In Re Merrill Lynch Auction Rate Sec. Litig.This Document Relates To No. 08 Ci v. 3037

• Decision Date: 31 March 2010
• Docket Number: No. 09 MD 2030 (LAP).,09 MD 2030 (LAP).
• Parties: In re MERRILL LYNCH AUCTION RATE SECURITIES LITIGATION.This Document Relates To No. 08 Civ. 3037 (LAP).
• Court: U.S. District Court — Southern District of New York

704 F.Supp.2d 378

In re MERRILL LYNCH AUCTION RATE SECURITIES LITIGATION.

This Document Relates To No. 08 Civ. 3037 (LAP).

No. 09 MD 2030 (LAP).

United States District Court,

S.D. New York.

March 31, 2010.

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Aaron Michael Sheanin, Christina H.C. Sharp, Daniel Charles Girard, Jonathan K. Levine, A.J. De Bartolomeo, Girard Gibbs LLP, Geoffrey C. Rushing, Gianna Christa Gruenwald, Richard Alexander Saveri, Saveri & Saveri Inc., San Francisco, CA, Christopher Adam Seeger, David R. Buchanan, Stephen A. Weiss, Seeger Weiss LLP, Philadelphia, PA, Norman E. Siegel, Rachel Erin Schwartz, Stueve Siegel Hanson LLP, Kansas, MO, Thomas V. Urmy, Ian J. McLoughlin, Shapiro, Haber & Urmy, L.L.P., Boston, MA, Jessica K. Case, Richard A. Getty, Getty & Childers, P.L.L.C., Joe F. Childers, Lexington, KY, William Hickman, III, Jones & Hickman, Pikeville, KY, Brent J. Bourgeois, Larry M. Roedel, Roedel, Parsons, Baton Rouge, LA, James Richard Swanson, Lance C. McCardle, Fishman Haygood Phelps Walmsley Willis & Swanson, LLP, New Orleans, LA, Andrew C. Shen, David L. Schwarz, Kevin J. Miller, Mark Charles Hansen, Kellogg, Huber, Hansen, Todd, Evans & Figel, PLLC, Washington, DC, Brian Craig Kimball, Charles Louis McBride, Jr., Brunini, Granthan, Grower & Hewes, PLLC, Jackson, MS, John Norman Bolus, Maynard, Cooper & Gale, PC, Birmingham, AL, for Plaintiffs.

Jay B. Kasner, Scott D. Musoff, Skadden, Arps, Slate, Meagher & Flom LLP, Alex Jason Kaplan, Sidley Austin LLP, Barry J. Mandel, Jonathan Hale Friedman, Foley & Lardner, LLP, George Freeman, The New York Times Company, Timothy P. Burke, Bigham Englar Jones & Houston, Shari A. Brandt, Brian S. Fraser, Richards Kibbe & Orbe LLP, David Neal Wynn, Arent Fox LLP, James J. Coster, James J. Regan, Joshua M. Rubins, Justin Evan Klein, Satterlee Stephens Burke & Burke LLP, Mark David McPherson, Carl Hanline Loewenson, Jr., Morrison & Foerster LLP, New York, NY, Bill James Symes, Page R. Barnes, Foley Lardner LLP, Elizabeth Allen Frohlich, Morgan, Lewis & Bockius LLP, Farschad Farzan, Perkins Coie LLP, Jayesh Santkumar Hines-Shah, Jonathan Alan Patchen, Stephen McGeorge Bundy, Stephen E. Taylor, Taylor & Company Law Offices, L.L.P., San Francisco, CA, A. Inge Selden, III, Carl S. Burkhalter, Gregg M. McCormick, John Norman Bolus, Maynard Cooper & Gale, Birmingham, AL, Robert B. Craig, O'Bryan Baun Choen Cuebler Karamanian, Birmingham, MI, Antoinette Susan Waller, Arent Fox, L.L.P., Los Angeles, CA, David Andrew McCarthy, Wilson Sonsini Goodrich & Rosati, Palo Alto, CA, for Defendants.

Opinion and Order

LORETTA A. PRESKA, Chief Judge.

Plaintiffs Colin Wilson, Ronald Levy, and Michael Bonde, purchasers of auction rate securities (“ARS”), bring this purported class action against Merrill Lynch & Co., Inc. (“Merrill Lynch & Co.”), a financial firm that offers wide-ranging financial services and products through its subsidiaries, and Merrill Lynch, Pierce, Fenner & Smith, Inc. (“Merrill Lynch”), a securities broker-dealer and a wholly-owned subsidiary of Merrill Lynch & Co. Plaintiffs bring their claim under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and Rules 10b-5 (a) and 10b-5(c) thereunder, 17 C.F.R. § 240.10b-5(a), (c). Plaintiffs also claim violations of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). Defendants now move to dismiss the Plaintiffs' complaint for failure to state a claim. For the reasons discussed below, the Defendants' motion is GRANTED.

I. Background

This case is one of nine that comprise the Multidistrict Litigation (“MDL”) known as In re Merrill Lynch Auction Rate Securities Litigation, 09 MD 2030. In an order dated June 10, 2009, 626 F.Supp.2d 1331 (Jud.Pan.Mult.Lit.2009), the Judicial Panel on Multidistrict Litigation (“MDL Panel”) granted a motion by defendants to centralize four actions that had been brought against Merrill Lynch in various district courts throughout the country. The MDL Panel transferred three actions to the Southern District of New York and assigned the Multidistrict Litigation to this Court for coordinated or consolidated pretrial proceedings pursuant to 28 U.S.C. § 1407.¹ To date, five other actions have been added to this MDL. ²

By Order dated October 30, 2008, the Court instructed the Defendants to inform the Plaintiffs of any perceived deficiencies in the complaint by letter. Plaintiffs were instructed to then inform the Court whether they wished to stand on their complaint or file an amended complaint. Plaintiffs filed the Consolidated Class Action Complaint on December 10, 2008. [dkt. no. 34.] ³ Defendants filed a motion to dismiss on February 27, 2009. [ dkt. no. 40.]

