Ashland Inc. v. Oppenheimer & Co. Inc.

• Citation: 648 F.3d 461
• Decision Date: 28 July 2011
• Docket Number: No. 10–5305.,10–5305.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)
• Parties: ASHLAND, INC.; AshThree LLC,* Plaintiffs–Appellants,v.OPPENHEIMER & CO., INC., Defendant–Appellee.

648 F.3d 461

ASHLAND, INC.; AshThree LLC,* Plaintiffs–Appellants,

v.OPPENHEIMER & CO., INC., Defendant–Appellee.

No. 10–5305.

United States Court of Appeals, Sixth Circuit.

Argued: June 10, 2011.Decided and Filed: July 28, 2011.

ARGUED: Christopher P. Johnson, Kasowitz, Benson, Torres & Friedman LLP, New York, New York, for Appellants. Rodney Acker, Fulbright & Jaworski L.L.P., Dallas, Texas, for Appellee. ON BRIEF: Christopher P. Johnson, Joshua Moses Greenblatt, Kasowitz, Benson, Torres & Friedman LLP, New York, New York, Barbara B. Edelman, Grahmn N. Morgan, Dinsmore & Shohl LLP, Lexington, Kentucky, for Appellants. Rodney Acker, Peter Stokes, Fulbright & Jaworski L.L.P., Dallas, Texas, Lionel G. Hest, Fulbright & Jaworski L.L.P., New York, New York, Douglass C. Farnsley, Clark C. Johnson, Stites & Harbison PLLC, Louisville, Kentucky, for Appellee.Before: KEITH, CLAY, and COOK, Circuit Judges.

OPINION

COOK, Circuit Judge.

The plaintiff, Ashland Inc. (“Ashland”), appeals the district court's dismissal of its amended complaint against Oppenheimer & Co., Inc. (“Oppenheimer”) in this securities-fraud action. We affirm the district court's decision.

I. Background

Ashland is a diversified global chemical company headquartered in Kentucky. Oppenheimer is a securities broker-dealer headquartered in New York. This suit arises from Ashland's purchase of Oppenheimer-brokered auction rate securities (“ARS”) in 2007 and 2008.

ARS are long-term bonds whose interest rates periodically reset through recurring auctions—commonly held every seven, fourteen, twenty-eight, or thirty-five days. ARS typically offer higher returns than treasuries or other money market instruments, but with little additional credit risk. Moreover, investors can liquidate their positions at each auction— assuming demand exceeds supply. If, however, sellers outnumber buyers at a particular auction, the auction “fails,” and no ARS owner may sell his position. Though they have no obligation to do so, ARS underwriters (generally investment banks) may partake in the auctions, placing proprietary bids, to help ensure that the auctions do not fail. As an additional safeguard, if an ARS auction fails, the securities will offer a “penalty” interest rate meant to compensate owners for temporary illiquidity and entice new buyers to emerge. The penalty rate offered varies from security to security, but is generally specified in each security's offering document.

Following a capital divestiture in 2005, Ashland sought to invest approximately $1.3 billion while it searched for acquisition targets. During May 2007, Joseph Broce, Ashland's Assistant Treasurer, met with Sherri Castner, Oppenheimer's Executive Director of Investments, to discuss the matter. Castner advocated that Ashland buy ARS. Touting ARS' strong credit ratings, Castner represented them as “safe and liquid” investments, “comparable to money market instruments.” “[I]nstances of ‘disequilibrium’ in the ARS market were very rare,” she said, because underwriters “had never allowed an auction to fail and would continue to act to prevent such an occurrence.” Ashland heeded Castner's advice and purchased Oppenheimer-brokered, municipal-bond-backed ARS.

In mid–2007, Broce became worried about the subprime-mortgage crisis's effect on the securities and asked Castner what other investments Ashland might consider. Castner recommended that he look at student-loan-backed ARS (“SLARS”), which she claimed offered the same benefits as municipal ARS, but “were not connected to the market for subprime mortgages.” Ashland thus started purchasing SLARS in lieu of tax-exempt ARS.

In January 2008, Ashland learned that Goldman Sachs, an underwriter for several SLARS deals, allowed one of its auctions to fail. Broce, concerned about the event, contacted Castner; she characterized the failure as an “aberration” and told Broce that SLARS remained “safe, liquid[,] and suitable investments” with “strong investor demand.” But later that month, Lehman Brothers also let some of its ARS auctions fail. Shortly thereafter, Piper Jaffray followed suit. In the days surrounding these auctions, Oppenheimer continued marketing SLARS to Ashland, but “made absolutely no mention of the substantial systemic dangers in the ARS market,” leading Ashland to hold and expand its SLARS portfolio.

