparency made ARS buyers heavily dependent on their broker-dealers for key data to make sound investment decisions.5
BAS's ARS Pitch
In 2004, Tutor Perini opened a nondiscretionary-investment account with BAS -- i.e., an account that required BAS to get Tutor Perini's authorization before making account transactions; according to Tutor Perini's treasurer Susan Mellace, BAS would give her investment " options," and she would choose from a BAS-provided " recommended list." A certified public accountant with a master's degree in finance, Mellace reported to Tutor Perini's chief financial officer, who in turn reported to Tutor Perini's president. And she discussed what " vehicles" -- stocks, bonds, etc. -- she wanted to invest in with these gentlemen, though " [i]n terms of the day-to-day purchases and sales," those were her calls to make.
Keenly aware of Tutor Perini's investment strategy ( i.e., avoiding risks and illiquidity), BAS pitched ARS to Tutor Perini at an in-person meeting in May 2006 -- even though (as we noted) its own credit agreement with Tutor Perini banned the company from investing in ARS. During the confab, BAS salesperson Lois McGrath gave Mellace a PowerPoint presentation on ARS. Mellace knew nothing about ARS -- she " had never" even " heard of" ARS before " that presentation," she later explained. And up to that point, Tutor Perini had never invested in them.
One of McGrath's PowerPoint slides explained how BAS offered " the full spectrum of fixed income securities underwritten by [BAS], traditional money market funds, and customized portfolios" -- " [a]ll of which can be tailored to meet your specific investment guidelines" -- and promised BAS's " [s]trict focus on thoroughly identifying your portfolio objectives and understanding your ongoing investment needs, rather than on executing transactions," by providing " [i]nvestment solutions that meet your needs by clearly defining the risk/reward of particular securities and maintaining the highest level of client servicing." Another slide stressed how BAS pledged that it would " work with [Tutor Perini] to evaluate market conditions and determine which investment" would " meet [Tutor Perini's] investment objectives." Still another slide noted that ARS belonged in a portfolio as part of Tutor Perini's " [c]ore cash" strategy, along with other short-term investments like " U.S. Treasury Bills." Yet another slide played up ARS's " [l]iquidity opportunities," stressing that " [l]iquidity is enhanced by frequent auctions" and declaring that " the ARS auction process has developed into an established and mature market." Touting ARS's low risk and high liquidity, another slide emphasized what " a valuable...
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