By letter dated April 17, 2009, Plaintiffs informed the Court that they would not respond to Defendants' motion to dismiss in light of Judge Lawrence M. McKenna's ruling in In re UBS Auction Rate Securities Litigation, No. 08 CV 2967(LMM), 2009 WL 860812, at *6 (S.D.N.Y. Mar. 30, 2009). Judge McKenna had ruled that the lead plaintiffs in a similar proposed class action against UBS did not have standing to pursue their claims because they had accepted a UBS repurchase offer for their ARS pursuant to a regulatory settlement and were precluded from bringing claims on behalf of those who had not settled. See id. at *5-6. Since the original lead plaintiffs in the instant case had accepted a similar repurchase offer from Merrill Lynch, counsel for the lead plaintiffs proposed to amend the complaint by substituting new lead plaintiffs who had not been eligible for the repurchase offer. [dkt. no. 44.]

Plaintiffs filed the First Amended Consolidated Class Action Complaint for Violations of the Securities Laws (“Complaint”) on May 22, 2009. [dkt. no. 45.] On June 19, 2009, this Court granted the withdrawal of former lead plaintiffs Gerald Wendel and Robert Berzin and approved the substitution of new lead plaintiffs Colin Wilson, Ronald Levy, and Michael Bonde (“Lead Plaintiffs” or “Plaintiffs”). [dkt. no. 48.] Defendants filed the instant motion to dismiss the Complaint on July 24, 2009. [dkt. no. 51.] On March 25, 2010, the parties convened before the Court for oral argument on the motion to dismiss.

The Lead Plaintiffs purport to represent all persons or entities who purchased ARS for which Merrill Lynch served as sole auction dealer, lead auction dealer, co-lead auction dealer, or joint lead auction dealer between March 25, 2003, and February 13, 2008 (the “Class Period”). (Compl. ¶¶ 2, 18.) A summary of the factual allegations of the Complaint follows.

A. Auction Rate Securities

Auction rate securities were equity or debt instruments that were traded through periodic Dutch auctions held every seven, twenty-eight, thirty-five, or forty-nine days. (Compl. ¶¶ 30, 34.) The securities were issued by closed-end preferred funds, states, state agencies, municipalities, student loan originators and lenders, and other corporations and entities. ( Id. ¶ 31.) While the market for ARS was initially populated by sophisticated institutional investors in the 1980s, issuers and underwriters subsequently attracted unsophisticated investors by lowering the minimum investment to $25,000. ( Id. ¶ 33.) By February 2008, the market for ARS had grown to over $330 billion. ( Id. ¶ 32.)

Investors participated in the periodic auctions by submitting orders to buy, sell, or hold ARS at particular interest rates. ( Id. ¶¶ 34, 37.) An auction succeeded if the number of purchase orders at a particular interest rate equaled or exceeded the number of sell orders at that same rate. ( Id. ¶ 37.) The clearing rate was then set as the lowest interest or dividend rate at which all sale orders could be fulfilled. This clearing rate applied until the next auction. ( Id.)

An auction failed if the number of sell orders exceeded the number of buy orders. ( Id.) In the event of a failed auction the interest rate on a security was reset to a predetermined rate, referred to as the maximum rate. ( Id. ¶ 38.) If the maximum rate was sufficiently high it would attract new buyers or prompt the issuer to refinance; if the maximum rate was sufficiently low, on the other hand, it would not attract new buyers and the holder would be left with an illiquid security. ( Id. ¶ 39.)

Plaintiff Colin Wilson purchased ARS from E*Trade on July 17, 2007. ( Id. ¶ 11; Certification of Proposed Lead Plaintiff Colin Wilson ¶ 7.) Plaintiff Ronald Levy, as Trustee of the Levy Family Trust, purchased ARS from Wells Fargo Investments, LLC (“Wells Fargo”) on March 16, 2006. (Compl. ¶ 12; Certification of Proposed Lead Plaintiff Ronald Levy ¶ 7.) Plaintiff Michael Bonde purchased ARS from Wells Fargo on December 24, 2007. (Compl. ¶ 13; Certification of Proposed Lead Plaintiff Michael Bonde Ex. A.)

B. Defendants' Conduct

Plaintiffs allege that Merrill Lynch engaged in a scheme to manipulate the ARS market “to create the appearance of a functioning auction market in which auction rate securities traded in accordance with actual supply and demand.” (Compl. ¶ 42.) Merrill Lynch participated in the ARS market as an underwriter, an auction dealer, and a bidder for its own account. ( Id. ¶¶ 40, 44-45, 163.) As an underwriter, Merrill Lynch allegedly issued ARS with maximum rates that were insufficient to attract liquidity in the event of a failed auction. ( Id. ¶ 41.) As an auction dealer, Merrill Lynch accepted orders from investors and managed the auctions. Investors could also place orders through other brokerages, which would then submit orders to Merrill Lynch. ( Id. ¶ 36.)

The central component of the alleged scheme was Merrill Lynch's intervention to prevent auction failures in every auction for which it served as sole or lead auction dealer. From January 3, 2006, to May 27, 2008, for example, Merrill Lynch prevented more than 5,800 auctions from failing by placing bids for its own account. ( Id. ¶ 47.) This intervention occurred pursuant to...