Ashland purchased its last SLARS in early February 2008. Four days later, Oppenheimer's CEO called a meeting with company executives “to discuss the ARS market.” The CEO later testified that, “at the end of this meeting, Oppenheimer had concluded that there were particular problems concerning SLARS.” The market imploded the next day. Following this event, Broce told Castner to sell Ashland's SLARS, but neither Oppenheimer nor any underwriters would place proprietary bids, leaving Ashland with $194 million in illiquid SLARS. Ashland, unable to sell most of these holdings, discounted them by millions of dollars and lost similar amounts in the few sales it did execute. Moreover, when Ashland finally encountered an acquisition opportunity—the entire reason it sought a liquid investment—it had to borrow funds and incurred millions of dollars in financing costs.

Ashland now alleges that, contrary to Oppenheimer's CEO's statements, Oppenheimer actually knew about the ARS meltdown months in advance. As support for its allegation, Ashland points to several occurrences. First, “beginning no later than August 2007, [Oppenheimer's CEO] received a hand[-]delivered memo each day documenting the status of failed ARS auctions.” Second, Oppenheimer's CEO and an Oppenheimer Vice President, “aware of the spate of auction failures in the ARS market,” sold some of their ARS holdings—$2.65 million and $100,000, respectively—between December 2007 and early February 2008. Then, in January 2008, another Oppenheimer Senior Vice President emailed company executives, cautioning that if a lead underwriter were “to quickly exit the [ARS] business entirely,” the firm would have to find a replacement to process orders. If there were no replacements, however, Oppenheimer “[might] not be able to sell shares.” Finally, in November 2008, the Massachusetts Office of the Secretary of the Commonwealth filed an administrative complaint against Oppenheimer. In conversations with these officials, an Oppenheimer Vice President retrospectively commented that “downgrades in monoline insurers were causing increasing[ly] noticeable stress on the ARS market by late 2007.”

In addition to this central claim, Ashland's complaint lists several other facts about the securities that Oppenheimer allegedly withheld. For example, Oppenheimer never provided offering documents for ARS issuances until after Ashland purchased the instruments.¹ Nor did Oppenheimer disclose the ARS' true liquidity risks, including their lack of organic demand and the degree to which underwriters supported the auction market. Similarly, Oppenheimer failed to warn Ashland that underwriters “were not committed to ensuring liquidity” for ARS and SLARS, and would only place bids when it served their “own commercial best interests.” Moreover, in promoting the ARS' AAA credit ratings, Oppenheimer never mentioned that they “were ... achieved only because” of the securities' low penalty rates, which made the bonds harder for buyers to resell.² Finally, Oppenheimer never disclosed its sales commission structures, including that employees lost commissions if clients resold their ARS before a “minimum holding period” had passed.

In April 2009, Ashland sued Oppenheimer in the Eastern District of Kentucky, asserting five claims: (1) violation of the Securities Exchange Act of 1934, (2) violation of Kentucky Blue Sky Laws, (3) common-law fraud, (4) promissory estoppel, and (5) negligent misrepresentation. Oppenheimer moved to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). The district court heard oral argument on the motion before dismissing the case with prejudice in early 2010. In its memorandum opinion, the court explained that Ashland's securities-fraud claims did not allege “facts or scienter with the requisite particularity,” Ashland Inc. v. Oppenheimer & Co., 689 F.Supp.2d 874, 889 (E.D.Ky.2010), and that its common-law allegations failed to state a claim, id. at 889–91. Ashland appeals the ruling.

II. Analysis

A. Applicable Legal Standards

We review de novo a district court's dismissal of a complaint pursuant to Rule 12(b)(6). Bowman v. United States, 564 F.3d 765, 769 (6th Cir.2008). In conducting this review, we “construe the complaint in the light most favorable to the plaintiff” and “accept all well-pleaded factual allegations as true.” La. Sch. Emps.' Ret. Sys. v. Ernst & Young, LLP, 622 F.3d 471, 477–78 (6th Cir.2010). “In addition to the allegations in the complaint, [we] may also consider other materials that are integral to the complaint, are public records, or are otherwise appropriate for the taking of judicial notice.” Ley v. Visteon Corp., 543 F.3d 801, 805 (6th Cir.2008) (internal quotation marks and citation omitted), abrogated on other grounds by Matrixx Initiatives, Inc. v. Siracusano, ––– U.S. ––––, 131 S.Ct. 1309, 1323–25, 179 L.Ed.2d 398 (2011), as recognized in Frank v. Dana Corp., 646 F.3d 954, 960–62 (6th Cir.2011).

Under Federal Rule of Civil Procedure 8(a)'s pleading standard, a plaintiff must provide “a short and plain statement of the claim showing that [he] is entitled to relief.” Yet the complaint must include more than “labels and conclusions” or “a formulaic recitation of the elements of a cause of action,” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), and instead proffer “enough facts to state a claim to relief that is plausible on its face,” id. at 570, 127 S.Ct. 1955. Regarding culpability, the complaint must allow the court to “draw the reasonable inference that the defendant is liable for the misconduct...